U.S. Markets closed

EXCO Resources, Inc. Reports Second Quarter 2017 Results

DALLAS--(BUSINESS WIRE)--

EXCO Resources, Inc. (XCO) ("EXCO" or the "Company") today announced operating and financial results for second quarter 2017.

2017 Second Quarter Highlights

  • Drilled 11 gross (4.8 net) and turned-to-sales 4 gross (3.5 net) operated horizontal wells in North Louisiana in second quarter 2017.
  • Produced 229 Mmcfe per day, or 21 Bcfe, for second quarter 2017, a decrease of 4% compared to first quarter 2017, primarily due to natural production declines and the timing of wells turned-to-sales.
  • GAAP net income was $121 million, or $6.13 per diluted share, and Adjusted net loss, a non-GAAP measure, was $5 million, or $0.23 per diluted share, for second quarter 2017. GAAP net income was primarily due to unrealized gains on derivative financial instruments related to common share warrants.
  • Adjusted EBITDA, a non-GAAP measure, was $18 million for second quarter 2017, consistent with first quarter 2017.
  • Operating expenses and general and administrative expenses were within guidance.
  • Liquidity was $170 million as of June 30, 2017.
  • Extended the scheduled closing date of the divestiture of the Company's oil and natural gas properties in South Texas to August 15, 2017, subject to the satisfaction of certain conditions.
  • Issued 2.7 million common shares to pay interest on the 1.75 Lien Term Loans in lieu of $23 million in cash. The ability to pay interest in common shares will be limited in the future due to the decline in the Company's share price.
  • Effected a 1-for-15 reverse share split and reduced the number of authorized common shares from 780 million to 260 million.

Key Developments

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:

  1. Restructuring the balance sheet to enhance its capital structure and extend structural liquidity - The Company's restructuring program is focused on establishing a sustainable capital structure that provides the Company with the liquidity necessary to execute its business plan. The Company's senior secured 1.5 lien notes due March 20, 2022 ("1.5 Lien Notes") and senior secured 1.75 lien term loans due October 26, 2020 ("1.75 Lien Term Loans") provide the option, at the Company's discretion, subject to certain limitations, to pay interest in cash, additional indebtedness, or common shares. On May 31, 2017, EXCO's shareholders approved a proposal to amend EXCO's certificate of formation to permit the issuance of common shares to pay interest on the 1.5 Lien Notes and 1.75 Lien Term Loans and permit the issuance of common shares upon the exercise of the warrants associated with the 1.5 Lien Notes and 1.75 Lien Term Loans, in each case for purposes of New York Stock Exchange rules. On June 20, 2017, the Company paid interest on the 1.75 Lien Term Loans in common shares, which resulted in the issuance of 2.7 million common shares in lieu of a $23 million cash interest payment.

    Liquidity, which represents cash plus the unused borrowing base under the Company's credit agreement ("Credit Agreement"), was $170 million as of June 30, 2017. EXCO's ability to pay interest in common shares will be limited in future periods due to restrictions in its debt agreements. Due to a significant decline in EXCO's share price, the Company will not be able to pay interest in common shares to the extent initially forecasted. As a result, the Company will be required to pay interest in cash or additional indebtedness that will further restrict its Liquidity and ability to comply with covenants in its debt agreements. The Company continues to evaluate additional transactions to restructure its existing indebtedness and address near-term liquidity needs, which may include an in-court or out-of-court restructuring. See further discussion in the "Liquidity Results" section of this press release.
  2. Transforming EXCO into the lowest cost producer - EXCO continues to exercise fiscal discipline to transform itself into the lowest cost producer. GAAP general and administrative expenses decreased by 108% in second quarter 2017 compared to second quarter 2016. The decrease primarily related to changes in the fair value of equity-based compensation. Adjusted general and administrative expenses, a non-GAAP measure, decreased 11% for second quarter 2017 compared to the same period in 2016 primarily due to lower personnel costs from reduced headcount. The Company's cost reduction efforts have resulted in a decrease in total employee headcount of approximately 36% since second quarter 2016.

    The Company's development plans for 2017 continue to focus on cost effectiveness and improved efficiencies. The drilling program includes a combination of standard lateral lengths of 4,500 feet and longer lateral lengths up to 10,000 feet. In North Louisiana, EXCO drilled a Haynesville shale well with the longest lateral in its history of approximately 10,000 feet and drilled a Bossier shale well with a lateral length of approximately 7,000 feet. The extended lateral length wells target improved cost per lateral foot metrics compared to standard well designs. Also, the Company continues to evaluate the optimal completion design for its Haynesville and Bossier shale wells. The wells completed during 2017 have higher fracture intensity utilizing 3,500 lbs of proppant per lateral foot, and the Company continues to analyze well performance data from operated and non-operated wells.
  3. 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 closing conditions and adjustments based on an effective date of January 1, 2017. The transaction was originally scheduled to close in June 2017; however, the scheduled closing date was extended until August 15, 2017, pending satisfactory resolution of certain conditions. No assurance can be given as to outcome or timing of the transaction. See further discussion in the "Operational Results" section of this press release.

    The Company is currently running four drilling rigs in North Louisiana focused on the development in the Haynesville shale and unlocking additional value from the Bossier shale. The Haynesville projects are among the highest rate of return projects in the Company's portfolio. In addition, the Company acquired oil and natural gas properties and undeveloped acreage in its core position in North Louisiana for approximately $5 million and $15 million in June and August 2017, respectively.

Operational Results

Table 1: Summary of operating activities and operational results
Historical vs. guidance; mixed measures

        Quarter-to-Date     Year-to-Date     Q2     Q3
6/30/17     3/31/17     6/30/16 6/30/17     6/30/16

2017 (2)

2017 (3)

Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Rig counts (1) # 4 1 300   1 300   3 1 200   N/A 4
 
Net wells drilled (1)
North Louisiana # 4.8 3.5 37   0.9 433   8.3 5.2 60   N/A N/A
East Texas #       N/A N/A
South Texas #       N/A N/A
Appalachia and other #       N/A N/A
Total net wells drilled # 4.8 3.5 37   0.9 433   8.3 5.2 60   3.9 5.3
 
Net wells turned-to-sales (1)
North Louisiana # 3.5 100   2.5 40   3.5 2.5 40   N/A N/A
East Texas #     3.6 (100 ) N/A N/A
South Texas #       N/A N/A
Appalachia and other #       N/A N/A
Total net wells turned-to-sales # 3.5 100   2.5 40   3.5 6.1 (43 ) 3.5
 
Daily production
North Louisiana Mmcfe/d 131 134 (2 ) 146 (10 ) 133 148 (10 ) N/A N/A
East Texas Mmcfe/d 46 53 (13 ) 76 (39 ) 50 69 (28 ) N/A N/A
South Texas Mmcfe/d 22 24 (8 ) 32 (31 ) 23 36 (36 ) N/A N/A
Appalachia and other Mmcfe/d 29 30 (3 ) 43 (33 ) 30 42 (29 ) N/A N/A
Total daily production Mmcfe/d 229 241 (5 ) 296 (23 ) 235 296 (21 ) 215-225 220-230
 
Production
Oil Mbbls 303 331 (8 ) 447 (32 ) 634 997 (36 ) 200-220 175-195
Natural gas Bcf 19.1 19.7 (3 ) 24.3 (21 ) 38.8 47.8 (19 ) 18.4-19.2 19.2-20.0
Total production Bcfe 20.9 21.7 (4 ) 27.0 (23 ) 42.6 53.8 (21 ) 19.6-20.5 20.2-21.2
 
Capital expenditures

$MM

40 18 122   19 111   58 56 4   N/A N/A
 
(1)   Includes average rigs during the period and wells operated by EXCO, and excludes rigs and wells operated by others.
(2)

Q2 2017 guidance assumed South Texas divestiture occurred on June 1, 2017.

(3)

Q3 2017 guidance assumes South Texas divestiture occurs on September 1, 2017.

 

North Louisiana

Highlights:

  • Produced 131 Mmcfe per day, a decrease of 3 Mmcfe per day, or 2%, from first quarter 2017 and a decrease of 15 Mmcfe per day, or 10%, from second quarter 2016.
  • Drilled 11 gross (4.8 net) and turned-to-sales 3 gross (2.7 net) operated Haynesville shale wells.
  • Drilled 10,000 foot lateral length Haynesville shale well, to be completed in third quarter 2017.
  • Turned-to-sales 1 gross (0.8 net) operated Bossier shale well with enhanced completion methods.

EXCO’s decrease in production compared to first quarter 2017 was attributable to natural production declines, partially offset by the additional wells turned-to-sales during second quarter 2017.

The Company's 3 gross (2.7 net) standard 4,500 foot lateral length Haynesville wells that were turned-to-sales during second quarter 2017 were completed with an average of 3,500 lbs of proppant per lateral foot, representing a 30% increase when compared to prior wells completed by EXCO in the region. The wells averaged initial production rates of 17.4 Mmcfe per day on a 23/64th choke with an average flowing pressure of 8,000 psi. The early results from these wells have exhibited performance above the Company's proved reserve type curves. During second quarter 2017, the Company drilled the second and third fastest standard lateral length Haynesville wells in EXCO's history with drill times of 22 and 24 days, respectively, from spud to rig release.

EXCO also turned-to-sales its first cross-unit Bossier shale appraisal well during second quarter 2017. This well was drilled with a lateral length of approximately 7,000 feet and completed with 48 frac stages using 3,500 pounds of proppant per lateral foot. This well is currently performing in-line with the Company's expectations with an average initial production rate of 12.1 Mmcfe per day on a 21/64th restricted choke with an average flowing pressure of 7,500 psi. The Company spud an additional Bossier shale well in early third quarter 2017 and will continue to monitor the potential for future development of Bossier shale locations in North Louisiana. EXCO has 167 gross (84 net) Bossier shale drilling locations within Desoto Parish in North Louisiana based on lateral lengths of approximately 7,500 feet.

The Company has recently experienced significant increases in certain service costs, particularly hydraulic fracturing and related completion services, that are expected to increase the average cost per well by approximately 10-13% compared to wells drilled during the first and second quarter 2017. EXCO is currently evaluating methods to improve the cost effectiveness of its well design in order to partially offset the increases in service costs.

East Texas

Highlights:

  • Produced 46 Mmcfe per day, a decrease of 7 Mmcfe per day, or 13%, from first quarter 2017 and a decrease of 30 Mmcfe per day, or 39%, from second quarter 2016.

EXCO’s decrease in production compared to first quarter 2017 and second quarter 2016 was primarily due to natural production declines. The Company has not turned an operated well to sales in the region since first quarter 2016.

EXCO's development activities in the East Texas region during 2017 primarily include participation in wells operated by others. During second quarter 2017, EXCO elected to participate with another operator in the drilling of an extended lateral Bossier shale well that will be completed as a stacked pair with a Haynesville shale well in the southern portion of this region. The Company plans to closely monitor the results of this stacked lateral test for potential downspacing and future development of the Bossier shale in this area.

South Texas

Highlights:

  • Produced 3.7 Mboe per day, a decrease of 0.3 Mboe per day, or 8%, from first quarter 2017 and a decrease of 1.6 Mboe per day, or 31%, from second quarter 2016.

EXCO’s decrease in production compared to first quarter 2017 and second quarter 2016 was primarily due to natural production declines. The Company has not turned an operated well to sales in the region since late 2015.

On April 7, 2017, the Company entered into a definitive agreement to divest its oil and natural gas properties in South Texas. The agreement was amended to extend the scheduled closing date of the transaction to August 15, 2017. The closing of the transaction is subject to certain conditions, including either the reinstatement of a natural gas sales contract due to the purported termination by the purchaser, Chesapeake Energy Marketing L.L.C. ("Chesapeake"), or by the entry into a new gathering agreement with terms and conditions that are acceptable to the buyer in its sole discretion. No assurance can be given regarding the outcome of the transaction.

On June 6, 2017, EXCO filed a lawsuit against Chesapeake asserting breach of contract, tortious interference with existing contract, tortious interference with prospective business relations, and declaratory relief that the contract is still in full force and effect. The lawsuit remains pending in federal court.

See further discussion regarding this transaction in the Company's Current Reports on Form 8-K filed with the SEC on April 13, 2017 and June 23, 2017, and other periodic filings with the SEC.

Appalachia

Highlights:

  • Produced 29 Mmcfe per day, a decrease of 1 Mmcfe per day, or 3%, from first quarter 2017, and a decrease of 14 Mmcfe per day, or 33%, from second quarter 2016.

EXCO’s production decreased from first quarter 2017 due to natural production declines. The decrease from second quarter 2016 was primarily due to natural production declines and the sale of the Company's conventional assets in 2016.

Regional natural gas price differentials in Appalachia have been volatile and narrowed for year-to-date 2017 compared to prior year. The differentials have recently widened due to seasonal conditions; however, the Company believes there is potential for additional demand catalysts within this region in the future. 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 is evaluating plans to participate in appraisal wells with another operator to further evaluate the potential of the formation.

Financial Results

Table 2: Summary of operational earnings
Historical vs. guidance; mixed measures

        Quarter-to-Date     Year-to-Date     Q2     Q3
6/30/17     3/31/17     6/30/16 6/30/17     6/30/16 2017 (5) 2017 (6)
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Operating revenues
Oil revenues $MM 14   16   (13 ) 18   (22 ) 30   33   (9 ) N/A N/A
Natural gas revenues $MM 50   53   (6 ) 36   39   103   72   43   N/A N/A
Total oil and natural gas revenues $MM 64   69   (7 ) 54   19   134   106   26   N/A N/A
Realized oil prices $/Bbl 47.21   48.92   (3 ) 40.25   17   48.10   33.57   43   N/A N/A
Oil price differentials $/Bbl (1.41 ) (2.91 ) (52 ) (5.04 ) (72 ) (2.19 ) (5.15 ) (57 ) (3.00-4.00) (2.00-3.00)
Realized gas prices $/Mcf 2.63   2.70   (3 ) 1.49   77   2.66   1.51   76   N/A N/A
Gas price differentials $/Mcf (0.56 ) (0.63 ) (11 ) (0.46 ) 22   (0.59 ) (0.50 ) 18   (0.50-0.60) (0.55-0.65)
 
Derivative financial instruments
Cash settlements (payments) $MM (1 ) (4 ) (75 ) 17   (106 ) (6 ) 33   (118 ) N/A N/A
Cash settlements (payments) $/Mcfe (0.05 ) (0.21 ) (76 ) 0.62   (108 ) (0.13 ) 0.62   (121 ) N/A N/A
 
Costs and expenses
Oil and natural gas operating costs $MM 8   8     8     17   17     N/A N/A
Production and ad valorem taxes $MM 3   3     5   (40 ) 7   9   (22 ) N/A N/A
Gathering and transportation $MM 27   27     27     54   52   4   N/A N/A
Oil and natural gas operating costs $/Mcfe 0.39   0.39     0.28   39   0.39   0.32   22   0.35-0.40 0.35-0.40
Production and ad valorem taxes $/Mcfe 0.16   0.16     0.18   (11 ) 0.16   0.18   (11 ) 0.15-0.20 0.15-0.20
Gathering and transportation $/Mcfe 1.30   1.26   3   0.99   31   1.28   0.96   33   1.25-1.30 1.25-1.30
General and administrative (1) $MM 7   7     8   (13 ) 13   15   (13 ) 6-7 7-8
 
Operational earnings
Adjusted EBITDA (2) $MM 18   18     23   (22 ) 37   44   (16 ) N/A N/A
GAAP net income (loss) (3) $MM 121   8   NM (111 ) (209 ) 129   (241 ) (154 ) N/A N/A
Adjusted net loss (2) $MM (5 ) (5 )   (14 ) (64 ) (10 ) (33 ) (70 ) N/A N/A
GAAP diluted shares outstanding (4) MM 20   19   5   19   5   19   19     N/A N/A
Adjusted diluted shares outstanding (4) MM 20   19   5   19   5   19   19     N/A N/A
GAAP diluted EPS (4) $/Share 6.13   0.44   NM (5.99 ) (202 ) 6.71   (13.00 ) (152 ) N/A N/A
Adjusted diluted EPS (4) $/Share (0.23 ) (0.27 ) (15 ) (0.77 ) (70 ) (0.51 ) (1.78 ) (71 ) N/A N/A
 
(1)   Excludes equity-based compensation income of $8.0 million and $2.4 million, and expense of $9.3 million for the three months ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively, and income of $10.3 million and expense of $13.1 million for the six months ended June 30, 2017 and 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 $122 million and $6 million of gains related to the revaluation of common share warrants issued in connection with the 1.5 Lien Notes and 1.75 Lien Term Loans for the three months ended June 30, 2017 and March 31, 2017, respectively, and $128 million for the six months ended June 30, 2017. GAAP net income (loss) included impairments of oil and natural gas properties of $26 million and $161 million for the three and six months ended June 30, 2016, respectively.
(4) During second quarter 2017, the Company effected a 1-for-15 reverse share split which required retrospective adjustments to diluted shares outstanding and diluted EPS to reflect the impact of the reverse share split.
(5)

Q2 2017 guidance assumed South Texas divestiture occurred on June 1, 2017.

(6)

Q3 2017 guidance assumes South Texas divestiture occurs on September 1, 2017.

 

EXCO's GAAP net income increased from $8 million in first quarter 2017 to $121 million in second quarter 2017 primarily due to the change in unrealized gains on common share warrants issued in connection with the issuance of the 1.5 Lien Notes and 1.75 Lien Term Loans as a result of the decline in EXCO's share price.

EXCO's costs and expenses were within guidance for second quarter 2017 and consistent with prior quarter.

Cash Flow Results

Table 3: Summary of key cash flow items
Historical vs. guidance; mixed measures

        Quarter-to-Date     Year-to-Date     Q2     Q3
6/30/17     3/31/17     6/30/16 6/30/17     3/31/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Cash flow provided by (used in)
Operating activities $MM 28   5   460   18   56   34   46   (26 ) N/A N/A
Investing activities $MM (47 ) (20 ) 135   (7 ) 571   (67 ) (43 ) 56   N/A N/A
Financing activities $MM (4 ) 38   (111 ) (30 ) (87 ) 34   13   162   N/A N/A
Net increase (decrease) in cash $MM (23 ) 23   (200 ) (19 ) 21     15   (100 ) N/A N/A
 
Other key cash flow items
Adjusted operating cash flow (1) $MM 19   3   533   8   138   22   13   69   N/A N/A
Free cash flow (1) $MM (4 ) (7 ) (43 ) (5 ) (20 ) (11 ) (9 ) 22   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.
 

EXCO's increase in operating cash flows in second quarter 2017 compared to first quarter 2017 was primarily the result of favorable working capital conversions and lower cash interest payments. The Company issued common shares to pay interest on the 1.75 Lien Term Loans during second quarter 2017. EXCO's net cash used in investing activities during second quarter 2017 primarily related to drilling and completion activities and acquisitions in North Louisiana. The decrease in net cash provided by financing activities primarily related to the issuance of the 1.5 Lien Notes in first quarter 2017.

Liquidity Results

Table 4: Financial flexibility measures
Historical vs. guidance; mixed measures

        Quarter-to-Date     Year-to-Date     Q2     Q3
6/30/17     3/31/17     6/30/16 6/30/17     6/30/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Cash (1) $MM 31   48   (35 ) 53   (42 ) 31   53   (42 ) N/A N/A
Gross debt (2) $MM 1,202   1,202     1,125   7   1,202   1,125   7   N/A N/A
Net debt (3) $MM 1,170   1,154   1   1,072   9   1,170   1,072   9   N/A N/A
Adjusted EBITDA (4) $MM 18   18     23   (22 ) 37   44   (16 ) N/A N/A
Cash interest expenses (5) $MM 3   15   (80 ) 17   (82 ) 18   35   (49 ) 12-16 3-5
Adjusted EBITDA/Interest (6) x 6.00   1.20   400   1.35   344   2.06   1.26   63   N/A N/A
Sr. Secured debt/LTM Adj. EBITDA (6) x       0.80   (100 )   0.80   (100 ) N/A N/A
Net debt/LTM Adjusted EBITDA x 13.15   12.41   6   7.05   87   13.15   7.05   87   N/A N/A
 
(1)   Includes restricted cash of $22 million, $16 million and $25 million as of June 30, 2017, March 31, 2017 and June 30, 2016, respectively.
(2) Represents total principal balance outstanding. See Table 5 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.
(5) 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 5 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 June 30, 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 30, 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 Credit Agreement) was 0.1 to 1.0 as of June 30, 2017.
 

Table 5: Reconciliation of carrying value to principal
2Q 17; $MM

        6/30/17 (Actual)
Factors Unit Carrying value    

Deferred
reduction in
carrying
value (1)

   

Unamortized
discount/deferred
financing costs

   

Principal
balance

EXCO Resources Credit Agreement $MM    
1.5 Lien Notes $MM 151     149 300
1.75 Lien Term Loans $MM 829   (166 ) 20 683
Exchange Term Loan $MM 24   (7 ) 17
2018 Notes $MM 131     132
2022 Notes $MM 70     70
Deferred financing costs, net $MM (14 )   14
Total debt $MM 1,192   (173 ) 183 1,202
 
(1)   The Exchange Term Loan and a portion of the 1.75 Lien Term Loans are accounted for in accordance with ASC 470-60. As a result, the carrying amounts of the Exchange Term Loan and a portion of the 1.75 Lien Term Loans are equal to the total undiscounted future cash payments, including interest and principal. All payments under the terms of these loans, whether designated as interest or as principal amount, reduce the carrying amount of each loan and no interest expense is recognized. The undiscounted future interest payments on the Exchange Term Loan and the 1.75 Lien Term Loans expected to be due in the next twelve months are classified as "Current maturities of long-term debt" on the balance sheet.
 

Table 6: Liquidity schedule
Historical vs. guidance; $MM

        Quarter-to-Date     Year-to-Date     Q2     Q3
6/30/17     3/31/17     6/30/16 6/30/17     6/30/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Borrowing capacity on revolver (1) $MM 150   150     325   (54 ) 150   325   (54 ) N/A N/A
Amount drawn on revolver (2) $MM       122   (100 )   122   (100 ) N/A N/A
Letters of credit $MM 12   12     10   20   12   10   20   N/A N/A
Available for borrowing $MM 138   138     193   (28 ) 138   193   (28 ) N/A N/A
Cash (3) $MM 31   48   (35 ) 53   (42 ) 31   53   (42 ) N/A N/A
Liquidity (4) $MM 170   186   (9 ) 246   (31 ) 170   246   (31 ) N/A N/A
 
(1)  

If the Company successfully closes the South Texas divestiture, the borrowing base under the Credit Agreement will be reduced to $100 million, including letters of credit.

(2) In July and August 2017, the Company borrowed an aggregate of $50 million to fund the acquisition of certain oil and natural gas properties and undeveloped acreage in the North Louisiana region and other working capital needs. Therefore, the remaining amount available for borrowing was reduced to $88 million, including letters of credit.
(3) Includes restricted cash of $22 million, $16 million and $25 million as of June 30, 2017, March 31, 2017 and June 30, 2016, respectively.
(4) Liquidity is calculated as the available borrowing capacity under the Credit Agreement plus cash and cash equivalents and restricted cash. The borrowing base under the Credit Agreement was $150 million as of June 30, 2017.
 

On May 31, 2017, the Company’s shareholders approved a proposal to, among other things, permit the issuance of common shares to pay interest on the 1.5 Lien Notes and 1.75 Lien Term Loans and permit the issuance of common shares upon the exercise of the warrants associated with the 1.5 Lien Notes and 1.75 Lien Term Loans. On June 20, 2017, the Company paid interest on the 1.75 Lien Term Loans by issuing 2.7 million common shares. The Company elected to pay interest in common shares in lieu of a cash payment of $23 million. The price of the Company's common shares issued for payment of interest was based on the trailing 20-day volume-weighted average price calculated as of the end of the three trading days prior to February 28, 2017.

It is currently unclear how many common shares will be issued in the future as a result of the payment-in-kind feature, the amount of which will substantially depend on prevailing market conditions, Liquidity and the price of the Company's common shares. The Company's common share price has and continues to be volatile, and has significantly decreased from historical levels. EXCO's ability to pay interest in common shares will be limited in future periods due to restrictions in its debt agreements. If the Company is not able to make interest payments on the 1.5 Lien Notes and 1.75 Lien Term Loans in common shares, it will be required to pay interest in cash or additional indebtedness that would further restrict its Liquidity and ability to comply with covenants in its debt agreements. The Company is currently permitted to make interest payments in additional indebtedness of up to $50 million due to limitations on the Company's aggregate secured indebtedness within its debt agreements.

EXCO's capital expenditures are expected to exceed its operating cash flows for the remainder of 2017. The deficit is expected to be funded with borrowings under the Credit Agreement or asset sales, if any. The Company borrowed an aggregate of $50 million under its Credit Agreement in July and August 2017 to fund the acquisition of certain oil and natural gas properties and undeveloped acreage in the North Louisiana region and other working capital needs.

The Company does not believe it will be able to comply with all of the covenants under the Credit Agreement or have sufficient Liquidity to conduct its business operations based on existing conditions and estimates during the next twelve months, and could be in default under certain covenants in its Credit Agreement as early as of the end of third quarter 2017. The Company’s ability to comply with its debt covenants is dependent upon oil and natural gas prices, decisions regarding the method of interest payments on the 1.5 Lien Notes and 1.75 Lien Term Loans, closing of the sale of properties in South Texas, and other factors. In addition, the Credit Agreement matures on July 31, 2018, and senior unsecured notes mature on September 15, 2018 ("2018 Notes"). The Company's Liquidity is not expected to be sufficient to repay the outstanding indebtedness due in 2018 based on existing conditions and estimates. These factors raise substantial doubt about the Company's ability to continue as a going concern.

If the Company is unable to restructure its current obligations under its existing outstanding debt, and address near-term liquidity needs, it may need to seek relief under the U.S. Bankruptcy Code. See further information on the risks related to EXCO’s indebtedness and its ability to continue as a going concern in the Company’s periodic filings with the SEC.

Risk Management Results

Table 7: Hedging position
2Q 17; mixed measures

        Six Months Ended     Twelve Months Ended
12/31/17 12/31/18
Factors Unit Volume  

Strike
Price

Volume  

Strike
Price

Natural gas
Fixed price swaps - Henry Hub Bbtu/ $/Mmbtu 18,400 3.05 3,650 3.15
Collars - Henry Hub Bbtu 5,520    
Sold call options $/Mmbtu   3.28  
Purchased put options $/Mmbtu   2.87  
 
Oil
Fixed price swaps - WTI Mbbl/ $/Bbl 92 50.00
 

The Company's derivative financial instruments covered approximately 62% of natural gas production and 15% of oil production during second quarter 2017.

Financial Data

The following financial statements are attached.

...