Despite the opposition, the deals closed in early 2013 when oil was sitting up at around ~$80 a barrel. Unfortunately for the company, oil has since plummeted and with a debt laden balance sheet, the company is now looking at creative ways to ‘optimize its funding’ for its oil & gas business. One of the options under consideration is the partial IPO of Freeport Oil & Gas, which would set those assets slightly apart just a few years after being brought in house.
Not surprisingly, the company was peppered with questions regarding its capital plan (can see it in this presentation) by skeptical analysts during its most recent quarterly conference call. The company thinks it’s still a good idea to ramp up and that issuing equity is the cheapest way to raise capital for them right now:
Currently, the market that we see is a market that has capital in it on a, from a JV basis. But everybody’s got a lot of projects to do, and there’s not a lot of discretionary capital out there, so it’s very expensive. The private equity market’s very expensive as well because they’re recapitalizing their existing businesses. We’re just looking for the best form of capital. I mean we’ve got a fabulous growth profile in our business. We drove the wells, taken the risk. We’re not going to, certainly not going to give them away just because we don’t want to borrow the money here. That’s not the prerogative. We want to make sure we find the lowest, cheapest cost of capital and with the best benefits. And the benefits we get in the visibility of all of our shareholders to what we’ve achieved and what the performance of the oil and gas business along with what we think is an inexpensive form of equity for Freeport-McMoRan in the form of equity at FM O&G, makes some sense. Again, like Richard said, we’re studying it. We hope to have — go through this process and — but right now, it looks like the most favorable because the industry just issued $8 billion of equity here into a pretty dynamic environment. So right now, that’s a very viable entity for us, and we’re encouraged by a lot of investment banks to pursue it.
Maybe I just know too many bankers, but I find it hard to believe that there have been many shareholder value enhancing activities ‘encouraged by a lot of investment banks’.
Either way, according to Jim Flores, CEO of FCX’s energy business, ‘while the company can afford its plans using cash and a credit facility, reorganizing the corporate structure would give investors a way to calculate the value of its mining and drilling assets separately…the key thing we think it does is highlight the stand-alone value of our oil and gas business.’ While some may think that’s not a great thing at this time, Mr. Flores thinks the company has ‘had more success than anybody with the drill bit in the last two years’ and ‘it’s not getting reflected in the equity.’ Part of that could be due to the fact that its analyst coverage is mining based and not oil & gas focused, but that should have been an anticipated problem. The gyrations of the commodities market have clearly wreaked havoc on its plans (selling assets is now a much more difficult proposition etc.), but it has to be a wee bit embarrassing to admit that these assets, which the company spent so much on to bring in house, need to be separated in order to have the value fully understood.
Ultimately, while personally enriching for the directors, diversification into the energy space has been disastrous so far for shareholders. To be fair, copper’s sluggish performance hasn’t helped, but I bet the diversification move could certainly have been done more cheaply today while being just as unpopular. Well…it would probably be less popular today, but maybe it could still have worked. Freeport was recently upgraded by Deutsche Bank though, so some people are turning more bullish on the name.
While it couldn’t go into too many details for regulatory reasons, the company plans on retaining a majority of the oil & gas company and sees the IPO coming as early as late 2015. Of course, as with any IPO, ‘market conditions’ will have the ultimate say over the timing.
Disclosure: Author holds shares of FCX