A Quick Look at What Fueled Freeport's Earnings

Shares of newly minted global resource company, Freeport-McMoRan (NYSE: FCX  ) , are up over 3% after the company reported its second-quarter earnings. The company beat Wall Street's earnings estimate, though its revenue was a little light. Let's take a quick look at what went down in the quarter.

Fueling the numbers
Freeport's profit came in at $482 million, or $0.49 per share, for the second quarter. While that's well below last year's second-quarter showing of $710 million in profit, or $0.71 a share, it's well above estimates which were for the company to earn just $0.39 a share. Revenue, however, was a little light at just $4.29 billion, as the Street was expecting $4.39 billion. That begs the question: How did the company crush earnings estimates even as revenue came in light?

In one word: oil. Freeport's $19 billion acquisition of a pair of oil and gas companies added $265 million in net income and $0.27 per share to its profits for the quarter. These results only include about a month's worth for both companies because the two deals didn't close until early June. If Freeport didn't make these big bets, then the quarter would have been much worse.

Instead, high oil prices this past June helped pad Freeport's bottom line. Freeport was able to realize $97.42 per barrel of oil produced, which was about 94% of the price of Brent crude that month. When adding back natural gas and liquids, the company was able to realize revenue of $74.37 per barrel of oil equivalent against low production costs of just $16.58 per barrel oil equivalent, leading Freeport to pocket the difference as a very nice profit.

Tarnished metals
Without the addition of oil and gas, the quarter would have been pretty bleak. The tragedy at its Grasberg mine, which resulted in 28 fatalities and another 10 injuries, caused the company to suspend operations at the mine. The suspension of operations cost the company 125 million pounds of copper production and another 125,000 ounces of gold production in the quarter. On top of this, the company battled lower copper and gold prices, which caused it to realize less value for the copper and gold that it was able to produce.

The Grasberg mine. Source: Alfindra Primaldhi (Wikimedia Commons).

Freeport was still able to produce 951 million pounds of copper in the quarter, which was up from 927 million pounds from the second quarter of last year. However, falling copper prices led to an average realization of $3.17 per pound, which is down from $3.53 in last year's second quarter. Where the effect of the Grasberg situation was most felt was in Freeport's gold operations. The company produced just 173,000 ounces, which is down substantially from last year's 266,000 ounces. However, given the record 23% plunge in gold prices in the quarter, it actually might have been a good thing that the company's gold production was suspended because its realized price for gold fell from $1,588 an ounce all the way to $1,322 per ounce.

Final Foolish thoughts
Freeport's quarter was clearly fueled by oil -- high oil prices provided nearly half of the quarter's earnings. That's pretty substantial when considering that overall the oil and gas business is just about one-fourth of Freeport's total operations. Clearly, it would seem the company's move into oil and gas is paying off as the added diversity really helped Freeport this quarter. 

With that in mind, this is a good time to think what role oil plays in fueling your investing returns. If its place in your portfolio isn't as high as it should be, you might want to check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.


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  • Report this Comment On July 23, 2013, at 8:11 PM, allrightallready wrote:

    Can DiLallo and Jayson - both Motley fools - "decide" which FCX "reporting numbers" are correct?

    Jayson seems to want to report "his own set of numbers." He seems to like "NON-GAAP" numbers.

    What is going on here.

  • Report this Comment On July 24, 2013, at 9:18 PM, TMFmd19 wrote:

    Both numbers are correct, GAAP numbers are what's most commonly referred to when looking at a company's earnings. However, because so many one time items will hit non-GAAP can sometimes give a better picture.

    In this case it appeared more to me that investors were reacting to the GAAP beat which is why those were the numbers I that I mentioned. Hope that helps explain the difference.

    Matt

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