Freeport-McMoRan's Exploration Buys Boon For Energy
Freeport-McMoRan shares plunged 16% to a four-month low after the company announced it's acquiringMcMoRan Exploration ( MMR ) andPlains Exploration & Production ( PXP ) 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 ( IYM ) sank 0.85% andMaterials Select Sector SPDR ( XLB ) fell 1.18%. Both have heavy stakes in Freeport. Both ETFs are trading below their 50- and 200-day moving averages, indicating a strong downtrend.
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 the stock.
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.