Freeport-McMoRan: It's Not Getting Any Better

| About: Freeport-McMoRan Inc. (FCX)

Summary

Freeport-McMoRan lost more than 35% of its price.

The company keeps cutting down capex and may decide to further scale down its oil and gas production.

Should FCX sell its oil and gas operations and focus on copper?

Freeport-McMoRan Copper & Gold (NYSE:FCX) kicked off the year with huge selloffs: The stock was slashed by 35% since the beginning of the year. China's uncertain outlook has weighed on the copper market in general and FCX's stock in particular. Since the start of 2016 copper plummeted below $2 --its lowest rate since 2008-2009. The difference, however, is that back then plunge in prices were shortly followed by a rebound in 2010. Also, China's rise in investments helped the global economy to recover; in the process this shift raised the demand for copper, which pushed back up prices. This time, China faces outflow of capital that will make it harder for the country to increase its demand for copper. And without a growing demand for copper, FCX isn't expected to do much than keep going down.

Even though FCX has diversified its portfolio, copper still accounts for the lion share of its revenue -- over 60%. The company also produce gold and oil, which have also experienced a drop in prices over the past year. But perhaps gold could benefit from the growing uncertainty in the financial markets: Some investors may acquire gold and gold related investment in the hopes that it could serve as a hedge in such uncertain periods. In any case, China's slowing demand for copper puts into question the possible rebound in the price of copper in 2016 - especially considering the global copper production is still expected to grow in the coming years.

What's the game plan?

Given the current market conditions the company will aim towards saving up on cash and reduce its debt - two objectives that are much easier said than done. To meet these goals, FCX will need to keep: Scaling down on production - mainly where production costs are high, slashing capital spending, selling non-core assets, and improving its cost structure. Freeport may also revise its portfolio when it comes to oil and gas operations.

The company stated back in late 2015 its plans to "undertaken a strategic review of its oil and gas business" so in the near term it could decide to sell off or spinoff its oil operations - but these are only two among several possibilities.

Until then, the company continues to reduce its capex for its oil and gas assets: It slashed again the capital spending from $2 per annum to $1.8 billion for 2016 and $1.2 billion for 2017. Following this recent cut, the share of oil and gas capex accounts for less than half of FCX's total capex this and next year. Bear in mind, FCX also stated it will: "…evaluate its mining operating plans in response to market conditions and will make further adjustments as required". So while it's not clear what's the direction of the company - besides reducing costs -- it's worth noticing the following: In terms of profitability per unit - for copper it's per pound and for oil it's per barrel - oil still offers higher profit per barrel, as indicated in the table below.

Click to enlarge

Source: FCX

And even at current prices - oil at $29 and copper at $1.95 - oil presents a higher profit margin than copper's (assuming production costs per unit as listed in the table above) at 33% and 20%, respectively.

Since both the copper and oil markets aren't doing well and it will take a long time before either of these commodities recover, it doesn't seem clear whether the company needs to focus on one commodity over the other. The decision to shut down or sell a certain asset should be on a project by project level rather than a business segment basis.

In conclusion…

FCX still faces too many question marks and the current market conditions. Even though FCX is priced at an over-decade low level, there is a reason for that. The upcoming Q4 earnings could shed some light on where the company is heading. Will it cut more of its capex? And if so, from which business segment. FCX may also elaborate if it revised its strategy on its oil and gas operations and its plans to scale back on other projects. At this point, however, all these questions could determine the direction of the company, but the direction of the stock will still be mostly determined by oil and copper prices. And for now both copper and oil aren't likely to pull back up the stock. For more please see: Freeport-McMoRan: It Will Get Worse before It Gets Any better

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.