Why Freeport's Management Was Spot On

It was about two weeks ago that I inquired in a headline whether Freeport-McMoRan's (NYSE: FCX  ) shares had further room to run. My conclusion was that they did, and with help from a strong third quarter, they've tacked on 14% in valuation since that still-recent look at the company.

That makes for a more-than-healthy 37% pop in the shares since their low in June. For the sake of comparison, BHP Billiton (NYSE: BHP  ) , the Australian mining giant, which, like Freeport, also sports substantial oil and gas operations, has risen by 24% during the same period. And Southern Copper (NYSE: SCCO  ) , a pure play on the red metal, is up by about 7% since midyear.

A new beat
Freeport reported adjusted per-share earnings of $0.79 for the third quarter, a solid beat vis-a-vis the consensus forecast of $0.62. A significant amount of the $0.17 surprise was attributable to a better-than-anticipated contribution from the company's newly acquired oil and gas operations.

Now, however, my two-week-old question merits repeating: With the third quarter duly reported, praised, and consigned to history, does Freeport-McMoRan still appear to be headed higher?

Erasing the negatives
Before drawing a conclusion, it's important to recall that Freeport's share price slide from late 2012 until the middle of this year resulted largely from a pair of factors. First, as 2012 neared its conclusion, management announced that it had decided to acquire two oil and gas producers, Plains Exploration and Production and McMoRan Exploration. Investors initially frowned upon the prospective deals as a departure from Freeport's mining concentration and because of substantial existing overlaps among the officers and directors of the three companies.

Second, as the world's largest publicly traded copper producer, Freeport clearly reflected the instability of copper prices during the first half of this year. From $3.80 per pound during the early part of 2013, the price for the metal slid to nearly $3.00 during the summer, only to bounce back to the $3.25-$3.35 range, where it has essentially remained for the past 90 days.

A current assessment 
Looking at the current status of those two prior negatives, for my money the oil and gas purchases, which were consummated in May and June, have turned positive for Freeport far earlier than I'd anticipated. As CEO Richard Adkerson noted on the company's post-release call, "The quarter reflects a significant contribution from our oil and gas business, and that's very exciting."

The most noteworthy of those operations occur in California, the Gulf of Mexico (both on the Outer Continental Shelf and in the deepwater), and the Eagle Ford. Perhaps the most promising of the plays involves the Lucius development in the Gulf's deepwater Keathley Canyon, where a discovery of 600 feet of net oil play was made earlier this year. Production from the play is expected to begin during 2014, with Freeport having a 23.33% interest in what's likely to be 80,000 barrels of crude output per day.

While I don't anticipate that copper prices will trend meaningfully higher during the next year or so, neither do I expect a dip far below $3.00. On the one hand, as Adkerson noted on the call, "despite all of the political uncertainties associated with the economy, our business and our customers' businesses in the U.S. (are) progressing well." On the other, however, I must confess to being somewhat less sanguine than most about China's real economic growth rate.

Debt headed lower?
The primary challenge at Freeport these days concerns its debt level, which was catapulted by the Plains and McMoRan acquisitions. Today, long-term debt is piled up to $21.1 billion, compared with $3.5 billion a year ago. Adkerson said that several approaches to meaningfully lowering the obligations are being considered, including asset sales and joint venture arrangements. Beyond that, there's the possibility of forming a master limited partnership involving onshore oil and gas properties.

Finally, it's worth noting that, despite its successful market performance during the past several months, Freeport's forward P/E still sits below 12 times, compared with nearly 14.4 for BHP and 14.5 for Southern Copper. At the same time, its 3.60% forward annual dividend yield is 20 basis points higher than BHP's and double Southern Copper's.

The bottom line
Taking all this into account, then, my response to the key question surrounding Freeport remains unchanged from earlier this month: Yes, it appears that the big copper, gold, and now oil and gas company retains considerable upward mobility.

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