Stressed Out: Freeport-McMoRan Makes Debt Reduction 2016 Priority

 | Jan 26, 2016 | 2:18 PM EST
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This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

There's a usual rhythm to quarterly earnings calls, comically captured in this Medium post from 2014.

Freeport-McMoRan's (FCX) fourth-quarter earnings call on Tuesday broke the mold. In fact, instead of the usual chorus of "Great quarter, guys!" from analysts, at least three said, "Good luck."

The Phoenix-based company already earned a spot on Real Money's "Stressed Out" index and its recently announced earnings confirm its place on the list. While this piece will focus on Freeport's fourth-quarter earnings call, Real Money will provide continuing coverage of the company.

Freeport reported a loss of $3.47 per share for the quarter and $11.31 per share for 2015. Investors in search of a bright side will note that the company beat analyst estimates and the stock is soaring in Tuesday's trading, but it goes downhill from there.

"This is going to be a different call than we've done in the past for obvious reasons," CEO Richard Adkerson said in his opening remarks, citing weaknesses in the company's balance sheet.

Freeport has the unfortunate distinction of being engaged in a range of businesses that are directly affected by falling commodity prices and weaker global demand. Its primary business is in mining copper, gold and molybdenum, but it also has oil and gas interests.

The Deal: Moffett ousted as Freeport-McMoRan chairman 

As these assets are of relatively little worth in today's market, the company is focusing on reducing its debt load, which stands at $20.4 billion. Of that amount, $14.8 billion is in senior notes, which are trading at steep discounts and many of the notes maturing after 2020 trade below 50 cents on the dollar. The company said on the call that it is hoping to reduce its debt load by $5 billion to $10 billion, but that reaching that target would take time and multiple transactions.

In Tuesday's call, the company affirmed that it is working with Lazard Asset Management in conjunction with its usual banker, JPMorgan, to review potential sales of its oil and gas assets. Freeport recorded a $3.7 billion impairment for these assets in the fourth quarter. In the meantime, it is idling all three of its deepwater rigs and is renegotiating its contracts with rig operators and it expects idle rig costs of $600 million in 2016.

On Tuesday, Freeport announced its capex spending for 2016 is expected to total $3.4 billion, compared to 2015 when capex spending totaled $6.35 billion. It is projecting a flat commodity market for 2016, with copper at $2 a pound, gold at $1,100 an ounce, molybdenum at $4.50 a pound, and Brent crude at $34 a barrel.

The tempered projections are in line with many of the cost-cutting measures the company announced in 2015, which included suspending its dividend, curtailing copper and molybdenum production, and cutting its oil and gas spending. Freeport also received approximately $2 billion from an at-the-market offering out of necessity, which involved nearly 210 million shares being issued as the company's stock was plunging.

At the start of the call, Adkerson acknowledged that management reviewed several scenarios in forming its capital plans and that it happens to be experiencing the worst of those scenarios now.

"We are where we are. We can't wish the market away. We can't wish this debt away we've got to deal with it and that's the hard decisions that we're making," Adkerson said.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: 5 Steelmakers to Put on Your Distressed Watch List

Stressed Out: Is Avon Using Vanishing Cream on Its Cash?

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