exercise of the warrants, in the aggregate, will constitute 49% of the common equity securities of
Plains Offshore on a fully diluted basis. In addition, we will be required to purchase $300 million of
junior preferred stock in Plains Offshore. If this occurs, our cash expenditures relating to the assets of
Plains Offshore will approximate the cash contribution made by EIG to Plains Offshore. Plains Offshore
must use the proceeds to repay its senior credit facility, which is discussed below.
In the event of liquidation of Plains Offshore, each preferred holder is entitled to receive the
liquidation preference before any payment or distribution is made on any junior or common stock. A
liquidation event includes any of the following events: (i) the liquidation, dissolution or winding up of
Plains Offshore, whether voluntary or involuntary, (ii) a sale, consolidation or merger of Plains Offshore
in which the stockholders immediately prior to such event do not own at least a majority of the
outstanding shares of the surviving entity, or (iii) a sale or other disposition of all or substantially all of
Plains Offshore’s assets to a person other than us or our affiliates. The liquidation preference is equal
to (i) the greater of (a) 1.25 times the initial offering price and (b) the sum of (1) the fair market value of
the shares of common stock issuable upon conversion of the preferred stock and (2) the applicable tax
adjustment amount, plus (ii) any accrued dividends and accumulated dividends.
The non-detachable warrants may be exercised at any time on the earlier of (i) the eighth
anniversary of the original issue date or (ii) a termination event. Under the terms of the securities
purchase agreement, a termination event is defined as the occurrence of any of (a) the conversion of
the preferred stock, (b) the redemption of the preferred stock, (c) the repurchase by us or any of our
affiliates of the preferred stock or (d) a liquidation event described above.
In November 2011, Plains Offshore also entered into a senior credit facility providing for $300
million of commitments to fund future capital costs beyond that already raised. See Financing
Activities. At December 31, 2011, Plains Offshore had $300 million available for future secured
borrowings.
Crude Oil Marketing Contract.
In August 2011, we entered into a new marketing contract with
ConocoPhillips effective January 1, 2012 that covers approximately 90% of our California production,
extends the dedication from January 1, 2015 to January 1, 2023, and replaces the percent of NYMEX
index pricing mechanism with a market-based pricing approach. Separately, we executed an
agreement with a third party purchaser to sell a large portion of our Eagle Ford Shale crude oil using a
Light Louisiana Sweet based pricing mechanism. Due to these new marketing contracts, we expect oil
price realizations on a significant portion of our crude oil production to increase relative to WTI
beginning in 2012.
Other Considerations.
Our cash flows depend on many factors, including the price of oil and gas,
the success of our acquisitions and drilling activities and the operational performance of our producing
properties. We use various derivative instruments to manage our exposure to commodity price risk.
This practice may prevent us from receiving the full advantage of increases in oil or gas prices above
the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of
the counterparties to such agreements. The level of derivative activity depends on our view of market
conditions, available derivative prices and our operating strategy. See Item 7A – Quantitative and
Qualitative Disclosures About Market Risk – Commodity Price Risk.
Our 2012 capital budget is approximately $1.6 billion, including capitalized interest and general
and administrative expenses. We intend to fund our 2012 capital budget from internally generated
funds and borrowings under our senior revolving credit facility, with the portion of our 2012 budget
related to Plains Offshore being funded with cash on hand. In addition, we could curtail the portion of
our capital expenditures that is discretionary if our cash flows decline from expected levels.
60