Freeport-McMoRan Copper & Gold Inc. is investing $500 million in a Louisiana company set to ramp up oil production in the Gulf of Mexico in the next few years.
Freeport-McMoRan’s investment will effectively fund more than half of McMoRan Exploration Co.‘s purchase of shallow-water operations in the Gulf of Mexico for roughly $818 million from Houston-based Plains Exploration and Production Co. McMoRan Exploration is a separate oil production company based in New Orleans that shares some management with Phoenix-based Freeport-McMoRan.
Plains Exploration said it wants to move to safer on-shore drilling in the wake of the BP oil spill.
Freeport-McMoran is assuming some of the risk of drilling in the Gulf because it expects to reap the benefits from the oil company’s “highly prospective North American exploration and development activities, which have the potential to generate significant value,” the Arizona company said in a news release.
Freeport-McMoRan is buying $500 million worth of preferred stock from McMoRan Exploration that can be converted into common stock at $16 per share. McMoRan Exploration’s shares rose 9.5 percent Monday and closed at $15.96; the stock is up more than 82 percent for the year.
McMoRan Exploration already has a significant stake in the shallow water shelf assets, called the Davy Jones prospect, and announced in January that it made what could be one of the largest gas discoveries in the shallow area of the Gulf in decades.
Freeport-McMoRan’s investment deal is expected to close when McMoRan Exploration officially acquires the property from Plains Exploration, likely by the end of the year.
Freeport-McMoRan’s share prices rose about 1.1 percent on Monday, closing at $82.99.
Plains Exploration, a Houston-based company, is also selling its deep water assets, the company said in a release, but neither Freeport-McMoran nor McMoRan Exploration has announced interest in those.
At least one analyst is skeptical of investing in McMoRan Exploration and its oil ventures right now. Neal Dingmann of Wunderlich Securities said McMoRan Exploration is assuming a bigger capital burden for constructing wells that aren’t expected to produce until at least late next year.
“Remember: McMoRan will have to pay more the cost now,” Dingmann said in a phone interview. “McMoRan is always a high-risk, high-reward type of stock. It’s just more high-risk now.”
Several analysts have been raising their outlook for Freeport-McMoRan stock in recent months. On Monday, Goldman Sachs’ Sal Tharani joined the more optimistic analysts as he upgraded Freeport-McMoRan’s stock (FCX) to buy from neutral, citing the increasing demand for copper.
“Copper inventories are declining and the supply is struggling to meet demand,” Tharani wrote in a note. “An increasing number of miners are reducing their production forecasts. We see FCX as the best vehicle to express a bullish view on copper.”
Tharani said Freeport-McMoRan is poised to benefit from its “strong balance sheet, global exposure, growth prospects and high-quality assets.”
In Arizona, Freeport-McMoRan has been ramping up its copper mining activity at two mines this year. The company has hired 423 employees as it reopened a mine in Miami and expanding its mine in Morenci. It also has operations in Bagdad, Green Valley and Safford, all in Arizona, as well as New Mexico and Colorado; its foreign mines and refineries are in Chile, Peru, Spain, Congo and Indonesia.
Fact about the company:
• Copper and gold mining company based in downtown Phoenix.
• Formerly based in New Orleans. Moved its headquarters after acquiring Phelps Dodge Corp. in 2007.
• Earned $15 billion in revenue and $2.5 million in net income in 2009.
• Had an estimated 104 billion pounds of copper and 37 million ounces of gold reserves as of Dec. 31, 2009.
• Operates six open-pit mines in the United States and foreign mines in Indonesia and the Democratic Republic of Congo, Peru and Chile.