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Freeport-McMoRan reviewing options for oil and gas business

October 7, 2015

Freeport McMoRan Inc. on Tuesday said it would explore options for its troubled oil and gas business and cut the size of its board as it contends with tumbling commodity prices and a move on the company by activist investor Carl Icahn.

Phoenix-based Freeport, the U.S.’s biggest miner and a major copper producer, said options for the oil and gas division include a spinoff, joint-venture arrangements or further cost cuts. The firm’s biggest challenge, observers say, will be untangling its promising copper mines from the more risky energy business.

Freeport moved into the oil and gas business in 2013, when it purchased McMoRan Exploration Co. and Plains Exploration & Production Co. for a total of $9 billion. The acquisition turned out to be a mess. Freeport held a 16% stake in McMoRan, and people with ties to both companies owned millions of dollars of McMoRan stock, according to public filings. In January, Freeport agreed to pay $137.5 million to shareholders to settle complaints that executives had acted in their own interests in connection with the acquisition.

The purchase, which saddled the company with a high debt load, also came just ahead of the oil-price rout. For the first six months of 2015, Freeport took a $4.24 billion charge related to depreciating oil and gas reserves.

The acquisition could end up being a “very expensive rental,” said analyst Dan Rohr of Morningstar Inc.

Freeport also said Tuesday said it would cut its board to nine members from 16. Five of the departing members will be named to a shadow oil and gas board, and two will retire.

The moves come after “constructive discussions” with “many of its biggest shareholders,” Freeport said. The company has been under pressure from Mr. Icahn, who, according to most recent filings, holds an 8.8% stake. In a filing first disclosing the stake, Mr. Icahn had said the board’s composition was a potential problem.

Freeport’s stock ended Tuesday in New York at $11.83, up 5.8% on the day but down 49% year-to-date.

The latest moves may not be enough. “It’s still going to be a board where long-tenured board members will continue to dominate,” said Mr. Rohr of Morningstar. Chief Executive Richard Adkerson, who has been at the helm since 2008, and Chairman James Moffett will remain in charge, he noted.

Splitting the firm in two “makes each a more viable takeover target,” said John Tumazos, a New Jersey-based metals analyst and investor who said he owns 3,000 shares in Freeport.

Mr. Icahn first disclosed an 8.5% stake in Freeport in August, when the company announced it would slash 2016 capital spending by 29%, cut expected copper production by 150 million pounds, and eliminate about 10% of its U.S. workforce of roughly 15,600.

Freeport’s main value still lies in its massive copper reserves, say analysts and shareholders. The company controls some of the world’s best copper deposits, in Peru, Chile, Arizona, Indonesia and the Democratic Republic of Congo. Despite a 33% fall in copper prices in the last two years, copper is still a profitable enterprise, considered less prone to oversupply than iron ore, aluminum or coal. In the second quarter, Freeport reported an average price of $2.71 a pound for its copper, and an average unit cash cost of $1.50 a pound.

One aim of the new structure would be “self-funding of the oil and gas business from its cash flows and resources,” Freeport said.

“The mining company won’t have to pay for drilling contracts anymore,” said Mr. Tumazos. “The oil and gas company won’t be allowed to rob the piggy bank.”

By John W. Miller and Tess Stynes

Source: Wall Street Journal

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