Cobalt International Energy Inc

Photo credit: Cobalt International Energy.

So far 2016 has been an abysmal year for Freeport-McMoRan (NYSE:FCX), with its stock off more than 40% in just the past few weeks. The main culprit is weak oil and copper prices, which have fallen below $30 a barrel and $2 per pound, respectively. That's putting a lot of pressure on the company's cash flow because it had been banking on those two commodities staying above $45 a barrel and $2 per pound to balance its cash flow with its capex. That said, its cash flow will now be getting a little bit of a boost after its key Heidelberg offshore oil project came online earlier than expected.

Drilling down into Heidelberg
According to an announcement by Anadarko Petroleum (NYSE:APC), which is the operator of Heidelberg, the deepwater Gulf of Mexico project achieved first oil last week. That's four months ahead of schedule, and a little bit better than budget, meaning that the project will start fueling some much needed cash flow to its owners which include not just Freeport-McMoRan and Anadarko, but Cobalt International Energy (NYSE:CIE) and four other partners. In fact, as important as this project is to Freeport-McMoRan's cash flow the argument can be made that its most important to Cobalt International Energy because it's that company's first development project to come online, meaning it is finally cashing in after years of investments.

 Heidelberg

Heidelberg. Source: Anadarko Petroleum.

At its peak Heidelberg is expected to produce 80,000 barrels of oil per day along with 80 MMcf per day of natural gas, of which 12.5% of that production is attributable to Freeport-McMoRan. That production is important because it will help the company make up some of the cash flow it has been losing on lower prices with higher volumes. Having said that, given the size of the project and the overall glut of supply on the market, it could actually weigh on the oil price by increasing the oil glut, so it is a bit of a catch 22. However, in a world where oil companies are only looking out for No. 1, Freeport-McMoRan will take what it can get.

What's next for Freeport's oil and gas business
The addition of Heidelberg's production is only one aspect of Freeport-McMoRan's 2016 oil and gas plans. The company expects to bring a total of eight 100% owned offshore wells in the Gulf of Mexico online by the end of this year, which when combined with Heidelberg is expected to grow its production from last year's rate of 150,000 BOE/d to an average of 159,000 BOE/d in 2016. Further, this is very low-cost production and is expected to push the company's cash production costs from $19 per BOE to just $16 per BOE. That helps to reduce a little bit of the sting of low oil prices. Though, the company still needs oil at $45 per barrel to be self-funding.

Therein lies the key issue for Freeport-McMoRan. While its production is profitable, its operations are consuming too much cash because of the costs of developing new oil supplies. While the case could be made that the company should cease investing in new production, that is easier said than done because of the sunk costs of many of these projects as well as the fact that these projects are still economic given the low break-even points. That's why it is talking with financial partners, considering an IPO, or even an outright sale to a deep pocketed buyer. It sees its oil and gas business as having huge value over the long-term, even if it's under stress right now.

Investor takeaway
Any time a major project is finished ahead of schedule and under budget it is reason to celebrate. That being said, Freeport-McMoRan can't celebrate too long because it has a lot of work to do in order to right size its oil and gas business because it's unsustainable at the current oil price given the growth it continues to push through. So, until it patches its cash flow gap, either through more cost reductions or an alternative funding solution, the company will continue to be under a lot of pressure because that gap widens with every dollar the oil price sinks.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.