Slowdown in China coupled with decline in oil and gas prices has resulted in a steep decline for industrial commodity stocks as well as energy stocks. Freeport-McMoRan (FCX, Financial), with presence in industrial commodities as well as the energy sector, has faced challenging times in the last three to four years. From a stock price perspective, Freeport-McMoRan has declined by 57.5% in the last one year. It might be a good time to accumulate Freeport-McMoRan with focus on the company’s balance sheet and the recent equity program.
Starting with the company’s equity program, Freeport-McMoRan announced in 3Q15 a $2 billion at-the-market equity program to boost its liquidity position. At an average price of $10.63 per share, Freeport-McMoRan has already raised gross proceeds of $1.2 billion to date. With $0.8 billion still remaining under the program, Freeport-McMoRan is likely to end the current quarter with liquidity position in excess of $2.0 billion.
The important point to note here is that Freeport-McMoRan has short-term debt maturity of $906 million as of September, and the company is likely to utilize the cash to repay short-term debt. With Freeport-McMoRan having $20.5 billion in debt as of 3Q15, deleveraging is critical, and this is probably the first step towards that. The equity issuance does dilute EPS, but I don’t see that as a priority now with the company looking to survive the crisis.
The second positive is that Freeport-McMoRan has announced likely 2016 capital expenditure of $4.0 billion, which is significantly lower than 2015 capital expenditure target of $6.3 billion. An aggressive cut in investment was required to control leverage, and Freeport-McMoRan has moved in the right direction. Importantly, Freeport-McMoRan expects consolidated operating cash flow for 2016 to be $6.3 billion. In other words, the company is likely to generate $2.3 billion in free cash flow for 2016. I see this as another source to reduce debt, and this implies that Freeport-McMoRan can potentially reduce debt by $2 to $3 billion in the next 15 months. With the stock having corrected by 57.5% in the last one year, these initiatives will trigger some upside for Freeport-McMoRan.
On looking at a 12- to 15-month time horizon, I believe that divestment of partial stake in the oil and gas business is also likely. The management has said that it’s looking for strategic alternatives for the oil and gas business. Coming out with an IPO might not help as the company will not get the desired valuations. I see partial stake sale in order to further reduce debt.
It’s important to understand that the recovery in industrial commodities as well as the energy sector will be “U shaped,” and this implies a prolonged period of muted cash flows. Therefore, deleveraging is a good option in order to keep credit metrics sound through the crisis period.
From a growth perspective, Freeport-McMoRan has several expansions lined up in the copper segment as well as in the oil and gas segment. While operating cash flows will suffice for 2016 investments, Freeport-McMoRan also has $3.5 billion in undrawn credit facility. For now, I expect the company to invest within its means, and Freeport-McMoRan will leverage only after there is sustained recovery in the industry.
It is important to note that I am recommending Freeport-McMoRan for exposure as a value investment, but I strongly believe that the industrial commodity and energy sector will see slow recovery. However, investors can grab the stock at current valuations and the investment horizon has to at least for the next three to five years. Freeport-McMoRan has been among the key players globally in the commodity business, and I see the company overcoming this challenge.
