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The Brains at Plains Buy Mainly Into Gains

The Houston oil company's management maintains a creative, acquisitive stance that has resulted in steady growth.

Plain and simple could well describe the strategy of

Plains Resources

(PLX) - Get Free Report


Houston-based Plains doesn't spend a lot of money on high-risk properties. Rather, it invests in older, mature fields, and then spends its cash on technology to make sure it can squeeze out more oil. Plains also is one of the only independent oil and gas companies with interests in the so-called midstream business, or crude-oil marketing, transportation and storage.

With this mix of assets, Plains generates healthy cash flow, providing flexibility for it to make more acquisitions or pay down debt. And even after running to about 19 from 9 in early March, the stock looks inexpensive based on this year's cash flow, investors say. It trades at less than six times its 1999

First Call

consensus cash-flow estimate of $3.24. That's well below other exploration and production companies such as


(APA) - Get Free Report



(APC) - Get Free Report


"The key is management," says Stephen Roberts, an analyst at

(LSCRX) - Get Free Report

Loomis Sayles Small Cap Value fund, a Plains shareholder. Plains' management team "is consistently growing the company," he says, largely through acquisitions.

That focus on acquisitions is paying off. On Tuesday, Plains reported second-quarter net income of $4.6 million, or 11 cents per share, compared with net income of $1.4 million, or 6 cents per share, in the year-ago quarter. Cash-flow from operations -- a measure of what can be reinvested in the business -- increased 78% in the second quarter. Cash-flow grew to $16.3 million from $9.2 million in the year-ago period, while revenue jumped to $887 million from $189 million in the year-ago quarter, largely due to acquisitions.

On Monday,

Plains All American Pipeline

(PAA) - Get Free Report

, a crude-oil transportation and storage limited partnership that's majority owned by Plains Resources subsidiary

Plains All American

, reported net income of $12.1 million, or 38 cents per unit, for its second quarter. Pro forma 1998 second-quarter net income was $11.4 million, or 37 cents per unit. Plains All American Pipeline is the largest crude-oil pipeline connecting California and Texas, and it connects from West Texas to Cushing, Okla., the largest crude-oil storage and trading hub in the country.

Plains Resources' history includes acquisitions from oil majors such as




Shell Oil

, the U.S. unit of

Royal Dutch/Shell


. But its acquisition strategy coalesced under the leadership of Greg Armstrong, president and chief executive, who was appointed in 1992. It was then that Plains purchased a large but underdeveloped field in the Los Angeles basin from Chevron and boosted proved oil reserves from those properties to 74 million barrels from 18 million barrels. Along with California, Plains considers Florida and Illinois its core producing areas.

Under Armstrong, Plains' total assets have grown to almost $1 billion last year from $266 million in 1994, while shareholder's equity has grown to $73 million from $46 million in 1994. Roberts at Loomis Sayles cites this steady growth as one of the reasons he chose to invest in Plains, one of only two independent oil and gas firms in which his firm holds shares.

Two recent acquisitions, one upstream, one midstream, furthered the company's reputation for making synergistic acquisitions. In mid-July, the pipeline company acquired a crude-oil pipeline system in West Texas form

Chevron Pipeline

, a Chevron subsidiary, for $35 million. And earlier in the month Plains acquired Chevron's interest in an oil field offshore California.

The Chevron oil field acquisition gives Plains a larger chunk of the production from that field, and ensures that the Plains pipeline in the area will have production to transport. The midstream acquisitions are evidence of management's creativity in growing the business, says Steve Smith, who follows Plains at

Dain Rauscher Wessels

in Houston. Smith rates the stock a buy; Dain has performed underwriting for Plains All American.

"If we just execute on existing acquisitions, we believe all of our stakeholders will be rewarded," said Armstrong, Plains' president, on Tuesday's earnings conference call. And with $190 million in borrowing capacity, Plains is quite liquid, he added.