Plains Exploration & Production has announced quarterly results, an operations update, and amends the Haynesville Shale joint venture agreement.
SECOND QUARTER FINANCIAL HIGHLIGHTS
James C. Flores, Chairman, President and CEO of PXP commented, "The second quarter of 2009 is noted for the operational and financial results that everyone at PXP worked hard to achieve and that better positioned our Company during the challenging low commodity price environment gripping our industry. Strong production with lower operational and administrative costs, plus effective hedging has proven essential for our business to remain profitable. Continued progress on the current operational and financial aspects of our business, as well as fully evaluating our outstanding exploration portfolio throughout the second half of the year, should position PXP for long-term incremental expansion of both production and reserves beyond the development of our existing assets in California and the Haynesville Shale.
"As part of our conservative long-term financial strategy, we are announcing today an amendment to the joint venture agreement with Chesapeake Energy that provides for us to pay the remaining Haynesville Shale drilling carries, originally agreed to in July 2008, on a discounted and accelerated basis. PXP previously agreed to fund 50% of Chesapeake's share of drilling and completion costs for future Haynesville Shale wells up to $1.65 billion over a several year period. On August 5, 2009, PXP and Chesapeake entered into an amendment that provides for PXP to pay $1.1 billion of an estimated $1.25 billion carry balance on September 29, 2009. This represents an approximate 12% reduction in the total amount of drilling carry commitments due to Chesapeake. In addition, Chesapeake has agreed to maintain a minimum level of activity on the jointly owned Haynesville acreage by drilling a minimum of 150 wells during each of the next three twelve month periods commencing on October 1, 2009. After the closing of the amendment, PXP and Chesapeake will each pay their proportionate working interest costs on future drilling.
"By pre-paying this carry, we unlock potential capital for PXP's other high quality assets and allow PXP to achieve an appropriate long-term financing structure that correlates with our tremendous Haynesville Shale assets. This structure maintains our balance sheet strength and increases our financial flexibility on a go forward basis to increase investment in our existing oil and gas leasehold. As a result, we are projecting our production growth rate to double to 8-10% in 2010 and +10% in 2011 forward while simultaneously improving the equilibrium between operating cash flow and capital spending.
"PXP will remain focused on its conservative financial strategy while aggressively deploying both development and exploration capital to expand current production and reserves as well as position the Company for consistent growth in the future."
CONSERVATIVE FINANCIAL STRATEGY
PXP had no amounts outstanding under its $1.34 billion senior revolving credit facility and held approximately $455.8 million in cash at quarter end. Debt-to-capitalization was 43% at June 30, 2009 compared to 54% at year-end 2008.
Approximately 80% of our 2009 estimated sales volumes, using the mid-point of our annual guidance, are protected by oil and natural gas derivative positions and natural gas physical purchases. For 2009, natural gas volumes are protected with $10 by $20 collars on 150,000 MMBtu per day while crude oil volumes have put options with a $55 strike price on 32,500 barrels per day. For 2010, PXP acquired natural gas three-way collars on 45,000 MMBtu per day bringing the total natural gas derivative position to 85,000 MMBtu per day. Crude oil volumes for 2010 have put options with a $55 strike price on 40,000 barrels per day. A summary of PXP's open commodity derivative positions is located after the financial tables in this release.
AGGRESSIVE OPERATIONAL STRATEGY
PXP and its partner, and operator, Chesapeake Energy Corporation, have drilled and completed 74 horizontal wells in the Haynesville Shale and continue to experience outstanding drilling results. PXP now owns approximately 113,000 net acres of leasehold in the Haynesville Shale with 1,400 potential net drilling locations and 6.8 Tcfe of estimated net resource potential.
The Flatrock area wells are producing over 65 MMCFE per day net to PXP. As previously reported, in May 2009 the operator completed a planned facility expansion at the Tiger Shoal production facility.
Positive drilling results at the Blueberry Hill deep gas exploratory well, operated by McMoRan and located on Louisiana State Lease 340 in the Gulf of Mexico, indicate a potential discovery. As previously reported, the exploratory sidetrack well was drilled to a true vertical depth of 21,900 feet and log-while-drilling tools indicated resistive zones approximating 150 gross feet. Operations are currently underway to deepen the well to a proposed total depth of 24,000 feet to assess deeper targets. PXP holds a 47.9% working interest.
A drilling rig is on location at the Davy Jones prospect. McMoRan, as the operator, is re-entering a previously abandoned well bore located on South Marsh Island Block 230 in the Gulf of Mexico, which had been drilled to 19,957 feet, and plans to deepen the well to a proposed total depth of 28,000 feet. PXP has a 30.8% working interest.
Four more high-potential exploration prospects, each one with a reserve potential of more than 100 million barrels of oil equivalent net to PXP, are currently drilling or will begin drilling during the third quarter 2009.
The Salida exploration prospect, located on Garden Banks Block 988 in the Gulf of Mexico, was drilled to a total depth of approximately 27,300 feet and is being plugged and abandoned.
PXP is currently evaluating its exposure to the recently announced positive industry Granite Wash results in the Texas Panhandle. PXP holds leases covering 9,040 gross and about 5,650 net acres in the Stiles Ranch Field area in Wheeler County, Texas. The acreage is located within the productive trend of horizontal drilling that is targeting multiple Pennsylvanian Granite Wash/Atoka Wash reservoirs. In addition to the horizontal potential at Wheeler, PXP is also evaluating the horizontal potential of the Marvin Lake Area in Hemphill County, Texas where PXP holds approximately 14,000 gross/net acres. PXP has identified a minimum of 29 horizontal well locations targeting discrete units within the Granite Wash/Atoka Wash section. More information is being obtained and added to the interpretation both regionally and locally. It is likely that more locations will be identified as additional information is integrated and the critical criteria for economically attractive horizontal targets are better defined.
PXP is evaluating its exposure to the recently announced positive industry discovery in Kern County, California. The discovery area is under evaluation and apparently consists of conventional oil and gas bearing formations. PXP holds approximately 9,800 net acres in the Kern County area.
PXP's T-Ridge project, offshore California, continues to maintain strong support and has benefited from the attention it received during the recent high profile California budget debate. Although the California State Assembly failed to approve legislation authorizing a path forward for the T-Ridge project, PXP intends to continue pushing for the project based on its merits to the state of California. The project has received support from Santa Barbara County, the California State Senate, the Governor and a large environmental coalition, including the Environmental Defense Center, Trust for Public Land, and "Get Oil Out", as well as firefighters and peace officers throughout the state. More than two dozen environmental groups have urged approval for T-Ridge because of the significant merits of the project. We will aggressively utilize this time to address and remedy any misconceptions that groups and individuals may have regarding the project. The T-Ridge project utilizes an existing platform and facilities operating off the Santa Barbara coast to access oil and gas reserves currently drained by PXP and upon project approval will include a steady new revenue stream to the state of California, as well as a range of significant environmental protections and offsets.
THREE MONTHS ENDED JUNE 30, 2009
For the second quarter 2009, PXP reported adjusted net income of $171.2 million, or $1.44 per diluted share (a non-GAAP measure), which includes realized gains and losses and excludes unrealized gains and losses on our mark-to-market derivative contracts, an $87.3 million pre-tax legal settlement recovery, and a beneficial income tax effect from a change in the balance of our unrecognized tax benefits. Net income, as reported, was $43.6 million, or $0.37 per diluted share, on revenues of $278.7 million.
Daily sales volumes for the second quarter 2009 were 80.6 thousand BOE compared to 87.5 thousand BOE for the prior year period. Lower volumes primarily reflect the impact of the 2008 divestments. Excluding divestments, higher production from our Flatrock and Haynesville Shale properties is primarily responsible for a 9% increase in sales volumes in the second quarter 2009 compared to the same period a year ago.
Total production costs decreased 30% to $14.43 per BOE for the second quarter 2009 compared to the prior year period. Lower per unit lease operating expense, steam gas costs and production and ad valorem tax costs accounted for the year-over-year improvement. Lease operating expense per unit reflects the impact of our cost reduction program implemented earlier this year.
Total general and administrative costs declined 17% during the second quarter 2009 compared to the prior year period. The cost reduction program contributed to this improvement.
The average realized sales price before derivatives was $49.44 per barrel of oil and $3.37 per Mcf of natural gas for the second quarter 2009. The average realized cash sales price including derivative settlements (a non-GAAP measure) was $86.32 per barrel and $8.17 per Mcf for the period.
Cash margin (a non-GAAP measure) was $57.16 per BOE in the second quarter 2009 compared to $68.05 per BOE in the second quarter 2008.
Oil and gas capital expenditures were $452.1 million for the second quarter 2009 compared to $231.5 million for the prior year period.
SIX MONTHS ENDED JUNE 30, 2009
For the first six months of 2009, PXP reported adjusted net income of $304.8 million, or $2.68 per diluted share (a non-GAAP measure), which includes realized gains and losses and excludes unrealized gains and losses on our mark-to-market derivative contracts, debt extinguishment costs, a legal settlement recovery, and a beneficial income tax effect from a change in the balance of our unrecognized tax benefits. Net income, as reported, was $48.8 million, or $0.43 per diluted share, on revenues of $507.2 million.
Daily sales volumes for the first six months of 2009 were 80.7 thousand BOE compared to 91.6 thousand BOE for the same period in 2008. The variance primarily reflects the impact of the 2008 divestments.
Total production costs per BOE were 20% lower for the first six months of 2009 compared to the same period in 2008. Lower per unit lease operating, steam gas and production and ad valorem tax costs accounted for the year-over-year improvement.
Total general and administrative costs declined 12% for the first six months of 2009 compared to the same period in 2008.
Operating cash flow (a non-GAAP measure) was $735.3 million for the first six months of 2009 compared to $902.7 million for the same period in 2008.
FULL-YEAR GUIDANCE UPDATE
For 2009, PXP has increased its capital budget to $1.4 billion from $1.05 billion. The increase reflects our participation in anticipated additional Haynesville Shale wells and additional acreage purchases offset by the elimination of the Haynesville carry commitments in the fourth quarter combined with slower than anticipated reduction in rig rates and service costs as well as additional Gulf of Mexico high-potential exploratory drilling. PXP reaffirms the previously announced estimated full-year 2009 daily sales volumes of 78 to 82 thousand BOE.
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