Overview -- On Sept 10, 2012, we placed the ratings of Plains Exploration and Production Co. on CreditWatch negative following the company's announcement that it intends to acquire certain BP and Shell assets in the Gulf of Mexico for $6.1 billion. -- The 100% debt financed transaction will initially be funded with the proceeds from a $5.0 billion secured credit facility and a $2.0 billion unsecured bridge facility. -- At the closing of the acquisition (which is expected to occur in November), we will likely lower the corporate credit rating to 'BB-' and assign a negative outlook. -- We are assigning a 'BB' issue rating and '2' recovery rating to the company's $5.0 billion senior secured credit facilities. In addition, we are assigning a 'B' issue rating and '6' recovery rating to the company's $2.0 billion unsecured bridge facility. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services said its ratings on Plains Exploration & Production Co. will remain on CreditWatch, where it placed them with negative implications on Sept. 10, 2012. Upon completion of the transaction, we expect to lower the corporate credit rating on the company to 'BB-', assign a negative outlook, and lower the issue ratings on the company's existing unsecured debt to 'B'. At the same time, we assigned our 'BB' senior secured rating and '2' recovery rating to Plains Exploration & Production Co.'s new $5.0 billion senior secured credit facility--consisting of $3 billion secured revolver due 2017, $750 million secured term loan due 2017, and $1.25 billion term loan due 2019. We also assigned a 'B' rating and '6' recovery rating to the company's $2.0 billion unsecured bridge facility. These ratings are not on CreditWatch negative. Rationale The initial negative CreditWatch listing followed the announcement that PXP intends to acquire BP's and Shell's interests in certain deepwater Gulf of Mexico properties in a debt-financed transaction for $6.1 billion. The acquisition will give PXP interests in the Marlin, Dorado, King, Horn Mountain, Holstein, Diana-Hoover, and Ram Powell fields in the deepwater Gulf of Mexico. Upon completion of acquisition, we will likely downgrade the company. The acquisition represents a strategic shift for Plains and presents increased execution risk, particularly given the complexities associated with operating in the deepwater Gulf of Mexico. While the company currently has offshore exposure through its working interest in Point Arguello and Point Pedernales in California, as well as its ownership of Plains Offshore Operations Inc. in the Gulf of Mexico, these operations represent less than 10% of the company's existing reserve base and are modest in scale relative to the assets the company is acquiring. Further, the debt-financed nature of the transaction results in a meaningful deterioration in the company's credit protection measures. While we currently forecast that the company's credit ratios could return to pre-acquisition levels over the next 12-18 months, we deem that this could be delayed if management expands capital investment beyond currently contemplated levels in pursuit of improving shareholder returns. Despite these concerns, the transaction significantly expands Plains existing reserve base and production. The company estimates that these assets will increase proved reserves by 127 million barrel of oil equivalents (boe) and production by 67 thousand boe per day, representing increases of 31% and 68% respectively. New production will increase the company's exposure to oil production from current levels of 57% to approximately 70%. In addition, the company has numerous opportunities to expand its reserve base through recompletion, workover and tie-in opportunities. Pro-forma for the transaction, debt to EBITDA, which has been trending in the mid-2x area, will rise to more than 3x. Under our current pricing assumptions ($90 Brent and $3.00 natural gas in 2013), we estimate that leverage will fall to levels closer to 3x by the end of 2013. If the company is successful in completing planned divestitures (primarily its Haynesville and Madden assets), leverage could fall closer to 2.5x. The ratings on the $7.0 billion of facilities the company is raising to fund the transaction reflect our assessment of the company's corporate credit rating following the transaction. For the complete recovery analysis, see Standard & Poor's recovery report on Plains Exploration & Production to be published on RatingsDirect following the release of this report. CreditWatch We will resolve the CreditWatch upon the closing of the acquisitions. If the transaction is completed upon substantially similar terms as those we currently expect, we will lower the corporate credit rating to 'BB-' and assign a negative outlook. Related Criteria And Research -- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, July 24, 2012 -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Plains Exploration & Production Co. Corporate credit rating BB/Watch Neg/-- New Ratings Plains Exploration & Production Co. $5.0 billion senior secured BB Recovery rating 2 $2.0 billion unsecured B Recovery rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.