




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 September 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 September 30, 2004, there were issued and outstanding 17,179,131 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 Flow (Unaudited)	5

Notes to Consolidated Financial Statements	6

Remarks	12

Report of Independent Registered Public Accounting Firm	13

Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Quantitative and Qualitative Disclosures about Market Risks	25

Controls and Procedures	25

Part II. Other Information	25

Signature	26

Exhibit Index	E-1

McMoRan Exploration Co.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

McMoRan EXPLORATION Co.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30,			December 31,
	2004			2003
	(In Thousands)
ASSETS
Cash and cash equivalents, continuing operations	$	55,980		$	100,938
Restricted cash from discontinued operations		976			961
Restricted investments		7,800			7,800
Accounts receivable		15,049			6,306
Prepaid expenses		2,414			1,053
Current assets from discontinued operations, excluding cash		263			417
Total current assets		82,482			117,475
Property, plant and equipment, net		55,996			26,185
Discontinued sulphur business assets		312			312
Restricted investments and cash		10,830			18,974
Investment in K-Mc Venture I LLC		318			-
Other assets		6,206			6,334
Total assets	$	156,144		$	169,280

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	19,043		$	5,345
Accrued liabilities and other		26,302			12,894
Accrued interest		1,950			3,900
Current portion of accrued oil and gas reclamation costs		-			238
Current portion of accrued sulphur reclamation cost		2,550			2,550
Current liabilities from discontinued operations		3,507			9,405
Total current liabilities		53,352			34,332
6% Convertible senior notes		130,000			130,000
Accrued sulphur reclamation costs		12,101			11,451
Accrued oil and gas reclamation costs		7,974			7,035
Contractual postretirement obligation		21,473			22,034
Other long-term liabilities		16,589			18,435
Mandatorily redeemable convertible preferred stock		29,547			30,586
Stockholders' deficit		(114,892	)		(84,593	)
Total liabilities and stockholders' deficit	$	156,144		$	169,280

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

McMoRan EXPLORATION Co.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
	(In Thousands, Except Per Share Amounts)
Revenues:
Oil & Gas	$	3,704		$	3,850		$	10,218		$	11,317
Service		3,597			392			10,628			624
Total revenues		7,301			4,242			20,846			11,941
Costs and expenses:
Production and delivery costs		1,576			1,206			3,590			4,953
Depletion, depreciation and amortization		1,664			2,914			4,052			6,298
Exploration expenses		3,230			917			16,662			8,593
General and administrative expenses		3,804			2,624			10,193			7,173
Start-up costs for Main Pass Energy Hub^TM		2,666			7,073			8,660			7,073
Total costs and expenses		12,940			14,734			43,157			34,090
Operating loss		(5,639	)		(10,492	)		(22,311	)		(22,149	)
Interest expense		(2,079	)		(2,295	)		(6,491	)		(2,297	)
Equity in K-Mc Venture I LLC’s (loss) income		(125	)		-			318			-
Other income, net		287			1,384			664			1,396
Provision for income taxes		-			-			-			(1	)
Loss from continuing operations		(7,556	)		(11,403	)		(27,820	)		(23,051	)
Loss from discontinued operations		(267	)		(7,506	)		(3,676	)		(9,957	)
Net loss before cumulative effect of change in accounting principle		(7,823	)		(18,909	)		(31,496	)		(33,008	)
Cumulative effect of change in accounting principle		-			-			-			22,162
Net loss		(7,823	)		(18,909	)		(31,496	)		(10,846	)
Preferred dividends and amortization of convertible preferred stock issuance costs		(410	)		(430	)		(1,232	)		(1,313	)
Net loss applicable to common stock	$	(8,233	)	$	(19,339	)	$	(32,728	)	$	(12,159	)

Basic and diluted net loss per share of common stock:
Continuing operations		$(0.46	)		$(0.71	)		$(1.70	)		$(1.48	)
Discontinued operations		(0.02	)		(0.45	)		(0.21	)		(0.60	)
Before cumulative effect of change in accounting principle		(0.48	)		(1.16	)		(1.91	)		(2.08	)
Cumulative effect of change in accounting principle		-			-			-			1.34
Net loss per share of common stock		$(0.48	)		$(1.16	)		$(1.91	)		$(0.74	)

Basic and diluted average shares outstanding:		17,179			16,716			17,128			16,535

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

McMoRan EXPLORATION Co.

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

	Nine Months Ended
	September 30,
	2004			2003
	(In Thousands)
Cash flow from operating activities:
Net loss	$	(31,496	)	$	(10,846	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued sulphur operations		3,676			9,957
Depletion, depreciation and amortization		4,052			6,298
Exploration drilling and related expenditures		9,439			4,924
Cumulative effect of change in accounting principle		-			(22,162	)
Compensation expense associated with stock-based awards		1,025			2,009
Stock warrants granted to K1 USA Energy Production Corporation		-			6,220
Reclamation and mine shutdown expenditures		(283	)		(342	)
Amortization of deferred financing costs		1,056			346
Equity in K-Mc Venture I LLC’s income		(318	)		-
Other		219			270
(Increase) decrease in working capital:
Accounts receivable		(3,984	)		8,687
Accounts payable and accrued liabilities		(538	)		(3,335	)
Inventories and prepaid expenses		611			642
(Increase) decrease in working capital		(3,911	)		5,994
Net cash (used in) provided by continuing operations		(16,541	)		2,668
Net cash used in discontinued operations		(4,209	)		(6,849	)
Net cash used in operating activities		(20,750	)		(4,181	)

Cash flow from investing activities:
Exploration, development and other capital expenditures		(25,135	)		(4,494	)
Proceeds from restricted investments		7,800			(22,991	)
Increase in restricted investments		(157	)		-
Net cash used in continuing operations		(17,492	)		(27,485	)
Net cash (used in) provided by discontinued operations		(5,920	)		189
Net cash used in investing activities		(23,412	)		(27,296	)

Cash flow from financing activities:
Proceeds from 6% convertible senior notes offering		-			130,000
Dividends paid on convertible preferred stock		(1,148	)		(1,233	)
Financing costs		(68	)		(6,987	)
Exercise of stock options and other		435			199
Net cash (used in) provided by continuing operations		(781	)		121,979
Net cash used in discontinued operations		-			-
Net cash (used in) provided by financing activities		(781	)		121,979
Net (decrease) increase in cash and cash equivalents		(44,943	)		90,502
Net increase in restricted cash of discontinued sulphur operations		(15	)		(16	)
Net (decrease) increase in unrestricted cash and cash equivalents		(44,958	)		90,486
Cash and cash equivalents at beginning of year		100,938			14,282
Cash and cash equivalents at end of period	$	55,980		$	104,768

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

McMoRan EXPLORATION Co.

NOTES TO CONSOLIDATED 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):

	Third Quarter				Nine Months
	2004		2003		2004		2003
In-the-money stock options ^a		745		515		841		387
Stock warrants ^b		2,500		1,800		2,500		1,762
5% convertible preferred stock ^c		6,365		6,716		6,365		6,716
6% convertible senior notes ^d		9,123		9,123		9,123		3,008

Represents stock options outstanding whose exercise price is 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 (K1 USA) 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. The 2003 amounts include the effect of the September warrants being issued seven days prior to September 30, 2003. 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. Dividends and other related charges for the preferred stock totaled $0.4 million during the third quarter of 2004 and 2003 and $1.2 million and $1.3 million for the nine months ended September 30, 2004 and 2003, respectively. 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 third quarter of 2004 and $5.9 million for the nine months ended September 30, 2004. Accrued interest on the convertible senior notes totaled $2.0 million during the third quarter and nine months ended September 30, 2003.

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:

	Third Quarter				Nine Months
	2004		2003		2004		2003
Outstanding options (in thousands)		2,516		2,699		2,513		2,839
Average exercise price	$	17.99	$	16.79	$	17.99	$	16.48

Stock-Based Compensation Plans. As of September 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