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Plains Exploration & Production Company (NYSE:PXP)

Q2 2010 Earnings Call

August 5, 2010 9:00 ET

Executives

James Flores – Chairman, President and Chief Executive Officer

Scott Winters - Vice President, Corporate Communications.

Analysts

Leo Mariani – RBC Capital Markets

David Heikkinen- Tudor, Pickering, Holt & Co.

Joe Allman - JP Morgan

Brian Singer - Goldman Sachs

Scott Wilmuth - Simmons & Company

Brian Corales – Howard Weil

Joe Magnum - Macquarie Capital.

Marshall Carver - Capital One Southcoast

Operator

Good morning and welcome to the 2010 second quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a questions-and-answers session. (Operator Instructions)

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

Scott Winters

Operator, thank you very much. Good morning everybody. Welcome to PXP’s 2010 quarterly earnings conference call which is also being broadcast live on the internet. And one may listen to the call or the replay by accessing the company’s website at php.com. Also located on the website are the earnings release, a slide presentation and the form 10-Q.

Before we begin today’s comments I’d 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 present non-GAAP measures. A reconciliation of non-GAAP financial measures to comparable GAAP financial measures is included with the press release.

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 Investor Relations.

For the second quarter 2010 revenues were $364.6 million and net income was $45.4 million or $0.32 per diluted share compared to revenues of $278.7 million and net income of $43.6 million or $0.37 per diluted share for the second quarter of 2009. These results include certain items affecting the comparability of operating results. Those items consist of realized and unrealized gains and losses on our marked market, driven of contracts which exclude the impact of the derivatives monetized in 2009.

Our non cash impairment charge related to our Vietnam Well and gas properties in 2010and a legal well covering in 2009 and other items. When considering these items net income for the second quarter of 2010 was $36.9 million or $0.26 per diluted share compared to $71.7 million or $0.60 per diluted share for the same period in 2009. this is a non-GAAP measure.

Net cash provide by operating activities was $252.7 million and our cash flow was $212.3 million for the second quarter of 2010 compared to net cash provided by operating activities of $171 million and operating cash flow of$224.1 million for the second quarter of 2009. Operating cash flow was on non-GAAP measures.

Sales price realizations before diluted transactions were 86% for oil, 99% for natural gas during the second quarter of 2010 versus 83% for oil and 96% for natural gas on the second quarter of 2009. 2010 second quarter oil and gas revenues when compared to the second quarter of 2009 were higher due primarily to a $9.15 per bill increase in realized prices before derivatives.

Total production costs were$13.03 per barrel oil equivalent for the second quarter or 10% lower than the 2009 second quarter of $14.43. A quick review of some of the components of total production costs for the quarter is as follows; these operating expenses decreased 14% to $7.44 per BLE in the second quarter of 2010 versus $8.64 per BLE in the second quarter of 2009 reflecting a decrease in stock based compensation and our program to reduce costs.

Lower taxes both production and up along per unit primarily reflect production tax of payments and lower add lower taxes due to lower commodity prices at the time of assessment.

Higher gathering and air transportation expenses on a per unit basis reflect an increase in the production from the Haynesville Shale properties. PXP completed interpretation of seismic and drilling data from its two off-shore Vietnam exploratory wells and has decided not to pursue additional exploratory activities in the area. PXP recorded 59.9 million non cash pretax impairment charge related to these wells and a course spanning tax benefit of 23 million in the second quarter of this year.

In the first half of 2010 PXP reported net income of $103.9 million or $0.73 per diluted share compared to net income of $48.8 million or $0.43 per diluted share in the firs half of 2009. The increase primarily reflects higher commodity prices and increased gains on mark to market derivative contracts primarily offset or partially offset by the impairment of our Vietnam oil and gas properties.

There have been no changes in our open derivative positions since our first quarter report. A summary of PXP’s derivative position is included with financial tables in the press release. PXP amended and restated its senior revolving credit agreement. The agreement extends the senior revolving credit facility maturity to August 3rd, 2015 from November 6th, 2012 and increases PXP’s borrowing base from $1.3 billion to $1.6 billion, an increase of 23% and well in excess of the $1.4 billion of commitments in closing. On June 30th, 2010 the senior revolving credit facility had no amounts outstanding.

We began 2010 well positioned to continue efficiently growing production reserves with contribution from multiple asset areas. Here’s a quick update; PXP’s average daily sales volumes were 85,000 barrels well equivalent per day for the second quarter of 2010 or 5% higher than the second quarter of 2009. This result was impacted by the fire and damage on a portion of the gas processing facility at the Madden Field in Fremont County, Wyoming which reduced the net production from the field to PXP by approximately 850,000 barrels of oil equivalent per day in the second quarter. Current production at the Madden Field net to PXP is approximately 3800 barrels of oil equivalent per day which is approximately 75% of flow capacity. The operator informed us that it expects to turn to full capacity by year end upon completion of our repairs.

PXP reaffirms its 2010 full year operating financial guidance but with lower volumes due to facility sport at Madden Field. PXP expects full year 2010 average depth daily sales volumes to be at the lower end of the stated guidance of 88,000 to 92,000 BOE’s per day.

In the Texas Panhandle Granite Wash development, we’re currently operating four rigs drilling horizontal wells and plan to add one additional rig by the end of September, 2010 to accelerate development of our inventory of over 100 potential locations. The five rig program will enable PXP to spud up to 19 horizontal wells this year and 22 projected wells in 2011. So far this year two producing wells have been drilled and completed and a third well is waiting on completion.

PXP’s first Granite Wash horizontal producer, a Thomas 903-H well in the Wheeler area has been completed and initial production rate of 12.2 million cubic feet per day with 1,373 barrels of condensate per day and an estimated 1,311 barrels of natural gas liquids per day. This is 3,653 BOEs net per day.

PXP’s second Granite Wash horizontal producer the Hanson 40-4H in Marvin Lake are has also been completed and the initial of 15.4 million cubic feet per day, 746 barrels of condensate per day and an estimated 1,532 barrels of natural gas liquids per day. This is 3,822 BOEs net per day. The Hanson well is located approximately ten miles north of the established Granite Wash Horizontal Producing Trend and is a significant extension to the current play.

Completion operations are underway on the third well, the Hanson 29-2H in the Marvin Lake area with first production expected this month. The Granite Wash development is expected to contribute approximately 30% of PXP’s production growth in the second half of 2010.

In the Haynesville Shale second quarter 2010 average daily sales volumes were 106 million cubic feet equivalent per day net to PXP, an approximate 19% increase over the 89 million cubic feet equivalent net per day average for the first quarter of 2010. With interests in nearly 50 active drilling rigs, production from this asset area is expected to exceed 125 million cubic feet equivalent net per day in the fourth quarter of 2010 n d to contribute approximately 60% of PXP’s production growth for the second half of 2010.

In California PXP continues to develop its inshore projects. In the first half of this year the company drilled 59 wells in the San Joaquin Valley and one well in the Los Angeles Basin. During the second half of this year PXP plans to drill up to 40 wells in the San Joaquin Valley and up to 25 wells in the Los Angeles Basin. California onshore development is expected to contribute approximately 10%of PXP’S production growth in the second half of this year.

In the Gulf of Mexico second quarter 2010 average daily sales volumes from the Flatrock area were inline with our expectations at 42 million cubic feet equivalent per day net to PXP. The operator plans to recomplete the number 229 and the number 230 wells during this year. Our working interest is 30%.

Shallow water drilling operations are ongoing at Blackbeard East, Davy Jones number two and Blueberry Hill each operated by McMoRan Exploration Company. Recently the operator provided an update on Blueberry Hill number nine [site track] number one. It's an offset to previous announced discoveries in 2009 and has been drilled to true vertical depth of 23,630 feet. Log-while-drilling tools indicate a possible hydrocarbon bearing zone in a high quality bearing sand measuring 105 feet. Wire line logs will be required to fully evaluate this section and the operator will continue to deepen the well.

2010 shallow water drilling plans also include Laffite, Boudin and Hurricane Deep, each operated by McMoRan. The Laffite exploration well is expected to commence during the second half of this year and Blackbeard East will target Middle and Lower Miocene objectives. PXP’s working interest is 31.5%.

The Boudin exploration prospect is located in the Eugene Island Block 26, has a proposed total depth of 23,050 feet and will test Miocene objectives. PXP’s working interest in this well is 37.1%.

Hurricane Deep is located on the southern flank of the Flatrock structure on South Marsh Island Block 217, has a proposed total depth of 21,750 feet and is targeting the significant Gyro sand encountered in the Hurricane Deep discovery well. PXP’s working capital is 30%.

Now in the deep water Gulf of Mexico the Lucius project continues to move forward. An integrated team has been assembled with the goal of project sanction by the end of 2010. During the second quarter the operator announced the Lucius number two well which encountered more than 650 net feet of oil pay in three primary targets. Drilling was suspended approximately 2000 feet from the total depth with one additional target yet to test.

As previously reported the Lucius discovery well encountered more than 200 net feet of play in the Pliocene and Miocene age sands and the side track well discovery encountered almost 600 net feet of oil pay with additional gas condensate pay in the same Pliocene and Miocene age sand seen in the discovery well. And the number two well encountered more than 650 net feet of oil pay. PXP’s working interest is 33.33%.

We believe our balance portfolio of assets and our ongoing hedge program positions well for both the current commodity price environment and future potential off side for they continue to develop our track and growing resource opportunities.

With that I’ll turn the call over to Jim.

James C. Flores

Thanks Scott, good morning everyone. We’re proud of the second quarter for PXP, we had another good quarter on the margin and our high oil prices and in spite of languishing gas prices our costs were well contained and low production costs on a year over year basis is a true adjustment how hard [Robert] is working around here to make sure our business is priced correctly in the current environment.

Our strong drilling results in the Granite Wash and the Haynesville and the Gulf of Mexico continue. Obviously the Haynesville and the Granite Wash were near-term production, with the Gulf of Mexico more long term production but the drill bit continues to stay high. The latest sand that we drilled at the Blueberry Hill from preliminary results looks like one of the best sands we’ve drilled in that land as far as the rest of our characteristics. And things continue to improve, just like our Lucius discovery and Davy Jones and everything along what we’ve had the last nine, ten months here in the Gulf of Mexico has been nothing but keeping the drill a bit hot.

We look at our company and we put some additional slides in our presentation -- I’d like to push up by to page 14 of our presentation. It talks about the capital expenditures going forward, the rate of production in our California assets as well as our PXP cash flow and in financial terms it's PXP EBITDA, because [it's struck] in the lease level and the operating level and it's just net expenses, those are just net lease, [LOES] expenses not G&A and net versus [Indiscernible].

But you can see over and above the – even the ramped up spending that we expect in 2011, 2012 we’re going to spend additional dollars to bring on even more projects in California and really try to empty the culvert in the next five years as far as what we think is a very strong oil curve is we’ve got tremendous free cash flow coming up out of California and that’s been the base and cornerstone that all of our investors depend on in this company.

And you go to page 19 which is the Haynesville Shale and you see how sensitive it is to gas prices. Right now we’re – the CapEx is above our current cash flow numbers in 2010 by about 50% so we’ve added about $150 million of California’s free cash flow right there. In 2011 it's a $5 gas price and you see we’re down there by about 25% of our CapEx is not funded by the project and you see in 2012 it's a $5.50 gas price. That $0.50 on hand is very sensitive to making a project even or a negative cash flow or $6 would make it probable to lease level.

So our Haynesville Shale asset as everybody knows is very sensitive to gas prices. At the same point time we’re building a tremendous production there and a huge plant and we expect to break even one way or the other in 2012. when I say one way or the other either to prices are higher or if prices are lower we fully expect that with Chesapeake and our [sale of these] holds the Amusi HPT by the end of 2011 will have the flexibility to cut capital in 2012 if not late 2011 to start reducing the capital to bring this asset more into line of standing on it's own as far as on a lease level to at least carry it's own CapEx if not show some free cash flow by 2012, either by cutting CapEx in 2012 or responded low prices or have a high gas prices, one or the other. And that will be one of our cornerstone projects depending on what gas prices do more forward as far as develop a free cash flow.

Additionally, we modeled Granite Wash from page 21 for everyone. The Granite Wash with it's high condensate yield has a more accelerated profitability curve and 2012 and at $5.50 gas prices also but with the $85 oil price and condensate discount we expect it to be at the lease level, carry it's own weight on the CapEx side and—if not making a profit at these levels, and so forth. But also remember the Granite Wash is in a situation where we’re operator and most of the work interest there so we can dial up or dial down the CapEx relativity depending on cash flow.

Since these are going to be our three big growth areas we’re looking at growth the next few years of California being 15% of PXP’S contribution. We’re looking at the Granite Wash being somewhere between 30% and 35% of contribution and Haynesville being 50%. These are the three areas that we focus on as far as profitability going forward.

Now, looking at the Gulf of Mexico, we’re looking at the Gulf of Mexico as our option area and also long-term growth with our deep water discoveries and also our deep [shelf] discoveries. We’re looking at that from the stand point of how long it's going to take to get these projects to profitability, how long it's going to take to cover the CapEx and what the costs and carrey costs sales will be till that event happens. That’s why we decided as the Board of Directors here at PXP to rationalize our exposure in the Gulf of Mexico for two reasons. Number one obviously is the exposure to the risk associated with drilling in the Gulf of Mexico; they’ve been highlighted by the [Indiscernible] situation, unclear regulatory environment and so forth. It's [safer in] time to focus on the assets that are growing the fastest in the near term in the flow commodity price environment which is the Granite Wash, Haynesville and California.

So we’ve engaged Barclays and Jefferies to develop a process for us later this fall that will entail a creative array of options for PXP all pointed toward reduction of CapEx and rationalization of capital to whether we can address issues like debt around here and keep our financial flexibility especially in this low commodity price environment and try to raise say $1 billion or $2 billion out of the assets in any form or fashion. We’re not putting any boundaries or any gates around assets, we’re looking at a situation that we have a financial target mark, we’re going to raise the financial target and what’s left is what we’ll try to go forward and maximize with.

We hope to continue to be in the Gulf of Mexico, we hope to continue to get some form or fashion, just in the smaller form or fashion. At the same time raising this money out of the Gulf of Mexico is going to put us in a situation to be stronger and more opportunistic onshore in the years to come as we see the gas price fundamentals change to the positive. We do not see that in the near-term or for the medium term so it's going to be a while but we think the stronger balance sheet is going to work.

We have – I don’t want to talk much about the process because we have had a lot of enquiries from partners and friends when we made our earlier announcements in May and we did have some ongoing things that are moving forward and so forth but the formal process we’re looking at starting some time this fall, so stay tuned for that.

So with that Scott, I will open up for questions. We have Winston, Doss and John and everybody here so ready to take the first question operator. Operator?

Question-and-Answer session

Operator

(Operator Instructions). Your first question comes from the line of Leo Mariani of RBC Capital Markets.

Leo Mariani – RBC Capital Markets

Yeah, good morning guys.

Company Speakers

Morning.

Leo Mariani – RBC Capital Markets

Quick question on the Gulf; I guess at this point you guys no longer contemplate a spin off that will be either at [GAB] or some type of asset sale?

James Flore

That’s correct. We have about $700 million, $800 million of tax attributes we’re trying to monetize with the proceeds we’ll raise on the Gulf of Mexico.

Leo Mariani – RBC Capital Markets

Okay, just jumping over to the Granite Wash, you guys talked about making say 19 wells throughout this year, how many of those wells do you actually think you can get on production?

James Flores

About six or seven this year.

Leo Mariani – RBC Capital Markets

Okay, so it sounds like your Granite Wash will really need drive and put onshore will be harder than I guess then in 2011?

James Flores

Well it's going to be a bit considering we’re in the second half of the year cause of the size of them and so forth. And there’s a big part of our second half ramp up besides that in the Haynesville and California but then next year is going to be obviously a big contributor.

Leo Mariani – RBC Capital Markets

Okay, I guess you guys have got – there’s still over 19,000 looks like one of your wells is a pretty good step up there at Marvin Lake. How much do you think that kind of de-risks your acreage than any other industry activity in and around your acreage? I mean, I guess how many of that acreage at this point are you comfortable thinking is pretty good?

James Flores

We’re cut with the lion’s share but it's hard to say 100% or 80%. You guys put a factor to it but with the whole 19,000 acres is all bout HCT but vertical wells so it's not exactly, we’re not [Indiscernible] which is side the whole lot play, we have a lot of well date and so forth. We ‘re looking at probably anywhere between seven and 14 zones in different wells so when you tip multiple layers of – we only access from one zone per horizontal so the overlapping reservoirs on the 19,000 acres, you’ve got to put some kind of multiply effect to what the value of that really is on a reservoir by reservoir basis. I know other operators out there have been out there for long, I do feel certain they’ve had seven zones they’ve established, we’ve only established three out of the 14 that we actually tested so, we’ve got ways to go but it's continuing to get more and more prolific as with every zone we get.

Leo Mariani – RBC Capital Markets

Okay, I guess just looking at California you guys talked about that contributing about 10% of your growth in the second half of the year. So I guess, just to make sure is California actually starting to grow here? I guess I kind of thought that was more of a 2011 sort of hope, that you’d get growth and kind of like it seems its sooner rather than later here.

James Flores

Are you accusing us of modeling conservatively?

Leo Mariani – RBC Capital Markets

I guess I am, to some extent yeah.

James Flores

We’ll take whatever California gives us at this point in time. Operations have continued to prove. I mentioned that you coming out of the [CapEX] starvation, the first $40 million or $50 million we spent in California was very variable and I wish we had much more of that type of stuff. So the growth isn’t surprising around here from a standpoint but from a modeling stand point we didn’t have a model either. But it's a continuous bond, possibly I think it's a good trend but it all equals out over time.

Leo Mariani – RBC Capital Markets

Okay, anything on the regulatory crime in California and the onshore stuff that has you guys concerned at all?

James Flores

Well that we stay on top of that obviously another operator had some problems there and it has spilled over to a total review and everybody--all hands type deal. But we are working through all those issues and if you handle your business correctly then the regulators actually come to the people that are producing correctly following the rules that have you on how should we proceed, just enforce the rules and make sure they are properly looked at. And everybody is cooperating in California, the big thing there you have to plan ahead. A lot of education process and I think that is what’s going to happen all over the place, the Gulf of Mexico or everywhere else. It’s that we have to spend a lot more time in the industries that has spent a lot more time with regulators getting more comfortable, doing different things and so forth to make sure that everybody is educated.

Also on the permitting process, but we start our permitting processing California 2 ½ years before this projects and so try to put them all on a total project basis, then get the individual wells. So right now its business as usual for us just with a heightened awareness and sensitivity a lot more questions coming from regulators and we are making sure we are going to answer and satisfy more. But right now, our diatomite rock drilling going forward, we are looking forward to working with everybody at Dolger to get our L.A basin water flood stop approve this more of the man power issue, getting the work done. I want help on doing that and then also the diatomite going forward we are going to be able to meet whatever standards or every restrictions they put on it because of our position out there.

Leo Mariani – RBC Capital Markets

Alright, thanks a lot guys, I appreciate it.

James Flores

Thank you.

Operator

Your next question comes for the line of David Heikkinen with Tudor, Pickering, Holt & Co.

David Heikkinen- Tudor, Pickering, Holt & Co.

Good morning gentlemen and everybody.

Company speakers

Good morning David.

David Heikkinen- Tudor, Pickering, Holt & Co.

As you think about the Granite Wash what stones were tested in those two wells?

James Flores

Well we had two Granite Wash zones and one at Toucan, David lets leave it that way. I mean we are in A and B zones in the Granite Wash I mean it’s pretty much taken on that basement, look on it on the proper turf.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay and then the hundred locations, is there an exploit between oily locations and drier gas locations that you can provide?

James Flores

No we are seeing on a pretty consistent calls like Scott do you want to make some comments on that?

Scott Winters

I think we are still in the early stages of where we extended to play to the north on our initial IDS or that was in the middle of drier and the responses we are seeing are encouraging. That are a difference more to the (indiscernible) that work…that pulled down on that weeks more bad.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay that’s helpful. As there are other opportunities between to add some acreage or is it pretty well locked up at this point, with that big step to the north?

James Flores

David we are not looking at acreage up there, we’ve got 3 or 4 years of drilling out there that we are just going to draw production out of that and we feel stronger about industry fundamentals may be so but we are just not that excited about it.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay on Lucius can a project be sanctioned without a third well or another test point?

James Flores

Or you can say...

David Heikkinen- Tudor, Pickering, Holt & Co.

At where I’d be I mean it’s the first…

James Flores

Yeah exactly you know the answer to that question, you can’t…any sanctionable would approve or operate a sanction I guess where you are asking a question. Yeah I think because of second wells I mean it’s strong, we’d love to have some more detail the special engineers of both sides look up at all the data in the world but you my have to really yield it that in a darker woods. But I know it’s obviously the highest priority that we can have and I know its one of the highest and everybody is very excited about. Its all really good to say but everybody is rethinking the whole development plans and thought plans which is more to our [indiscernible] I am sure there has been a lot of planning toward what the goals and needs are, and actually Lucius at the top of the list.

David Heikkinen- Tudor, Pickering, Holt & Co.

And Lucuis looks like a pretty big component of the value for the Gulf of Mexico. How does that appraisal sanctioning, process and timing impact here kind of asset monitorsation targets for the Gulf of Mexico?

James Flores

Well I don’t figure…its just a value miles down from a stand point but I don’t think there is a person that would look at Lucius and think it would not be sanctioned at some point in time so I think its much of a risk in that connect okay.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay and then just deep in the weed on this Dagger still on the injection process, are receiving new permits now or is that just you expect to receive permits in the back half of the year?

James Flores

Well we have our permits now. We have our permits that are in process that are permanent on a project basis that the world permits should roll out of. We don’t see any interruption to that process. Now if we had to get those permits like today before they finish their review versus when we expect to begin them in the third quarter I think that would be problematic there because you just haven’t done the work yet. But in our schedule and the way ours rolled out and having our projects already permitted and understood have all the background and so forth that we feel had been assured that our projects are going to continue to roll out on consistent basis fitting our business plan.

David Heikkinen- Tudor, Pickering, Holt & Co.

So for your existing projects and the business plan all that’s still moving forward. It’s really like you mentioned the new (water front) project or a new project, do you have any thoughts about whatever the standards will be and how long it would take to get new projects or an extension of any dynamite today if you were trying to move forward?

James Flores

Well like our projects for 2013, I think it’s you got to do what you are supposed to do. You got to put in comprehensive reports. You’re going to have to do all the engineering work for him. So for a third party all the stuff that you can interpret the regulations that way today or you can interpret in a different way. We interpret in a stringent way. You put all that in and then basically you’re going to have to, you’ve got to provide all the ongoing support to a lengthy instead of an 90, 180 day primary process you are going to have a hundred, you are going to have 270 to a 360 by day permit process. We call that in California time 18 months to 24 months. So as long as you process your permits that way and your business that way you’re never disappointed.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay, and then just thinking about the 100 locations in the Granite wash and you know only tested a few of them. As I think about that inventory growth if you continue to have potential success, do you have any bread box numbers as far as how big or how many locations you could possibly have? And that’s the last question.

James Flores

Yeah, we are going to leave that up to you guys, just kind of give you some facts between seven and thirteen reservoirs and the hundred locations. There is a conservative look at that; you take that kind of reservoirs over the twenty thousand acres you can get pretty big numbers. But our big thing is five rates running the rest of this year starting in September; we’re probably at position to add a couple more next year. I guess one or two depending on what prices there and that type of thing. So having that flexibility and high (inaudible) obviously is going to be our focus project for top line growth behind California and Haynesville.

David Heikkinen- Tudor, Pickering, Holt & Co.

Okay helpful. Thanks guys.

Operator

The next question comes from the line of Joe Allman with JP Morgan

Joe Allman - JP Morgan

Thank you, good morning everybody.

James Flores

Hey Jeff.

Joe Allman - JP Morgan

So Jim, just on the strategy going forward here and the Gulf of Mexico monetization., so working backwards, so let’s say you get a billion to two billion dollars of cash, what do you do with that cash?

James Flores

Well let’s talk in after tax dollars. Let’s just call it conserve the purpose of billion dollars after tax. It depends on the currency and whatever. Somebody is going to carry us for the interest out there or monetize iff we get a billion dollars of cash. We just probably reduced debt somewhat to change our balance sheet. We don’t see a whole of great investment opportunities to go out and reemploy that capital right now. We are pretty soft on gas prices next year and you know we kind of want to have the financial flexibility to grow our business with the assets we have and get a premium evaluation for our shareholders. Using that cash either to expand our business would be number one, you know reduced debt number two, and three you take the authorization and buy that stock its going to be the three things you can put in print. But we are not going to be first to move on any of those.

Joe Allman - JP Morgan

Okay that’s helpful. And then just in terms of the assets here so you know one of the options was you know do a spin off and not just for the Gulf of Mexico but also offshore California. So is offshore California off the table for now?

James Flores

Yeah, though our revenues out there are something that we are drawing our (inaudible) is pretty easy to offer. We have a couple of wells to draw out there hopefully when the permeating gets a little clearance and so forth. So it’s going to be a nice revenue string for us. And then the Gulf of Mexico is much more dynamic with derogatory environment that is changing out there.

Joe Allman - JP Morgan

Okay, and then focused on the Gulf of Mexico you know on your release I don’t think you focused on just the deep water. So the whole Gulf of Mexico is out there for monetization. So just what are your thoughts you know clearly the focus from regulatory perspective is on the deep water. So what are your thoughts you know first about the deep water? Do you plan on monetizing just the already made discoveries or also the prospects? And how active do you want to be in the deep water. And then same question for the shelf, I mean, how active do you want to be going forward along with knocking around with some of these exciting prospects?

James Flores

As far as, we’ve been very successful in the Gulf of Mexico. One thing if our revenues kept up with our success you know we would be probably having a different discussion. But the type of projects that we are doing in The Gulf of Mexico, the deep water and also the deep shelf both these projects have long lee tops. And we talk about long lee tops its four dollar gas this is probably such tough equation. And we can, with our wall revenue in California we could gut it out the next four five years if wanted to but the way we looked at it around here at the management of the board is that we got a great growing onshore business and if we just trim our activity in the Gulf of Mexico and make it self funding. And self funding I mean raise the money that we want to raise on the balance sheet and see how prices do, see how the Gulf of Mexico, see how much money we raise in this environment. Maybe we are in after the [indiscernible] portion of the Gulf of Mexico retained. Maybe we don’t, we certainly will stay active in doing geologic GNG work and our prospecting. How many exploratory wells we still are going to drill in the Gulf of Mexico next two or three years? Probably very few. One would love the drills our foremost prospect that we have had after (inaudible) which is just south of luscious field discovery. So we’ve got some exciting things to do there but I think it’s really important and from the shows I looked at this company that the Gulf of Mexico is going to be an area where we are going to harvest capital and for sure pay its own way. But anyway we are going to reduce activities dried volumes both in our greater wash Haynesville California which I think will drive cash flow and drive production and drive earnings in this company at a much easier level with these community cash prices and keep our flexibility up and maybe by 2012 or 13 will be opportunistic and be able to expand our company further.

Joe Allman - JP Morgan

Jim, in your mind how do you differentiate between the deep shelf alter deep shelf and then the deep water in terms of how it fits with plan?

James Flores

It’s really going to be investor appetite from the standpoint Joe. I mean it’s going to be a kind of we are kind of taking a blank sheet of paper and said okay what big step in investor? Some investors were playing kind of sick buying gas. Some are like buying a wall because its high and I think it’s kind of higher and it’s got good revenues so it’s really being driven by who wants what.

Joe Allman - JP Morgan

Okay.

James Flores

We are not trying to look at it strategically from our standpoint because of and we are trying to maximize as much value because where we look we put the capital out in the gulf of Mexico what’s our return on that capital? And now is the time for us to harvest the capital. It’s highlighted by the regulatory environment but at the same point in time we think instead of continuing to put capital out there it’s probably a good time to take some capital off the table.

Joe Allman - JP Morgan

Okay, so when we think about Plains going forward is it right that you still want the optionality in the Gulf of Mexico? You are going to retain some optionality in your view that’s a likely scenario but your focus is really going to be onshore?

James Flores

Yeah, I think it’s going to be significantly reduced but it’s going to be very targeted. You know we may only have four of us left. You know and drill four of us which could you know and its one of the size that could make our Gulf of Mexico again very significant. So we are going [indiscernible] outside optionality in the gulf but then the onshore is going to be the key driver going forward.

Joe Allman - JP Morgan

Okay, do you wait till the morning turns over so that you can potentially enhance the value of some or it’s not a factor here or what?

James Flores

The enquiries have a way that feels more trying to be over how is that?

Joe Allman - JP Morgan

Okay, got you.

James Flores

You know we have to be finished by year end.

Joe Allman - JP Morgan

Okay, and then just on this topic as a quick one, so what’s your estimate of the size of luscious at this point?

James Flores

Yeah we have, you have added (inaudible) on that you know there is still so much unknowns like [indiscernible] over here like another well. You know how it is. The NGO’s don’t have enough data to tell us how big it is. And the jaw just think it’s bigger the engineers. How is that?

Joe Allman - JP Morgan

That’s okay.

James Flores

We are paired off land yeah.

Joe Allman - JP Morgan

Okay, just some quick ones. Are you going to draw any big wells with big Mac?

James Flores

Well we do the sizing there, I try to calibrate back into to real pretty wet sand we seen. We could drill other wells but it’s wounded. From the standpoint of some of the things we found were pretty distal. It’s one of the things we were concerned about. We are pushing that depositional fan pretty for our self so we are looking at it but I don’t think it’s a big deal either way.

Joe Allman - JP Morgan

Okay. And in granite wash how much did those wells cost you?

James Flores

Somewhere around eight million bucks around eight million dollars.

Joe Allman - JP Morgan

Okay, and then lastly if it’s with the dynamite, can you give us what’s the likelihood we get kind of a resolution over the very interim solution and then kind of a long term you know fairly quick here. And what does that look like?

James Flores

Yeah the dynamite’s fine. They are just it’s really going back and forth from regulations and enforce some regulations and do our comprehensive studies requiring everybody to fill studies like we’ve done and so forth. From my stand point it’s none of that but it’s going to cause a lot of the other smaller operators to really step up their game on the regulatory and find guys to do all the work for the regulators that they need done.

Joe Allman - JP Morgan

Alright great. Thanks for your time. Very helpful.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Two questions, first on the granite wash. Can you put into context the Hansen 44H in Marvin like area, what that means for Marvin like overall and whether that creates any additional overall and whether that creates any additional outside to the 100 potential locations.

James Flores

Yeah, it creates outside brand and also the offset that have some 29-2H is you know looks very encouraging at this point we don’t have any cleaned up numbers but it looks like it’s comparable to what the 40-H is going to do and so forth. And so we are gaining courage out there all the time. What surprises the [indiscernible] chills has been so strong. We were very concerned about that. So we went further north. And we’ve only hit two of the zones out of that’s one of the areas that has you know a dozen to fourteen different zones. So there is a lot of work left to do it more than late. So that’s one of our big areas to expand. I don’t think anybody is in a position to work with the numbers but I think a year from now we’ll have soon [indiscernible] more locations out there than what we are talking about today.

Brian Singer - Goldman Sachs

And I guess how many of your 100 location are in a Marvin lake area? Or maybe the other way to ask it would be what percent of Marvin Lake have you kind of assumed this perspective built into the hundred locations. We got to some data for that question. That’s pretty deep in there. You give them a Ball Park on that just try to help them a little bit?

James Flores

Yeah, we are probably right now more of it like 60% we live with our 100 locations. In truth the Marvin lake probably has more of an upside to that number of locations than Wailer does because both the wells have just produced shallow grand wash and the deep grand was I think is a horizontal target. So I think we got a lot of growing look at Marvin Lake.

Brian Singer - Goldman Sachs

Okay thanks. And I should think California you highlighted the kind of 40 to 50 barrels per day rate from the bulk of wells drilled this year. Did you see any changes in that as you go forward? And as you think about 2011, how do you expect your recount to change if it on California.

James Flores

Brian I think we now see right change in the rate. I think the rig count will expand the whole bit but where you see the expansion of capitalist on the plant and facilities adding new steam capacity and a new water handling capacity specific to Rory Grande and those things. And then once we get that dodge you’ll see the rig count probably starting to increase what rise 12, 13 will be the big increases drill Rory Grande and Niking Z but it’s still not you are talking about [indiscernible]

Brian Singer - Goldman Sachs

Or the five rigs.

James Flores

Yeah four to five rigs it’s still not a big number on the rigs. It’s really by tap of facilities.

Brian Singer - Goldman Sachs

Okay great. And then I guess lastly you just kind of mentioned [Hankite] here in terms of allocating the capital from potentials here. What would you need to see to make a decision to go forward with that more aggressive? Share a purchase acquisitions or substantial reinvestments in increase in drilling or any existing business.

James Flores

We have to see nine months of following rig count and I guess we got sick in tracking supplies and tracking storage. We’d have to see an increased demand in world economy recovery so I think we have our ways in all that. And now I’m being serious on a stand point it just we got tonnes of gas at the Haynesville, we got tonnes of gas [Conosaid] at Granite Wash, we’ve got tonnes of oil in California. What you saw us do was put in some floors on our oil side. This is all pre Miocene before they shut down in Gulf of Mexico. We’re very concerned about worldwide oil demand, worldwide oil prices and felt like $80, $85 was a high price versus the 60 by 80 foot squares we put in place.

Now I think you can probably bump that 10 bucks hoping that the world will continue to absorb that and with the strong oil prices and the low gas prices California has never looked better. So I think we’ll spend some time just healing our shareholders and making sure that they get the value that’s realized of all the value we piled up here at PXP and then if that’s all been realized and we still have a lot of cash then we can take advantage of that or expand existing operations.

The oil sales on shore are becoming more interesting, they’re very premature, there’s a lot of things going on. We have 70,000 acres in the [Monaray] that [Venico] and [Oxi] are starting to do some work on. If they’re successful we can handle that water out there and everything. That might be an area we’ll put more capital to work, but our first thing from a tax advantage standpoint would be putting capital work through our own business model depending on what the assets are and how the business environment.

But right now we’re not very possible in the overall business environmental natural gas and the oil side obviously we’re very happy with in California but we’re not – we’re confident of any kind of double dip or any kind of erosion to that forecast.

Brian Singer - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Scott Wilmuth with Simmons & Company.

Scott Wilmuth - Simmons & Company

Hey guys. Just looking at the Granite Wash economics model EUR, gross EUR is 1.3 million BOE. What assumptions are there on the breakout of gas, oil [NGL] goes into that?

James Flores

Right, you want to go ahead?

Scott Winters

Yes, the six BCF roughly of gas and the remainder is [condensated in NGL]

Scott Wilmuth - Simmons & Company

Ok and then any comments…

Scott Winters

More like the condensate is a little leaner so the [NGL] is probably two one over condensate there and [Weaver] it’s kind of equal, the condensate rates of [NGL] rates for everybody.

Scott Wilmuth - Simmons & Company

Ok, thanks and obviously there’s been some concern about [NGL] pricing going forward just with the [indiscernible] activity from the industry. Can you guys just tell us how you’re thinking about that?

James Flores

Yeah I think it’s going to be localized pockets of price construction and how you can move them and so forth and we’re trying to stay attuned to that. We’ve been pretty good at marketing for a standpoint, right now it’s 40% on [Nimex] from a standpoint of – and I don’t see it going anywhere fast. We’re focused more on the common side, discounts, WTI and NGL. We’re not producing a lot with us, nothing really we can do about it.

Scott Wilmuth - Simmons & Company

Alright, okay and then lastly can you just comment on the service cost environment in both the Haynesville and the Granite Wash and what you guys are seeing there?

James Flores

Well the service cost environment is going up a little bit but with Chesapeake as our main operator we’ve been in a situation where they’ve been helping control those. We’ve obviously started stock [indiscernible] and really try to maintain that. The rigs are pretty flat but the [fracking] services will get tighter.

We do forecast about 20% more [frack] capacity coming on industry later this year and if the gas price erosion overcomes the activity level then I think it will be a great year next year with lower service prices and bigger margins. If gas prices continue to increase and the [red caxton] increase I think things will kind of stay with the odds of – with upper buyers or tight buyers on the service costs.

Scott Wilmuth - Simmons & Company

Okay great, thanks guys.

Operator

Your next question comes from the line of David Deckelbaum with UBS

James Flores

Dave, are you there?

Operator

He withdrew his question. Your next question comes from the line of Brian Corales with Howard Weil

Brian Corales – Howard Weil

Good morning. Just – the slide in your presentation that shows 15% production growth, is that excluding anything from the non-producing Gulf of Mexico?

James Flores

Talking about on company wide?

Brian Corales – Howard Weil

Yes.

James Flores

Okay, page 9?

Brian Corales – Howard Weil

It is page – yes.

James Flores

Page 9, yeah that excludes the Gulf of Mexico. In 2012 we include some Davy Jones that’s now been replaced with Granite Wash.

Brian Corales – Howard Weil

Okay and kind of on the same note and the billion dollar 2011, I guess that the target today, I mean if I guess time will tell what will happen with the Gulf of Mexico with your interest in your projects there. But just say – is there anything from the Gulf of Mexico to be added to that or would it be replacing something else?

James Flores

There could be like a [fodas] drill, that type of thing at some point in time but we’re not sure whether our structure will be there, whether we’ll just pay for it or be carried on it type of thing. We’re leaving all that kind of [out] to be funded by itself if we participate in it. Right now it’s going to be focused on our CapEx going forward, 11 is going to be the California, Haynesville and Granite Wash.

Brian Corales – Howard Weil

Ok and then one final, I hate to keep bringing up this California issues, with the [sickler steam] for the – was there any new projects that I guess you said, is it 2013 that was the timeframe to come on new for California? So I mean there’s a lot of time for that resitory issues to go away, is that kind of _?

James Flores

Yeah we’re in the middle of dynamite drilling all the time. So we have projects that have [indiscernible] over a period of time. The aspect of it is putting the extra step forward and working with them and so I’m just talking about the time frame, we’re talking about as far as new [primates] I mean we’re somewhere in that realm of 2013.

The existing 10, 11 and 12 are in the system, we’re working with them, they’re going to be highly scrutinized which is fine and they meet all our criteria and so forth and we’re going to work with them and take our time. I was mentioning that we just – we’re not waiting on any projects to meet 2010 goals from that standpoint.

Brian Corales – Howard Weil

Ok, understood. Alright guys, good quarter and thank you.

Operator

(Operator instructions). Your next question comes from the line of Joe Magnum with Macquarie Capital.

Joe Magnum - Macquarie Capital.

Good morning, just following along the lines of Gulf of Mexico discussion. What’s driving the objective to set the goal at 1 to 2 billion dollars and if there’s interest beyond that would you stop because you want to have that exposure going forward or what? Just sort of some additional guidelines as to what’s setting that level?

James Flores

We’ve never had a problem with turning down capital Joe, it’s a good question. The facts of the matter are once – we want to leave it flexible because the board wanted to be in a position to say okay that’s enough from a standpoint because there is tax consequences and timings and things of that nature. But we don’t know what really the market is going to create for us as far as [value monetization]. We’re in the early throes of it and there’s a lot of chatter back and forth and we don’t know what the regulatory deal is.

We want to put a stake in the ground of what we felt was something that corporately was the correct goal for PXP and then we’ll let the assets and the business proposition drive the individual values across there to give us much flexibility to process as we could and then we’re going to be in a situation to make that decision of how much do you let go of these prices or how do you feel about it and then it also it goes back to how we feel about to redeployment of [Caplo]. It would probably be a higher number if we felt like there was a really good place to go put much capital. But right now we think it’s just a good time to [husband] some.

Joe Magnum - Macquarie Capital.

Okay, that’s helpful. And then similar to the growth coming out of California that’s sort of incremental or wasn’t expected necessarily, the Granite Wash now expected to drive 30% of second half volumes, is that news part of the plan or is that offsetting something like the sort of replacement of any production expected from the Davy Jones test?

James Flores

No, remember one thing is with pricing, we’re losing about 1200 barrels a day in the second half of this year for [mud] to shut it. That will probably be back next year but I mean that’s unexpected in our plans. So it’s overcoming that and obviously when we drilled the Granite Wash wells we had a certain risk factor on it and so forth. So as we’re expanding it now and adding rigs and so forth, it’s actually fitting in our operation plan, but the second half of this year it’s really going to be overcoming a lot of the unexpected things like mud and so forth and next year it will be obviously a big driver on top of our Haynesville big growth wedge and our California expansion as well.

So I think someone asked the question earlier. The second half of this year is [inaudible] but all of 2011 is going to be spectacular.

Joe Magnum - Macquarie Capital.

Yeah, I guess following along those lines at the ramp to five rigs expected over the next month or so you’ve got 19 wells planned this year, 22 next year, that seems a bit low, but do you plan to maintain that recount through the year or?

James Flores

Well, with gas prices where they are right now, if they go lower then I think that’s probably a decent rig number, but if they stay pretty strong where they are right now and oil prices maybe you can see that bump a few rigs to next year. We’re just [coming] our flexibility out there.

Joe Magnum - Macquarie Capital.

Ok, thanks. That’s all I’ve got.

Operator

Your final question comes from the line of Marshall Carver with Capital One Southcoast.

Marshall Carver - Capital One Southcoast

Yes good morning. I just had a couple of questions on the Gulf of Mexico sale or JB process. I’m not sure whether you can give answers to this or not. But do you plan on having data rooms open and what would be the timing on that, where would they be closed? Do you know when bids would be due? Just trying to get a feel for the timing of potential announcements.

James Flores

How about we’re using year end as a target how’s that? [Indiscernible] this is premature but yeah there will be a formal process if we get to that.

Marshall Carver - Capital One Southcoast

Okay and one follow up on – I think, I’m not sure if you answered the Big Mac. Did you plan on doing any more follow up wells there? If you did answer that I didn’t hear.

James Flores

We’re doing some more seismic reprocessing and correlation there and well there are some geology concerns now [for withdrawing] results on what we had, whether it’s going to be something we want to pursue or not. But we’ll see what – we’re leaving the door open a little bit just seeing what the seismic possibility gives us the confidence to tie in to high quality sands and we can figure it out.

We might do another well there but either way I think it’s not going to be a big deal.

Marshall Carver - Capital One Southcoast.

Okay thank you.

Operator

Thank you. I will now turn the call back to Mr. Flores for closing remarks.

James Flores

Thank you operator, appreciate everybody’s attention. A lot going on and expansion continues around here and stay tuned for all the exciting [indiscernible] for the rest of the year. Thank you and see you in the third quarter.

Operator

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

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Source: Plains Exploration & Production Company Q2 2010 Earnings Call Transcript

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