Update: Freeport-McMoRan Updates On Its New Oil Discovery

| About: Freeport-McMoRan Inc. (FCX)
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Summary

Freeport announces decent test production results at Highlander and emphasizes there are multiple prospects on its 60,000 acres land package.

This is a nice surprise (as is the dividend confirmation), but I expect 2015 to be a tough year for Freeport if the copper and oil price doesn’t rebound.

The investment thesis is slightly changed as Freeport’s share price has crashed in the past few months. However, I’d first like to see a plan to tackle the net debt.

Freeport-McMoRan (NYSE:FCX) has given more details about its Highlander discovery in Louisiana. Production is now expected to begin in 2015 as the test production indicated a daily production of approximately 43 million cubic feet of gas per day (of which 21M cubic feet will be attributable to Freeport). This should result in a revenue of roughly $200,000 per day (or $70M per year) based on the current average natural gas price in Louisiana.

This well has reached a depth of almost 30,000 feet and contains approximately 150 feet of net pay. Freeport retains a 49% net revenue interest and is the operator of this well and will very likely be running point in exploring the other prospects on its 60,000 acres land package. Keep in mind the Gulf Coast Ultra-Deep Royalty Trust (GULTU) holds a 3.6% gross overriding royalty on the entire production of Highlander as this was included in the list of tenements where GULTU (which was created when Freeport acquired McMoRan Exploration last year) would be entitled to share in the revenue. Meanwhile, Freeport has reconfirmed its dividend and stated it will be paying $0.3125 per share over Q4 2014. The ex-dividend date is January 15 2015 with the dividend being payable in early February 2015. The company hasn't given any dividend guidance for 2015 just yet, but I'm expecting the dividend to be slashed in 2015 as the oil price looks extremely weak and even the copper price doesn't look as strong as it used to be earlier this year. This makes me think the current yield of in excess of 5.4% isn't sustainable in the long run as Freeport's primary focus should be on the reduction of net debt. If Freeport would for instance slash its quarterly dividend to $0.15 (which still results in a dividend yield of 2.6%), it would be able to keep $675M in its treasury to pay down the existing debt.

I currently don't own shares in Freeport, but as the company isn't sitting on its hands in its oil and gas division, I might be tempted to write a put option. I'm particularly looking at writing a P20 May 2015 for an option premium of $1.30. If I'd get assigned stock I'd receive it at $18.70, and if the share price trades above $20 at the expiration date, I'll have made 6.5% in just five months time. However, my look on the company will change depending on how it intends to tackle its total liabilities of in excess of $40B. With the Fed expecting to increase interest rates in 2015, Freeport's debt might become more expensive to re-finance, so I'd like the company to be proactive on this matter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.