Last year was brutal for Exco Resources Inc. Unapologetically gas-weighted at more than 95%, its revenues and shares nose-dived as natural gas fell below $2 per thousand cubic feet. By the end of third-quarter 2012, debt-to-capitalization had climbed to 75% on $1.8 billion outstanding, with liquidity at $330 million. The company slashed capex by half and cut jobs in a valiant effort to operate within cash flow. Thirty-plus rigs dissipated to five, and 1,100 employees to 900. “That's the worst part,” chief executive Doug Miller said in a February conference call. “We had to shrink.”
The aggressive defensive moves worked; Exco succeeded in ramping down to a cash-flow lifestyle, with a bit to spare.
Additionally, in the first of two planned divestitures to raise capital, the Dallas-based company reduced its debt by $575 million in February by dropping conventional East Texas and West Texas producing assets into a private master limited partnership (MLP) joint venture with a financial investor, keeping a 25% interest and creating some balance-sheet breathing room. Its midstream entity, TGGT Holdings, was also on the block at press time with an anticipated raise of $500- to $700 million, by some estimates.
One industry source observed, “Exco has been stuck for a long time.”
Yet Exco's $1-billion deal with Chesapeake Energy Corp. in July to buy Eagle Ford and Haynesville shale assets may be the catalyst to get the once-active acquirer back in the game. The deal immediately establishes 6,100 barrels of oil equivalent a day production in the oil window of the Eagle Ford (read that, “revenue”). It also amalgamates nonoperated interests in 170 partnered Haynesville shale wells that Exco already operates, with a few producing wells bolted on to boot.
“We're finally back,” Miller trumpeted after the announcement. “We need to be making acquisitions.”
Notably, the $680-million portion of the deal involves producing oil assets. Even in the face of a gas-tape headwind, Exco has been reticent to chase the oil and liquids plays as so many other once-proud gas players have. In his first-quarter review comments before this deal, Miller reminded us that Exco is a gas company first, with vast resource bases in the Haynesville and Marcellus shales. “Our main focus is still going to be gas” in its two core plays, he said.
But “weathering the storm is getting tiresome,” he then confessed, and he believes a 75:25 gas-to-oil ratio would be a better balance. The Eagle Ford assets are the first toward oil diversification, in which Exco plans to immediately deploy five rigs in the play the rest of this year and throughout next. The company is actively looking for oil in West Texas, too, near its MLP'd assets.
Count the oil as insurance only; Miller is a gas guy through and through, even in hard times. He attempted to take Exco private in 2011 to ride out the storm without shareholder pressure—without success—and still takes the long view. The $320-million Haynesville portion of the Chesapeake deal bolsters this belief, a gas resource play out of favor with buyers today. Now he wants more.
“There is a window of opportunity, especially on the gas properties, that we plan on pursuing and trying to build our core areas,” he said following the deal. “There are a lot of reasons we're focusing on gas.”
Unsolicited phone calls, mostly. Calls from utilities, industrials, even foreign countries, “from people wanting to buy gas,” he said. “We're trying to get as much gas under control as we can. Over the next several years, we think there is going to be a demand increase.”
Organic growth isn't on Miller's radar. “With gas prices where they are, we can buy producing properties cheaper than we can drill for them. Our best use of capital is to reinvest in acquisitions.”
Exco is funding the deal with its bank revolver. The company will be 80% debt-to-cap pro forma, with about $400 undrawn on its upsized $1.6-billion revolver, and $75 million cash on hand, according to KeyBanc Capital Markets research. Partner payouts in the newly acquired Eagle Ford and Haynesville assets are expected to increase capacity, along with the TGGT proceeds.
“There's not anyone here who likes playing defense all the time. We've got everything stabilized, and it's now time to play offense,” said Miller. “We've ordered new tennis shoes for everybody. Our defensive days are over. Our emphasis is going to be on strategic acquisitions.”
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