Is McMoRan Exploration Great or What?

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For every stock out there screaming "buy me," there are a bunch of others simply giving us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the sign that they're on the path to greatness. 

These opportunities -- including familiar names and beaten down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. This time out we'll take a look at independent oil and gas driller McMoRan Exploration (NYS: MMR) , perhaps a less obvious source for tomorrow's great buys.

McMoRan Exploration snapshot:

Market Cap$2.2 billion
Revenues, TTM$461 million
1-Yr. Stock Return7.9%
Return on Investment(0.4%)
Est. 5-Yr. EPS Growth5%
Dividend & YieldNA/NA
Recent Price$13.33
CAPS Rating****

Source: FinViz.com

Of course, just because the 180,000-member CAPS community has chosen this stock as one being on the road to greatness doesn't mean you should buy in too. Due diligence is still required, but let's see why they think it might merit your attention.

In the sight of greatness
You could hear the bitterness dripping from the words of ATP Oil & Gas' CEO just before filing for bankruptcy last month. "It is all directly attributable to what the government did to us," he said about the Obama administration in an interview with Forbes. "This Administration has gone out of its way to create problems for my company, the company that I formed from scratch." It echoed the sentiments of Seahawk Drilling, whose assets were eventually bought by Hercules Offshore (NAS: HERO) , which also pointed an accusatory finger at the administration for its demise.

The permitted flow that became a torrent over the past year came too late to help these drillers, but those that remain, like McMoRan Exploration, are expecting the deluge ultimately to benefit their bottom lines. Moreover, McMoRan is pursuing a strategy that could bridge the difference between deepwater drillers like Transocean (NYS: RIG) and Seadrill (NAS: SDRL) and shallow water specialists like Hercules and Parker Drilling.

Ultra-deepwater exploration posits that there are huge reserves locked deep beneath the Gulf of Mexico salt geology at depths of 25,000-35,000 feet. McMoRan has said that testing and development drilling confirms its predictions; they expect to hit reserves of multi-trillion cubic feet.

Its drilling in the Davy Jones field is showing that the potential is there, but achieving success has proved elusive thus far. McMoRan is learning as it goes, as the recent seal leak at a test site shows -- it will be using different methods going forward -- but delays have also raised worries that it may run out of cash before it can prove the validity of its thesis.

But, unlike ATP, which carried a heavy debt load that help pushed it over the brink, McMoRan is a far leaner operation. Although, you can't escape the conclusion that, had it been permitted to drill, ATP would have been able to pay the bills, eventually. McMoRan is nimble enough to avoid a similar situation. Its total debt-to-equity ratio is just 34% (ATP was somewhere north of 1,500% when it went bankrupt), but even in comparison to its peers, McMoRan seems well situated.

Company

Long-Term Debt/Equity

Total Debt/Equity

McMoRan Exploration29.5%33.6%
Hercules Offshore87.3%97.2%
SeaDrill136.5%164.9%
Energy XXI (NAS: EXXI) 72.1%74.0%
Parker Drilling72.1%80.7%

Source: S&P CapitalIQ

There's huge potential hidden in the ultra-deep shelf of the Gulf; should McMoRan prove the doubters wrong (and there are many who believe it will), there could be a new rush to the shallows once again since it would support rapid development.

Value is what you get
I'm one of those becoming a believer in McMoRan's promise. It has the market cornered on the ultra-deep shelf -- an investment requires patience, as well as allowing for the occasional setback. I've rated the oil and gas driller to outperform the broad market indexes on CAPS and find its price a reasonable risk even after having risen 72% from its early spring lows. I agree with CAPS member casement89 who says they're "on the verge of proving a concept to capture enormous natural gas reserves in the Gulf of Mexico."

But tell me in the comments box below whether you worry that the financial position of McMoRan Exploration is something to be concerned about.

A great opportunity for you
If you're an energy investor, you know McMoRan isn't the only exciting play in the space. One in particular, though, is Seadrill and the analysts at the Motley Fool have created a brand new premium report examining its strengths and weaknesses, as well as what to expect from the driller going forward. Get started on the learning curve today!

The article Is McMoRan Exploration Great or What? originally appeared on Fool.com.

Fool contributor Rich Duprey owns shares of Seadrill, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Seadrill and Transocean. Motley Fool newsletter services have recommended buying shares of Seadrill. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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