Exploration & Production | Top Story | Quarterly / Earnings Reports | Exploration & Appraisals | First Quarter (1Q) Update | Financial Results | Capital Markets | Capital Expenditure
Freeport-McMoRan Talks Deepwater GoM Discoveries; 1Q Results
Email
Print 
Bookmark
Freeport-McMoRan Inc. has reported its first quarter 2015 results.
Highlights:
- Net loss attributable to common stock totaled $2.5 billion, $2.38 per share, for first-quarter 2015, compared with net income attributable to common stock of $510 million, $0.49 per share, for first-quarter 2014. After adjusting for net charges totaling $2.4 billion, $2.32 per share, primarily for the reduction of the carrying value of oil and gas properties and the related tax charge to establish a deferred tax valuation allowance, adjusted net loss attributable to common stock totaled $60 million, $0.06 per share, for first-quarter 2015.
- Consolidated sales totaled 960 million pounds of copper, 263 thousand ounces of gold, 23 million pounds of molybdenum and 12.5 million barrels of oil equivalents (MMBOE) for first-quarter 2015, compared with 871 million pounds of copper, 187 thousand ounces of gold, 27 million pounds of molybdenum and 16.1 MMBOE for first-quarter 2014.
- Consolidated sales for the year 2015 are expected to approximate 4.2 billion pounds of copper, 1.3 million ounces of gold, 95 million pounds of molybdenum and 52.3 MMBOE, including 960 million pounds of copper, 300 thousand ounces of gold, 25 million pounds of molybdenum and 12.9 MMBOE for second-quarter 2015.
- Average realized prices were $2.72 per pound for copper, $1,186 per ounce for gold and $56.51 per barrel for oil (including $11.97 per barrel for realized cash gains on derivative contracts) for first-quarter 2015.
- Consolidated unit net cash costs for first-quarter 2015 averaged $1.64 per pound of copper for mining operations and $20.26 per barrel of oil equivalents (BOE) for oil and gas operations.
- Operating cash flows totaled $717 million (net of $86 million in working capital uses and changes in other tax payments) for first-quarter 2015. Based on current sales volume and cost estimates and assuming average prices of $2.75 per pound for copper, $1,200 per ounce for gold, $8 per pound for molybdenum and $65 per barrel for Brent crude oil for the remainder of 2015, operating cash flows for the year 2015 are expected to approximate $4.4 billion.
- Capital expenditures totaled $1.9 billion for first-quarter 2015, including $0.6 billion for major projects at mining operations and $1.0 billion for oil and gas operations. Capital expenditures are expected to approximate $6.5 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 taken actions to reduce or defer capital expenditures and other costs and is evaluating funding alternatives to advance growth projects in its oil and gas business, including consideration of a sale of public equity for a minority interest in its oil and gas subsidiary. 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. FCX has a broad set of natural resource assets that provides many alternatives for future actions to enhance its financial flexibility.
- At March 31, 2015, consolidated debt totaled $20.3 billion and consolidated cash totaled $549 million.
Freeport-McMoRan Inc. reported a net loss attributable to common stock of $2.5 billion, $2.38 per share, for first-quarter 2015, compared with net income attributable to common stock of $510 million, $0.49 per share, for first-quarter 2014. FCX’s net loss attributable to common stock for first-quarter 2015 included net charges totaling $2.4 billion, $2.32 per share, primarily for the reduction of the carrying value of oil and gas properties and the related tax charge to establish a deferred tax valuation allowance. The first quarters of 2015 and 2014 were also impacted by net noncash mark-to-market (losses) gains on oil and gas derivative contracts and other items described below.
James R. Moffett, Chairman of the Board; Richard C. Adkerson, Vice Chairman, and FCX President and Chief Executive Officer; and James C. Flores, Vice Chairman, and FM O&G President and Chief Executive Officer, said, "During the first quarter, we continued to focus on effective execution of our operating and capital plans and on our cost management initiatives. We are pleased to report important progress on our mining development projects and ongoing success in our oil and gas exploration and development activities that will provide future growth. We have taken actions to maintain financial strength and flexibility during this period of weak and uncertain commodity prices. We remain optimistic about our business, the long-term commodity markets for the commodities we produce and the significant values embedded in our large-scale, long-lived assets."
Consolidated Sales Volumes
First-quarter 2015 sales from oil and gas operations of 12.5 MMBOE, including 8.4 million barrels (MMBbls) of crude oil, 21.8 billion cubic feet (Bcf) of natural gas and 0.5 MMBbls of natural gas liquids (NGLs), were lower than first-quarter 2014 sales of 16.1 MMBOE primarily reflecting the sale of the Eagle Ford properties, and were lower than the January 2015 estimate of 13.1 MMBOE reflecting a delay in initial production and ramp-up of Lucius and planned recompletions.
Consolidated Unit Costs
Oil and Gas Cash Production Costs per BOE. Cash production costs for oil and gas operations of $20.26 per BOE in first-quarter 2015 were higher than cash production costs of $18.51 per BOE in first-quarter 2014, primarily reflecting the sale of lower-cost Eagle Ford properties.
Based on current sales volume and cost estimates for the remainder of 2015, cash production costs are expected to approximate $19 per BOE for the year 2015.
Oil & Gas Operations
Through its 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 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 an industry-leading position in the emerging Inboard Lower Tertiary/Cretaceous natural gas trend located in the shallow waters of the GOM and onshore in South Louisiana. During first-quarter 2015, 86 percent of FCX's oil and gas revenues, excluding the impact of derivative contracts, were from oil and NGLs.
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.
At March 31, 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 U.S. Securities and Exchange Commission (SEC) full cost accounting rules, which resulted in the recognition of an impairment charge totaling $3.1 billion ($1.9 billion to net loss attributable to common stock) for first-quarter 2015. The twelve-month average of the first-day-of-the-month historical reference oil price required to be used under SEC full cost accounting rules in determining the March 31, 2015, ceiling amount was $82.72 per barrel (the twelve-month average was $94.99 per barrel at December 31, 2014).
FM O&G's reference price is West Texas Intermediate (WTI) for oil. Because the ceiling test limitation uses a twelve-month historical average price, if WTI oil prices remain below the twelve-month average of $82.72 per barrel, the ceiling limitation will decrease resulting in potentially significant additional ceiling test impairments of FCX's oil and gas properties during the remainder of 2015. Other factors that would also contribute to such impairments 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. The WTI oil price was $56.16 per barrel at April 22, 2015.
In first-quarter 2015, FM O&G's average realized price for crude oil was $56.51 per barrel, including $11.97 per barrel of realized cash gains on derivative contracts. Excluding the impact of derivative contracts, the first-quarter 2015 average realized price for crude oil was $44.54 per barrel (81 percent of the average Brent crude oil price of $55.19 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 $65 per barrel for Brent crude oil, FCX would receive a benefit of $20 per barrel on remaining 2015 derivative contract volumes of 23.1 million barrels, before taking into account weighted-average premiums of $6.89 per barrel.
In first-quarter 2015, FM O&G's average realized price for natural gas was $2.86 per MMBtu, compared to the New York Mercantile Exchange natural gas price average of $2.98 per MMBtu for the January through March 2015 contracts.
Realized revenues for oil and gas operations of $43.71 per BOE in first-quarter 2015 were lower than realized revenues of $77.22 per BOE in first-quarter 2014, primarily reflecting lower oil prices, partly offset by the impact of higher realized cash gains on derivative contracts (realized cash gains were $100 million or $8.00 per BOE in first-quarter 2015, compared with losses of $65 million or $4.01 per BOE in first-quarter 2014).
Cash production costs for oil and gas operations of $20.26 per BOE in first-quarter 2015 were higher than cash production costs of $18.51 per BOE in first-quarter 2014, primarily reflecting the sale of lower-cost Eagle Ford properties.
Following is a summary of average oil and gas sales volumes per day by region for the first quarters of 2015 and 2014:
Daily sales volumes averaged 139 MBOE for first-quarter 2015, including 93 MBbls of crude oil, 242 million cubic feet (MMcf) of natural gas and 6 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.
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 recent sharp decline in oil prices, FCX has taken steps to significantly reduce capital spending plans and near-term oil and gas growth initiatives and is evaluating funding opportunities for capital expenditures for its oil and gas business, including consideration of a sale of public equity for a minority interest in FM O&G.
FM O&G has a large strategic position in the Deepwater GOM with significant current oil production, strong cash margins and existing infrastructure and facilities with excess 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 drilling and development opportunities that can be tied back to existing facilities.
U.S. Oil and Gas Capital Expenditures. First-quarter 2015 capital expenditures for U.S. oil and gas operations totaled $1.0 billion (including $0.6 billion incurred for the Deepwater GOM, $0.1 billion for the Inboard Lower Tertiary/Cretaceous natural gas trend and $0.3 billion primarily associated with prior period costs).
Capital expenditures for oil and gas operations are estimated to total $2.8 billion for the year 2015. Approximately 85 percent of the 2015 capital budget is expected to be directed to the highest return focus areas in the GOM. Capital expenditures for 2015 have been revised from the previous estimate of $2.3 billion, reflecting increased development drilling and activities following success from first-quarter 2015 exploration results.
Deepwater GOM. Multiple development and exploration opportunities have been identified in the Deepwater GOM that 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 Vito basin area.
During first-quarter 2015, FM O&G achieved several important accomplishments. Positive drilling results were achieved at the Holstein Deep and King tie-back projects and the Power Nap prospect in the Vito area. Production commenced at the Lucius facility, theDorado development well and Highlander, with aggregate rates of approximately 25 MBOE per day by the end of March 2015. Development progressed at the Heidelberg field.
Initial production was successfully established in January 2015 at the Lucius oil facility in Keathley Canyon. The facility has a capacity of 80 MBbls of oil per day and is scheduled to ramp up to full capacity in second-quarter 2015. Lucius consists of six subsea wells tied back to a truss spar hull located in 7,200 feet of water. FM O&G has a 25.1 percent working interest in Lucius.
During first-quarter 2015, development activities advanced at Heidelberg, which is a large, high-quality oil development project located in 5,300 feet of water in the Green Canyon area. Fabrication of the main topsides module is more than 85 percent complete, and the operator plans to install the hull in second-quarter 2015. The Heidelberg truss spar was designed as a Lucius-look-alike facility with capacity of 80 MBbls of oil per day. Development drilling continues, and the project remains on track for first production in 2016. FM O&G has a 12.5 percent working interest in Heidelberg.
Following successful drilling results at the 100-percent-owned Holstein Deep delineation well in the Green Canyon area in late 2014 that logged 444 feet of net oil pay, FM O&G achieved positive results at the second delineation well in first-quarter 2015. Wireline logs indicated that the well encountered approximately 482 feet of net oil pay and established sand continuity across the primary reservoir encountered in the first delineation well. The second well, which is updip to the discovery well, was drilled to 32,260 feet in February 2015. In April 2015, FM O&G commenced drilling the third delineation well, which is the most updip in the reservoir and is currently drilling below 7,200 feet towards a proposed total depth of approximately 30,800 feet. Production from the planned three-well subsea tieback development program is expected to reach approximately 15 MBOE per day in the first half of 2016.
Drilling results, logs and accompanying other data received to date continues to support the potential for additional development opportunities at Holstein Deep to achieve production of up to 75 MBOE per day by 2020. The Holstein Deep development is located in Green Canyon Block 643, west of the Holstein platform in 3,890 feet of water. FM O&G has identified multiple additional development opportunities in the Green Canyon area that could be tied back to the Holstein facility.
Marlin, in which FM O&G has a 100 percent working interest, is located in Viosca Knoll and has production facilities capable of producing 60 MBbls of oil per day. Several tieback opportunities in the area have been identified, including the Dorado and King development projects.
In March 2015, FM O&G performed a successful production test in excess of 8 MBOE per day and established production on the first of three planned subsea tieback wells from the 100-percent-owned Dorado development project. 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.
In first-quarter 2015, sidetrack drilling at the 100-percent-owned King prospect encountered the optimum oil take point in the M66 reservoir, and completion operations are under way. The well is expected to commence production in late 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.
Horn Mountain, in which FM O&G has a 100 percent working interest, is located in Mississippi Canyon and has production facilities capable of producing 75 MBbls of oil per day. Several tieback opportunities in the area have been identified including Kilo/Oscar/Quebec/Victory (KOQV), which are expected to commence drilling in mid-2015. This infill drilling program will target undrained fault blocks and updip resource potential just east of the Horn Mountain facility. KOQV is located in approximately 5,500 feet of water.
In first-quarter 2015, sidetrack drilling at the Power Nap exploration well in the Vito area successfully extended the known oil reservoir downdip. A second sidetrack well was drilled to a favorable position to acquire core data from the primary pay sand. The operator is preparing to drill the Deep Sleep exploration well, which is a key offset to the Vito and Power Nap discoveries. Deep Sleep is located in 4,200 feet of water approximately 5 miles south of Power Nap. FM O&G owns a 50 percent working interest in Power Nap and Deep Sleep.
FM O&G has an 18.67 percent working interest in the Vito oil discovery in the Mississippi Canyon area and a significant lease position in the Vito basin in the Mississippi Canyon and Atwater Valley areas. Vito, a large, deep subsalt Miocene oil discovery made in 2009, is located in approximately 4,000 feet of water. Exploration and appraisal drilling in recent years confirmed a significant resource in high-quality, subsalt Miocene sands. Development options are under evaluation.
Inboard Lower Tertiary/Cretaceous. FM O&G has an industry-leading position in the emerging Inboard Lower Tertiary/Cretaceous natural gas trend, located on the Shelf of the GOM and onshore in South Louisiana.
The Highlander discovery, which is located onshore in South Louisiana, began production on February 25, 2015, following production testing that indicated a flow rate of 75 MMcf per day (approximately 37 MMcf per day net to FM O&G). The well has been restricted to approximately 24 MMcf per day because of limited processing facilities. FM O&G is currently developing additional processing facilities to accommodate the higher flow rates, and installation is expected by year-end 2015. 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 prospects in the Highlander area where it controls rights to more than 50,000 gross acres.
The Farthest Gate West onshore exploration prospect was drilled to a total depth of approximately 22,000 feet in March 2015, and wireline logs indicated the well encountered hydrocarbon bearing sands in the Eocene section. FM O&G plans to complete and flow test the well in second-quarter 2015. FM O&G is the operator and has a 90 percent working interest in Farthest Gate West, which is located onshore in Cameron Parish, Louisiana.
California. FM O&G's California assets benefit from an established oil production base with a stable production profile and access to favorably priced crude markets. Development plans are principally focused on maintaining stable production levels through continued drilling in the long-established producing fields onshore in California. 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.
Haynesville. FM O&G has rights to a substantial natural gas resource, located in the Haynesville shale play in North Louisiana. Drilling activities in recent years have been reduced to maximize cash flows in a low natural gas price environment and to benefit from potentially higher future natural gas prices.
International Exploration (Morocco). FM O&G has a farm-in arrangement to earn interests in exploration blocks located in the Mazagan permit area offshore Morocco. The exploration area covers 2.2 million gross acres in water depths of 4,500 to 9,900 feet. FM O&G expects to commence drilling the MZ-1 well associated with the Ouanoukrim prospect in May 2015. First-quarter 2015 capital expenditures for international oil and gas exploration activities in Morocco totaled $15 million.
Cash Flows, Cash and Debt
Operating Cash Flows. FCX generated operating cash flows of $717 million (net of $86 million in working capital uses and changes in other tax payments) for first-quarter 2015.
Based on current sales volume and cost estimates and assuming average prices of $2.75 per pound of copper, $1,200 per ounce of gold, $8 per pound of molybdenum and $65 per barrel of Brent crude oil for the remainder of 2015, FCX's consolidated operating cash flows are estimated to approximate $4.4 billion for the year 2015. The impact of price changes for the remainder of 2015 on operating cash flows would approximate $250 million for each $0.10 per pound change in the average price of copper, $30 million for each $50 per ounce change in the average price of gold, $95 million for each $2 per pound change in the average price of molybdenum and $80 million for each $5 per barrel change in the average Brent crude oil price.
Capital Expenditures. Capital expenditures totaled $1.9 billion for first-quarter 2015, including $0.6 billion for major projects at mining operations and $1.0 billion for oil and gas operations.
Capital expenditures are currently expected to approximate $6.5 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 taken actions to reduce or defer capital expenditures and other costs and is evaluating funding alternatives to advance growth projects in its oil and gas business, including consideration of a sale of public equity for a minority interest in its oil and gas subsidiary. 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. FCX has a broad set of natural resource assets that provide many alternatives for future actions to enhance its financial flexibility.