Freeport-McMoRan Inc. (FCX) has deferred activity in a natural gas-rich trend of the shallow waters of the Gulf of Mexico (GOM) and onshore Louisiana in response to current market conditions.
The company's target to reduce its debt to $12 billion by the end of 2016 also is unrealistic in the face of slumping commodity prices, CEO Richard Adkerson said during a conference call Tuesday. Consolidated debt for the international natural resources conglomerate at the end of December was $19 billion.
The Phoenix-based operator, one of the world's largest copper producers, diversified its dependence on metals two years ago by bringing into the fold its oil and gas affiliate McMoRan Exploration Co. and McMoRan's partner Plains Exploration & Production Co. (see Daily GPI, Dec. 6, 2012). The mergers gave the operator key prospects from coast to coast and across the GOM's shallow and deepwater.
The pick-up buoyed FCX when oil prices rose, but the increased debt continued to be a burden. Under pressure from shareholders, FCX began selling off U.S. onshore assets, including its Eagle Ford Shale portfolio, to concentrate on the plethora of GOM opportunities (see Daily GPI, July 25, 2014). All appeared to be going swimmingly until the bottom fell out of the oil market.
"All in all, we were rolling out of 2014 with a lot of optimism," said Jim Flores, the former Plains chief who now runs FM O&G, the exploration arm. Plans were in place to launch several big developments this year and then the second half of 2014 led to disarray across the sector.
The fall out in oil prices "is unexpected from a lot of people's standpoint," Flores said. "We thought prices would get soft...but we had no idea oil would get a mind of its own and create this kind of calamity."
To preserve cash flow, FM O&G's budget has been slashed by 34%, or $1.2 billion, to $2.3 billion. All shallow water development, i.e., natural gas-heavy work, is deferred. The company also is prowling for third-party investors to help fund deepwater development
Next year looks no better. For 2016, plans already are in place cut capital spending in the oil and gas arm by 43% to $1.7 billion. Even joint venture partners wouldn't induce FCX to raise spending at this point.
"Anything marginal or anything discretionary, anything out on the frontier has been shelved," Flores said. "We've reduced spending as much to slow growth as to preserve the resource value to wait for better prices, when economics are better..."
The shallow water gas and onshore Louisiana gas prospects in the emerging Inboard Lower Tertiary/Cretaceous trend are at drilling depths below the salt weld, generally deeper than 25,000 feet. Shallow offshore prospects include the touted Davy Jones wells in the South Marsh Island blocks, and Blackbeard on Ship Shoal Block 188. In Louisiana's shallow waters, FM has more than 267,300 developed net acres, with 537,000 of undeveloped net acreage. Onshore Louisiana holdings total about 71,000 net acres of developed leasehold with 41,500 undeveloped net acres.
FCX is considering this a "bridge year," said Adkerson. The plan had been for the oil and gas arm to be self-funding, but that was when oil prices were attractive. "We are seeing that we have to deal with the sudden change in cash flow from how quickly prices are moving," he said. The company isn't getting any relief from copper prices either.
"The way we look at it, goals are for oil and gas to be self-funding," but first priority is to "manage the balance sheet," which may take about two years," said Adkerson. "Additional capital cost reductions, potential additional divestitures or monetizations and other actions, will be pursued as required to maintain a strong balance sheet while preserving a strong resource position and portfolio of assets with attractive long-term growth prospects."
The company posted a net loss of $2.85 billion (minus $2.75/share) in 4Q2014 versus profits in the year-ago period of $707 million (68 cents). Included in the latest quarter was a $3.4 billion writedown on impaired oil and gas properties. Excluding one-time items, FCX earned $257 million net (25 cents/share). Revenue slumped 11% to $5.24 billion. Oil prices in the final period were down 15.8% from 4Q2013 at $78.02/bbl on average, prices for copper fell almost 11%.