he pretty much admitted he was wrong on xco on cnbc a month or so ago - he called it wrong on NG pricing (early) but clearly since almost every other NG name has done better than XCO, he picked the wrong hat....he went with the 300mn in secured debt to salvage his investment in the case of restructuring, the probability of which has gone up measurably.
there are quite a few "great" investors who've entered this space and have learned, the hard way, that E&P is a shell game....its not the same as buying a bank at 25c on the $1. The guys that make money are the PEs, either buying on the cheap (azure + TGGT at 6x ebitda w/o debt) or floating it out....
outside of not doing a secondary and having market reprice, its the same - current shareholders are giving away future cashflows to another entity, presumably at a decent level. I admit, the share price might not react as much as a secondary but it is the same thing, and sometimes worst because current shareholders do not get to participate...
unfortunately, there are so many instances of bad "forecasts" that deception is becoming the most likely....look at the difference btw the presentations on the KKR transaction and the actual wording of the legal document....also, just because KKRs cash flows don't get paid out till term, allowing them to pay down credit line in '14, doesn't mean they've reduced it...its just off balance sheet financing.....maybe that is why the accountant quit
it seems less and less likely NG will rise. More byproduct from oil wells and low cost plays like Marcellus (ex XCO) seem to be keeping pressure on. See EIA article on the disconnect btw nat gas rigs and production. When u sell oil at 95, gas at 3 is a gift.
their portion of drill cost is 1.2 per well vs .8 for first year cash flow so i don't see how ebitda exceeds capex in '14 and then you have to pay the PV-10. That's the way it goes with E&P - u pony up the $$s up front, drill, and hopefully make dough (or stuff it in a trust and do an IPO!). His statement makes no sense unless its taken in conjunction with "I think the other thing that people are missing is the cash flow that they get out of their 75% is a credit towards the purchase price." In other words, XCO gets to "use" the first year's cash flow over the course of the year, to pay down debt, only to have to bump debt back up to pay it out to KKR at year-end. That's hookie dooks, if u ask me.
Its a play on the tail of the decline curve. If their assumptions are correct (they look optimistic to me given the little history in that part of the play), then u get 10% or maybe 12%, if there is the kicker (which is only for the first year of wells 60/300 btw). That is before corporate expense so it is unclear to me what ends up going to the bottom line. Their interest rate is ~5% so at 50/50, that would be a 15% ROE before expense so maybe 10% to common...that's if everything works right
If the strip curve is backward as it is today, and oil ends up trading at spot over time, then you will be making some nice coin but not sure one should depend on that.
yes...last year they wrote down about $1.3bn due to a declining nat gas price (TTM basis). This year it has gone up 90c but they have only written up about 300mn (net of TGGT write-down). Part of that is because they pulled out roughly $500mn in reserves (my gross estimate) but they broke even on it so its effectively gone from book. so net it seems like they are not writing up as much as they wrote down - which tells me that some properties are being written off, probably those not HBP in the Marcellus. (i think they are only 60% up there). I don't see any meaningful write ups so I think book value at say 1-year forward is best $1 share.
i have no idea but I would take anything Doug says about offers and levels with a healthy grain of --- as a reminder, we were suppose to get like 500mn for tggt free and clear....right....this corpse is getting picked over
read the Q2 conf call....miller stated there was a heated debate on the board wrt KKR acquisition; Wilbur jumped up front with secured term loan and Ares divested part part of their common just afterwards. That doesn't sound like there was overwhelming approval. I think Doug showed them the decline curves in the Haynesville (80-90% 1Yr) and the $7.5 well cost; the disparate acreage in Marcellus and said "this is it boys" - doug flutie time
also, why would KKR care if they go BK? They'd still operate the wells and they have a secured interest....
I am NOT saying gold is going to 1,100...i have absolutely no idea where it will go and the futures market has a pretty flat curve...my point is that as a responsible management team you would want to look at your leverage metrics etc. under that scenario (ABX mgt even said they were doing such). With that in mind, and no gold hedging, one has to run with more equity. That is all I am saying.
why do you say Marcellus is "top-notch"? Doug clearly admitted that it was not great, piece-meal, and needs to be blocked up in a JV with someone...and why stop production and close the office when everyone else seems to be making $$$s at even $3 natty? As for Haynesville, you need $4 for it to become economic. Right now you are losing money and draining reserves. I admit if you get back to $5 then it becomes better but maybe just get long back natty contracts - why take the buz risk.
Effectively they are buying eagle ford PDP at close to PV-10 assuming a very gratuitous assumptions on the decline curve, both IP and EUR, and then levering it up with a credit line where they currently pay 2-3% after tax. Their true cost of capital is much higher (bonds at 8, stock easily bonds+10) so if they had to pay for it match finance, there would be no deal. So its a levered spread trade. If it works, then you get 15% ROE before expense, maybe 10% down to the common, if not then well....Now if it turns out that oil trades 95 flat vs the backward strip curve, yes, then u can make dough but just go get long back WTI contracts (again.)
The fact that the "known" smart investors are involved has repeatedly been used on this board as a buy. They will salvage their investment somehow, leaving commoners in the lurch.
Also, EBITDA is not god's gift. Especially when you are talking interest expense at well over 20% of EBITDA...
Im sounding like a jilted lover so good luck with your positions......
i think management has done a very good job at finally getting the message - of course, it took a 14 handle on the share price to get them there - and they have taken the necessary steps to stabilize the balance sheet. Closing PL was a necessary evil and total free cash flow will allow them to pay down debt next year 500-750mn to keep leverage ration ~2.5 at 1,300 GP. What this means is that there will be very little dividend growth for the next 3-5 years and as a value play, where should it lie? Also, if one wants to operate in a risk adjusted manner, in case gold was to visit say 1100 for a year, then raising equity is probably the last piece of the puzzle. So net, I don't think it is a great buy here' probably OK, with downside at $10-15 pps....don't see a heck of a lot of upside though
if i had to guess, the big players may be in on the credit line syndicate like Wilbur's secured position. They know its a gamble and need to at least get a piece of the restructured co. its all a game
i believe the downside risk has increased significantly. All signs point to lower price, potential restructuring (if EF doesn't work as "planned"). Wilbur took a lead position just in case. Have you looked at what kind of IP rates and EURs are needed in the eagle ford to make the KKR deal work and the cartoon in their presentation come real? I have and they are unlikely to get them. You need something like 900+ and 450k EURs....that's bold even in the sweet spot....sorry but the game has changed here from a value play to a total hail-mary gamble...