EXCO Resources, Inc. (XCO) (“EXCO” or the "Company") today announced operating and financial results for first quarter 2017.
2017 First Quarter Highlights
- Drilled 4 gross (3.5 net) operated horizontal wells targeting the Haynesville and Bossier shales in North Louisiana in first quarter 2017.
- Produced 241 Mmcfe per day, or 22 Bcfe, for first quarter 2017, within guidance.
- GAAP net income was $8 million, or $0.03 per diluted share, and Adjusted net loss, a non-GAAP measure, was $5 million, or $0.02 per diluted share, for first quarter 2017.
- Adjusted EBITDA, a non-GAAP measure, was $18 million for first quarter 2017.
- Lease operating expenses and general and administrative expenses were below the low-end of guidance.
- Improved liquidity by $120 million compared to prior quarter primarily through capital structure transactions including the issuance of new indebtedness and exchange of existing indebtedness. These transactions provide additional financial flexibility through the Company's option to pay interest in cash, indebtedness or common shares (subject to shareholder approval).
- Executed agreement to divest the Company's properties in South Texas for $300 million, subject to customary purchase price adjustments, that is expected to close in June 2017. The proceeds from the divestiture will primarily be deployed to high rate of return opportunities in the Haynesville and Bossier shales.
- Announced 2017 capital budget of $158 million focused on the development of Haynesville and Bossier shale assets in North Louisiana.
Strategic plan update
EXCO's strategic plan continues to focus on three core objectives: 1) restructuring the balance sheet to enhance its capital structure and extend structural liquidity, 2) transforming EXCO into the lowest cost producer, and 3) optimizing and repositioning the portfolio. The three core objectives and the Company's recent progress are detailed below:
- Restructuring the balance sheet to enhance its capital structure and extend structural liquidity - The Company remains committed to improving its financial flexibility and enhancing long-term value for shareholders through the continued execution of its comprehensive consensual restructuring program (the “Restructuring Program”). The focus is to establish a sustainable capital structure that provides the Company with the liquidity necessary to execute its business plan.
The Company executed a series of transactions during March 2017 that significantly improved its capital structure, including the issuance of $300 million in aggregate principal amount of senior secured 1.5 lien notes due March 20, 2022 ("1.5 Lien Notes"), exchanges of $683 million in aggregate principal amount of senior secured second lien term loans due October 26, 2020 ("Second Lien Term Loans") for a like amount of senior secured 1.75 lien term loans due October 26, 2020 ("1.75 Lien Term Loans"), the issuance of warrants, and an amendment to its credit agreement ("Credit Agreement"). Liquidity, which represents cash plus the unused borrowing base under the Credit Agreement, improved from $66 million as of year-end 2016 to $186 million as of March 31, 2017.
The 1.5 Lien Notes and 1.75 Lien Term Loans provide the option, at the Company's discretion prior to December 31, 2018 and subject to certain limitations, to pay interest in cash, additional indebtedness, or common shares (subject to shareholder approval). The option to pay interest in common shares on the 1.5 Lien Notes and 1.75 Lien Term Loans has the potential to reduce annual cash interest payments by approximately $109 million, subject to certain restrictions. The Company is required to obtain certain shareholder approvals to permit the exercisability of the warrants and issuance of common shares in connection with the payment of interest on the 1.5 Lien Notes and 1.75 Lien Term Loans. In addition, the Company will seek approval to execute a reverse stock split to increase the per share market price of its common shares in order to maintain its listing on the New York Stock Exchange ("NYSE") and effectively increase the total number of common shares it is authorized to issue in order to provide adequate number of common shares to effect the transactions contemplated by the 1.5 Lien Notes and 1.75 Lien Term Loans. EXCO is seeking the required shareholder approvals as part of its annual meeting of shareholders on May 31, 2017.
The Company plans to pursue additional transactions to improve its Liquidity and capital structure including the issuance of indebtedness, issuance of equity in exchange for indebtedness and repurchase of indebtedness.
- Transforming EXCO into the lowest cost producer - EXCO continues to exercise fiscal discipline to transform itself into the lowest cost producer. Lease operating expenses decreased by 11% for first quarter 2017 compared to the same period in 2016 primarily due to its cost reduction initiatives that more than offset increased workover activity. GAAP general and administrative expenses decreased by 59% in first quarter 2017 compared to first quarter 2016. The decrease primarily related to changes in the fair value of equity-based compensation and lower personnel costs. Adjusted general and administrative expenses, a non-GAAP measure, decreased 30% for first quarter 2017 compared to the same period in 2016. The Company's cost reduction efforts have resulted in a decrease in total employee headcount of approximately 41% since first quarter 2016.
- Optimizing and repositioning the portfolio - The Company continues to execute its disciplined capital allocation program to ensure the highest and best uses of capital. On April 7, 2017, the Company entered into a definitive agreement to divest its oil and natural gas properties in South Texas as part of its portfolio optimization initiative. The purchase price of $300 million is subject to customary closing conditions and adjustments based on an effective date of January 1, 2017. The Company expects the transaction to close in June 2017; however, no assurance can be given as to outcome or timing of such transaction.
The Company resumed drilling activity in early 2017 and is currently running four rigs in North Louisiana. EXCO's 2017 capital budget focuses on the development of its highest rate of return projects in the Haynesville shale in North Louisiana and unlocking additional value from the Bossier shale in North Louisiana.
2017 Capital Budget
EXCO’s 2017 capital budget of $158 million was designed to ensure the highest and best use of capital targeting the development of the Haynesville shale and appraisal of the Bossier shale in North Louisiana. The 2017 capital budget includes $122 million allocated to the drilling of 38 gross (15.9 net) operated wells and the completion of 27 gross (11.6 net) operated wells in North Louisiana. The 2017 capital budget could be impacted by acquisitions, if any, and the elections of partners in the Company's operated wells.
The capital budget is currently allocated among the different budget categories as follows:
Table 1: Capital budget by type
|Drilling and completion (1)||$MM||137|
|Corporate and other (2)||$MM||10|
|(1)||Includes $122 million of operated and $15 million of non-operated drilling and completion costs|
|(2)||Includes $5 million of capitalized interest and $4 million of capitalized general and administrative expenses|
Details of the plans follow:
Table 2: Development activity and capital spending by area
2017; mixed measures
|Corporate and other (3)||—||—||—||—||—||10||10|
|(2)||Includes drilling and completion costs on wells operated by others|
|(3)||Includes $5 million of capitalized interest and $4 million of capitalized general and administrative expenses|
EXCO expects to operate four rigs in North Louisiana during 2017 to drill 38 gross (15.9 net) operated wells featuring a modified well design that builds on the success of the results from the Company's 2016 development program. The program will include extended laterals up to 10,000 feet in length and larger completions with an average of 3,500 lbs of proppant per lateral foot. The Company will evaluate the results and may test higher levels of proppant if evidence of potential for further upside exists. The first wells drilled as part of the 2017 development program are expected to turn-to-sales in second quarter 2017. The cost per well for the wells drilled during 2017 is expected to be between $6.9 million to $11.9 million in the Haynesville shale based on the lateral length and $11.4 million in the Bossier shale.
EXCO's development activities in the East Texas region during 2017 will primarily include participation in wells operated by others. This includes the development of wells by a third-party that will delineate EXCO's position in the southern portion of the region and extend its continuous drilling obligation on certain acreage.
On April 7, 2017, the Company entered into a definitive agreement to divest its oil and natural gas properties in South Texas. The Company expects the transaction to close in June 2017; however, no assurance can be given as to outcome or timing of such transaction. The Company does not plan to allocate any development capital to South Texas during 2017.
EXCO expects to turn-to-sales 1 gross (0.5 net) operated well in the Marcellus shale during late 2017. Regional natural gas price differentials in Appalachia have recently narrowed and there is potential for additional demand catalysts. The Company will monitor these conditions to determine the extent of future development of its properties in the Marcellus shale. EXCO continues to perform its technical assessment of the dry gas window of the Utica shale and its plans for 2017 may include participation in wells with another operator to further evaluate the potential of the formation.
Table 3: Summary of operating activities and operational results
Historical vs. guidance; mixed measures
|Rig counts (1)||#||1||—||100||2||(50||)||1||2||(50||)||N/A||4|
|Net wells drilled (1)|
|Appalachia and other||#||—||—||—||—||—||—||—||—||N/A||N/A|
|Total net wells drilled||#||3.5||—||100||4.3||(19||)||3.5||4.3||(19||)||3.9||3.9|
|Net wells turned-to-sales (1)|
|Appalachia and other||#||—||0.4||(100||)||—||—||—||—||—||N/A||N/A|
|Total net wells turned-to-sales||#||—||0.4||(100||)||3.6||(100||)||—||3.6||(100||)||—||3.5|
|Appalachia and other||Mmcfe/d||30||27||11||42||(29||)||30||42||(29||)||N/A||N/A|
|Total daily production||Mmcfe/d||241||263||(8||)||295||(18||)||241||295||(18||)||235-245|| |
|Natural gas||Bcf||19.7||21.9||(10||)||23.5||(16||)||19.7||23.5||(16||)||19.4-20.1|| |
|Total production||Bcfe||21.7||24.2||(10||)||26.8||(19||)||21.7||26.8||(19||)||21.2-22.1|| |
|(1)||Includes average rigs during the period and wells operated by EXCO, and excludes rigs and wells operated by others.|
- Produced 134 Mmcfe per day, a decrease of 15 Mmcfe per day, or 10%, from fourth quarter 2016 and a decrease of 17 Mmcfe per day, or 11%, from first quarter 2016.
- Drilled 3 gross (2.6 net) operated Haynesville shale wells and 1 gross (0.9 net) operated Bossier shale well during first quarter 2017.
EXCO’s decrease in production compared to fourth quarter 2016 was primarily due to natural production declines. The three Haynesville shale wells drilled during the first quarter 2017 included standard average lateral lengths of 4,500 feet and will be completed with up to 3,500 pounds of proppant per lateral foot. This represents a 30% increase in proppant levels compared to wells completed by the Company in the region during 2016.
The Company will evaluate the results of the Bossier shale well drilled in first quarter 2017 to assess the potential for future development of Bossier shale locations in North Louisiana. Compared to EXCO's most recent Bossier shale well completed in the region during 2015, the well drilled during first quarter 2017 features enhanced completion methods including a 64% increase in lateral length, a 49% increase in proppant per lateral foot, and tighter spacing between fracturing intervals. In addition, EXCO participated in a Bossier shale well with another operator adjacent to the Company's acreage that was turned-to-sales during first quarter 2017 using similar completion methods. The Company's extensive infrastructure could allow for efficient development of its inventory of 168 gross (78 net) operated undeveloped locations in the Bossier shale based on average lateral lengths of 7,500 feet.
- Produced 53 Mmcfe per day, a decrease of 7 Mmcfe per day, or 12%, from fourth quarter 2016 and a decrease of 10 Mmcfe per day, or 16%, from first quarter 2016.
EXCO’s decrease in production compared to fourth quarter 2016 was primarily due to natural production declines as the Company has not turned an operated well to sales in the region since March 2016. The Company participated in a Haynesville shale well with another operator in the southern portion of the region that was turned-to-sales in early 2017. This well is exhibiting similar strong performance results comparable to EXCO's most recent operated wells drilled in the area. The recent operated wells drilled in the southern portion of the region have the highest EUR's for the Haynesville shale across the Company's portfolio.
- Produced 4.0 Mboe per day, a decrease of 0.5 Mboe per day, or 11%, from fourth quarter 2016 and a decrease of 2.5 Mboe per day, or 38%, from first quarter 2016.
EXCO’s decrease in production compared to fourth quarter 2016 was primarily due to natural production declines and higher downtime associated with repairs of a third-party central production and storage facility.
- Produced 30 Mmcfe per day, an increase of 3 Mmcfe per day, or 11%, from fourth quarter 2016, and a decrease of 12 Mmcfe per day, or 29%, from first quarter 2016 primarily due to the sale of the Company's conventional assets during 2016.
EXCO’s increase in production compared to fourth quarter 2016 was primarily due to lower shut-in volumes. During fourth quarter 2016, the Company shut-in approximately 0.6 Bcfe due to low natural gas prices that was subsequently turned on-line as prices improved during the period. The regional natural gas price differentials in Appalachia improved in late 2016 and into 2017 from an average of NYMEX less $0.90 per Mcf during 2016 to NYMEX less $0.44 per Mcf during March 2017.
Table 4: Summary of operational earnings
Historical vs. guidance; mixed measures
|Natural gas revenues||$MM||53||54||(2||)||36||47||53||36||47||N/A||N/A|
|Total oil and natural gas revenues||$MM||69||72||(4||)||52||33||69||52||33||N/A||N/A|
|Realized oil prices||$/Bbl||48.92||46.27||6||28.15||74||48.92||28.15||74||N/A||N/A|
|Oil price differentials||$/Bbl||(2.91||)||(2.86||)||2||(5.23||)||(44||)||(2.91||)||(5.23||)||(44||)||(3.00-4.00)||(3.00-4.00)|
|Realized gas prices||$/Mcf||2.70||2.48||9||1.54||75||2.70||1.54||75||N/A||N/A|
|Gas price differentials||$/Mcf||(0.63||)||(0.50||)||26||(0.55||)||15||(0.63||)||(0.55||)||15||(0.50-0.60)||(0.50-0.60)|
|Derivative financial instruments|
|Cash settlements (payments)||$MM||(4||)||1||(500||)||17||(124||)||(4||)||17||(124||)||N/A||N/A|
|Cash settlements (payments)||$/Mcfe||(0.21||)||0.04||(625||)||0.63||(133||)||(0.21||)||0.63||(133||)||N/A||N/A|
|Costs and expenses|
|Oil and natural gas operating costs||$MM||8||9||(11||)||9||(11||)||8||9||(11||)||N/A||N/A|
|Production and ad valorem taxes||$MM||3||2||50||5||(40||)||3||5||(40||)||N/A||N/A|
|Gathering and transportation||$MM||27||27||—||25||8||27||25||8||N/A||N/A|
|Oil and natural gas operating costs||$/Mcfe||0.39||0.36||8||0.35||11||0.39||0.35||11||0.40-0.45||0.35-0.40|
|Production and ad valorem taxes||$/Mcfe||0.16||0.09||78||0.17||(6||)||0.16||0.17||(6||)||0.15-0.20||0.15-0.20|
|Gathering and transportation||$/Mcfe||1.26||1.10||15||0.94||34||1.26||0.94||34||1.20-1.25||1.25-1.30|
|General and administrative (1)||$MM||7||10||(30||)||7||—||7||7||—||9-10||6-7|
|Adjusted EBITDA (2)||$MM||18||26||(31||)||21||(14||)||18||21||(14||)||N/A||N/A|
|GAAP net income (loss) (3)||$MM||8||(35||)||(123||)||(130||)||(106||)||8||(130||)||(106||)||N/A||N/A|
|Adjusted net loss (2)||$MM||(5||)||(2||)||150||(19||)||(74||)||(5||)||(19||)||(74||)||N/A||N/A|
|GAAP diluted shares outstanding||MM||281||280||—||278||1||281||278||1||N/A||N/A|
|Adjusted diluted shares outstanding||MM||281||280||—||278||1||281||278||1||N/A||N/A|
|GAAP diluted EPS||$/Share||0.03||(0.12||)||(125||)||(0.47||)||(106||)||0.03||(0.47||)||(106||)||N/A||N/A|
|Adjusted diluted EPS||$/Share||(0.02||)||—||(100||)||(0.07||)||(71||)||(0.02||)||(0.07||)||(71||)||N/A||N/A|
|(1)||Excludes equity-based compensation income of $2.4 million, and expense of $0.2 million and $3.8 million for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016, respectively.|
|(2)||Adjusted EBITDA and Adjusted net loss are non-GAAP measures. See Financial Data section for definitions and reconciliations.|
|(3)||GAAP net income (loss) included an impairment of oil and natural gas properties of $135 million for the three months ended March 31, 2016.|
EXCO's GAAP net income increased from a net loss of $35 million in fourth quarter 2016 to net income of $8 million in first quarter 2017 primarily due to the change in unrealized gains and losses on commodity derivative financial instruments.
EXCO’s decrease in Adjusted EBITDA compared to fourth quarter 2016 was primarily due to lower oil and natural gas production.
Cash Flow Results
Table 5: Summary of key cash flow items
Historical vs. guidance; mixed measures
|Cash flow provided by (used in)|
|Net increase in cash||$MM||23||6||283||34||(32||)||23||34||(32||)||N/A||N/A|
|Other key cash flow items|
|Adjusted operating cash flow (1)||$MM||3||12||(75||)||5||(40||)||3||5||(40||)||N/A||N/A|
|Free cash flow (1)||$MM||(7||)||(6||)||17||(5||)||40||(7||)||(5||)||40||N/A||N/A|
|(1)||Adjusted operating cash flow and Free cash flow are non-GAAP measures. See Financial Data section for definitions and reconciliations.|
Table 6: Financial flexibility measures
Historical vs. guidance; mixed measures
|Gross debt (2)||$MM||1,202||1,130||6||1,159||4||1,202||1,159||4||N/A||N/A|
|Net debt (3)||$MM||1,154||1,110||4||1,086||6||1,154||1,086||6||N/A||N/A|
|Adjusted EBITDA (4)||$MM||18||26||(31||)||21||(14||)||18||21||(14||)||N/A||N/A|
|Cash interest expenses (5)||$MM||15||16||(6||)||17||(12||)||15||17||(12||)||N/A||12-16|
|Adjusted EBITDA/Interest (6)||x||1.20||1.63||(26||)||1.24||(3||)||1.20||1.24||(3||)||N/A||N/A|
|Sr. Secured debt/LTM Adj. EBITDA (6)||x||—||2.39||(100||)||0.67||(100||)||—||0.67||(100||)||N/A||N/A|
|Net debt/LTM Adjusted EBITDA||x||12.41||11.56||7||5.48||126||12.41||5.48||126||N/A||N/A|
|(1)||Includes restricted cash of $16 million, $11 million and $28 million as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively.|
|(2)||Represents total principal balance outstanding. See Table 7 below for reconciliation to carrying value.|
|(3)||Net debt represents principal amount of outstanding debt less cash and cash equivalents and restricted cash.|
|(4)||Adjusted EBITDA is a non-GAAP measure. See Financial Data section for definition and reconciliation.|
Cash interest expenses exclude interest paid or accrued in-kind, the amortization of debt issuance costs, discount on notes and capitalized interest. In addition, cash payments under the second lien term loan ("Exchange Term Loan") and a portion of the 1.75 Lien Term Loans are not considered interest expense per FASB ASC 470-60, Troubled Debt Restructuring by Debtors ("ASC 470-60") and are excluded from the cash interest expenses amounts shown. See Table 7 below for additional information on the accounting treatment of the Exchange Term Loan and a portion of the 1.75 Lien Term Loans.
|(6)||These ratios differ in certain respects from the calculations of comparable measures in the Credit Agreement. As of March 31, 2017, the Company was exempt from maintaining a ratio of consolidated EBITDAX to consolidated interest expense (as defined in the agreement); however, the Company is required to maintain a ratio of consolidated EBITDAX to consolidated interest expense of 1.75 to 1.0 for the fiscal quarter ending September 31, 2017 and 2.0 to 1.0 for fiscal quarters thereafter. In addition, the Company's ratio of aggregate revolving credit exposure to consolidated EBITDAX (as defined in the agreement) was 0.1 to 1.0 as of March 31, 2017.|
Table 7: Reconciliation of carrying value to principal
1Q 17; $MM
|Factors||Unit||Carrying value|| |
|EXCO Resources Credit Agreement||$MM||—||—||—||—|
|1.5 Lien Notes||$MM||147||—||153||300|
|1.75 Lien Term Loans||$MM||834||(173||)||21||683|