Steven Cohen Approves of the Plains Offshore Deal

SAC CAPITAL ADVISORSIn September, Plains Exploration & Production Company (NYSE:PXP) announced a significant transition in the company’s strategy. It took out a large loan to help finance the purchase of deepwater Gulf of Mexico oil acreage previously owned by BP plc (NYSE:BP) and Royal Dutch Shell plc (NYSE:RDS.A) and will pay back much of these loans through divesting from onshore shale gas fields. The deepwater oilfields are also producing currently, and with oil prices trading at a high spread over the prices for the energy equivalent in natural gas Plains should also see higher cash flow. Read our initial take on the deal. The market’s initial reaction sent the stock down: it is now 4% below its price from the beginning of September, over a period when the S&P 500 has risen.

Now billionaire Steven Cohen’s SAC Capital Advisors, which had owned 3.5 million shares of Plains Exploration & Production Company at the end of June (a 33% increase from what it had owned from the beginning of April) has announced that it has purchased additional shares, signaling that Cohen and his team believe that the deal will add value. SAC now owns 6.5 million shares, giving it 5.1% of the shares outstanding according to a recent filing with the SEC (see what SAC owned in its 13F portfolio at the end of June). Billionaire Dan Loeb’s Third Point had initiated a position of 2.2 million shares during the second quarter (find more stock picks from Dan Loeb and Third Point).

Our reaction to the announcement had been skeptical, but we had seen the potential for the company to be engaging in arbitrage. Currently the market is very optimistic about companies focused on onshore shale, with many trading at high multiples; oil producers, however, tend to be lower priced. If oil prices start to tick up- which would likely require stronger global growth, notably in China and the U.S., than we are currently seeing- it could be positive for more expensive-to-drill deepwater wells. Plains Exploration & Production Company seems to have been bullish on oil prices and seen BP’s need to sell some of its assets as an opportunity to shift its business into that space, and SAC seems to have considered it a smart move.

Plains currently trades at 14 times forward earnings estimates. Brazil’s integrated oil company Petroleo Brasileiro Petrobras SA (NYSE:PBR), which is focused on deepwater drilling in terms of production but also has marketing and retail operations across that country, has a forward P/E of only 8. Petrobras grew its revenue by 12% in its most recent quarter versus a year earlier; with a trailing P/E of 16, Wall Street analysts apparently expect that its business will pick up in 2013. BP and Shell both trade at 8 times trailing earnings, demonstrating that the market did not place very much value on their earnings despite their large capitalization. Both companies saw revenue declines in the second quarter compared to the same period in 2011; both also pay dividend yields in the 4-5% range if that is of interest to an investor.

Chesapeake Energy Corporation (NYSE:CHK), meanwhile, carries a forward P/E of 15 even though the company is recovering from administrative problems from earlier this year and still needs to sell a portion of its shale gas assets in order to finance its operations. Note that this forward multiple is well above what the oil majors are seeing despite Chesapeake’s problems, demonstrating the market preference for the growth opportunities in shale gas over oil.

Plains also needs to sell gas assets in order to repay the debt it used in its deal, so we are a bit worried that between it and Chesapeake the market may become clogged with supply and so one or both companies might have to settle for lower prices. Investors in the company, however, should be satisfied with SAC’s vote of confidence in its strategic move offshore.