Freeport-McMoRan Not Just Copper Anymore

The huge gains by Freeport-McMoRan Copper & Gold (NYSE: FCX  ) (NYSE: FCX  ) (NYSE: FCX  ) over the last few months probably caught a lot of investors off guard. The company is a premier natural resource company, with a global portfolio of copper and gold assets, and significant domestic oil and gas resources. Somehow, slumping commodity prices for copper and gold haven't crushed the stock. In addition, the purchase of energy assets (with debt) isn't holding down the stock. So what is pushing it higher?

It was beaten during the early parts of 2013 due to a merger that took away the focus on copper production and byproducts. Ironically, the stock has done better than copper focused producer Southern Copper (NYSE: SCCO  ) (NYSE: SCCO  ) (NYSE: SCCO  ) . Looking at large energy producers such as Chesapeake Energy (NYSE: CHK  ) (NYSE: CHK  ) (NYSE: CHK  ) , you can see a shift in sentiment toward more complex energy producers that happen to be laden with debt.

Hidden energy projects
One of the biggest benefits (and now concerns) with the Freeport-McMoran purchase of the oil and gas operations of Plains Exploration & Production and McMoRan Exploration, was the ability to develop the Deepwater Gulf of Mexico, or GOM, assets. The major benefit of the merger was the assets of Freeport-McMoran could be utilized to develop high-risk exploratory projects. Now though, copper assets and revenue overshadows its oil and gas work. A big concern is that these assets don't get the attention, and focus needed to prosper.

The ultra-deep activities include the current drilling of an exploratory well at Lomond North (36% working interest) and 2014 production tests at Davy Jones #2 (63% working interest), Lineham Creek (36% working interest), and Blackbeard West #2 (69% working interest). The company has a substantial set of other areas to drill once some of these wells are proven out. It's important to note that McMoRan alone listed the potential for 130 Tcfe of reserves in the GOM prospects.

On top of that, Freeport-McMoRan has significant assets in California and the Eagle Ford in Texas that are already producing significant amounts of oil. The Haynesville Shale has an additional 5 Tcfe of reserves that is waiting for higher natural-gas prices.

Ironically the company gets most of its current production from California and the Eagle Ford, yet 75% of its resources exist in the mostly untapped GOM and Haynesville areas. These amounts don't include the vast potential of unproved reserves in the GOM. See the slide below, presented by McMoRan, on the potential in the GOM:

Source: fcx.com. 

Lucius Deepwater GOM development
The Lucius Deepwater GOM development project expects first production in the second half of 2014 with six-producer wells drilled and the spar in place. The well is 23.33% owned by Freeport-McMoran with a processing capacity of 80,000 Bopd and 450,000 Mcf/d. The company has also discovered oil at the Phobos area in close proximity to Lucius. The 50% working interest for the Phobos deepwater project could have enhanced economics due to its location near existing facilities at Lucius.

Complex over simple
Southern Copper has a simple corporate structure with a primary focus on copper. The company is expected to hit net income margins of over 26% on revenue of over $6 billion. Though that's an incredible bottom line margin, it is actually down from 34% in 2011. The stock sits close to a 52-week low and has limited catalysts for growing profits. Not to mention, the company may struggle to maintain those lofty margins going forward.

Previously, the market appeared to shy away from stocks loaded with debt such as Chesapeake Energy. The company is still encumbered with roughly $13 billion, yet; the market appears more comfortable with those levels. Under the previous CEO, the company was known for developing leading positions in the majority of the shale plays including the Eagle Ford, Utica, Marcellus, and Haynesville.

Chesapeake entered into numerous joint ventures to fund the capital projects, further confounding its value proposition. With proven reserves of 15.7 Tcfe on a vast 14 million acres of leases, the company now has a market cap of $18 billion and an enterprise value of over $31 billion. The stock has soared 75% from its lows to start the year, further suggesting the market is more comfortable with debt funded growth.

Bottom line
With the pure play copper producer sitting near 52-week lows and the complex energy producer soaring to multiple year highs, the theory that Freeport-McMoRan would be a bad investment because of its complex corporate structure is flawed. The market appears comfortable with companies that have used debt to fuel growth. Investors following Freeport-McMoRan need to remember that the purchased GOM assets have vast, untapped resources, that could drive the stock higher, regardless of the price of precious metals.


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