Freeport-McMoRan Copper & Gold (FCX 2.45%) surprised a lot of people by reporting unexpectedly strong first-quarter earnings. The copper giant beat analysts' estimates by $0.08 per share, even after many had braced for the worst as copper prices took a dive in the quarter. What was the secret to Freeport-McMoRan's success? Oil and gas.

Drilling down into Freeport-McMoRan's quarter
This had the potential to be a very tough quarter for Freeport-McMoRan. The company is having issues exporting copper out of Indonesia, which is compounded by the fact that copper prices are falling. Its saving grace over the first three months of 2014 might have been the standout performance of the newly acquired oil and gas business.

 

Photo credit: Anadarko Petroleum 

Freeport-McMoRan had projected that it would produce 15.3 million barrels of oil equivalent, or BOE, in the first quarter. However, strong production from the Eagle Ford shale, combined with strength in the Gulf of Mexico and stability in California, enabled the company to produce 16.1 million BOE. Furthermore, Freeport-McMoRan also kept its cash production costs lower than expected in the first quarter -- just $18.51 per BOE versus the earlier projection of $19. High production at lower cost is the recipe for success in today's stable oil price environment. 

Looking ahead, the company expects its oil and gas business to remain strong this year. While production is expected to decline from 179,000 BOE per day to 176,000 BOE per day, cash flow is expected to more than cover the company's growth plans.

Oil and gas should continue to fuel Freeport-McMoRan
These growth plans include bringing the Anadarko Petroleum (APC) led Lucius development online in the second half of this year. Freeport-McMoRan owns a 23.3% working interest in Lucius, while operator Anadarko holds a 27.8% position in the project. Five other partners own the remaining interests. As the following slide shows, Freeport-McMoRan, Anadarko, and their partners are making progress on the significant project.

Source: Freeport-McMoRan Investor Presentation (Link opens a PDF).

Freeport-McMoRan also has several promising natural gas prospects in what it calls the Inboard Lower Tertiary/Cretaceous. Freeport-McMoRan and its partners so far have drilled eight wells that indicate the presence of geological formations that are similar in nature to the deepwater Gulf of Mexico, as well as onshore in the Gulf Coast region. The company believes it has the potential to develop a significant source of long-term, low-cost natural gas.

Next up in the exploration process, Freeport-McMoRan will complete its Davy Jones No. 2 well and plans to complete the Blackbeard West No. 2 well later this year. The company has a number of additional near-term drilling opportunities, along with a vast inventory of potential on its more than 56,000 gross acres. This segment has the potential to generate significant long-term returns for the company. 

Investor takeaway
Freeport-McMoRan couldn't have timed its oil and gas acquisitions any better. The company would otherwise have had a tough first quarter, with slumping copper and gold prices, along with decreased sales volumes, delivering a much bigger hit to its business. Looking ahead, oil and gas should remain an area of strength for Freeport-McMoRan, which has a number of compelling oil and gas projects under way that should keep its production flowing and growing.

 

Photo credit: Anadarko Petroleum 

OPEC is absolutely terrified of this game changer
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