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Freeport under fire for $9-billion energy deal

Keywords: Tags  Freeport-McMoRan Copper & Gold, Plains Exploration & Production, McMoRan Exploration, copper, natural gas, Daniel Rohr, Morningstar, Evy Hambro BlackRock


NEW YORK — Freeport-McMoRan Copper & Gold Inc.’s share price logged a double-digit decline Wednesday after the company announced its $9-billion push into the energy business, with analysts criticizing the move as an unhappy marriage between two incompatible industries.

"I don’t see any reason why these two disparate sets of assets need to be together," Daniel Rohr, an analyst at Chicago-based Morningstar Inc., told AMM. "There’s nothing complementary here."

Freeport on Wednesday announced definitive plans to acquire oil and gas producer Plains Exploration & Production Co. for $6.9 billion in cash and stock, as well as oil and gas producer McMoRan Exploration for $3.4 billion in cash, or $2.1 billion net after taking into account the copper and gold miner’s and Plains Exploration’s existing stakes in the business. Included in the deal are Plain Exploration’s oil and gas assets in the Gulf of Mexico, onshore production at Eagle Ford in Texas and Haynesville, La.; and oil production facilities in California (amm.com, Dec. 5).

Market analysts and investors hammered the merger on a conference call Wednesday, questioning the wisdom of Phoenix-based Freeport’s diversification and challenging the company for making the decision without adequate shareholder input.

"I haven’t heard anything on this call that justified why these companies should be put together," Evy Hambro, managing director of BlackRock Inc., said during the conference call. "Congratulations on making one of the worst teleconferences I’ve ever heard to justify a deal."

Investors and analysts also had sharp words for the company’s alleged lack of disclosure to shareholders.

"Investors obviously have the freedom to diversify by commodity or geography, and (they) don’t need management teams to do it for them," Hambro said.

Freeport’s share price reflected the concern, with shares trading at $38.28 apiece the evening before the deal was announced, or 19 percent above Wednesday’s $32.16 per share close. Particularly concerning was that the decision was announced without giving shareholders an opportunity to vote, Rohr told AMM.

"(Investors) woke up yesterday morning and they found out that they owned a pretty pricey chunk of two big oil and gas producers," he said.

Analysts and investors said they were skeptical that the two industries were relevant to each other, especially since company executives didn’t claim that natural gas and oil production would directly assist in copper output in the way that Nucor Corp. said its recent push into natural gas would directly reduce its costs (amm.com, Nov. 6).

"This deal is not one that’s driven (by) or has significant impact from any cost-reduction aspects to it," Freeport president Richard Adkerson conceded during Wednesday’s conference call. "It’s not one that’s driven by cost synergies."

Company executives insisted, however, that the company wouldn’t lose focus on continuing investments in global copper projects.

"It’s not an A or B situation. If we could find ways to grow in copper, we’d be doing it," Adkerson said. "You know me well enough to know there’s no bigger positive person about the copper markets in the world. And I’m staying with that. ... If there had been copper opportunities available to us, we would have taken advantage of it."

Leon Cooperman, chief executive officer of investment firm Omega Advisors Inc., also defended the deal. "Coupled with the diversification of the company’s exposure, ... (it) sounds to me like a good play," he said during the call.

Three-fourths of the combined company’s earnings would still come from copper output, Freeport said, with 12 percent of combined earnings of $12 billion before interest, taxes, depreciation and amortization (Ebitda) generated from oil and gas in 2013 and 48 percent from U.S. operations, including metal and energy.

"If it’s successful, (the deal) could bring tremendous amounts of gas to the market at exactly the right period of time," Adkerson said.


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