Freeport-McMoRan Is Well-Positioned To Grow

| About: Freeport-McMoRan Inc. (FCX)

Summary

Energy assets are starting to contribute, and will become a substantial part of the total revenues over the next few months.

The Indonesian ban will result in short-term supply concerns for the company.

Focus on energy assets will allow the company to diversify the revenue mix and bring stability to revenues.

Freeport-McMoRan (NYSE:FCX) is working towards diversifying the revenue mix due to the volatility and weak prices in the commodities market. The company has added oil and gas exploration and production operations to its portfolio. The addition of the energy assets to the portfolio is already showing the positive impact, as the first-quarter earnings showed how these assets made up for the weak commodities market. The company continues to face problems from the Indonesian ore export ban, which has affected the overall production volumes of the company.

A Look at the Financials

Freeport-McMoRan recently released its first-quarter earnings, and it proved to be a tough quarter for the company. The company is still facing issues from Indonesia due to the ore export ban and the weak copper prices. However, the oil and gas business was a saving grace over the first three months of the current year. The company acquired oil and gas assets in the second quarter of the last year, and posted strong revenue of around $1.25 billion for the quarter. Moreover, the total revenues for the quarter stood at $4.96 billion, compared to $4.58 billion for the same period last year. First-quarter revenue saw year-over-year growth, but the net income decreased as compared to the same quarter last year.

Net income stood at $510 million, against the $648 million reported for the same quarter last year. The net margins showed a downtrend due to the production shortfall in the copper business, as well as the declining prices of copper and gold. The revenues from the mining operations stood at around $3.72 billion this quarter, compared to $4.58 billion last quarter. The company gave lower sales forecasts for the current year for copper and gold as compared to its previous guidance, due to the unresolved Indonesian situation. However, the company has reaffirmed the full-year outlook for molybdenum and oil and gas, and it has also maintained its capital expenditure targets for the year.

Oil & Gas Assets Portfolio

During the first quarter, the oil and gas sales volumes were 16.1 MMBOE, which are higher than the January forecast volumes of 15.2 MMBOE, due to higher production volumes from the Eagle Ford assets of the company. Freeport also continued its strong operational throughput in the Gulf of Mexico, and derived stable production from the California region. The oil prices also showed an uptrend in the first quarter, adding more strength to the oil revenues. Moreover, the company acquired some high-yielding assets, including the California, Madden and Eagle Ford regions, which could further enhance its yield in the coming quarters. However, the largest proved reserves are located in California, with 188 MMBOE of oil and more than 2,000 future locations for exploration and production activities.

The oil and gas business segment should continue to fuel the company by the development of Lucius Deepwater GOM, which is expected to deliver its first production in the second half of 2014. The project is operated by several other industry peers, and Freeport holds 23.3% working interest in it. Furthermore, the company is trying to increase its natural gas yield by drilling eight wells in the Gulf of Mexico, as well as onshore in the Gulf Coast region.

Role of Copper in Future Growth

The average price of copper stood at $3.14 per pound, compared to $3.51 per pound in the same period last year. Copper price is largely impacted by the global macroeconomic conditions. China, being the largest consumer of the global copper production, influences the global copper prices with its continuously growing large economy. Over the last few months, slower economic growth in China has led to a downturn in the copper prices. Moreover, the newly-proposed structural reforms by the Chinese leadership have shifted the focus of the economy from an investment and export-driven economy to a service and consumption-led economy. This transformation could be negative for the copper demand in China. Therefore, the revenues generated from copper could show a slight downturn over the next few months due to its dependency on the global macroeconomic factors.

Conclusion

Freeport-McMoRan is facing some supply issues in the short-term due to the Indonesian ban, as well as the expansion of its operations in Latin America. However, the addition of energy assets have brought variety to the revenue mix of the company and reduced the overall risk. Going forward, energy assets will become a substantial portion of the total revenues of the company and provide it stability in the volatile global market of commodities. Furthermore, the expansion of operations in the Latin American assets should allow the company to make up for the lost volumes from Indonesia. However, in the short term, the supply issues are likely to persist.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.