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Plains Exploration & Production Company (NYSE:PXP)

Q2 2008 Earnings Call

August 6, 2008 9:00 am ET

Executives

Scott Winters - VP of Corporate Communications

Jim Flores - Chairman, President and CEO

Doss Bourgeois - Executive VP of Exploration and Production

Winston Talbert - Executive VP and CFO

John Wombwell - Executive VP and General Counsel

Hance Myers - VP of IR

Analysts

David Kistler - Simmons and Company

David Heikkinen - Tudor, Pickering, Holt

Nicholas Pope - JPMorgan

Duane Grubert - CRT Capital Group

Larry Benedetto - Howard Weil

Jeff Robertson - Lehman Brothers

Chris Cox - Lehman Brothers

Marshall Carver - South One

Brett Hendrickson - Nokomis Capital

Andrew Coleman - UBS

Operator

Good morning. My name is Barbara and I will be your conference operator today. At this time, I would like to welcome everyone to the Plains Exploration second quarter earnings 2008 conference call. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Scott Winters, Vice President of Corporate Communications, sir you may begin your conference.

Scott Winters

Barbara, thank you very much and good morning everyone. Welcome to PXP second quarter 2008 Earnings Call which is also being broadcast live on the internet. Anyone may listen to the call or the replay by accessing our company website pxp.com. A copy of the earnings release and the 10-Q can be found on the website as well.

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 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, Executive Vice President of Exploration and Production; Winston Talbert, our Executive Vice President and Chief Financial Officer; John Wombwell, our Executive Vice President and General Counsel; and Hance Myers, our Vice President of Investor Relations.

The second quarter was another strong quarter financially and operationally with all asset areas contributing to overall company results. Net income increased to $202.9 million in the second quarter of 2008 from $25.3 million in the second quarter of 2007. On a per share basis, net income was $1.84 per diluted share, up from $0.35 per diluted share in the second quarter of 2007.

Operating cash flow was $450.3 million in the second quarter of this year compared to $111 million in the second quarter of last year. Operating cash flow is a non-GAAP measure and reconciliation is included in the press release.

The stronger quarterly results reflect a 64% increase in production sales volumes and a $39 per BOE increase in realized prices. Second quarter 2008 oil and gas sales volumes averaged 87.5 thousand barrels of oil equivalent per day, reflecting the previously announced asset divestitures, which closed in February of this year.

Sales volumes averaged 91.6 thousand barrels of oil equivalent per day for the first six months of 2008 and we expect sales volumes to average between 92,000 and 96,000 barrels of oil equivalent per day for the year ended 2008. PXP is currently producing within that range.

Flatrock and other growth initiatives are expected to contribute to sales volume growth throughout the year. With respect to Flatrock, we continue to see positive drilling results. There are four successful wells to date and two producing wells with approximately 30 million cubic feet equivalent per day net to PXP.

Flatrock No. 2 well commenced production on July 6 of this year. Gross production currently approximates 102 million cubic feet equivalent per day or 23 million cubic feet equivalent per day net to PXP. As a reminder the Flatrock No. 1 well commenced production in January of this year.

Flatrock No. 3 well logged deeper pay in May of 2008. In total, the well encountered 256 feet of net pay and first production is expected in the third quarter of this year.

Flatrock No. 4 and No. 5 are currently drilling and Flatrock No. 6 is expected to commence drilling in the second half of 2008.

The South Timbalier Block 168 exploratory well has been drilled to 32,550 feet and is being evaluated. The Fredericksburg exploratory prospect, operated by Shell and located on Desoto Canyon Block 486, is currently drilling with results expected in the third quarter.

The Friesian No. 2 well, operated by PXP and located on Green Canyon Block 643, has a rig on location running anchors, with drilling results expected in the fourth quarter of this year.

Activity in the Gulf of Mexico remains high. Onshore, we have been busy as well in all of our asset areas. I will highlight our activity in few of those areas now. We see positive drilling results from the Texas Panhandle development program. We began the year producing 6,500 barrels of oil equivalent per day and are currently producing approximately 7,600 BOEPD. These production gains are primarily coming from the Courson Ranch and Marvin Lakes areas where we are drilling vertical wells targeting the Mississippian St. Louis formation and horizontal wells targeting the Cleveland formation.

Additionally, wells in the Marvin Lakes area targeting the Granite Wash and Atoka Wash formations, where we have a significant inventory of future drilling locations, are contributing to these positive results.

In the Piceance Basin, we expanded our presence during the second quarter by adding approximately 11,000 acres adjacent to our existing position with over 800 potential future drilling locations. Overall PXP's Piceance drilling inventory is now over 3,600 potential well locations. There are six rigs running and a total of seven rigs expected by year-end of 2008. Production from these properties has increased about 155% to 27.5 million cubic feet per day in the second quarter of 2008 compared to 10.8 million cubic feet per day in the second quarter 2007.

PXP is finalizing 20 year to life of lease agreements in the Piceance basin which effectively provide for the transportation and processing of 100% of PXP's Collbran Valley Gas production. To accomplish this, PXP in its capacity has a 12.5% owner in this. CVGG LLC will participate in the construction of a 20-mile, 24-inch pipeline with throughput capacity of over 600 million cubic feet per day.

This pipeline will interconnect with a new 22-mile, 24-inch pipeline to be constructed by a pipeline company and plant operator and provide direct access to their Meeker, cryogenic facility processing facility and connecting downstream NGO and natural gas pipelines.

Completion of these pipelines and the first deliveries of gas to Meeker is targeted for the first quarter of '09. Separately but related, PXP has entered into a seven-year physical sales agreement with Sempra Energy Trading, LLC, for the sale of up to 50,000 MMBtus per day during January of 2010 at a differential fixed to the monthly NYMEX settlement price for natural gas.

This deal supplements an existing five-year NYMEX deal with Sempra for $26 million BTUs, which began in January of 2008. Together, when combined with PXP's favorable transportation and processing terms, PXP will realize wellhead differentials at or near NYMEX for most of its Piceance Basin production.

With superior economics and delivery capabilities, PXP continues to look for additional opportunities to capture value for its production and its acreage as they present themselves. We added a significant acreage position in the Haynesville Shale, and are excited about their future production and reserve growth potential that this area holds.

We acquired a 20% interest in Chesapeake's 550,000-acre leasehold position in the Haynesville Shale. That equates to 110,000 acres net to PXP, and we paid $1.65 billion. In addition, PXP agreed to fund 50% of Chesapeake's 80% share of the drilling and completion costs for future Haynesville Shale joint-venture wells over a several-year period until an additional $1.65 billion has been paid. This applies to less than 10% of the estimated 6,800 potential future drilling locations.

PXP expects average drilling and completion costs of $1.25 per MCFE and total finding and development costs of $1.83 per MCFE. Drilling operations are underway with six rigs running and a total of 30 expected by year-end 2009. Production contribution is expected in the fourth quarter of this year.

In California, we received Santa Barbara County Planning Commission approval Tranquillon Ridge project in April. Now we are working to secure the remaining approvals necessary for this project.

With respect to our international activity, in particular Vietnam, we contracted a rig to drill our first well in mid-year of 2009. Our commitment to a long-term strategy of accelerating per share growth is intact and supported by an inventory of growth opportunities and of several high-impact projects with near-term and longer term impacts. We remain focused on executing our plans to optimize the value of our properties and efficiently increase reserves and production.

Now let me make a few comments about PXP's financial results. Average NYMEX pricing for the second quarter was $123.80 for oil and $10.90 for natural gas. The average realized price for oil was 88% and NYMEX in the second quarter of 2008. Our average realized price for oil increased $54.43 to $108.74 per barrel for 2008 from $54.31 per barrel in 2007. The increase is primarily attributable to stronger NYMEX oil prices and an improved price differential received on a portion of our heavy crude oil sold under contract in California.

The average realized price for natural gas is 95% of NYMEX prices in the second quarter of 2008, compared to 85% for the same period a year ago. The stronger metric primarily reflects the impact of the Pogo property and improved differentials from the Piceance Basin properties. Our average realized price for gas was $10.31 per million cubic feet in 2008, compared to $6.40 per million cubic feet in 2007.

Revenues in the second quarter of 2008 compared to the prior year period increased substantially reflecting higher volume, stronger commodity prices and improved price realizations. Total production cost per BOE increased in the second quarter of 2008, compared to the prior year period. Higher commodity prices and the addition of the Pogo and Piceance Basin properties increased per unit, production and ad valorem tax cost.

An increase in our stock price during the period resulted in higher per unit lease operating cost due to charges for stock appreciation rights. Stock appreciation rights accounted for about $0.98 of the total per unit lease operating cost in the second quarter of 2008, compared to only $0.28 in 2007.

Total production costs per BOE increased in the second quarter to $20.49, compared to $19.26 in the prior year period. PXP recognized a $51.4 million loss reflected to the mark-to-market derivative contracts during the quarter. Cash payments related to the contracts totaled $20.8 million. Approximately $12.9 million of the settlements are associated with the crude oil deferred premium put options.

The balance of the cash settlement is associated with the crude oil collars. As a reminder in June PXP acquired put options contracts for 40,000-barrels of oil a day in 2009 and 2010. The 2009 put options have an average strike price of $106.16, and the 2010 put options have an average strike price of $111.49.

PXP also acquired natural gas collars with an average floor price of $10 and an average sealing price of $20 on 150 million BTUs per day for the months of July in 2008 through December of 2009.

PXP has elected not to use hedge accounting for these derivatives and consequently the derivatives will be mark-to-market each quarter with fair value gains and losses recognized currently as a gain or loss in the mark-to-market derivative contracts on the income statement.

For a complete description of these derivatives, please refer to the 10-Q which was filed today. So, for the rest of the year, PXP remains focused on growing production from the development assets, delivering upside growth via high quality, high impact projects and maintaining the financial flexibility.

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

Jim Flores

Thank you, Scott. Good morning everyone. I know that was a thorough report of our operations and we are going to get some questions. So I will make my remarks brief. The production increases of 64% quarter-to-quarter are relative to all the transactions and everything we have been doing while commodity prices have been high to position our company for our money track.

The aspect of production growth at PXP is experiencing now and is going to continue to experience through unveiling all of the operational plans we have on the assets. I think is going to be our fruit for many, many quarters to come. PXP is well-positioned with its floors, with the $100 net floors and 110 for most of its oil production for 2009 and 2010 and also its gas collar with a 10 by 20 gas collar Scott mentioned.

You look at commodity prices this year and one day everybody experiences the $147 oil that's branded in everybody's mind. This is so unrealistic because if we look at commodity price for our forecast this year, internally it was $105 average crude oil prices at the beginning of the year. Therefore we did budgets at $90. It looks like if crude oil hangs in there where it is right now, we will be average at about 1$15 to $116 a barrel for 2008 which is about $10 a barrel above where we had forecast and about $9.40 on the gas, that's an easy dollar ahead of where we forecast gas.

So from our standpoint, business environment, we are way ahead of plan, we are going to continue to be ahead of plan financially and we are going to use our excess proceeds to continue to pay down some debt, get our balance sheet strong again after our interest sensitive (inaudible) Haynesville play. We looked around here this past Monday at our company and the entire executive group and we are very, very excited about the investments we made in the Haynesville and the growth that we are going to be able to put up on an organic basis inside this company that will reduce our appetite for outside activities.

The market volatility is going to be positive in some respects in the third quarter, of course with our mark to market, even though our mark to market volatility is low. With our put strategy, it still could have a positive effect on incremental earnings beyond the cash earnings that we are having which will turn to maybe over $0.25 million dollars, if it stays in these prices, all positive effects of when we put our contracts in place and how they're working favorably in the third quarter for our hedges.

Also Scott mentioned the thing about stock-based comp at the least level. Thevery key, is integrating all of our employees whether they are in the executive suite or in the field, turning the wells and drilling the wells. We want to make sure everybody is aligned with our shareholder. Therefore we have a significant amount of stock at the least level that's charging us our LOEs. So as our stock went up 50% in the second quarter that would be significant increase to our LOEs as well as gas prices to our steamy operations in San Joaquin.

Comp score in the third quarter painfully charged to our employees that the stock has retreated and therefore would be a positive there, the lower LOEs and with gas prices significant to our steaming operations. I'm not too worried about our employees, as they are all long term, they are looking at the future of the company, not the quarter-to-quarter, but I do want to mention that, from a standpoint of how the volatility will be effecting PXP going forward.

All right, with that, we've got everybody here. I am going to open it for questions. I know you guys have some. So, operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from David Kistler from Simmons and Company.

David Kistler - Simmons and Company

Morning.

Jim Flores

Morning, Dave.

David Kistler - Simmons and Company

Hi, quick question for you. As you have digested the Pogo acquisition and with the recent transaction with Chesapeake, can you walk us through your projected oil to gas mix over the next few years and then maybe generally your thoughts of oil versus gas?

Jim Flores

Well, if you just take where we are right now, we are just basically two thirds oil, one thirds gas and reserves and 60/40 production oil versus gas. The big variable is, obviously gas is going to be coming at us in a big way out of the Panhandle and South Texas and the Piceance and the Haynesville but not small but offsetting that will be our investments in T-ridge and Friesian in the near term. I am talking about in the next two to four years. So we think it will, at the low maybe 55% of oil and somewhere in the low 50s and then we will work back to where we are closer to 60 once T-ridge is up and rolling. We think we will stay about where we are and just wobble around in the 50% to 60% range as far as oil.

David Kistler - Simmons and Company

Okay. Then jumping over to T-ridge for a second. If I am not mistaken, you have pretty important date on the 18, with respect to the appeal that is taking place. Is that correct? Can you walk us through, maybe the time line for T-ridge?

Jim Flores

Well, yes, David. I can help you as much as I can, but remember the agencies in California are in control of the dates. They are in control of the meetings and in control of what gets done. We just simply react to it. We have been told that the end of August, the appeals process will have run its course. We have actually heard from them that one of the appellates have actually withdrawn their appeal so we are continuing to work through those. So we fully expect by the end of August having those extinguished and the date I think you refer to is actually the expiration date that we have heard.

So if they have not been after affirmed by that point in time then they do expire, our understanding of it is. So basically shortly after that, the office of State of Atlanta will be cleared to hear the lease request and grant the lease and then the next step would be go to California Coastal Commission for their approval and then MMS for final approval and then we can commence drilling operations.

There are a lot of people involved. A lot of moving parts and so forth but we still feel comfortable at this point in time that we will be hopefully drilling by October, November at the latest.

David Kistler - Simmons and Company

Okay, great. Thank you very that update. Then last, the housekeeping question with Salida, I think last you had mentioned it was going be end of the year or start of next year, has that moved one way or the other.

Jim Flores

We haven't got any updates from Shell on that. I am sure that is subject to their rig schedule and their other operations. However, I think they have some more equipments showing up in the first quarter. So I think that may be what that is earmarked for. So I would keep that first quarter of '09 and be surprised if it gets moved up.

David Kistler - Simmons and Company

Great. Well, thanks so much and good work on the quarter.

Jim Flores

Thanks.

Operator

Our next question is coming from David Heikkinen from Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt

I think that is me.

Jim Flores

Yes, that was pretty close.

David Heikkinen - Tudor, Pickering, Holt

That was pretty close. When you think about the Haynesville, have an AMI with Chesapeake. Can you talk at all about your expectation for additional leasing and where that could go by the end of '09.

Scott Winters

Well, I think you heard Aubrey, and obviously, Aubrey is very comprehensive on his calls and so forth and we are a participant with those. So do not ever construe any statement that we make as something that we are in control of as far as something we will change or whatever. We are a team player with those guys and happily so. So with that being said, he did mention he had 800 brokers up there which were paying 20% of the hope they are buying leases everyday. So we are actively filling out blocks and buying tracks the laying rush was on the larger tracks and there is enough substantive acreage that, we hope to be at 750,000 acres by year end next year, ’09, it is a goal.

David Heikkinen - Tudor, Pickering, Holt

Yes. That is the partnership. On Vietnam, so, you have contracted a rig. Can you talk at all about partnership or any of the moves there? Who is interested and then how that could be structured?

Jim Flores

Well, we do not have a lot of people interested, and we are going through that process. What we are looking for there primarily is a contribution situation where we could leverage what we think is a Grade A prospect in Vietnam, for something that someone else has to trade, from a standpoint.

We have got, we liked the prospect, we are prepared to drill it and go forward, but if we can maximize it to another opportunity that would be appealing to us. So, those deals, as you know, are complicated and best look at their own inventory. You have to have two sets of opinion, both say yes. So, we will go through that process till we draw the well probably.

David Heikkinen - Tudor, Pickering, Holt

Okay. Then in second quarter can you give a regional breakdown of what your production was?

Jim Flores

Yes. Winston, you want to?

Winston Talbert

Yes. In onshore California we are producing about 34,000 barrels a day.

David Heikkinen - Tudor, Pickering, Holt

Okay.

Winston Talbert

Offshore California, right around 12,000 barrels a day. Permian, Panhandle, around 16,000 barrels a day and then the Rockies, about 8,000 barrels a day. We have been fluctuating a little bit out there because of the Madden Fields, couple of trains been up and down and things like that.

Jim Flores

Yes. David, if there has been a disappointment, it is probably been in the Madden Field but, its one of those things that Conoco’s operating equipment’s 25 years old. Scary, for I remember that feels discovered and I thought it’d last forever. However, so, we had to replace a lot of the H2S equipment and so forth. Actually it is been spotty in the second quarter. It is going through a major overhaul in the third quarter. We had that baked in to our numbers. So, we are comfortable especially with the contribution of the Flatrock but, once Madden gets to go on full steam here in the third quarter, then we could put up some real fun numbers around here.

David Heikkinen - Tudor, Pickering, Holt

Okay.

Winston Talbert

The other piece of the Gulf Coast which includes South Texas and Breton Sound and the Flatrock and things like that, we are producing about 15,000 barrels a day and that is ramping up.

David Heikkinen - Tudor, Pickering, Holt

Okay. Thanks.

Jim Flores

Sure.

Operator

Our next question is coming from Nicholas Pope from JPMorgan.

Nicholas Pope - JPMorgan

Good morning.

Jim Flores

Good morning, Nick.

Nicholas Pope - JPMorgan

I was hoping you can give a little more detail on the Panhandle when you talked about the inventory there. What are you all thinking about in terms of potential wells that you all have, targeting the Granite, Atoka Wash’s and what costs are you expecting up there where you are located?

Jim Flores

Well, Nick as you remember, we have one of the largest positions up there inherited from Pogo and it was also one of the most premature areas as far as drilling. We break it up in two areas. We have three very nice development projects, Wheeler, Courson Ranch and Marvin Lake.

Okay those areas are continuing to, with completion techniques and drilling costs and working with those aspects are improving, that is directional from there. We are seeing some interesting things there.

The other parts we are seeing is some of the horizontal Cleveland Sands, we are talking about wells that, its hard for me to give you the exactly at this point, we think the excellent economics but, there are multiples and multiples of them. Then you get into the exploration of our ranches there that we are just now starting and trying new concepts in new areas.

What we want to do is highlight it to everybody that it is a very positive area from production contribution. We think we will have enough wells drilled, enough data so say it is going be a long-term area for PXP by first quarter next year, and after we have passed some decline curves, some EUR work that we feel comfortable with expounding out, but right now, just with the well performance and so forth and some of the numbers we have seen without being, without engineering confirmation of time and actual production, we have a very positive slam on at this point.

Nicholas Pope - JPMorgan

All right. No problem. What deferred tax rate are you all expecting for the remainder of the year? What are you all expecting to defer in the second half?

Winston Talbert

Well it really depends on commodity prices. We are thinking more like where they are up about $130, $140 million a day. We are thinking like 20% current, 80% deferred, and but the current portion will start going down as the commodity prices start going down. Because we burned through a lot of our NOIs and like I said, it is really dependent on the commodity price.

Nicholas Pope - JPMorgan

All right sounds good. That is all I had. Thank Winston.

Winston Talbert

All right.

Operator

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

Duane Grubert - CRT Capital Group

Hey Jim, could you comment a little bit about the Permian Basin JV with Oxy. I think of it as a JV. Is that something that you would look to expand like the philosophy of the Chesapeake or is it pretty much, here’s a set bunch of assets and that is it?

Jim Flores

Duane you were real soft on the call. Let me repeat the question, make sure I got it right was comment on the Permian JV we have with Oxy and whether it is expandable or not; is that correct?

Duane Grubert - CRT Capital Group

Yes, that is right.

Jim Flores

Okay. I have got the question. It was very quite. We have had no discussions with that. Of course we have only been in it a couple of months with Oxy. They have been busy getting their hands around. The wells we have planned and get them drilled, we have done a fine job there as well as, their own thoughts and ideas and so forth.

We are very excited about the sourcing of the CO2 out of their SandRidge deal to give Oxy an excellent cost effective CO2 input into the Permian Basin; it is going to really help these assets over the long-term as far as retail potential, but the CO2. The aspects of additional plans in the Permian, we haven’t heard of any and I do not really expect them since Oxy is a big consumer of every opportunity out there that makes sense, and are definitely not in a cash bind.

Duane Grubert - CRT Capital Group

Okay. That was real useful. Then on a couple of off beaten past projects, can you comment a little on the Eagle prospect and if there are any other emerging one off ideas, like at one time you had some interest in Nevada. Is there anything like that on the back burner?

Jim Flores

Well, we are always looking for opportunities that will move the needle around here. Haynesville has set a new precedent around here for moving the needle not only long-term but near term. The impact of that project is really going to change the course of PXP regards to long-term projects. We are going to be looking at probably projects more from the standpoint of resource plays that we are going to be able to have near-term effects on to Eagle. Eagle, we look at that project as being a supplement to our Piceance Basin activities. We are on schedule to work things out with all of the agencies up there, so we start preparations for drilling next summer, roads and those type of things and then hopefully begin exploratory and development drilling in 2010.

That should be ramping up and supplementing our full blown Piceance development. I think you heard from Scott Winters, the key about the Rockies is marketing and the key about our interest in the Piceance a year ago was the marketing aspect and we are now got all of that flushed out, from our first phase of the next 7 years and 20 years on the firm transportation with the cryogenic stripping of liquids and being able to realize higher prices than actually NYMEX gas, higher prices than what we receive if we had the best gas contract there because of the liquid payback.

So we are high on the Rockies from there and looking forward to taking a very stable and thoughtful approach to Eagle with our deepwater program in the Gulf of Mexico and the offshore California being the dynamic portion of our business. We are excited of the next six months to figure out where all of that stands, get T-Ridge up and running and get our deepwater program exploratory well drills at Salida, our confirmation well drilled at Friesian and find out what happens at Vicksburg. We will have a lot of more directional picture of what we want to do or need to do. We actually think about what we have done in the last couple of years, builds on array of not only assets that grow but opportunities and we are very rich right now in those.

So, we are probably going to be a little slow to the switch as far as other new investments, but monetizing what we have through the drill bit. So, I do not want to say we are pat, but we were pat before the Haynesville and the Haynesville is a spectacular juice to our operations. So, if there is anymore Haynesville times two, we would be interested in those, but other than that I think it is going to be tough.

Duane Grubert - CRT Capital Group

That is great. Thanks, Jim.

Jim Flores

Okay.

Operator

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

Larry Benedetto - Howard Weil

Thank you. Jim, Block drilled to 32,550 and being evaluated, does that mean you are still considering whether or not to drill it down to 35,000 feet?

Jim Flores

The 35,000 is just a number, Larry from our standpoint, what we are interested is in commercial production. So let see what happens here at 32,550 and what comes out from that and see what our additional plans are for the whole play. I think Jim Bob; I am going to see him over in China. I am going to see him at the Olympics over there. I asked Jim Bob, I said Jim Bob what do you want me to bring from China. He said, look brother, why do not you come with me and help drag some drill pipe back in China. We had a talk over there and see when we get back. I think we will have some definitive plans at Block, we are talking about commerciality and all additional drilling plans directly there whether it'd be in this well or others.

Larry Benedetto - Howard Weil

Okay. Then, second question on the Haynesville joint venture with Chesapeake. From a personnel standpoint, do you plan to assign a group of technical people to work hand in hand with Chesapeake or maybe step back and be more of a passive type of investor and let those people direct their attention to other plays?

Jim Flores

Well, it is a two part question, Larry. It is a good question because every single technical person in this company was engaged in evaluating and involved in the Haynesville Doss Bourgeois, every single vice president. So how is that for input? We did. We are set up functionally, so every investment we make, everybody touches the ball. So, every vice president has been involved and one comment on that, dually impressed by the operating capabilities of Chesapeake and also the technical capabilities.

I think they gets overshadows commercially in their organization as some people said also in ours. We have done business with the best of the best, the Chevrons, the Shells and everybody else around world and Andarko and those guys in Oxy. So, if you look at Chesapeake and have our guys blown away by their capabilities plus their confidence plus their abilities, just pure abilities, to evaluate something like this, get their hands around it. Just on the marketing side, when Chesapeake lies out their marketing plans, everything is what you would dream of and they are doing it as matter of course of business.

So, we are very please from that standpoint. Now, once the deal is evaluated, we made the investment to your question is we haven't operated by other's group that obviously works with the Oxy for example in the Permian Basin. We will put a segment together of that group that will be involved with Chesapeake on a daily basis. The way Chesapeake is set up with their scatter system on a production wells and all of the data we are real-time data daily, so it is a very easy thing to operate. The big thing is staying up with the leasing and the commercial aspects and just be flexible.

So, Chesapeake is restricted from doing. What they need to do is, bring additional rigs and those types of things to accelerate the play. That is really what our biggest goal is going forward.

Larry Benedetto - Howard Weil

Thank you.

Jim Flores

Okay.

Operator

Our next question is coming from Jeff Robertson from Lehman Brothers.

Jeff Robertson - Lehman Brothers

Thank, Jim. Can you talk a little bit about the freezing well and what you are looking for with that well. Whether or not it is going target the original prospect idea that PXP and Shell announced or Shell announced as a discovery back in late 2006.

Jim Flores

Sure.

Jeff Robertson - Lehman Brothers

Also just the ownership situation?

Jim Flores

Sure. We have 50% Shell has 50%, Jeff, from there. We are drilling the well, PXP is operating the well and we are drilling down to 28,000 feet. We think it will test through the M12 sands. We think the M10 to M12 are perspective.

The M12 was the main pay sand in our original discovery. These are the uppermost sands in that Tahiti Basin. We have not tested today the M15, M20, M21 A and B sands yet, which is still the meat of the prospects. What we are doing is establishing commerciality for our production hub and our plans to develop the lease economically.

We are going to set this well up with a casing program, so it can not be reentered and drilled on to 32,000 feet additional 4,000 feet to test those sands when the drilling equipment is available. Obviously, we talked about new equipment coming for Shell and there is a lot of new heavier equipment coming in the gulf of Mexico over the next couple of years and we will be able to easily, easily deepen as well or drill a new well by the time our production goes on stream in the production facility.

So it does not delay the project. What it does, it help accelerate the economics by drilling the well to the known field pays right now and development of production scenario around that. However, with the exploration benefit still ahead of us.

Jeff Robertson - Lehman Brothers

Okay. Thank you.

Jim Flores

Sure.

Operator

Thank you. Our next question is coming from Gary Stromberg from Lehman Brothers.

Chris Cox - Lehman Brothers

This is actually Chris [Cox]. Good morning.

Jim Flores

Hey, Chris.

Chris Cox - Lehman Brothers

Secured debt is going to be pretty high after this Haynesville acquisition close the minority interest in July, is there any plans for reducing borrowings under your credit facility through asset sales or additional equity issue?

Jim Flores

Yes, the answer to that is yes. I mean we are not all that comfortable with having that much secured debt on top of the senior notes. So we are going be looking to reduce debt through cash flow, through maybe term in some of it out and asset sales. We still have some clean up to do around some of the Pogo assets and that is really the plan going forward and that is what we have been communicating to the agencies and everybody else.

Winston Talbert

Chris, as an augment to that, we have no plans to issue any equity. We got a lot of cash flow, we just reduced the share count by 5%. So from our standpoint, we have a lot of ways to raise capital with non-producing assets at are deepwater assets or our real estate, or just through our cash flow.

So overtime it will solve itself as well as continue to generate a lot of earnings and cash flow out of the base business. So we are very pleased with things like T-ridge and all of the drilling we just outlined to everybody and the growth in the Haynesville and Piceance and Panhandle Ranches. We like our position right now.

Chris Cox - Lehman Brothers

All right. Thanks.

Winston Talbert

Sure.

Operator

Our next question is coming from Marshall Carver from South One.

Marshall Carver - South One

Yes, so a couple of questions, one I know that share repurchases are going to stop with the Haynesville ac acquisition, but were there any share purchase.

Jim Flores

We used the word postpone, Marshall.

Marshall Carver - South One

Okay. Were there any share repurchases at all during the second quarter just want to make sure my go-forward numbers are good.

Jim Flores

No, they were not. Because we were tied up in all the Haynesville stuff, we had no open windows.

Marshall Carver - South One

Okay. That makes sense. Next question on the Haynesville, I know that you are expecting some production impact in the fourth quarter. When specifically does that transaction close?

Jim Flores

Well, it closed July 7th, effective June 30th. However, moving in the third quarter we will be able to get a lot more specifics, but we are getting all of the dust settled on it. We participant in all wells spudded after June 30, so, the wells, there is probably 14 or 16 wells. I forget the number that have been drilled or started before June 30 that we are not in. We did not want to pay for those and they do not want to sell them.

So by third quarter, we will have some results. That is why we are saying production, we any the fourth quarter. Then the schedule of the way it is ramping up and actually accelerating from Chesapeake that we look at 1,000-barrel a day net increase to PXP per month for the next four or five years out of that Haynesville.

Marshall Carver - South One

Okay. That is helpful thank you. That is all for me.

Jim Flores

Okay.

Operator

Thank you. Our next question is coming from Brett Hendrickson from Nokomis Capital.

Brett Hendrickson - Nokomis Capital

Hey. It is Brett with Nokomis Capital. My question was on the share repurchase. I think you just answered it. Any sense for how long it may be postponed? We were hoping that was the hedge.

Winston Talbert

Brett, when we told you by we wanted to reduce debt by $1 billion. Okay? We have $3.5 billion for the pro forma for the debt for the deal, which is $1.5 billion of senior notes and another $2 billion on the revolver. We have a lot of cash flow right now. We are not spending our cash flow. We have got some real estate that to monetize and some other things. We want to reduce that debt by $1 billion dollars, whether we leave $1 billion on revolver or term a portion of it out that will be due to market circumstances and where ever we think that is prudent.

Brett Hendrickson - Nokomis Capital

Got you. So you want to take the 3.5 of debt you added, you want to get rid of a million of that, netted at 2.5.

Winston Talbert

A billion, that is correct.

Brett Hendrickson - Nokomis Capital

Okay. Thanks.

Winston Talbert

Then it is going to be commodity price driven, that is with our put strategy, commodity prices are strong and we have excess cash flow. I would like to think that we would excess cash flow over Chesapeake's aspirations. However, maybe that will continue to surprise the upside but that is really going to be the only area that we see any upside volatility to our business plans, so we will use that incremental cash flow to reduce the share count, to press it against those opportunities.

Brett Hendrickson - Nokomis Capital

Okay. I was hoping that is where your head was, and good to hear. Thanks.

Winston Talbert

There is another part to it. You think about where we are at the midpoint of the range of our production, 94,000-barrels a day this year. You add 20% growth to that and use any commodity price, its reasonable with our force. You are going to see we are going to generate a lot of cash flow beyond the CapEx budgets that we have discussed of $1.75 billion for '09. So there is, there is hopes and aspirations, that is why I wanted to make sure that the stock buy back is postponed until we are in a better cash flow situation with prices and CapEx in '09.

Brett Hendrickson - Nokomis Capital

Is there any share price where you would say, all right, its too tight and I cannot postpone it? Would you entertain that?

Winston Talbert

Well, I think we will do what is prudent. We were making long-term investments in those types of things. I would say never say never. We now have got about $700 million or $800 million of bank liquidity and flexibility. However, we have been communicating with our debt holders, our banks and so forth. We are operationally focused right now. However, we know how to get our business in shape to where we can take advantage of that.

I think as people understand what is going on with the Haynesville and things like that I think then things will clear up as far as our share price. However, we are always going to be cheap compared to what our opportunities are. So the stock price with incremental cash, is always going to be stock prices is always going to be going to be attractive to us to purchase.

Brett Hendrickson - Nokomis Capital

Great. Good to hear. Thanks a lot.

Operator

(Operator Instructions) Our next question is coming from Andrew Coleman from UBS.

Andrew Coleman - UBS

Hi. Good morning.

Jim Flores

Morning.

Andrew Coleman - UBS

I had a couple of financial questions here. One, it says guidance still 92,000 to 96,000-barrels a day, and covered earlier, I apologize, but with the Haynesville volume coming in the fourth quarter, you think there is much of a chance that 1,000-barrels per day per month could raise that guidance for the year?

Jim Flores

I think I would start in January. We are saying we have about 500 or 1,000-barrels of contribution in the fourth quarter to Haynesville. So starting in January.

Andrew Coleman - UBS

Okay, great. Thinking about the California assets and the pull back that we have had here in gas price a little bit, I know your steam cost are indexed to the gas used to fire those heaters.

Jim Flores

Right.

Andrew Coleman - UBS

What do you think is going to happen? Or how should I think about the margin improvement happening in those assets going forward?

Jim Flores

Well, think about it this way. We have $1 change and natural gas is about $70 million either way. So we would rather have gas prices high. We are low on gas. We are only burning about 20 million. We burn 40 million a day but we can net 20 that we do not produce. So you can get that working on the margin but basically the aspect is that sensitivity holds is already factored in the gas uses or you can use the 40 million a day and 20 of it and then take our net loan position of where we are in gas and offset it.

Andrew Coleman - UBS

Okay. Great. Thank you.

Jim Flores

All right.

Operator

There appears to be no further questions at this time.

Jim Flores

All right. Thank you, Barbara. Everyone, thank you. I look forward to bringing you further results in the third quarter and as PXP continues to enjoy this high commodity price environment and healthy active successful exploration season. Thank you very much.

Operator

Thank you, this does conclude today's Plains Exploration conference call. You may now disconnect.

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Source: Plains Exploration & Production Company Q2 2008 Earnings Call Transcript
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