Freeport-McMoRan To Auction Off Oil And Gas Business?

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Freeport-McMoRan Inc.‘s (NYSE:FCX) stock price rose nearly 16% on Wednesday last week as news that the company could auction off its oil and gas assets came to light. [1] The company is currently facing challenging business conditions with both copper and oil, the two major commodities that it produces, experiencing an extended downturn in prices. Adding to Freeport’s woes is its heavy debt burden, with the company’s credit rating under threat from major ratings agencies. [2] With an adverse pricing environment negatively impacting the company’s business prospects, the company has tried to reduce costs, cut capital spending, and has also lowered production levels. However, with the adverse pricing environment unlikely to end any time soon, the company could resort to a sale of its oil and gas assets. Should it do so, it is unlikely to realize the best value for these assets under current market conditions.

Adverse Business Environment

Freeport-McMoRan Stock Price, Source: Google Finance

Freeport-McMoRan’s stock price has declined considerably over the course of the last twelve months, as illustrated by the chart shown above. As mentioned previously, Freeport’s stock has been impacted by declines in both copper and oil prices. Weakening economic growth in China, the world’s largest consumer of copper, has negatively impacted the global demand for copper and consequently, prices of the commodity. London Metal Exchange copper prices have fallen nearly 26% so far this year. [3] The sale of copper accounts for nearly 60% of Freeport’s revenues. [4] Besides faltering copper prices, oil prices have weakened considerably, as well, due to a global supply glut. Brent crude oil prices have declined roughly 45% over the past twelve months. [5]

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With the drastic decline in Freeport’s stock price over the past year, the company management has been under pressure to act decisively to protect shareholder interests. This pressure intensified with noted activist investor Carl Icahn acquiring a stake in the company earlier in the year. The most pressing concerns for the company, in the ongoing downturn in commodity prices, are the preservation of its cash flows and debt reduction. Though the sale of its oil and gas interests could help Freeport reduce some of its debt, it is an extreme step and one that is unlikely to generate the best value for the company under prevailing market conditions. Interestingly, most of Freeport’s debt burden can be traced to its diversification into oil and gas in 2013. [6] The move to diversify into oil and gas looks like a poor decision in retrospect, which is perhaps now ratcheting up the pressure on the management to sell off its oil and gas interests. While the market has reacted positively to news of an auction of Freeport’s oil and gas assets being in the works, the company is unlikely to generate the best value for its assets under prevailing market conditions. However, with the management under pressure to act decisively in the current business environment, Freeport-McMoRan could soon exit the oil and gas business.

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Notes:
  1. Freeport-McMoRan to launch auction for oil and gas assets-sources, Reuters []
  2. Moody’s revises Freeport’s outlook to negative; affirms ratings, Moody’s Investor Services []
  3. LME Copper Prices, LME []
  4. Freeport-McMoRan’s 2014 10-K, SEC []
  5. Brent Crude Oil Prices, Nasdaq []
  6. Freeport-McMoRan 2013 10-K, SEC []