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Plains Exploration & Production Company (PXP)

Q2 2007 Earnings Call

August 7, 2007, 10:30 AM ET

Executives

Scott D. Winters - VP, IR

James C. Flores - Chairman, President & CEO

Analysts

David Kistler - Simmons & Company

David Heikkinen - Pickering Energy Partners

Eric Kalamaras - Wachovia Capital Markets

Larry Benedetto - Howard Weil

Presentation

Operator

Good morning ladies and gentlemen. My name is Sierra and I will be your conference operator today. At this time, I would like to welcome everyone to the Plains Exploration Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [Operator Instructions]. Thank you.

It is now my pleasure to turn the floor over to your host, Scott Winters, Vice President, Investor Relations. Sir, you may begin your conference.

Scott D. Winters - Vice President, Investor Relations

Operator, thank you and good morning everybody. Welcome to our call this morning. Our results were released early this morning, and a copy of the press release and a short slide presentation are available on our website at pxp.com.

Also, PXP plans to file its 10-Q today. There is a lot of information in the Q, so please refer to the document for additional details when it becomes available. Our conference call is being broadcast live on the Internet and any one may listen to the call or the replay by accessing our website after the call today.

Before we begin today's comments, I'd like to remind everybody that during this call there will be forward-looking statements as defined by the Securities and Exchange Commission. These statements are based on our current expectations and projections about future events and they involve 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 Chief Executive Officer; Doss Bourgeois, our EVP of Exploration and Production; Winston Talbert, our EVP and Chief Financial Officer, and John Wombwell, our EVP and General Counsel.

PXP reported $25.3 million of net income in the second quarter of 2007 versus a loss of $7.1 million for the same period last year. Compared to the first quarter of 2007, oil and gas revenues were up 14% due to higher realized prices and increased volumes.

Sales volumes increased about 3% to 53.5 thousand barrels of oil equivalent per day during the second quarter of 2007 from 51.9 thousand barrels of oil equivalent per day in the first quarter of this year. Higher volumes offshore California, the Los Angeles Basin and the Gulf Coast combined with one month of Piceance Basin volumes more than offset slightly lower San Joaquin Valley volumes resulting from the Star Fee incident in March.

Compared to the second quarter of last year, oil and gas revenues in 2007 were lower primarily due to the Occidental property sales in the fall of 2006 which lowered volumes and a decrease in realized prices which were partially offset by the absence of an oil revenue hedging loss in the 2007 period.

Compared to the second quarter of last year, total production cost per unit increased due to lower volumes from the assets sale and higher LOE and steam operating costs. LOE costs reflect increased expenditures for repairs, maintenance, well workovers, increased labor costs and general cost increases from service providers.

The steam operating costs primarily reflect higher steam volumes and higher cost of gas used in the steam.... in steam generation. As we discussed in the first quarter call, this past May, because we sold California producing properties in 2006 that provided much of the gas used in the steaming operation, it was a one-time structural change in the source of the natural gas used in our steaming operations which led to higher costs. The higher cost in 2007 reflects the fact that almost all the gas burned to generate steam was purchased while in 2006 almost half of the gas burned was produced from the company's properties. Costs for these volumes consisted only of transportation costs.

Compared to the first quarter of 2007, total production costs per unit were up due to higher LOE expenses as a result of increased workover and contract labor costs and to higher gathering and transportation costs as a result of adding the Piceance Basin assets.

Compared to the second quarter of last year, G&A expense decreased in 2007 compared to the same period in 2007. G&A expense increased from the first quarter of 2007 due mainly to higher stock-based compensation expense as PXP stock price moved up throughout the quarter.

In 2007, we recognized a $15.8 million loss related to mark-to-market derivative contracts in the second quarter and cash payments related to the contracts that settled totaled about $25.6 million. However, in the second quarter of 2006, we recognized a $142.9 million loss related to the mark-to-market derivative contracts and cash payments related to the contracts that settled totaled $25.4 million for that period.

As you remember, our derivative position in 2007 consists of crude oil put options and our potential loss on these contracts will be limited to the cost of the options. In 2006, the derivative losses were primarily related to crude oil collars.

The company issued $600 million of 7 3/4% senior notes that mature June 15, 2015. The net proceeds were used to repay borrowings under PXP's revolving credit facility.

With respect to recent corporate developments on July 17, 2007 PXP announced a definitive agreement to acquire Pogo Producing Company in a stock and cash transaction valued at approximately $3.6 billion, based on PXP's closing price on July 16th of 2007. Along with asset diversification and significant cost savings, this accretive transaction nearly doubles PXP's production with the addition of a substantial number of producing properties, provide significant growth potential in Texas, primarily the Panhandle, Permian and Gulf Coast, plus the prolific Madden Field in Wyoming and the San Juan Basin in New Mexico and it diversifies PXP's exposure into new and attractive region with lower risk exploration and development opportunities and unconventional resources.

On May 31st of this year, PXP closed the previously announced acquisition of oil and gas and midstream properties in the Piceance Basin of Colorado in which PXP acquired interest in the oil and gas producing properties covering over 55,000 net acres, over 200 producing/productive wells, over 3000 additional potential drilling locations and 40 miles of pipeline and gathering systems including a 25% interest in the Collbran Valley Gas Gathering System. These properties are currently producing approximately 5500 barrels of oil equivalent per day.

The planned expansion project within the Collbran Valley Gas Gathering System is expected to be completed by the end of the third quarter. Upon completion, PXP expects to increase production to approximately 12,000 barrels of oil equivalent per day in this basin by the end of the year.

In addition to this recent transaction, PXP's ongoing Gulf of Mexico exploratory program has yielded significant positive results so far this year with several more exploratory test currently underway. The operator announced the discovery at the Flatrock prospect on South Marsh Island 212, PXP's working interest is 30% and positive results of the Cottonwood Point prospect on Vermilion Block 31, PXP's working interest is 14%. Drilling continues at both of these projects.

Last week, the operator provided an update on Flatrock. Flatrock has so far encountered eight zones totaling 260 net feet of hydrocarbon bearing sands over a combined 637 foot gross interval.

Completion operations are underway as well on the previously announced Hurricane Deep discovery nearby on South Marsh Island Block 217, PXP's working interest is 30%. The developments of Hurricane Deep and Flatrock are expected to contribute meaningful production in 2008.

Six additional high-impact Gulf of Mexico prospects are currently drilling or planned to spud during the third quarter. Cottonwood Point, Cas, Mound Point South, Vicksburg and Bob North are currently drilling. The Buckhorn Prospect is scheduled to begin drilling late in the third quarter.

On the development front, in California, PXP continues to focus on the waterflood projects in the Los Angeles Basin and steam-enhanced recovery projects in the San Joaquin Valley.

I won't repeat all the drilling activities stats that's in the press release but I'll point out that at Montebello Field and Los Angeles Basin, PXP drilled the remaining 5 of the 10 planned wells for 2007 in the second quarter and finished the batch completion of all the wells.

In the Gulf Coast region, the successful Perseus II well was completed during the second quarter, and as I mentioned earlier completion operations are underway on the Hurricane Deep discovery.

In the Piceance Basin, PXP is operating five drilling rigs and plans to drill a total of 63 wells during the third and fourth quarters of this year. As indicated in the press release and I mentioned earlier the first planned expansion project on the Collbran Valley Gas Gathering System is expected to be completed by the end of the quarter allowing PXP to nearly double production from this basin by the end of the year.

The first six months have been both busy and prosperous. For the remainder of the year we intend to work through the remaining planned exploration project inventory to continue developing our California and Piceance assets and to move quickly to close the proposed acquisition of Pogo Producing Company.

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

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

Thank you, Scott and good morning everyone. I think Scott's synopsis of all our results has been very accurate summarize, as everybody knows from all the press releases that we made on the transactions as well as the compounding activity has been the successful drilling and we still await a lot of our high-impact drilling here in the next 60 days, so we think that will have a meaningful impact to the company.

Earlier in the year, with our financings or our access to the bond market well time, we were able to get some good foundation of financing underneath Plains and gave us a springboard to acquire Pogo. We're still working on that transaction and look forward to filing the S-4 this month and then we will find out whether we will be reviewed by the Securities and Exchange Commission and then either we will go through a review process and then move to a closure or just go straight to the closing of the transaction.

We have not put forth any form of plans on the transaction until we get closer to closing. It would be premature to do that. We continue to like what we see as we continue to live with Pogo people for a while. They are great people. They are great assets and look forward to energize in the areas of we think that there are growth opportunities as well as accompanying our areas.

The Piceance Basin continues to get better for us from a marketing standpoint and also from the well productivity standpoint, had five rigs planning up there. And we like our situation of bringing on some gas this winter in the Piceance and also the Pogo gas compared to where we are -- we are basically consuming what we are selling right now out in the San Joaquin Basin. So we are benefiting from the low gas prices today and looking forward to a better gas market in the future.

The gas market continues to stay tough per year. So I think we will be well positioned having brought the gas here in a low price environment and looking forward to the turnaround in the economics there.

On the oil side, we are continuing to see gains in San Joaquin and LA Basin by doing less. We've cut our capital budget there. We've moved a lot of rigs out of field and waiting to see some of our EUR [ph] and steam enhancements and waterflood respond and we are seeing response there that has been long waited but we've finally seen. There's been and basically by not disrupting the production there has continued to lead the fields respond to the all the work stimulation we have done over the last couple of years.

Offshore California seems, continues to rock along, our Tirex [ph] project is still in the permit process and some of the California regulators and industry groups are getting their hands around or whether we'll get the project on the run way this fall, we'll be working heavily on that as well as expanding our exploration effort, expanding a more realizing our exploration effort this year with all the success. It's planning us to doing less exploration going forward and more development because the size of the projects and what we will be able to develop at Flatrock and Hurricane Deep and Cottonwood Point and that's before many of our deepwater stuff comes along -- as able to be develop and then we'll have some resolution around our Friesian Project with Shell about how we're going to develop that and go forward.

So presently we are planning on developing the projects. However, we'll continue to look at the Shell's market if those projects are better to be monetized in the Shell's market. We'll continue to look at that.

One of the things that we'll be doing is testing all the assets in conjunction we're closing the Pogo transaction that we'll be looking at certain target asset sales there. So when we realized been maximized all the synergies in that transaction and of course some of the PXP assets long dated ones, the technology to bring on production will be predicated as well as well as our real estate out in Los Angeles.

So with that update and kind of synopsis to Scott's comments, I want to turn it over questions over the operator and we can get your questions. Operator?

Question And Answer

Operator

[Operator Instructions]. Your first question is coming from David Kistler from Simmons & Company.

David Kistler - Simmons & Company

Good morning guys.

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

Good morning.

David Kistler - Simmons & Company

Hey, quick question on the Piceance here a little bit of maintenance. Can you talk a little bit of about what your CapEx expectations are for the balance of '07 and '08 or are we getting ahead of ourselves on that?

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

Wellwe may probably get, we'll have it in '08, '07 we can get some figures on that one. We're basically having the same CapEx, we just kept things running the same way with five rigs running, I think it's about 20 million bucks, $20 million to $25 million the rest of the year.

David Kistler - Simmons & Company

Okay. And then just kind of continuing in that area, would the CVG, ASX expansion and is it 25% owner of that? Are you guys also carrying the capital commitments for that expansion?

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

Yes, but that's minimal.

David Kistler - Simmons & Company

Okay.

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

And for this, really the second compressors all the hard dollars are over spent [ph].

David Kistler - Simmons & Company

Okay. And then you mentioned a little bit about assets that the monetization market opens up for you to liquidate some assets. Can you rank order any of the things in your portfolio right now or is that kind of it will be on a very specific basis based on the individual market?

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

No, it's interesting question because I got to tell you I've never been on a transaction where every single one of the Pogo assets have gotten... multiple request on every single asset, from bonafide buyers and lot of people I know and so forth. I have never seen that kind of appetite on anything we have ever bought before. When we do that, we do the breakup value math, it's much higher than what the value of Pogo is today as well as PXP. So, when we expect the cash market to be real robust, it's really going to be around what we think we want to continue... we want to accelerate the growth, not weight the company down and being in a situation where things, we think we can have near term growth impact to PXP, the ones that are going to be the most coveted assets. The other thing is, there is nothing broken with due to the Pogo assets.

The assets that we've always been top of the list have been our long-dated assets toward production which are the deepwater assets that we sold last year. We'll continue to... I mean I would have those on top of the list because that's capital out of the door for several years versus capital in the door like some of the near-term assets. Then also we've retained, Lehman Brothers is working on the... our MLP concept and structure that if that market is still there, we're going to be looking at accessing that. At the same point in time, I think what we are realizing that a lot of other operators that aren't considering MLPs are finding that whether you form an MLP or not, some of the assets on a tax advantage but an MLP multiple basis does the same thing as the MLP basically because you don't have the complications of the governance and the economics.

So just here in the near term that, so the market is going to be changing all the time and when we look at closing the Pogo deal late in the fourth quarter we're going to have a different gas market. We're going to have a different outlook for '08 that nobody has today. It's going to be positive or negative if it's the way we look at things going forward. We had planned on $65 oil this year and it's kind of average in there. Second half of the year looks also stronger than the first half of the year, and we plan for $6 gas, that's what we sold our gas last year and sold those assets. And we are a net consumer all this year. Buying into the gas market the way we are seeing it right now makes a lot of sense looking at what we think gas prices are back in '08 '09. And so we will be kind of trying to make those decisions here late in the fourth quarter or early in '08.

One of the key things is this, it's going to be imperative for us to focus on getting our balance sheet in good shape. We're going to have a lot of cash flow. We're going to have a lot of development commitments for something that's all can be ratable. So we should be a free cash flow generator in '08 and be... kind of be back in business where all of our shareholders are comfortable.

David Kistler - Simmons & Company

Kind of ask you on the free cash flow question for a second. Given the recent success you guys had with your partnership with McMoran, is that something you've looked to extend as well?

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

Well it's a great partnership for somebody who's performance oriented, only if there is quality projects. And so if there is a quality project yes but it won't be of the magnitude of the seismic program we had this year where there was... this is a culmination of five years of Jim Bob's work and effort in pulling together Chevron and Exxon and drillings of deep wells and testing projects. So these things just didn't fall off the shelf and that's a really unique one in a once... I think once in a decade once in a clear opportunity. So if Jim Bob can recreate another one of those on say new field's acreage whatever we will be highly interested in that but we're going to give him a little time. So it's kind of a... we look at it as kind of a one shot deal that will be add-ons but nothing of this significance as for the program.

David Kistler - Simmons & Company

Great. Well thanks so much for the update.

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

Thank you.

Operator

Thank you. Your next question is coming form David Heikkinen from Pickering Energy Partners.

David Heikkinen - Pickering Energy Partners

Good morning, Jim.

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

Good morning Dave.

David Heikkinen - Pickering Energy Partners

First, Scott, very good prepared remarks, so that was very helpful. And on the MLP volatility what we are seeing and in the kind of thinking about the market, your comments about if the market still there given yesterday and today, just how do... how do you think about the volatility going into the back half of the year and kind of the financing needs and how you think about the structure of PXP?

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

Well the way we are trying to stay flexible because we want to see the markets telling you better be flexible and been and just start off with the way the transaction is financed, I mean we are looking at transaction that we do all our revolver, we are not subject to the credit markets from the standpoint of bonds, so those types of things. And because you don't want to have to depend on that as much as an LBO shop [ph] I guess but from our standpoint we want to take it if it's there. At the same point in time with the robust commodity market on the oil side, we have a lot of opportunity to monetize assets or hedge what we have, or do those types of things. So we like the operational flexible... as well as financial flexibility.

Specifically your question, we look at the MLP as asset sale vehicle, a synthetic structure finance vehicle and we think it has merit whether it's got... whether it has the merit to the PXP shareholder we're still working those cakes out and that changes depending on the market outlook like you said in everything else. But the greatest parallel to the any MLP is cost and one of the biggest cost is debt financing. And with the credit crunch out there and access to capital there and pushing the yields, not only it credited up they can be pushing the MLP yields up as everyone knows. So the main advantages for forming MLPs versus just doing commodity... just doing commodity property sales and those types of things if we can get those type of aggressive multiples, I think the MLP market out there right now is going to be very challenged operationally to meet its performance targets. And if we have some challenged buyers out there, then that might be a good seller's market for us. So we're going to be flexible but one of the things we can't commit to is having a good balance sheet starting '08 because that's going to be important for... here we have a... we think we have a healthy balance sheet but we think we need to be stronger and take advantage of it of what we've been able to accomplish.

David Heikkinen - Pickering Energy Partners

AndSo if you think about next year, free cash generation priorities for that free cash flow, can you talk about that or somewhere is it too soon to...

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

No I'd say... we still have a 150 or 200 up or $150 million authorized on stock purchase buyback. We can fluff that up. I mean the best return we made to our shareholder is drilling good exploratory wells, selling them and buying stock back. And we've been continued to look at doing that because I mean it's loyal shareholders' share here and that's important to us. And... but we at the same point in time, we wanted to fill on the intermediate growth of our company with the Piceance and the Gulf of Mexico and the Ranches area that Pogo has in the south Texas and some of the things that they have going on, we think that they are pretty good.

So what we'll look at is trying to develop a budget that has say $150 million, is not going to be robust compared to some of the past years of free cash flow prior to asset sales that we can have on a reoccurring basis, because we think as we can operate our business that way and with the amount of discoveries that we have had this year already and the good things happen to us on some of the development fronts in the Piceance, we are not going to need to restart our business like we did this year with the exploration drill bits. So we are going to be able to be mindful of our capital out of door have the good operating results and have the ability operationally to put the other budget that will develop some free cash flow assuming all prices in the 60 to 65 range in gas, around 7.50 to 8 bucks.

David Heikkinen - Pickering Energy Partners

Okay Jim. Thanks a lot.

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

Thank you.

Operator

Thank you. Your next question is coming from Eric Kalamaras from Wachovia Capital Markets.

Eric Kalamaras - Wachovia Capital Markets

Give a little bit more clarity on the wells in the Piceance just to kind of what the AURs [ph] might look like there as well as with the capital spending on a per well basis might look like?

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

Yes, we've had the Piceance for about 60 days. So to say the AURs [ph] have changed much there versus what... we talked about earlier and the capital spending and so forth. I know we are drilling the shallower wells. We are drilling... we have wells in all of that, so we have wells that cost, 800,000. We have wells that cost 1.3 million. So we can give an average across that, that is really unfair comparison and AURs are strictly subject to the early parts of the decline curves, so that's is not real enough data there. We fully expect these wells to make Bcf plus average and cost somewhere between a $800 million and $1.3 million but that's just a rough estimate, and they have a whole lot technical background. We have been in the basin five years like in Canyon where obviously those guys have some really good data on.

Eric Kalamaras - Wachovia Capital Markets

Great, thank you.

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

Okay.

Operator

Thank you. [Operator Instructions]. Your next question is coming from Anthony Martino from Eugene & Company [ph].

Unidentified Analyst

Was hoping you could give a little more clarity on the possible alternative to the MLP option. I know you are mentioning some kind of monetization more commodity oriented if perhaps you can mention one or two examples out there recently that we can look at.

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

Well, I appreciate you ask for clarification on that. What I am saying commodity... basically the asset market trades off at slight discounts of the commodity strip at, I had probably finished the entire thoughts and it's commodity strip. And so we are seeing a much more robust valuation for assets beyond where they are priced today and our capitalization in the stock and bond market. So when I have to talk about that if we can sell assets to the MLPs.

Unidentified Analyst

I see.

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

At a value significantly higher than where we trade in and capture that in assets that we believe are fully evaluated and those types of things maybe an alternative to the MLP and let them take the risk of the bond market and the risk of the MLP market and so forth. Just here in the near term there is no reason to rush out and do the MLP. That's what I was trying to articulate because we can do it next quarter. We can do it six months from now, or do it a year from now, we own the assets, so we don't have to wait and capture. But it's something that we can do if that market firms a little bit.

Unidentified Analyst

That's helpful. Thanks.

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

Thank you.

Operator

Thank you. Your next question is coming from Nicholas Paul [ph] from J.P. Morgan.

Unidentified Analyst

The question, the midstream assets the... in the potential MLP, could they go into the same MLP as the regular E&P assets?

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

Sure. There is... nothing is going to... that's more marketing requirements versus anything else. I mean if midstream assets are excellent, MLP candidates.

Unidentified Analyst

I didn't know that you're going to the same vehicle.

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

We have made an full evaluation but we don't see [ph] while I couldn't but it may be more toward in the break him out we'll see.

Unidentified Analyst

And then just a little clarification on some of the deepwater prospects, first who operates Bob North and like what are your expected drilling times for Vicksburg, Bob North and Buckhorn?

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

Okay. Buckhorn is still on the shelf but and that... so that project, that starts... that project just starts here in October and we'll be the operator of Buckhorn. Vicksburg project and... in Buckhorns, you are looking somewhere 500 plus Bcf is the project there. It's correlative to our Cas prospect is drilling right now and we are working with different partners and their interest in trying to see what we adapt with on that project. Vicksburg project, Shell is the operator of it that's currently drilling right now. And as we maintain with all of our confidence in relationships with all the operators, they speak for the aspects for wells just like McMoran speaks for as their operator and our well Shell's obviously, their spokesman in all the projects we have had. So, they're going to be speak spokesman at Vicksburg and then you have Bob North that recently spud in, Chevron is the operator there. And those are both very large deepwater opportunities somewhere between 200 and 600 million barrels each.

Unidentified Analyst

And do you know, like the, how long it's going to take to drill those?

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

This should be down in the third quarter.

Unidentified Analyst

And the timing like once they start drilling.

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

Those deepwater projects, you've got so many things involved and so forth. We are only authorized to say they are drilling and I can give you kind of quarterly targets but it's hard to time those. You've to really just call Shell and Chevron a good luck.

Unidentified Analyst

Got it. And what's the infrastructure like out there? Are there things that could be brought on fairly quickly or would there be a long-term development process sort of in this well?

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

You know what in Friesian the project the Discovery announced last year with Shell and Bob North and Vicksburg, all three of those do have a near term tie-back potential because of infrastructure, which is a big shift from where we were two years ago with Big Foot when it was a fairly a standalone development. And that's the one of the things that we were able to move toward.

At the same point in time if they realize their peak-end reserve potential and are off size [ph], they will probably be standalone developments. Consequently it would push out production along the ways and that's where we get into whether it's worth it for PXP to hold on to those and wait five to seven years for production versus monetizing them today. So we'll just have to wait and see as those projects, all three of them as they mature and also if they are successful and mature. Friesian, obviously we know it's successful whether there are going to be tie-back potentials or whether there are going to be standalones and then we'll be able to make a decision on which way PXP can value the most one.

Unidentified Analyst

Right. That's all I have. Thanks a lot.

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

Sure.

Operator

Your next question is coming from Larry Benedetto from Howard Weil.

Larry Benedetto - Howard Weil

Thank you.

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

Good morning.

Larry Benedetto - Howard Weil

Jim, when you bought the Piceance assets you talked about possibly second 10/31 exchange.

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

Right.

Larry Benedetto - Howard Weil

Is that still a possibility now?

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

No, what we did it in shifting that, Larry I guess we articulated in the last call that we made clear on. We kept the tax basis inside the Piceance assets that would help aid us and then we want to form an MLP and drop those assets down. We do have enough and so the aspect of it, and also with our exploration drilling on IDCs it wasn't a real value grab that we needed here, near term. So it was better off leaving the basis in the Piceance assets for the MLP.

Larry Benedetto - Howard Weil

Okay. And then secondly is Buckhorn a McMoran generated prospect?

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

No Buckhorn is a prospect that we generated in house here at PXP.

Larry Benedetto - Howard Weil

Okay.

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

But our guys that did find all those, only gas for us.

Larry Benedetto - Howard Weil

And then thirdly, Flatrock looks like a very, very nice discovery. How much running room do you have there as far as additional locations and plans to develop that?

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

LarryFlatrock is probably one of the bigger discoveries in my career, last thing so far with between the Rubel and Operc especially near term value just strictly from a standpoint of to able to bring the production on 130 miles south of Henry Hub. That's probably just what the world needs right now, another big slog of gas but the interesting thing about Flatrock is that it is a settled large structure, we say, it's not a large structure anywhere between 1500 and 30,000 acres depending on which fault blocks are going to be productive in which sands and so forth.

One thing that we are... at McMoran and PXP and the un-named major Chevron is they've all committed to accelerate development there. In fact we've received another AFP [ph] to put in another rig and drilling development well. So we can have three rigs lying there by year end, yielding multiple targets in there. So I think we have a lot of running which is going to be... it's going to be chasing the Piceance as far as production contributor for the PXP next year.

Larry Benedetto - Howard Weil

Great.Thanks a lot.

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

Okay.Thank you.

Operator

Thank you. Your final question is coming from Jerry Gesole [ph] from KS & Company.

Unidentified Analyst

Hi, this is Craig Govensky with [indiscernible]. I had three questions on hedging. First off can you talk about this year relative to last, is it something changed in the accounting treatment different or is it just sort of how it works out? I noticed there was some included in oil and gas revenues last year and it's a negative impact this year. Is it some change in the accounting treatment or is it just how it works out?

Scott D. Winters - Vice President, Investor Relations

No last year that, what was in our income statement last year were slopes that we had terminated about a year and half, two years ago. And so when we terminated them we had to keep them flowing through the income statement as they would have expired over time but we terminated them early. So when we... and then we bought out all the collars last year and so that eliminated that. So we went to fully mark to market about a year, two years ago on all of our derivatives. So now all we have going forward are put contracts.

Unidentified Analyst

Okay, great. And the other two questions were I think you sort of answered that. What's the strategy going forward? And do you envision any changes to the existing hedging structure in place at Pogo after it's acquired and others eliminated amount, you can say about what you are doing there but how does that match with existing strategy you guys have?

Scott D. Winters - Vice President, Investor Relations

Well I think the strategy and our philosophy that we've had around here is that we want to put in protects... price protection for oil at reasonable price of that, that will protect our capital budget and preserve the upside for our shareholders going forward. So that's why we have been put in $55 floors and it's just kind of letting the commodity price do what it is going to do. I don't see that philosophy changing our oil now as we look into the Pogo assets, we're getting a lot of gas and gas tiers tends to be a little bit more volatile. We'll look at strategy that I think will do the same thing which is capture the upside but protect the downside. So they have been using a lot of collars. I don't see changing that kind of philosophy. We might put in more put contracts than collar contracts but going forward I don't really see a big difference from what have been doing.

Unidentified Analyst

Hey great. Thanks a lot.

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

Thank you.

Operator

There are no further questions at this time.

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

Operator thank you. Everyone, appreciate your interest and look forward to the third quarter drilling results, we can be a little bit more definitive on timing, some success, some of those wells as well as moving towards the S-4 filing and closure of the Pogo transaction. We will be up at the Lehman Brothers conference early September in New York spending few days there and look forward to seeing all our friends at that time. Thanks again. Bye.

Operator

This concludes today's Plains Exploration second quarter earnings conference call. You may now disconnect and have a wonderful day.

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Source: Plains Exploration & Production Q2 2007 Earnings Call Transcript
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