What the Freeport-McMoRan Acquisition Means for Plains Exploration?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Freeport-McMoRan (NYSE: FCX) has made an offer to acquire both Plains Exploration & Production (NYSE: PXP) and fellow junior oil and gas explorer Mcmoran Exploration (NYSE: MMR).  Initially the deal was seen as all positive for the juniors, since both have heavy debt loads and stand to benefit from an infusion of Freeport cash. However, analysts were quick to jump in with downgrades of Plains, since the deal calls for its shareholders to receive half of the offer price in Freeport shares, which have been slaughtered in the wake of the announcement. Freeport is further troubled by a rash of credit downgrades and shareholder lawsuits.

Future Prospects

There is a real disconnect here between what investors are thinking and future trends in the oil and gas business.  Market participants made their feelings about this deal clear by selling off Freeport stock.  The fact that shares of Plains and fellow acquisition target Mcmoran Exploration soared on the news is evidence the deal is seen as good for them. Some experts, however, are looking at changing trends in oil and gas that support the view that mining and oil and gas activities can be pursued under a single corporate umbrella. BHP Billiton is already there.

No one has yet raised the possibility that the deal will not go through.  Some investors are unaware that Freeport was once in the oil and gas business, having full ownership of the now independent Mcmoran Exploration.  Both copper mining and oil and gas production rely on prospecting for new sources, requiring geological investigations.  There may be more similarities in these businesses than investors and analysts are willing to recognize. 

Plains Exploration vs. the Rest

Although Plains has producing wells, this is a company known primarily for its exploratory assets with proven and probable reserves. The following table looks at some key performance metrics for Plains and two other junior oil and gas explorers and producers with similar profiles: Chesapeake Energy (NYSE: CHK) and Pioneer Natural Resources (NYSE: PXD).

<table> <tbody> <tr> <td> <p><strong> </strong></p> <p><strong>Indicator</strong></p> </td> <td> <p><strong>Plains Exploration & Production</strong></p> </td> <td> <p><strong>Chesapeake Energy</strong></p> </td> <td> <p><strong>Pioneer Natural Resources</strong></p> <p><strong> </strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$5.83 bil</p> </td> <td> <p>$11.27 bil</p> </td> <td> <p>$13.01 bil</p> </td> </tr> <tr> <td> <p><strong>Trailing P/E</strong></p> </td> <td> <p>32.38</p> </td> <td> <p>-</p> </td> <td> <p>247.4</p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>12.12</p> </td> <td> <p>12.75</p> </td> <td> <p>19.94</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> </td> <td> <p>1.77</p> </td> <td> <p>0.74</p> </td> <td> <p>2.31</p> </td> </tr> <tr> <td> <p><strong>Earnings Growth (Quarterly)</strong></p> </td> <td> <p>+34.33%</p> </td> <td> <p>-360.1%</p> </td> <td> <p>-104>36%</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p>-</p> </td> <td> <p>2.06%</p> </td> <td> <p>-.63%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>1.37</p> </td> <td> <p>1.06</p> </td> <td> <p>0.63</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>5.45%</p> </td> <td> <p>-6.02%</p> </td> <td> <p>5.38%</p> </td> </tr> </tbody> </table>

The numbers indicate Plains Exploration will enter its new corporate structure with solid, if not spectacular, past performance and good growth prospects. The forward P/E ratio is the best of the three companies above, and Plains is the only company to show positive quarterly earnings growth. This number is particularly impressive in light of the depressed price of oil and the historic lows in natural gas prices in the US over the last year.

Debt to equity ratios over 1.0 are always cause for major concern, but this downside to the otherwise bright picture at Plains will be washed away should the deal with Freeport-McMoRan go through.

Foolish Summary

Changing trends rattle markets and the positive potentialities in the change are frequently overlooked with a panicky short-term view. This appears to be the case with the extreme negative reaction to the Freeport deal. The concern about the additional debt load on the Freeport balance sheet is real. However, that should not be a big concern for Plains Exploration shareholders. After all, the company has substantially improved its quarterly earnings. 

ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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