Oil Company Loses On Price Increases

Plains Resources took a massive hit last week, as its outstanding bonds got punished in the secondary market by a full 10 points. The 10.25%, $200 million issue had been trading above par but fell to 93 in the beginning of the week. Standard & Poor's downgraded the issuer's subordinated debt to single-B minus, while Moody's Investors Service put the issuer on review for possible downgrade.

The price decline and S&P downgrade came on the news of unauthorized trading and the consequent trading losses of its subsidiary, Plains All American Pipeline LP. Plains Resources owns 54% of the partnership.

In a conference call, which one buy-sider characterized as less than enlightening, the company said that losses had resulted from a trader taking "short" positions, hoping the price of oil would fall. Oil prices have increased dramatically throughout 1999, however, forcing the company to pay back those positions and creating a $160 million shortfall.

Shares of the partnerships plunged by 47% last week to $10.375. In fact, with more than $300 million in equity capitalization getting wiped out in one day, the shares lost much more than the trader.

Even though, as one analyst said, the company "doesn't just have $160 million laying around," it still appears to have fairly solid footing in the near term.

At press time, the partnership had reached an agreement with its lenders on its credit facilities that will provide $300 million, and parent company Plains Resources will provide up to $64 million.

But in the longer term, the company will be set back in its plans for future acquisitions, according to portfolio managers familiar with the firm. The company had recently sold some assets for about $100 million, and those proceeds had been earmarked for buying other properties. Several of the smaller oil companies are preparing for future acquisitions in light of the large investment-grade companies divesting some of their assets.

Plains All American was formed to manage the 1,233-mile pipeline business of its parent.