Freeport-McMoRan Copper & Gold Inc Increasing Gulf of Mexico Exposure

Considering the desire to reduce debt, it wasn't a huge surprise that Freeport-McMoRan Copper & Gold (NYSE: FCX  ) agreed to sell its valued Eagle Ford Shale assets. The slight surprise was the willingness for the company to continue spending large sums in the Gulf of Mexico.

With the energy market going shale-crazy, the shift from hot shale assets to out of favor deepwater assets is probably a brilliant move. Not to mention, the assets appear to have similar reserve potential, yet Freeport will net approximately $1.3 billion after tax to repay a portion of its gigantic $20 billion debt load

Unloading Eagle Ford assets
Back in 2012, when Freeport bought Plains Exploration & Exploration Company and McMoRan Exploration Co., it was clear the company wanted to focus on the huge long-lived assets in the Gulf of Mexico that the market lost interest in following the Macondo disaster. This left the Eagle Ford and California assets from Plains Exploration as the likely candidates for divestiture.

Encana (NYSE: ECA  ) agreed to buy the assets, producing 53,000 Boe/d during the first quarter of 2014, for a transaction price of $3.1 billion. Freeport will net around $2.5 billion after taxes. The Eagle Ford assets include only 45,500 net acres with estimated net proved reserves totaling 59 million Boe and estimated net proved and probable reserves of 69 million Boe at year-end. According to Freeport, production in the area had grown significantly, yet the company reduced rig counts from eight in mid-2013 to only two operated rigs at the end of the first quarter.

For its part, Encana has been busy offloading natural gas assets in order to buy this oil-rich Eagle Ford property. For the first quarter of 2014, liquids production surged 56% year over year to reach 67.9 Mbbls/d.

Plunging more into the Gulf
After recently acquiring 20 leases in the Gulf of Mexico covering 106,000 gross acres for $330 million, Freeport is now adding more assets from Apache (NYSE: APA  ) for $1.4 billion. The assets include working interests in the Deepwater Gulf of Mexico such as the Lucius and Heidelberg that are of particular interest to the company. In addition, the deal includes 11 exploration leases with working interests ranging from 16.67% to 60%. In total, the Apache properties have estimated proved, probable, and possible reserves of 55 million boe and several hundred million boe resource potential.

Both the Lucius (11.7% interest) and Heidelberg (12.5% interest) offer near-term production opportunities, with the Lucius expected to hit production by the second half of this year. The Heidelberg will take until mid-2016 to commence production.

For its part, Apache wants to focus more on subsalt and other deeper exploration opportunities in water depths less than 1,000 feet that require less capital. The company still maintains working interests in approximately 650 blocks in the GOM, though it only produces roughly 9,000 Boe/d from deepwater properties. With onshore liquids production growing over 20%, and strong Permian Basin production hitting 25% growth, selling these non-controlling assets shores up the balance sheet and allows the company to focus capital spending on more strategic locations.

Bottom line
The deals appear brilliant for Freeport-McMoRan and leave the company more focused on assets where it believes it has an advantage over the market. Investors need to realize that the company obtained substantial cash from the asset shift, but oil production will decline in the short term, with roughly 30% of current production sold in the deal. With the Lucius project coming on production soon, Freeport will recoup some of the lost production, but it will take time to match the current levels.

For Apache and Encana, selling out-of-favor assets to focus on hot shale production doesn't appear attractive. At least in the case of Apache, the company is dumping non-strategic assets that the company lacked the capital to develop in the first place.

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  • Report this Comment On May 19, 2014, at 8:50 AM, GEC135 wrote:

    How do you calculate a $2.5B after tax gain. FCX paid $16.3B for the PXP fields. Prorating based upon production Eagle Ford (36% of the three fields) would be valued at approximately $5.3B +/- $0.25B. Looks like a loss, not a gain.

  • Report this Comment On May 19, 2014, at 3:06 PM, maholder wrote:

    those numbers were provided by FCX... and you can't prorate based upon production.

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