Freeport Restructures Oil And Gas Portfolio Primarily To Reduce Debt

-13.22%
Downside
47.02
Market
40.81
Trefis
FCX: Freeport logo
FCX
Freeport

Freeport McMoRan Copper (NYSE:FCX) recently announced the sale of its Eagle Ford Shale assets to a subsidiary of Encana Corporation for $3.1 billion. The company simultaneously announced the purchase of some of Apache Corporation’s interests in the Deepwater Gulf of Mexico (GOM) for $1.4 billion. The focus of these transactions is to use the net proceeds to reduce the company’s heavy debt burden.

You can check out our full analysis for Freeport McMoran Copper here:

The Two Deals

Relevant Articles
  1. Will Freeport Stock Recover To Pre-Inflation Shock Highs Of $52 Per Share?
  2. What To Expect From Freeport’s Q2 Results
  3. How Is Freeport Stock Faring Amid Volatile Copper Prices?
  4. Copper Prices Have Recovered A Bit. Is Freeport Stock Worth A Look?
  5. Lower Copper Prices Will Weigh On Freeport’s Q3 Results
  6. What’s Happening With Freeport-McMoRan Stock?

Freeport announced that its oil and gas subsidiary, Freeport McMoRan Oil & Gas (FM O&G), had entered into a definitive purchase and sale agreement to acquire certain of Apache Corporation’s interests in the Deepwater Gulf of Mexico (GOM). These include Apache’s interests in the Lucius and Heidelberg oil production development projects and 11 exploration leases. The Deepwater GOM assets being acquired have estimated proven, probable and possible reserves of 55 million barrels of oil equivalents (BOE). ((Freeport-McMoRan Announces Agreement to Acquire Deepwater GOM Interests for $1.4 Billion, Freeport News Release))

FM O&G also entered into a definitive purchase and sale agreement to sell its Eagle Ford Shale assets for $3.1 billion to a subsidiary of Encana Corporation. The Eagle Ford assets include all of FM O&G’s interests on approximately 45,500 net acres with estimated net proven reserves totaling 59 million BOE and estimated net proven and probable reserves of 69 million BOE at year-end 2013. Production from the field averaged 53,000 BOE per day in the first quarter of 2014. ((Freeport-McMoRan Announces Agreement to Sell Eagle Ford Interests for $3.1 Billion, Freeport News Release))

The estimated combined after-tax net proceeds from these transactions of approximately $1.3 billion will be used to reduce outstanding debt, following closing of the transactions.

Debt Reduction

Freeport’s total debt stood at $20.7 billion at the end of 2013. This is a steep rise from the figure of $3.5 billion that the company reported as debt at the end of 2012. The company raised $10.5 billion in debt in 2013 to fund the acquisition of Plains Exploration And Production Company (PXP) and McMoran Exploration Company (MMR). Freeport further assumed $6.7 billion in debt from PXP. In comparison to the $20.7 billion in debt, the company reported a paltry $2 billion in cash and equivalents at the end of 2013.

The company’s senior unsecured debt was rated ‘BBB’ with a negative outlook by Standard and Poor’s at the end of 2013. While the company’s debt is currently investment grade, Freeport is looking to shore up its balance sheet to maintain such a rating and keep its borrowing costs low. The company is looking to reduce its total debt to $12 billion by the end of 2016.The rejiggering of its oil and gas portfolio through the two transactions announced recently is a part of its efforts to reduce debt. Asset sales may constitute the bulk of Freeport’s efforts to pare its debt, considering the bleak prospects of its copper mining businesses, with falling copper prices and stalled operations in Indonesia. [1]

Copper Prices

Copper prices have fallen sharply over the last year. LME spot prices have fallen from average values of around $7,800 per ton in Q1 2013 to around $6,800 per ton in Q1 2014. Lower copper prices will negatively impact the fortunes of Freeport’s copper mining business. Copper sales accounted for 69% of Freeport’s consolidated revenues in 2013. A slowdown in China and fears of unwinding of financing deals using copper as collateral have led to a fall in copper prices. ((LME Copper Prices, LME))

China is the world’s largest consumer of copper, accounting for nearly 40% of the total world consumption of copper. Copper has diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. Slower economic growth in China has led to a moderation in copper prices. According to data from China’s National Bureau of Statistics, growth in investment, factory output and retail sales has slowed to multi-year lows in the first two months of the year. Further, a proposed structural transformation of the economy from investment and export-led growth to consumption-driven growth may lower Chinese demand for copper in the long run. ((China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters))

Copper is also used as collateral for financing deals by Chinese firms. Smelters, refiners and fabricators have been using copper inventory as collateral to obtain financing. It is estimated that up to a third of China’s copper imports may be tied up in financing deals. Thus an unwinding of these deals could result in large quantities of copper being dumped in the market. The uncertainty regarding the financial health of Chinese firms and falling copper prices are forcing banks to demand more collateral from borrowers. This is forcing borrowers to sell their copper stocks in order to meet these obligations. In some cases the banks themselves are selling copper in order to recover their money. This is worsening an already existing oversupply situation. ((China Fears Trigger Dramatic Drop In Copper, Financial Times))

The results of a recent survey by Thomson Reuters have revealed expectations of low copper prices for the rest of the year, in the range of $6,000-$7,000/ton. This will negatively impact Freeport’s prospects. [2]

The Indonesian Situation

A law enacted in Indonesia in 2009 banned exports of unprocessed minerals from the country with effect from January 12, 2014. The intent behind this law was to provide a boost to the development of the Indonesian mineral processing industry and simultaneously increase the value of the country’s commodity exports. Though last minute changes to the export ban permitted Freeport’s copper concentrate exports, the government also imposed an export duty of 25% which will rise to 60% by 2016. Freeport contends that this violates its agreement with the Indonesian government. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. Though the Indonesian government has recently displayed some leniency in its stance on the tax issue, it has still not been resolved. Freeport is yet to resume its exports of copper concentrate. Indonesia accounted for over 20% of Freeport’s consolidated copper production in 2013.Quarterly revenues from Freeport’s Indonesian mining operations, which also includes the bulk of Freeport’s gold mining operations, fell 49% from $931 million in Q1 2013 to $470 million in Q1 2014. [3]

The Road Ahead

Freeport’s management has reaffirmed its commitment to its debt reduction targets in its Q1 2014 earnings conference call. In view of the low prevailing copper prices and the unresolved situation in Indonesia, the prospects for Freeport’s copper business appear bleak in the near term. Reduced cash flows from operations will mean that asset sales are probably the best way of bringing down the company’s debt. We may see more asset sales from Freeport in the near-term. [4]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

Notes:
  1. Freeport McMoran’s 2013 10-K, SEC []
  2. Copper Prices May Fall Below $7000/Tonne On Oversupply, The Economic Times []
  3. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes []
  4. Freeport McMoran’s Q1 2014 Earnings Conference Call Transcript, Seeking Alpha []