Plains Stays Neutral

We reiterate our Neutral recommendation on Plains Exploration & Production Company (PXP). The company turned in a dull first quarter with both earnings and revenue coming in below the corresponding Zacks Consensus Estimates.

Plains is one of the foremost competitors in the U.S. energy market with its balanced asset portfolio. Although comparatively new to the market, Plains’ strategy of upgrading its existing infrastructure, acquisitions and diversification of operations as well as maintenance of its reserves have propelled the company’s stock position in the utility market. The efforts are evident from its recent contracts in the Eagle Ford Shale region and California.

However, Plains’ involvement in hedging activities might constrain the company’s ability to realize maximum prices if the market price rises above the current hedged prices. Exposure to volatile natural gas and oil prices could adversely impact the company’s profitability, which in turn could affect its cash flow and debt financing operations.

On the upside, the company’s tenacious approach towards maintaining a solid liquidity position as well as flexible financials is expected to support its aggressive exploration and development programs ensuring long-term growth. The company has in the most recent quarter increased cash flow by 15.7% to $335.4 million. Additionally, the company aims at de-emphasizing it’s repurchase programs and intends to use the profits to boost future operations.

On the flip side, factors that could affect the company’s revenue and volumes include unexpected natural disasters, regulatory restrictions and lack of accessibility to proper equipment.

The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently pegged at 73 cents per share and $3.02 per share, respectively.

Plains Exploration & Production Company presently retains a Zacks #3 Rank which translates into a short-term Hold rating. The company’s peers include Anadarko Petroleum Corporation (APC - Analyst Report) and Chesapeake Energy Corporation (CHK - Analyst Report).

Based in Houston, Texas, Plains Exploration & Production Company engages in the acquisition, development, exploration and production of oil and gas properties, primarily in the U.S. Its key operations are spread over onshore California, offshore California, the Gulf Coast region, Gulf of Mexico region and the Rocky Mountains.