Fitch Ratings assigns an Issuer Default Rating (IDR) of 'BBB' to Freeport McMoRan Oil & Gas LLC (FMOG), a wholly owned subsidiary of Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) that is successor to Plains Exploration and Production Company following its acquisition by FCX and FCX's guarantee of FMOG's senior unsecured notes. A full list of ratings for FMOG and FCX follows at the end of this release.
The ratings contemplate the special dividends, announced on May 20, 2013, in the aggregate amount of $1.4 billion associated with FCX's acquisition of FMOG and McMoRan Exploration Co.(NYSE: MMR). The MMR acquisition is expected to close on June 3, 2013. The acquisitions give rise to $10.5 billion in additional borrowing at FCX and $6.7 billion in assumed debt for a total consolidated debt of $20.8 billion. FCX has announced that, assuming completion of the acquisitions, it plans to complete $1.5 billion in asset sales from the combined company and/or reduce its capital spending plans.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect FCX's leading position in the mining industry, strong liquidity, and sound operational and financial management. Operations benefit from low average costs, large scale and long lived copper reserves. Long-term copper fundamentals benefit from limited new supply, modest inventories, strong demand from China and solid demand from developed nations. FCX management has a long experience with oil and gas and the transaction does diversify the company's Indonesian copper exposure.
Of the $9.6 billion in cash on hand at March 31, 2013, $8.5 billion would available to the holding company after withholding taxes and minority interests. At March 31, 2013, Fitch estimates pro forma total debt was $20.8 billion with scheduled maturities over the next five years of $2 million in 2013, $600 million in 2014, $1.1 billion in 2015, $750 million in 2016 and $700 million in 2017. The new $3 billion revolver, maturing in 2018, would have been fully available except for $43 million representing letters of credits. Financial covenants under the revolver are a maximum net debt to EBITDAX ratio of 3.75x with debt net of domestic cash capped at $1 billion and a minimum interest coverage ratio of 2.5x.
The Stable Outlook reflects FCX's intent to reduce debt and Fitch's outlook on the copper and energy markets.
Guidance for average 2013/2014 EBITDA and operating cash flow excluding the impacts of working capital pro forma for the PXP and MMR acquisition is about $12.5 billion and $9.5 billion, respectively assuming average realizations of copper at $3.50/lb., gold at $1,500/oz., molybdenum at $12/lb, Brent oil prices of $100/bbl. and natural gas at $4.50/mcf. This compares to 2012 operating EBITDA of $7.2 billion and operating cash flow before working capital of $5.2 billion on average realizations of copper at $3.60/lb., gold at $1,665/oz., and molybdenum at $14.26/lb.
Guidance for pro forma annual capital expenditures is $7.2 billion on average in 2013 and 2014. Fitch estimates annual interest costs on pro forma debt levels to be about $1 billion per year and ordinary common dividends to be about $1.3 billion per year, at the current dividend rate.
Fitch expects free cash flow to be neutral to positive. Fitch expects FFO adjusted leverage to remain under 2.5x on average over the next 24 months.
Fitch notes that earnings and cash flows are highly leveraged to metals prices and a $0.10/lb. decline in copper prices could cut EBITDA by $405 million and operating cash flows by $275 million over a 12-month period. In particular, FCX's average copper realizations were $3.60/lb. for the full year 2012. Fitch's Base Case copper price assumptions are $3.40/lb. in 2013 and $2.70/lb. longer term.
Pro forma EBITDA and operating cash flows will be sensitive to oil sales prices even after accounting for hedges. Using a base Brent price of $106/bbl. in 2013 and $101/bbl. in 2014, a $10/bbl. decrease in price would result in a decrease in EBITDA of $275 million and a decrease in operating cash flows of $280 million. Fitch's Base Case Brent price is $100/bbl. in 2013, $92/bbl. in 2014, and $85/bbl. in 2015.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Expectations that FFO adjusted leverage be above 2.5x and free cash flow negative in a normalized price environment by 2015.
Positive: Not anticipated over the next 12 months given the PXP and MMR transaction:
--Repayment of debt ahead of expectations.
Fitch assigned initial ratings for FMOG as follows:
--$400 million 7.625% senior notes due 2018 'BBB';
--$750 million 6.125% senior notes due 2019 'BBB';
--$400 million 8.625% senior notes due 2019 'BBB';
--$300 million 7.625% senior notes due 2020 'BBB';
--$1.5 billion 6.5% senior notes due 2020 'BBB';
--$600 million 6.625% senior notes due 2021 'BBB';
--$1 billion 6.75% senior notes due 2022 'BBB'; and
--$1.5 billion 6.875% senior notes due 2023 'BBB'.
Fitch rates FCX as follows:
--$3 billion unsecured bank revolver 'BBB';
--$4 billion unsecured term loan 'BBB';
--$500 million 1.40% senior notes due 2015 'BBB';
--$500 million 2.15% senior notes due 2017 'BBB';
--$1.5 billion 2.375% senior notes due 2018 'BBB';
--$1 billion 3.1% senior notes due 2020 'BBB';
--$2 billion 3.55% senior notes due 2022 'BBB';
--$2 billion 3.875% senior notes due 2023 'BBB'; and
--$2 billion 5.450% senior notes due 2043 'BBB'.
--7.125% senior unsecured debentures due 2027 'BBB';
--9.50% senior unsecured notes due 2031 'BBB'; and
--6.125% senior unsecured notes due 2034 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Monica M. Bonar
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Christopher M. Collins, CFA
Sean T. Sexton, CFA
Brian Bertsch, New York, +1 212-908-0549
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