Freeport’s energy business
Earlier, we saw how Freeport’s mining business performed in 2Q16. Now, let’s analyze how the company’s energy business performed in the quarter.
Previously, Freeport was looking at selling its energy business. It had even filed for an initial public offering. However, the company is now focusing on restructuring the business. Earlier this year, Freeport integrated its energy business as an operating segment, virtually calling off any potential divestment.
Freeport’s average realized price per barrel of oil stood at $41.1 in 2Q16. The company’s average realized price in 1Q16 was $29.06. Higher average realized prices could be attributed to the sharp rally in energy prices, but we’ve seen some pullback in crude oil prices over the last month.
Freeport has managed to further reduce unit cash costs in its energy (VDE) business. The company reported an average unit cash cost of $15 per boe (barrel of oil equivalent) in 2Q16 compared to $15.9 per boe in 1Q16. Freeport’s unit cash costs have been falling for the last several quarters, as we can see in the graph above.
Note that Freeport has restructured $1.1 billion worth of drilling contracts and has made organizational changes to survive the current slump in energy prices.
According to Freeport, it will realize annual savings of $150 million associated with operational and administrative costs. The company also hopes to realize $350 million worth of savings from its drilling contract terminations.
Meanwhile, Freeport has also curtailed its capital expenditure program in energy as well as in the mining business. In the next part of the series, we’ll see how these changes are helping the company.