Can Freeport-McMoRan Turn Oil & Gas into New “Gold”?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) closed at $38.28 on the afternoon of December 4th 2012.  Twenty-four hours later the share price dropped more than 15%, closing at $32.16.  Investors were deeply concerned with the company’s bold move to acquire Plains Exploration & Production (NYSE: PXP) and McMoRan Exploration (NYSE: MMR)

In theory, the rationale for the move makes sense.  With mining costs exploding and sources of high-grade copper dwindling the company is looking for additional revenue streams. In practice, investors voted with their feet and sold off the stock, followed by credit watch concerns from both Fisk and S&P as well as possible shareholder lawsuits.  Analyst downgrades completed the fiasco.

Future Prospects

Not all investors are aware Freeport was once in the oil and gas business before divesting itself of the company it is now taking back under its wing – McMoRan Exploration.  The companies share COBs in James Moffet, a well-respected geologist.  McMoRan Exploration needed cash to pursue drilling operations in the Gulf of Mexico and Freeport has cash to spare.  It seems like a marriage made in heaven, but investors disagreed. 

Yet Freeport-McMoRan is not the only leading miner in the world to see a promising future in oil and gas.  The world’s largest diversified miner and third largest copper producer, Australia and UK based BHP Billiton (NYSE: BHP), was also severely criticized for its acquisition of US oil and gas assets in 2010.  The company may have overpaid, but remains committed to expanding operations in oil and gas.

The share price of McMoRan Exploration shot up on the news, personally benefiting the dual chairman, James Moffet.  However, on an objective basis, getting into this space as oil and gas production in the US is booming seems to be a bold move that could pay off handsomely over time. Freeport-McMoRan could see somewhere around 25% of operating earnings for 2013 from oil and gas. 

Freeport-McMoRan vs. the Rest

Freeport is the largest publicly traded copper producer on the planet. The following table looks at some key performance metrics for Freeport  and its major rival – US-based copper producer Southern Copper Corporation (NYSE: SCCO).

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Freeport-McMoRan </strong></p> <p><strong>Copper & Gold</strong></p> </td> <td> <p><strong>Southern Copper Corp </strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$30.5 bil</p> </td> <td> <p>$32.4 bil</p> </td> </tr> <tr> <td> <p><strong>Trailing P/E</strong></p> </td> <td> <p>10.4</p> </td> <td> <p>16.8</p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>6.81</p> </td> <td> <p>15.6</p> </td> </tr> <tr> <td> <p><strong>P/B Ratio</strong></p> </td> <td> <p>1.8</p> </td> <td> <p>4.9</p> </td> </tr> <tr> <td> <p><strong>Earnings Growth </strong></p> </td> <td> <p>-</p> </td> <td> <p>19.9%</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p>3.71%</p> </td> <td> <p>9.65%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.2</p> </td> <td> <p>0.4</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>18.1%</p> </td> <td> <p>36.3%</p> </td> </tr> </tbody> </table>

Data as of December 12,

Risk adverse investors might see Southern Copper as a better investment.  It has a superior dividend yield and an impressive Return on Equity of over 36%.  In addition, the high yield is not a function of declining share price.  In fact, Southern Copper is up about 36% year over year compared to a 19.26% decline at Freeport-McMoRan.

The rise in Southern’s stock price has occurred in the last six months as the beaten down price of copper began to show signs of recovery.  That explains the miserable performance on earnings growth year over year where Freeport-McMoRan emerged as the best of a bad bunch of performers.  In addition, Freeport-McMoRan has a more attractive growth prospect with a Forward P/E of only 6.81.

Foolish Summary

Markets do not always react rationally.  The concern over the company’s surprise announcement and the intersection of interests of the Chairman of the Board may have led market participants to ignore any positives of the move. There is a real concern about taking on more debt, but Freeport-McMoRan currently has a strong balance sheet, with total debt of $3.52 billion and $3.73 billion total cash as of the most recent quarter.

ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus