Freeport’s 1Q results
Freeport-McMoRan (FCX) reported an adjusted loss of $0.06 per share in 1Q15. The company also incurred charges of $2.3 billion since it has written off the carrying value of its energy assets. In 2013, Freeport acquired Plains Exploration & Production Company for $16.2 billion. It was a major investment by Freeport in oil and gas production. Freeport also acquired Moran Exploration Company for $2.2 billion the same year.
Crude oil tumbles
As you can see in the above chart, crude oil prices have declined substantially since Freeport acquired these assets. Lower crude oil prices negatively impact companies engaged in oil and gas exploration. ConocoPhillips (COP), Petróleo Brasileiro (PBR), and SandRidge Energy (SD) are some of the leading energy companies. The iShares U.S. Energy ETF (IYE) tracks the American energy sector. ExxonMobil (XOP) is the largest holding of IYE, forming 21.8% of its portfolio.
Oil production down
Freeport produced 12.4 MMBOE (million barrels of oil equivalent) in 1Q15, down 22% on a year-over-year (or YoY) basis. Its realized revenues also fell 43% over this period. To add to Freeport’s woes, its unit cash production costs increased ~10% compared to 1Q14. Freeport’s revenues in 1Q15 are down 16% YoY, primarily due to lower energy sales.
Energy exploration business is capital-intensive in nature, and Freeport’s current leverage ratios don’t provide it the flexibility to borrow more. Apparently, it had to slash its dividend by 84% in a bid to control cash outflow. Freeport has also scaled back its debt reduction plan as commodity prices have corrected.
However, Freeport is looking at alternate ways to raise cash for its business. We’ll discuss some of these in the next part.