Freeport-McMoRan Copper & Gold Inc. Makes a Big Splash in the Gulf of Mexico

Photo credit: Cobalt International Energy 

Freeport-McMoRan (NYSE: FCX  ) emerged as the big spender in the government's latest round of lease auctions in the Gulf of Mexico. The company won 16 of the 17 bids it placed as it put up $321 million to secure drilling rights that come with these leases. That amount was three times more than the $104 million that runner-up Chevron (NYSE: CVX  ) bid to score its winning bids. Overall the industry bid $1.1 billion for leases, with $872.1 million of those bids being winners.

Big spender
Freeport-McMoRan wasn't the most aggressive bidder at the auction. That distinction went to Cobalt International Energy (NYSE: CIE  ) , which won 44 of its 46 bids. That said, Cobalt didn't gamble a whole lot of money on its winning bids as the company just offered up $26 million for those winning leases.

Freeport-McMoRan, on the other hand, put out one bid that was nearly three times what Cobalt Energy bid on all of its winning leases. That bet saw Freeport-McMoRan's pledge $69 million to beat out five rivals for a single tract in the Atwater Valley leasing area. One of the reasons why that tract appealed to Freeport-McMoRan is because it's a pretty sure bet as the industry has already made at least five discoveries in the area.

Freeport-McMoRan isn't known for being a high roller in the Gulf of Mexico. However, it didn't have as much competition for leases this time around because a lot of its big oil rivals are cutting back on spending. In fact, some of its larger rivals spent more than a $100 million each the last time the government auctioned off Gulf leases, but those same companies just spent a few million dollars a piece this time around on new leases. With so much competition on the sidelines Freeport-McMoRan was able to be aggressive and bulk up its position in the Gulf.

Why is Freeport-McMoRan interested in the Gulf?
The Gulf of Mexico is an important area for Freeport-McMoRan's future. While the company has proved reserves of 171 million barrels of oil equivalent, it sees its total resource potential of more than 5.8 billion barrels of oil equivalent. That resource potential only increased with the lasted round of winning bids. Because of this potential the company sees dynamic production growth in the years ahead as the following slide shows.

Source: Freeport-McMoRan Investor Presentation (link opens a PDF)

As that side details the potential is there for Freeport-McMoRan to double its production by 2020. The company can achieve that lofty goal because it has a really has a good balance of short-term production growth in the works as well as longer-term opportunities that hold real promise. One of the short-term projects that will start to produce for the company and its partners is the Lucius oil field. The field, which was discovered in 2009 and cost about $2 billion to develop contains about 300 million barrels of oil equivalent and should begin producing in the second half of this year.

In addition to that the company's 100% operated Holstein platform is being refurbished to handle additional oil production. The company is looking to tie in future production at its Holstein Deep development as well as any future discoveries from its Copper exploration project as the following slide shows.

Source: Freeport-McMoRan Investor Presentation 

Beyond that the company has a number of future opportunities, including the Tara exploration prospect, which is a Lucius analog prospect. In addition to these exploration prospects the new leases the company picked up in the latest auction also offer exploration opportunities.

Investor takeaway
Freeport-McMoRan was able to take advantage of the pullback in spending by big oil to secure a bigger lease position in the Gulf of Mexico. This big bet could pay off big time over the longer-term. As it does it will further diversify the copper giant's revenue stream away from mining and into energy.

Does that make Freeport-McMoRan the top stock to own in 2014?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2883071, ~/Articles/ArticleHandler.aspx, 8/31/2015 2:08:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated Moments ago Sponsored by:
DOW 16,545.13 -97.88 -0.59%
S&P 500 1,976.48 -12.39 -0.62%
NASD 4,799.89 -28.44 -0.59%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 1:51 PM
FCX $10.65 Up +0.15 +1.45%
Freeport-McMoRan C… CAPS Rating: ****
CIE $8.09 Down -0.04 -0.43%
Cobalt Internation… CAPS Rating: ***
CVX $80.41 Down -0.02 -0.02%
Chevron CAPS Rating: ****