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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 institutions.

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.  

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. (NBL - Analyst Report).

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.

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