Plains Stays in Neutral Lane

We have reiterated our Neutral recommendation on Plains Exploration and Production Company ( PXP - Analyst Report ) due to stringent regulations, volatile commodity prices and unfavorable drilling results. However, we expect the company’s strong balance sheet and liquidity position, strong asset rebalancing strategy, liquid-rich profile, higher realized oil prices, and development of onshore assets in several locations, to some extent mitigate those negatives.

In third-quarter 2012, Plains Exploration and Production Company’s earnings were in line with the Zacks Consensus Estimate, while revenues were ahead of the projection primarily due to strong contribution from the Eagle Ford Shale and steady performance from the Californian operations. The positives were partially offset by the sale of a few assets and production cut-back at the Haynesville Shale.

Performance of the oil and gas companies primarily depends on prices of the commodities, which are currently volatile to a great extent. A decline in the prices of these commodities would negatively impact Plains Exploration and Production Company’s revenues and cash flows.

As far as positive factors are concerned, Plains Exploration and Production Company is enjoying benefits from its asset high-grading and rotation approach, and is likely to follow this strategy in the forthcoming quarters. Currently, the company is concentrating on developing its onshore assets in the Eagle Ford Shale and several other locations. We believe these initiatives will strengthen the company’s future reserve-pipeline.

In addition, Plains Exploration and Production Company took several initiatives to boost its financial flexibility and liquidity position. The company raised its borrowing base from $1.8 billion to $2.3 billion. In the first nine months of 2012, cash from operating activities was $1.0 billion, a year-over-year rise of 13.4%. We believe this financial comfort will allow the company to pursue aggressive exploration and development programs.

On the flip side, Plains Exploration and Production Company 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.

Houston, Texas-based Plains Exploration and Production Company engages in the acquisition, development, exploration and production of oil and gas properties, primarily in the U.S.

With a market capitalization of $5.99 billion, the company has 880 full time employees. Like its peer Noble Energy Inc. ( NBL - Analyst Report ) , Plains Exploration and Production Company also has a short-term Zacks #3 Rank (Hold rating).