Freeport-McMoRan (NYSE:FCX) shares once again rose sharply on Wednesday and are up almost 50% since last Friday. FCX has rebounded along with the broader market. The stock though has been given an additional boost by the company's decision to sell a 13% interest in its Morenci mine. The proceeds from the sale will allow FCX to repay some of its debt. Given FCX's stretched balance sheet, even a small reduction in the debt is being seen as a positive. However, what will be an even bigger positive for the company is stabilizing oil prices.
Bringing Down Debt
As I have discussed in previous articles, Freeport-McMoRan's current situation is largely due to its ill-timed acquisition of oil & gas assets. The acquisition was not only made at the peak of the oil & gas boom but it was also made using leverage. That has significantly hurt FCX's balance sheet, and the sharp drop in copper and oil prices has made the matter worse. Late last year, there were reports that FCX was considering auctioning off the oil & gas assets. Exiting the business is the right strategy, however, in the present environment, offloading oil & gas assets would be a challenge.
FCX had more than $20 billion in debt on its balance sheet at the end of the third quarter. Earlier this week, the company announced the sale of 13% interest in its Morenci joint venture to Sumitomo Metal Mining Co. (OTCPK:SMMYY) for $1 billion in cash. Sumitomo already has a 15% stake in the venture, with the rest owned by FCX. FCX's stake in the venture will now reduce to 72%. In 2015, FCX's 85% share of Morenci revenue totaled $2.2 billion.
The proceeds from this sale, which will be realized in full as FCX will use losses to offset cash taxes on the transaction, will be used to repay borrowings under the company's bank term loan and revolving credit facility.
Investors see the sale from FCX as a positive. Indeed, the company has taken several steps since the second half of last year to adjust for the weak commodity price environment. FCX has already announced capex spending cuts and even completed a secondary offering. This latest measure is part of the company's effort to survive in the present environment. While the reduction in debt, albeit marginal, is good news, a better news for FCX is stabilizing oil prices in the wake of some developments this week.
Oil Prices Stabilizing
After falling to levels not seen since 2003, oil prices have bounced back a little. Prices though are still below the levels they were at the end of last year. However, the outlook has changed somewhat. In my previous note on Freeport-McMoRan, I had cited the International Energy Agency (IEA), which expects demand to outpace supply by around 1 million barrels per day in 2016. While the market is expected to remain oversupplied, Saudi Arabia has shown signs of being a little more flexible. Remember that it was Saudi Arabia's decision to maintain production levels at the OPEC meeting last year that led to a sharp decline in oil prices. But as I have discussed in articles here on Seeking Alpha, the decision to defend market share is coming at a huge cost to Saudi Arabia. The country's reserves are being depleted faster-than-anticipated, partly because prices have dropped to levels well below expectations and also because of the prolonged war in Yemen. Not surprisingly, the Saudis have blinked.
This week, Saudi Arabia, OPEC's most important member, met with Russia and the two major oil producers have agreed to freeze production at January levels. While the market was hoping for a production cut, the decision to freeze production levels is a strong sign that Saudi Arabia is now ready to back down from its earlier stance of increasing output even in a weak price environment in order to maintain market share. The final decision would likely hinge on what Iran does. According to the Financial Times, Iran has supported the effort, but not given any commitment on whether it will freeze its production. It must be noted that Iran is only returning to the market after the sanctions on the country were lifted following a nuclear deal last year. However, Saudi Arabia's own fiscal woes mean that it might have to compromise at the June meeting.
The development this week though has stabilized oil prices and this is a positive for Freeport-McMoRan. While offloading oil & gas assets still remains a challenge for Freeport-McMoRan, some stability in the oil market will certainly provide support to its stock price.
Disclosure: I am/we are long FCX.
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.