Freeport-McMoRan Inc. (NYSE:FCX), one of the world's largest copper miners, made what turned out to be an ill-fated diversification attempt in 2013. The energy business it bought floundered and, because the deal was financed with debt, left Freeport struggling to make ends meet. It's been a long slog, but Freeport's balance sheet is starting to look a lot better -- though it's nowhere near its pre-deal strength.
If you examined Freeport's balance sheet at the end of 2012 it was in great shape. The miner had $3.7 billion in cash, a current ratio of nearly 3.1, and long-term debt of $3.5 billion. At that point Freeport's financial foundation was rock solid, bordering on pristine.
One year later, at the end of 2013, the picture was very different. Cash had fallen by 45% to just under $2 billion. The current ratio had dropped to roughly 2.1. And long-term debt had ballooned to $20.4 billion. Interest expense, not surprisingly, was nearly 2.8 times higher in 2013 than it was in 2012. The balance sheet went from rock solid to stretched in a single year. These changes were all directly related to the company's move into the oil industry.
Freeport probably could have managed through this had oil prices remained high, but they didn't. In mid-2014 oil prices fell sharply from over $100 a barrel to as low as $30 at the nadir of the energy downturn.
A long road to recovery
Once oil joined the commodity downturn Freeport found itself in a difficult spot. Copper and gold were weak, and the new oil business was a further drain on resources. The company cut costs and after a late 2015 management shake up, started to sell the oil businesses it acquired just two years earlier along with other non-core assets.
A lot has changed since the end of 2015. At that point, long-term debt remained at around $20 billion. Cash had dropped to just $177 million. The current ratio had fallen to 1.7. And EBIT to interest expense was in negative territory, with the dollar value of the interest expense more than four times higher than what it was in 2012 (before the oil deal).
A year and a half later, at the end of the second quarter of 2017, most of Freeport's big asset sales had been completed and debt reduction plans were well underway. These moves had the expected impact, leaving Freeport's balance sheet in much better shape.
For example, long-term debt stood at $13.1 billion, with another half a billion dollars of debt paid down subsequent to the quarter's end. Cash at the end of the second quarter was nearly $4.7 billion. And the current ratio was heading higher again, inching up to 2.1. Interest expense, meanwhile, had fallen around 17% year-over-year in the quarter and EBIT to interest expense was back in positive territory.
A different company
So Freeport's management team has done a lot of heavy lifting and made a lot of difficult choices. The commodity recovery that started in early 2016 and dilutive equity sales helped a lot too. Despite all of that work, however, Freeport isn't the same company it was before the oil acquisitions.
The oil business is a rounding error at this point, with daily oil production falling roughly 95% year over year in the second quarter. But despite selling almost all of the oil business it acquired in 2013, long-term debt remains nearly $10 billion higher than what it was prior to the oil investment. The share count is nearly 40% higher than pre-deal levels. In the end, there's no question that management has made great strides when it comes to long-term debt, which is great -- but the debt hangover from the ill-fated oil investment is still there, and will continue to linger for years.