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A $20-billion (U.S.) splurge by Freeport-McMoRan Copper & Gold on two oil explorers lives down to the worst standards of the resources sector. The miner's convoluted plans to buy Plains Exploration and Production and McMoRan Exploration swiftly erased some $5-billion of market value. Freeport chairman James "Jim Bob" Moffett also runs and partly owns McMoRan. The strategic and governance bravado affirm the industry's Wild West culture.

The conflicts of interest, despite the formation of special committees for all involved, look bad even for a sector populated by the likes of Chesapeake Energy, SandRidge Energy and Kinder Morgan. Mr. Moffett's personal involvement epitomizes the problems.

In addition to presiding over Freeport's board, he is chief executive and co-chairman of McMoRan, and owns stakes in both companies. Though the 14-per-cent decline in Freeport shares on Wednesday cost Mr. Moffett some money, it was more than offset by the rich 74-per-cent premium being paid for McMoRan's shares. According to Breakingviews calculations using Thomson Reuters data, he's personally up on the day by about $19-million.

Mr. Moffett's gain may also be a result of McMoRan's pain. The recent troubles at the New Orleans-based company give the deal the whiff of a bailout. McMoRan has been plagued by delays in a Gulf of Mexico well, causing shares to plunge 40 per cent over the past two months. The company also has been burning cash at a rapid rate.

The cross-holdings create other bad optics, too. Plains boss James Flores also sits on McMoRan's board and the deal has netted him about $12-million, on paper, for his Plains stake. What's more, the fiendish complexity of the deal has Freeport partly paying for McMoRan using units of a royalty trust, which are difficult to value.

The shortcomings might have been overlooked if the deals had any reasonable logic. Yet there are no obvious synergies between excavating Indonesian gold and U.S. oil and gas. The deal dilutes Freeport's appeal as a focused copper and gold producer, without adding the benefits of full diversification enjoyed by the likes of BHP Billiton.

It makes the acquisitions look a desperate attempt to escape declining production. Freeport would have been better off simply giving the money back to shareholders. Instead, it has exposed a litany of conflicts and bad decisions.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 11:33am EDT.

SymbolName% changeLast
BHP-N
Bhp Billiton Ltd ADR
-0.09%57.48
FCX-N
Freeport-Mcmoran Inc
+2.66%47.1
KMI-N
Kinder Morgan
+0.28%18.2
SD-N
Sandridge Energy Inc
+0.21%14.54
TRI-N
Thomson Reuters Corp
-0.23%155.59
TRI-T
Thomson Reuters Corp
-0.65%210.3

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