Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) announced on December 5th that it plans to acquire both Mcmoran Exploration Co (NYSE:MMR) and Plains Exploration & Production Company (NYSE:PXP) at substantial premiums to where these stocks had previously been trading. Plains is currently up 25% on the news, with Mcmoran Exploration rising 81%. Plains had purchased considerable Gulf of Mexico assets from BP plc (NYSE:BP) in September, which at the time had confused many investors as the company planned to finance the transaction by taking out a loan and then repaying that loan after selling natural gas assets. With demand for natural gas expected to increase going forward, this had not seemed like a good strategic move to many analysts. As might be inferred, Freeport-McMoRan and Mcmoran Exploration Co had previously been part of the same company, and have maintained a close corporate relationship. Plains Exploration & Production Company is a major shareholder in Mcmoran Exploration.
Upon closing the deal, Freeport-McMoRan Copper & Gold Inc. would become a large natural resources company providing copper, gold, oil, and natural gas. As such it will be highly exposed to the global economy- possibly even more so than it currently is, with the stock carrying a beta of 2.3. We’d also expect it to be less focused on its core mining business, and would note that most M&A deals destroy shareholder value. However, Freeport’s stock is currently down about 14% on the news; it’s possible that the addition of oil and gas assets turns out poorly for the company but less so than the market is currently anticipating.
Mcmoran Exploration Co’s stock price had been down over 40% for the year following a plunge in late November. The company had been reporting net losses- it is unprofitable on a trailing basis- and a delay in bringing an oil well into production. Trailing EBITDA had been $71 million. As a result we’d be fairly confident in saying that Freeport is overpaying for the company. Plains Exploration & Production Company had been trading at a forward P/E multiple in the teens, though the BP transaction and the expected sale of its assets complicate the valuation.
BP itself, meanwhile, trades at 8 times forward earnings estimates and while that company certainly has concerns- including lingering poor sentiment following the Deepwater Horizon disaster- it still serves as a ballpark figure for what the market is treating oil and gas assets as being worth. Exxon Mobil Corporation (NYSE:XOM), an even larger oil major, is priced at 11 times consensus earnings for 2013. Both of these companies saw a small decline in revenue in the third quarter compared to the same period in 2011, and Exxon Mobil’s earnings decreased as well. We would say that an investor should see these companies as a better value opportunity than the oil and gas side of the new Freeport-McMoRan.
One hedge fund which is poised to be a big winner on the deal is billionaire Steve Cohen’s SAC Capital Advisors. SAC had filed a 13G in mid October reporting a position of 6.5 million shares in Plains, which had given the fund 5.1% of the total shares outstanding. Read our previous article about SAC buying Plains stock. This is interesting because SAC had been selling Plains during the third quarter of the year: the fund’s stake had been cut 32% during the quarter to 3.2 million shares (check out Cohen’s top stock picks). Fellow billionaire Ken Griffin’s Citadel Investment Group had more than doubled the size of its own position in Plains during the third quarter, with 1.9 million shares in its portfolio at the end of September (find more of Griffin’s favorite stocks).
With Freeport-McMoRan Copper & Gold Inc. paying a large premium for these oil and gas assets, investors in the company will likely depend on much better numbers from the mining operations than had been expected. Since copper is so closely tied to the global economy, it therefore might be a better idea to build a synthetic portfolio consisting of a mix of macro-dependent stocks (Caterpillar comes to mind) and oil majors. This would probably be a better value than buying the stock at current prices, and an investor would not have to worry about Freeport’s management being unable to focus on the mining business thanks to the new assets.
