Jim Bob's Thinking

Mining and minerals company Freeport-McMoRan Copper & Gold is taking it on the chin from investors not happy about the addition of $20 billion in oil and gas assets via pending acquisitions of McMoRan Exploration Co. and Plains Exploration & Production Co. The stock, known by its ticker FCX, dropped 15% in the two weeks following the early December announcement.

These investors, though, might not recognize the shrewd reputation of its chairman and architect of this deal, Jim Bob Moffett. Yes, the same aggressive and risk-taking Moffett the oil and gas industry knows simply by Jim Bob. The same Jim Bob who is co-founder and chief executive of Mc-MoRan Exploration, one of the to-be-acquired E&P companies, the “Mo” in McMoRan. The self-dealing has these investors crying foul. To be fair, McMoRan Exploration was once integrated within Freeport-McMoRan, IPO’d independently in the mid-1990s, so in essence this is just a roll-up into a former parent company. FCX owns equity in McMoRan.

To further cloud matters, Plains—the other to-be-acquired E&P—also owns 51 million shares of McMoRan Exploration acquired in an asset swap in 2010. Plains CEO Jim Flores is on the board of McMoRan. Additionally, Plains closed a highly-levered, $7-billion deepwater Gulf of Mexico deal just days before announcing this amalgamation, an unexpected and curiously timed move back into the deep Gulf.

So what is Jim Bob thinking? In a conference call following the announcement, and taking heat from investors, he somewhat defiantly proclaimed, “We know how to swing for the fences.” Trust me, was the unspoken message. Maybe investors should.

Moffett started McMoRan in 1967 and parlayed bright spot technology into some of the largest gas fields in the Gulf in the 1980s. He joined McMoRan with Freeport in 1981 and built it into the world’s largest publicly traded copper company, largely because of Moffett’s gamble to invest in the Grasburg mine in Indonesia, rife with challenges but now the world’s largest mine.

And once again Moffett is brazenly taking a home-run swing.

The Freeport party line is to build asset diversification via the E&P sector and pursue a unique opportunity to acquire undervalued resources with growth potential. The motivations might be broader.

One theory is that Moffett is throwing a lifeline to his McMoRan Exploration, which has been hemorrhaging cash into its ultra-exploratory, ultradeep Davy Jones gas wells, some $1 billion to date with no production to show for it. Operational challenges persist. Time is simply running out for Moffett to be the George Mitchell (father of the onshore shale plays) of the ultradeep play in the shallow water. McMoRan stock had tanked 50% year-over-year.

Likewise, Moffett could be stockpiling natural gas options. He made his prediction on the call: gas prices recover in 2015. So close. In addition to saving McMoRan’s capital-starved ultradeep inventory, Plains has a mothballed treasure trove of gas assets with 5.5 trillion cubic feet of reserves in the Haynesville shale and another 200 billion in Wyoming’s Madden Field. Alas, it was being forced to divest these to fund its newly acquired Gulf assets.

“Painfully,” Flores lamented on the call, “we were going to have to liquidate our natural gas assets at the bottom of the market—now we won’t.”

Too, the combination may be Jim Bob’s succession plan, with Flores next man up. “We’ve been friends a long time,” said Flores. “You can’t beat spending time in the saddle (together).” While FCX will be the parent with Jim Bob chairing, Moffett steps out of the CEO role and Flores will lead the new E&P arm consisting of the combined McMoRan and Plains assets.

All these considered, the primary reason to add E&P to its mining inventory is scale. Comparisons abound to Australian resource conglomerate BHP Billiton. This combination will make Freeport-McMoRan the fifth-largest U.S.-based natural resource company with a $60-billion enterprise value (behind ExxonMobil, Chevron, ConocoPhillips and Occidental Petroleum), and the fifth-largest global mining company. Plains’ deepwater Gulf expansion was certainly done in anticipation of the combination, and its announcement of an offshore Morocco farm-in days following the FCX news suggests the new E&P is poised to be an international player.

Oil and gas sector investors know Jim Bob can hit it out of the park when he says he will, and Plains and McMoRan stocks reflect this optimism post-announcement. Freeport’s mining sector investors should have faith in the bambino’s long ball.