We reiterate our Neutral recommendation on
Plains Exploration & Production Company
). The company's second-quarter 2012 earnings and revenue missed
the Zacks Consensus Estimate. The disappointing result was due to
the divesture of South Texas and Texas Panhandle assets, and
planned production curtailment at the Haynesville Shale.
These negatives were partially offset by higher crude oil sales
volumes, strong input from the Eagle Ford Shale and consistent
performance from the company's Californian operation.
We know that financial performance of the oil and gas companies
depends on the prices of the commodities, which are currently
volatile, to a great extent. A decline in the price of these
commodities would negatively impact revenues and cash flows of
Plains Exploration. Subsequently, the company could also face
difficulty for getting debt financing from the financial
As far as positive factors are concerned, Plains Exploration is
enjoying benefits from its asset high-grading and rotation
approach, and continues to follow this strategy in the forthcoming
quarters. Currently, the company is concentrating on developing its
onshore assets in California along with the Eagle Ford Shale.
Plains Exploration has also received approvals to build up its
Lucius project in the deepwater Gulf of Mexico and expects this
project to be online in 2014. We believe these initiatives will
enable the company to double its production and reserves by 2014.
In addition, Plains Exploration took several steps to bolster its
balance sheet along with financial flexibility and adequate
liquidity. In the second quarter of 2012, the company had cash and
cash equivalents of $302.2 million and long-term debt of $4
billion. The company had raised its borrowing limit from $1.8
billion to $2.3 billion.
Cash from operating activities was $348.5 million in
second-quarter 2012, a 16.3% increase over last year. We believe
this financial flexibility will permit the company to pursue its
aggressive exploration and development programs.
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Moreover, Plains Exploration manages its commodity price risk by
hedging production. This strategy prevents the company from
realizing maximum prices if market price rises over the current
hedged prices. However, derivative contracts also expose it to
financial losses, if there is a delay in production or a failure on
the part of the counterparty to satisfy its obligations.
We are also hesitant about uncertainty related to drilling results
and regulatory restrictions, which might negatively impact Plains
Exploration's forthcoming operational as well as financial results.
Plains Exploration & Production Company currently retains a
Zacks #3 Rank, which translates into a short-term Hold rating. The
company competes with
Noble Energy Inc.
Houston, Texas-based Plains Exploration & Production Company
engages in the acquisition, development, exploration and production
of oil and gas properties, primarily in the United States.