We have retained our Neutral recommendation on Plains Exploration & Production (PXP) as the future prospects of the company are significantly tied to the volatile oil and natural gas price movements. The top line suffers when the prices fail to scale up to the expected levels.
Counting among the positives are the initiatives taken by the oil major to concentrate on high-quality, low-cost, and high-return assets. Included in this category are its onshore assets in California, the Eagle Ford Shale and the Haynesville Shale. Besides, the strong balance sheet enables the company to continue with its share repurchase program. Presently, the company has assigned $1.0 billion to be utilized through 2016 for share repurchases.
Plains Exploration markets a large portion of its production through an oil marketing agreement with ConocoPhillips. This agreement is extended till January 1, 2023. In the preceding three years, this agreement on an average has contributed 47% of the total revenue of Plains Exploration. Since a significant amount of revenue is generated from this agreement, any decline in ConocoPhillips’ prospects will have a direct impact on the company.
Finally, the commercial viability of an oil and gas company depends on its ability to acquire, explore and develop oil and gas properties. Failure on the part of Plains to find economically viable reserves to replace existing reserves will hamper its future growth.
Plains Exploration & Production retains a short-term Zacks #3 Rank which translates into a Hold rating. Peers of Plains Exploration, Chesapeake Energy Corporation (CHK) and Pioneer Natural Resources Co. (PXD) also presently have a Zacks #3 Rank.
Based in Houston, Texas, Plains Exploration & Production engages in the acquisition, development, exploration, and production of oil and gas properties primarily in the United States.
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