Where Does Exco Resources Go From Here?
Investors in Exco Resources have been on a wild ride these past two quarters. After the company completed what may be the most complex deal of the year, CEO and Executive Chairman Doug Miller has decided to step down. All of these moves may have your head spinning, and the uncertainty of the future can trigger a decision to walk away from the company. Let's look at what 2014 has in store for Exco and whether the moves this year make shares worth hanging on to.
In the press release announcing Miller's departure and the appointment of Jeffery Benjamin as the new chairman of the board, there was one small announcement that didn't get much attention. In reality, though, it was probably one of the most important parts of the press release. The company announced that its capital expenditure budget will be about $368 million. That marks a major slowdown from previous years. Even in 2012, when Exco did very few deals, it spent about $500 on drilling and development.
One aspect that makes the 2014 capital budget less worrisome is that KKR , Exco's partner in the Eagle Ford properties it bought from Chesapeake Energy , will pay for 75% of the partnerships operations there. This also means that Exco will get only 25% of the production revenue, but it will get to buy those wells back after a year of production, which basically delays some capital expenditures for a year or so. That's not to say it was the best deal to make, but it could be an explanation for the company's capital budget. Since Exco is obligated to buy KKR's share in these wells after one year of production, though, it's pretty safe to say that this significant drop in capital expenditures will last for only a year.
This is actually what makes the decision to spend so little on production a puzzling move. After spending large sums of money to grow the company, it is now backing down capital expenditures to bare-bones levels. These moves seem to contradict themselves and could be a signal that the company wants to go in a different direction from the one Doug Miller had them going in.
Stick to your knitting
Acquisitions may not be a strong point for Exco, but natural gas drilling is. Exco has been able to produce natural gas from the Haynesville-Bossier shale for less than $3 per thousand cubic feet, which puts it in the upper echelon with Ultra Petroleum and Cabot Oil & Gas as companies that can make a profit on natural gas even at today's prices. With the demand for natural gas expected to increase because of LNG and other facilities that are coming online, these companies are going to be well positioned to supply the market.
Since the company made deals with both KKR and Harbinger Group back in 2012, it is contractually obligated to spend a certain amount on development in the Eagle Ford and Permain Basin. Other than that, it is probably in the best interest for the company to focus on drilling in the Haynesville and continue to drive down well costs. Exco actually increased its holdings in the region as part of the deal with Chesapeake, so it is well positioned to increase activity there.
What a Fool believes
There are lots of questions regarding Exco's future. How will this joint venture in the Eagle Ford work out in the long run? Whom will the company tap as its new CEO? What direction will the company go under new leadership? These sorts of uncertainties can test even the most stoic investors, and with so much uncertainty, it's hard to blame anyone who stays away. If the company gets back to doing what it does best and continues to make the Haynesville shale the core of its business, it should help to temper investors' fears. For now, though, it would be wise to see how it plans to spend that small capital budget for 2014 before making any decisions.
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The article Where Does Exco Resources Go From Here? originally appeared on Fool.com.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.The Motley Fool recommends, owns shares of, and has options on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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