Freeport-McMoRan Copper & Gold Inc. executives Wednesday enthused about a $9 billion cash-and-stock transaction to buy U.S. producers Plains Exploration & Production Co. (PXP) and McMoRan Exploration Co., but the deal drew sharply mixed reaction from shareholders.
PXP ended the day up 23.44%, gaining $8.45, while McMoRan soared, closing up 87.17%, or $7.38. Meanwhile, Freeport, which up to now has concentrated on global copper and gold development, saw its share price collapse by 15.99%, losing $6.12 on the day.
Freeport, which has a close working relationship both companies, agreed to pay $6.9 billion for PXP and $3.4 billion ($2.1 billion net) for McMoRan. Freeport Chairman Jim Bob Moffatt co-chairs McMoRan with Freeport CEO Richard Adkerson. PXP holds a 31.5% stake in McMoRan (see Daily GPI, Sept. 21, 2010).
During a conference call Wednesday, Moffatt said the U.S. oil and gas business offers a lot for the long-term. He noted that Houston's PXP is U.S. powerhouse in the onshore, as well as a leader in the deep and shallow waters of the Gulf of Mexico (GOM). McMoRan is a trailblazer in shallow GOM drilling; it also has a portfolio onshore in Louisiana. Oil prices hovering near $100/bbl provide solid prospects while natural gas will prove to be a winner over the long-term, Moffatt promised. He founded Freeport McMoRan Inc., which in 1994 separately spun off the minerals business and the exploration company.
"When you have the chance to realize what a treasure trove of assets we have brought together, and the management team now in place for the combined company, we will be in a position to explore or purchase any natural resource asset...Nobody will have a better feel for valuation..."
Once the transaction is completed, he said Freeport would become the fifth largest U.S.-based natural resource company by enterprise value after ExxonMobil Corp., Chevron Corp., ConocoPhillips and Occidental Petroleum Corp. The operator would "leapfrog" over Anadarko Petroleum Corp., Apache Corp., EOG Resources Inc., Chesapeake Energy Corp. and Marathon Oil Corp., Moffatt told analysts.
"This takes us from a mid-size player to a major player from both a resource business and a mining business...We are leapfrogging everybody in the mining business, and with a great grasp of other assets we have in North America, South America and Africa, we have a situation where we have the best mining in the world and now we have the best oil and gas assets..."
Adkerson added that 85% of the acquired revenues today are from oil. The transaction also provides a "favorable entry point to a source of low cost, long-term natural gas supplies."
With PXP, Freeport gains an estimated 575 million boe of proved reserves, with entry in North America's booming onshore oil and natural gas business. The Houston explorer has established California oil production, growing oil and liquids output in the Eagle Ford Shale, a large natural gas position in the Haynesville Shale and oil and gas prospects in Wyoming's Madden Field. PXP also is a big leaseholder in the deep and shallow waters of the GOM. Last week PXP completed $6.1 billion worth of GOM acquisitions from BP Exploration & Production Inc., BP America Production Co. and Shell Offshore Inc. (see Daily GPI, Dec. 3).
PXP holds a total of 1,521 million boe of proved, probable and possible (3P) reserves, including 538 million boe proved; 337 million boe probable and 646 million boe possible. It also has a "near-term resource potential" of 1,353 million boe, with total potential of 3,800 million boe. Its 3Q2012 production was estimated at 160,000 boe/d.
In 2013 PXP expects to produce 175,000 boe/d total from its U.S. operations, with 33% from the deepwater, 23% from California, 21% from the Eagle Ford, 11% from the GOM Outer Continental Shelf and 9% from other operations. PXP's 2013 estimated production mix is 66% weighted to oil, 28% to natural gas and 6% to natural gas liquids.
PXP CEO Jim Flores, who shared a microphone with the Freeport team, said the deal would allow the natural gas properties to not be sold -- a prospect that he said was inevitable given current prices and better returns from oil.
"Here at Plains we've achieved a coveted position in the oil and gas business. We have high-margin properties...but painfully, we would have had to leave our natural gas business that we think is very strong because it wasn't economic in the near-term" since the company began acquiring more assets in the GOM. "We would have had to liquidate in the bottom of the market. With this transaction, we're not selling any gas assets. They are complementary with McMoRan's story, which has very strong potential...
"We're gas bulls from 2015 on from the standpoint of fundamentals," Flores said. Prices will be "soft in the next two years" but the combined package of assets provides a cushion for the future. We have a great profile in the Eagle Ford and over 1,000 square miles of gas [acreage potential] in the Haynesville in which we have an interest in...Our gas business is in the best spots, the Haynesville, the Gulf of Mexico, and of course, the Madden Field in Wyoming offsets the gas in California to cook our oil...
"In the onshore, our thinking is about that we don't want to be everything to everybody. We've concentrated in areas where we know we can be strong...The Eagle Ford, Haynesville, California gives us that."
McMoRan's 3P reserves total about 60 million boe, including 37 million boe proved; 11 million boe probable and 12 million boe possible. Near-term resource potential is estimated at 4,981 million boe, with total potential of 50 Tcfe. Its 3Q2012 production rate was about 22,000 boe/d.
Once completed, Freeport's combined 3P reserves would be about 1,581 million boe, with 575 million boe proved, 348 million boe probable and 656 million boe possible. The near-term potential was set at 6,334 million boe; its 3Q2012 production was about 182,000 boe/d. When completed, 48% of Freeport's assets would be in North America; 26% would be U.S.-based oil and natural gas properties. Freeport now develops copper and gold assets in Indonesia, North America, South America and the Democratic Republic of Congo. It also has a molybdenum business.
The news dismayed Freeport shareholders, some of whom accused the company during the conference call of helping to prop up McMoRan, which has seen its share price fall steadily over the past few months. McMoRan, whose Moffatt-led management team has kept investors dangling with promises that its Davy Jones natural gas discovery in the shallow waters of the GOM would be flowing 50 MMcf/d by now, still is struggling to bring the prospective well online (see Daily GPI, Nov. 28).
Evy Hambro, joint chief investment officer of BlackRock's Natural Resources Equity Group, was especially dismayed about the company's diversification and the fact that Freeport's shareholders won't vote on the deal. Adkerson explained during the conference call that the shares issued for part of the purchase didn't meet the 8% threshold required for a vote. The transactions will require shareholder approval by McMoRan and PXP.
"I haven't heard anything on this call that in any way justifies why these companies should be put together," Hambro said. "I don't know why you've broken the trust with investors."
Adkerson and Moffatt tried to appease those dismayed by the news, but it appeared to fall on deaf ears.
"I have a lot of respect for what you've said," said Adkerson, who added that a lot of his personal wealth was tied to Freeport's stock. "We're going to make this work."
Moffatt added that Freeport would continue to be aggressive and said the executive team had a solid track record. "We're going to swing for the fences, and we're going to hit some home runs," he said. He also asked investors to have some faith in the management team's judgment. "Who do you want to bet on?...I hope you don't jump to conclusions too quick."
On a pro forma basis for 2013, close to three-quarters of the combined company's total earnings are expected to continue to be generated from mining, while 26% would be from oil and gas. Almost half (48%) of the combined earnings would be from U.S. operations. The transactions are expected to be completed before the end of June.
Freeport, said Moffatt, "has been built through our exploration and development capabilities, and this transaction will enable us to add assets with exceptional exploration and development potential to a world-class mining company to create a premier minerals and oil and gas business focused on value creation for shareholders...The combined mining and oil and gas teams have significant management depth in operations, technical innovation, project development and financial management, and share a strong commitment to safety, community development and environmental management."
Adkerson said the assets being acquired "possess the asset quality characteristics that we seek in our mining business -- large scale assets with long lives, low cost and geologic potential to support growth through exploration and development."
Freeport offered a 39% premium for PXP, based on its closing price Tuesday of $36.05. Under the terms of the PXP transaction, Freeport agreed to a exchange of 0.6531/share and $25.00 in cash, or around $50/share, based on Freeport's closing price on Tuesday. For McMoRan, Freeport offered $14.75/share in cash and 1.15 units of a royalty trust, which would hold a 5% overriding interest in future production from McMoRan's properties. The cash consideration for McMoRan represents a 75% premium to its closing price Wednesday of $8.46. The cash portion of the McMoRan transaction totals $2.1 billion, excluding payment for interests currently held by Freeport and PXP.
Moffatt would continue as chairman of Freeport. B. M. "Mack" Rankin Jr. also would continue as vice chairman, and Adkerson would remain CEO and become co-vice chairman. Once the transaction is completed Flores also would be a vice chairman and become CEO of Freeport's oil and gas operations. Kathleen L. Quirk would remain Freeport's CFO. Flores and two other PXP board members would be added to Freeport's board. The corporate headquarters would be in Phoenix, with offices in Houston and New Orleans.
©Copyright 2012 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.