Pogo Deal May Not Stick

When I looked at the proposed buyout of Pogo Producing (NYSE: PPP) back in July, it was from the perspective of Pogo shareholders. Now a major shareholder of acquiring company Plains Exploration & Production (NYSE: PXP) has shared its own perspective on the deal -- a perspective that's none too pleased about what's in the works for Pogo.

Jeffrey Tannenbaum's value-oriented Fir Tree Partners controls about 9% of Plains' shares, and in an SEC filing on Friday, the fund expressed its plan to vote against the Pogo deal. Fir Tree initially supported the deal, but now that natural-gas prices have tumbled, Pogo's gas-heavy assets are suddenly looking less attractive. Fir Tree isn't alone in this assessment -- since the day of the merger announcement, Plains' share price has fallen harder than that of any other exploration-and-production outfit that I follow.

Fir Tree didn't just take this opportunity to gripe publicly. It also laid out an alternative strategic vision for the company in its filing. The fund argues that Plains could better deploy capital by continuing to repurchase shares -- as it had done before this deal. That path makes sense only if Plains is undervalued, however, so let's look at the evidence.

Fir Tree estimates that Plains' forward multiple to proven reserves, after adjusting for future non-core asset disposals, is less than half that afforded to a peer group including Cimarex Energy (NYSE: XEC), Petrohawk Energy (NYSE: HK), and Newfield Exploration (NYSE: NFX). There are several assumptions built in here, such as having Plains shed its remaining Gulf of Mexico properties. That said, it did set a precedent with some sales last year.

If non-core asset sales are reasonably assured going forward, Plains is effectively valued at a very steep discount to recent transactions, including the Pogo deal. The company's production costs are running higher than anyone would like, but the strong aversion to this operator seems excessive.

The bottom line? Plains can either buy Pogo for what appears to be a fair price, or it can buy its own shares at a deep discount. I'm inclined to believe that ditching Pogo might just help Plains regain its mojo.

Related Foolishness:

• I've recently cottoned to Cotton Valley operator Comstock Resources (NYSE: CRK).
• Over in the Barnett Shale, Devon Energy (NYSE: DVN) is master of its domain.
• One of the offshore drillers is right-sizing its asset portfolio as well.