Freeport-McMoRan Copper & Gold Inc. (FCX): Consider Playing Oil Through This Copper Company

Page 1 of 2

As oil prices continue to rise, investors looking to play the move should consider Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). For most of its history, Freeport had been considered a pure-play copper company with a little bit of gold exposure. However, that all changed when Freeport announced plans to buy McMoran Exploration and Plains Petroleum for a combined total of $9 billion.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

The initial reaction to the deal was quite negative, with Freeport shares falling by more than 14% the day the deal was announced. Since then, as shown by the chart below, shares have continued falling to new lows. The primary reason for Freeport’s decline has been falling copper prices, since Freeport is the world’s second largest copper producer.



FCX data by YCharts

Freeport shares have not reacted at all to rising oil prices. Currently, WTI crude oil is trading at a 14-month high. Pure oil exploration and production plays such as ConocoPhillips (NYSE:COP) and Marathon Oil Corporation (NYSE:MRO) are trading at 52-week highs. Of course, Freeport is not a pure oil play, and it should not be expected to trade as one. However, because of its recent acquisitions, Freeport does have a significant exposure to the oil business.

Thoughts on Conoco Phillips & Marathon Oil

I like both Conoco and Marathon as oil plays. It should be noted that larger integrated oil plays such as Exxon, BP, and Chevron are cheaper on a valuation basis. However, Conoco & Marathon are different as they have spun off their refining businesses into separate companies. I am not bullish on the refining business right now as spreads have tightened considerably of late. Between Conoco & Marathon, my preference would be Conoco because of its 4.25% dividend yield and cheaper valuation. Of course, unlike Freeport, Conoco & Marathon are well known as oil plays and thus have likely priced in much of the recent rise in oil prices.

The main reason why I prefer Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) to Conoco or Marathon is valuation. Freeport trades at about 7.5 times forward earnings while Conoco and Marathon trade at 10.5 and 11.7 times forward earnings. I believe that Freeport should trade at the same valuation or a richer valuation than these two oil plays, because Freeport has the flexibility to invest money in a more efficient way. For example, if oil prices are strong, as they are today, then Freeport can divert resources (cash) into producing oil instead of copper. Contrastingly, if copper prices are stronger than oil prices, then Freeport can allocate more resources to the copper business. as opposed to oil.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!