It's a free fall led by shorts who once again see a rat in distress and are drowning it. Some NG plays are getting killed today is no excuse. This CEO has lied and misled with totally distorted projections.
And what are you doing here then sir? Index funds are for general investing. I too was put into this stock. Up 20% in one month and he told me to hold. Now down 30% and he's telling me that someday this is a $12 stock. This is a 30 yr veteran who I've been with for over 15 years.
It was for everyone's benefit which obviously you don't agree with?? Plus it is well written but most negative for we shareholders.
Exco's balance sheet improved somewhat with the recent sale of TGGT, its midstream assets in the Haynesville (see this well written SA article for more info), but the price and cash received was a disappointment and roughly one-half of what management had guided for. Throw in recent comments by XCO management on the Marcellus acreage needed to be blocked up and potentially JVd, and the fair value for XCO becomes near impossible to discern. With tangible book value around 50c/share and no write-ups of gas reserves in sight, it seems hard to argue it is cheap, even at $5.5/share. Hopefully, management will make a case for the company's shares at the upcoming analyst day on Dec. 10.
For all its complexity, the Eagle Ford deal looks to us like a purchase of proved developed properties at PV-10 financed with cheap interest rate debt. The strategy appears to be one of raising EBITDA and, hopefully, reducing leverage, to raise the stock price and stave off the declining natural gas production in its existing assets as it awaits higher natural gas prices. However, with interest costs in the ball park of $120mn annual (20-25% of expected EBITDA) and the company still being highly levered, it is unclear if the stock price will respond. Currently, the stock price is so low and cost of capital is so high, relative to acquisition economics, that issuing equity is difficult. A higher stock price, however, would allow an offering and further acquisitions allowing Exco to "grow out" of its troubles. We find that a risky proposition for owning the stock and a gamble we are not willing to take. Coupled with management's inability to create a clear vision for the company going forward leads us to believe the stock price will languish. Without the benefit of having some large investors owning the common stock, we believe the share price would be significantly below where it currently trades tangible equity is a mere 50c/share.
In the discussion of the valuation of the deal, on a conference call, management stated that EURs from the wells are expected to be 400-450k Boe equivalents net with roughly 87% oil. A study on wells within the Eagle Ford indicate that XCO's assumption may be optimistic although Chesapeake, and others, have claimed success in Zavala county akin to XCO's assumptions (link). Improvement in, and area specific, frac techniques certainly have an impact. On its most recent conference call, management stated that IP rates were 600 boe/d on fully owned XCO wells and in the 700-900 boe/d range for wells in the KKR deal. That seemed low to us, in terms of meeting EURs in the 400k+ range, although one can tweak the decline curve assumptions. That's the rub. No one really knows what the value to be unlocked is until well after the fact. KKR seems to be in the enviable position of taking a lower risk position in that they lock in a sale price, after year one, at PV-10 while having an option to retain the well if the first year does not meet the hurdle of 20% IRR. In addition, they only put up 50% of the land price. The one bright side is that buying the 75% back from KKR at forward PV-10 allows for some downside well risk to be mitigated although EXCO is fully exposed to 50% of the land value. In addition, the added farm-out option and access to other plays (e.g. buda) might prove fortuitous. Also, if XCO is able to buy the wells back from KKR at PV-10, using a backwardated futures curve like today, and oil ends up trading say flat at $95, then the deal may end up being very economic. But that is just a play on the futures curve that investors could implement themselves
Finally, KKR appears to have the option of retaining 15% of their interest.
A facet of the deal that management touted as extremely beneficial was that the payout to KKR was credited towards the purchase price and that XCO would only need to borrow about $280mn outside its secured borrowing base. At first this sounded like XCO would have the benefit of using KKR's cash flows over the first year of each well, which would have been an inventive form of financing. In fact, that is not the case and XCO will fund drill costs and the KKR buy-outs out of debt and/or equity. Shown below are our estimated cash flows, based on calibrating our model to XCO's assumptions along with a four-year drill program of 300 wells. While XCO's net income and EBITDA will grow, via well production, XCO will have negative cash flow until 2018 as drill costs and KKR buy-outs will outweigh production. We see approximately $400mn in funding needs over the next few years. While some of this may come from a secured credit line, XCO's current leverage implies that some sort of equity offering, most likely a preferred or convertible deal, cannot be ruled out. Throw in the capital needs XCO has in other plays (e.g., Haynesville) and some sort of equity financing, potentially another JV, will be required.
Estimated Cash Flows from KKR/XCO Eagle Ford Transaction
In our view, the true essence of the Eagle Ford deal is XCO buying PV-10 at future market prices with, hopefully, low cost of capital. With their debt trading ~8.5% and equity cost of capital clearly higher, it is only with shorter-term credit lines does the math work. Assuming 50/50 financing at 5% debt cost, that implies 15% return to equity not including corporate expense. When all is said and done, however, it is unclear if common shareholders will get much more than 10% on their capital assuming all conditions come true. In our view, that is a risky bet.
At first, we were not enamored with the deal, mostly because it seemed pretty complicated to us and we couldn't understand what value it presented to common shareholders. In particular, the deal came with various options and so-called drill-return hurdles (see here for specifics). But the real kicker was that XCO was to purchase, from KKR, the value of each well drilled after one year of production according to its then PV-10 (present value of future oil/gas discounted at 10%). This made us a bit queasy and we lightened up our position in common shares albeit quite a bit off the $9 high price. We couldn't really understand how shareholders benefit from paying PV-10, outside of buying a proven asset, unless it is simply a leverage play (e.g., fund with cheap debt). Management did not really clarify the deal for investors and, in fact, there appeared to be confusion between the deal and XCO's presentation materials.
One confusing piece of information was whether XCO has an option or is required to purchase KKRs interest, after one year, at fair value, defined as PV-10. The deal document, which we take as the final say, indicates that XCO is required to make such offer and, in certain conditions, KKR has the right not to accept. In general, however, it would appear that the transaction would occur assuming fair-value is agreed upon. More importantly, there is a kicker for XCO in the deal in that if the one-year drill return (first year's cash flow + PV-10 one year out) exceeded 20%, the excess value would be split between both parties. In effect, this allows XCO to potentially purchase the producing wells at a cheaper level than PV-10. According to the illustration in XCO's recent presentation, this would give XCO a 12% return over the first year based on the type curve and PV-10 assumptions. Beyond that, XCO would earn the purchased 10% so, in the scheme of things, the wells will essentially provide a 10% return over their life, if all assumptions come true.
Late in the summer, XCO made a deal with Cheasapeake Energy (CHK) to purchase assets in the Eagle Ford as well as XCO-operated properties in the Haynesville. The purchase was large, ~$1bn, and seemed to stretch XCO's balance sheet to the limit. In the Eagle Ford, the land was located in the southwestern part of the oil window and included acreage that had some producing wells (~94) as well as prospective acreage. Mostly, it was in Zavalla county and, while not in the so-called "sweet spot" of the Eagle Ford play, initial well results were promising (e.g., some IPs ~ 1,000 boe/d). In addition, there is a farm-out option on many more acres and the potential for other plays, such as the buda, Austin Chalk and Pearsall.
In conjunction with the purchase, XCO's credit line was enhanced and it received a secured (term) loan from Wilbur Ross' Invesco. Mr Ross is also a common shareholder in XCO (14.5%) along with a number of other big-name investors (e.g., Howard Marks of Oaktree and Prem Watsa). With the term loan, Mr. Ross jumped ahead in the capital structure in front of the common shares as well as the unsecured bonds (7.5s of '18). In fact, it is the presence of these large value investors that has attracted so much attention to this name. Even with the financing, a JV partner was needed to fund drilling and XCO chose KKR to share in the Eagle Ford portion of the deal. KKR provided $131 mn, for 50% of the land value, and agreed to provide 75% of the drilling capital for the venture.
Over the last few years, we were generally bullish (link), but not always, on Exco Resources (XCO), a primarily natural gas E&P company. However, recently XCO has done a few deals, with private equity partners, that has made us less bullish on the growth prospects for the company while leaving down side risk in place for common shareholders. Management has confused investors and analysts with the marketing details of its recent Eagle Ford transaction, which leads to uncertainty around the company's vision and strategy. It appears that private equity investors are getting the best of XCO's assets and XCO appears to be on a risky path of buying oily PDP properties at PV-10 using debt on an already heavily levered balance sheet. While, in the end, this may prove to be fortuitous for common shareholders, we feel risk outweighs reward. With the prospect of natural gas reaching $5 slipping farther into the future (link), XCO looks like a highly speculative trade. Even the company's 2018 bonds, which we've been fond of, have lost their luster (trading at 8.5% yield) as secured credit holders now dominate the balance sheet.
The first sign was the deal XCO did with HGI, about this time last year, when XCO sold off conventional assets across plays in Texas and Louisiana. We were not fond of the deal as the company sold assets for $1.33 per cfe, which we thought was exceptionally low for mature, stable, low-decline gas assets, particularly in light of the then low price of natural gas. We understood the need for XCO to accept liquidity, given the state of its balance sheet, but thought that the deal put the value proposition for XCO's post-deal shares at about $6. They reached that level, and we took a long position (link) but recent events have moved the needle the other way.
Need to start using the stuff to propel our autos and produce electricity with in-house generators fueled by NG. Have you seen what NG has done to the East Coast? Fuel oil used to heat homes is on a major down slope.
Any accountants here from UAL? What does United charge for renting out one of their 747 charter ships? Wife is working the purser position tonight on a United Baltimore-Ramstein charter. Much deadheading on this 4 day trip which costs UAL bucks so they must be racking it in on these deals??