Image: Freeport-McMoRan.
Times have been tough throughout the energy and mining industries, and with its feet firmly in both camps, Freeport-McMoRan (FCX -0.69%) has had to deal with unprecedented challenges in trying to keep itself afloat in an increasingly hostile environment. Coming into Thursday's third-quarter financial report, Freeport investors were bracing themselves for another steep drop in revenue as well as a modest loss. What Freeport delivered was another enormous impairment charge related to falling commodity prices and even steeper declines in sales than investors had expected. Let's look more closely at how Freeport-McMoRan has been faring and whether there's more bad news ahead for the company.
Another wave of red ink hits Freeport-McMoRan
Massive losses have become a regular occurrence for Freeport-McMoRan, and the company's third-quarter results once again included a big charge because of the energy markets' poor conditions. Revenue plummeted 35% to $3.68 billion, which was even worse than the 30% decline that investors had prepared themselves to see. The company reported a net loss of $3.83 billion, or $3.58 per share, almost entirely a result of a $3.7 billion reduction in the carrying value of oil and gas assets. Even after making allowances for that impairment charge and other extraordinary items, Freeport's adjusted net loss of $0.15 per share was almost double what the consensus forecast among investors had predicted.
The impairment charge brought Freeport closer to the energy market's new reality. Specifically, the crude oil reference price for accounting purposes declined almost $12.50 per barrel during the quarter and now stands at $59.21 per barrel. That necessitated the $3.7 billion charge, of which $3.5 billion was attributable to Freeport shareholders.
Yet as we've seen before, even taking out the effects of the impairment, Freeport continues to struggle. In its energy business, realized revenue fell by nearly a third from year-ago levels, and fairly consistent cash production costs cut operating margins nearly in half. Most people have focused on oil's declines, but as rival Chesapeake Energy (CHKA.Q) has seen, natural gas prices have also remained weak. Chesapeake actually has taken sizable impairment charges as well, and many have noted widespread impairments across the industry. Even though Freeport's production volumes have risen fairly substantially from year-ago levels -- overall oil-equivalent production rose 10% to 13.8 million barrels -- a nearly $30 per barrel drop in realized oil prices combined with a one-third drop in natural gas and an almost 60% plunge in prices for natural gas liquids to eat into revenue and profitability.
For the mining business, performance was mixed. Copper production attributable to Freeport edged downward to 841 million pounds, and sales volumes declined by 6% even as realized prices fell by nearly 25% to $2.38 per pound. Gold production dropped by nearly 40% to exacerbate a more than $100 per ounce drop in realized gold prices, and molybdenum production stayed relatively flat even as prices got slashed almost in half to go below the $8 per pound mark.
Freeport executives are still trying to show that the company is taking steps to preserve its financial health in tough times. A joint statement from Chairman Jim Moffett and CEO Richard Adkerson said that "we took a series of aggressive actions to reduce costs and capital expenditures and to strengthen our financial position" during the quarter, and the executives believe that Freeport's moves will let it survive a weak period while still having profit potential when conditions improve.
Are still more losses on the way for Freeport?
Those operating plans will have dramatic impacts on Freeport's future activity. The company cut its estimated 2016 capital expenditures by 25% in the mining segment and 30% in oil and gas, with a net reduction of about $1.6 billion. Planned curtailments at the Sierrita mine in Arizona would affect copper and molybdenum production, and declines in exploration budgets will inevitably have an impact on the oil and gas segments future production levels.
As we noted last quarter, though, Freeport-McMoran might have to go through another round of impairment charges before all is said and done. The company noted that West Texas Intermediate prices are in the mid-$40s right now, or about $14 per barrel below the current reference price that Freeport used in its third-quarter calculations. If prices don't bounce back, then further declines in the average reference price in future could well lead to further writedowns in asset value. That's something that most of Freeport's peers are dealing with, as Chesapeake Energy has also joined Freeport with multi-billion dollar impairment charges.
One piece of good news came from the Indonesian government, which Freeport says has provided assurances that it will support Freeport's long-term mining rights at its key Grasberg mine. Given the measures that Freeport has taken to raise capital, including at-the-market equity sales, maintaining long-term investor confidence will be critical in giving Freeport continued access to the financial resources it will need to move forward.
Investors took Freeport's latest results in stride, opening lower but quickly moving up by about 2% in the first half-hour of trading following the announcement. Nevertheless, for those with a long time horizon, the key for Freeport will be to survive this tough period and find ways to tap into growth in its two respective industries once conditions improve.
