Expectations for improved results in California and in its shale plays, along with tightening of its finances, caused Standard & Poor’s Ratings Services (S&P) to increase its ratings and outlook on Houston-based midsize exploration and production (E&P) company, Plains Exploration & Production Co. (PXP), the rating agency announced earlier in November.

S&P raised PXP’s outlook to “positive” from “stable” and its rating on the company’s senior unsecured debt to “BB.” The BB rating was also applied to PXP’s upcoming $500 million notes offering.

Citing what it called PXP’s participation in the “highly cyclical” E&P space in the broad oil/gas industry and holding a historically “aggressive” capital and acquisition spending program, S&P said its improved assessment takes into consideration what it sees as PXP’s geographical diversity in its oil/gas reserve base and its significant exposure to oil production volumes.

S&P called PXP’s California plays in the San Joaquin Valley, Arroyo Grande, Los Angeles, Point Pedernales and Point Arguello basins “stable,” noting reserves of 416 million boe with a seven-year reserve life. It also noted the company’s interests in the Haynesville and Eagle Ford shale plays. “Over the intermediate term, we expect that the majority of the company’s reserve and production growth likely will come from the Eagle Ford shale play,” said S&P analyst Lawrence Wilkinson.

In addition to the operational improvements, S&P cited the company’s credit protection moves, saying they are likely to improve to levels consistent with a higher overall company rating over the near term. The rating agency said it could raise PXP ratings during the next several quarters if the company maintains discipline in its funding of capital spending programs and maintains a debt-to-EBITDA ratio of less than 2.75x. A downgrade in the credit rating would be considered it the ratio went up to 3.75x.

“We revised the outlook to positive from stable to reflect the anticipated improvement in the company’s operating performance and credit protection measures over the next several quarters,” Wilkinson said. “We could raise the rating over the near term if the company is able to meet its anticipated production growth goals while preserving the leverage at acceptable levels for the higher rating category.”

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