We recently reiterated our ‘Neutral’ recommendation on Plains Exploration & Production Company (PXP).
Texas-based Plains Exploration & Production Co. is an independent oil and gas company primarily engaged in acquiring, developing, exploring and producing oil and gas. The company has its core operations in North America – onshore and offshore California; the Gulf of Mexico; the Gulf Coast Region; the Mid-Continent Region; the Rocky Mountains, and offshore Vietnam.
The company’s main competitors include Anadarko Petroleum Corp. (APC) and Pioneer Natural Resources Co. (PXD).
Recent Quarter & Guidance
Plains Exploration & Production posted third-quarter earnings of 29 cents per share, above the Zacks Consensus Estimate of 24 cents, but below the year-ago profit of 60 cents.
Net revenues of $387.8 million grew 3.4% (positive surprise) from the Zacks Consensus Estimate of $375 million. Also, revenue grew 24% from $312.2 million a year-ago, driven primarily by higher commodity prices and higher sales volumes. Strong drilling results in the Granite Wash, Haynesville, California and South Texas Eagle Ford accounted for the volume growth during the quarter.
For the fourth-quarter 2010, Plains expects average daily sales volumes to be in line with third quarter volumes reflecting the impact of the Gulf of Mexico shelf asset sale, downtime on certain California and Texas assets and the previously announced repair work following a fire at the Madden Field in Wyoming.
Outlook
Plains Exploration & Production benefits from its asset high-grading/rotation strategy. The company has positioned itself for continued growth with the divestment of its Piceance and Permian basin assets. Continuing with its asset rotation strategy, the company is now in the process of trimming down operations in the Gulf of Mexico (GOM) mainly to align capital spending with operating cash flow. Plains’ decision to dispose assets in the GOM area was also perpetuated by the uncertain regulatory environment in that region.
In keeping with this decision, the company recently sold some of its shallow water Gulf of Mexico assets to McMoRan Exploration Company (MMR) for roughly $818 million. Further, Plains is looking to sell some of its deepwater Gulf of Mexico assets, including the Friesian and the Lucius prospects, by year-end 2010.
While curbing its offshore exposure on one end, Plains continues to build on new onshore oil-producing prospects as evident from the recent acquisition of acreage in the Eagle Ford shale play in South Texas. The Eagle Ford acquisition enables the company to aggressively expand its large, high-margin onshore oil business. The Eagle Ford properties have an estimated net resource potential of approximately 140 to 175 million barrels of oil equivalent (BOE). The company targets year-end 2011 production at Eagle Ford to reach 5,000 BOE per day, net to Plains.
Moreover, Plains Exploration & Production remains focused on cost control, operational execution and reserve and production growth from its balanced portfolio of assets. Going forward, the company plans to double production and reserves by 2014 and continuing to reduce production cost per BOE.
However, the company’s bottom-line depends greatly on the prices of oil and natural gas, which by nature are extremely volatile. Though a major portion of the company’s commodity price risk is hedged, there remains a risk of opportunity loss in the event of prices rising above the hedged prices. Also, like other E&P companies, the company is exposed to the risks of acquisition and integration. The company’s success depends on its ability to acquire, explore and develop oil and gas properties.
We believe Plains is poised for long-term incremental expansion in both production and reserves, given its attractive liquids-rich profile, strong balance sheet and liquidity position. Additionally, its asset rebalancing strategy has made a good mix of low cost, repeatable oil and gas production for the long-term.
All this, along with the recently proposed GOM assets sale by year-end and the acquisition of Eagle Ford acreage offer ample upside potential for the stock, in our view.
However, we believe that demand and supply fundamentals with respect to both crude oil and natural gas may prevent E&P stocks from making a significant move to the upside. This keeps us on the sidelines, with a neutral outlook on the stock.
ANADARKO PETROL (APC): Free Stock Analysis Report
MCMORAN EXPLOR (MMR): Free Stock Analysis Report
PIONEER NAT RES (PXD): Free Stock Analysis Report
PLAINS EXPL&PRD (PXP): Free Stock Analysis Report
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