Research Strategy: FCX Diversification Play into High Growth, High Risk
NEW YORK, January 22, 2013
NEW YORK, January 22, 2013 /PRNewswire/ --
Increased oil and natural gas drilling in the US could make the country the
world's leading oil producer in coming years, and companies like FCX are
looking to pursue entry in an effort to leverage growth while opting to
diversify its revenue.
Toward the end of last year, shares of mining giant Freeport-McMoRan Copper &
Gold Inc. (NYSE: FCX) [ Full Research Report ] ^(1) plunged by 16 percent
after announcing plans to acquire McMoRan Exploration Co. (NYSE: MMR) [ Free
Research Report ] ^(2) for $3.4 billion and $6.9 billion respectively, in an
attempt to expand to its energy sector.
Exposing the company to the high-risk oil and gas markets played a role in the
stock price reduction, but it bounced back shortly after speculators saw the
potential of diversification compensating for short-term integration
A study conducted by the International Energy Agency shows that the US could
overtake global leader Saudi Arabia as the world's leading oil producer in
2017 and could become a net oil exporter by 2030. Increased oil production and
new policies for improving energy efficiency would help the US become just
that in two decades, a "dramatic reversal of the trend," the report added.
The acquisitions basically look like Freeport is jostling to carve out its
market share in the US's newfound growth in domestic oil production, despite
its declining cash levels. A report from Seeking Alpha indicates that Freeport
lost more than $1 billion from $4.8 billion in 2011 to just $3.7 billion in
September last year.
Despite these losses, Freeport looks to take a $4 billion term loan and a $5.5
billion bridge to bonds. They also want to refinance a $1.5 billion, five-year
revolver facility. All these plus existing debts would put the total debt
amount at a staggering $20 billion.
However, the acquisitions would also put Freeport's existing strategy in
trouble as they would be forced to enter the exploration and production
business - which counters the former. Earnings are likely to get hurt,
considering that Freeport will be assuming $10.6 billion in debt. McMoRan
Exploration Co. lost $116 million last year, or negative $0.72 per share.
Fortunately, Plains Exploration earned $185.5 million, or $1.44 per share.
^(1) The Full Research Report on Freeport-McMoRan Copper & Gold Inc. -
including full detailed breakdown, analyst ratings and price targets - is
available to download free of charge at: [
^(2) The Free Research Report on McMoRan Exploration Co. - including full
detailed breakdown, analyst ratings and price targets - is available to
download free of charge at: [
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