Freeport-McMoRan: No Asset Sale A Good Decision

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Feb 24, 2015
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Freeport-McMoRan (

FCX, Financial) has been hit hard in the last 3-4 quarters on account of a slowdown in China coupled with the steep decline in oil prices. From a high of $39.04 on July 9, 2014, the stock slumped to $16.81 on January 30, 2015. Since then, the stock has recovered to current levels of $20.59. However, the near-term sentiments remain weak for Freeport-McMoRan. On the other hand, the company’s long-term prospects still remain bright, and the stock is worth accumulating at current levels. I am particularly positive on Freeport-McMoRan due to some good decisions by the management in difficult times and I believe that the company has the potential to navigate through this crisis.

Freeport-McMoRan had earlier planned asset sale in order to reduce the company’s debt that currently stands at $18.3 billion. In-line with this strategy, Freeport-McMoRan had already completed $5 billion worth in asset sale with $4.3 billion, net of tax proceeds to the company. However, with the decline in commodity and oil prices, the decision to sell assets was challenging as any asset sale would not fetch the right price for the asset. Therefore, Freeport-McMoRan has decided to stall the asset sale process amidst weak market conditions.

I believe that this decision will hurt the stock in the near-term as it changes the outlook for the company‚Äôs financial flexibility and the company‚Äôs debt position. However, I believe that this is an excellent decision from a long-term perspective. Freeport-McMoRan should not enter into any asset sale that sounds more like a ‚Äúdistressed asset sale‚ÄĚ in term of valuations. When industrial commodity prices recover along with recovery in oil prices 1-2 years down the line, the company can get far better valuations.

In the current scenario, it is more important to cut the discretionary cost and reduce the capital expenditure in order to keep debt at manageable levels. The company has already planned to reduce capital expenditure in 2015 to $6.0 billion from $7.2 billion in 2014. In particular, the oil and gas expenditure has been reduced from $3.2 billion in 2014 to $2.3 billion in 2015 and $2.3 billion in 2016. I expect further decline in capital expenditure if oil prices sustain at current levels in the second half of 2015. Therefore, the decline in capital expenditure will imply that robust revenue and cash flow growth is unlikely in the coming years. This will keep the stock sideways to lower and presents a good accumulation opportunity.

I believe that Freeport-McMoRan is well positioned to increase its capital expenditure in 2015 or 2016 if oil prices do recover faster than expected. However, at current level of crude prices, Freeport-McMoRan will continue to struggle considering the fact that the oil and gas segment is the company’s biggest EBITDA generator. The weakness will continue even at $50 or $60 per barrel oil as the company’s projects are deep-water that have a higher break-even.

From a valuation perspective, Freeport-McMoRan certainly looks attractive with the stock currently trading at an EV/EBITDA of 5.01 and a forward (December 2016) PE of 7.7. I therefore believe that the stock can be considered for gradual accumulation and I further believe that the company’s debt is likely to decline once oil price recover. In the recent past, the company has extended its debt maturity profile and that is a positive factor from the company’s debt schedule perspective.

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