Mining giant Freeport-McMoRan Copper & Gold Inc. last week put a $9 billion cash-and-stock transaction — $20 billion total including debt — on the table to buy U.S. producers Plains Exploration & Production Co. (PXP) and McMoRan Exploration Co., a deal that is expected to vault Freeport into the upper ranks of domestic producers but initially with faltering shareholder support.
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 NGI, Sept. 27, 2010).
The U.S. oil and gas business offers a lot for the long-term viability of Freeport, Moffatt said during a conference call. He noted that Houston’s PXP is a 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, he promised.
“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,” said Moffatt. “Nobody will have a better feel for valuation…” He founded Freeport McMoRan Inc., which in 1994 separately spun off the minerals business and the exploration company.
Once the transaction is completed, 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., said Moffatt. The operator would “leapfrog” over Anadarko Petroleum Corp., Apache Corp., EOG Resources Inc., Chesapeake Energy Corp. and Marathon Oil Corp.
“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…”
Eighty-five percent of the acquired revenues are from oil. The transaction also provides a “favorable entry point to a source of low cost, long-term natural gas supplies,” said Adkerson.
PXP brings an estimated 575 million boe of proved reserves, with established California oil production, growing output in the Eagle Ford Shale, a large natural gas position in the Haynesville Shale and prospects in Wyoming’s Madden Field. PXP also is a big leaseholder in the deep and shallow waters of the GOM, recently completing $6.1 billion worth of acquisitions from BP plc and Royal Dutch Shell plc subsidiaries (see NGI, Dec. 3a).
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.
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.
“We have high-margin properties,” said Flores, “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…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.” Prices will be “soft in the next two years” but the assets provide a cushion for the future. “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…”
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.
Pro forma, Freeport’s 3P reserves would be about 1,581 million boe, with 575 million boe proved, 348 million boe probable and 656 million boe possible. Forty-eight percent of the 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.
PXP and McMoRan shareholders last week enthusiastically supported the deal, with PXP’s stock rising almost 25% on Wednesday; McMoRan’s jumped 87%. However, Freeport saw its stock fall about 16%. Some Freeport shareholders 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 NGI, Dec. 3b).
Evy Hambro, joint chief investment officer of BlackRock’s Natural Resources Equity Group, was especially dismayed about the 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 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 pointed to the solid track record of the executive team. “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.”
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.
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