Freeport-McMoRan Putting The McMoRan Back In Freeport-McMoran

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Others have noted that Citi's announcement of 11,000 layoffs today came with a larger than usual helping of corporate jargon, but this morning's other big news release - copper producer Freeport-McMoRan's double-barrelled acquisition of oil companies Plains Exploration and McMoRan Exploration - lacks one favorite piece of corporatese. Also it lacks layoffs. Where are the synergieshere?

The combined company is expected to be a premier U.S.-based natural resource company with an industry leading global portfolio of mineral assets, significant oil and gas resources and a growing production profile. FCX’s mineral assets include [copper and stuff]. The addition of a high quality, U.S.-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.

That's just "we got some copper, now we got some oil, so you can have both." A benefit of liquid equity markets is that a Freeport shareholder could just go invest his own money in oil companies, so it's a little weird that Freeport is doing it for them. Why? There's no really satisfying answer, leading to disjunctions like slide 7 of the investor presentation talking about how this lets FCX diversify and slide 8 talking about how closely correlated the two commodities - oil and copper - are.1 Is the message here "we are diversifying away from copper, to protect your investment from copper price risk," or is it "we are buying more of a thing that's the closest substitute we can find to copper, other than copper, to give you more of the copper exposure you crave"? Who knows?

As the FT puts it:

Industry observers said that the deals could surprise some shareholders, however. The biggest global mining groups have come under pressure to return money to shareholders, rather than invest excess funds in ambitious new projects.

"Surprise" is a euphemism there; Freeport's stock is down 13%ish as an expression of surprise.2

I'm really looking forward to the Background of the Merger in this proxy! They sort of touched on it on this morning's call; the first question was "was there a long-term plan to do this or was it just opportunistic based on McMoRan's stock price drop?" and the answer was "well there's no long-term plan." There's a lot of history here - McMoRan Exploration was spun off from Freeport-McMoRan in 1994, its CEO is also Freeport's chairman, and Plains became its biggest shareholder recently after an asset swap - so there are many potential permutations of who asked whom to do what when. And why.

You can have cynical guesses of various flavors,3 but I kind of believe the set of explanations that FCX waved at on the call. They like themselves! They think of themselves less as "guys who manage some copper mines" and more as "guys who are geniuses at commodity investing." They think that they can see where value is in different commodities, that the copper assets they've been shown look pretty rich, and that these oil & gas assets are a steal. So they're buying them.

I guess everybody thinks nice things about themselves, but this sort of confidence is a particularly standard model in commodities businesses - witness Aubrey McClendon. People run these companies because, well, mainly because they found oil or metal or whatever once, and because they're shrewd investors and risk-takers, so they're pretty confident in their ability to spot value. And oil.

Also, separately: FCX is triple-B. Plains is double-B. McMoRan is single-B. The combined company will finance more cheaply than the oil & gas independents. When asked about synergies on the call, Freeport's execs said that there'd be no employee-layoff synergies but some $250mm in interest rate savings. And this means that they can keep otherwise marginal products: for instance the Plains CEO said the company will keep gas projects that it had been planning to get rid of.

Anyway! Might be worth noticing how close this surprising deal is to the financial industry model that is now under some attack. If companies are run by people who think of themselves as good traders and spotters of value across asset classes, they will be happy to diversify into places that their investors didn't expect, because they'll figure that they're better spotters of value than their investors are. And if bigness begets cheap financing, then it'll sort of look like they're right. At least for a while.

Freeport in $20bn energy move [FT]
Webcast to Discuss FCX Acquisition of PXP and MMR [FCX]
Freeport-McMoRan Copper & Gold Inc. to Acquire Plains Exploration & Production Company and McMoRan Exploration Co. in Transactions Totaling $20 Billion, Creating a Premier U.S. Based Natural Resource Company [FCX]

1.Diversify:

But also not:

2.Also surprised: FURIOUS Blackrock guy on the call who said "congratulations on having one of the worst conference calls ever" and asked "before I ask my question, can you tell me, is anyone on this call not conflicted?" Not a fan of conglomerate mergers then. Leon Cooperman chimed in to say he's a fan though.

Oh but you know who wasn't a fan? Circa 1994 Freeport-McMoran; this is from an April 1994 Bloomberg article that appears to be terminal-only now:

The spinoff gives Freeport McMoRan shareholders an opportunity to own a pure oil and gas investment, said Craig Saporito, company spokesman. He said the oil and gas business wasn't being valued properly as part of Freeport McMoRan Inc.'s overall resource portfolio.

Now it will be of course. There's something very satisfying, for a former banker, about a round-trip spinoff-into-merger, even if it does take 18 years.

3.OH GOSH SO LET'S.

  • What do you make of the fact that (1) McMoRan exploration announced bad results in its Davy Jones well a couple of weeks ago, (2) the stock cratered, and (3) Freeport bought it? Given the ties between the companies, etc. etc. Is this insider-trading-lite, where Freeport has more visibility into (and optimism about) Davy Jones than everyone else has, and swooped in for this deal? Given the need for a proxy disclosing everything, and the fact that there'll be a royalty trust for McMoRan shareholders to give them some upside in the well, I'd guess not, but it's interesting timing.
  • If you're all "companies should return cash rather than do mergers," as the FT notes many people think, and if you further cynically note that companies that return a lot of cash often do so because insiders are big shareholders and so it gets a lot of cash to them, then you might have the following scurrilous thought. Delightfully named FCX chairman and MMR CEO Jim Bob Moffett owns ~5mm shares of MMR, meaning that this deal will cash him out to the tune of ~$73mm. He also owns ~3mm shares of FCX. If FCX had wanted to dividend him $73mm worth of cash, it'd need to dividend ~$24 per share, or about $23bn total. This deal is only $5.5bn of cash to get him the same amount.

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