Friday, May 01, 2015

Looking for Value? Start with Truth-Telling at EXCO Resources

Wow! How refreshing to witness a senior executive immune to the “Bullsh-t Syndrome” (the commonplace corporate condition where imaginary events are presented as fact). C. John Wilder, who recently joined EXCO Resources' (XCO - $2.05) Board of Directors as Executive Chairman, had this to say on the Q1 earnings’ call about challenges currently facing the natural gas producer amid low energy prices:

  • “EXCO is highly levered. The company's net debt to market cap of 72% and net debt to EBITDA 4.3x are simply not sustainable. We have annual cash interest fixed costs of $107 million. We must improve these metrics, and that will take both time and ruthless execution.
  • EXCO has underutilized gathering and firm transportation commitments of approximately $90 million per year. Of this amount, approximately $40 million isn't used at all. This is a critical problem, which will require commercial ingenuity to solve.
  • EXCO's net drilling inventory is inadequate. EXCO suffers from a lack of a high networking interest locations with a current average operating net working interest across the shale portfolio of 35%, we're essentially a contract driller. We need to reposition the portfolio to average 60% to 75% net working interest. EXCO has a highly qualified operational team, and needs more economic interest in its project.
  • EXCO's drilling and completion costs are too high. EXCO has made progress reducing drilling and completion costs, but we still need to reduce cost by an additional 15% to 20%. This is our number one objective and we will require lean manufacturing practices across the portfolio.
  • EXCO's corporate G&A is simply too high for its drilling program. EXCO needs to book NPV from drilling of about 5X its corporate overhead. Today, NPV accretion is about equal to annual G&A. To fix this, we need to improve both sides of the equation, reducing G&A and increasing the amount of NPV generated by drilling.
If Wilder can execute on survivability and value creation through operational efficiencies, EXCO could be well-positioned to capitalize on the current commodity cycle – and yield significant gains for risk-tolerant investors when forward gas & oil price decks move higher.

1 comment:

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