Plains Exploration & Production Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Plains Exploration (PXP)

Plains Exploration & Production (NYSE:PXP)

Q4 2012 Earnings Call

February 21, 2013 9:00 am ET

Executives

Scott D. Winters - Former Vice President of Corporate Communications

James C. Flores - Chairman, Chief Executive Officer and President

Analysts

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Operator

Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Plains Exploration Fourth Quarter and Full Year Earnings Results. [Operator Instructions] I will now turn the conference over to Scott Winters, Vice President of Corporate Planning and Research. Thank you, Mr. Winters. You may begin your conference.

Scott D. Winters

Brooke, thank you very much and good morning, everyone, and welcome to our conference call.

Earlier this morning, we issued our fourth quarter and full year earnings release and filed our Form 10-K. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our company website at pxp.com. The webcast, 10-K and today's press release are available on our company's website in the Investor information section.

Before we begin today's comments, I would like to remind everyone that during this call, there will be forward-looking statements as 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 filings with the SEC, including our Form 10-K, for a discussion of these risks.

In our press release and our prepared comments this morning, we will present non-GAAP measures. A reconciliation of non-GAAP financial measures to comparable GAAP financial measures is included in the press release. Please take a minute to review those reconciliations.

References to oil in the press release and in our prepared comments this morning include crude oil, condensate and natural gas liquid volumes.

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

Fourth quarter and full-year results reflect significant growth in sales volumes, net income and cash flow provided by operating activities, as well as solid reserve replacement and substantially higher reserve value. The results reported this morning include 1 month benefit from the Gulf of Mexico assets, which were acquired on November 30, 2012. After pre-closing adjustments of approximately $219 million from the effective date of October 1, 2012, PXP paid a total of $5.9 billion for those assets.

During the fourth quarter of 2012, total revenues were $869 million compared to $518 million in the fourth quarter of 2011. Total daily sales volumes averaged 132.9 thousand barrels of oil equivalent compared to 105.4 thousand BOE in the fourth quarter of 2011. This represents a 35% increase per diluted share.

Net cash provided by operating activities was $284 million compared to $188 million in the fourth quarter of 2011 and operating cash flow was $536 million compared to $284 million in the fourth quarter of 2011.

Cash expenditures for additions to oil and gas properties and leasehold acquisitions were $491 million, of which $36 million was funded by Plains Offshore Operations Inc., PXP's consolidated subsidiary.

Income from operations was $177 million compared to $102 million in the fourth quarter of 2011. And PXP reported fourth quarter net income attributable to common stockholders of $218.6 million or $1.65 per diluted share, compared to net income attributable to common stockholders of $97.7 million or $0.69 per diluted share for the fourth quarter of 2011.

The fourth quarter net income attributable to common stockholders includes certain items affecting the comparability of operating results. Those items in the fourth quarter of 2012 consist of realized and unrealized gains and losses on our mark-to-market derivative contracts, resulting in a net loss of $15.5 million due to, in large part, increased crude oil forward prices, a $298.9 million unrealized gain on investment on McMoRan Exploration Co. common stock, acquisition, merger and related financing costs of $70.5 million and other items.

When considering these items, PXP reports adjusted net income attributable to common stockholders of $54.8 million or $0.41 per diluted share, compared to $28.6 million or $0.20 per diluted share for the same period in 2011.

The fourth quarter 2012 results include an increase in stock-based compensation expense, which resulted in a $0.05 after-tax decrease in earnings per diluted share. Stock-based compensation increased due to a 30% increase in PXP stock price following the Freeport-McMoran Copper & Gold Inc. merger announcement in December.

Also included in the adjusted quarterly results was an increase in oil and gas depreciation, depletion and amortization rate, which resulted in a $0.29 after-tax decrease in earnings per diluted share. The higher DD&A rate primarily reflects the impact of lower sustained natural gas prices on gas reserves and our Gulf of Mexico acquisition.

Fourth quarter oil revenues increased 91% to $799 million due to higher oil sales volumes, higher oil prices and stronger oil sales price realizations. Oil sales volumes increased 78% due to a 1-month contribution from the acquired deepwater Gulf of Mexico asset, the continued strength of the Eagle Ford Field and steady, consistent performance in California.

Oil sales price realizations before derivative transactions were 85% of Brent in the fourth quarter of 2012 compared to 80% in fourth quarter 2011, reflecting the impact of the new marketing contracts effective January 1, 2012, for our California and Eagle Ford crude oil production. The average realized oil price increased $6.26 to $93.28 per barrel in the fourth quarter of 2012 from $87.02 per barrel in the fourth quarter of 2011.

Brent crude oil price averaged $110.05 per barrel compared to $108.96 per barrel in the fourth quarter of 2011.

Fourth quarter natural gas revenues declined approximately 27% to $70 million due to lower natural gas sales volumes and lower natural gas prices, offset slightly by higher sales price realizations.

Natural gas volumes declined 25% due to the 2000 -- the December 2011 asset sales and lower drilling activity in the Haynesville Field, partially offset by 1-month contribution from the acquired deepwater Gulf of Mexico assets and increased production from the Eagle Ford Field.

Natural gas sales price realizations before derivative transactions were 94% of NYMEX in the fourth quarter 2012 versus 92% in the fourth quarter 2011. The average realized natural gas price decreased $0.11 to $3.19 per Mcf in 2012 compared to $3.30 per Mcf in 2011. NYMEX gas price averaged $3.38 per Mcf compared to $3.50 per Mcf in the fourth quarter of 2011.

Fourth quarter gross margin was $23.22 per BOE and cash margin was $55.85 per BOE, a 51% and a 56% increase compared to fourth quarter 2011, respectively.

Cash margin per BOE improved due to a $17.92 per BOE increase in revenue, a $0.93 per BOE or a 6% decrease in total production costs per BOE and a $1.29 per BOE increase in realized gains on derivative instruments.

A complete reconciliation can be located on the operating data table included in the press release.

For the full year of 2012, results reflect higher oil sales volumes and higher realized prices, partially offset by lower average realized gas prices and lower gas sales volumes.

Total revenues were $2.6 billion, a 31% increase compared to full year 2011. Total daily sales volumes averaged 106.2 thousand BOE, a 16% increase per diluted share compared to full year 2011. Net cash provided by operating activities was $1.3 billion and operating cash flow was $1.6 billion, a 20% and a 42% increase over full year 2011, respectively.

Cash expenditures for additions to oil and gas properties and leasehold acquisitions were approximately $1.9 billion during the year, of which $205 million was funded by Plains Offshore Operations Inc.

Net income attributable to common stockholders was $306.4 million or $2.32 per diluted share, compared to full year 2011 net income attributable to common stockholders of $205.3 million or $1.44 per diluted share.

Adjusted net income attributable to common stockholders was $229.2 million or $1.74 per diluted share compared to full year 2011 adjusted net income attributable to common stockholders of $223 million or $1.56 per diluted share.

Included in the adjusted results was an increase in the oil and gas DD&A rate, which resulted in a $1.11 after-tax decrease in earnings per diluted share. The higher DD&A rate primarily reflects the impact of lower sustained natural gas prices on gas reserves.

We provided our full year -- I mean, our year-end reserve update as well today. Proved reserves increased 7% to 440.4 million BOE. The standardized measure of discounted future net cash flows was $10 billion versus $5.1 billion in 2011. PV-10 value for proved reserves is $13.7 billion compared to $7.9 billion in 2011. The increase is primarily attributable to greater concentration of oil reserves, which now represents approximately 82% of total proved reserves.

PXP added total proved reserves of 68.6 million BOE. Extensions and discoveries were 58.9 million BOE, primarily in the Eagle Ford Field and Lucius Field. Deepwater Gulf of Mexico acquired reserves were 126.4 million BOE. Negative revisions, predominantly gas-price related in the Haynesville Field and Madden Field, were 114.4 BOE. And minor reserve divestments were 2.3 million BOE. These reserves additions replaced 181% of 2012 production.

With that, I'll turn the call over to Jim.

James C. Flores

Thank you, Scott, and good morning, everyone. It's a pleasure to be with everybody for our fourth quarter 2012 and year-end 2012 conference call. Obviously, 2012 was a momentous year for the company of growth on our indigenous assets in California and the Eagle Ford and then the acquisition of our Gulf of Mexico assets that have really vaulted the company forward on a tremendous growth pattern that everyone got a sniff of in the fourth quarter, when we had 1 month of production attributed from the acquisition. And things are going quite well with that. And price has obviously been at our back on the Brent pricing there, so we're actually paying down a lot of debt here in the first quarter and things are on schedule.

Subsequent to those operational successes, we entered into a merger agreement with Freeport-McMoran Copper & Gold and we're in the process of that transaction and dealing with the SEC filings and comments. So we're going to have to restrict our comments there to the S-4 filings and the public filings according to the lawyers.

So with that, I'm going to open it up for questions and try to answer whatever -- what's on everybody's minds. So operator, I'd like to take the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Leo Mariani with RBC.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Hey, guys, I just wondered if you could shed any more light on progress on the Phobos well in terms of where that may be at and when you think it might decision?

James C. Flores

Yes, Andarko, our operators, continue to handle all communications there, Leo. But I can confirm it's drilling at this point in time and continue to drill.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. I just wanted to get a sense of where your current Gulf of Mexico production was and kind of how that's performing relative to your expectations at the time of the deal.

James C. Flores

We put some guidance out for 2013 that -- it's company-wide and so forth but we think it's pretty solid. The Gulf of Mexico, we're just kind of getting fitted to that saddle. We've seen some really encouraging things on the production wells' performance that are encouraging. Our group of employees out there have all come away with their special and there's -- it's a situation where we're going to be able to do a lot of great things out there. But we've been operating it for about 75 days now. The good news is everything is running smoothly. We're communicating well. We've got great plans. We do hope to have most of our service contracts for our development in place by the end of the first quarter -- I'm talking about drillships, rigs, semis, work boats, those types of things, so that we have the next 3 years pretty well mapped out for everybody. And we're going to be accelerating that into '14. So a combination of being very pleased with the production there. I don't want to front run anything. I'm very pleased with the performance of the facilities and the group of professionals we have out there and the integration of the corporate side with all the hiring that we've had to do to get beefed up on the -- to support those operations. As well as the vendor community has responded to our plans to provide the equipment, services and slots. We couldn't have had a better start to our Gulf of Mexico.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay, great. And I guess your Eagle Ford production looked like it was extremely robust yet again in the fourth quarter here. It looks like it kind of continues to outpace your expectations. I think you guys had come out with some expectations for 2013 Eagle Ford production a while back and it looks like your fourth quarter is just blowing and going. Should we just expect Eagle Ford just to kind of continue to chug along at an aggressive pace in 2013 here?

James C. Flores

I think we'll continue to hit the ball pretty hard there. We have the -- we call it the heart of the watermelon because I mean, the grav [ph] there is so thick and the reservoirs obviously are performing very well. But on top of that, the engineering efficiencies, what we've been able to do with the drilling rigs and so forth, we've actually, for 2013, reduced our rig count from 8 to 6, it's a 25% reduction, while increased our overall well count. And you can only do that by drilling efficiencies and rig days becoming more efficient. We've talked about them going from 50 days when we started to averaging 16 days now with the drilling rigs. So the aspect of us becoming more efficient there and also more productive now that our central facilities are in would probably be a fair expectation, Leo, because the Eagle Ford is continuing to just outperform all of our own internal expectations, which are highly risked.

Operator

Your next question comes from Ron Mills with Johnson Rice.

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Just to follow-up on the Eagle Ford. Are you just seeing -- continuing to see stronger results as you move through the development program as opposed to what you just mentioned at the very end there? The way you had highly risked your drilling program as you radiated out away from your initial drilling areas? Is that really the core of what's driving that performance, is that you're not seeing as much degradation?

James C. Flores

Yes. I think it's a part of it, yes. We have a very concentrated lease block there. I think that's part of it. And then you also got the engineering tweaks and twirls of the frac makeup. The service companies are learning more. I mean, just -- they're doing a better overall job -- I mean, from that standpoint, on the engineering side. So geographics mean a lot. We just risked our projects and make sure that we're in a position to be surprised at the upside. That worked very well in the Haynesville, when we thought we'd have 4 Bcf EURs and ended up with 8 Bcf EURs and wrecked the gas market. So you've got to be careful what you ask for. But in the Eagle Ford, we put some tough economics on it when we moved in there, wanted to make sure that we had high expectations for what the quality of it would be and it's continued to outperform. I think you hear the same thing from EOG and in certain areas, especially on the eastern side, has continued to show more and more that it's got a lot of oil there and it's going to be that way for several years to come.

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Good. And then 2 real quick ones. On California, the consistency there, were you expecting some sort of downtime out in California that just didn't occur during the fourth quarter? Am I remembering that incorrectly? And then secondly, as it relates to Haynesville. Now with the plan to keep it on -- as a standalone basis, are you still maintaining your plans in this gas price environment to go nonconsent to the extent that Chesapeake starts completing some more wells or what's the outlook on that?

James C. Flores

Well, in California, there is some noise in the fourth quarter with downtime actually in 2011, with ESB [ph] and so forth. So -- and we had a very good production quarter subsequent to that. So the -- when you average all that out, we probably produced 39,000 BOE a day in both years on an annual basis versus 1 being a little higher, 1 being a little lower when you look at the shut-in. We had some platform maintenance at Platform Irene, as I recall. So that's steady as she goes. We have our big Rio Grande water treatment facility turned on and that's going to be a big thing to see how the production grows out there and gets going. And we're actually going to make a trip out there next week and see that. It's been a big project for us for a long time. So we can dewater that reservoir and get hold on that large reserve out there. But moving to Haynesville, the Haynesville aspect is we're still curiously watching. The gas business is so impaired. I wouldn't say we're robust at all. We're seeing coal continue to keep gas in purgatory for the near-term. And whether we drill a well or go knock [indiscernible] us in, it's really on an engineering or lease basis. So I would say our attitude has not changed but that's not going to prohibit us from participating in a specific well versus the whole program.

Operator

Your next question comes from Duane Grubert with Susquehanna Financial Group.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Jim, I was hoping you could comment a little on the thinking behind Morocco and that exploration partnering that you guys released recently.

James C. Flores

Well, the Moroccan acreage is very exciting. We've looked at deals over the world for the past 5 years and we've taken very few because we wanted to have a situation where we felt like we could bring some technical expertise to it, plus the operational risk and make sure it's big enough to be impactful and so forth. So the Moroccan acreage is about 436 OCS blocks. The third shot in seismic [ph] and that's 4 to 6 well-defined, billion-barrel-type traps. If you look back -- if you think back in Pangea time when Morocco and Nova Scotia were believed to be connected and pulled apart, so basically you're looking at a lot of the big washes from the standpoint of the Miocene and Tertiary and maybe Cretaceous that came off those mountains on both respective continents and basically provided the reservoirs in Nova Scotia, Hebron and Hibernia. And we're looking for the same type of opportunities in Morocco, coming off the Atlas Mountains out -- they're east of us on shore and to the west. So it's got all the geologic components. The seismic is very exciting. Our guys obviously know what big oil looks like and are excited about that part of it. Now, the aspect of Morocco having a little flurry of activity, with Chevron picking up the 3 blocks around our acreage, now bordering our acreages, is always comforting. They're going to be shooting some seismic and getting their ahead around what they think the potential is. And the reason why we like this project is it's just more advanced stage since they've gone through the seismic acquisition phase and we like the neighborhood.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

That all sounds very interesting. Did that process involve -- you picked Morocco or were you filtering all kinds of international things and ended up finding Morocco?

James C. Flores

No, we like the Atlantic rift basin. I mean, with all the Atlantic Rift play, we're looking down all coasts, North America, South America and Africa. So it's more about -- you can find a lot of oil in West Africa at terrible terms and not make any money. So you got to have the right sweet spot. In Morocco, with a little more risk, has some decent economic terms and they'll take some risks with you. So we have a shot of really making some money there if we find anything.

Operator

[Operator Instructions] Your next question comes from Pearce Hammond with Simmons and Company.

Pearce W. Hammond - Simmons & Company International, Research Division

Since you'll be keeping the Haynesville, at what gas price do you think your partner will ramp up activity in the play?

James C. Flores

Being a soothsayer about our partner? That's the toughest question I think I've ever had. I have no idea what our partners asked [indiscernible]. They are dealing with their own issues. I know they've got significant take-or-pay type firm transportation commitments. So there is -- they have a different economic playbook than what we have as far as the Haynesville. We're going to continue to look at it on an economic basis. We are obviously long-term bulls on gas. We are excited about the Haynesville's potential long-term and also the ultradeep potential with the McMoRan marriage, the aspect. So we think 2015 on, gas is going to be real exciting. It's just getting from here to there, everybody has to take care of their own accounting and own books and I think that's driving more activity versus what price makes sense because obviously no one is doing any price economics at these prices and drilling wells.

Pearce W. Hammond - Simmons & Company International, Research Division

Great. And then following up on the Morocco question prior. Should we see more of these types of deals moving forward from Plains?

James C. Flores

It's kind of like making the Gulf of Mexico acquisition. We're terms driven, opportunity driven and the thought process that if you had asked me 3 years ago, when we started doing this up and down the basin, I'd say we'd have done 2 or 3. And Morocco being the first one, 3 years later, is kind of a surprise but we've been really diligent taking our time and making sure that we understand the risk involved across the board. So we're going to continue to move diligently with the new footprint of the international exposure of Freeport. Obviously, the expertise they have and -- on the mining side is very deep and very important. We'll try to leverage all those strengths and the synergies to create more opportunities. But we'll just have to see. That's going to be driven by the individual opportunities of what we see from there.

Operator

Thank you. At this time, there are no further questions. I'll turn it back to the presenters for closing remarks.

James C. Flores

Okay. One more thought on that, on the Moroccan thing. Think about it from this standpoint. The next 7 to 8 years, we feel like the development business that we have, not only in California, Eagle Ford and also the Gulf of Mexico, especially the Gulf of Mexico, that's going to drive our returns, drive our volumes, drive our business. We've got some great near-term exploratory wells to drill in the deepwater Gulf of Mexico. The Moroccan thing is going to be coming on slow. So really, we're going judicious in our exploration thought process because we've got the gas business to finish identifying on the McMoran side. That's going to take a couple of years and so looking at '15. We feel like our operating plan is very, very solid for really the rest of this decade. And then so when you think about the Moroccan things or additional aspects like that, their potential is exciting. But really, they're planning for the next decade, really, as far as production volumes. So we're going to continue to source the best projects and drill the best exploratory wells. But the operational development execution business at the oil and gas group here and potentially at Freeport is going to be very strong on a quarter-to-quarter basis with what we already have on our portfolio.

So with that, operator, I will end the call. Thank you all and hope to be talking to you guys in April, about time we close the deal. Thanks, again.

Operator

Thank you. This concludes the conference. You may now disconnect.

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