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EXCO Resources, Inc. Reports Third Quarter 2017 Results

DALLAS--(BUSINESS WIRE)--

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

2017 Third Quarter Highlights

  • Drilled 11 gross (6.5 net) horizontal wells in North Louisiana during third quarter 2017.
  • Produced 237 Mmcfe per day, or 22 Bcfe, for third quarter 2017, a decrease of 4% compared to second quarter 2017, primarily due to natural production declines.
  • GAAP net loss was $19 million, or $0.81 per diluted share, and Adjusted net loss, a non-GAAP measure, was $21 million, or $0.91 per diluted share, for third quarter 2017.
  • Adjusted EBITDA, a non-GAAP measure, was $10 million for third quarter 2017.
  • Liquidity was $106 million as of September 30, 2017. Borrowed remaining unused commitments and had no availability remaining under the Company's credit agreement ("Credit Agreement"), including letters of credit, as of September 30, 2017.
  • Paid $17 million and $26 million of interest on 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"), respectively, through the issuance of additional 1.5 Lien Notes and 1.75 Lien Term Loans in September 2017.
  • Paid $5 million of cash interest on the senior unsecured notes due September 15, 2018 ("2018 Notes") and $3 million of cash interest on the senior unsecured notes due April 15, 2022 ("2022 Notes") in September 2017 and October 2017, respectively.
  • Hired financial advisors to explore strategic alternatives to strengthen the Company's balance sheet and maximize the value of the Company, which may include, but not be limited to, seeking a comprehensive out-of-court restructuring or reorganization under Chapter 11 of the U.S. Bankruptcy Code, and engaged in negotiations with certain stakeholders.

Operational Results

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

    Quarter-to-Date   Year-to-Date   Q3   Q4
9/30/17   6/30/17   9/30/16 9/30/17   9/30/16 2017 (2) 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Drilling rig counts (1) # 4 4   100   3 1 200   4 3
 
Net wells drilled (1)
North Louisiana # 6.5 6.1 7   100   16.1 5.2 210   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 # 6.5 6.1 7   100   16.1 5.2 210   5.3 4.3
 
Net wells turned-to-sales (1)
North Louisiana # 3.5 (100 ) 2.7 (100 ) 3.5 5.2 (33 ) 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 ) 2.7 (100 ) 3.5 8.8 (60 ) 6.6
 
Daily production
North Louisiana Mmcfe/d 150 131 15   159 (6 ) 138 152 (9 ) N/A N/A
East Texas Mmcfe/d 41 46 (11 ) 69 (41 ) 47 69 (32 ) N/A N/A
South Texas Mmcfe/d 20 22 (9 ) 27 (26 ) 22 33 (33 ) N/A N/A
Appalachia and other Mmcfe/d 27 29 (7 ) 33 (18 ) 29 39 (26 ) N/A N/A
Total daily production Mmcfe/d 237 229 3   288 (18 ) 236 293 (19 ) 220-230 235-245
 
Production
Oil Mbbls 276 303 (9 ) 391 (29 ) 910 1,388 (34 ) 175-195 235-255
Natural gas Bcf 20.2 19.1 6   24.1 (16 ) 59.0 71.9 (18 ) 19.2-20.0 20.2-21.0
Total production Bcfe 21.8 20.9 4   26.5 (18 ) 64.4 80.3 (20 ) 20.2-21.2 21.6-22.5
 
Capital expenditures   $MM   49   40   23     14   250     107   70   53     N/A   60
 
(1)   Includes average drilling rigs during the period and wells operated by EXCO, and excludes rigs and wells operated by others.
(2) Q3 2017 guidance assumed South Texas divestiture occurred on September 1, 2017; however, the purchase and sale agreement to divest the Company's oil and natural gas properties in South Texas was terminated on August 15, 2017.
 

North Louisiana

Highlights:

  • Produced 150 Mmcfe per day, an increase of 19 Mmcfe per day, or 15%, from second quarter 2017 and a decrease of 9 Mmcfe per day, or 6%, from third quarter 2016.
  • Drilled 10 gross (5.7 net) operated Haynesville shale wells and one gross (0.8 net) operated Bossier shale well.

EXCO’s increase in production compared to second quarter 2017 was primarily the result of additional wells turned-to-sales during late second quarter 2017. The decrease from third quarter 2016 was primarily due to natural production declines.

The Company is expected to turn-to-sales nine gross (5.8 net) Haynesville shale wells and one gross (0.8 net) cross-unit Bossier shale appraisal well during fourth quarter 2017. The Company will monitor the results of the Bossier shale wells completed during 2017 to assess potential for future development of Bossier shale locations in North Louisiana.

EXCO closed the acquisition of certain oil and natural gas properties and undeveloped acreage in North Louisiana for $20 million, subject to customary post-closing purchase price adjustments, during third quarter 2017.

East Texas

Highlights:

  • Produced 41 Mmcfe per day, a decrease of 5 Mmcfe per day, or 11%, from second quarter 2017 and a decrease of 28 Mmcfe per day, or 41%, from third quarter 2016.

EXCO’s decrease in production compared to second quarter 2017 and third 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. EXCO is participating 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 wells are expected to turn-to-sales in fourth quarter 2017. The Company plans to closely monitor the results of this stacked lateral test for future development.

South Texas

Highlights:

  • Produced 3.3 Mboe per day, a decrease of 0.4 Mboe per day, or 9%, from second quarter 2017 and a decrease of 1.2 Mboe per day, or 26%, from third quarter 2016.

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

The purchase and sale agreement to divest the Company's oil and natural gas properties in South Texas was terminated on August 15, 2017. The Company was not able to satisfy certain closing conditions due to the purported termination of a natural gas sales contract by Chesapeake Energy Marketing L.L.C. ("Chesapeake"). 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, June 23, 2017, August 16, 2017 and periodic filings with the SEC.

Appalachia

Highlights:

  • Produced 27 Mmcfe per day, a decrease of 2 Mmcfe per day, or 7%, from second quarter 2017, and a decrease of 6 Mmcfe per day, or 18%, from third quarter 2016.

EXCO’s production decreased from second quarter 2017 due to natural production declines. The decrease from third quarter 2016 was primarily due to natural production declines and the sale of the Company's conventional assets in 2016. Production in the Appalachia region will be impacted by net shut-in volumes of approximately 0.4 Bcfe during October 2017 due to low regional natural gas prices.

Financial Results

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

    Quarter-to-Date   Year-to-Date   Q3   Q4
9/30/17   6/30/17   9/30/16 9/30/17   9/30/16 2017 (5) 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Operating revenues
Oil revenues $MM 13   14   (7 ) 16   (19 ) 43   50   (14 ) N/A N/A
Natural gas revenues $MM 48   50   (4 ) 55   (13 ) 152   127   20   N/A N/A
Total oil and natural gas revenues $MM 61   64   (5 ) 71   (14 ) 195   177   10   N/A N/A
Realized oil prices $/Bbl 46.76   47.21   (1 ) 41.47   13   47.70   35.80   33   N/A N/A
Oil price differentials $/Bbl (1.26 ) (1.41 ) (11 ) (3.57 ) (65 ) (1.91 ) (4.70 ) (59 ) (2.00-3.00) (2.00-3.00)
Realized gas prices $/Mcf 2.39   2.63   (9 ) 2.27   5   2.57   1.77   45   N/A N/A
Gas price differentials $/Mcf (0.61 ) (0.56 ) 9   (0.54 ) 13   (0.60 ) (0.52 ) 15   (0.55-0.65) (0.55-0.65)
 
Derivative financial instruments
Cash settlements (payments) $MM 1   (1 ) (200 ) 5   (80 ) (5 ) 38   (113 ) N/A N/A
Cash settlements (payments) $/Mcfe 0.03   (0.05 ) (160 ) 0.18   (83 ) (0.08 ) 0.47   (117 ) N/A N/A
 
Costs and expenses
Oil and natural gas operating costs $MM 9   8   13   9     26   26     N/A N/A
Production and ad valorem taxes $MM 3   3     4   (25 ) 10   13   (23 ) N/A N/A
Gathering and transportation $MM 29   27   7   28   4   83   80   4   N/A N/A
Oil and natural gas operating costs $/Mcfe 0.42   0.39   8   0.33   27   0.40   0.32   25   0.35-0.40 0.40-0.45
Production and ad valorem taxes $/Mcfe 0.14   0.16   (13 ) 0.14     0.15   0.17   (12 ) 0.15-0.20 0.15-0.20
Gathering and transportation $/Mcfe 1.32   1.30   2   1.06   25   1.29   0.99   30   1.25-1.30 1.25-1.30
General and administrative (1) $MM 11   7   57   9   22   24   24     7-8 18-19
 
Operational earnings
Adjusted EBITDA (2) $MM 10   18   (44 ) 25   (60 ) 47   70   (33 ) N/A N/A
GAAP net income (loss) (3) $MM (19 ) 121   (116 ) 51   (137 ) 110   (191 ) (158 ) N/A N/A
Adjusted net loss (2) $MM (21 ) (5 ) 320   (6 ) 250   (31 ) (39 ) (21 ) N/A N/A
GAAP diluted shares outstanding (4) MM 23   20   15   19   21   21   19   11   N/A N/A
Adjusted diluted shares outstanding (4) MM 23   20   15   19   21   21   19   11   N/A N/A
GAAP diluted EPS (4) $/Share (0.81 ) 6.13   (113 ) 2.73   (130 ) 5.35   (10.24 ) (152 ) N/A N/A
Adjusted diluted EPS (4)   $/Share   (0.91 )   (0.23 )   296     (0.31 )   194     (1.51 )   (2.08 )   (27 )   N/A   N/A
 
(1)   Excludes equity-based compensation income of $0.9 million and $8.0 million, and expense of $1.4 million for the three months ended September 30, 2017, June 30, 2017 and September 30, 2016, respectively, and income of $11.2 million and expense of $14.6 million for the nine months ended September 30, 2017 and 2016, respectively. Q4 2017 guidance includes approximately $9 million of professional fees in connection with the Company's restructuring activities.
(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 $18 million and $122 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 September 30, 2017 and June 30, 2017, respectively, and $147 million for the nine months ended September 30, 2017. GAAP net income (loss) included impairments of oil and natural gas properties of $161 million for the nine months ended September 30, 2016.
(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) Q3 2017 guidance assumed South Texas divestiture occurred on September 1, 2017; however, the purchase and sale agreement to divest the Company's oil and natural gas properties in South Texas was terminated on August 15, 2017.
 

EXCO's GAAP net income decreased from net income of $121 million in second quarter 2017 to a net loss of $19 million in third 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. The Company recorded gains on the revaluation of the warrants of $122 million and $18 million during the second and third quarter 2017, respectively, primarily due to a decrease in EXCO's share price.

EXCO's decrease in Adjusted EBITDA compared to second quarter 2017 was primarily due to lower natural gas prices and higher costs and expenses, primarily general and administrative, due to higher professional and legal fees incurred in connection with restructuring initiatives.

Cash Flow Results

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

    Quarter-to-Date   Year-to-Date   Q3   Q4
9/30/17   6/30/17   9/30/16 9/30/17   9/30/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Cash flow provided by (used in)
Operating activities $MM 18   28   (36 ) (50 ) (136 ) 51   (4 ) NM N/A N/A
Investing activities $MM (70 ) (47 ) 49   (13 ) 438   (137 ) (56 ) 145   N/A N/A
Financing activities $MM 126   (4 ) NM 39   223   160   51   214   N/A N/A
Net increase (decrease) in cash $MM 73   (23 ) (417 ) (24 ) (404 ) 73   (9 ) (911 ) N/A N/A
 
Other key cash flow items
Adjusted operating cash flow (1) $MM 8   19   (58 ) 11   (27 ) 29   23   26   N/A N/A
Free cash flow (1)   $MM   (29 )   (4 )   625     (65 )   (55 )   (40 )   (74 )   (46 )   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.
 

The Company's net cash used in investing activities during third quarter 2017 primarily consisted of acquisitions of oil and natural gas properties of $20 million and capital expenditures of $47 million. EXCO's increase in financing cash flows in third quarter 2017 compared to second quarter 2017 was primarily due to $126 million of net borrowings under the Credit Agreement.

Liquidity Results

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

    Quarter-to-Date   Year-to-Date   Q3   Q4
9/30/17   6/30/17   9/30/16 9/30/17   9/30/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Cash (1) $MM 106 31 242   22 382   106 22 382   N/A N/A
Gross debt (2) $MM 1,371 1,202 14   1,116 23   1,371 1,116 23   N/A N/A
Net debt (3) $MM 1,265 1,170 8   1,094 16   1,265 1,094 16   N/A N/A
Adjusted EBITDA (4) $MM 10 18 (44 ) 25 (60 ) 47 70 (33 ) N/A N/A
Cash interest expenses (5) $MM 5 3 67   16 (69 ) 23 51 (55 ) 3-5 5-6
Adjusted EBITDA/Interest (6) x 2.00 6.00 (67 ) 1.56 28   2.04 1.37 49   N/A N/A
Sr. Secured debt/LTM Adj. EBITDA (6) x 1.73 100   1.84 (6 ) 1.73 1.84 (6 ) N/A N/A
Net debt/LTM Adjusted EBITDA   x   17.33   13.15   32     9.35   85     17.33   9.35   85     N/A   N/A
 
(1)   Includes restricted cash of $23 million, $22 million and $18 million as of September 30, 2017, June 30, 2017 and September 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 September 30, 2017, the ratio of consolidated EBITDAX to consolidated interest expense (as defined in the agreement) was 2.2 to 1.0. The Company's ratio of aggregate revolving credit exposure to consolidated EBITDAX ("Aggregate Revolving Credit Exposure Ratio") of 1.9 to 1.0 exceeded the maximum of 1.2 to 1.0 as of September 30, 2017. See discussion below of the waiver of an event of default as a result of a failure to comply with this ratio as of September 30, 2017.
 

Table 5: Reconciliation of carrying value to principal
3Q 17; $MM

    9/30/17 (Actual)
Factors Unit Carrying value  

Deferred
reduction in
carrying
value (1)

 

Unamortized
discount/deferred
financing costs

 

Principal
balance

EXCO Resources Credit Agreement $MM 126     126
1.5 Lien Notes $MM 172     145 317
1.75 Lien Term Loans $MM 844   (154 ) 19 709
Exchange Term Loan $MM 24   (6 ) 17
2018 Notes $MM 131     132
2022 Notes $MM 70     70
Deferred financing costs, net $MM (13 )   13
Total debt   $MM   1,355     (160 )   176   1,371
 
(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.
 

EXCO paid $17 million and $26 million of interest on the 1.5 Lien Notes and 1.75 Lien Term Loans, respectively, through the issuance of additional 1.5 Lien Notes and 1.75 Lien Term Loans in September 2017. In addition, EXCO paid $5 million of cash interest on the 2018 Notes and $3 million of cash interest on the 2022 Notes in September 2017 and October 2017, respectively.

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

    Quarter-to-Date   Year-to-Date   Q3   Q4
9/30/17   6/30/17   9/30/16 9/30/17   9/30/16 2017 2017
Factors Unit Actual Actual   % Actual   % Actual Actual   % Guidance Guidance
Borrowing capacity on revolver $MM 150 150   300 (50 ) 150 300 (50 ) N/A N/A
Amount drawn on revolver $MM 126 100   215 (41 ) 126 215 (41 ) N/A N/A
Letters of credit $MM 24 12 100   10 140   24 10 140   N/A N/A
Available for borrowing $MM 138 (100 ) 75 (100 ) 75 (100 ) N/A N/A
Cash (1) $MM 106 31 242   22 382   106 22 382   N/A N/A
Liquidity (2)   $MM   106   170   (38 )   97   9     106   97   9     N/A   N/A
 
(1)   Includes restricted cash of $23 million, $22 million and $18 million as of September 30, 2017, June 30, 2017 and September 30, 2016, respectively.
(2) Liquidity is calculated as the available borrowing capacity under the Credit Agreement plus cash and cash equivalents and restricted cash.
 

EXCO's Liquidity is currently significantly constrained. The Company's capital expenditures are expected to exceed its operating cash flows for the remainder of 2017 and future periods. The Company's Liquidity is not expected to be sufficient to fund this cash flow deficit and conduct its business operations unless it is able to restructure its current obligations under its existing outstanding debt and address near-term liquidity needs.

Near-term Liquidity risks

During third quarter 2017, the Company borrowed its remaining unused commitments, and had $126 million of outstanding indebtedness and $24 million of outstanding letters of credit under the Credit Agreement as of September 30, 2017. As a result, the Company had no availability remaining under the Credit Agreement, including letters of credit, as of September 30, 2017. The redetermination of the borrowing base scheduled for November 2017 is currently in process.

As of September 30, 2017, the Aggregate Revolving Credit Exposure Ratio under the Credit Agreement exceeded the allowed maximum of 1.2 to 1.0. In anticipation of the potential default, on September 29, 2017, the Company obtained a waiver from the lenders under the Credit Agreement waiving a potential event of default as a result of a failure to comply with the Aggregate Revolving Credit Exposure Ratio as of September 30, 2017. In addition, the Credit Agreement requires that the Company's liquidity, as defined in the Credit Agreement, exceeds $50 million as of the end of a fiscal month and $70 million as of the end of a fiscal quarter. It is probable that the Company will not be in compliance with these covenants at December 31, 2017. Therefore, the Company has classified the amounts outstanding under the Credit Agreement, as well as any outstanding debt with cross-default provisions, as a current liability on its Condensed Consolidated Balance Sheet as of September 30, 2017.

The Company's ability to make future interest payments in common shares is subject to a Resale Registration Statement (as defined in the indenture governing the 1.5 Lien Notes or the credit agreement governing the 1.75 Lien Term Loans, as applicable) being declared effective by the SEC, which has not yet occurred. The Company's ability to pay interest in additional indebtedness is limited to $7 million due to limitations on its aggregate secured indebtedness within its debt agreements. EXCO's next quarterly interest payment of approximately $27 million, based on the paid in-kind interest rate of 15.0% on the 1.75 Lien Term Loans, is scheduled to occur on December 20, 2017, and is required to be paid in-kind pursuant to the terms of the indenture governing the 1.5 Lien Notes. Unless the Company amends its debt agreements or obtains a waiver or other forbearance from certain lenders, it will not be able to make its next interest payment on the 1.75 Lien Term Loans on December 20, 2017.

If the Company is unable to comply with the covenants under the Credit Agreement, or is unable to make scheduled interest payments on its debt, there will be an event of default. Any event of default may cause a default or accelerate the Company’s obligations with respect to other indebtedness including the 1.5 Lien Notes, 1.75 Lien Term Loans, 2018 Notes and 2022 Notes. If this occurs and the Company's indebtedness is accelerated and becomes immediately due and payable, its Liquidity would not be sufficient to pay such indebtedness and the Company may be forced to seek protection from creditors under the U.S. Bankruptcy Code.

These factors raise substantial doubt about the Company's ability to continue as a going concern. See further information on the risks related to EXCO’s ability to continue as a going concern in the Company’s periodic filings with the SEC.

Management's plans

The Company, together with the Audit Committee of the Board of Directors, is currently exploring strategic alternatives to strengthen the Company's balance sheet and maximize the value of the Company, which may include, but not be limited to, seeking a comprehensive out-of-court restructuring, or reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company's plans may include obtaining additional financing or relief from debtholders to support operations throughout the restructuring process, delevering its capital structure, and reducing the financial burden of certain gathering, transportation and other commercial contracts. At the direction of the Audit Committee, the Company has retained PJT Partners LP as financial advisors and Alvarez & Marsal North America, LLC as restructuring advisors. The Company is actively engaged in negotiations with its stakeholders to evaluate the feasibility of a consensual in-court or out-of-court restructuring. The Company continues to retain Kirkland & Ellis LLP as its legal advisor to assist the Audit Committee and management team with the strategic review process. 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.

Risk Management Results

Table 7: Hedging position
3Q 17; mixed measures

    Three 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 9,200 3.05 3,650   3.15
Collars - Henry Hub Bbtu 2,760      
Sold call options $/Mmbtu   3.28  
Purchased put options $/Mmbtu   2.87 null