Freeport-McMoRan Returns to its Roots
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Earlier today the Financial Times reported that Freeport-McMoRan Copper & Gold (NYSE: FCX), an international mining company, is planning big acquisitions in the oil and gas sector, which would take the mining giant back to its roots as an energy producer. The FT, citing people familiar with the matter, said that Freeport-McMoRan was set to acquire a large oil and gas group, as well as McMoran Exploration.
The Financial Times’ report has turned out to be accurate. Freeport-McMoRan is indeed making a comeback in the oil and gas sector, with the acquisitions of McMoran Exploration Co. (NYSE: MMR) and Plains Exploration & Production Company (NYSE: PXP). However, investors have reacted negatively to Freeport-McMoRan’s plans, as shares of the Phoenix, Arizona-based mining giant plunged in early trading.
Returning to Roots
Freeport-McMoRan today announced that it entered into definitive agreements to acquire Plains Exploration for $6.9 billion in cash and stock and McMoran Exploration for approximately $3.4 billion in cash, or $2.1 billion net of 36% of the McMoran Exploration interests currently owned by Freeport-McMoRan and Plains Exploration. On completion of the transaction, shareholders of McMoran will also receive a distribution of units in a royalty trust. The trust will hold a 5% overriding royalty interest on future production in McMoran Exploration’s existing shallow water ultra-deep properties.
Based in Houston, Texas, Plains Exploration is an independent oil and gas company focused on acquisition, development, exploration and production of oil and gas in California, Texas, Louisiana, and the Gulf of Mexico. Under the terms of the agreement, shareholders of Plains Exploration will receive 0.6531 shares of Freeport-McMoRan common stock and $25 in cash for each share of Plains Exploration common stock they hold.
McMoran Exploration, which is engaged in the exploration, development and production of natural gas and oil in shallow waters of the Gulf of Mexico Shelf and onshore in the Gulf Coast area, was spun out of Freeport-McMoRan in 1994. Freeport-McMoRan will acquire McMoran for per-share consideration of $14.75 in cash and 1.15 units of the royalty trust.
Freeport-McMoRan, which is the largest publicly traded copper producer in the world, once had a significant presence in the oil and gas sector. The company later switched its focus to mining; however, with the acquisitions announced today, it is making a comeback to the oil and gas sector. The big question is why Freeport-McMoRan is diversifying its operations now?
James R. Moffett, Chairman of Freeport-McMoRan, believes that the transaction will enable the company to add assets with exceptional exploration and development potential to a world-class company to create a premier minerals and oil and gas business focused on value creation for shareholders. Moffett, who is also the co-Chairman and CEO of McMoran Exploration, also said that the transaction offers significant value to shareholders of McMoran Exploration and Plains Exploration.
What Would The Combined Company Look Like?
The combination of Freeport-McMoRan, McMoran Exploration and Plains Exploration will create a diversified natural resource company, worth around $60 billion with a portfolio of mineral assets, substantial oil and gas resources, and a growing production profile. Freeport-McMoRan believes that the combined company’s long-lived resource base with commodities vital to the world’s economies offers enhanced opportunities to take advantage from long-term global economic growth. Approximately 74% of the combined company’s estimated EBITDA for 2013 will be generated from mining, and the rest will be from oil and gas. In terms of regions, 48% of the estimated EBITDA for 2013 will be generated from U.S. operations.
Richard C. Adkerson, President and CEO of Freeport-McMoRan, said that
"the transaction will add a high quality portfolio of assets with strong current cash flows, significant growth options and complementary exposure to markets positioned for global growth in the developed and developing world and reflects the company’s positive view of the factors that will drive demand for copper and other commodities."
Freeport-McMoRan received $9.5 million in funding commitments from JP Morgan Chase to finance the cash part of the deals and to repay Plains Exploration’s outstanding debt under its existing term loans and revolver.
While the transaction will help Freeport-McMoRan to diversify its operations, investors have reacted negatively to transaction. Freeport-McMoRan shares are currently trading down more than 13%.
Shares of McMoran Exploration and Plains Exploration, meanwhile, have surged in early trading.
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