Skip to Content
Stock Analyst Update

Freeport McMoRan Sale Is No Panacea

Although the oil and gas sale to Anadarko strengthens the no-moat miner's balance sheet, it does nothing to solve Freeport's bigger problem--decelerating Chinese copper demand.

Mentioned: ,

On Monday,  Freeport-McMoRan (FCX) announced it will sell its deepwater Gulf of Mexico oil and gas assets for $2 billion to  Anadarko (APC).The deal is expected to close by the end of the year. Although the deal accomplishes two separate strategic goals for Freeport--pay down debt and refocus on copper--it does so at what we think is a low price; 1.5 times 2017 EBITDA and $21,000 per flowing barrel equivalent of production.

We've cut our fair value estimate to $3.95 per share from $4.30. Our fair value would have declined more steeply, but we've also lowered our pretax cost of debt assumption to 10.0% from 14.5% due to a stronger balance sheet following this deal and other sales in 2016. Our no-moat and extreme uncertainty ratings are intact.

The sale to Anadarko represents another major reversal of Freeport's foray into oil and gas, reducing near-term oil and gas production by roughly half. Buying exploration and production companies Plains and McMoRan in 2013 carried a combined price tag of $20 billion (including assumed debt), swelling Freeport's debt burden to unsustainable levels once commodity prices faltered. At the time of the deal, we questioned the benefit to shareholders given the hefty premium and lack of potential synergies.

We continue to regard Freeport as overvalued. Although the oil and gas sale strengthens the balance sheet, it does nothing to change Freeport's bigger problem—decelerating Chinese copper demand. In contrast to most sell-side shops, we doubt that a sustained copper price recovery is likely in the years to come. We expect China's copper needs, which currently account for roughly half of global demand, to fall as fixed-asset investment falters, real estate activity fades to a level more commensurate with underlying urbanization trends, and power spending shifts away from copper-heavy distribution to copper-light transmission. On the supply side, cost deflation, a flattening of the cost curve, and rising scrap supplies all threaten prices.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Jeffrey Stafford does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.