TEXT-S&P cuts Plains Exploration & Production rating to 'BB-'

Wed Dec 5, 2012 12:29pm EST

Overview
     -- U.S.-based Plains Exploration & Production Co. has completed its
transaction to acquire deepwater Gulf of Mexico properties from BP and Shell.
     -- We are lowering our corporate credit rating to 'BB-'. We are lowering 
our issue rating on the company's senior unsecured debt to 'B' and revising 
the recovery rating to '6'. We are removing the ratings from CreditWatch 
negative.
     -- The negative outlook reflects the potential to lower the ratings in 
the next year if debt to EBITDA rises above 4x.
Rating Action
On Dec. 5, 2012, Standard & Poor's Ratings Services lowered its corporate 
credit rating on Houston, Texas-based Plains Exploration & Production Co. 
(Plains) to 'BB-' from 'BB' and removed the ratings from CreditWatch negative 
where they were placed on Sept. 10, 2012. The outlook is negative.

In addition, we lowered our issue rating on Plains Exploration & Production 
Co.'s senior unsecured debt to 'B' (two notches lower than the corporate 
credit rating) from 'BB-'. We revised the recovery rating on this debt to '6', 
reflecting our assessment of negligible (0% to 10%) recovery in the event of a 
default.
Rationale
The downgrade follows Plains' completed acquisition of deepwater Gulf of 
Mexico properties from BP PLC and Royal Dutch Shell PLC. The acquisition 
represents a strategic shift for Plains and presents increased execution risk, 
particularly given the complexities associated with operating in the deepwater 
Gulf of Mexico. Although the company currently has offshore exposure through 
its working interest in Point Arguello and Point Pedernales in California, as 
well as its ownership of Plains Offshore Operations Inc. in the Gulf of 
Mexico, these operations represent less than 10% of the company's existing 
reserve base and are modest in scale relative to the assets the company is 
acquiring. Further, the debt-financed nature of the transaction results in a 
meaningful deterioration in the company's credit protection measures. While we 
currently forecast that the company's credit ratios could return to 
preacquisition levels over the next 12 to 18 months, this could be delayed if 
management expands capital investment beyond currently contemplated levels in 
pursuit of improving shareholder returns.

Despite these concerns, the transaction significantly expands Plains existing 
reserve base and production. The company estimates that these assets will 
increase proved reserves by 127 million barrel of oil equivalents (boe) and 
production by 67,000 boe per day, representing increases of 31% and 68%, 
respectively. New production will increase the company's exposure to oil 
production from current levels of 57% to approximately 70%. In addition, the 
company has numerous opportunities to expand its reserve base through 
recompletion, workover, and tie-in opportunities.

Pro forma for the transaction, debt to EBITDA, which has been trending in the 
mid-2x area, will rise to more than 3x. Under our current pricing assumptions 
($90 Brent and $3.00 natural gas in 2013), we estimate that leverage will fall 
to levels closer to 3x by the end of 2013. If the company is successful in 
completing planned divestitures (primarily its Haynesville and Madden assets), 
leverage could fall closer to 2.5x.

Liquidity
In our view, PXP's liquidity is "strong". Key elements of its liquidity 
profile include:
     -- We expect the company's liquidity sources (including cash, FFO, and 
revolving credit facility availability) to cover uses by more than 1.5x over 
the next 12 months.
     -- The company's sources of liquidity will likely cover potential uses 
even in the unlikely event that EBITDA declined by more than 30% from 
currently forecast levels.
     -- The company does not have any material long-term debt maturing over 
the next three years and amortization of the company's term loan is manageable.
     -- The company owns 51 million shares of McMoRan Exploration Co. stock 
that could serve as an alternative source of liquidity.

Recovery analysis
The rating on the company's senior secured debt is 'BB' (one notch higher than 
the corporate rating) and the recovery rating is '2', indicating our 
expectation of substantial (70% to 90%) recovery for the lenders in case of a 
payment default. The rating on the company's senior unsecured debt is 'B' (two 
notches lower than the corporate rating) indicating our expectations of 
negligible (0% to 10%) recovery for bondholders in the event of a payment 
default. The '6' recovery rating reflects our assessment of negligible (0% to 
10%) recovery for lenders in the event of a default.

Outlook
The outlook is negative. We could lower the ratings if we believe Plains' debt 
to EBITDA will trend above 4x for a prolonged period. We could revise the 
outlook to stable or raise ratings if PXP delivers on its deleveraging plan, 
specifically by generating significant free operating cash flow and selling 
assets to pay down debt to where we believe debt to EBITDA will fall below 
2.5x.
Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011.
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 
Exploration And Production Industry, Jan. 20, 2012
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Temporary telephone contact numbers: Lawrence Wilkinson (212-991-8514); Carin 
Dehne-Kiley (917-496-8208)
Ratings List
Downgraded; Off CreditWatch; Outlook Negative
                                        To                 From
Plains Exploration & Production Co.
 Corporate Credit Rating                BB-/Negative/--    BB/Watch Neg/--

 Senior Unsecured                       B                  BB-/Watch Neg
   Recovery Rating                      6                  5

Ratings Affirmed

Plains Exploration & Production Co.
 Senior Secured                         BB                 
   Recovery Rating                      2               


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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