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.
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.
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.