Last updated: December 5, 2012 9:43 pm

Freeport returns to oil with $20bn deals

Freeport-McMoRan Copper & Gold has engineered a dramatic re-entry to the oil business with two deals worth a total of about $20bn, buying Plains Exploration and Production and McMoRan Exploration.

The deals will see the US mining group pay about $6.9bn in cash and stock for Plains, and about $2.1bn in cash for McMoRan Exploration, net of the 36 per cent of McMoRan Exploration already owned by Freeport and Plains. Freeport will also assume about $11bn in debt.

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Taken together the moves will create the fifth-largest natural resources company in the US and the fifth-largest mining company in the world, the companies said.

Freeport investors punished the company for the deal, sending shares down 14 per cent in early trading. McMoRan Exploration stock was up 86 per cent and Plains shares rose 26 per cent.

The move will take Freeport back to its roots as an energy producer and mark a major shift in strategy for the company, creating a natural resources conglomerate with a major foothold in the Gulf of Mexico.

James “Jim Bob” Moffett, chairman of Freeport and chief executive of McMoRan Exploration, has long considered reuniting mining and oil and gas operations under one company, following the 1994 split of McMoRan Exploration from Freeport.

The tie-up will connect three companies that already know each other well. Mr Moffett for years has both chaired the Freeport board and been chief executive of McMoRan Exploration. Those two companies share an office building in New Orleans. Plains owns more than 30 per cent of McMoRan Exploration, and Plains chief executive James Flores and general counsel John Wombwell sit on the board.

The merged company will make about 74 per cent of next year’s earnings before interest, depreciation and tax from mining and the remainder from oil and gas.

Plains has oilfields in California and the Eagle Ford shale of Texas, and last month bought a package of fields and platforms in the Gulf of Mexico from BP for $5.5bn. Plains’ acquisition of the BP assets was not the catalyst for the Freeport deal, but made the assets more attractive, according to people familiar with the matter.

About 48 per cent of the merged group’s ebitda will come from North America, giving Freeport diversification away from its troubled Indonesian copper mines.

McMoRan Exploration, an oil and gas company that was spun out of Freeport in 1994, has been pioneering drilling at extreme depths below sea level in the shallow waters of the gulf. The technique has not yet yielded commercially attractive results but is believed to offer great potential for future production.

The terms of the Plains offer are 0.6531 Freeport shares and $25 in cash, worth a total of about $50, for every Plains share, representing a 39 per cent premium to the Plains closing price on Tuesday night.

The McMoRan Exploration offer is $14.75 in cash and 1.15 units of a new royalty trust for every McMoRan share. The royalty trust will hold a 5 per cent overriding royalty interest in future production from McMoRan’s ultra-deep oilfields. The cash alone offers a premium of 74 per cent to McMoRan Exploration’s share price on Tuesday night, or 31 per cent to its average over the past month.

Credit Suisse advised Freeport’s special committee, while Wachtell Lipton provided legal counsel. Evercore advised the special committee of McMoRan Exploration, while Weil Gotshal provided counsel. Barclays advised Plains, while Latham & Watkins provided counsel. Freeport received $9.5bn in financing from JPMorgan Chase. Cravath advised JPMorgan in arranging the financing.

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