Global mining powerhouse Freeport-McMoRan Copper & Gold Inc. is making a big and risky jump into the oil and gas business by agreeing to buy Plains Exploration and Production Co. as part of an $8.5 billion cash and stock deal that aims to diversify its operations.
Executives at the world’s largest publicly traded copper producer defended the deal Wednesday as one of the few valuable opportunities Freeport-McMoRan has to take advantage of favorable financing terms and grow its business by moving into new territory and increasing its exposure to the U.S.
The deal would create a massive natural resource company with significant mineral assets, oil and gas interests and growing production capability.
“It’s not an A or B situation,” Richard Adkerson, Freeport-McMoRan Copper & Gold’s chief executive officer, said in a lengthy conference call with analysts and investors, some of whom had doubts about the merits of the deal. “If we could find ways to grow in copper, we would be doing it.”
Investors panned the deal for Freeport-McMoRan, sending shares of the company down $6.12, or 16 percent, to close at $32.16, which dropped the value of the deal from $9 billion to roughly $8.5 billion.
Oppenheimer & Co. analyst Fadel Gheit said the growth opportunities in the oil and gas business are a lot better right now than in the mining business, but he noted Freeport-McMoRan is paying a big premium under the deal. It also is doubling its debt to roughly $20 billion.
Asked what mining and oil and gas have in common, Gheit said, “Very little, almost nothing. Like very distant relatives, almost strangers.”
The combined company would be based in Phoenix, which is where Freeport-McMoRan Copper & Gold currently has its corporate headquarters. It would maintain offices in Houston and New Orleans.
It wasn’t immediately clear if there would be any layoffs under the deal or how Plains Exploration and Production Co.’s 1,100 employees would be affected. That figure includes employees absorbed by the company in its recent deal to acquire some of British oil giant BP’s deep-water Gulf of Mexico assets.
Adkerson said he understood the concerns being raised by investors, but he vowed that management would make the deal to acquire Plains Exploration and Production work for shareholders.
“We’re in this to make money,” he said. “The market reaction is what it is. It’s not unexpected.”
The complicated transaction calls for Freeport-McMoRan Copper & Gold to acquire Plains Exploration for roughly $6.4 billion in cash and stock, and also buy McMoRan Exploration Co., an independent firm, for roughly $2.1 billion in cash, net of the 36 percent combined stake Freeport-McMoRan Copper & Gold and Plains Exploration currently own in McMoRan Exploration Co.
At closing, McMoRan Exploration Co. shareholders will also receive a distribution of units in a royalty trust that will hold a 5 percent overriding royalty interest on future production in the company’s existing shallow water ultra-deep properties.
James Moffett, chairman of Freeport-McMoRan Copper & Gold, will continue as chairman of the combined company, and Adkerson will remain as CEO. James Flores, chairman, president and CEO of Plains Exploration, will become vice chairman of the combined company and head of the company’s oil and gas operations. Kathleen Quirk will remain as finance chief of the combined company. Flores and two other members of Plains Exploration’s board will join Freeport-McMoRan Copper & Gold’s board.
Shares of Plains Exploration soared $8.45, or 23.4 percent, to $44.50, while shares of McMoRan Exploration Co. rose $7.36, or 87 percent, to $15.82.
Freeport-McMoRan Copper & Gold’s mineral assets include operations in Indonesia, North America, South America, and Africa. Plains Exploration’s major assets include production facilities in California, the Gulf of Mexico and the Eagle Ford in South Texas. It also has onshore operations in the Haynesville natural gas play in Louisiana.
McMoRan Exploration Co. is an independent natural gas exploration and production company with operations in the shallow waters of the Gulf of Mexico and on shore in the Gulf Coast area.
The transactions, subject to shareholder and regulatory approval, are expected to close in the second quarter of 2013.