Freeport-McMoRan Copper & Gold 's (
) ambition of becoming a natural resource powerhouse by buying
two oil explorers was a boon for energy
but a bust for basic materials Wednesday.
Freeport-McMoRan shares plunged 16% to a four-month low after
the company announced it's acquiringMcMoRan Exploration (
) andPlains Exploration & Production (
) for $2.1 billion and $6.9 billion, respectively.
It also has to pay off Plains' $9.5 billion outstanding debt
and McMoRan's $900 million interests in Freeport and Plains.
McMoRan shares exploded 87% to a one-year high, while Plains
spiked 23% to a nine-month high. Plains shareholders will get
0.6531 of Freeport shares and $25 cash.
IShares Dow Jones U.S. Basic Materials (
) sank 0.85% andMaterials Select Sector SPDR (
) fell 1.18%. Both have heavy stakes in Freeport. Both ETFs are
trading below their 50- and 200-day moving averages, indicating a
Vanguard Materials ETF (VAW) andSPDR S&P Metals &
Mining (XME) also hold the Phoenix, Ariz.-based firm.
SPDR S&P Oil & Gas Exploration & Production ETF
(XOP), which includes both buyout targets, surged 2.98% to a
one-month high of 53.93 and outperformed all domestic equity
ETFs. XOP appears to be forming a cup-with-handle base with a
potential 59.99 buy point.
IShares Dow Jones U.S. Energy Sector (IYE), with scant
holdings in the small-cap energy explorers, climbed 0.95%. IYE is
consolidating below its 50-day line but is above the 200-day line
and appears to be forming a base.
Wall Street reacted negatively to the news, as it could divert
Freeport's focus on growing its copper business.
"The trend in the (mining) industry has been more towards
shareholder return and not large-scale investment," Anthony
Rizzuto, an analyst at Dahlman Rose & Co., wrote in a note
after the announcement.
BlackRock, one of Freeport's largest shareholders, contended
the deal made no sense. "I haven't heard anything on this call
that in any way justifies why these companies should be put
together," said Evy Hambro, a managing director and portfolio
manger at BlackRock, during a conference call.
Law firms kicked off investigations, alleging the acquisitions
may be unfair to shareholders of all three companies.
The deal valued Plains' shares at 4.1 times 2013 earnings and
2.6 times next year's projected cash flows, which are below their
five-year averages of 5.5 times and four times, according to
Michael Kay, an equity analyst at S&P Capital IQ.
"Valuations are depressed (because of) weak U.S. gas (prices)
and rising debt, but we expect Plains' production mix to surpass
80% oil and acquisitions should step up 2013 production," Kay
wrote in a client note.
S&P Capital cut its rating on Freeport shares from hold to
sell and its 12-month price target from 44 a share to 29, 11%
below Wednesday's price, on the expectation the deal will dilute
Freeport said it plans to continue paying its $1.25 per share
annual dividend. It projects 74% of next year's earnings will
come from mining operations, and 26% from oil and gas. Its bonds
sold off as investors demanded higher interest rates. Insurance
to protect the company's debt against default also shot up.