Wednesday, December 05, 2012 4:04 pm
Big miner buys pair of energy companies for $9B
By JONATHAN FAHEY and SANDY SHOREAP Business Writers
Freeport-McMoRan Copper & Gold Inc., based in Phoenix, said Wednesday it is paying $6.9 billion in cash and stock for Plains Exploration & Production Co., and $2.1 billion for McMoRan Exploration Co. Freeport also will assume $11 billion in debt in the deal. Its shares fell 14.5 percent in afternoon trading.
Plains Exploration, based in Houston, produces oil in California, Texas and the Gulf of Mexico, along with natural gas in Louisiana. McMoRan Exploration, based in New Orleans, is developing natural gas resources that lie deep below shallow water regions of the Gulf of Mexico.
The opportunity to buy these two companies was too good to pass up, Argus Research analyst Bill Selesky said. Freeport-McMoRan will be able to diversify into a growing global market for natural gas without losing focus on mining operations.
It also gives the company a chance to help stabilize revenue streams that largely are depending on the commodity prices of copper and, to a smaller extent, gold.
Mining companies face growing challenges in finding and developing resources around the world. Besides development costs, there are environmental issues and increased geopolitical risks such as the nationalization of assets or the requirement of loyalty payments.
With this move, Freeport-McMoRan can operate in the Gulf of Mexico and North America, which have less risk, Selesky said.
But the recent track record of miners buying oil and gas companies has been mixed.
BHP Billiton, the Australian mining giant, wrote down the value of its U.S. natural gas assets by $2.8 billion in August. The company had paid $5 billion for much of those assets in 2011 when it bought reserves in the Fayetteville Shale in Arkansas from Chesapeake Energy.
Natural gas prices in the U.S. have been pushed sharply lower in recent years because drillers have learned to unlock enormous amounts of natural gas from shale formations under several states, dramatically boosting supplies.
BHP Billiton also acquired Petrohawk Energy in 2011 for $12 billion. Petrohawk focused on oil instead of gas, though, so BHP did not have to write down those assets.
U.S. oil production is at its highest level since 1998, according to the Energy Department, but global oil prices have remained relatively high.
Analysts expect to see backlash from some shareholders because they just aren't interested in owning oil and gas assets.
Evy Hambro, joint chief investment officer of BlackRock's natural resources equity team, criticized the deal during a conference call with Freeport-McMoRan executives.
"I haven't heard anything on this call that in any way justifies why these companies should be put together," Hambro said.
In afternoon trading, shares of Freeport-McMoRan fell $6.22, or 16.2 percent, to $32.06.
Meanwhile, shares of Plains Exploration rose $8.50, or 23.6 percent, to $44.55, while McMoRan surged $7.38, or 87.2 percent, to $15.84.
The acquisitions will require approval from shareholders at Plains Exploration and McMoRan but not from investors at Freeport-McMoRan because of the small number of shares being issued.