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Plains Exploration & Production Company (NYSE:PXP)

Q3 2007 Earnings Call

November 1, 2007, 10:00 AM ET

Executives

Scott D. Winters - VP of IR

James C. Flores - Chairman, President and CEO

Analysts

David Kistler - Simmons & Company

Nicholas Pope - JP Morgan

Duane Grubert - CRT Capital Group

Anthony Iorfino - Muzinich and Company

Larry Busnardo - Keystone Capital

Gregory Brady - J.P. Morgan

Presentation

Operator

Good morning. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the PXP Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. [Operator Instructions].

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

Scott D. Winters - Vice President of Investor Relations

Operator, thank you and good morning everybody. Welcome to PXP's third quarter 2007 earnings conference call. 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. PXP plans to file our 10-Q this week. There is a lot of information in the documents so please read it when it becomes available for additional details and discussion on the quarterly results. Our conference call is being broadcast live on the internet and anyone may listen to the call or the replay by accessing our company website.

Before we begin today's comments I would 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 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 Form 10-K, 10-Q, and 8-K filed with the SEC for a complete discussion on forward-looking statements.

On the call today is Jim Flores our Chairman, President, and CEO; Doss Bourgeois, our EVP of Exploration and Production; Winston Talbert, our EVP and CFO; and John Wombwell, our EVP and General Council.

The third quarter was a strong quarter both financially and operationally as we continue building on previous quarter's successes. On a per share basis PXP reported net income of $0.45 per diluted share in the third quarter of 2007 which is up from $0.35 in the second quarter and up from $0.28 in the first quarter of this year. Along with net income operating cash flow, our non GAAP measure, and gross margin per BOE before DD&A, a GAAP measure both showed significant consecutive quarterly improvements. Operating cash flow in the third quarter of 2007 increased 35% over the second quarter of 2007 and nearly 60% over the first quarter of this year. Gross margin per BOE before DD&A in the third quarter increased 18% over the second quarter of 2007 and about 30% over the first quarter of this year. Please refer to the explanation and reconciliation of the non-GAAP measure located in the table at the end of the press release.

Oil and gas revenues in the third quarter of 2007 compared to the second quarter of 2007 increased approximately 17% due to stronger oil prices and increased sales volumes. Sales volumes increased 7% to 57.1000 barrels of oil equivalent per day during the third quarter of 2007 from 53.5000 barrels of oil equivalent per day in the second quarter of this year.

Slightly higher California volumes combined with a full quarter of Piceance Basin volumes more than offset lower Gulf Coast volumes. Since the first quarter of 2007 PXP production and sales volumes have increased to about 10%. The average realized price for oil increased about $8.90 during the third quarter of 2007 reflecting higher NYMEX oil prices. The average realized price for natural gas decreased to about $2.10 due to the decrease in the index price for natural gas and higher differentials for the Piceance Basin properties.

Oil and gas revenues in the third quarter of 2007 compared to the third quarter of 2006 increased primarily due to the absence of an oil revenue hedging loss in 2007 which was partially offset by decreased volumes as a result of the sale of oil and gas properties in 2006. Total production cost per unit in the third quarter of 2007 compared to the second quarter of 2007 improved by nearly a $1.30 per BOE due to higher sales volumes and lower costs. Higher sales volumes reflect the Piceance Basin property acquisition, lower costs reflected primarily reduced steam gas cost due to the lower natural gas prices paid for the gas used in steam operation which were partially offset by electricity costs that reflect higher usage of electrical submersible pumps and a temporary reduction of our co-generation capacity at one of our onshore California fields. And slightly gathering and transportation cost which reflect the addition of Piceance Basin properties.

Total production cost per unit in the third quarter of 2007 compared to the third quarter of 2006 increased due to lower sales volumes related to the asset sales and higher LOE and steam operating cost. LOE cost for that period reflect increased expenditures for repairs and maintenance, well work overs, increased labor cost, and general cost increases from service providers. The steam operating cost reflect higher steam volumes and a higher cost of gas used in steam generation.

As we've discussed in the prior two earnings calls, because we sold California producing properties in 2006, they provided much of the gas used in the steaming operations. There is a structural change in the source of natural gas used in our steaming operations. The higher steam cost in the third quarter of 2007 over the same quarter a year ago reflects the fact that almost all the gas burnt to generate steam was purchased while in 2006 a large portion of the gas burn was produced from the Company's properties and costs for these volumes consisted only of transportation cost.

G&A expense in the third quarter of 2007 compared to the second quarter of 2007 and to the third quarter of last year decreased due mainly to lower stock based compensation expense. In the third quarter of 2007 we recognized a $39.2 million loss related to the mark-to-market derivative contracts, cash payments related to the contracts that expired totaled $25.6 million. Our derivative position in 2007, 2008, and 2009 consists of crude oil put options and any potential loss on these contracts will be limited to the costs of the options.

Operationally PXP delivered another strong quarter. PXP's ongoing Gulf of Mexico exploratory program continues to yield significant results. We announced a significant discovery at Flatrock exploratory prospect. The discovery well encountered 8 pay sands totaling 260 feet of net fee pay, production test indicated a gross flow rate of approximately 71 million cubic feet of natural gas per day, and 739 barrels of condensate which is about 17 million cubic feet equivalent net to PXP. Three additional locations have been selected to provide further options for development of the multiple reservoirs found in the Rob-L and Operc sections.

One of those locations is currently being drilled. A rig will be on the second location shortly and a third location has been permitted. Our production test during the quarter Hurricane Deep discovery indicated a gross flow rate of approximately 15.4 million cubic feet per day, 3.3 million cubic feet per day net to PXP. In the Flatrock area the developments of flat rock and Hurricane Deep are expected to have first sales volumes in the fourth quarter and to contribute meaningful production in 2008.

The Cottonwood Point exploratory prospect was drilled to a total depth of nearly 20000 feet and will be completed in the Rob-L section. As previously announced, wireline logs indicated the well encountered 43 feet of net hydrocarbon bearing sands over an approximate 92-foot gross interval in the upper Rob-L section.

The Shell-operated Vicksburg exploration prospect was drilled to a depth of approximately 25,400 feet. The well has been temporarily abandoned while drilling results are being evaluated. Three additional high impact Gulf of Mexico exploration prospects are currently drilling, Bob North in the Mississippi Canyon Block 860, Buckhorn in the South Pass 19, and Terrebonne in Green Canyon Block 452.

Now switching on short to the Piceance Basin, PXP integrated the properties and completed the first plant, Collbran Valley Gathering System compression expansion project in early October. Sales volumes averaged 7,200 net barrels of oil equivalent per day in September, representing a 20% increase in sales volumes from the time of acquisition. PXP is operating five drilling rigs and drilled a total of 26 successful wells during the third quarter and plans to drill 20 to 30 wells during the fourth quarter.

Now in California PXP continues to focus on the water flood projects in Los Angeles Basin and the steam enhanced recovery projects in the San Joaquin Valley. The past nine months have been prosperous and the momentum continues to build as we drill the remaining plant, high impact exploration inventory, develop our California, Gulf of Mexico and Piceance assets and close the proposed acquisition of Pogo producing company. The shareholder vote is scheduled next Tuesday, November the 6th. With that I will turn the call over to Jim.

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

Thanks Scott and welcome and good morning to everyone. Just a few comments and we will turn it over to questions and note it's a busy morning. The operations here at PXP continued to ramp up as far as performance on the operating side, consistency on the operating side and we are, the transition we started 18 months ago trying to find the assets to take our business to not only preserve the high cash generating assets and the commodity exposure but also the operational leverage where we just start growing the company through additional assets that could grow. Our investment Piceance as you heard from Scott has already gone through the first expansion, we are fully integrated there and we have increased production about 50% over where we were when we took it over. We are going to increase it another significant amount by year-end, we will get it up to about 80% increase this year and look for compounding 20% growth rates going forward in '08, '09, '10 and '11 towards our ultimate production rates we think is $250 million to $300 million a day there.

That's been tucked away. The Flatrock area is going to be a significant growth area for several years. We so... PXP from a standpoint has really accomplished a lot of it's objectives to get near term growth at the same point in time continue to invest in a highly powerful exploration programs in the deepwater that continue to yield good results. I know the information has come slow there, at the same point in time we really teed up for some very nice occurrences and profit opportunities in the deepwater next year and we will be... there will be a little more buckle there when we have opportunities once our... the lese sales are out of the way and operating plans are fully designated.

So with that preservation of those opportunities and plus the real estate and the near term growth opportunities that we have secured next Q or this year, PXP has accomplished a lot of objectives. Now secondly on the Pogo transaction which has got a lot of color obviously on our stock performance here, and this loop to loop we just did and as well as with lot of shareholders, we are... some of our newer shareholders this summer we spent a lot of time with them to get them to understand that there are strategy and if PXP is still consistent and is still the same you, reach page 34 in the proxy its in there outlined pretty clearly. But it is an opportunistic strategy we have here. And the inventory build of our properties by applying Pogo came at just the right time.

We've had a $25 increase in crude oil prices and about a buck on the gas side during some announcements to date. But more importantly when we looked at PXP with the enterprise value of PXP at the time of the announcement there is about 20% leverage on that enterprise value. When we were able to buy Pogo, with... acquired Pogo with 45% leverage we leveraged on a per share basis more commodity, more barrels, more MCS to our net shareholders, at the same point in time their ranches area we think has a same growth characteristics as of Piceance and our Flatrock area. And their Vietnam has as much potential as our deepwater Gulf of Mexico, a little bit unproven. So it matched up well and as many of our long time shareholders know we're very adept at executing and integrating these types of opportunities. We've already secured all the Pogo employees that we need to move forward with a copy on a combined basis, operations has been working very closely. We should have that well in hand here in 30 days and for sure fully integrated by the year end, and accounting will take a quarter or two after that to get everything crossed over.

But all of the Pogo employees that we've been able to hire have been willing and highly proficient in what they do. We're very excited about them joining the PXP team next Wednesday. So for our standpoint with the backdrop of commodity prices, the integration of the Pogo assets as well as the PXP operation plan is unfolding that there is some really spectacular times ahead for PXP and regards to operational performance things like production costs are going to be going down on an integrated basis, LOE cost, G&A cost will be going down on LOE basis, our bond and finance cost and so forth will be higher with the leverage on a combined basis but we hope to be addressing that overtime with cash flow and possible asset rationalization.

So, we're very pleased where we are in the world of E&P with the commodity price backdrop and post the Pogo transaction with the vote imminent on Tuesday and we appreciate everybody's support there. So, with that, Scott we will open up to questions and get through the work at hand.

Scott D. Winters - Vice President of Investor Relations

Jason, thank you.

Question And Answer

Operator: [Operator Instructions]. Our first question comes from David Kistler of Simmons.

David Kistler - Simmons & Company

Good morning guys.

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

Good morning David.

David Kistler - Simmons & Company

Quick question, as we look at kind of the oil and gas relationship right now and I guess to perceive this location in terms of the traditional 8 to 1 or MMBTU 6 to 1 relationship and then think about your steam enhanced recovery projects, how do you think about potentially locking in some of the gas costs associated with that when the revenue is coming out of it or primarily oil?

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

Well, when we were assured gas before we bought the Piceance we thought about doing that financing but now that we are long gas, we just do it physically. Basically if gas price goes up, we have our gas production to burn ratio, is what, 8 to 10 times now. So we will just make it up on the long side.

David Kistler - Simmons & Company

Okay and then kind of on that same thing... same theme as we think about the integration of Pogo about a week away or so, obviously you have been working on it previously but with your kind of oil levered company right now or slightly more oil levered company how do you think about what your focus is on attacking as far as projects etcetera within pogo given the oil and gas environment right now?

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

Well remember there is two great oil basins in the United States, California and the Permian. We are in California, Pogo is on the Permian. So that's obviously the one of the very important constructs of this transaction. So they know all, we know all, we grew up in the Gulf Coast, we understand gas and timely operations there, they have some Gulf Coast assets, we are in the Rocky's there are in the Rocky. There is so much overlap of production it's really about getting the work done and you know I am sure with big organization or more complex organization it takes a lot of integration. We are... we basically feel very confident that the Pogo employees will adhere to the PXP way of doing things and enjoy. They are enthusiastic, they are getting paid well, so the aspect to that I think is we will continue to see enhancements and better production and lower cost going forward. So we don't really see an issue and I am sure the Street has made an issue of geographics and also commodity mix. I mean to tells us it is all hydrocarbons and dollars off the ground and frankly it is really whether you view things that gas is going to have more of a rebound opportunity or more of a recovery opportunity that we are all growing faster than 95, higher than 95 bucks a barrel. This can be kind of outlook investor's look at either way is how we are going to be judged.

David Kistler - Simmons & Company

Alright. Thanks for that clarification. With... one last thing we have turned 2008 ahead of this year thinking about the California land stuff you had mentioned in the past, that's where you thought you would have your opportunity to be looking at divesting that, can we get just a touch of color on that?

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

Yes, its still on. We are at one regulatory timeline, it's a five year time line we started in 2003 and we are moving through that. We have got great partners, local partners in Later we will conduct a question-and-answer session and instructions will be given at that time., Lod Cook and his group. So we are confident we are not going to handle all the requirements. I mean its... it is on schedule for late next year to be... have some clarification around entitlement and monetization. So, nothing has changed there.

David Kistler - Simmons & Company

Great, thanks so much guys.

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

Yes.

Operator

[ Operator Instructions]. Our next question comes from Nicholas Pope of JP Morgan.

Nicholas Pope - JP Morgan

Good morning.

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

Good morning.

Nicholas Pope - JP Morgan

Quick question about your, the McMoRan work. I was wondering how many wells you have left on that agreement and if you are planning to extend that agreement further and if you do, what kind of costs are you going to see there, are you going to hire... are you going to have to pay higher to get into the future wells, higher costs.

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

Well it was only best efforts, it is more of a relationship than an agreement, how's that from a standpoint because these projects is large enough to stand on its own as you know and we are concerned about the cost more than key things. We had three areas that we wanted to explore; the Flatrock area, the State Lease 340 with a Chevron relationship, the secondary was the Exxon relationship and both of these was with McMoRan around the Caswell which turned to be a dry hole, and the third area is our own proprietary Buckhorn area and so forth which we are doing all on our own.

Well what we hope to do is have one of these areas carry the other three in a fashion to where we make some money. The Flatrock area on its own has doubled our expectations for the other two so, we feel like... even if we are disappointed Caswell was a dry hole, and we can't... we are not going to be pursuing that area involved more with Exxon, Jim Bob has got other ideas and other opportunities and we will look at on our best efforts basis and if Buckhorn is successful obviously we will have two areas which is obviously much better than having one but with the size of Flatrock we feel like Buckhorn is even a free well. So, the Flatrock area just kind of rolling back to that with the discoveries at Hurricane Deep Flatrock, the Cottonwood Point which is naturally going to completion, and we are going to set a pipe on Mound Point South, at least what we did there, because it might be a production contributor to our same facilities at Flatrock that is more of a additional production well. But there are something's going on around Mound Point South and now that we physically what looks like production based on the Flatrock and we do have seismic signatures and we think that give us lot of clarification and the newer been to process seismic out there work in hand in hand which Chevron and McMoRan to kind of fully evaluate the whole area.

We are seeing additional opportunities in the Flatrock area beyond what we drilled so far but those will be added on an as needed basis. We haven't seen anything of the size of Flatrock but there are a lot of false projects out there with 50 to 100 BCF that can be quite productive now that we know what production looks like on the seismic signature. So I expect us to drill probably 2 to 4 Flatrock development wells out in the Flatrock area, probably the Hurricane Deep offset, and maybe two more step outs in these newer place where CNG are physically because I think McMoRan controls I think 300,000 acres there with Chevron and we are... we want a big piece of that and I think we'll just continue our relationship there. So, the Flatrock area continues to develop and unfold, its going to be a bigger and bigger part of our production profile going forward with our 30% interest.

Nicholas Pope - JP Morgan

And in these future; to get into some of these future prospects, is there any additional cost other than your working interest costs that you might have at the point?

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

Not that I'm aware of.

Nicholas Pope - JP Morgan

Okay.

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

How's that?

Nicholas Pope - JP Morgan

Sounds good.

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

That maybe different after my lunch with Jim Bob as well.

Nicholas Pope - JP Morgan

Alright. Thanks guys.

Operator

Thank you. Our next question is coming from Duane Grubert of CRT Capital Group.

Duane Grubert - CRT Capital Group

Yes, Jim I'd wonder if you would comment for us about earlier in the year when you changed some of your reserve bookings in California based on mechanical well life, you re-categorized some barrels from PDP to PUD, I'm wondering if in the interim, you've seen any well bore mechanical failures, because I think that was part of the rationale for doing that?

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

Well, there's two rationales. Number one when we changed our management. Okay, so that was the key thing as more of a management for us to be more conservative along those lines. We haven't seen any additional changes on well bore integrity and so forth but really got around the timing of when the big push was initially developed in the field ten years ago, that where we saw the kind of rash of failures that we wanted to make sure we took an account of our reserve bookings so forth. So that was a one time adjustment. We don't see any other adjustments going forward on that. There's much of methodology as it was well failures and we feel very confident of where we are on that.

Duane Grubert - CRT Capital Group

Okay and then in terms of these great high oil prices out there, I see that your activity level continues to be pretty high, real high actually drilling multiple zones in the San Joaquin Valley which is very encouraging. At these high prices do you anticipate that we'll see some reserved additions based on price being the driver of revisions on the book?

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

No, I think we always see some tale reserves being added although one tail reserve gets so far out there with these prices that I don't think it has any monetary effect but you may see a few barrels added. Actually Duane we're still active out here but we are reducing capital in California for kind of two reasons, number one, its less disruptive to our existing production because lot of our areas that we drill have so much well density that we found we were disrupting more production than we were trying to... than we were able to get on and it was two years for recovery. So we continue to see better results out of our onshore properties in LA and San Joaquin due to less disruption. And then also we're doing a little more rationalization toward more meaningful reserve ads with the drill bit and more meaningful projects. So, turning back the capital has not turned back the commitment but it's also... but its had the effect of better performance.

Duane Grubert - CRT Capital Group

And then finally if you could just hit on, if there's any schedule of progress on the T-Ridge process?

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

Yes, there's a foray of meetings coming up with state lands and all the... County of Santa Barbara and so forth. We've been in discussions with them working through the issues of leases quality agreements and getting everybody on board and that continue to progress and that is as much as I can probably say at this point in time about it.

Duane Grubert - CRT Capital Group

Okay and then one quick last one. In terms of extending offers to the Pogo people, what kind of capture rate are you getting and is it inline with what you expected?

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

We got a good capture rate, we got a 100% of the field people which is key and then we had about 80% of the offers extended which we kind of assume that was about what we are doing today.

Duane Grubert - CRT Capital Group

Okay thank you very much.

Operator

: [Operator Instructions]. Our next question is coming from Brian Hennessy [ph] of Citigroup Investment.

Unidentified Analyst

: Thank you my questions have been answered.

Operator

: Thank you our next question is coming from Anthony Iorfino of Muzinich and Company.

Anthony Iorfino - Muzinich and Company

Hi, just wondering if you could just give a little bit of an update in terms of your thinking Piceance Basin moving forward on that what your thinking is currently in terms of capital expenditures in the near term or intermediate term given what you believe to be the planned takeaway capacity and obviously price realizations there, what you are thinking at this point, give us some idea of the pace of things we should expect?

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

Piceance Basin has come out pretty much like we had planned. The gas prices are all high and looks like next year than what we had planned but the differentials are closing up on the... with all the marketing arrangements. Incidentally about the Piceance, the longer term future of takeaway capacity of the Piceance is going through this optimism phase while there is a lot of projects being talked about. They all get built and there is going to be a plenty of takeaway capacity but anyway the... the Collbran Valley gas system expansion as Scott mentioned was cleared by getting our production increasing about 50%. We will have another expansion of production going on by year-end, we should meet our 72 MCF a day gross production volumes 60 million a day net for next year and that will be kind of flat all next year and we will be growing at 20% going forward to be in the situation where the capital that we are spending now with our five brick programs are just under $200 million, $180 million to $190 million that has lot of expansion and a lot of pipeline. We are laying the Buzzard Creek pipeline which give us access to Southeastern side of the Valley and a lot of... we will basically take care of our '09 expansion. So we are kind of... and Collbran Valley obviously takes care of our '08 so we are kind of focusing on the long term solution out there. Obviously that will be through firm transportation interaction with one of these other pipelines and there seem to be enough of it available because there is a shortage of physical gas to fill all of the gases. All the firm transportation has been contracted on those bigger pipes.

So, all in all, I mean, the Piceance, we look at it like a big oil field coming on just in the Gulf of Mexico or from a stand-point our capital cost or fitting our model as far as in the near term but we look pretty good in the long term has far as what the free cash flow and net cash flow out of it should be.

Anthony Iorfino - Muzinich and Company

Yes, right, exactly. I was just trying to get a sense as to what expense you are trying to manage within cash flows?

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

Not next year but '09 and really that is going to be a function of gas prices because if gas prices continue to recover we can add. We go from five rigs, we have got seven rigs, we got a nine rig, we got an 11 rig programs and we just need to kick in based on what the commodity prices will do. We have enough... plenty of acreage and plenty of takeaway capacity. So, we will be responsive to commodity prices there and right now we are planning five rig program all next year.

Anthony Iorfino - Muzinich and Company

Okay, great. And just wondering, forgive me, if you mentioned this already but have you given any sort of color as to for instance with Flatrock whether or to what extent you maybe able to book some reserves for this year?

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

We will be out of books and reserves this year because of the... we are obviously putting the wells on production. We have not drilled it down to limits of these wells so it won't be anything meaningful. The meaningful reserve bookings will be next year.

Anthony Iorfino - Muzinich and Company

Great, thanks.

Operator

: Thank you our next question is coming from Larry Busnardo of Tristone Capital.

Larry Busnardo - Keystone Capital

Hey, good morning Jim.

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

Good morning Larry.

Larry Busnardo - Keystone Capital

: Just follow up on the Piceance Basin. I know that you have that under your control here for last several months, have you been doing anything differently there or seeing anything different on the wells or is it just been kind of business as usual and just...

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

Yes, we given our job this little more... be a little more liberal in these initial wells, to test some of the deeper sands below the Marine Shale and we have had some pretty interesting luck. So, we are finding some, you know, some... it was definitely not fully explored and developed and that's too early to tell whether these things happen you know big lateral condos and it is too early to tell whether these things have big lateral continuity. We haven't drilled enough wells but we are finding additional pace and we found that we've mapped it probably a little conservative on pay counts. But the big thing we've had is that getting all the marketing out of the way. We may finally get some true flow rates next year, unrestricted flow rates. All the flow rates of the wells and well data all reflects flow rates that have had... wells that have not been able to follow their capacity because of marketing issues. So we think by next year '09, lets move on to key things, I mean '08 and then going forward after that in '09 that you will start to really see the value that we are seeing in the Piceance on the individual well basis. And that's... we will have enough data probably for in the spring time to be bringing all the analysts over the well to see what we are seeing.

Larry Busnardo - Keystone Capital

It sounds like in terms of IP rating you are still meeting expectations and probably will get better as you move forward?

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

We are seeing better results there but we will clean the well up in 1.2 million to 1.4 million a day and then shut it down and then we got to flow at 600 MCF a day waiting on pipeline expansions and so forth. So once we get that kind of cleaned up and we get some production as to where we get some true colors and so forth, that's what I am talking about where we are to sit there and talk about how its all been done, we will just show you.

Larry Busnardo - Keystone Capital

Is the... was the year-end intact, is that still 12000 BOE a day?

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

Yes, on a gross basis, 10 net.

Larry Busnardo - Keystone Capital

10 net. Okay.

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

Yes.

Larry Busnardo - Keystone Capital

And then just one on San Joaquin, looks like production is up there, I think you addressed it a little bit, but is there anything being done differently or is it just...?

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

Yes, I think it is production management just like I talked about and it is not to be under sold. The guys are doing a good job. I am real proud of how smart our people have been out there and also on our management so forth, say lets take a different cut at this thing. We have been having people out there with sledgehammers just beating and beating and beating on it and not... it just beat us down and so we said lets take a different tact and be smart and prudent and little more finesse out there and its paying off.

Larry Busnardo - Keystone Capital

All right. Great, thanks a lot Jim.

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

Thank you.

Operator

Our next question is coming from Elena Golunek [ph] of Barclays.

Unidentified Analyst

Hi, how are you?

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

Fine.

Unidentified Analyst

I just have one question for you, you mentioned the pro forma for the Pogo acquisition, your leverage increases and you are going to address that next year after the acquisition closes. Do you have a target capital structure?

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

No, we don't have a target capital structure but if you look back last year we paid all our debt off. So, that's not foreign to us, at the same point in time we have been pretty opportunistic about taking care of our bondholders and our debt structures, ties of high oil and gas prices and I guess that will qualify for this period of time.

Unidentified Analyst

Okay. That's all I have. Thank you.

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

Thank you.

Operator: Thank you. Our next question is coming from Bob Clements [ph] of Brittany Capital.

0

Unidentified Analyst

Good morning Jim.

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

Good morning.

Unidentified Analyst

Two questions. One, what are your thoughts about hedging some oil up at these levels and then the second question would relate to what you see in the way of MLP opportunities in this market?

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

Now, I got you Bob, obviously MLPs have struggled recently because of the credit markets but that's kind of losing it up. I mean, MLP market looks pretty healthy. Next year however, they obviously got a lot of product hedge, oil hedge, and if gas starts continues its upward movement, they have probably got a lot of gas hedge at lower levels. So, they're going to be active in the market. We're going to continue to look at our situation there and there's no reason why we don't take advantage of that market right after the first year once we get the Pogo deal closed. The MLP situation for PXP hasn't changed as far as the opportunity, we just have more inventory. So, we fully expect to move that direction either as in a joint venture with somebody or as own if we have to.

As far as hedging oil at these levels, there is kind of two ways to take advantage of the market, if it is hedging the oil at these markets, at these levels or rationalizing assets into them then we are going to, obviously that's our preferred strategy what we've done in the past. We stayed away from hedging, since we got burned at the $37 level that will always be branded on our backsides around here, back 2 to 3 years ago. So what we've been doing is continuing to sell the $55 plugs. And the $55 plugs when you look at our cost structure being about $23 to $24 on a cash cost basis mainly that most of you got $4 to $5 interest on that cash cost it gives us a pretty good spread to operate our business. So it's basically buying insurance at $55 and let the rest of it flow. Therefore we don't have any; hedge caps. We wrote off the $36 million of '09 plugs this year, I mean this quarter and that had affected our earnings. If you backed those out our earnings are even much higher. So we don't have really any put cost left to write off in the next 2.5 to 2 plus 1, 1 quarter years. So, we got full exposure to commodity prices and it has served us well not to hedge it but be prudent about the balance sheet and the floors obviously give us an opportunity to use some leverage opportunistically like we did here in the Pogo transaction to get more barrels per share and more barrels per employee for our company.

So, we're going to stay with this strategy on the crude oil side. Obviously gas with some of the LNG volatility we may look at hedging some of that if that becomes a real opportunity for us next year, those types of things. But on the crude side we're just going to let the geo-political world kind of call the price and we're going to be a beneficiary with our wet barrels.

Unidentified Analyst

Very good. Thank you.

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

Okay.

Operator

Thank you. Our next question comes from Greg Brady of J.P. Morgan.

Gregory Brady - J.P. Morgan

Good morning guys.

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

Good morning.

Gregory Brady - J.P. Morgan

Just a one question for you; just trying to understand the potential size of Flatrock, and just how you think about that?

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

Well our operator McMoRan has been vocal on that and I will just kind of quote on them. They take the area as 1.5 TCF potential overall. We can see that and we think its... or as far as proved reserves and booking those types of things we have got some more wells to drill. We have kind of an out log process around the 500 BCF is what we can engineer and they see on a probable and possible basis. But geologically we definitely can see the potential there and that's before we talk about a lot of the newer things and lot of the seismic integration I talked about in my earlier comments. So the interesting thing about Flatrock, that the pay starts below 14000 feet and above 14000 feet these same leases have produced 5 trillion in cubic feet of gas. So when we talk about these types of numbers its only 20% of the overall field production which is 1.5 Ts and this is one of the key fields that actually go back in the first and last century. So to have access to this acreage and with Chevron and McMoRan, Jim Bob is truly an unique experience for PXP and we are going to be there and drilling wells for a long time in the Flatrock area.

Gregory Brady - J.P. Morgan

Thank you.

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

Okay.

Operator

Thank you there appear to be no further questions at this time. I'll now turn the floor back over to Mr. Winters for any closing remarks.

Scott D. Winters - Vice President of Investor Relations

I think that's it. Thanks everybody for joining us today. Call if you have any questions.

Operator

Thank you ladies and gentleman this does conclude today's teleconference. You may disconnect all the lines at this time and have a great day.

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Source: Plains Exploration & Production Company Q3 2007 Earnings Call Transcript
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