Freeport-McMoRan Oil & Gas: An Experiment Gone Wrong?

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Freeport-McMoRan, one of the world’s largest producers of copper, diversified into oil and gas with the acquisition of McMoRan Exploration Company and Plains Exploration & Production Company in 2013. Freeport’s foray into oil and gas was made with the purpose of participating in an industry with strong growth prospects and diversifying its exposure to copper. However, three years on, the diversification into oil and gas seems to have been an experiment gone wrong. A sharp decline in oil prices has compounded the woes of Freeport, which has also had to contend with declining copper prices. With Freeport financing the acquisition of its oil and gas assets through debt, shrinking cash flows as a result of a downturn in commodity prices have meant that Freeport’s measures of indebtedness such as total debt to EBITDA have worsened, as shown in the table below, resulting in a ratings downgrade from major credit ratings agencies.

FM O&G An Experiment Gone Wrong

With debt reduction becoming a priority for the company, the company concluded a 13% stake sale in its profitable Morenci copper mine in Arizona earlier in the year and also announced the sale of its African copper mining operations. With the proceeds of these transactions earmarked for debt reduction, the company’s debt situation should improve in 2016, as illustrated by the table shown above. However, with the company having to sell off stakes in profitable mining operations in order to pay off debt that can largely be traced to the acquisition of the oil and gas assets in 2013, Freeport’s foray into oil and gas seems to have been an experiment gone wrong, in retrospect.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport-McMoRan

 

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