Operational Updates | Top Story | Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Capital Markets | Capital Expenditure

Freeport Concentrates Efforts on GOM Growth; Updates Onshore Ops

Share Print Bookmark    |    Thursday,July 23,2015

Freeport-McMoRan Inc. has reported its second quarter 2015 results, specifically noting its Gulf of Mexico growth and future operational plans for the area.

Financial & Operational Highlights:

• Net loss attributable to common stock totaled $1.85 billion, $1.78 per share, for second-quarter 2015. After adjusting for net charges totaling $2.0 billion, $1.92 per share, second-quarter 2015 adjusted net income attributable to common stock totaled $143 million, $0.14 per share.
• Operating cash flows totaled $1.1 billion (net of $104 million in working capital uses and changes in other tax payments) for second-quarter 2015. Based on current sales volume and cost estimates and assuming average prices of $2.50 per pound for copper, $1,150 per ounce for gold, $6 per pound for molybdenum and $56 per barrel for Brent crude oil for the second half of 2015, operating cash flows for the year 2015 are expected to approximate $3.6 billion.
• Capital expenditures totaled $1.7 billion for second-quarter 2015, including $0.6 billion for major projects at mining operations and $0.8 billion for oil and gas operations. Capital expenditures are expected to approximate $6.3 billion for the year 2015, including $2.5 billion for major projects at mining operations and $2.8 billion for oil and gas operations.
• FCX has made substantial progress toward the completion of its major mining development projects, which are expected to result in increased near-term production, lower unit costs, declining capital expenditures and growth in free cash flow over the next several quarters. In addition, positive oil and gas drilling and development activities are expected to result in a growing oil production profile. FCX remains focused on maintaining a strong balance sheet and on continuing to manage costs, capital spending plans and other actions as required to maintain financial strength.

James R. Moffett, Chairman of the Board; Richard C. Adkerson, Vice Chairman and FCX Chief Executive Officer; and James C. Flores, Vice Chairman and FM O&G Chief Executive Officer, said, "Our second-quarter results reflect strong operating performance in our global mining business, and solid production results and continued positive drilling and development results in our oil and gas operations. We are pleased to report achievement of several important milestones as we complete our major development projects and position FCX for improving free cash flow generation. We remain focused on managing our costs and capital expenditures under volatile market conditions as we seek to strengthen our balance sheet and build values from our strong portfolio of resources."

Oil & Gas Operations

Through its wholly owned oil and gas subsidiary, FCX Oil & Gas Inc. (FM O&G), FCX's portfolio of oil and gas assets includes significant oil production facilities and growth potential in the Deepwater Gulf of Mexico (GOM), established oil production facilities onshore and offshore California, large onshore natural gas resources in the Haynesville shale play in Louisiana, natural gas production from the Madden area in Central Wyoming, and a position in the Inboard Lower Tertiary/Cretaceous natural gas trend onshore in South Louisiana. For the first six months of 2015, 88 percent of FCX's oil and gas revenues, excluding the impact of derivative contracts, were from oil and NGLs.

Oil and Gas Exploration, Operating and Development Activities

FCX's oil and gas business has significant proved, probable and possible reserves, a broad range of development opportunities and high-potential exploration prospects. The business is managed to reinvest its cash flows in projects with attractive rates of return and risk profiles. Following the sharp decline in oil prices in late 2014, FCX has taken steps to significantly reduce capital spending plans and is evaluating funding opportunities for capital expenditures for its oil and gas business, including the potential IPO for a minority interest in Freeport-McMoRan Oil & Gas Inc.

FM O&G is focused on growing its strategic position in the Deepwater GOM with significant current oil production, strong cash margins and existing infrastructure and facilities with excess production and handling capacity. These assets, combined with FM O&G’s large leasehold interests in an established geologic basin, provide financially attractive investment opportunities for high-impact growth in oil production and cash margins. FM O&G’s capital allocation strategy is principally focused on development opportunities that can be tied back to existing facilities.

During second-quarter 2015, FM O&G achieved several important accomplishments, principally in its Deepwater GOM focus areas, that are expected to contribute to future growth. Production reached full capacity at the Lucius facility and development advanced at the Heidelberg field. Positive drilling results were achieved at the Holstein Deep, Quebec/Victory (QV), Kilo/Oscar (KO) and Horn Mountain Updip tieback prospects. Since commencing development activities in 2014 at its three 100-percent-owned production platforms in the Deepwater GOM, FM O&G has drilled 10 wells with positive results. Three of these wells have been brought on production, and FM O&G plans to complete and place in production four wells over the next 12 months and the remaining three wells in 2017. Longer term, FM O&G's production is expected to benefit from the success in the Atwater Valley focus area, where multiple discoveries have been drilled to date. During second-quarter 2015, FM O&G commenced drilling at the Deep Sleep exploration well in the Atwater Valley focus area and the MZ-1 exploration well offshore Morocco.

U.S. Oil and Gas Capital Expenditures

Capital expenditures for U.S. oil and gas operations totaled $0.8 billion (including $0.6 billion incurred for the Deepwater GOM and $0.1 billion for the Inboard Lower Tertiary/Cretaceous natural gas trend) for second-quarter 2015 and $1.8 billion (including $1.2 billion incurred for Deepwater GOM and $0.2 billion for the Inboard Lower Tertiary/Cretaceous natural gas trend) for the first six months of 2015.

Capital expenditures for oil and gas operations are estimated to total $2.8 billion for the year 2015, with approximately 85 percent of the 2015 capital budget expected to be directed to the highest potential return focus areas in the GOM.

Deepwater GOM

The drilling and evaluation of multiple development and exploration opportunities in the Deepwater GOM is in progress. These prospects benefit from tieback opportunities to significant available production capacity at the FM O&G operated large-scale Holstein, Marlin and Horn Mountain deepwater production platforms. In addition, FM O&G has interests in the Lucius and Heidelberg oil fields, and in the Atwater Valley focus area.

After successfully commencing first production in January 2015, the Lucius oil facility in Keathley Canyon reached capacity of 80 MBbls of oil per day in second-quarter 2015. FM O&G has a 25.1 percent working interest in Lucius, which consists of six subsea wells located in 7,200 feet of water tied back to a truss spar hull.

Field development continued at Heidelberg in the Green Canyon focus area during second-quarter 2015. Fabrication of the main topsides module is complete, the hull is on location, and mooring lines are completed. The Heidelberg truss spar was designed as a Lucius-look-alike facility with capacity of 80 MBbls of oil per day. Development drilling in the field is ongoing and first production is anticipated in mid-2016. FM O&G has a 12.5 percent working interest in Heidelberg, which is a large, high-quality oil development project located in 5,300 feet of water.

In July 2015, FM O&G logged its third successful subsalt Miocene delineation well at the 100-percent-owned Holstein Deep development project in the Green Canyon focus area since commencing drilling in the area in third-quarter 2014. The third delineation well, which is the most updip in the reservoir, was drilled to 29,440 feet and wireline logs indicated that the well encountered approximately 200 feet of net oil pay. Drilling results from this initial three-well development program successfully established sand continuity across the primary reservoir.

Completion activities for the initial three-well subsea tieback development program are expected to commence in third-quarter 2015 and production is expected to begin in 2016. Successful results from the initial three-well drilling program established opportunities for additional wells. When fully developed, this project will have the potential to produce up to 75 MBOE per day. The Holstein Deep development is located in Green Canyon Block 643, west of the Holstein platform in 3,890 feet of water with production facilities capable of processing 113 MBbls of oil per day.

FM O&G’s 100-percent-owned Marlin Hub is located in the Mississippi Canyon focus area and has production facilities capable of processing 60 MBbls of oil per day. Several tieback opportunities have been identified, including the 100-percent-owned Dorado and King development projects. Future wells can be brought on-line using existing infrastructure with the potential to utilize subsea enhancement technologies that could increase total recovery efficiencies. In second-quarter 2015, FM O&G completed maintenance activities, including the installation of new export flow line flex joints, which will extend the life of the Marlin platform.

The initial FM O&G drilled Dorado well was placed in production in March 2015 after a successful production test in excess of 8 MBOE per day and continues to produce at strong rates. Drilling operations for the second and third wells, which are targeting similar undrained fault blocks and updip resource potential south of the Marlin facility, are expected to begin in 2016. The Dorado development is located on Viosca Knoll Block 915 in 3,860 feet of water.

Initial production from the first development well at King is expected to commence in fourth-quarter 2015, and additional drilling is planned in the area starting in the second-half of 2015. King is located in Mississippi Canyon south of the Marlin facility in 5,200 feet of water.

FM O&G’s 100-percent-owned Horn Mountain field is also located in the Mississippi Canyon focus area and has production facilities capable of processing 75 MBbls of oil per day. To enhance recovery of remaining oil in place, future development plans will target subsea tieback from multiple stacked sands in the area. In second-quarter 2015, the QV well, the first location of this program, was drilled to 14,780 feet and successfully encountered 355 feet of oil and gas pay as indicated by wireline logs. FM O&G plans to complete this well and place it in production in 2017. In June 2015, drilling operations commenced at the KO and Horn Mountain Updip wells. In July 2015, interim results from KO indicated the well encountered 62 feet of oil pay and drilling continues to evaluate additional objectives. At Horn Mountain Updip, the well was drilled to a total depth of 14,780 feet in July 2015 and successfully logged 83 feet of oil pay. These infill wells are targeting undrained fault blocks and updip resource potential east and west of the Horn Mountain facility, which is located in approximately 5,400 feet of water.

FM O&G has an 18.67 percent working interest in the Vito oil discovery and a significant lease position in the Atwater Valley focus area. Vito is a large, deep subsalt Miocene oil discovery made in 2009, located in approximately 4,000 feet of water. Exploration and delineation drilling in recent years confirmed a significant resource in high-quality, subsalt Miocene sands. Development options are under evaluation, and FM O&G expects the operator to propose a sanctioning development plan in 2016.

As previously reported, success at the Power Nap exploration well and appraisal sidetracks, which are located in close proximity to Vito, produced positive results, and development options are being assessed. The neighboring Deep Sleep exploration well in the greater Mars/Ursa basin commenced drilling in June 2015. Deep Sleep is located in 4,200 feet of water approximately five miles south of Power Nap. FM O&G owns a 50 percent working interest in the Power Nap and Deep Sleep prospects.

Inboard Lower Tertiary/Cretaceous

FM O&G has a position in the Inboard Lower Tertiary/Cretaceous natural gas trend, located onshore in South Louisiana.

In second-quarter 2015, the Highlander well, which has been restricted because of limited processing facilities, averaged a gross rate of 22 MMcf per day (approximately 11 MMcf per day net to FM O&G). As previously reported, production testing in February 2015 indicated a flow rate of 75 MMcf per day (approximately 37 MMcf per day net to FM O&G). FM O&G is developing additional processing facilities to accommodate the higher flow rates with installation expected by year-end 2015. In July 2015, the Highlander well was shut in for remedial workover operations to address a mechanical issue encountered in the wellbore. A second well location has been identified, and future plans are being considered. FM O&G is the operator and has a 72 percent working interest and an approximate 49 percent net revenue interest in Highlander. FM O&G has identified multiple additional locations on the Highlander structure, which is located onshore in South Louisiana where FM O&G controls rights to more than 50,000 gross acres.

California

Sales volumes from California averaged 38 MBOE per day for second-quarter 2015, compared with 39 MBOE per day for second-quarter 2014. FM O&G’s position in California is located onshore in the San Joaquin Valley and Los Angeles Basin, and offshore in the Point Arguello and Point Pedernales fields. During second-quarter 2015, production from Point Arguello platforms, which produced approximately 2 MBOE per day in first-quarter 2015, was temporarily shut in following the shutdown of a third-party operated pipeline system that transports oil to various California refineries.

Haynesville

FM O&G has rights to a substantial natural gas resource, located in the Haynesville shale play in North Louisiana. Drilling activities remain constrained in response to low natural gas prices in order to maximize near-term cash flows and to preserve the resource for potentially higher future natural gas prices.

International Exploration (Morocco)

In May 2015, FM O&G commenced drilling the MZ-1 well associated with the Ouanoukrim prospect in the Mazagan permit area offshore Morocco under a farm-in arrangement to earn interests in exploration blocks. The well is currently drilling below 15,260 feet towards a proposed total depth of approximately 18,500 feet. The exploration area covers 2.2 million gross acres in water depths of 4,500 to 9,900 feet. Capital expenditures for international oil and gas exploration activities in Morocco totaled $29 million for second-quarter 2015 and $44 million for the first six months of 2015.

Oil & Gas IPO

On June 23, 2015, Freeport-McMoRan Oil & Gas Inc. filed a registration statement on Form S-1 with the U.S Securities and Exchange Commission (SEC) related to its potential IPO of Class A common stock representing a minority interest in the entity. Freeport-McMoRan Oil & Gas Inc. intends to apply to list the common stock on the NYSE under the ticker “FMOG.” The registration statement has not yet become effective, and securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.

FM O&G follows the full cost method of accounting whereby all costs associated with oil and gas property acquisition, exploration and development activities are capitalized and amortized to expense under the unit-of-production method on a country-by-country basis using estimates of proved oil and natural gas reserves relating to each country where such activities are conducted. The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated.

Under the full cost accounting rules, a "ceiling test" is conducted each quarter to review the carrying value of the oil and gas properties for impairment. The SEC requires the twelve-month average of the first-day-of-the-month historical reference oil price be used in determining the ceiling amount. Using West Texas Intermediate (WTI) as the reference oil price, the average price was $71.68 per barrel at June 30, 2015, compared with $82.72 per barrel at March 31, 2015. At June 30, 2015, net capitalized costs with respect to FM O&G's proved U.S. oil and gas properties exceeded the ceiling amount specified by the SEC's full cost accounting rules, which resulted in the recognition of an impairment charge totaling $2.7 billion ($1.7 billion to net loss attributable to common stock) for second-quarter 2015.

Because the ceiling test limitation uses a twelve-month historical average price, if WTI oil prices remain below the June 30, 2015, twelve-month average of $71.68 per barrel, the ceiling limitation will decrease, resulting in potentially significant additional ceiling test impairments of FCX's oil and gas properties. The WTI spot oil price was $49.19 per barrel at July 22, 2015.

In addition to a decline in trailing average oil and gas prices, other factors that could result in impairment of FCX's oil and gas properties in future periods include costs transferred from unevaluated properties to the full cost pool without corresponding proved oil and natural gas reserve additions, negative reserve revisions and increased future development or production costs. As FM O&G completes activities to assess its $9.3 billion in unevaluated properties, related costs currently recorded as unevaluated properties not subject to amortization will be transferred to the full cost pool. If these activities do not result in additions to discounted future net cash flows from proved oil and natural gas reserves at least equal to the related costs transferred (net of related tax effects), additional ceiling test impairments may occur.

Financial and Operating Data

Following is summary financial and operating data for the U.S. oil and gas operations for the second quarters and first six months of 2015 and 2014:

In second-quarter 2015, FM O&G's average realized price for crude oil was $67.61 per barrel, including $11.79 per barrel of realized cash gains on derivative contracts. Excluding the impact of derivative contracts, the second-quarter 2015 average realized price for crude oil was $55.82 per barrel (88 percent of the average Brent crude oil price of $63.57 per barrel).

FM O&G has derivative contracts that provide price protection averaging between approximately $70 and $90 per barrel of Brent crude oil for more than 80 percent of estimated 2015 oil production. Assuming an average price of $56 per barrel for Brent crude oil, FCX would receive a benefit of $20 per barrel on remaining 2015 derivative contract volumes of 15.46 million barrels, before taking into account weighted-average premiums of $6.89 per barrel.

In second-quarter 2015, FM O&G's average realized price for natural gas was $2.66 per MMBtu, compared to the New York Mercantile Exchange natural gas price average of $2.65 per MMBtu for the April through June 2015 contracts.

Realized revenues for oil and gas operations of $50.04 per BOE in second-quarter 2015 were lower than realized revenues of $77.53 per BOE in second-quarter 2014, primarily reflecting lower oil prices, partially offset by the impact of higher cash gains on derivative contracts (cash gains were $101 million or $7.73 per BOE in second-quarter 2015, compared with losses of $63 million or $3.94 per BOE in second-quarter 2014).

Cash production costs for oil and gas operations of $19.04 per BOE in second-quarter 2015 were lower than cash production costs of $19.57 per BOE in second-quarter 2014, primarily reflecting lower cash production costs in California related to reductions in repair and maintenance costs and well workover expense.

Following is a summary of average oil and gas sales volumes per day by region for the second quarters and first six months of 2015 and 2014:

Daily sales volumes averaged 144 MBOE for second-quarter 2015, including 95 thousand barrels (MBbls) of crude oil, 259 million cubic feet (MMcf) of natural gas and 5 MBbls of NGLs. Oil and gas sales volumes are expected to average 143 MBOE per day for the year 2015, comprised of 67 percent oil, 29 percent natural gas and 4 percent NGLs.

Based on current sales volume and cost estimates, cash production costs are expected to approximate $19 per BOE for the year 2015.

Consolidated Sales Volumes

Second-quarter 2015 sales from oil and gas operations of 13.1 MMBOE, including 8.6 million barrels (MMBbls) of crude oil, 23.5 billion cubic feet (Bcf) of natural gas and 0.6 MMBbls ofnatural gas liquids (NGLs), were higher than the April 2015 estimate of 12.9 MMBOE, but were lower than second-quarter 2014 sales of 16.0 MMBOE, primarily reflecting the sale of the Eagle Ford properties in June 2014.

Consolidated sales for the year 2015 are expected to approximate 52.3 MMBOE, including 13.6 MMBOE for third-quarter 2015.

Consolidated Unit Costs

Mining Unit Net Cash Costs. Consolidated average unit net cash costs (net of by-product credits) for FCX's copper mines of $1.50 per pound of copper in second-quarter 2015 were lower than unit net cash costs of $1.72 per pound in second-quarter 2014, primarily reflecting lower site production and delivery costs as a result of higher sales volumes in Indonesia and North America, and higher by-product credits.

Assuming average prices of $1,150 per ounce of gold and $6 per pound of molybdenum for the second half of 2015 and achievement of current sales volume and cost estimates, consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.53 per pound of copper for the year 2015. Quarterly unit net cash costs vary with fluctuations in sales volumes and average realized prices (primarily gold and molybdenum prices). The impact of price changes for the second half of 2015 on consolidated unit net cash costs would approximate $0.01 per pound for each $50 per ounce change in the average price of gold and $0.01 per pound for each $2 per pound change in the average price of molybdenum.

Oil and Gas Cash Production Costs per BOE. Cash production costs for oil and gas operations of $19.04 per BOE in second-quarter 2015 were lower than cash production costs of $19.57 per BOE in second-quarter 2014, primarily reflecting lower cash production costs in California related to reductions in repair and maintenance costs and well workover expense.

Based on current sales volume and cost estimates for the second half of 2015, cash production costs are expected to approximate $19 per BOE for the year 2015.

Cash Flows, Cash & Debt

Operating Cash Flows. FCX generated operating cash flows of $1.1 billion (net of $104 million in working capital uses and changes in other tax payments) for second-quarter 2015 and $1.8 billion (net of $190 million in working capital uses and changes in other tax payments) for the first six months of 2015.

Based on current sales volume and cost estimates and assuming average prices of $2.50 per pound of copper, $1,150 per ounce of gold, $6 per pound of molybdenum and $56 per barrel of Brent crude oil for the second half of 2015, FCX's consolidated operating cash flows are estimated to approximate $3.6 billion for the year 2015. The impact of price changes for the second half of 2015 on operating cash flows would approximate $190 million for each $0.10 per pound change in the average price of copper, $25 million for each $50 per ounce change in the average price of gold, $60 million for each $2 per pound change in the average price of molybdenum and $55 million for each $5 per barrel change in the average Brent crude oil price.

Capital Expenditures. Capital expenditures totaled $1.7 billion for second-quarter 2015 (including $0.6 billion for major projects at mining operations and $0.8 billion for oil and gas operations) and $3.5 billion for the first six months of 2015 (including $1.2 billion for major projects at mining operations and $1.8 billion for oil and gas operations).

Capital expenditures are currently expected to approximate $6.3 billion for the year 2015, including $2.5 billion for major projects at mining operations (primarily for the Cerro Verde expansion and underground development activities at Grasberg) and $2.8 billion for oil and gas operations. FCX has made substantial progress toward the completion of its major mining development projects, which are expected to result in increased near-term production, lower unit costs, declining capital expenditures and growth in free cash flow over the next several quarters. In addition, positive oil and gas drilling and development activities are expected to result in a growing oil production profile. FCX remains focused on maintaining a strong balance sheet and on continuing to manage costs, capital spending plans and other actions as required to maintain financial strength. FCX has a broad set of natural resource assets that provide many alternatives for future actions to enhance its financial flexibility.

Financial Results

Highlights:

• Consolidated oil & Gas sales totaled 13.1 million barrels of oil equivalents (MMBOE) for second-quarter 2015, compared with 16.0 MMBOE for second-quarter 2014.
• Consolidated sales for the year 2015 are expected to approximate 52.3 MMBOE, including 13.6 MMBOE for third-quarter 2015.
• Average realized prices were $67.61 per barrel for oil (including $11.79 per barrel for cash gains on derivative contracts) for second-quarter 2015.
• Consolidated unit net cash costs for second-quarter 2015 averaged $19.04 per barrel of oil equivalents (BOE) for oil and gas operations.

• On June 23, 2015, Freeport-McMoRan Oil & Gas Inc. filed a registration statement related to its potential initial public offering (IPO) of Class A common stock representing a minority interest in the entity.
• At June 30, 2015, consolidated debt totaled $20.9 billion and consolidated cash totaled $466 million.

Freeport-McMoRan Inc. reported a net loss attributable to common stock of $1.85 billion, $1.78 per share, for second-quarter 2015 and $4.3 billion, $4.16 per share, for the first six months of 2015, compared with net income attributable to common stock of $482 million, $0.46 per share, for second-quarter 2014 and $992 million, $0.95 per share, for the first six months of 2014. FCX’s net loss attributable to common stock included net charges totaling $2.0 billion, $1.92 per share, for second-quarter 2015 and $4.4 billion, $4.24 per share, for the first six months of 2015, primarily for the reduction of the carrying value of oil and gas properties and other items described below. Net income attributable to common stock included charges for special items totaling $160 million, $0.15 per share, for second-quarter 2014 and $179 million, $0.17 per share, for the first six months of 2014, comprised of items described below.