“He is the last of the old-time wildcatters,” Mike Madden, managing partner of private-equity firm BlackEagle Partners LLC says of departing Freeport-McMoRan executive chairman James R. Moffett, who is stepping down after falling commodity prices helped push the company’s shares to their lowest levels of the 21st century.
Late in August, Carl Icahn disclosed an 8.5% stake in Freeport shortly after the company unveiled plans to cut 2016 capex by nearly a third, slash about 10% of its American workforce (around 1,500 jobs) and rein in production. Earlier in the month, Freeport cut its oil-and-gas capex plans for 2016 and 2017 by $900 million. Then, in December, the company said it would suspend its dividend and cut capex further.
Like other firms in the space, Freeport has been forced to trim the proverbial fat as depressed demand from China and the global deflationary supply glut have driven commodity prices into the ground (no pun intended).
After Icahn’s disclosure, Freeport said it “maintains an open dialogue with shareholders and welcomes constructive input toward our common goal of enhancing shareholder value.”
The problem for Icahn and others, is that shareholder value has been systematically destroyed rather than “enhanced.”
"Moffett’s last big gamble as head of the world’s largest copper miner was a $1.2 billion wrong-way bet six miles beneath the Louisiana coastline [where] he in 2007 staked much of the company’s future on an obscure cluster of gas-soaked rocks, hidden beneath coastal oil fields, that had been discarded by bigger operators including Exxon Mobil Corp." Bloomberg wrote on Monday. "After seven years of drilling, Freeport suspended work on fields with names like Davy Jones and Blackbeard in January."
Some of the problems stem from the 2013 acquisition of McMoRan Exploration Co. and Plains Exploration & Production. Those deals cost more than $9 billion, and came ahead of a truly epic downturn in crude. “Freeport paid $2.1 billion for McMoRan, an oil-and-gas company it had separated from in the 1990s, and $6.9 billion for Plains, a Houston-based rival,” WSJ recalls. “The deals in part were a bet that oil prices would remain high, but as the acquisitions quickly soured, Freeport shareholders alleged conflicts of interest led the firm to pay too much for the deals.”
As WSJ goes on to note, the combined entity saw its debt rise fivefold to $20 billion.
From the latest quarterly:
And from Q3 2012's 10-Q:
Ultimately, Freeport ended up paying nearly $140 million to shareholders to settle the dispute over the deals.
Given the high debt burden, the company is now "depending on asset sales or a potential restructuring to avoid more extensive cost-cutting, CLSA's David Lipschitz, says.
Moffett, who according to The Australian, does a legendary Elvis impression, co-founded McMoRan Oil & Gas 46 years ago and helped orchestrate the merger with Freeport Minerals Co. T. Boone Pickens calls him "the best Gulf Coast geologist that I’ve ever known."
When Carl Icahn succeeded in grabbing two board seats in October, he said he was set to discuss "capital expenditures, executive compensation practices and capital structure as well as curtailment of the issuer’s high-cost production operations."
And while Icahn may ultimately get his way when it comes to capex cuts and the scaling back of uneconomic businesses, it looks as though executive compensation is one fight the billionaire will lose - or at least as it relates to Moffett who is departing with a glorious golden parachute that ultimately sums to around $80 million. Here's WSJ again:
He will receive $16.1 million in severance pay as well as $63.3 million in other retirement benefits that have accrued over his decades with the company, according to securities filings. His departure also locks in options for about 1.2 million Freeport shares that are currently worthless given the company’s low stock price; those shares could become valuable again should the stock rise significantly before they expire, according to one filing.
And here's Bloomberg:
Life after Freeport-McMoRan Inc. will have its benefits for outgoing chairman James “Jim Bob” Moffett: namely, a payout that could reach $83.3 million plus $1.5 million in annual consulting fees.
The $83.3 million potential payout was calculated with 562,000 performance based restricted stock units and performance units. The value of the units could fall, lowering the end payout, or Freeport could raise or lower the number of shares Moffett receives based on his performance.
Moffett also had 5.5 million stock options, none of which has value until Freeport’s shares reach at least $18.98. The shares closed at $6.85 on Monday.
So apparently, this is Moffett's reward for helping to create the conditions that left the company unprepared for the current downturn. We wonder if, considering the following chart, a majority of shareholders support the $83 million package:
We close with one last quote WSJ, paraphrasing Moffett (who was known in the industry as "Jim Bob"):
On one occasion, he told shareholders worried about the prospects of a gas well that they needed only to “Trust Jim Bob.”