Debt-laden natural resources giant Freeport-McMoRan (FCX - Get Report) said after the markets closed Monday that its unit Freeport McMoRan Oil & Gas agreed to sell its deepwater properties in the Gulf of Mexico to Anadarko Petroleum (APC - Get Report) for $2 billion and up to $150 million in contingency payments.
The company said contingent payments would be received over time as Anadarko realizes future cash flows connected with a recently completed third-party production handling agreement for the Marlin platform. Anadarko also will assume abandonment obligations associated with the properties, which had a book value of around $500 million as of June 30.
"This immediately accretive, bolt-on transaction strengthens our industry-leading position in the Gulf of Mexico and is a catalyst for the company's oil-growth objectives with quality assets being acquired at an attractive price to create significant value," Anadarko chairman, CEO and president Al Walker said in a statement.
The deal is expected to close in the fourth quarter. Freeport-McMoRan doesn't expect to record a material gain or loss on the sale. Anadarko plans to pay for it with a $2 billion stock offering led by JP Morgan Securities Inc.
Freeport-McMoRan CEO and president Richard Adkerson said in a statement that the sale brings the company's divestitures this year to more than $6 billion and is part of its commitment to reduce debt and focus on its copper business. "With our announced asset sale transactions combined with cash flows from operations and previously announced at-the-market equity transactions, we are on track to achieve our stated balance sheet objectives," he said.
Anadarko said the purchase will double its ownership in the Lucius development to around 49%, adds around 80,000 net barrels of oil equivalent per day, more than 80% of which is oil, and expands its operated infrastructure throughout the Gulf of Mexico. The properties also are expected to generate an estimated $3 billion in free cash flow, which can be used to accelerate investment in the company's properties in the Delaware Basin in West Texas and the DJ Basin in the Rockies.
Billionaire corporate raider-turned activist Carl Icahn on Tuesday sought to boost the share price of Freeport-McMoRan by issuing a statement saying the Deepwater Gulf of Mexico properties sale will help it deleverage and put it on track to cut its net debt by half by the end of 2017.
Icahn's statement, which he also tweeted to his followers, noted that the deal suggests it is "making good on its stated goal of deleveraging and is on track to cut its net debt by half" from year-end 2015 to the end of 2017. He added that the sale represents a "classic example of activists working constructively" with an existing board.
The asset sale comes after Freeport-McMoRan reached a settlement with Icahn in October, 2015 to install two Icahn-backed directors, including a general counsel for Icahn Enterprises, on a board that was reduced in size to 11 members. It also installed an Icahn-backed candidate onto Freeport's oil and gas subsidiary.
Icahn criticized Freeport-McMoRan's board and management over its oil deals and its hike in debt - and the insurgent manager reached a settlement quickly, a little over a month later, partly as a result of investor outrage over the mining company's stock price drop in the period leading up to Icahn's campaign.
Anadarko said the properties' acquisition and development costs, excluding $300 million in materials inventory and seismic, are an estimated $13.50 per barrel of oil equivalent proved reserves and that the purchase came at an Ebitdax multiple of 1.5 for the expected sales volumes over the next year.
Capital One Securities analyst Phillips Johnston said the 2 times Ebitda multiple Anadarko is paying is "exceptionally cheap," especially considering that most of it is free cash flow and that the deal should pay out in just over two years at current strip prices without doing anything upon closing. He's increasing his net asset value estimate for the company by $5 to $73 per share.
Pearce Hammond, an analyst at Piper Jaffray's Simmons & Co. International, said while some investors might question increasing Anadarko's deepwater Gulf of Mexico exposure at the expense of its onshore U.S. properties, he believes it "misses the mark" as the new properties should provide the cash flow to support increased activity in the Delaware and the DJ Basins.
Seaport Global Securities analyst Mike Kelly said $2 billion to $3 billion of free cash flow over the next five years "is hard to disagree with" and Anadarko's expected 10% to 12% growth from within cash flow results in a $50 to $60 per barrel world is double what he was originally expecting.
Tudor, Pickering, Holt & Co. said the deal was positive on valuation as Anadarko is only paying for the reserves that have been proven.
Anadarko said it's boosting its 2016 capital guidance as a result of the deal to $2.8 billion to $3 billion. Walker said the company plans to add two rigs in the Delaware and DJ Basin later this year and boost activity further after that to double production in the two areas to at least 600,000 barrels of oil equivalent per day over the next five years.
Anadarko's Gulf of Mexico properties will produce net sales volumes of about 155,000 barrels of oil equivalent per day, 85% of which will be oil.
Freeport-McMoRan said the assets averaged 73,000 barrels of oil equivalents per day over the 12 months ending June 30 with sales reaching $1 billion, cash production costs before general and administrative expenses totaled $300 million and capital expenditures were $1.6 billion.The seller noted that preferred shareholders in the unit's subsidiary Plains Offshore Operations are entitled to receive $582 million from the sale and the rest of the proceeds will be used for debt repayment. It also said it's beginning a consent solicitation to obtain approval from holders of five series of the unit's notes to align covenants to those in the existing notes previously issued by Freeport-McMoRan. The parent is the guarantor of the notes, whose principal amounts total $2.3 billion.
Lazard's Al Garner, David Cecil, Dan Hamilton and Jeremy Griggs and JP Morgan's Laurence Whittemore and Mark Deverka advised Freeport-McMoRan. Wachtell, Lipton, Rosen & Katz provided it with outside legal counsel, including David Shapiro, Jenna Levine, Francisco José Morales Barrón, Kwon-Yong Jin, Meng Lu, Nelson O. Fitts, Jeannemarie O'Brien, Michael Schobel, Joshua Feltman, Jordan Sauer, Joshua Holmes and Rachel Reisberg.
Jefferies' Ralph Eads assisted Anadarko, which used Latham & Watkins LLP as outside legal counsel. The Latham team included Michael Darden, Chris Bennett, Sean McKinley, Barret Schitka, Brock Naeve, Michael Dillard, Sean Wheeler, Tad Lipsky, Sydney Smith, Tim Fenn, Jim Cole, Joel Mack, Alicia Handy and David Della Rocca.
-- Ronald Orol contributed to this report