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Plains Exploration & Production (PXP)

Q2 2011 Earnings Call

August 04, 2011 9:00 am ET

Executives

Hance Myers - Vice President of Investor Relations

Scott Winters -

James Flores - Chairman, Chief Executive Officer and President

Winston Talbert - Chief Financial Officer and Executive Vice President

Analysts

Brian Singer - Goldman Sachs Group Inc.

Philip McPherson - Global Hunter Securities, LLC

David Kistler - Simmons & Company International

Leo Mariani - RBC Capital Markets, LLC

Brian Corales - Howard Weil Incorporated

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Marshall Carver - Capital One Southcoast, Inc.

Nicholas Pope - JP Morgan

Unknown Analyst -

Presentation

Operator

Good morning. My name is a Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2011 Second Quarter Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Scott Winters, Vice President of Corporate Planning and Research. Mr. Winters, please go ahead, sir.

Scott Winters

Operator, thank you. Good morning, everyone, and welcome to our conference call. Earlier this morning, we issued our earnings release and filed our 10-Q. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our company website at pxp.com. We've posted a slide presentation to supplement our comments this morning, and we may refer to the slides during the call. The webcast, the slides, 10-Q and today's press release are available on the website, in the Investor Information section.

Before we begin today's comments, I'd like to remind everybody that during this call, there will be forward-looking statements as defined by the SEC. These statements are based on our current expectations and projections about future events, and involve certain assumptions, known, as well as unknown risks, uncertainties and other factors that could cause our actual results to differ materially. Please refer to our filings with the SEC, including our Form 10-K for discussion of these risks.

In our press release, the slide presentation and our prepared comments this morning, we present non-GAAP measures. A reconciliation of all the non-GAAP financial measures to comparable GAAP financial measures is included with the press release.

On the call today is Jim Flores, our Chairman, President, Chief Executive Officer; Winston Talbert, our Executive Vice President and Chief Financial Officer; John Wombwell, our Executive Vice President and General Counsel; and Hance Myers, Vice President Corporate Information Director.

For the second quarter of 2011, PXP reported net income of $125 million or $0.87 per diluted share, compared to net income of $45 million or $0.32 per diluted share for the second quarter of 2010. Net income includes the impact of realized and unrealized gains and losses on our mark-to-market derivative contracts, and unrealized gain on investment and other items, which may affect the comparability of operating results. When considering these items, PXP reported net income of $77 million or $0.54 per diluted share compared to net income of $37 million or $0.26 per diluted share for the same period in 2010.

2011 second quarter daily sales volumes averaged approximately 97,700 barrels oil equivalent per day, a 15% increase compared to the second quarter 2010 or a 27% increase pro forma for the 2010 asset sale. Average daily liquids sales volumes increased 7% compared to the second quarter of 2010 or 12% pro forma for the 2010 asset sales, and are expected to increase ratably throughout the rest of the year.

During the second quarter of 2011, gross margin per BOE was $25.31 and cash margin per BOE was $39.92, up 35% and a 20% increase over second quarter of 2010, respectively. Higher production and higher realized prices are the primary drivers for this increase.

For the second quarter of 2011, oil and gas revenues increased 41% compared to second quarter of 2010. Oil revenues increased approximately $123 million reflecting higher average realized prices, benefited by California crude postings, which remain strong relative to NYMEX, and higher sales volumes. Gas revenues increased approximately $26 million, reflecting higher sales volumes and higher average realized prices.

Lease operating expenses increased approximately $25 million to $82 million in 2011, reflecting an increased number of producing wells at our Eagle Ford Shale and Panhandle properties, and higher scheduled repair and maintenance and well workovers, primarily at our California properties. Steam gas cost increased approximately $1.5 million, primarily reflecting higher cost of gas and higher volumes used in steam generation. In the second quarter of 2011, we burned approximately 4.1 Bcf of natural gas at a cost of approximately $4.13 per MMBtu, compared to 3.9 Bcf at a cost of approximately $3.90 per MMBtu in 2010.

Production and ad valorem taxes increased $13 million to approximately $17 million in 2011, reflecting higher ad valorem taxes at our California and Haynesville Shale properties. The increase in production taxes in 2011 compared to 2010 reflect the impact of the production tax abatements recorded in 2010, and increased production, primarily from our Panhandle property in 2011. Gathering and transportation expenses increased approximately $4 million to $17 million in 2011, primarily reflecting an increase in production from our Haynesville Shale properties.

Income from operations was approximately $186 million during the second quarter of 2011 compared to approximately $50 million for the same period in 2010. The derivative instruments we have in place are not classified as hedges for accounting purposes. Consequently, these derivative contracts are marked to market each quarter, with fair value gains and losses, both realized and unrealized, recognized currently as a gain or loss on mark-to-market derivative contracts in our income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making a payment to, or receiving a payment from, the counter-party. We recognized a $19 million gain on mark-to-market derivative contracts in the second quarter of 2011, which was primarily associated with an increase in the fair value of our 2011 crude oil and natural gas collars due to lower forward prices. In the second quarter 2010, we recognized a $58 million gain related to mark-to-market derivative contracts. There have been no changes in our open derivative positions since our last quarterly report, and a summary of PXP's derivatives is included with the financial tables in the press release.

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