Freeport in $20bn energy move
Freeport-McMoRan Copper & Gold , the US mining group, is re-entering the oil business with two deals worth a total of about $20bn, buying XP"> Plains Exploration and Production and McMoRan Exploration .
The deals value the equity of Plains at about $6.9bn in cash and stock and McMoRan Exploration at about $3.4bn in cash.
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The merged company will make about 74 per cent of next year’s earnings before interest, depreciation and tax from mining and the remainder from oil and gas.
The move will take Freeport back to its roots as an energy producer and mark a change in strategy for the company, creating a natural resources conglomerate with an enterprise value of about $60bn, including debt.
Plains has oilfields in California and the Eagle Ford shale of Texas, and last month bought a package of fields in the Gulf of Mexico from BP for $5.5bn.
McMoRan Exploration, an oil and gas company that was spun out of Freeport in 1994, has been pioneering drilling at extreme depths below sea level in the shallow waters of the gulf. The technique has not yet yielded commercially attractive results but is believed to offer great potential for future production.
Richard Adkerson, Freeport’s chief executive, said the deal would create a group with “complementary exposure to markets positioned for global growth in the developed and developing world”.
About 48 per cent of the merged group’s ebitda will come from North America.
Mr Adkerson added that the deal would not diminish the company’s focus on safe and efficient mining operations and executing its organic growth projects.
The terms of the Plains offer are 0.6531 Freeport shares and $25 in cash, worth a total of about $50, for every Plains share, representing a 39 per cent premium to the Plains closing price on Tuesday night.
The McMoRan Exploration offer is $14.75 in cash and 1.15 units of a new royalty trust for every McMoRan share. The royalty trust will hold a 5 per cent overriding royalty interest in future production from McMoRan’s ultra-deep oilfields. The cash alone offers a premium of 74 per cent to McMoRan Exploration’s share price on Tuesday night, or 31 per cent to its average over the past month.
Freeport and McMoRan have kept close ties since their split. James “Jim Bob” Moffett is chairman of Freeport, and chairman and chief executive of McMoRan Exploration. Freeport and McMoRan Exploration also share an office building in New Orleans.
Plains owns a 31.5 per cent stake in McMoRan Exploration while James Flores, chief executive of Plains, sits on McMoRan’s board.
Freeport is the world’s largest publicly traded copper producer but was once a diversified conglomerate with substantial oil and gas operations, before selling those assets to focus on mining. Freeport reported revenues of $4.4bn for the three months to September 30.
Freeport’s copper operations generate ample cash, said an industry expert, and the miner has been looking for ways to reinvest profitably. However, expanding the company’s copper operations could increase the group’s exposure at a time when ailing economic growth in China and a series of large new copper projects are damping the outlook for the price of the metal. The miner’s management has long been interested in oil and gas, another industry source added.
Industry observers said that the deals could surprise some shareholders, however. The biggest global mining groups have come under pressure to return money to shareholders, rather than invest excess funds in ambitious new projects.
Freeport in October reported weaker-than-expected third-quarter earnings, as the recovery in production and sales at its Grasberg copper and gold mine in Indonesia proceeded more slowly than expected. The miner was also forced to halt operations at Grasberg last year due to strikes and suffered labour problems at its Cerro Verde mine in Peru.
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