Freeport's Misguided Buyouts

 | Dec 05, 2012 | 10:00 AM EST
  • Comment
  • Print Print
  • Print
Stock quotes in this article:






Freeport McMoRan (FCX) wants back into the energy business, and on Wednesday it announced agreements to buy McMoRan Exploration (MMR) and Plains Exploration (PXP) for $20 billion. The question is whether this is good for Freeport, and whether there's an opportunity for you. In both cases, the answer is: probably not.

Looking over the palette of Gulf of Mexico offshore assets and the deals that have been made in the last several months, you see the picture clearly: Exploration-and-production costs continue to increase, and the risks associated with individual projects continue to rise with them. Look at the acquired McMoRan, for example. It recently disappointed on its Davy Jones project, and is now seeing a 30% drop in its shares. With every big risk you take in the Gulf now, you can bankrupt yourself or get massively hurt. (See ATP Oil and Gas, which is now nearly bankrupt.)

Look at who's getting out of the Gulf to concentrate on safer onshore assets -- Devon (DVN) and BP (BP), and even Petrobras (PBR) is trying now to dump GoM assets. Now look at who's buying those assets -- at deep discounts to be sure: Plains Exploration, SandRidge (SD) and now Freeport McMoran. The environment post-Macondo-disaster is making Gulf drilling a tough, tough trade.

It's all about increasing production onshore. In the Eagle Ford, in the Bakken, and with Canadian tar sands assets, you're far less likely to hit a dry hole, and it's a lot cheaper to drill afresh if you do. Long-term projections are for decreased demand in oil and greater reliance on natural gas. It's not that GoM assets are worthless -- hardly. It's just that you're likely to sit on them for a while, until the risk matches the reward of oil prices a lot further north than where they are now.

If you own Plains or McMoran Exploration, congratulations -- you hit the lucky daily double.

As for Freeport, these acquisitions present an interesting question. If you own that one, my condolences -- Freeport is clearly exhausted, being an under-pressure mining stock. It overpaid for some incestual tie-ups with McMoRan Exploration and Plains Exploration, and its stock price has already shed $5. I do think the company has overpaid; that the assets are risky and currently the wrong place to be in energy; and that Freeport-McMoRan is unsalable here at $33.

However, I'd rather be a buyer.

But not by much -- I'm going to watch for a while, but at $30, I'll have to take a shot. This isn't because of the Gulf assets for which Freeport paid far too much, but because the mining assets will then finally be too far underpriced.

Columnist Conversations

there is some very heavy selling today and poor price action in Facebook today.  in the first hour the st...
Stock has been roasted last five trading sessions. Time to rotate into Ford ahead of big CEO long-term plan re...
Equity futures were up slightly just before 9:30 PM Sunday night.
Spent a good amount of time with PayPal CEO Dan Schulman this week...and came away fully understanding why thi...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.