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Why Freeport-McMoRan Copper & Gold Is About Much More Than Metals

Just by its name alone, you'd naturally assume Freeport-McMoRan Copper & Gold (NYSE: FCX  ) was a mining pure-play, and that's exactly what it used to be. Freeport is one of the biggest producers of precious metals such as copper, gold, and molybdenum in the world. But all that's about to change.

Management has taken the company on a brave new path into an entirely different business. Just over the past few months, Freeport has built up a huge oil and gas segment. In short order, Freeport has transformed itself into a diverse natural resources powerhouse.

Here's the new direction Freeport is going and how it's already paying off.

Going long on oil
Freeport made two separate acquisitions last year, buying Plains Exploration & Production and McMoRan Exploration for a total of $19 billion. These acquisitions have added a high-quality portfolio of oil and gas assets to its operations.

Freeport now has access to some of the most promising fields in the country. These include onshore plays like the Haynesville natural gas shale and both onshore and offshore fields in California. In addition, Freeport is poised to become a major player in the deepwater Gulf of Mexico.

Earlier this year, the U.S. government held a major lease sale for drilling contracts in the Gulf of Mexico. You might be surprised to know that Freeport was hugely involved. Freeport-McMoRan's energy subsidiary, Freeport-McMoRan Oil & Gas, was actually the highest bidder for federal oil contracts. It made 16 separate bids for a grand total of $321 million, including the sale's single largest bid of nearly $70 million.

More recently, Freeport-McMoRan has added to its Gulf of Mexico operations by acquiring approximately $1.4 billion worth of deepwater interests from Apache  (NYSE: APA  ) . The acquisition was funded with proceeds from a previous sale, in which Freeport sold $3.1 billion worth of onshore acreage in the Eagle Ford shale to Encana  (NYSE: ECA  ) .

It's clear that Freeport-McMoRan really believes the Gulf of Mexico is where it should be targeting, since it gave up some promising assets in the Eagle Ford. The acreage involved produced 53,000 barrels of oil and gas equivalents just in the first quarter. Encana management anticipates the deal will be immediately accretive to cash flow this year, and will double the company's current oil production.

Freeport is confident in its strategic direction. After the lease sale, management said its winning bids were concentrated mostly on what it calls high-impact, drillable targets.

Diversity is hugely valuable right now
Freeport McMoRan is already reaping the benefits of having a more diverse business. That's because the environment for copper and gold mining isn't exactly favorable right now. Precious metals prices have been stuck in a prolonged downturn over the past few years. And it's been widely reported that the U.S. is in the midst of an oil and gas boom. This prompted Freeport-McMoRan to switch focus to energy, and it's already paying dividends.

Freeport generated $1.2 billion in oil and gas revenue just in the last quarter. This means its oil and gas segment accounted for 25% of the company's revenue. Management also expects one quarter of its earnings before interest, taxes, depreciation, and amortization (EBITDA) to come from oil and gas this year.

A soon-to-be resources powerhouse
Freeport-McMoRan is poised to become a natural resources giant, as it continues to build its oil and gas business. Due to massive acquisitions over the past year, Freeport now derives a large chunk of its revenue and cash flow from oil and gas.

This is particularly valuable because of the market conditions facing each industry. Mining is a very difficult business right now, since precious metals prices have been stuck in a pronounced downtrend for a few years now. On the other hand, oil and gas is very favorable, since underlying commodities are supportive and domestic production is booming.

Add it all up, and Freeport-McMoRan is a natural resources powerhouse in the making.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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