Largely pushed by the continuing commodity price crash, mining giant Freeport-McMoRan Inc (NYSE:FCX) has decided to divest its onshore oil and gas properties in California. Potential buyers for the assets include Sentinel Peak Resources California LLC, while the value of the deal stands around $742 million.
Out of this figure, $592 million would be paid in cash while the remainder would be paid on a contingent basis. Given that Brent crude averages around $70 per barrel or above, a further $50 million per year would be added to the contingent based remainder, believes sell side firm Deutsche Bank.
Following the mining company’s announcement, Deutsche Bank expects Freeport’s net debt to reduce by 50% over the next two years – from $20 billion at year-end 2015 to roughly $10 billion by year-end 2017.
The latest divestments close the company’s Oil and Gas Chapter, with barely minor assets remaining. Just prior to the asset sales announcement, the research firm’s net asset valuation for the O&G Chapter stood around $640 million, quite close to the upfront payment of $592m due in the fourth quarter of fiscal year 2016 (4Q16).
Although Freeport has given up on crude price optionality, the mining giant is simplifying its operations to redirect focus on copper. This is viewed positively by Deutsche Bank, which also considers the recent move the last significant asset sale of the year. In addition, the sell side firm believes the deal will further aid the company’s balance sheet repair process.
Deutsche Bank has kept the price target of the company unchanged at $12.50 per share, calculated using a 9% WACC, while reiterating a Buy rating on the company’s stock.
Freeport stock receives coverage from 21 Wall Street analysts. Prior to the 3QFY16 earnings financial results, fourteen analysts rated the stock Hold, while 4 recommended a Buy. The 12-month target price is $10.97 per share, slightly higher than the current price of $9.61 per share.
Among the Street analysts, Jefferies and Cowen are most bullish on the stock with a target price of $15, while Macquarie is most bearish with a target price of $9.