McMoRan Exploration Strikes It Rich

Anyone who has read my coverage of McMoRan Exploration (NYSE: MMR  ) lately knows I've been warming to the ultra-deep sea driller that's looking to exploit the Davey Jones prospect in the Gulf of Mexico. Going deeper than even ExxonMobil (NYSE: XOM  ) thought wise, McMoRan believes it can successfully tap the huge reserves trapped beneath the Gulf's salt geology at depths as far down as 35,000 feet.

After seeing McMoRan's stock catch a case of the bends last week following reported delays in flow testing on the well, I decided to buy into the company because it seemed to have been unduly punished, considering the outsized potential it held.

Deep pockets
While there is a lot of risk in McMoRan's endeavor, if the driller hits the trillions of cubic feet of reserves it believes it can, investors may find themselves with a profitable bridge between traditional deepwater drillers like Transocean (NYSE: RIG  ) and Seadrill (NYSE: SDRL  ) and those which ply the shallow waters of the Gulf shelf like Hercules Offshore (NASDAQ: HERO  ) .

Now McMoRan Exploration's once and future parent, Freeport-McMoRan Gold & Silver (NYSE: FCX  ) , also thinks the explorer has a good shot at hitting a gusher: It has decided to buy McMoRan Exploration and partner Plains Exploration & Production (UNKNOWN: PXP.DL2  ) in a $9 billion deal.

McMoRan was spun off from Freeport back in 1994, as its parent preferred to dig solely for precious metals. Freeport's partnership with Plains -- which owns about one-third of McMoRan's shares, which it obtained by selling acreage on the Gulf of Mexico shelf to McMoRan -- indicates that Freeport wants to return to its roots in a big way.

A long and winding road
There have been delays in McMoRan's path to proving its theory, but I've long felt that the market is misreading these as failures, rather than postponements -- particularly last week's announcement, which should have been a source of encouragement, as the driller said it was moving onward. The barite-solvent injection now being performed is a requisite step to performing the measurable flow test. As I noted then, it may seem at times that the exploration and production play moves at a glacial pace, but it is moving nonetheless.

Analysts see opportunities for growth in copper mining as limited because of political instability where deposits are found, including Freeport's own Grasberg mine, the world's largest copper deposit. While it has long-term contracts in place with Indonesia that largely exempt it from new taxes being imposed on others, the government wants to renegotiate them with an eye toward increasing its own haul.

Wet and dry commodities
By buying McMoRan and Plains, the gold and copper miner diversifies its resources and opportunities with a strong base of oil assets in the Gulf, Texas, and California, as well as natural gas in Louisiana. That diversity puts it into a new, rarified league -- one currently dominated by BHP Billiton (NYSE: BHP  ) , the Australian miner that also drills for oil.

Freeport will be paying around $50 a share for Plains -- a 38% premium to where it closed yesterday -- and $14.75 cash for McMoRan, which is a 75% premium for the stock. While at least one analyst thinks the miner is getting a steep discount on Plains' stock, McMoRan's stock is trading above the offer price, which usually happens when investors believe a new, higher bid could come (Plains is actually trading below the deal's value).

I don't even know you anymore
Freeport's stock is down sharply on the news because current investors bought a mining company, not an oil and gas play. With a larger debt load to manage if the deal goes through, the company won't be as nimble as it once was -- which wasn't all that much to begin with.

Due to Foolish trading rules, I'm not eligible to sell my stock for 10 days after having purchased it, so I wouldn't be able to take advantage of this premium even if I wanted to, but the acquisition offer underscores my belief that McMoRan was an undervalued opportunity as ripe for exploiting as the ultra-deep deposits it's going after.

Drill, baby, drill!
If you're an energy investor looking for exciting opportunities, then you should look into one of the more exciting plays in the space: Seadrill. To learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.


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