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Plains Exploration Primed For '09

Posted: Mar 19, 2009 10:09 AM by Eric Fox

Tickers in this Article: L, DO, RIG, RDS.B, RDS.A, PXP

Plains Exploration and Production Company (NYSE:PXP) has put aside concerns over finances, and for 2009 Plains is focused on exploring and developing its acreage, which includes some promising, albeit expensive, wells in the Haynesville shale.

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Financial
When oil and gas prices fell sharply over the last six months, investors became suitably concerned regarding the industry's heavy use of leverage. The business is very capital-intensive, and some companies had taken on significant amounts of debt to fund exploration and development.

Plains, however, has adjusted its financial strategy to meet this new reality. Plains hedged its oil production in 2009 and 2010 at prices above $100. That hedge position was in the money by $1.43 billion and the company decided to monetize the position and receive cash. The company then paid down its outstanding credit facility by $1.3 billion. Its net debt to total capitalization is now a more manageable 52%. Plains still maintains a significant hedge protection in both oil and gas to protect it from an unexpected drop in oil and gas prices. The company's next maturity is not until 2015 when it must repay $600 million. (Learn more in Evaluating A Company's Capital Structure.)

California Dreaming
At the end of 2008, Plains had 60% of its proved reserves in California. Although the majority of its reserves are there, only 7% of its capital expenditures are being spent in this area. So, where is Plains putting down its chips in 2009? In a shale play, just like everyone else.

Plains has 111,000 acres in the Haynesville shale in North Louisiana. The company has only drilled a handful of wells there, but is planning to have 45 gross wells by year-end. These wells are expensive at $7 million each.

Gulf of Mexico
The company also has some more exploratory projects in the Gulf of Mexico. In January 2009, PXP drilled a successful confirmatory well at its Friesian project with its partner Royal Dutch Shell (NYSE:RDS.A, RDS.B), which has a 50% interest in the project. Plains has decided to deepen the well and has contracted a more sophisticated rig to work on the well. Reserves here are estimated at 300 mmboe (million barrels of oil equivalent).

The rig the company is using is a semisubmersible leased from Diamond Offshore Drilling (NYSE:DO), which owns 46 rigs, and is the second largest offshore driller after rival Transocean (NYSE:RIG), which owns 136 rigs. The Loews Corporation (NYSE:L) owns 50.4% of the outstanding stock of Diamond, and James S. Tisch is the Chairman of the Board of Diamond and the CEO of Loews.

The Bottom Line
Plains was feeling a little heat from investors due to some heavy debt, but the company's prescient move to hedge its oil production at much higher oil prices paid off. This move has allowed the company the financial capacity to develop its shale and other properties in 2009. (Before jumping into this hot sector, learn how these companies make their money. Read the Oil And Gas Industry Primer.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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