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Freeport-McMoRan Jumps into the Oil & Gas Industry

Freeport-McMoRan Copper & Gold is one of the world’s largest producers of, you guessed it, copper and gold.  The company is making plans, however, to jump into a new territory with two acquisitions: Plains Exploration & Production Company as well as McMoRan Exploration for a hefty fee of $6.9 billion and $3.4 billion, respectively.  By going through with this deal, they are taking a risky jump into the oil and gas industry.

As you may have inferred, Freeport-McMoRan and McMoRan Exploration were previously a part of the same company.  Plains Exploration is not a new contender either, as they are a major shareholder of McMoRan Exploration.  After closing the deal, Freeport-McMoRan will become a large natural resources company providing not only copper and gold, but oil and natural gas as well.

Executives of Freeport-McMoRan defended the deal, saying it is a valuable opportunity to grow the business, move into new territory, and increase exposure to the U.S.  Chief Executive Officer Richard Adkerson stated in a conference call, “It’s not an A or B situation.  If we could find ways to grow in copper, we would be doing it.”  Although Freeport-McMoRan is doubling its debt to almost $20 billion with the acquisitions, analyst Fadel Gheit believes the growth opportunities in the oil and gas market are much better than those in the mining business.

The company agrees with Gheit’s analysis, “The addition of a high quality, U.S.-focused oil and gas resource base is expected to provide fundamentals, strong margins and cash flows, exploration leverage and financially attractive long-term investment opportunities.”

Executives seem confident that the deal will be successful for the company and shareholders alike.  Jim Bob Moffett, CEO of McMoRan Exploration, was the founder and chairman of Freeport-McMoRan in 1981.  Seven years later he led the company to a massive gold discovery at the Grasberg mine located in Indonesia.  Since McMoRan Exploration operates some of the deepest wells in the world, many are convinced that another Grasberg-sized discovery will occur in the near future.

In light of the merger announcement, McMoRan Exploration shares increased 87% to $15.82.  Similarly, Plains Exploration & Production Co. shares rose 23% to settle at $44.50.

Unfortunately, the news is not as rosy for Freeport-McMoRan.  Freeport’s stock is currently down about 14% and shareholders do not seem too pleased.  Loyal shareholder Shawn Reynolds expressed his views on the situation, “We’ve known the company intimately for over 12 years and we’re not happy.  We certainly didn’t own Freeport because we thought it was going into the oil and gas industry.”  Evy Hambro, joint chief investment officer of BlackRock Inc.’s Natural Resources Equity Team (which is one of Freeport’s largest shareholders), believes the shareholders should have voted on this deal and was quoted saying, “I find it incredibly disappointing that you have chosen to break the trust of investors.”

This ambitious acquisition has clearly brought much apprehension to all parties involved, but executives and leaders of these companies remain positive that this plan will result in major profits. The energy world will certainly be watching in anticipation to see what their next move will be.

Sarah Battaglia
Energy Curtailment Specialists, Inc.

Sarah can be found on LinkedIn and Google+.

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