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Research Strategy: FCX Diversification Play Into High Growth, High Risk

Stocks in this article: FCX MMR

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 uncertainties.

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.

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