After paying a consistent dividend for two decades, often adding in a special dividend when times where good, Freeport-McMoRan (NYSE:FCX) slashed and then suspended its dividend earlier this year. Due to a hefty debt load and weak commodity prices crimping its cash flow, the company needed the more than $1 billion dollars it was paying investors each year to improve its financial footing. That said, given the company's long history of paying a dividend, it suggests that it could quickly bring back the payout if conditions were to improve. Here's what needs to happen for the payout to return in 2016.
Where things stand right now
When Freeport-McMoRan suspended its already-reduced dividend in early December, it noted that this would save the company $240 million per year. However, even with that savings, the company projected that its capex spending in 2016 would exceed its cash flow by more than $600 million, assuming $2 per pound for copper and $45 per barrel for oil. This is after the company made further reductions in capex, with its oil and gas capex falling by another $200 million to $1.8 billion next year, while mining capex was cut by 25% to $2 billion.
Freeport-McMoRan doesn't have all that much more it can cut capex spending because the bulk of the capital is going toward completing some of its major projects. So, with a $600 million projected gap and a lot of debt on the balance sheet, it doesn't look promising for a return of the dividend in 2016. That said, it isn't impossible for the dividend to return, but there are two things that would first need to happen.
Finding some funding partners
Freeport-McMoRan's initial thoughts on funding the 2015 gap between projected cash flow and capex at its oil and gas business was to find joint venture or financial partners to pay for the development of some of its assets. It's an arrangement Anadarko Petroleum (NYSE:APC) used in 2013 to bring in $860 million to pay for the final development costs of the Heidelberg development in the Gulf of Mexico, where Freeport-McMoRan is also a partner. In that deal, Anadarko Petroleum conveyed a 12.75% working interest in the project to secure the cash it needed to fund the rest of its development. While Freeport-McMoRan has struck out in its search for capital thus far, finally securing a partner to bring in the cash it needs to fund its growth would alleviate some of the pressure it's feeling on its balance sheet.
In addition to seeking a funding partner for its oil and gas business, Freeport recently disclosed that it is evaluating financing alternatives for its mining business, including the sale of a minority interest in some of its assets. With a vast portfolio of mining assets around the world, the company has a number of assets that would be attractive to a minority partner. That being said, given its struggles in finding an oil and gas partner, this is easier said than done in the current environment.
A sustainable rebound in commodity prices
As noted before, Freeport-McMoRan's 2016 plan is built around $2 per pound for copper and $45 per barrel of oil. Both numbers are below what some analysts are projecting. For example, the Chilean Copper Commission sees copper averaging $2.50 per pound next year. That extra $0.50 per pound would mean a great deal to Freeport-McMoRan, because each $0.10 change in the price of copper is worth $350 million to its operating cash flow. Meanwhile, the oil price forecast by the EIA is in the mid-$50's, a sentiment echoed by some of the major Wall Street banks. Like copper, a higher-than-expected oil price would have a big impact on Freeport-McMoRan's cash flow, with each $5 per barrel change impacting its operating cash flow by $170 million.
To put this in perspective, if the price of copper and oil averaged $2.50 and $55, respectively, it would erase the company's projected $600 million cash flow deficit and instead deliver a cash flow surplus of $1.5 billion.
Given its current outlook for commodity prices and funding, there's no way Freeport-McMoRan's dividend makes a return in 2016. However, if it can find the outside funding it's seeking at both its oil-and-gas and mining businesses, and commodity prices deliver a sustainable improvement from the company's forecast, then it is possible that the company could again pay its shareholders a dividend in 2016. While it's not something investors should bank on, it's also not impossible, either.