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Francis Chou Comments on Exco Resources

On January 15, 2018, EXCO (OTCPK:EXCE) filed voluntary petitions for a court-supervised reorganization under Chapter 11 of the U.S. Bankruptcy Code to facilitate a restructuring of its balance sheet, which was saddled with expensive transportation and other contracts. On November 5, 2018, EXCO filed a restructuring plan, stating that holders of the 1.75 lien term loan would receive 82% of the new common stock of the company, subject to dilution by a management incentive plan. However, this plan did not come into fruition due to the company's inability to raise enough capital and an amended plan of reorganization was offered to the creditors on April 10, 2019.

Based on the valuation analysis by EXCO's investment banking firm, PJT Partners Inc., under the amended plan, the 1.75 lien term loan holders would receive 38.8% of the new common shares resulting in a recovery of 27 cents on a dollar or 27% (given the total principal outstanding for the 1.75 lien term loan was US$742.2 million).

Summary of Amended Valuation Analysis (as of May 31, 2019):

In early July of 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every $1,000 in par value, after netting out certain adjustments.

We remain optimistic about EXCO's future over the long run. We are bullish in the oil and gas sector in the long-term, not withstanding the current bleak environment. Globally, less than 20% of oil and gas reserves are being replaced simply because it does not make sense to drill for oil and gas when the price is below the cost of extracting oil and gas from the ground. We believe the demand for oil and gas should be higher in the future. In time the price equilibrium will be restored and EXCO is now better positioned given its post-bankruptcy cost structure.

From Francis Chou (Trades, Portfolio)'s semi-annual 2019 Chou Associates Fund shareholder letter.
This article first appeared on GuruFocus.