Reduction In Oil & Gas Capex A Good Move By Freeport-McMoRan

Freeport-McMoRan Inc. (NYSE:FCX) recently announced a revised oil and gas capital expenditure budget, a move that more closely aligns the company’s operations with prevailing market conditions. The company reduced its capital expenditure budget by $0.9 billion each in 2016 and 2017 to $2 billion. ^[1] The reduction in oil and gas capital expenditure is primarily a response to a weak oil pricing environment.

• Oil prices have declined over the last twelve months due to oversupplied global markets. Global oil supply has been boosted by rising output from the U.S. over the course of the last few years, enabled by hydraulic fracturing techniques. Though U.S. oil and gas production has declined lately in response to falling prices, it still remains at fairly high levels. Moreover, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) have not lowered output in response to falling prices, in order to preserve their market shares. Given that the demand for oil remains weak in the midst of economic weakness in Europe, and slowing Chinese growth, oil prices are likely to remain subdued in the near term. Brent crude oil prices currently stand around 53% lower on a year-over-year basis. ^[2]

Brent Crude Oil Prices, Source: Y Charts

• In addition to reducing oil and gas capital expenditure, the company filed for a $1 billion IPO of its oil and gas division. ^[3] The proceeds of the IPO will be used to partially fund the company’s capital expenditure, in addition to ongoing operating expenditure and debt repayment.
• Given the prevailing weakness in oil prices, these steps taken by the company are largely unavoidable, particularly as copper, the other major commodity sold by Freeport-McMoRan, is also characterized by a weak prevailing pricing environment.

See our forecasts for average realized prices for Freeport’s North American copper mines

See the link below for more information and analysis:

Oil And Gas Division IPO Has Mixed Implications For Freeport-McMoRan

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1. Freeport-McMoRan Announces Significant Reduction in Oil & Gas Capital Budget & Continuing Review of Mining Operations, Freeport-McMoRan Website [↩]
2. Brent Crude Oil Prices, Y Charts [↩]
3. Freeport-McMoRan Files Prospectus Supplement for At-the-Market Offering of Common Stock, Freeport-McMoRan News Release [↩]