1 Number that Freeport-McMoRan Copper & Gold Inc. Really Needs to Improve

1 Number that Freeport-McMoRan Copper & Gold Inc. Really Needs to Improve

Freeport-McMoRan Copper & Gold made a bold move last year to diversity into oil and gas production. So far the early returns look good as production is higher than expected and the business is throwing off positive cash flow. However, the company still has room to improve its oil and gas business with one number standing above the rest and that's the company's growth in proved oil and gas reserves.

Digging deeper into the number
Proved reserves are the energy reserves that are estimated with reasonable certainty to be recoverable with today's technology and at today's prices. Basically, it's how much oil and gas a company is likely to produce in the future based on what assets it controls today. As investors we want to see a company grow its proved reserves each year. Typically this is referred to as the reserve replacement ratio. The problem when it comes to Freeport-McMoRan is that last year its proved reserves actually slipped a little.

While the results are currently preliminary, the company ended the year with 464 million barrels of oil equivalent, or BOE of proved reserves. That's down from the 472 million BOE that Freeport-McMoRan acquired when it bought both Plains and McMoRan Exploration. While the company recorded extensions and discoveries of 24 million BOE and revisions added another 7 million BOE, the problem is that those additions didn't replace the company's production of 38 million BOE. We want to see the company discover more oil that it produces each year.

Peer review
Independent oil and gas peers like ConocoPhillips and Occidental Petroleum Corporation did much better last year. ConocoPhillips, for example, saw its preliminary proved reserves increase by 3% from 2012. Moreover, the company organically replaced 179% of its 2013 production. Even after factoring in asset sales, ConocoPhillips enjoyed a total reserve replacement ratio of 147% of 2013 production. That's healthy growth, especially for a company the size of ConocoPhillips.

Occidental Petroleum experienced similar results last year. The company's preliminary reserve replacement ratio was 169% last year. The company's development program was a key to adding these reserves as these additions alone resulted in a 156% reserve replacement ratio for Occidental Petroleum.

One of the reasons that Freeport-McMoRan's didn't grow its reserves as much as it could is the fact that the company is cutting back on drilling in the Eagle Ford Shale which was a key area of reserve growth for ConocoPhillips. Freeport-McMoRan's move to reduce its Eagle Ford Shale rig count from 8 in the middle of last year to just one this year could stunt reserve growth again in 2014. That would be a problem if that company didn't have several promising projects in the Gulf of Mexico that could potentially add to reserves in 2014.

Investor takeaway
Freeport-McMoRan's lackluster reserve replacement ratio isn't yet cause for concern. The company is currently managing the oil and gas business for cash flow to pay down debt. That said, this is a number investors should keep an eye on in the future as growth here is something investors need to see in future years.

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The article 1 Number that Freeport-McMoRan Copper & Gold Inc. Really Needs to Improve originally appeared on Fool.com.

Matt DiLallo owns shares of ConocoPhillips. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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