Mining company Freeport enters oil and gas space with MMR, PXP acquisition

Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), the world's largest publicly traded copper company, has entered the oil and gas space with a signed agreement to acquire both Plains Exploration & Production Company (NYSE: PXP) and McMoRan Exploration Co. (NYSE: MMR) in transactions totaling $20 billion.

The definitive merger agreements states that FCX will acquire PXP for approximately $6.9 billion in cash and stock and FCX will acquire MMR for approximately $3.4 billion in cash, or $2.1 billion net of 36% of the MMR interests currently owned by FCX and PXP. Upon closing, MMR shareholders will also receive a distribution of units in a royalty trust which will hold a 5% overriding royalty interest on future production in MMR’s existing shallow water ultra-deep properties.

FCX’s mineral assets include the world class Grasberg minerals district in Indonesia, the large-scale Morenci minerals district in North America, the Cerro Verde and El Abra operations in South America, the high potential Tenke Fungurume minerals district in the Democratic Republic of Congo (DRC) and a global molybdenum business.

The addition of a high quality, US-focused oil and gas resource base is expected to provide exposure to energy markets with positive fundamentals, strong margins and cash flows, exploration leverage and financially attractive long-term investment opportunities. On a pro forma basis for 2013, approximately 74% of the combined company’s estimated EBITDA is expected to be generated from mining and 26% from oil and gas, with 48% of combined EBITDA from US operations.

PXP’s major assets include its established strong oil production facilities in California, a growing production profile in the onshore Eagle Ford trend in Texas, significant production facilities and growth potential in the Deepwater Gulf of Mexico and large onshore resources in the Haynesville natural gas trend in Louisiana. MMR has assets offshore in the shallow waters of the Gulf of Mexico and onshore in South Louisiana.

James R. Moffett, chairman of the board of FCX, said: “FCX has been built through our exploration and development capabilities, and this transaction will enable us to add assets with exceptional exploration and development potential to a world-class mining company to create a premier minerals and oil and gas business focused on value creation for shareholders.”

Richard C. Adkerson, FCX’s president and CEO, said: “The oil and gas assets being acquired possess the asset quality characteristics that we seek in our mining business – large scale assets with long lives, low cost and geologic potential to support growth through exploration and development. We anticipate that attractive debt financing markets and our strong balance sheet will allow us to finance a significant portion of the transaction using low cost debt and enable FCX shareholders to retain the significant value we see in our existing asset base, while enhancing future value generation opportunities.”

PXP
FCX has agreed to acquire PXP for per-share consideration consisting of 0.6531 shares of FCX common stock and $25.00 in cash, equivalent to total consideration of $50.00 per PXP share, based on the closing price of FCX stock on December 4, 2012. This represents a premium of 39% to the PXP closing price on December 4, 2012, and 42% to its one-month average price at that date. PXP shareholders may elect to receive cash or stock consideration, subject to proration in the event of oversubscription, with the value of the cash and stock per-share consideration to be equalized at closing. Aggregate consideration to the PXP shareholders is expected to consist of approximately $3.4 billion in cash and approximately 91 million shares of FCX common stock.

MMR
FCX has agreed to acquire MMR for per-share consideration consisting of $14.75 in cash and 1.15 units of a royalty trust, which will hold a 5% overriding royalty interest in future production from MMR’s existing ultra-deep exploration properties. The cash consideration of $14.75 per share represents a premium of 7% to the MMR closing price on December 4, 2012, and 31% to its one-month average price at that date. The cash portion of the transaction totals $2.1 billion, excluding payment for MMR interests currently held by FCX and PXP. The cash premium, excluding interests held by FCX and PXP, totals approximately $900 million.

Management and board
James R. Moffett, chairman of FCX and co-chairman and CEO of MMR, will continue as chairman of FCX. B. M. “Mack” Rankin, Jr. will continue in his role as vice chairman. Richard C. Adkerson, president and CEO of FCX and co-chairman of MMR, will continue as president and CEO and be appointed vice chairman. Upon completion of the transaction, James C. Flores, chairman, president and CEO of PXP, will be vice chairman of FCX and CEO of FCX’s oil and gas operations. Kathleen L. Quirk will continue as executive vice president and CFO of FCX.

At closing, FCX will add to its board of directors James C. Flores and two other members from PXP’s board. The corporate headquarters of the combined company will be located in Phoenix, Arizona, and the combined company will also maintain offices in Houston, Texas and New Orleans, Louisiana, to support its oil and gas operations and existing administrative functions.

Financing
FCX has received $9.5 billion in financing commitments from JPMorgan Chase Bank NA to fund the cash portion of the merger consideration for both transactions and to repay debt outstanding under PXP’s existing term loans and revolver. FCX intends to provide a guarantee for all existing PXP bonds and PXP in turn will provide guarantees for all current and future FCX bonds and term loans. After giving effect to the transaction, estimated pro forma total debt at September 30, 2012, is approximately $20.0 billion, or approximately $16.3 billion net of cash.

Combined cash flows
For the year 2013, assuming prices of $3.50 per pound for copper, $1,500 per ounce for gold, $12 per pound for molybdenum, $100 per barrel for Brent crude and $4.50 per MMbtu for natural gas and current estimates of production, the combined company’s estimated EBITDA would approximate $12 billion and operating cash flows would approximate $9 billion.

Analysis
The deal was a surprise to some, and traditional mining investors will take the news negatively, said Dahlman Rose & Co. analysts in a note to investors following the announcement. Shares of FCX were down nearly 13% Wednesday morning, as “the trend in the industry has been more towards shareholder return and not large-scale investment,” they noted.

McMoRan Davy Jones project

The analysts said the deal makes sense for ultra deep Gulf of Mexico player MMR as it viewed the primary risk to the stock as funding and timing of its Davy Jones project. “Recent delays in the Davy Jones flow test raised concerns over near-term funding. We viewed the delays as primarily related to wellbore issues, as opposed to reservoir or trend related. The project likely makes significantly more sense as part of a larger organization with more capital available,” they noted.

As for PXP, the analysts noted, “the company recently levered itself to acquire a significant producing deepwater assets. We expected the company to de-lever significantly with its oily free cash flow, as the new debt was structured to allow for quick pay-down. We believe the 25% premium is attractive, considering the increased financial risk subsequent to the transaction.”

The transactions are expected to close in the second quarter of 2013.

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