Freeport-McMoRan 2014 Annual Report Download - page 56

MANAGEMENT’S DISCUSSION AND ANALYSIS
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Atlantic Copper smelts and refines copper concentrates and
markets refined copper and precious metals in slimes. Following
is a summary of Atlantic Copper’s concentrate purchases from
our copper mining operations and third parties for the three years
ended December 31:
2014 2013 2012
North America copper mines 21% 13% 16%
South America mining 21% 32% 31%
Indonesia mining 8% 16% 10%
Third parties 50% 39% 43%
10 0% 100% 100%
PT-FI’s contract with PT Smelting provides for PT-FI to supply
100 percent of the copper concentrate requirements (subject to
a minimum or maximum rate) necessary for PT Smelting to
produce 205,000 metric tons of copper annually on a priority
basis. PT-FI also sells copper concentrate to PT Smelting at market
rates for quantities in excess of 205,000 metric tons of copper
annually. PT-FI supplied 81 percent in 2014, 83 percent in 2013 and
99 percent in 2012 of PT Smelting’s concentrate requirements, and
PT Smelting processed 58 percent in 2014, 41 percent in 2013 and
52 percent in 2012 of PT-FI’s concentrate production.
We defer recognizing profits on sales from our mining
operations to Atlantic Copper and on 25 percent of Indonesia
mining’s sales to PT Smelting until final sales to third parties
occur. Changes in these deferrals attributable to variability in
intercompany volumes resulted in net reductions to net loss
attributable to common stockholders totaling $43 million ($0.04
per share) in 2014, compared with net reductions to net income
attributable to common stockholders of $17 million ($0.02 per
share) in 2013 and $80 million ($0.08 per share) in 2012. Our net
deferred profits on inventories at Atlantic Copper and PT Smelting
to be recognized in future periods’ net income attributable to
common stockholders totaled $73 million at December 31, 2014.
Quarterly variations in ore grades, the timing of intercompany
shipments and changes in product prices will result in variability
in our net deferred profits and quarterly earnings. Refer to Note 6
for further discussion.
Oil and Gas Operations
Our portfolio of oil and gas assets includes significant oil
production facilities and growth potential in the Deepwater GOM,
established oil production facilities onshore and offshore
California, large onshore natural gas resources in the Haynesville
shale play in Louisiana, natural gas production from the Madden
area in central Wyoming, and an industry-leading position in the
emerging Inboard Lower Tertiary/Cretaceous natural gas trend
located in the shallow waters of the GOM and onshore in South
Louisiana. Approximately 90 percent of our oil and gas revenues
are from oil and NGLs.
Exploration, Operating and Development Activities. Our oil
and gas business has significant proved, probable and possible
reserves, a broad range of development opportunities and
high-potential exploration prospects. The business is managed to
reinvest its cash flows in projects with attractive rates of return
and risk profiles. Following the recent sharp decline in oil prices, we
have taken steps to significantly reduce capital spending plans and
near-term oil and gas growth initiatives in order to preserve cash
flows and resources for anticipated improved market conditions in
the future. We are also evaluating third-party participation in our
oil and gas projects to provide additional funding.
FM O&G has a large, strategic position in the Deepwater GOM
with significant current oil production, strong cash margins
and existing infrastructure and facilities with excess capacity.
These assets, combined with FM O&G’s large leasehold interests
in an established geologic basin, provide financially attractive
investment opportunities for high-impact growth in oil production
and cash margins. FM O&G’s capital allocation strategy is
principally focused on drilling and development opportunities
that can be tied back to existing facilities.
Capital expenditures for our oil and gas operations totaled
$3.2 billion for the year ended December 31, 2014, including
$2.1 billion incurred for the Deepwater GOM and $0.7 billion for
the Inboard Lower Tertiary/Cretaceous natural gas trend. Capital
expenditures for oil and gas operations for the year 2015 are
currently estimated to total $2.3 billion. Approximately 80 percent
of the 2015 capital budget is expected to be directed to the
highest return focus areas in the GOM. We are committed to
achieving our objective of funding oil and gas capital expenditures
with oil and gas cash flows, third-party joint venture transactions
or asset sales. FM O&G is engaged in discussions to obtain
funding from industry partners and other oil and gas market
participants for a substantial portion of its 2015 capital expenditures
to achieve this objective. Third-party funding could also enable
FM O&G to complete additional development wells for
production.
Sale and Purchase Transactions. In June 2014, FM O&G
completed the sale of its Eagle Ford shale assets for cash
consideration of $3.1 billion and the acquisition of Deepwater
GOM interests for $0.9 billion, including interests in the Lucius
and Heidelberg oil fields and several exploration leases. In
September 2014, FM O&G acquired additional Deepwater GOM
interests for $0.5 billion, including an 18.67 percent interest
in the Vito oil discovery in the Mississippi Canyon area (Blocks
940, 941, 984 and 985) and a significant lease position in the
Vito area. Refer to Note 2 for further discussion of this
disposition and these acquisitions.
International Oil and Gas Operations. International Exploration
(Morocco). FM O&G has a farm-in arrangement to earn interests in
exploration blocks located in the Mazagan permit area offshore
Morocco. The exploration area covers 2.2 million gross acres in
water depths of 4,500 to 9,900 feet. FM O&G expects to commence