Investors love to follow the "smart" money. But when it comes to energy, Carl Icahn's money has not proven to be so "smart."
The billionaire activist investor announced an 8.8% stake in Freeport-McMoRan (FCX), an Arizona-based natural resources company, in August when the stock was trading around $11. Shares have tumbled 36% since then and are down 70% for the year. Icahn's other energy holdings, in Chesapeake Energy (CHK) and Cheniere Energy (LNG), are similarly bad. Chesapeake Energy is down 78% for the year while Cheniere is down 44%. Calls to Icahn's office for comment went unanswered.
Activists such as Icahn tend to take large stakes in companies to exert their influence in a way to lead a turnaround in a troubled company. Along the way, activists ideally see a boost in their own returns as well as in the broader shareholder base. Unfortunately, unlike Icahn, small shareholders often do not have the luxury of waiting for a turnaround story to come true as their investments wither, which is what is happening in energy.
On Wednesday, Freeport announced that it would suspend its dividend and reduce its capital spending. With these measures, Freeport is following in dangerous footsteps. Boardwalk Pipeline Partners' (BWP) stock has not recovered since the company cut its dividend in October 2014, and Anglo American, a London-based mining company, announced a "radical restructuring" plan on Tuesday that included cutting 85,000 jobs and suspension of its dividend.
"We are taking further actions to strengthen our financial position during a period of weak and uncertain market conditions," Freeport Chairman James Moffett and CEO Richard Adkerson said in a joint statement released Wednesday.
The company reiterated its plan to defer investments in oil and gas projects and announced that it would further curtail its capex spending, down from $2 billion a year to $1.8 billion in 2016 and $1.2 billion in 2017. Freeport said that it plans to shut down its Sierrita mine in Arizona, curtail production in its molybdenum mines, and is considering the sale of mining assets to reduce debt.
The adjustments to Freeport's capital spending, coupled with the suspension of its dividend to meet liquidity needs, look like death by a thousand cuts.
Freeport has been taking measures to shore up its balance sheet throughout the year. It slashed its dividend by 84% in March and it announced in October that it was curtailing high-cost production. Completely suspending the dividend is expected to add $240 million in cash savings. That's no small amount, but it hints at desperation, especially since the company raised $1.6 billion in equity since August.
As Freeport continues to chip away at its business to find savings, investors may wonder if they want to double down on Icahn or view him as a contrary indicator.