The upstream and midstream business segments of Houston-based Plains Resources Inc. (Amex: PLX) may be separated, to help the stock market figure out the value of each, says president and chief executive Greg Armstrong. Plains conducts its E&P business through four subsidiaries and its midstream activities through its Plains All American Inc. , which is general partner of and owns 54% of Plains All American Pipeline LP (NYSE: PAA). Armstrong says the corporate structure is effective but complex. The two stocks-PLX and PAA-have diverse investor bases and their capital structures require some study to comprehend completely. Plains Resources has an aggregate equity market value of $506 million, when its three series of convertible stocks are converted into common shares. Plains All American Pipeline has an aggregate equity value of about $685 million, of which $370 million belongs to Plains Resources. If the holdings in Plains All American are subtracted from Plains Resources' market valuation, that leaves $136 million in equity value attributable to the upstream. "Our 1999 year-end proved reserve volumes were 234 million barrels, which equates to a value of less than $1 a barrel-roughly 60 cents per barrel," Armstrong says. A long-lived, low-decline established upstream reserve base should trade for 5.5 times EBITDA (earnings before interest, taxes, depreciation and amortization), Armstrong said. Based on Plains Resources' 2001 upstream EBITDA of $140 million, and subtracting the upstream debt balance of $290 million, Plains should have an upstream equity valuation of $480 million. This situation "suggests there is very little, if any, equity value being placed on our investment in Plains All American," Armstrong said. "I can't tell you which one is not being valued, but it would appear that certainly there is some value falling through the cracks in the market's analysis." To patch these cracks, Plains Resources has retained Petrie Parkman & Co. to help it evaluate alternatives to optimize the value of each business. Alternatives include a spin-off or split-off of the upstream or midstream segment, a spin-off or special dividend of certain units of Plains All American Pipeline, and asset sales. Ray Deacon, an E&P analyst with Dain Rauscher Wessels, agrees that Plains is undervalued in comparison with peers like Nuevo Energy Co. (NYSE: NEV), Vintage Petroleum Inc. (NYSE: VPI) and Murphy Oil Corp. (NYSE: MUR). "These guys are all trading at about 4.5 times EBITDA, and if I put that multiple on Plains' E&P business, and just value the other piece that's its ownership in PAA, you've got about $15 a share value for its PAA [interest], and roughly $9 a share for PLX. In theory, you break those two apart and you should have a value of $23-and the stock is $18." Though the Plains corporate structure is a big reason for its valuation, Deacon notes that the upstream segment is 98% oil, much of it heavy, in California. This may make the E&P stock tough to sell, compared with natural gas-oriented stocks. "It's not as easy of a case to make that investors need to have more exposure in oil," he said. Plains Resources has also retained Spencer Stuart to conduct an executive search for an upstream executive officer to focus exclusively on aggressively growing the upstream business. If executives decide to split the two segments into two, completely separate entities, this person would be the chief executive officer of the upstream entity, and Armstrong would stay with the midstream business. Deacon suggests that a spun-off upstream company might be a good acquisition target for other oil-based producers with California assets, such as Nuevo or Vintage. "I wouldn't be surprised to see the thing get spun off and then subsequently sold to another E&P company, just because the market is not particularly fond of these smaller-cap stories," he says. Moody's Investors Service is reviewing its ratings of Plains Resources and Plains All American Pipeline with an uncertain direction. Standard & Poor's Corp. placed its assessments of Plains Resources and Plains All American Pipeline on watch, with developing implications.

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