Freeport-McMoRan (FCX, Financial) declared its 1Q15 results yesterday, and the company did not have lot of negative surprises to offer. The stock traded flat yesterday and was marginally higher in after hours. This article discusses the company’s results and the reasons to consider gradual accumulation of the stock.
On the revenue front, Freeport-McMoRan reported $4.2 billion in 1Q15 revenue as compared to $4.9 billion in 1Q14. The decline in revenue was expected due to a slowdown in China coupled with lower oil prices. Therefore, there were no negative surprises on the revenue front.
On first look, the EPS seems terrible with the company reporting a net loss of $2.38 per share in 1Q15 as compared to a net income of $0.49 per share in 1Q14. However, according to the company, $2.4 billion in net loss ($2.32 per share) was related to reduction of the carrying value of oil and gas properties and the related tax charge to establish a deferred tax valuation allowance. Therefore, excluding this factor, the net loss was $0.06 per share.
An important point to note in the results is that Freeport-McMoRan reported an operating cash flow of $717 million in 1Q15 and expects an operating cash flow of $4.4 billion for FY15. However, the company’s capital expenditure for 1Q15 was $1.9 billion and the company expects to incur a capital expenditure of $6.5 billion for FY15. The funding gap has to be filled by asset sales or through debt. However, Freeport-McMoRan is looking to reduce the capital expenditure for FY15 and that would be the right step in my view. Freeport-McMoRan already has $20.3 billion in debt, and this might not be a good time to consider further leveraging. Therefore, I expect capital expenditures to be muted in the coming quarters.
Freeport-McMoRan has also been considering asset sale, but I don’t expect that to happen in 2015 as the company might not get the desired valuations. The company has been looking for partners in oil and gas operation, but it is important to note that the company’s operations are offshore that have a higher breakeven. Therefore, there might not be many parties interested in investing in offshore at this point of time.
Even after considering the negatives of lower capital expenditures and potential delay in partners for offshore drilling, I believe that Freeport-McMoRan is a good stock to buy at these levels. I am not suggesting a big exposure to the stock, but a gradual exposure to the natural resources giant can be profitable from a 3-5 year investment horizon.
It is also important to mention here that the company’s oil and gas segment revenue declined to $547 million in 1Q15 from $1.2 billion in 1Q14 and the cash operating margin declined to $293 from $947 for the same period. The point I am trying to make here is that the company’s oil and gas operations have a big impact on EBITDA and investors should consider a bigger exposure to the stock only after oil prices have trended higher and stabilized.
In conclusion, Freeport-McMoRan’s results are not significantly negative considering the economic scenario (especially China) and considering the slump in oil and gas prices. I recommend some exposure to the stock as a part of the long-term portfolio allocation.
