Can Freeport-McMoRan Survive?
Freeport-McMoRan reported its third quarter 2015 result on 22nd Oct. It reported revenue of $ 3.68 billion for the quarter compared to $ 5.7 billion for the same quarter last year. The net operating loss amounted to $ 3.95 billion compared to a profit of $ 1.13 billion last year. The net loss attributable to common stock was $ 3.8 billion or $ 3.58 per share compared to a net profit of $ 0.5 billion or $ 0.53 per share a year ago.
Looking at the uncertainty regarding an up cycle in the commodity market, Freeport would obviously like to preserve its resources to make the best use of them when the market conditions improve. Thus, Freeport-McMoRan continues to review its capital projects and costs to maximize cash flow in a weak market environment. For this, it will be further reducing capital expenditures, operating, exploration and administrative costs and curtail production at certain mining operations. Under this action plan, there will be a 29 % reduction in estimated 2016 capital expenditures i.e. from $ 5.6 billion to $ 4.0 billion. The breakup is 25 % reduction in estimated mining capital expenditures (from $ 2.7 billion to $ 2.0 billion) and on the oil and gas side, a 30 % reduction in estimated oil and gas capital expenditures (from $ 2.9 billion to $ 2.0 billion). This article will focus mostly on the company’s oil and gas business.
The liquids have a very high weightage in the portfolio of FM O&G. About 87% of Freeport-McMoRan oil and gas revenues for the first 3 quarters, excluding the impact of derivative contracts, were from oil and NGLs. Apart from a revision of capital expenditures, FM O&G has also revised its estimate of the start-up of initial tieback production in the Horn Mountain area to 2016. This action will help it continue to grow production and enhance cash flow in a weak oil and gas price environment.
In early October, the company board had announced that it is “reviewing” the oil and gas business (Freeport-McMoRan Oil & Gas Inc., or FM O&G) from a strategic point of view, in order to evaluate alternatives designed to enhance Freeport-McMoRan shareholders’ value and achieve a sufficient level of sustainable cash flow from the business itself. The options being considered to achieve this are an initial public offering (IPO) of a minority interest, spinning off the oil and gas business to Freeport-McMoRan shareholders, joint venture arrangements and further spending reductions. The management believes that the company has enough high-quality assets which are still underutilised and a large inventory with low risk development opportunities that will allow the company to derive great value out of all the above options being considered by them.
The latest news is that Freeport will put a majority of its oil and gas fields on the auction block in 2016, including assets onshore and offshore Louisiana. This announcement hints that the board has finally chosen to spin off the oil and gas business. But for the moment, the people familiar to the matter have said that this process may not result in an actual sale of assets. Rather, it will only help Freeport-McMoRan with valuing the assets in order to get more clarity before taking the most strategically apt decision on the business.
Freeport’s run as oil and gas player has been poor. It made a big bet on Plains Exploration and McMoRan Exploration for $ 19 billion (including debt) more than two years ago. Call it a coincidence, but the oil prices have literally fallen steeply since then. Now, the company's entire oil and gas interests are being estimated to be worth only about $ 3 billion due to a grim outlook.
The Freeport-McMoRan oil and gas segment is suffering badly. So, if it decides to sell some of those assets after valuation it will be better for investors. It will help reduce some debt and will increase the weight of the metals even further in the portfolio. The metals are likely to recover before oil since a glut is not behind the low metal prices. Thus, the investors will be the owners of a financially and potentially better company if such a deal gets through. But I don’t believe the company will get a good price for these assets at the prevailing oil prices. Hence, it is advisable to wait for the valuation process to complete before making new investments into Freeport.