Our rating on the independent oil and gas producer Plains Exploration & Production Company (PXP) remains Neutral following the company’s not so good fourth quarter and full-year 2010 results.
Plains Exploration & Production Company posted fourth-quarter and full-year earnings of 20 cents and $1.06 per share, widely missing the Zacks numbers for both the periods. However, the company’s revenue in both the periods was encouraging driven by solid sales.
During the fourth quarter 2010, Plains successfully sold off its pending assets in the Gulf of Mexico with an aim to eliminate its offshore exposure, due to BP Plc’s (BP) oil spill incident. In the quarter, the company also expanded its acreage position in Eagle Ford acquiring 60,000 net acres in the shale.
The closing of the Gulf of Mexico sale and a ramp-up in Eagle Ford and Granite Wash along with increased investment onshore California should position the company to substantially grow production over the next couple of years, in our view. We believe the company’s asset base offers an attractive blend of growth opportunities.
Furthermore, Plains has made several strides to bolster its balance sheet, keeping it financially flexible and adequately liquid, while strengthening its operating profile. The company ended 2010 with nearly $6.4 million of cash, $778.6 million of available credit facility and no near-term debt maturities until 2015.
Additionally, the company has a 2011 capital budget of roughly $1.2 billion, including capitalized interest and general and administrative expenses. This flexibility will enable the company to pursue its aggressive exploration and development programs aimed at ensuring long-term growth for the company.
With a conservative financial strategy and an aggressive operational strategy, we believe Plains Exploration & Production Company is poised for long-term incremental expansion in both production and reserves. We believe Plains looks attractive because of its liquids-rich profile, strong balance sheet and liquidity profile. Additionally, its asset rebalancing strategy has created a good mix of low cost, repeatable oil and gas production assets for the long-term.
On the negative side, Plains depends a great deal on the prices of oil and natural gas, which are extremely volatile in nature. A decrease in the price of these commodities could have an adverse impact on the company, which could include decreased revenues and cash flows. Thus, 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.
Also, the success of Plains depends on its ability to acquire, explore and develop oil and gas properties. As the estimated productive potential from exploratory or development acreage is hard to predict, the company may not realize the returns to achieve an economic profit.
Plains Exploration & Production Company retains a Zacks #3 Rank (Hold).
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PLAINS EXPL&PRD (PXP): Free Stock Analysis Report
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