When momentum turns in a sector, the headwinds sometimes come out of nowhere. In the case of Freeport-McMoRan (NYSE:FCX), the company is being hit on all fronts from government actions to declining commodity prices to increasing competitive threats.
After recently writing about the recent copper headwinds facing Freeport-McMoRan, more issues popped up for the company. Just as the issues with the Indonesian government appeared finally headed in the right direction, more negative headlines arouse. At the same time, positive operational achievements in the oil and gas division pile production into an already over supplied market. If the company can't seem to catch a break, should you buy the stock?
More Indonesian Headaches
Freeport-McMoRan spent most of 2014 battling with the Indonesian government over the export taxes on copper. Back at the end of July, the company resolved the issues with a MOU to move forward with building a copper smelter including paying a $115 million assurance bond along with increased royalties for copper and gold and declining duties on copper concentrate exports. While the plan included further negotiations around long-term investments, the general understanding was the need to build one copper smelter. The plan allowed Freeport to resume copper concentrate exports.
Suddenly, a government official is now claiming that Freeport-McMoRan needs to build two Indonesian copper smelters by 2020. The original plan was to develop a $2.3 billion smelter with Newmont Mining (NYSE:NEM) by 2017. According to the Reuters story, Coal and Minerals Director General Sukhyar is now requesting Freeport to build a second smelter at a cost of $1.5 billion in Papua by 2020.
The story continues a concerning trend of the Indonesian government continuing to squeeze the company for more and more of the profits from the large Grasberg mine. Freeport is busy diversifying outside of Indonesia, but the Grasberg mine was always a big part of the long-term future.
Fantastic Gas Results At The Wrong Time
On December 24, Freeport-McMoRan Oil & Gas released that the Highlander discovery performed a successful production test. The production test located onshore in South Louisiana flowed at a rate of 43.5 million cubic feet of natural gas per day (MMcf/d) with approximately 21 MMcf/d to Freeport.
Freeport has a 72% working interest and an approximate 49% net revenue interest. Other owners include Energy XXI (EXXI). The well is expected on production starting in 2015. The news follows other positive drilling results at the Holstein Deep and Dorado wells in the Gulf of Mexico. Those wells are expected to add approximately 30,000 barrels of oil equivalent per day in 2016.
At this point, the Highlander well is coming on production just as natural gas prices have collapsed to briefly below $3/mmbtu. The mild weather outlook is contributing to limited gas burn from inventories. The latest EIA report showed only 49 Bcf burned from inventories leaving the levels nearly 5% above the amounts from last year. At this rate, BNP Paribas predicts storage levels reaching a record of around 4 Tcf by the end of the inventory building season around October 2015.
The troubles with the Indonesian government appear headed toward further conflicts and solid production results in the Gulf of Mexico are only going to add further to a supply glut in that commodity. Despite being a solid operator and yielding around 5.5%, the stock continues facing too many headwinds outside of its control.
Freeport-McMoRan is making great progress expanding copper production outside of Indonesia and developing energy assets in the Gulf of Mexico, but it doesn't matter if the company faces so many headwinds. Unfortunately, 2015 appears headed towards a year of mass difficulties and because of highly fluctuating commodity prices a solid dividend isn't reliable enough to buy the stock for that reason alone.
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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.