The Haynesville shale play will “bully its way into the natural gas market…and force a lot of marginal gas production out of the way,” says Plains Exploration & Production Co., Houston, (NYSE: PXP) chairman, president and chief executive officer Jim Flores.

While capex is being cut by some Haynesville players, such as by play leader Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) with which Plains is in an 80/20 (CHK/PXP) joint-venture partner, many lease-holders are in strong financial shape, he adds.

Flores visited with Oil and Gas Investor while in Lafayette, La., for the Gulf Coast Prospect Expo 2008, presented by the Louisiana Oil & Gas Association.

Independents among play leaders that are well-funded to exploit the deep gas resource are Plains; Devon Energy Corp., Oklahoma City (NYSE: DVN); Petrohawk Energy Corp., Houston (NYSE: HK); and EnCana Corp., Calgary (NYSE: ECA). Super-funded majors in the play include Chevron Corp. (NYSE: CHV), BP Plc (NYSE: BP) and Royal Dutch Shell (NYSE: RDS).

“These are companies that can drill the reserves,” Flores says.

Early Haynesville wells are making more than 5 million cubic feet of gas—some more than 10 million—a day. Average estimated ultimate recovery per well is more than 5 billion cubic feet. “There’s going to be 3 billion cubic feet of gas a day coming out of the Haynesville in less than five years…It will be very difficult for the Gulf Coast and Gulf of Mexico (producers) to send gas north.”

Traditionally viewed as a high-yield E&P investment, Plains’ own financial profile is strong, he adds. “We look more like an investment-grade company…right now, with our amount of liquidity.”

The company has cash reserves; strong cash flow, including from oil hedges of $106 to $110 per barrel through 2010 and gas hedges of more than $10 per thousand cubic feet through 2009; a large, unused revolver with four years remaining on its term; and a first high-yield debt maturity isn’t until 2015.

“Our need of capital (access) is minimal,” including to meet expectations of 10% reserve growth per year. The company can achieve that just from cash flow, he says. “It comes at a great time—when the high-yield markets are shut.”

Will Plains be a net asset buyer in the coming 18 to 24 months? “There are going to be some compelling opportunities to buy,” he says. And, it may have targeted its powder to acquisitions five years ago in a cycle like this, but Flores says the company has enough organic-growth opportunities to harvest. Its exploration and exploitation prospects include the Haynesville; the deep-shelf Gulf of Mexico, where one well drilled by partner McMoRan Exploration Co., New Orleans, (NYSE: MMR) is making 125 million cubic feet per day; and onshore and offshore California, where Plains makes 55,000 barrels of oil per day.

“If we buy something, it would have to come with a higher rate of return than we’re already generating (internally) and these businesses (Plains has) are all very good…You may see us sitting on the (M&A) sidelines during this time…and just run our business.”

He anticipates potential investors may now take a first look at Plains’ stock, or a new look. The company’s financial and asset profiles have been transformed since the last down-cycle. Yet, the market is spurning U.S. E&P stocks equally.

“The valuations are all unfounded right now…It was a tip last year when analysts were evaluating (E&P companies based on) enterprise value per acre…People are going back to cash-flow evaluations and that’s where Plains shines.”

The following are comments Flores made during a keynote presentation at the Gulf Coast Prospect Expo:

-- The Haynesville’s potential force on the U.S. gas scene includes its relative productivity in terms of rig demand. An average Barnett well makes 1 million cubic feet per day; the Haynesville’s average 5-million-per-day well is “five times more efficient.”

-- How long will low gas prices last? “As everyone knows, there’s nothing that cures low gas prices like low gas prices.”

-- It is unlikely that the federal government will permit abundant, excess U.S. natural gas production to be exported.

-- A new capital-gains tax regime, if adopted by a new Congress and White House, could compel E&P companies to spend their cash flow or lose a lot of it.

-- Oil prices will be stronger in 2009, if OPEC members do pare output. An extraordinary OPEC meeting is planned for Oct. 24 to consider paring production, which would be unprecedented for OPEC while the Northern Hemisphere enters the winter demand season.