Please ensure Javascript is enabled for purposes of website accessibility

Underneath Freeport-McMoRan Inc's Ugly Headline Number Is a Surprisingly Strong Quarter

By Matthew DiLallo - Jan 26, 2016 at 11:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Global resource producer’s top goal in 2016 is to reduce its debt.

At first glance, Freeport-McMoRan (FCX 4.49%) reported a rather atrocious quarter after detailing a multi-billion loss due to a huge asset writedown. However, after adjusting for that loss, and despite a horrendous slide in commodity prices, the company actually reported better-than-expected fourth-quarter results before the market opened this morning.

Digging into the numbers
Freeport-McMoRan reported a net loss totaling $4.1 billion, or $3.47 per share for the fourth quarter. However, the bulk of that loss was due to a $3.7 billion impairment charge the company took on its oil and gas assets, as well as a few other additional charges and adjustments. If we adjust for these one-time charges, the company's net loss for the quarter was only $21 million, or $0.02 per share. That's a much lower loss than the consensus estimate of $0.08 per share.

The company was able to surpass expectations by keeping its costs in check, with the company's consolidated unit net cash cost averaging $1.45 per pound for copper and $16.67 per barrel of oil equivalent during the quarter. That was due to lower site production and delivery costs on the mining side, and lower maintenance and repair costs on the oil side. In addition to those lower costs, the company was able to benefit from strong oil hedges, which pushed the company's average realize price per barrel of oil equivalent up by $11.39 to $48.88.

Production volumes were also solid, with the company producing 1.15 billion pounds of copper, 338,000 ounces of gold, 20 million pounds of molybdenum, and 13.2 million barrels of oil equivalent during the quarter. Most of those commodities were right on track with Freeport's prior guidance, however, gold sales were particularly strong and exceeded the company's guidance of 310,000 ounces for the quarter.

What's next for Freeport-McMoRan
While Freeport-McMoRan's results were a bit better than expected, the company still has a lot of work to do. Priority No. 1, according to CEO Richard Adkerson, is a "clear and immediate objective ... to restore Freeport-McMoRan's balance sheet." That will be accomplished through a series of third-party transactions that it expects to work through during the first half of 2016. While the company was short on specifics, it did note in the press release that it is pursing both asset sales and joint venture transactions, and that "several initiatives are currently being advanced, including an evaluation of alternatives for the oil and gas business as well as several transactions involving certain of its mining assets."


Image source: Rowan.

In addition to that, the company is taking further action to reduce costs at its oil and gas business. The company has now decided to defer all exploration and development activities, which will result in it idling all three of the deepwater drillships it has under contract. This impacts its drillship vendors Noble (NEBLQ) and Rowan (RDC), which have these contracts. Noble would bear the brunt of this impact because it supplies two rigs -- Rowan supplies the other rig -- which is a lower dayrate than the two Noble vessels. That said, neither Noble or Rowan will come away empty handed, with Freeport-McMoRan expected to incur idle rig costs totaling $600 million in 2016 and $400 million in 2017 associated with these three rigs.

Given these cost adjustments and the company's new commodity price outlook, Freeport-McMoRan now expects to produce $3.4 billion in cash flow this year at an average copper price of $2 per pound, and an average oil price of $34 per barrel. That will largely match the company's expected capex budget of $3.4 billion for the year.

Investor takeaway
Freeport-McMoRan has worked very hard to reduce its spending to level it with its expected cash flow. That said, the company still has yet to address its debt, which has grown by a net $1.8 billion over the past year. That's expected to change given that the company's primary goal going forward is to reduce its debt, with its aim to make tangible progress over the next six months. It's a goal it must accomplish given that its balance sheet is nearing the breaking point due to persistently weak commodity prices.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$31.40 (4.49%) $1.35
Noble Corporation plc Stock Quote
Noble Corporation plc
Rowan Companies plc Stock Quote
Rowan Companies plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.