Freeport-McMoRan's New IPO: Smart Move or Selling Low?

Image: Freeport-McMoRan.

In late 2012, Freeport-McMoRan (FCX -1.96%) made what many saw as a controversial buyout bid for energy companies Plains Exploration and Production and McMoRan Exploration. After spending nearly $9 billion and assuming another $11 billion in debt, Freeport found its fortunes linked to the energy markets for the first time since the mining giant spun off from its former parent 20 years ago. Since then, though, oil prices have plunged, and Freeport's energy unit has needed to sell assets in order to meet its goal of cash flow independence.

Last month, Freeport filed a registration statement to offer shares of Freeport-McMoran Oil & Gas to the public in an IPO. With the move coming only a couple years after the company acquired its energy unit, Freeport faces questions about whether the IPO amounts to buying high and selling low, or whether it's a smart tactical response to tough conditions in the industry.

Why Freeport-McMoRan is selling a piece of its energy business
Freeport faces a dilemma with its energy holdings. In its initial pitch to shareholders, Freeport sought to assure them that the acquired energy divisions would be self-sustaining operationally, not requiring capital input from the copper and gold side of the business. Through the end of 2014, despite the big drop in oil prices toward the end of the year, Freeport made good on that promise, with the sale of Freeport's interest in an oil-shale project in the Eagle Ford shale play providing enough capital to allow the oil and gas business to break even on a cash flow basis .

Now, though, Freeport has to figure out new sources of funding for the oil and gas business. Crude prices have rebounded somewhat, but Freeport still believes its capital spending needs could require more money. Accordingly, as CEO Richard Adkerson said at an industry conference in May, "Our board has decided to proceed with the filing of a registration statement with the [SEC] that's necessary to have the opportunity to consider an IPO of an interest in [the oil and gas business]." Adkerson was quick to point out that registering doesn't commit Freeport to that course of action, but rather paves the way for an IPO to remain an option going forward. Freeport followed through with its actual IPO filing on June 23.

Selling low or boosting shareholder value?
Some investors have inevitably pointed out that Freeport's timing throughout the past two years has been horrendous. Having paid top dollar for the energy business when oil prices were in the triple-digits, looking to sell even a minority interest in its oil and gas assets calls into question Freeport's entire long-term strategy surrounding the deal.

Yet from Freeport's perspective, an energy IPO might actually help remedy what company executives perceive as a problem with its overall valuation. As Oil & Gas divisional CEO Jim Flores said at the company's quarterly conference call in April, "There's a big disconnect between the value of our Oil and Gas business within Freeport-McMoRan today and the public market perception of stand-alone oil and gas businesses. We've had more success than anybody with a drill bit in the last two years, and it's caused more spending, but it also is not getting reflected in our equity." Freeport hopes that by providing an explicit valuation for the energy business, its own stock will perform better.

Finally, it's important to understand that Freeport will not be in a huge hurry to move forward if conditions aren't right. Flores noted that waiting for favorable markets is a definite option, saying "we're going to be patient from that standpoint." At the same time, Freeport will also look into other potential funding alternatives, such as outright divestitures and joint venture opportunities.

In hindsight, Freeport probably wishes it had waited before reintegrating oil and gas exposure into its corporate structure through its buyouts of Plains and McMoran. Yet the company remains committed to playing the cards it has been dealt, and in the long run, Freeport remains bullish that its opportunities for growth will pan out despite the plunge in energy prices.