In two separate transactions, Plains Exploration and Production (ticker: PXP) purchased approximately 67,000 BOEPD (combined 84% oil and NGLs) of Gulf of Mexico production for $6.1 billion. The largest chunk, 59,500 BOEPD, was purchased for $5.5 billion from BP (ticker: BP). The remaining 7,400 BOEPD was purchased from Shell (ticker: RDS.B) for $560 million.
During Q2’12, PXP reported sales volumes of approximately 59.8 barrels of oil and NGLs. Pro forma today’s announcement, PXP essentially doubled its existing crude oil and NGL production. We view this consistent with the company’s outlined strategy to diversify and de-emphasize projects focused on natural gas.
Initially, PXP has $7.0 billion in facilities committed to fund the initial purchase price. PXP’s initial borrowing base then increases to $5.3 billion from $2.3 billion. Cohesive with its recent strategy, the company plans to sell approximately $1.5 to $2.0 billion of non-operated, low-margin natural gas assets. The company said on its conference call: “By selling the gas business, we’re able to pay down the debt on an accelerated basis. So, in fact, you’re trading your Haynesville, Madden and McMoRan (ticker: MMR) shares for this Gulf of Mexico deal, plus the free cash flow to pay it off.”
We note that at June 30, 2012, PXP owned 51.0 million shares of McMoRan Exploration Co. common stock, approximately 31.6% of the total common shares outstanding. The shares were acquired in December 2010, in exchange for all of PXP interests in U.S. Gulf of Mexico leasehold located in less than 500 feet of water. PXP may sell shares of McMoRan common stock pursuant to underwritten offerings, in periodic sales under the shelf registration statement filed by McMoRan subject to certain volume limitations. At June 30, 2012, the McMoRan shares on PXP’s balance sheet were valued at approximately $562.5 million, based on McMoRan’s closing stock price of $12.67 on June 30, 2012, and discounted to reflect certain limitations on the marketability of the McMoRan shares.
PXP plans to hedge 90% of its oil production through 2015 to achieve approximately $1.0 billion in yearly free cash flow.
The majority of commentary from research notes this morning negates the possibility of an equity raise to fund the acquisition due to its debt financing, future cash flow opportunities as the production increases, and planned asset sales.
Based on the total purchase price, the two transactions were completed at approximately $91,000 per flowing BOEPD. Keep in mind, PXP believes significant upside production potential exists in the currently producing reservoirs through numerous low risk, high-margin drilling/recompletion and well workover opportunities. According to EnerCom’s database of 115 exploration and production companies, as of September 7, 2012, PXP was trading at an enterprise value to trailing twelve months production of $93,210 per flowing BOEPD.
By comparison, Energy XXI (ticker: EXXI) trades for $82,896 per flowing BOE.
On an enterprise value to estimated 2012 oil and gas cash flow basis, PXP is trading at 6.9 times. Management said on its conference call that it is purchasing the properties at approximately 3.5 times current cash flow, and said the transaction basically doubles its EBITDA.
Final Thoughts on Plains Exploration:
Given the long lead time (four to five years) before PXP fully realizes the upside (large oil volume increases and high margin drilling/recompletion activities) of this acquisition, many unknowns will need to be answered. Will the company be able to sell its low-margin natural gas projects at a fair market price? Will the company see “multiple-compression” since a large portion of the company’s spending going forward will be in the Gulf of Mexico? Will future cash flows come in as anticipated to de-leverage the company’s balance sheet? We applaud the company’s strategy to strengthen its oil weighting, and take advantage of water born crude oil price strength seen over the last 18 months. Time has a way of working everything else out and we believe PXP is capable of growing per share value with these new assets. OAG360 notes that investors seem initially weary as the share price fell more than 16% on the day of announcement with share volume 8 times higher than average.