Energy initial public offering
Freeport-McMoRan (FCX) has filed a prospectus with the US SEC (Securities and Exchange Commission) for an IPO (initial public offering) of $100 million for its oil and gas assets.
You should note that the $100 million figure is only an indicative figure used for calculating the registration fees. The final IPO might differ from this, but we’ll have to await further details from the company to know by how much.
The chart above shows how Freeport-McMoRan’s net debt has increased over the last few years. You can define net debt as total debt minus cash and cash equivalents. As you can see, Freeport’s net debt was negative in 4Q 2012. This basically means that the cash on the company’s balance sheet was greater than its debt.
Freeport had to borrow heavily to acquire these energy (XLE) (XOP) assets. This increased its debt levels. Freeport’s debt ratios are currently much higher than other copper producers such as Southern Copper (SCCO) and Teck Resources (TCK).
Freeport-McMoRan acquired its energy assets when crude oil was trading at elevated levels. The energy business was expected to enhance its earning capacity.
The energy business was expected to be self-funding over the long term. The business was expected to generate sufficient cash flow to meet its capital expenditure needs. However, crude oil prices have seen a sharp correction over the last eight months.
Freeport was planning to reduce its debt levels. Lower crude oil prices have changed the equation. It has had to defer its debt reduction targets since commodity prices fell.
Is the energy IPO in the best interests of its shareholders? We’ll discuss this in the next part of this series.