




SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2004



Commission File Number: 001–07791



McMoRan Exploration Co.



Incorporated in Delaware	72–1424200
	(IRS Employer Identification No.)


1615 Poydras Street, New Orleans, Louisiana 70112


Registrant's telephone number, including area code: (504) 582–4000


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes X No _

On June 30, 2004, there were issued and outstanding 17,178,862 shares of the registrant's Common Stock, par value $0.01 per share.


McMoRan Exploration Co.
TABLE OF CONTENTS

	Page

Part I. Financial Information

Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited)	3

Consolidated Statements of Operations (Unaudited)	4

Consolidated Statements of Cash Flows (Unaudited)	5

Notes to Consolidated Financial Statements	6

Remarks	10

Report of Independent Registered Public Accounting Firm	11

Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Quantitative and Qualitative Disclosures about Market Risks	21

Controls and Procedures	21

Part II. Other Information	21

Signature	22

Exhibit Index	E-1

McMoRan Exploration Co.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

McMoRan EXPLORATION Co.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,			December 31,
	2004			2003
	(In Thousands)
ASSETS
Cash and cash equivalents:
Cash and cash equivalents, continuing operations	$	85,937		$	100,938
Restricted cash from discontinued operations		971			961
Restricted investments		7,800			7,800
Accounts receivable		6,408			6,306
Prepaid expenses		682			1,053
Current assets from discontinued sulphur operations, excluding cash		1			417
Total current assets		101,799			117,475
Property, plant and equipment, net		40,031			26,185
Discontinued sulphur business assets		312			312
Restricted investments and cash		15,057			18,974
Investment in K-Mc Venture I LLC		443			-
Other assets		5,682			6,334
Total assets	$	163,324		$	169,280

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	18,393		$	5,345
Accrued liabilities		24,261			12,894
Accrued interest		3,900			3,900
Current portion of accrued oil and gas reclamation costs		-			238
Current portion of accrued sulphur reclamation costs		2,550			2,550
Current liabilities from discontinued sulphur operations		3,486			9,405
Total current liabilities		52,590			34,332
6% convertible senior notes		130,000			130,000
Accrued sulphur reclamation costs		11,885			11,451
Accrued oil and gas reclamation costs		7,321			7,035
Contractual postretirement obligation		21,137			22,034
Other long-term liabilities		17,992			18,435
Mandatorily redeemable convertible preferred stock		29,520			30,586
Stockholders' deficit		(107,121	)		(84,593	)
Total liabilities and stockholders' deficit	$	163,324		$	169,280

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION Co.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
	(In Thousands, Except Per Share Amounts)
Revenues:
Oil and gas	$	2,923		$	2,703		$	6,514		$	7,467
Service		6,512			98			7,031			232
Total revenues		9,435			2,801			13,545			7,699
Costs and expenses:
Production and delivery costs		488			2,136			2,014			3,747
Depreciation and amortization		1,012			1,582			2,388			3,384
Exploration expenses		10,106			5,881			13,432			7,676
General and administrative expenses		3,712			2,584			6,389			4,549
Start-up costs for Main Pass Energy Hub^TM		1,711			-			5,994			-
Total costs and expenses		17,029			12,183			30,217			19,356
Operating loss		(7,594	)		(9,382	)		(16,672	)		(11,657	)
Interest expense		(2,180	)		-			(4,412	)		(2	)
Equity in K-Mc Venture I LLC’s income		409			-			443			-
Other income (expense), net		228			(23	)		377			12
Provision for income taxes		-			-			-			(1	)
Loss from continuing operations		(9,137	)		(9,405	)		(20,264	)		(11,648	)
Loss from discontinued sulphur operations		(1,692	)		(1,417	)		(3,409	)		(2,451	)
Net income (loss) before cumulative effect of change in accounting principle		(10,829	)		(10,822	)		(23,673	)		(14,099	)
Cumulative effect of change in accounting principle		-			-			-			22,162
Net income (loss)		(10,829	)		(10,822	)		(23,673	)		8,063
Preferred dividends and amortization of convertible preferred stock issuance costs		(410	)		(430	)		(822	)		(883	)
Net income (loss) applicable to common stock	$	(11,239	)	$	(11,252	)	$	(24,495	)	$	7,180

Basic and diluted net income (loss) per share of common stock:
Continuing operations		$(0.55	)		$(0.59	)		$(1.23	)		$(0.76	)
Discontinued operations		(0.10	)		(0.09	)		(0.20	)		(0.15	)
Before cumulative effect of change in accounting principle		(0.65	)		(0.68	)		(1.43	)		(0.91	)
Cumulative effect of change in accounting principle		-			-			-			1.35
Net income (loss) per share of common stock		$(0.65	)		$(0.68	)		$(1.43	)		$0.44

Basic and diluted average common shares outstanding		17,170			16,649			17,102			16,445

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION Co.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2004			2003
	(In Thousands)
Cash flow from operating activities:
Net income (loss)	$	(23,673)		$	8,063
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Loss from discontinued operations		3,409			2,451
Depreciation and amortization		2,388			3,384
Exploration drilling and related expenditures		7,542			4,935
Cumulative effect of change in accounting principle		-			(22,162	)
Compensation expense associated with stock-based awards		564			1,820
Reclamation and mine shutdown expenditures		(281	)		(237	)
Amortization of deferred financing costs		704			-
Equity in K-Mc Venture I LLC’s income		(443	)		-
Other		245			(47	)
(Increase) decrease in working capital:
Accounts receivable		1,989			1,959
Accounts payable and accrued liabilities		10,200			(8,781	)
Inventories and prepaid expenses		371			542
Net cash provided by (used in) continuing operations		3,015			(8,073	)
Net cash used in discontinued operations		(3,215	)		(5,226	)
Net cash used in operating activities		(200	)		(13,299	)

Cash flow from investing activities:
Exploration, development and other capital expenditures		(12,332	)		(3,096	)
Proceeds from restricted investments		3,900			-
Increase in restricted investments		(109	)		-
Proceeds from disposition of oil and gas properties		-			7,050
Net cash (used in) provided by continuing operations		(8,541	)		3,954
Net cash (used in) provided by discontinued operations		(5,920	)		131
Net cash (used in) provided by investing activities		(14,461	)		4,085

Cash flow from financing activities:
Dividends paid on convertible preferred stock		(765	)		(830	)
Proceeds from exercise of stock options and other		435			148
Net cash used in continuing operations		(330	)		(682	)
Net cash from discontinued operations		-			-
Net cash used in financing activities		(330	)		(682	)
Net decrease in cash and cash equivalents		(14,991	)		(9,896	)
Net increase in restricted cash of discontinued operations		(10	)		(11	)
Net decrease in unrestricted cash and cash equivalents		(15,001	)		(9,907	)
Cash and cash equivalents at beginning of year		100,938			14,282
Cash and cash equivalents at end of period	$	85,937		$	4,375

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION Co.

NOTES TO CONSOLDIATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

McMoRan Exploration Co.’s (McMoRan) financial statements are prepared in accordance with U.S. generally accepted accounting principles. McMoRan consolidates its wholly owned subsidiaries McMoRan Oil & Gas LLC (MOXY) and Freeport-McMoRan Energy LLC (Freeport Energy) and reflects its investment in K-Mc Venture I LLC (K-Mc I) using the equity method. As a result of McMoRan’s exit from the sulphur business, its sulphur results have been presented as discontinued operations and the major classes of assets and liabilities related to the sulphur business have been separately shown for all periods presented.

Certain reclassifications of prior year amounts have been made to conform with the current year presentation. McMoRan has classified as service revenue certain management and other fees that were previously recorded as a reduction of its exploration and/or general and administrative expenses.

2. EARNINGS PER SHARE

Basic and diluted net income (loss) per share of common stock were calculated by dividing the net loss applicable to continuing operations, net loss from discontinued operations, cumulative effect of change in accounting principle and net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the periods presented. For purposes of the earnings per share computations, the net loss applicable to continuing operations includes preferred stock dividends and amortization of the related issuance costs.

McMoRan had a net loss from continuing operations for all periods presented in the accompanying financial statements. Accordingly, the assumed exercise of stock options and stock warrants whose exercise prices are less than the average market price of McMoRan’s common stock during these periods, as well as the assumed conversion of McMoRan’s 5% convertible preferred stock and 6% convertible senior notes, were excluded from the diluted net income (loss) per share calculations. These instruments were excluded because they are considered to be anti-dilutive, meaning their inclusion would have decreased the reported net loss per share from continuing operations. The excluded share amounts are summarized below (in thousands):

	Second Quarter				Six Months
	2004		2003		2004		2003
In-the-money stock options ^a		821		570		895		328
Stock warrants ^b		2,500		1,742		2,500		1,742
5% convertible preferred stock ^c		6,365		6,736		6,365		6,736
6% convertible senior notes ^d		9,123		N/A		9,123		N/A

Options with an exercise price less than the average market price for McMoRan’s common stock for the periods presented.

Stock warrants were issued to K1 USA Energy Production Corporation in December 2002 (1.74 million shares) and September 2003 (0.76 million shares). The warrants are exercisable for McMoRan common stock at any time over their respective five-year terms at an exercise price of $5.25 per share. See Note 4 of McMoRan’s 2003 Annual Report on Form 10-K (the 2003 Form 10-K) for additional information regarding the stock warrants.

At the election of the holder, and before the shares mature on June 30, 2012, each outstanding share of 5% mandatorily redeemable convertible preferred stock is convertible into 5.1975 shares of McMoRan common stock. For additional information regarding the convertible preferred stock see Note 6 of the 2003 Form 10-K.

The notes, issued in July 2003, are convertible at the option of the holder at any time prior to their maturity on July 2, 2008 into shares of McMoRan common stock at a conversion price of $14.25 per share. Additional information regarding the notes is disclosed in Note 5 of the 2003 Form

10-K. Accrued interest on the convertible senior notes totaled $2.0 million during the second quarter of 2004 and $3.9 million for the six months ended June 30, 2004.

Outstanding stock options excluded from the computation of diluted net loss per share of common stock because their exercise prices were greater than the average market price of the common stock during the periods presented are as follows:

	Second Quarter				Six Months
	2004		2003		2004		2003
Outstanding options (in thousands)		2,628		2,619		2,629		2,838
Average exercise price	$	17.25	$	16.94	$	17.24	$	16.48

Stock-Based Compensation Plans. As of June 30, 2004, McMoRan had five stock-based employee compensation plans and two stock-based director compensation plans, with all but the most recent director plan described in Note 8 of the 2003 Form 10-K. On May 6, 2004, McMoRan’s shareholders approved the most recent stock-based director compensation plan, the 2004 Director Compensation Plan. The 2004 Director Compensation Plan authorizes the Board of Directors to grant stock-based awards representing up to 175,000 shares of McMoRan common stock and provides for grants of options to advisory directors as well as non-employee directors. Options granted under the 2004 Director Compensation Plan are exercisable in 25 percent annual increments beginning one year from the date of the grant. McMoRan accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for S tock Issued to Employees,” and related interpretations, which require compensation cost for stock-based employee compensation plans to be recognized based on the difference on the date of grant, if any, between the quoted market price of the stock and the amount the participant must pay to acquire the stock. The following table illustrates the effect on net income and earnings per share if McMoRan had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” which require compensation cost for all stock-based employee compensation plans to be recognized based on the use of a fair value method (in thousands, except per share amounts):

Three Months Ended June 30,

Six Months Ended

June 30,

2004

2003