Freeport Makes a Dramatic Return to the Energy Business

on Dec 6, 2012

On 5 December 2012, the world’s largest publicly traded copper company Freeport-McMoRan Copper & Gold Inc (NYSE:FCX) announced its re-entry into the oil and gas business by acquiring the two US oil and natural gas companies McMoRan Exploration Co (NYSE:MMR) and Plains Exploration & Production Co (NYSE:PXP). The acquisitions will see Freeport return to its energy roots and will also mark a major strategy shift for the company. Investors, however, are already questioning the tie-up, with the Financial Times reporting that shares in Freeport plunged 14 percent following the news.

**Freeport Returning to Oil and Gas**
As announced in a press release, the Arizona-based Freeport signed definitive merger agreements with Plains and McMoRan, under which Freeport will acquire Plains for approximately $6.9 billion (£4.3 billion) in cash and stock, and McMoRan for $2.1 billion (£1.3 billion) in cash, net of the 36 percent of McMoRan already owned by Freeport and Plains. The FT reports that Freeport will also assume about $11 billion (£6.8 billion) in debt, meaning that the transactions will total $20 billion (£12.4 billion).

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The deal, which as noted in the press release, is expected to create “a premier US-based natural resource company,” will also see Freeport reunited with McMoRan, which was spun out of Freeport in 1994. The FT reports that James Moffett, chairman of Freeport and CEO of McMoRan Exploration has been considering reuniting mining and oil and gas operations under one company for some time.

“Clearly the synergies between putting a mining company and an oil exploration and production company together remain to be seen,” commented Kuni Chen, an analyst at CRT Capital Group LLC, as quoted by Bloomberg.
**Major Strategy Shift**
The transactions will give Freeport access to oil production facilities in the Gulf of Mexico as well as to shale formations in Texas and Louisiana. The FT reports that the move will mark a major strategy shift for Freeport, giving it diversification away from its copper mines in Indonesia. Following the merger, approximately 48 percent of the natural resources group’s earnings before interest, taxes, depreciation and amortisation (EDBITA) will come from North America.

**Investor Criticism**
!m[The Gold And Copper Giant To Acquire Plains, McMoRan With $20 Billion Deals](/uploads/story/976/thumbs/pic1_inline.png)The news however sent Freeport’s shares plunging 14 percent. By contrast, McMoRan’s shares were up 86 percent, whereas shares in Plains rose by 26 percent. As reported by the NY Times, many Freeport investors appeared concerned that the deals were an expensive distraction from a mining operation which had been performing well. In addition, Bloomberg quotes Joan Lappin, chief investment officer for Gramercy Capital Management, as saying that due to the structure of the transaction, McMoRan shareholders would not get the “big, huge reward” they had been hoping for.

The conference call for investors also contributed to shareholder disappointment. “Congratulations on making one of the worst teleconferences I’ve ever heard to justify a deal,” said Evy Hambro, manager of BlackRock Inc (NYSE:BLK), one of Freeport’s largest shareholders, as quoted by Bloomberg. “I haven’t heard anything on this call that in any way justifies why these companies should be put together.”
The FT quotes Freeport’s CEO Richard Adkerson as realising he had a job to do to explain the company’s strategy to investors. “I look forward to having the time to sit down with you to review this with you and other investors, who I know share your concerns,” he told Mr Hambro, as quoted by the FT.


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