Well that was one hell of a turnaround. Just a week ago Jim Bob Moffett, CEO of McMoRan Exploration was facing a firing squad of investors anxious over months of delays in the completion of the landmark ultra-deep Davy Jones well. Shares of MMR had fallen 40% in two days amid discouraging words from an analyst that the company had "zero equity value" and that it would run out of cash before the second quarter of 2013 -- and before Moffett could succeed in his Captain Ahab-like quest to unlock the oil and gas from deeper beneath the Gulf of Mexico than anyone's gone before.
On that conference call last Tuesday, Lee Cooperman, chairman of Omega Advisors, and a leading investor in McMoRan, asked Moffett what the potential was for bringing fresh capital into the company. In reply, Moffett sounded cagey, and he had little response other than to say they would go about seeking options in a "businesslike manner."
Now we know why he was being cagey. Talk about an ace up the sleeve!
This morning McMoRan announced that it had reached a definitive agreement to be acquired by sister company Freeport-McMoRan Copper & Gold for $3.4 billion in cash plus assumption of debt. At last Moffett can shake off those short sellers and naysayers and get back to drilling out the smorgasbord of 30,000-feet-deep prospects he's identified on the Gulf Coast and the shallow waters of the Gulf.
In the deal, Freeport-McMoRan (NYSE: FCX) will also acquire Plains Exploration, which is a big holder of MMR shares that it received when selling Moffett its portfolio of shallow Gulf acreage a few years back. The purchase price of Plains (PXP) is $6.9 billion in cash and stock plus assumed debt. Freeport-McMoRan already owned a big slug of McMoRan Exploration (36% between it and PXP), so the price for MMR's floating shares comes to $2.1 billion. That's a long way from zero equity value.
What's more, according to the company, current MMR holders will get a 5% overriding royalty interest on future production from MMR's existing shallow water ultra-deep properties -- a reward for having the faith to stick with Moffett through the ups and downs of the past few years.
No doubt this deal constitutes some hefty self-dealing. Moffett was the founder and chairman of Freeport-McMoRan in 1981, and in 1988 led the company to a giant gold discovery at the Grasberg mine in Indonesia. In the mid-1990s Freeport spun off McMoRan Exploration to focus on minerals, culminating in the acquisition of mining giant Phelps Dodge in 2007 for $26 billion. Some existing FCX shareholders might not be wild about this deal, considering the riskiness of what Moffett has been pursuing with McMoRan Exploration.
Then again, as Moffett and his supporters have insisted time and again -- with MMR's ultradeep discoveries at wells like Davy Jones, Blackbeard and more, Freeport shareholders will be acquiring a Grasberg-equivalent-sized horde of oil and gas at a deep discount.
Plains Exploration was itself just beginning to digest a bet-the-company deal in which it acquired deepwater Gulf of Mexico fields from BP and Shell for $5.5 billion. In a conference call Wednesday morning Plains CEO Jim Flores said that Freeport's takeover would alleviate the need for Plains to sell some of its onshore natural gas fields at a time when gas prices remain unsustainably low. At the closing of the deal, Flores will become vice-chairman of Freeport and CEO of its oil and gas division.
As expected, MMR shares have soared, up 83% at midday to $15.50. At their nadir last week they touched $7.25. Considering that the per-share price that Freeport has agreed to pay is $14.75, there's a limit to how high MMR will go. The extra juice above that offer price corresponds to the perceived value of the 1.15 units they'll receive, per share, in the planned 5% overriding royalty trust. Such trusts receive a stream of cash from the sale of oil and gas generated from a particular set of fields, which they pass along to unit holders. Because it's an "override," the royalties are passed along prior to the deduction of any costs of production. Impossible to say what kind of production could eventually come out of MMR's share of its ultra-deep prospects -- I would welcome insights from anyone out there who's tried to do some hypothetical calculations.
Shares of PXP are up 26% to $45.58. Unsurprisingly, shares of FCX are down 13%. MMR's leading minority partner in its ultra-deep drilling, Energy XXI, is up 7.80% as investors recalibrate the value of their piece of the pie.
Freeport said this morning that the deal will be financed with debt, but reassured investors that it will continue paying its $1.25 annual dividend.
Follow me on twitter @chrishelman
