The steep slide in the price of oil this year caught Freeport-McMoRan (FCX +1.83%) a bit flat footed. Because it was pretty tapped out on the debt side after borrowing heavily to fund its foray into oil and gas, it was left with limited funding flexibility at a time when its business was consuming a lot of cash to grow both its oil and copper production. With a need for cash, the company searched high and low for capital to fund its oil and gas business.
However, after nearly a year of searching, it has completely struck out, which is bad because it not only desperately needed the cash, but the failure is making the company look really bad, too.
Putting out feelers
When Freeport-McMoRan reported its fourth-quarter results in late January, it said it was taking aggressive actions to reduce its costs amid the downturn in oil prices. Further, it noted in that report that it had
... initiated efforts to obtain third-party funding for a significant portion of its oil and gas capital expenditures to maintain financial strength and flexibility in response to recent sharp declines in oil prices.
Image source: Anadarko Petroleum.
What the company was looking for was either a joint venture or financial partner to help it fund some of its oil and gas developments because it didn't generate enough cash flow to fund these projects internally. In other words, Freeport-McMoRan was seeking either a deep-pocketed rival to join it on some of its projects, or a financial sponsor, such as a private equity fund.
Both arrangements are quite common in the energy industry. Freeport-McMoRan partner Anadarko Petroleum (APC +0.00%) is a great example of a company that uses these arrangements. For example, in 2013, Anadarko entered into a carried-interest arrangement with a third party for a portion of its ownership in the Heidelberg development, a project in which Freeport-McMoRan is also a partner. Under the terms of that deal, Anadarko Petroleum would be carried for $860 million, which at the time represented all of its expected capital requirements until Heidelberg delivered first oil in 2016. In exchange, Anadarko conveyed a 12.75% working interest in the development. It's the type of deal Freeport-McMoRan would likely be seeking to fund some of its oil and gas developments.
Tossing out another idea
One quarter later, however, the company updated investors on the progress by noting it was still "evaluating funding alternatives to advance growth projects in its oil and gas business." However, in addition to the aforementioned search for project-level funding partners, the company also wrote that it was considering a broader approach to its oil and gas business in general by considering a "sale of public equity in a minority interest of its oil and gas subsidiary." It subsequently filed a registration statement for an IPO of the business in late June.
The company, however, never went ahead with that IPO. Instead, it initiated an at-the-market public offering of stock at the parent level, raising $1.6 billion to date. That said, it still might move ahead with the IPO of its oil and gas subsidiary, or even spin that business off to investors, but for now, it is waiting for market conditions to improve a bit.
Why these were such bad moves by Freeport-McMoRan
Freeport's decision to seek financial partners wasn't a bad move, but the fact that it hasn't found a partner nearly a year later is a concern. It suggests the company was either being too greedy in what it was seeking, or that potential investors don't see the value in its assets. Worse yet, by waiting nearly a year, the company won't get as much value now as it would have in January because the market has only grown worse. It's a case where waiting too long proved to be a bad move.
Similarly, the oil and gas IPO idea rates as a poor move because this is a business Freeport just acquired in mid-2013. It suggests that management bought at the top and is now forced to sell at the bottom because of poor planning. And, like the lack of finding a financial partner, it looks bad and has really tarnished management's reputation.
