Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Plains Exploration & Production Company (NYSE:PXP)

Q3 2008 Earnings Call Transcript

November 7, 2008, 9:00 am ET

Executives

Scott Winters – VP of Corporate Communications

Jim Flores – Chairman, President and CEO

Doss Bourgeois – EVP of Exploration and Production

Winston Talbert – CFO and EVP

Analysts

Gary Stromberg – Barclays

Gregg Brody – JP Morgan

Nicholas [ph] – JP Morgan

Duane Grubert – CRT Capital Group

Michael Prober – Clovis

Bill Frazier – Greenhill Capital

Andrew Coleman – UBS

Bruce Wilcox – Cumberland Associates

Brett Hendrickson [ph] – Nokomis Capital

Operator

Good morning. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now like to turn the call over to Mr. Scott Winters, Vice President of Corporate Communications; please go ahead sir.

Scott Winters

Thank you Erica and good morning everybody. Welcome to our conference call which is also being broadcast live on the internet. Anyone may listen to the call or the replay by accessing our company website at www.pxp.com, also located on the website are copies of the earnings released, the 10-Q, the 2009 guidance and a short presentation. PXP filed its full-year 2009 operating guidance with the Securities & Exchange Commission in the Form 8-K.

Before we begin today’s comments, I would like to remind everybody that during this call, there will be forward-looking statements 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 Forms 10-K, 10-Q and 8-K filed with the SEC for a complete discussion on forward-looking statements.

On the call today is Jim Flores, our Chairman, President and CEO, Doss Bourgeois, Executive Vice President of Exploration and Production; Winston Talbert, our Executive Vice President and Chief Financial Officer; John Wombwell, our Executive Vice President and General Counsel; and Hance Myers, our Vice President of Investor Relations.

Earnings were approximately $493 million or $4.50 per diluted share for the third quarter of 2008, compared to approximately $33 million or $0.45 per diluted share for the same period 2007; included in 2008 earnings is an after-tax gain on mark-to-market derivative contracts of approximately $282 million. Our current income tax expense for the quarter was driven by the ending third quarter Permian and Piceance asset divestiture.

Operating cash flow was approximately $424 million for 2008 compare to $146 for the same period a year ago. This is a non-GAAP measure and reconciliation is provided is attached to the press release. The third quarter 2008 results compare to the same period 2007 reflect a 62% increased in production sales volumes and nearly 27 per barrel of oil equivalent increased in realize prices, accounting slightly higher per unit production cost with partially offset by lower per unit general administrative cost.

Result to the nine-month period ended September 30, compared to the same period in 2007 reflect as 10% increase in production sales volumes and nearly $29 per barrels of oil equivalent increase in realized prices only slightly higher per unit production cost which were offset by lower per unit general and administrative cost.

PXP liquidity position remains strong with no significant debt maturity approximately four years and pro forma for the Permian and Piceance property sale. PXP’s liquidity increases to approximately $1.3 billion and its new borrowing based is established at $2.7 billion. In addition PXP supported by derivative position which as of October 31, of this year and net value of approximately $930 million.

PXP’s derivatives remained unchanged providing downside commodity price per protection and supporting future cash flows. On average 80% of our 2009 and 2010 estimated oil production is protected with floors above $100 and approximately 80% of our estimated natural gas production through year end 2009 is protected with either physical purchase used in our operation or $10 by all cause.

Due to the pending asset sale, higher service cost and higher natural gas products we are revising certain estimate on certain items of our previously issued year 2008 guidance. Production is expected to average about 92,000 of barrels of oil equivalent per day for 2008. These operating expense per unit are higher than previously anticipated due primarily to increased well worked activity and higher service cost accompanied by higher water disposal costs. These operating expenses per unit are now estimated to approximate $9.50 per BOE for the year.

Steam gas cost and previously anticipated due to significantly higher average natural gas prices and slightly higher volumes of natural gas used in the steam generation and are now estimated to approximately $4 per barrels of oil equivalent. Sales volumes for the third quarter 2008 were 92.4000 barrels of oil equivalent per day compared to 57.1000 barrels of oil equivalent per day in the third quarter 2000.

This increase reflects the impacts of acquisition and investment 2007 and the first quarter of 2008. Production from the flat rock project and shut in production associated with the recent Gulf of Mexico hurricanes. All production impacted by the hurricanes has been restored.

In the Gulf of Mexico the flat rock development continues to deliver positive results with five successful wells today, three of these wells currently producing approximately 37 million cubic feet equivalent per day net to PXP. Flat rock No.4 well production test through the perforations in the primary Rob-L section indicate a gross flow rate of approximately 124 million cubic feet equivalent per day or 27 million cubic feet equivalent per day net to PXP.

Flatrock No. 5 has encountered 90 net feet of pay as indicated by wireline logs is currently drilling below 15,000 feet to a proposed total depth of around 18,400 feet and in the Flatrock No. 6 commenced drilling late in October.

In addition the Flatrock wells, there are several Flatrock step-out prospects either currently drilling or preparing to spud that include the Tom Sauk exploratory well located on the Louisiana State Lease 340, which commenced drilling in August of 2008 and is drilling below 12,500 feet. PXP holds a 24.4% working interest.

The Gladstone East exploration prospect also located on the Louisiana State Lease 340, is expected to commence drilling in November 2008 and carry over into 2009. PXP holds a 30% working interest in this prospect. In the Ammazzo exploration prospect, located on South Marsh Island Block 251, is also expected to commence in November and carry over into 2009. PXP holds a 28% working interest in this prospect.

This prospect has several hundred million cubic feet equivalent potential, multiple in the Middle to Lower Miocene expands and it’s operated by McMoRan. Other Gulf of Mexico activities include plans to completing a test to South Timbalier Block 168 ultra-deep exploratory well operated by McMoRan. The well will be temporarily abandoned waiting completion, PXP holds a 35% working interest and Friesian No. 2 well, operated by PXP and located on Green Canyon Block 643, is currently drilling below 24,000 feet to a proposed total depth of 28,000. Drilling results are expected before year end.

Turning our attention onshore; drilling in the Haynesville Shale now include 14 rigs, up from six in August, with an average of approximately 26 rigs expected in 2009. Drilling operations for our Haynesville Shale Joint Venture began in July of this year and inaugural production commenced during the third quarter. Currently four wells are producing 36 million cubic feet equivalent per day gross 5 million cubic feet equivalent net to PXP.

With over 7,000 potential well locations, asset area is expected to be a significant driver of future production and reserve growth. PXP holds a 20% interest in Chesapeake’s over 550,000 net acre leasehold position. For two things we allocated 40% of our 2009 capital budget to the Haynesville activity pursuant to Chesapeake’s, the operator’s 2009 operating plan.

Drilling in South Texas and Texas Panhandle areas continue to yield positive results as well. Production combined from these areas increased approximately 40% from January to September of this year. In South Texas, drilling is focused on the Los Mogotes, Lopez Ranch, Mills Bennett Fields and the area was producing around 11,700 barrels of oil equivalent per day at the end of the third quarter.

In the Texas Panhandle, production was approximately 8,100 net BOEs per day at the end of the quarter with ongoing drilling successes in the Courson Ranch, Wheeler and Marvin Lake Fields. The south Texas and the Texas Panhandle asset areas provide multi-year drilling inventories, supporting further reserve and production growth.

In California, we continue executing our development program and made substantial progress over the last few months on several important permitting issues. The Los Angeles County Board of Supervisors recently passed enhanced environmental and safety standards supporting continued development of the Inglewood Field in the Baldwin Hills area of Los Angeles, California. This approval gives PXP the ability to drill up to 600 new wells at the Inglewood Field.

The County of San Luis Obispo California recently approved a permit to construct a water reclamation and treatment facility, which would improve operating efficiencies for oil recovery activities in PXP’s Arroyo Grande Field. The new facility will accelerate field development and production growth in the Arroyo Grande’s Field, which represents a significant development for our onshore California production operations.

Construction is to begin by year-end 2008 followed by drilling and steaming operations to enhance the present production rate of 1,300 barrels of oil equivalent per day with a 17% compounded average growth rate expected over the next 10 years, and T-Ridge received approval from the County of Santa Barbara California Board of Supervisors on October 7.

PXP is working to obtain approvals from the California State Lands Commission, the California Coastal Commission, and the Federal Minerals Management Service which would allow drilling to begin as early as the first quarter of 2009. As illustrated by these three examples California asset areas remains an integral part of our operating strategy.

Quick update on our divestiture, PXP agreed on September 24 to divest its oil and gas properties located in Permian and Piceance Basins for $1.25 billion of Occidental Petroleum. This transaction is expected to close on December 1, 2008. On a pro forma year-end 2007 basis, PXP has approximately 507 million barrels of oil equivalent proved reserves and 2 billion barrels of oil equivalent of resource potential.

We’ve reduced our 2008 estimated operating capital expenditures from $1.5 billion to $1.2 billion due to lower estimated acreage cost and to reductions and development cost attributed to the Permian and Piceance asset sale, and we set our 2009 capital budget up $1.15 billion of which 50% of the capital is allocated to production and development activities, 40% to the Haynesville shale and 10% for exploration projects.

PXP intends to fund its 2009 capital budget from internally generated funds and has flexibility to adjust spending as market conditions warrant. The third quarter was a solid quarter financially we reported strong quarterly earnings, cash flow, balance sheet and liquidity disposition.

Operationally we made significant progress in execution of multiple high impact projects and we have substantial asset growing potential.

With that I will turn the call over to Jim.

Jim Flores

Thanks Scott and good morning everyone. We are pleased to report our third quarter operational and earnings update. We’ve had a tremendous quarter in a lot of respects and I know its not newest news to everybody the tremendous volatility everybody’s been dealing with, but we have been positioning our company for the tough times. The hedges that we have in place, the strong credit facility, strong banking group, bond maturity schedule, the finance side of the house. We have stayed oil weighted while continuing to invest in gas growth assets and to be balanced between our California oil productions in the Haynesville gas fields with Chesapeake is a special place.

Not to mention the dynamics we have with McMoRan and some of our deepwater projects in the Gulf of Mexico there are gong to be moved in April. As you can see we’re – we have kind of kick the Rock over on the permitting things in the California between T-Ridge Arroyo Grande models the house going very well from the real estate perspective. We have a lot of data to cover based on questions and so forth, so we will probably get directly to it, but I will tell you that the business here is in oil contraction and North America gas is still tracking. We are anxious to see what happens to the demand for gas and oil going forward during the first half of 2009, because of also the international contraction going around.

So we have been very cautious talking to investors on the standpoint of outlook and we will continue to maintain the low hip outlook on our business both on expenditures, capital and also corresponding activities. Our production rate of 15% pro forma growth in ’09, we feel very secure about it because you begin to really ramp up of the Haynesville production going forward and we are fully capitalizing that.

The 15% production growth from 2010 to 2011, 2012 becomes higher risk obviously, because we cut capital, we put more pressure on exploratory aspects, that’s typically of any capital cutting environment or we’re trying to manage both sides of the house and then until business improves and so forth on the price side, we are going to continue to maintain the focus, but in meantime the business plan we have 90% development, 10% exploratory is going to be good model going forward, to continue to generate the type of results you saw in today’s release.

So, with that I’ll open it up to comments or questions and we’ll try to get you all your answers.

Question-and-Answer Session

Operator

(Operator instructions) There are no further questions at this time. Your first question comes from the line of Gary Stromberg with Barclays.

Gary Stromberg – Barclays

Hi, guys. Try to get in there, you can’t have a conference call without questions right?

Jim Flores

We’re going to be patient, Gary, but I would just have at least one.

Gary Stromberg – Barclays

Couple of easy ones, Winston on the Occidental sale, what do you expect net proceeds to be?

Winston Talbert

We expect net proceeds to be slightly above the $1 billion, if you takeout the taxes, like $1.50 billion and it kind of depends on what commodity prices are in the fourth quarter.

Gary Stromberg – Barclays

Okay and I assume it just procedural of the close on that, there is no financing or anything that needed on the buyers part?

Jim Flores

We have been notified if any.

Gary Stromberg – Barclays

Okay and then few other questions. Derivative settlement in ’09 and ’10 on the investing in financing part of the cash flow statement, what can we expect there?

Winston Talbert

I’m not sure exactly what you are saying?

Gary Stromberg – Barclays

I guess the cost of the puts, right that amortized 2009, the cash payments for the…

Winston Talbert

The cash payments for the – for example in 2009 $100 puts, we paid the settlement as we got the cash. So, it net out of the money that would be received and now would be at the end of 2009.

Gary Stromberg – Barclays

Okay.

Winston Talbert

And then the monthly settlements for natural gas, just goes on as we’ve been going on in 2009, everything in single month, we settle those out and for example, if gas is below $10 we get the cash to just net out whatever premiums that we held on that.

Gary Stromberg – Barclays

Okay, I think my notes have $38 million plus $18.5 million for the year kind of spread out quarterly?

Winston Talbert

That’s sounds you are right.

Gary Stromberg – Barclays

Okay and then finally, Jim on the pro forma production growth for 2009 I think you mentioned 15% off of what basis is that? Is that off of a 92,000 fourth quarter run rate?

Jim Flores

Yes, 92,000 that’s reported. We have had, we have sold first half of Piceance in the early of the year and Permian. We sold our San Joaquin Basins basin production buyback in the South Texas then we sold San Joaquin Permian again and so forth and then depending on times of the year of how much contribution that production is that, and then their production growth at Flatrock got to you two as before 92,000 barrels a day for 2008.

If you pro forma all the sales out, alright? Then we’re look at 76,000 barrel a day. Pro forma number for 2008 and then – so then the mid point of the range we put out in 8-K today, kind of reflects the 50 that 13% to 15% production growth. So, that’s the 15% we have kind of amazed then we cut it off the amount of capital we cut out the budget discretionary and still realizing it really goes down to the fact of by selling by reduced to the reserve base reduce in the production base of assets and we’re growing as fast you start highlighting your more growth asset like your Haynesville, your Ranches area and also Flatrock areas and we are growing so much on the Gulf and so when you accelerate the growth and strength of mass, you are able to reduce capital at the same point in time we have maintained that growth rate. You know on top of that till we get an increased exposure per barrel and the company to our hedges just kind of we have lowered the volume of that we are going to produce next year and while keeping the hedges consistent.

Gary Stromberg – Barclays

I didn’t see the 8-K so I apologize. So, the 15% growth number is based is off of the 76,000 a day 8-k pro forma ’08 now.

Jim Flores

That’s correct.

Gary Stromberg – Barclays

Okay I got it.

Jim Flores

Thanks for clearing that up.

Gary Stromberg – Barclays

Alright thank you.

Operator

Your next question comes from the line Gregg Brody with JP Morgan.

Gregg Brody – JP Morgan

Just had a question before you relating to you capital commitments and your flexibility with your spending just may be a little bit color around whether some of your longer term commitments what’s your operating with your own operations and then what your partner? And why types of flexibility do you have to commit capital? How does that process work for example in the Haynesville if Chesapeake decides to spend ex amount? Do you have an option to slow that down at all? Or is that pretty much based on what they want you to do? Similar, but not variable.

Jim Flores

We have a maximum flexibility. We have kind of went through a period in 1998 where we had a lot rig contracts with the acquired company. We acquired a company called United Meridian was ocean and they had a tremendous about the long-term rig contracts that we had to suck down to a little period and we’ve obviously learned from that experience, that is not a healthy situation. So, we are on a rig a well to well days just we do have two commitments to drill a Blackbeard east currently that’s about a years worth of work with rig.

There we do have one rig in South Texas with one year commitment and everything else is six month or less as far as our rig commitments, so we are real tight there or well to well. That’s going to take background specifically to the Haynesville as our joint venture set our we are funding 60% of the drilling and completion cost that Chesapeake’s doing in the Haynesville and what’s interesting about that is next year you will get there corporate guidance that they get about in the analyst meeting.

When they have 25 points, six rigs average a day, six to seven wells per rig. Right now they are drilling six wells per rig per year, again about $7 million of cost get a little more because of the drilling initial cash in the first deals. The assumption a lot of analyst made, outcome of the analyst call was that Chesapeake to Plains owned to 100% of those cost in the rig. Many of the units have partners and so forth that is a 50/50 joint venture said with some other people that we are participating, so when you average those cost, when you take those cost across the venture its somewhere these should be 70% to 75% of those cost at least 73%.

So, just to go through the math on the Haynesville, if you take a $7 million rig times six drills a year times 25 and then want you do is times 0.73 that would be our interest in each one of those drills and then times 0.6 you get to a number about $460 million which is our budgeted number which is about 40% of our 1150 budget.

In doing that we want Chesapeake to drill as many wells as possible – has accelerated because right now with lower service cost coming through the next cycle plus it accelerates our PV-10, our PV value during this low cycle. So we are very much an instigator of more activity in the Haynesville. We may not be as big instigator of more acreage in the Haynesville. Now, we are not obligated to purchase anymore acreage. That on the internal between Chesapeake and Plains, anybody – we can buy I think which we offer Chesapeake 80%, they can buy acreage and they have to offer us 20%.

We to say no to it, but with the collapse in gas prices and so forth we really backed-off our acreage purchases because right now, we have about a 16 year inventory of acreage to possibly drill even under Chesapeake’s most aggressive plans, if we get up to 60 rigs in the next three or four years.

So for us the Haynesville is going to be based on Chesapeake’s capacity to drill and our financial flexibility and we think there are at full tilt right now and if they are able to grow that is why we are maintaining $1.3 billion of liquidity and carefully it cots us some extra $50 million or $100 million in individual year, we think we can handle it.

Gregg Brody – JP Morgan

Okay. That is very helpful and just one last question. you know a lot of that the congress is out there and I am sure they are somebody becoming a pressure to your aspect. I am just curious what are your thoughts on general about the M&A market to this? How you think things those might play out over the next several months not necessarily will play to just disturb you?

Jim Flores

Well, it is all about Plains.

Gregg Brody – JP Morgan

And that is specific about ways about you –?

Jim Flores

Okay let me just speak specifically about place that we go general. From our stand and I really think this liquidity issue. I may be get wrong about this, but its certainly feels like there is a longer-term situation than we have experienced since the early ‘90s, which came of to ‘80s and in stead of what you are going to have some major changes, but prior this with the liquidity crunches we have had in our industry, we had healthy banks, healthy financials, healthy other economies. This is the first time we will go through this as an energy industry where the rest of the economy is really on its kestrel as well and the banks were softening as well.

So we are going to have showed our discipline and get our buyer a chance to heal on repair. So we are kind of sitting here and going with the a lot of the sand god will gives us a lot of flexibility, but we are taking that to the really our operational aspects or full where we have with the proactively we have to lot more to do in the Panhandle, a lot more to do in South Texas, well obviously that’s where some of them might came out so, we are going to be powerful there, but the Haynesville it’s going to continue to grow our Gulf of Mexico is being developed, Flatrock rapidly.

So we our first three choices there is to just maintain liquidity here at PXP, because we have to blend with the liquidity has been so tight, with bond, with banks is going to predetermined all the players and also the bond market being non existent, we are not in a huge rush to go use our liquidity.

Now I think by mid to next year we will be have the change there, you will get worse or might get better by next year, but I think between now and mid-year and next year I think liquidity is going to be a premium and everything. I think a surety of cash flow is going to be there because you are going to see a lot of business model come under a lot of stress that they don’t have liquidity in cash flow based on needs for capital going forward.

It’s just tough as I’ve seen it, since 19s back before Enron started to have the gas bank, when the ability for the banks to say no has never been greater. So, we’re going to be paranoid, so we are not to be scared and we’re going to stay there while.

Gregg Brody – JP Morgan

I appreciate the time guys.

Jim Flores

Thank you.

Operator

Your next question comes from the line of Nicholas [ph], JP Morgan.

Nicholas – JP Morgan

Good morning.

Jim Flores

Good morning Nicholas.

Nicholas – JP Morgan

Couple quick questions. I was wondering, if you give a more detail here about Rio Grande day field. Is that bottle necked right now due to water constrains and I guess when will we start to see this 17% growth rate began?

Jim Flores

It’s a good question since, we’ve never really shown anybody or talked about Rio Grande, I mean in our standpoint Rio Grande is a steam plant project that has been hampered, its kind of been hobbled. We’ve had shackles on it for about 10 years since it was purchased from Shale back in the 19s. Basically, we’ve been drilling a low ebb amount of wells there, steaming the wells, if it in these reservoirs when you steam it, you release water, you release oil and so forth and basically you need to drill to a dewater in period to maximize the well rate to steam process.

Well, because we were in an agriculturally focused area and we are right on the hill on the coast overlooking the Pacific Ocean, what to do with that water has been a major issue for us to overcome because what we’ve been doing now is just re-injecting it back in the reservoir. So, in effort we probably has been – we’ve been steaming and producing and then cooling the reservoir all in the same fashion, in a circular motion.

Basically, we had in the project on maintenance, so the project steams very well, very productive, we drill a lot of production, but if you are unable to evacuate the water, unable to effective the steam process. Today as of this call, third quarter we have received the adequate large permit and have all of our plans approved with our reverse osmosis plant to clean the water and we’re going to help the trout in stream and Ag uses very coordinate efforts to one of the power of one the franchisee to have in the company to permit things.

Took where we are going to be at the full development and Arroyo Grande day and we got probably 18 to 24 months of construction and additional drilling. I would say that the growth rate you are talking about is over changing your period it’s going to accelerate in the second two thirds of those ten years. The first part is going to be more construction and development and continuing to accelerate our drilling out in production individual basis.

The big key is we have right now 12 million barrels PDP book there and 48 million barrel of PUD book there. there is probably another 100 million barrels there at least this is the big tank of oil that stream floods are very well defined that we will be booking over the next 10 years. That’s going to help us our reserve placement source basically adds just that 100 million barrels of reserves of un-booked reserves to work run that’s going to be probably the immediate impact and the production growth will come it one SVD on of the reservoir after the construction cycle.

Nicholas – JP Morgan

Okay and what’s you all is interest in the field?

Winston Talbert

We have a 100% working enroll. We are on the fee land

Nicholas – JP Morgan

Okay another note here. I guess one of your first announce for Piceance and Permian the divesture its sounded like you all are going to use the cash to pay down that is that has that plan changed?

Winston Talbert

Well it’s all only if we don’t feel like paying down our revolver we want to keep it some other banks. That was a joke like pay down the revolver and liquidity.

Nicholas – JP Morgan

Okay and also is there any progress on that Big Mac 3D issue that you acquire from XTO?

Jim Flores

Actually we own half of it and we just acquired the other half because the dominion who XTO bought had half and Pogo had half so operator of that and we have done a reprocessing on and so forth. We think it’s probably 50 million to 75 million barrels potential on that shoot some of the deeper sales. We haven’t drilled any wells year-to-date. We have a couple wells planned next year a Big Mac we have a couple wealth planned on the sister shoot over in central Louisiana called Big A. we are not a whole lot of drilling programs one of the areas where we have produced capital we are going to just having to those slowing next year, but they are both about the same size, if we can have some success and early drilling would be big area for us and we are looking at those as good growth areas coming off, some of the peak growth to Flatrock and South Texas and kind of all Gulf Coast area and kind of the next way of the growth is a Big Mac there.

Nicholas – JP Morgan

Alright, that’s great. That is all I have. Thanks a lot.

Jim Flores

Okay, great.

Operator

Your next question comes from the line of Duane Grubert with CRT Capital Group.

Duane Grubert – CRT Capital Group

Would you talk about the philosophy of your Gulf of Mexico program a little bit? You are partnered in a bunch of great projects in McMoRan with really a multi-year program ahead of you. Do you still have freezing project? Are you likely to do the less non-McMoRan is that going forward or just comment on that a little bit?

Jim Flores

Well, the overall philosophy on those projects – those all are in our discretionary exploratory thinking until we had success at Flatrock; where Flatrock, in Flatrock area that Gladstones and the Tom Sauk and all those things were dialing up to size making doing a lot of curl that work on exciting the adjacent power blocks to so forth. We do look that is the development like anything else, we’re drilling in the Panhandle or Haynesville or whatever, that is going to get capital on our budget.

When you taking the next prospects like Ammazzo and Blackbeard East, I put like East in there because we’re still conserver Blackbeard West. We want to see some production out of these sands, we want to see – we want to take a very conservatively right now because that the numbers get big if let them out of the corral and we think that a few months of waiting on some production equipment and finally what type of production we have at Blackbeard East. On Blackbeard West we tells a lot of about Blackbeard East in this sophistry play that we’ve been doing out there.

So, those projects are all on a one-off our basis, I mean consequently, Jim Bob; Bob has a tremendous acreage spread, he is got a tremendous seismic position in the Shale of Gulf of Mexico and having untracked as that the code of what we think it is some geologic signatures as significant gas fields and proved it by Flatrock. We are going to continue to rollout that plan until it’s tells something different, but right now, drilling the next big features throughout the Flatrock and JD Mountain, in the GK sand looks just as good on size of the Flatrock, but twice as big of the structures as we are all about Ammazzo.

The project region, which you bought up is kind of project were 50/50 with Shell, but its kind of a carry over from some of our deeper water projects help though it will make a confirmation well. They were drilling the second well there kind of stepping out and that what we called shallower sands at T-Ridge and we cannot drill the in 50 and in 21 potential on structure and we are still profit our plan to do that.

This could be a significant production drive for near term for PXP when I say near term less than five years. We have got lot of here and now production come out Flatrock, Haynesville and those things, but the regional prospect and then also our Salida project that’s like probably drill either right at the end of ’09 or it really beginning of 2010 depending on rig availability from Shell.

If we are going to continue to try the drill the best and the brightest in the deeper water and also Shell has come about. Now, when you look at our new capital program playing and our thought process we are going really hold range tight and its long data projects and hope we will be focused on drilling over months so and continue to step out around Flatrock in driven production higher because Flatrock’s production continue to expand the shallow water just adding vessels it’s not like its going to create you don’t like you have a lot of bone exit will money get off.

Duane Grubert – CRT Capital Group

Okay that’s helpful and then the Texas that the Panhandle, and the South Texas program is almost like sleeper upside I guess in my view and your history in the past of doing consolidation in various ways, in various places is that an area that I might suspect you might be favorable enough on to do bolt-ons over time.

Doss Bourgeois

Well we in South Texas remember when we rotated out San Juan and picking up the Samsonite which we did that already this year and double our inventory point out there probably outs about three year in South Texas a really good development drilling project in the Panhandle personally we had purchased a acres and area did that bulk on got to bolt on the acquisition so when we took over the Panhandle 5000 acres our guys are covering out the project and inventory and we avail a 5 to 7 year inventory there prior to some of the goods drilling we have done across the Ranch and market here like this year which will define the new sands do seismic signature to more channel.

That always new places are coming across the mid continent area and we are learning up we actually one rig that’s drilling not too many as territorial concepts we are over two right doing out we have a four more different concepts that have is may 30 or 40 prospects of tax to each one of the concepts. If it work so we are our points four and we like because of the place we dollar up or dollar down capital if we had another if oil prices for some reason of much higher than where there are now or may 80, 90 barrels to supplies we want to achieve to spend couple $100 million of capital, we do it in Panhandle, we do in South Texas, we do Big A and Big Mac. So, having that area we can dial-up and dial-down, so give us some flexibility results going to have some near-term production to see. You have a good bank for your buck based on prices versus just put it in long-term data projects.

Duane Grubert – CRT Capital Group

Okay and then two quick comments on California. One, San Joaquin Valley, which keeps making a lot of money for you guys, really haven’t been much of the focus with the other growth here stuff going on. Am I correct and regarding that very much as a harvest asset at this point?

Jim Flores

Well, we don’t characterize the harvest asset because we are continuing to do things. If we went into harvest mode, I’ll say like Nuevo, when we bought it they were spending $50 million a year out there. We think that $150 million of maintenance is more than harvest that’s maintaining and continue to think about things. We think spending between $250 million and $300 million is expanding assets.

Everybody talked, how California growing, we are in active dynamite program on a various, but we’ve been doing dynamite since the 19s as you know and as big part of our deal we’ve going to expanded our 19 Z lease later in 2009, which we’ve got on one side Chevron and other that’s to a lot of oil on 40-acres, but it’s one of those things that there is so many side things to talk about here in this company.

We never want to take California for granted or they LA Basin, just getting our new permits to drill another 600 wells in Inglewood. They are endless, but they are not forgotten and they get all the capital they need because their returns are very high out there and that’s why the majors are still out there because the returns are high based on the capital in point. I will mention one thing; there was some news release throughout about Governor towards, I think it was reversing his feel about talking about want to propose a severance tax on the domestic oil industry in California, look to our capital there.

The different big struggle on California, we’re going to see how the government can help out. I would tell you the last opportunity with prop 87 that was to put severance tax on oil production out there and all does its drive up gasoline and so it was defeated in a public vote two years ago at 55 to 45 and so, it’s not a slam dunk, it’s got some problems, but we’re going to see that as the new federal administration is continue to talk a prior taxes for everybody individually, we are going to be one of the industries that they are going to look at on a state wide basis and try to close some gas.

So, this is not surprising, they are probably in better situations to more workable situations, they don’t put a double taxation on their population like a severance tax does and raises gasoline prices needlessly to their population like a service tax does get definitely prices needles we put in population.

Duane Grubert – CRT Capital Group

That was good. Hey in bellow which you mentioned in passing, you said the real estates stuff there is going well. What is going up?

Jim Flores

Well we are trying to make sure, we pick the bottom and real estate before we get permanent and this is amazing I know with this new economic plan, people are getting a little more focus on getting things done, that is to have a little more time as little less traction I guess the probably better way of saying, but we are out on a glide we have to put a lot of pressure on this year but it moving forward toward getting permanent mid next year and then we will see where we are we are not considering that source of funds anytime.

Duane Grubert – CRT Capital Group

Very good. Thank you, guys. Bye.

Operator

Your next question comes from the line of Michael Prober with Clovis.

Michael Prober – Clovis

Just a couple of quick questions, did your production guidance include anything from T-Ridge?

Winston Talbert

Yes, we got small amount in T-Ridge second half of the year.

Michael Prober – Clovis

Okay and then can you discuss the decline curves at Flatrock? What has been your expectation and what are you actually seeing?

Winston Talbert

Well it is too still early in the development then Mike, Flatrock that those wells that we have put on it the drop 11% sander, there are almost two miles apart in both on Florid So we saw about 250 pounds of draw that took at almost 50 to 20 Bs out. So we have very larger reservoir out there. As far as at the decline curve, you want to see the decline curve in the probably for a three to four year.

You will see an incline from 200 million a day as year-end this year to 400 million a day at year-end ’09 and then that will flat for about 3 -years and they will decline from there, but it is all from the field management we have 10 reservoirs and as we rig completions additional drilling in capital played to how what that drop-off is, but these reservoirs are fast once you get that peak three to five years out, you there will be decline it at 25% to 30% a year to the hyper level with water and floods, but that’s along way off for this fresh new field.

Michael Prober – Clovis

And where is the $400 million they come from is that just a peak amount of capacity that you could put out there?

Winston Talbert

That is the plan right now with our operator MacMoRan on the drilling and our production operator Chevron. Chevron owns a facility, it is also kind of where they see is right economic level of slowing down drilling coming at ’09 to where we have plenty of to pack the facility for three years and then we reevaluate, but its one of the things is big field continue to get bigger so we will see what happens there is next round of drilling would not alter that peak it would – it may extend the length for the 400 million a day type peak production that’ why we’re kind to excited to see what happens to Gladstone and Tom Sauk, weather we can really talk level a long-term production volume like that.

Michael Prober – Clovis

Great, okay thanks very much.

Jim Flores

Thank you.

Operator

Your next question comes from the line Bill Frazier with Greenhill Capital.

Bill Frazier – Greenhill Capital

Good morning gentlemen. Back to the Haynesville, I believe the capital expenditures associated with that about $1.6 billion or so?

Winston Talbert

1.6 million?

Bill Frazier – Greenhill Capital

Billion

Winston Talbert

1.6 billion, those number at…

Bill Frazier – Greenhill Capital

Is that carry that you have to invest in?

Winston Talbert

Overtime yes, that’s a good number for January 1, that’s correct

Bill Frazier – Greenhill Capital

And I think you said $460 million from next year.

Winston Talbert

Right

Bill Frazier – Greenhill Capital

And it depend any in ‘08

Winston Talbert

Yes, that’s about $50 million, I give you $1.6.

Bill Frazier – Greenhill Capital

How does the remaining $1 million, is it over the couple of years or…

Winston Talbert

Yes, its based on wells we drill, so how many wells we drills, how many wells Chesapeake’s drill and we say 60% of those wells net to the Chesapeake clients interest now president we don’t half address in that acreage. In my take us twice is along it does we have interest if we have 75% interest in that acreage as a grew Chesapeake plan 80, 20; if its 80, we will take us three years, if its 75% we will take us full-years if its 50% may think its 5% or 60% drill through at all.

Bill Frazier – Greenhill Capital

Okay. With the new economic climate, assuming $7 in gas and cost $7 million of dual well, what’s the payback on that assuming you get average production model…

Winston Talbert

It depends, but then a lot to filling the flow rate, a lot of variables that from an operating standpoint your flexibility you can have a flow rate of $15 million and flow rate $6 million day just direct payback at $7 million investment. Let me give it you kind different framework at $7 million a day, its seven by gas, we think will have probably negative cash burn out of the Haynesville of about $150,000 year and ’10, ’11 and ’12.

Bill Frazier – Greenhill Capital

Okay, very good and that’s far enough. Thank you.

Jim Flores

No prob.

Operator

Your next question comes from the line of Andrew Coleman with UBS.

Andrew Coleman – UBS

Good morning folks, I had a couple of questions. First since you guys look like you are in general some pre cash next year, when you thought to buying back more shares?

Winston Talbert

That’s and interesting question. We bought back 5% of our shares, our stock down 60% of share. I’m not sure, we want do any more of that.

Jim Flores

Yes, I just want questions the – the kind of supplement to the question we just talked about with $1.3 billion of a cash flow, I mean that the – liquidity and some free cash tax here depending on what oil prices are as really what – how much free cash flow we have, we are going to be have $150 million of additional investment above cash flow in Haynesville for a few years. So we are probably, just going to maintain operation and grow production at 15%, well reserves at 10% and get valued on that. I think once our operational plan gets recognized in the marketplace, I don’t think will be is going to value to just buy stock and as we have been.

We have got a dedicated use of capital that is – give returns over the life of the projects. The – think about Haynesville, $7 gas, out there is no other place in the world rather been the Haynesville, it is $7 dollar gas environment when the cost of this business is above that and you have to throw a lot of production capacity.

So from our standpoint, we are excited about our new business plan and the next past half decade of what it is going to do for us besides, mine and stock? Because, as what happens since when you get the lower commodity prices the capital going forward and then and I don’t see the debt on your balance sheet not the stock you bought in. So, it didn’t really work unless you tell me we are fixing to go through a huge bill cycle in commodities. I think then bought stock might we some thing we might want to do in front of that, but has become, but I would have to be to, but have to be convince so that .

Jim Flores

Okay, yes I guess it depends on what the overall global decline rate is or North American gas decline rate is and we will see that emerges something over the next few months but that?

Jim Flores

Yes, it is the drilling down to what the value of buying stock is, what the market thinks actually the commodity prices are going to be at the future. Because if the market thought the commodities prices were going to be going up when the trends was up, yes the stock would be a great buy, but if commodity prices are going to still be $6,$7 and $5 and so forth we are going to be shutting down investment and the stock you are not going to get paid for buying the stock. So, as soon as I mean right now, with a liner look in commodity price that the market has $60 oil and $6 gas, I mean it is one of the things that we just trim back our business and moving along on the operational side and that stock the capital shell.

Andrew Coleman – UBS

Okay, and than I heard another operator speaking here that’s we discussing the prices differentials that are in mid-continent, prior on panhandle. Are you guys seeing? The same effects out there or do have enough Pogo production that the and given you a little more protection out there?

Jim Flores

We have a large percent of Pogo production in the mid-continent, to buffer that and so forth. But, yes, we will be subject to mid-continent difference, but it is so small compared to where, and it just blends into our California production basis differential so that’s I think that’s going to be the differentiating factor we can grow our company on the gas side as does not grown on the oil side the oil production we have is going to buffer all these wild swings in the gas market.

Andrew Coleman – UBS

Okay, and then kind of stepping back to California one more question here look at the Inglewood field, Is the feature out there primarily just improving water flood or is it down spacing or what is the challenge out there with those 600 new wells that you have plan?

Winston Talbert

Yes, its water flow authorization down spacing, everywhere we drill we find more pay there’s a lot of wind take reservoirs out there that drill big structure, you find them. So, the aspect of we have not been act to drill in the libation last two years. So, we have a larger catalog of projects to get through up there. So, its going to continue to get capital as price as a won and it can join, it is more things like California to get the keys on the haven.

Andrew Coleman – UBS

Okay, great thank you.

Winston Talbert

Thank you.

Operator

Your next question comes from the line of, Bruce Wilcox with Cumberland Associates.

Bruce Wilcox – Cumberland Associates

So, Jim, remember when we were taking half hedges at a tremendous loss at around the time of the Pogo deal. So, what thought have you given to maybe monetizing some of the gain that you got in your current hedge book?

Jim Flores

Yes, we thought about it. Here’s one interesting trade for you, Bruce. We have double puts here in 2009. You want to take him through that.

Winston Talbert

We have $65 both return on long-time ago when we put on the $100 puts decided just to keep them because they had value. If the prices and we’re watching it everyday price get down earn upward the 55s start kinking in, we could easily see ourselves. In some form of fashion monetizing those $100 forces and just taking the cash and just seeing what oil prices do going forward. So, we are watching that all time where can I continue to monetary.

Bruce Wilcox – Cumberland Associates

Okay, yes because I mean it sort of accounted in the calculation of liquidity or potential liquidity. It doesn’t really, accounted turn into cash.

Winston Talbert

Well, you get in either way is it a bit and it has liquidity goes way you get it out in the production prices and so what we are trying to as if we borrow on at 55 it’s a basically you know monetize 0.6 is then we basically got which called not output from a stand point we get to monetize these sort of downside protection look at this 106 so there is lot of ways to it with the double push strategy.

Bruce Wilcox – Cumberland Associates

The knock cup, that is simply sound you might have won it in high school so alright guys and very excitement report. Thank you.

Operator

Your next question comes from the line of Brett Hendrickson [ph] with Nokomis Capital.

Brett Hendrickson – Nokomis Capital

Can you remind me of the how acreage there is that metal bellow side that you are hopping to sell one day?

Winston Talbert

There is 250 acres developed applicable.

Brett Hendrickson – Nokomis Capital

Okay, thank you

Operator

There are no further questions at this time.

Jim Flores

Everyone, we look forward to see you at year end, with lost more drilling results and some more production on the Haynesville and moving things forward. Good luck to everybody for the rest of 2008.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Plains Exploration & Production Company Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts