Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 1

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The prolonged commodity downturn has changed the dynamics of the oil and gas industry over the last two years. Weak commodity prices have depressed the valuation of the oil and gas assets which were once considered to be pivotal to the industry’s growth. One of these compelling assets are the Deepwater assets located in the Gulf of Mexico, that were bought by Freeport-McMoRan Inc. (NYSE:FCX), primarily a mining company, in 2013 to diversify its mining operations and leverage the oil boom. However, the deal also brought along a large amount of debt, which has been weighing heavily on the company’s books in this weak price environment. As a result, the US-based miner decided to offload these assets to Anadarko Petroleum Corp. (NYSE:APC), an independent oil and gas company, earlier this week for a total cash consideration of $2 billion and up to $150 million in contingent payments. [1] While the proceeds of this transaction will enable Freeport to reduce its debt burden, it allows Anadarko to expand its portfolio of assets in the Deepwater GOM region at relatively cheap valuations.

Thus, in a series of articles, we will discuss the rationale and the impact of the deal on the two companies. We begin by analyzing the implications of the asset sale on Freeport and its financial position.

See Our Complete Analysis For Freeport Here

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Debt Reduction: An Imperative For Freeport

Debt reduction and strategic realignment of the company’s operations towards its mining business are the two primary reasons for Freeport’s decision to sell off its Deepwater GOM oil and gas assets. Freeport had diversified into the oil and gas business in 2013, hoping to benefit from participation in a market with robust near term growth prospects, at the time. However, the acquisitions of Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR) also saddled the company with a mountain of debt. An extended downturn in copper and oil prices, in conjunction with Freeport’s heavy indebtedness, has translated into a ratings downgrade to speculative grade status for Freeport by major ratings agencies since then. [2]

The intervention of activist investor Carl Icahn, who acquired an 8.5% stake in Freeport last year, has heightened the pressure on the management to lower the company’s debt burden and sell off some of its oil and gas assets. [3] An unfavorable credit rating and shareholder pressure to lower the company’s debt have precipitated asset sales totaling $6 billion this year, including the announcement of the agreement to sell off the Deepwater GOM assets. However, the timing of the Deepwater GOM sale is extremely inopportune, considering the 6o% decline in oil prices between 2013 and 2016. We have retrospectively calculated the EV/EBITDA for Freeport’s acquisition of PXP and MMR in order to compare the valuation of this transaction with that of Freeport’s sale of its Deepwater GOM assets. Given the weakness in the prevailing oil pricing environment, Freeport has sold off its oil and gas assets at subdued valuations, as illustrated by the following comparison between the EV/EBITDA multiples for the two transactions.

Deepwater GOM Valuation 1

Note: EV/EBITDA for the Deepwater GOM transaction is estimated based on data reported in an Anadarko company presentation.

Deepwater GOM Valuation 2

Note 1: EV reported in a Freeport-McMoRan news release.

Note 2: EBITDA estimate for 2013 has been calculated by annualizing Oil & Gas division EBITDA, using data reported by Freeport-McMoRan for a seven month period post the acquisition.

Freeport’s decision to sell off the Deepwater GOM assets has been viewed favorably by ratings agencies. [4] However, despite addressing the imperative of debt reduction, this transaction will not generate great value for Freeport.

Stay tuned for the Part 2 of this series – Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 2 – to learn the impact of the deal for Anadarko.

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Notes:
  1. Freeport-McMoRan Announces Agreement to Sell its Deepwater Gulf of Mexico Properties, Freeport-McMoRan News Release []
  2. Moody’s downgrades FCX’s ratings, assigns B1 CFR; outlook negative, Moody’s Investors Service []
  3. Schedule 13D Filing, SEC []
  4. Moody’s says Freeport’s Sale of its GOM Oil & Gas Properties is Credit Positive, Moody’s Investor Service []