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Energy Assets Could Be an Albatross around Freeport’s Neck in 2016

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Energy assets

In the previous parts of this series, we’ve seen that copper prices could continue to weaken in 2016. Lower copper prices in 2016 would put further pressure on earnings of copper producers such as Southern Copper (SCCO), Glencore (GLNCY), and Teck Resources (TCK). We’ve also looked at the challenges that Freeport-McMoRan’s (FCX) Indonesian operations face.

Meanwhile, another major challenge for Freeport would be to make a strategic decision on its energy assets. The company’s energy portfolio has become a virtual albatross around its neck.

Freeport-McMoRan paid a substantial premium two years ago when it acquired these energy assets. Overall, Freeport-McMoRan acquired the energy assets for a consideration of $19 billion, including debt of the acquired entities.

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Strategic action

Freeport is now looking at strategic alternatives to exit its energy business. However, the damage seems to be already been done. As Reuters reported last year, Freeport could auction its energy assets in early 2016, which could fetch it $3 billion. Now, that’s only a fraction of what Freeport acquired these assets for.

It’s getting worse

The problem is, the more Freeport delays its strategic decision on the energy assets, the worse it seems to get. The company announced an IPO about eight months ago, but it backed out of the plan in search of other “strategic alternatives.” At the time, we noted that the exit timing could be appropriate, as crude prices were hovering around a near-term high of $60 per barrel.

However, crude prices plunged shortly thereafter, as shown in the graph above. Freeport would realize even less value for its energy assets now compared to what it would have received last year.

In the next part, we’ll explore whether exiting the energy business at these levels makes strategic sense for Freeport-McMoRan.

Investors can consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the materials sector. Metal producers currently form ~9% of XLB’s portfolio

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