In my recent "11 O'Clock Stock" pitch for one of my favorite oil and gas companies, I noted that many investors are running to the relative safety of onshore plays. They're not alone. Operators themselves are fleeing the Gulf of Mexico as well.
Even before the Macondo oil spill, oil & gas producers were hightailing it out of there. Devon Energy (NYSE: DVN) did so as part of its extreme makeover. If Devon was in too deep, then Mariner Energy certainly wasn't a viable long-term deepwater player, and smartly sold out to Apache (NYSE: APA).
In August, Plains Exploration & Production (NYSE: PXP) announced its intention to reduce its exposure to the Gulf of Mexico. The first part of that plan took shape on Monday, with PXP agreeing to sell all of its shallow water interests to McMoRan Exploration (NYSE: MMR) for $75 million in cash and 51 million shares of McMoRan. At today's share price, that's a total take of around $888 million.
PXP explained that the form of the transaction would allow the company to "maintain upside exposure to the multi-trillion cubic feet equivalent ultra-deep exploratory potential without the substantial long-lead time capital requirements." That really gets to the heart of the firm's planned divestitures in the shallow and deepwater Gulf. McMoRan's ultradeep drilling operations are very costly, as are deepwater exploration wells. Even without a more onerous regulatory regime, these capital programs were extremely demanding. PXP says its Gulf sales will relieve $500 million of annual capex.
This looks like a good move for Plains, which will now be focusing on -- surprise, surprise -- onshore oil plays. Of course, the company is a bit late to the party, and now has to try to catch up to firms like EOG Resources (NYSE: EOG) and Chesapeake Energy (NYSE: CHK) that have already set out to make this shift. A lot of emerging oil plays are already overcrowded.
If Plains has an edge onshore, it's probably found in the firm's strong foothold in California. Occidental Petroleum (NYSE: OXY) and Venoco are working hard to unlock potentially significant unconventional oil plays out there, including the Monterey shale. Oxy says its California shale program could become the company's biggest business unit within a decade. I fully expect PXP to ride those coattails, as the company has successfully done with McMoRan in the Gulf, and perhaps regrettably done with Chesapeake in the overhyped Haynesville.
So what do you make of the move, Foolish reader? Is there any opportunity left for PXP in the onshore arena, or is the company too tardy to the party? Sound off in the comments section below.
