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Edited Transcript of XCO earnings conference call or presentation 9-Aug-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 EXCO Resources Inc Earnings Call

Dallas Aug 17, 2017 (Thomson StreetEvents) -- Edited Transcript of EXCO Resources Inc earnings conference call or presentation Wednesday, August 9, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harold H. Jameson

EXCO Resources, Inc. - COO and VP

* Harold L. Hickey

EXCO Resources, Inc. - CEO and President

* Heather Lamparter

EXCO Resources, Inc. - VP, General Counsel and Secretary

* Tyler Farquharson

EXCO Resources, Inc. - CFO, VP and Treasurer

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Conference Call Participants

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* Jules Scruggs

Westlake Securities, LLC - Partner and SVP

* Sinan Kermen

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Presentation

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Operator [1]

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Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the EXCO Second Quarter 2017 Earnings Results Conference Call. (Operator Instructions) Thank you.

Ms. Heather Lamparter, you may begin your conference.

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Heather Lamparter, EXCO Resources, Inc. - VP, General Counsel and Secretary [2]

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Good morning. Thank you for joining EXCO Resources Second Quarter 2017 Conference Call. Hal Hickey, Chief Executive Officer and President; Harold Jameson, Vice President and Chief Operating Officer; and Tyler Farquharson, Vice President and Chief Financial Officer, will provide our perspective on EXCO's results followed by a Q&A session. You can access our slides on our website at www.excoresources.com, and we will refer to these slides during our remarks.

Certain statements made during today's conference call, including those concerning future plans, objectives, goals, strategies or performance, are forward-looking statements. These statements reflect the good faith, beliefs and judgments of the company and are based upon currently available information only as of the date of this conference call. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from current expectations. These factors include those described in the Risk Factors section of the company's periodic reports that are filed with the Securities and Exchange Commission. Forward-looking statements are not guarantees of future performance, and the company expressly disclaims any obligation to update earlier statements as a result of new information, except as required by law.

I will now turn the call over to Hal to begin.

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Harold L. Hickey, EXCO Resources, Inc. - CEO and President [3]

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Thanks, Heather, and good morning all. I'll provide some introductory remarks, including an overview of recent initiatives and in following me, Harold Jameson, will discuss our assets, capital program and recent operational results. Following Harold, Tyler Farquharson will discuss our Q2 results and Q3 outlook.

Turning to Slide 1. This slide provides an update on our strategic plan. We worked really hard over the last year plus to improve our capital structure to allow us to execute our business plan. In March of this year, we announced a series of financing transactions, including issuing $300 million of 1.5 Lien notes and exchanging $683 million of second lien term loans for a like amount of 1.75 lien term loans. An important feature of both of these liens is the option to pay interest in kind, through the issuance of equity or additional debt. We're very appreciative of our shareholders for supporting the 1.5 lien and 1.75 lien through proposals at our annual shareholder meeting in May, including a reverse share split.

These transactions were intended to eliminate the substantial cash interest burden on our cash flow through 2018, and better position EXCO to execute its business plan.

In June, we did pay our interest with equity. We redirected $23 million of cash into EXCO's operations. However, the realization of cash interest savings from the 1.5 lien and 1.75 lien obligations is highly correlated with our share price. If we have to issue too many shares, we can experience a change of control. We all realize our share price has declined dramatically, and we're certainly disappointed with this drop. So unless we experience a dramatic increase in share price, we'll be unable to pay future interest in kind with common shares, which negatively impacts our liquidity and ability to execute our business plan.

Despite the challenges associated with this financial condition, we remain confident in the quality of our asset base, and our ability to maximize value. The Haynesville/Bossier shale has emerged as a top natural gas play. EXCO and other operators have been able to significantly improve returns through enhanced completion designs and longer laterals. There's been strong interest in the play as evidenced by a nearly 300% increase in rig count over the past year or so in this basin. Our assets are located in the core areas of the basin, and we've have amassed a substantial amount of technical knowledge since we've been actively developing this area for nearly 10 years.

Additionally, we believe there continue to be demand catalysts for natural gas that could provide further upside to prices. The United States is expected to become a global leader in LNG exports, and I'll note, there are 10 export projects in various stages of operation, permitting or development in Southwest Louisiana alone. Demand from Mexico continues to rise. Consumption from the industrial sector remains strong and natural gas is a cleaner, more cost-effective source of power generation as compared to coal-fired and nuclear plants.

We believe our portfolio of assets that is heavily weighted towards natural gas could allow us to take advantage of these factors as they continue to materialize.

We've stayed focused on things we can control within our organization, including managing our cost structure and enhancing value of our assets. We've been able to cut our G&A, keep lease operating expenses low, and improve our wellhead returns by drilling longer laterals and increasing profit levels and overall fracture intensity. Harold is going to elaborate on some of the operational achievements so far this year in few minutes.

We remain encouraged by not only the performance improvements and cost efficiency we've achieved, but also by the additional potential of what may be achievable in the future.

Earlier this year, we signed an agreement to divest our properties in South Texas. This divestment would provide us with additional liquidity that could be deployed to the acquisition and development of assets in other regions. However, the sale process has been delayed, since the primary purchaser of our natural gas in the region purportedly terminated a contract that was required to be assigned as a condition to closing. We filed a lawsuit to reinstate the contract and the suit remains pending in Federal Court. We're also working toward a commercial solution to allow the closing conditions to be met.

The scheduled closing date has been extended to August 15. We continue to diligently work towards a resolution, but our ability to close the transaction remains subject to factors outside of our control. If we're not able to close this transaction, our liquidity will be significantly limited and being able to comply with near-term covenants, and our debt agreements will be challenged.

In summary, we remain confident in the quality of our assets and people, however, we face significant challenges related to our liquidity and financial condition. We'll continue to evaluate strategic alternatives directed towards maintaining and protecting value of the company.

Now, I want to turn the call over to Harold to provide an update on our assets, capital program and operations.

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Harold H. Jameson, EXCO Resources, Inc. - COO and VP [4]

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Thanks, Hal. On Slide 3, the map shows the locations of our assets in Texas, Louisiana and Appalachia. In Panel 1, the table illustrates the breakdown of our acres positions, percent, acreage held-by-production, volumes for the quarter and the year-end 2016 proved reserves. We reengaged our drilling operations in late January. We added a fourth rig in April and currently are running 4 operating drilling rigs all in North Louisiana. Our year-end proved reserves were in excess of 1.5 Tcf equivalent based on 12/30/16 NYMEX pricing. Approximately 75% of EXCO's production and reserves are in the Haynesville and Bossier of North Louisiana and East Texas.

Slide 4 provides an overview of our 2017 capital budget of $158 million, approximately double the amount we spent in 2016. Panel 1 lists the major components and provides commentary on each of the items in the 2017 program. Our focus is clearly on North Louisiana as we are currently running 4 rigs targeting Haynesville and Bossier shale and plan to spud a total of 36 gross or 17.8 net operated wells this year.

Our drilling performance in the quarter continued to improve, as we accomplished record-setting performance with our drilling team. In the quarter, we drilled our second and third overall fastest Haynesville standard linked lateral wells from spud-to-rig release in 22 days and 24 days respectively. And we continue to make progress with our longer lateral wells. We successfully drilled our first 10,000-foot lateral during the quarter, as well as successful 7,500-foot laterals.

The Haynesville play has been reenergized with advancements in completion design and longer lateral lengths. EXCO's current completion designs include higher levels of proppant, higher volumes of fluid and tighter cluster spacing to deliver higher fracture intensity. We believe there are additional refinements to optimize the designs, and the wells we completed in North Louisiana during 2017 featured 30% more proppant, more fluid and tighter clusters than our previous generation designs.

Approximately 50% of the wells we plan to drill in our 2017 program will consist of longer laterals ranging up to 10,000 feet.

Our Bossier opportunities are held-by-production, but we are conducting additional appraisal work in the Bossier formation in North Louisiana in 2017. Our first well drilled this year was a Bossier appraisal well with a 7,000-foot lateral, which was completed with the modified design, consisting of 48 frac stages with 3,500 pounds of proppant per foot. This well IP-ed at 12.1 million cubic feet per day, at 7,500-psi flowing casing pressure on a 21/64th inch choke and it's performing as expected. One thing to note, with the degree of choke management we imposed on the Bossier shale flowback process, we need additional time to assess the performance improvements with the new design. We're currently drilling our second 2017 long lateral Bossier well and expect to complete the well later this year.

We completed 3 standard lateral length Haynesville wells in the quarter with our new completion design and the average IP was 17.4 million cubic feet per day at 8,000-psi flowing casing pressure on a 23/64th inch choke. These 3 wells were turned-to-sales in June, and are currently exceeding our type curve performance expectations with strong sustained flowing rates and pressures. We're currently fracture stimulating a 6 well group of Haynesville wells in Caddo Parish that will be turned-to-sales in approximately 2 months.

In Panel 2, note that $138 million of the $158 million budget or 87% of the total is directed to D&C activity. This includes $25 million D&C capital that is operated by others, or OBO, which is about 8x the OBO spending in 2016. We evaluate each OBO drilling opportunity one well at a time. These opportunities compete for capital, they're held to the same return standards as our operated wells, and provide valuable information to EXCO as most operators in the play have enhanced well designs, with larger completions and longer laterals.

The OBO activity will be focused in North Louisiana and East Texas. In East Texas, the activity will be in the southern part of our East Texas area in Nacogdoches County, where we have realized recent proved well performance above 2.6 Bcf per 1,000 feet of lateral, representing the highest EUR per foot in EXCO's Haynesville portfolio. The East Texas activity also includes a stack test of Haynesville and Bossier shale laterals in the same deep area of the play. The 2 wells are currently in the drilling phase.

Panel 3 breaks down the current operated gross and net well counts in the 2017 capital program. The company is maintaining capital discipline and is adjusting to comply with the total 2017 budget allocation of $158 million. We have recently received increases in cost on the completion side of the business, primarily fracture stimulation as the result of higher demand for services and increased material costs, higher coiled tubing, service costs and higher pump-down service costs. The increases in service costs will drive our overall well cost up by about 10% to 13% or an additional $750,000 to $1.5 million per well depending on lateral length. This is compared to the wells completed in the first half of 2017.

We received even higher pricing for an option on a second fracture stimulation fleet, and have declined to -- declined to accept those higher costs. We plan to run 1 dedicated frac fleet for the remainder of the year, unless we can secure a more reasonable service cost option for a second fleet. The one-fleet pace preserves value that would have otherwise been eroded with the higher service costs.

Another factor that impacts our 2017 budget is the non-consent elections by partners in certain EXCO operated wells in 2017. We have captured additional interest, reserves and value in certain wells from the non-consent elections by partners, and that allows EXCO the opportunity to improve well ownership, albeit with an additional capital burden.

With these adjustments to our capital budget, we are delivering fewer overall gross wells to sales in 2017; however, we realized only a very small reduction to net walls turned-to-sales in 2017.

We have updated all of our type curves to reflect these increased costs. We're striving to offset as much of the cost increases as possible with our continuous focus on efficiency gains across our operations. In the appendix on Slide 10, our standard table of type curves, drilling inventory, capital and economics with break-even pricing is shown. This group of type curves represents the mix of drilling projects that EXCO will direct capital to in the 2017 program.

Moving over to Slide 5. The chart illustrates the EXCO drilling inventory ranked by break-even gas price required to deliver a 25% before tax rate of return. While increases in service costs have eroded some of our wellhead returns, the inventory of high-quality locations on the chart provides EXCO a multiyear drilling inventory.

Now, I will turn the call over to Tyler to cover our Q2 results.

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Tyler Farquharson, EXCO Resources, Inc. - CFO, VP and Treasurer [5]

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Thanks, Harold. Slide 6 compares our financial performance to previous periods. Production declined 4% from prior quarter, as natural production declines were only partially offset by the 4 operated wells turned-to-sales late in the quarter. Prior to this quarter, the most recent operated well turned-to-sales by the company was in July 2016.

Our expenses remained relatively consistent with prior quarter, and we were able to significantly reduce our cash interest expense through the payment of interest on the 1.75 lien term loans in common shares during June. We issued 2.7 million shares in lieu of a cash interest payment of approximately $23 million.

Slide 7 compares the company's performance against guidance for Q2 '17, and presents our guidance for Q3 '17. The Q2 guidance assumed the sale of our South Texas properties would occur on June 1. As a result, this impacted the comparability against our actual results. Our Q3 '17 guidance assumes the sale of South Texas will now occur on September 1, but as Hal noted, we cannot be assured this transaction will close.

Natural gas production was at the high-end of guidance, driven by the strong results of our wells recently turned-to-sales in North Louisiana. Due to our revised completion schedule, we are now forecasting that natural gas production for Q3 '17 will be flat as compared to the prior quarter. Our next wells are scheduled to turn-to-sales in October.

Our operating expenses, production taxes, and gathering expenses were in line with guidance and are expected to remain relatively constant during Q3 '17. G&A was in line with guidance; however, G&A may increase during the second half of the year due to additional cost associated with litigation, the divestiture of our South Texas properties and other professional fees.

Cash interest expense was below guidance, as we were able to obtain shareholder approval, which allowed us to pay interest on the 1.75 lien term loans in common shares. Our Q3 '17 guidance assumes that we will pay interest in kind with either additional indebtedness or common shares, but we do not have to make a determination on method of payment until September 1.

Please see our SEC filings for additional information related to our liquidity and financial condition including a description on our limitations to pay interest in common shares, more additional indebtedness.

I will now turn the call back over to Hal for some closing remarks.

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Harold L. Hickey, EXCO Resources, Inc. - CEO and President [6]

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Thanks, Tyler. While the company faces headwinds, we do continue to work hard every day for all of our shareholders, and we are evaluating additional transactions to restructure our indebtedness and address near-term liquidity needs, which may include either in-court or out-of-court restructuring.

We have good assets, good people. We continue to have a very supportive Board of Directors, and we always have a desire to succeed. We'll provide updates on material information as required.

With that operator, we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) You first question comes from the line of Sinan Kermen with DRW.

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Sinan Kermen, [2]

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I have a few questions with regards to the asset sale process. I read on your 10-Q that you got into a temporary sales agreement with Chesapeake such that the wells are no longer shut in and they're producing. My question is for the sale conditions to be met, does EXCO have to strike a new long-term agreement with Chesapeake? Or does the potential new buyer have to negotiate a separate agreement that's to their liking? At this point, like, are you guys still involved with that part or is it basically between the potential buyer and Chesapeake?

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Tyler Farquharson, EXCO Resources, Inc. - CFO, VP and Treasurer [3]

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No, we're still definitely -- this is Tyler. We're still involved. We have to get a gathering agreement with Williams.

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Sinan Kermen, [4]

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Okay. Okay. And then you had mentioned that August 15 is the deadline, yet on your guidance remarks, you were kind of assuming September 1. Does that mean further delays in the -- or postponements of the closing date is possible under the current amended sales agreement?

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Tyler Farquharson, EXCO Resources, Inc. - CFO, VP and Treasurer [5]

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Yes, it's definitely possible.

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Sinan Kermen, [6]

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Okay. And then one other question I had was you had purchased a few natural gas properties in July and August for about $15 million. Were you under contract for them prior to June 1, or were they -- or did you get on their contract with them after June 1?

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Harold H. Jameson, EXCO Resources, Inc. - COO and VP [7]

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Yes, those were after. This is Harold Jameson. Yes, those acquisitions -- those additional assets are -- those are new, and those assets are located in our North Louisiana area, right in our core area of our play, in our Haynesville and Bossier shale play.

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Sinan Kermen, [8]

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Got it. Got it. And then my final question, again this is regarding the asset sale. To the extent that the SHL does not go through, I do assume, given your liquidity profile, you'd have to revise your CapEx plans for the year. How flexible are you with those CapEx plans like or how much committed CapEx is that, that can't be taken back really?

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Tyler Farquharson, EXCO Resources, Inc. - CFO, VP and Treasurer [9]

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Yes, this is Tyler. As far as contracts that we have on the development program, we don't have any long-term commitments for rigs or completion crew, so we could be pretty flexible with our capital program if we chose to.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of Jules Scruggs with Westlake Securities.

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Jules Scruggs, Westlake Securities, LLC - Partner and SVP [11]

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I'm just going to follow up on some of the questions that were prior, but can you give some additional color or explain why you went about spending $20 million on the oil and gas properties in undeveloped acreage here in June and August? Because you needed to draw down on your credit facility to do that, and you guys are disclosing potential liquidity problems as early as next quarter. And on your capital budget, you had forecast spending $7 million I think on land acquisition and you're spending $20 million now. If you could just explain and give a little bit more color on why that was important?

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Harold L. Hickey, EXCO Resources, Inc. - CEO and President [12]

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Yes, the bulk of these assets are assets that we currently operate. We feel like we got a very accretive acquisition that creates a lot of value for the company regardless of what situation we may end up in. So decision was made, good assets, we like them, it creates value, move on.

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Operator [13]

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And we have no further questions at this time, sir.

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Harold L. Hickey, EXCO Resources, Inc. - CEO and President [14]

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Once again, we thank everyone for participating in the call, have a great day.

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Operator [15]

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And this concludes today's conference call. You may now disconnect.