EXCO Resources, Inc. Reports Second Quarter 2013 Results
EXCO Resources, Inc. Reports Second Quarter 2013 Results
- Adjusted net income, a non-GAAP measure, was $0.10 per diluted share for the second quarter 2013 compared with $0.05 per diluted share for the second quarter 2012. The non-GAAP adjustments include gains from asset sales, non-cash gains or losses from derivative financial instruments (derivatives), non-cash ceiling test write-downs and other items typically not included by securities analysts in published estimates.
- Adjusted EBITDA for the second quarter 2013 was $90 million compared with $112 million for the second quarter 2012. Adjusted EBITDA is a non-GAAP measure and is computed using earnings before interest, taxes, depletion, depreciation and amortization, and is further adjusted using gains from asset sales, ceiling test write-downs and other non-cash income and expense items.
- GAAP results were net income of $86 million, or $0.40 per diluted share, for the second quarter 2013 compared with a net loss of $496 million, or $2.32 per diluted share, for the second quarter 2012. The second quarter 2012 net loss included a $429 million pre-tax non-cash ceiling test write-down of oil and natural gas properties.
- Oil, natural gas and natural gas liquids (NGL) production was 38 Bcfe, or 420 Mmcfe per day, for the second quarter 2013 compared with 50 Bcfe, or 550 Mmcfe per day in the second quarter 2012. The second quarter 2013 production from the East Texas/North Louisiana region was 328 Mmcfe per day compared with 483 Mmcfe per day in the second quarter 2012. The decrease in production was primarily the result of the contribution of conventional properties to the EXCO/HGI Partnership and normal production declines. The second quarter 2013 production in the Appalachia region was 64 Mmcfe per day compared with 41 Mmcfe per day in the second quarter 2012. The increase in production was due to our focus on completion activities in the Marcellus shale which resulted in 32 additional wells coming on line subsequent to the second quarter 2012. Our proportionate share of production from the EXCO/HGI Partnership was 28 Mmcfe per day in the second quarter 2013.
- Oil, natural gas and NGL revenues, before cash settlements on derivatives, for the second quarter 2013 were $150 million compared with second quarter 2012 revenues of $118 million. Our average sales price per Mcfe increased to $3.93 per Mcfe for the second quarter 2013 from $2.36 per Mcfe for the second quarter 2012. When the impacts of cash settlements from derivatives are considered, oil, natural gas and NGL revenues were $151 million, or $3.95 per Mcfe in the second quarter 2013, compared with $180 million, or $3.60 per Mcfe in the second quarter 2012.
- Our direct operating costs were $0.31 per Mcfe for the second quarter 2013 compared with $0.38 per Mcfe for the second quarter 2012. We continue to focus on reducing our operating costs. Our second quarter 2013 operating costs per Mcfe were favorably impacted by the contribution of certain conventional properties to EXCO/HGI Partnership in the first quarter 2013. The conventional assets have higher operating costs than our shale assets.
- Our 50% share of TGGT's adjusted net income for the second quarter 2013 was $12 million compared with $16 million for the second quarter 2012. Our 50% share of TGGT's adjusted EBITDA was $18 million for the second quarter 2013 compared with $21 million for the second quarter 2012, after adjustments for certain non-cash items.
- On February 14, 2013, we formed the EXCO/HGI Partnership and contributed our conventional non-shale assets in East Texas and North Louisiana and our shallow Canyon Sand and other assets in the Permian Basin of West Texas. We received net proceeds of $575 million, after final purchase price adjustments, and a 25.5% economic interest in the partnership. The partnership also purchased certain shallow conventional assets from BG Group, plc (BG Group) for $131 million, after preliminary purchase price adjustments. The pro forma operating and financial information for the three and six months ended June 30, 2013 and 2012 is presented as if these transactions occurred on January 1, 2012 in a supplemental schedule to this press release.
- On July 2, 2013, we entered into definitive agreements with subsidiaries of Chesapeake Energy Corporation (Chesapeake) to acquire producing and undeveloped oil and natural gas assets in the Eagle Ford and Haynesville shale formations for an aggregate purchase price of approximately $1 billion, subject to customary purchase price adjustments. We closed the acquisition of the Haynesville assets on July 12, 2013 for $288 million, after customary preliminary purchase price adjustments, with an effective date of January 1, 2013. We closed the acquisition of the Eagle Ford assets on July 31, 2013 for $685 million, after customary preliminary purchase price adjustments, with an effective date of April 1, 2013. To facilitate the purchase of these assets, we amended our credit agreement which has an initial borrowing base of $1.6 billion including a $400 million asset sale requirement and a $300 million term loan. The asset sale requirement requires mandatory payments from proceeds of asset sales and must be repaid or refinanced within one year.
In connection with the closing of the Eagle Ford assets, we entered into a participation agreement with affiliates of Kohlberg Kravis Roberts & Co. L.P. (KKR) to sell an undivided 50% interest in the undeveloped acreage we acquired for $131 million in cash, after preliminary purchase price adjustments. After giving effect to the acquisition and the KKR payment, the credit agreement's initial borrowing base and the $400 million asset sale requirement were reduced by $131 million. We will jointly develop the Eagle Ford acreage with KKR under the participation agreement. Details of the acquisitions and terms of the KKR agreement are presented in the "Recent developments" section of this press release.
Douglas H. Miller, EXCO's Chief Executive Officer, commented, "We are executing on our strategy of acquiring assets in both our existing core areas and strategic new plays. Our recently announced acquisition in the Haynesville shale fortifies our leading position in that area. Our acquisition in the Eagle Ford in South Texas diversifies our portfolio by adding significant oil volumes with upside drilling opportunities. These acquisitions have significant levels of production which enhance our cash flow and borrowing base capacity. We have partnered with KKR to facilitate the drilling and development of approximately 300 undeveloped locations in the Eagle Ford acquisition which helps us prudently manage our capital expenditures and build long-term value for our shareholders."
Adjusted net income
Our reported net income (loss) shown below, a GAAP measure, includes certain items not typically included by securities analysts in their published estimates of financial results. The following table provides a reconciliation of our net income (loss) to the non-GAAP measure of adjusted net income:
|Three Months Ended||Six Months Ended|
|June 30, 2013||June 30, 2012||June 30, 2013||June 30, 2012|
|(in thousands, except per share amounts)||Amount||Per share||Amount||Per share||Amount||Per share||Amount||Per share|
|Net income (loss), GAAP||$||85,598||$||(496,433||)||$||243,718||$||(778,082||)|
|Non-cash mark-to-market (gains) losses on derivative financial instruments||(54,452||)||77,073||5,779||73,353|
|Non-cash write down of oil and natural gas properties||—||428,801||10,707||704,665|
|Adjustments included in equity (income) loss||655||—||369||18,799|
|(Gain) loss on divestitures and other non-recurring operating items||3,041||6,673||(181,345||)||8,625|
|Deferred finance cost amortization acceleration||—||3,000||3,535||3,000|
|Income taxes on above adjustments (1)||20,302||(206,219||)||64,382||(323,377||)|
|Adjustment to deferred tax asset valuation allowance (2)||(34,239||)||198,573||(97,487||)||311,233|
|Total adjustments, net of taxes||(64,693||)||507,901||(194,060||)||796,298|
|Adjusted net income||$||20,905||$||11,468||$||49,658||$||18,216|
|Net income (loss), GAAP (3)||$||85,598||$||0.40||$||(496,433||)||$||(2.32||)||$||243,718||$||1.13||$||(778,082||)||$||(3.63||)|
|Adjustments shown above (3)||(64,693||)||(0.30||)||507,901||2.37||(194,060||)||(0.90||)||796,298||3.72|
|Dilution attributable to share-based payments (4)||—||—||—||—||—||—||—||—|
|Adjusted net income||$||20,905||$||0.10||$||11,468||$||0.05||$||49,658||$||0.23||$||18,216||$||0.09|
|Common stock and equivalents used for earnings per share (EPS):|
|Weighted average common shares outstanding||214,788||214,164||214,786||214,154|
|Dilutive stock options||437||—||—||—|
|Dilutive restricted shares||798||—||561||—|
|Shares used to compute diluted EPS for adjusted net income||216,023||214,164||215,347||214,154|
(1) The assumed income tax rate is 40% for all periods.
(2) Deferred tax valuation allowance has been adjusted to reflect the assumed income tax rate of 40% for all periods.
(3) Per share amounts are based on weighted average number of common shares outstanding.
(4) Represents dilution per share attributable to common share equivalents from in-the-money stock options and dilutive restricted shares calculated in accordance with the treasury stock method.
Our cash flow from operations before changes in working capital and non-recurring other operating items was $77 million for the second quarter 2013. We primarily use our cash flow from operations and available borrowing capacity in our credit agreement to fund our drilling and development programs and acquire producing properties. For the six months ended June 30, 2013, our cash flows from operations before changes in working capital and non-recurring items exceeded our capital expenditures by approximately $25 million.
|Three Months Ended||Six Months Ended|
|June 30,||June 30,|
|Cash flow from operations, GAAP||$||128,019||$||135,345||$||171,232||$||280,468|
|Net change in working capital||(53,585||)||(45,355||)||(18,595||)||(96,934||)|
|Non-recurring other operating items||2,353||6,673||5,005||8,625|
|Cash flow from operations before changes in working capital and non-recurring other operating items, non-GAAP measure (1)||$||76,787||$||96,663||$||157,642||$||192,159|
(1) Cash flow from operations before working capital changes and non-recurring other operating items are presented because management believes it is a useful financial indicator for companies in our industry. This non-GAAP disclosure is widely accepted as a measure of an oil and natural gas company's ability to generate cash used to fund development and acquisition activities and service debt or pay dividends. Cash flow from operations before changes in working capital is not a measure of financial performance pursuant to GAAP and should not be used as an alternative to cash flows from operating, investing, or financing activities. Non-recurring other operating items have been excluded as they do not reflect our on-going operating activities.
Haynesville shale acquisition
We closed the acquisition of the Haynesville assets from Chesapeake on July 12, 2013 for a purchase price of $288 million, after customary preliminary purchase price adjustments. The acquisition included certain producing and undeveloped oil and natural gas assets located in our core Haynesville shale operating area in Caddo Parish and DeSoto Parish, Louisiana. These properties included Chesapeake's non-operated interests in 170 wells operated by EXCO on approximately 5,600 net acres, and operated interests in 11 producing wells on approximately 4,000 net acres. The acquisition added approximately 55 identified drilling locations in the Haynesville shale formation to our drilling inventory. The Haynesville transaction provides strong base production and additional drilling inventory with upside development opportunities. Our internally generated engineered proved reserves, utilizing NYMEX strip prices and the January 1, 2013 effective date of the acquisition, are estimated to be 365 Bcfe. Recent net production from the properties averaged 114 Mmcfe per day. These assets are subject to BG Group's preferential right to acquire a 50% interest, which was formally offered to BG Group on July 13, 2013. Their election must be made within 60 days of our offer. If BG Group elects to participate, the proceeds, net of any applicable borrowing base assigned to the properties, will be used to reduce the bridge loan tranche of our credit agreement. Our development plans are to run up to three additional drilling rigs in manufacturing mode on recently acquired drilling locations by the end of 2013.
Eagle Ford shale acquisition
We closed the acquisition of the Eagle Ford assets from Chesapeake on July 31, 2013, for a purchase price of $685 million, after customary preliminary purchase price adjustments. The acquisition included certain producing and undeveloped oil and natural gas assets in the Eagle Ford shale in the counties of Zavala, Dimmit, La Salle and Frio in South Texas. These properties include operated interests in 120 wells on approximately 55,000 net acres. The acquisition added approximately 300 identified drilling locations to our drilling inventory. In addition, we entered into a farm-out agreement with Chesapeake covering an additional 147,000 net acres adjacent to the acquired properties. Pursuant to the terms of the farm-out agreement, Chesapeake retains an overriding royalty interest in wells drilled on acreage covered by the farm-out agreement, with an option to convert the overriding royalty interest to a working interest at payout of the well. Our internally generated engineered proved reserves, utilizing NYMEX strip prices and the April 1, 2013 effective date of the acquisition, are estimated to be 29 Mmboe, with potential for 92 Mmboe with the development of the acquired assets. Recent net production from these properties averaged 6,100 Boe per day (85% oil). We also believe that additional upside exists in deeper formations such as the Buda and Pearsall, as well as shallow targets in the Austin Chalk and additional formations up hole.
KKR Participation Agreement
In connection with closing the Eagle Ford assets transaction, we entered into a participation agreement with KKR (KKR Participation Agreement) and sold an undivided 50% interest in the undeveloped acreage we acquired for approximately $131 million, after preliminary closing adjustments.
The KKR Participation Agreement provides that EXCO and KKR will jointly fund future development costs. With respect to each well drilled, EXCO will assign half of its undivided 50% interest in such well to KKR such that KKR will fund and own 75% of each well drilled and EXCO will fund and own 25% of each well drilled. When each quarterly tranche of wells drilled has been on production for one year, EXCO is required to offer to purchase KKR's 75% working interest at fair market value as defined in the KKR Participation Agreement, subject to specific well criteria and return hurdles. With respect to the first year (first four quarters) of the development program, we are required to make our first offer during the fourth quarter of 2014 for wells that have been online for approximately one year.
There are currently three rigs drilling on the acquired Eagle Ford properties and our development plans for the remainder of 2013 include adding up to two more rigs. The development program will consist of manufacturing mode drilling, acreage retention focused drilling and pilot spacing drilling to test spacing between laterals. We expect to realize significant operational efficiencies by moving to a manufacturing mode development program in the play. With KKR, we expect to drill approximately 300 identified locations over a five-year period including 30 wells during 2013.
Operations activity and outlook
We spent $49 million on development and exploitation activities, drilling and completing 18 gross (6.5 net) operated wells in the three months ended June 30, 2013. In addition, we participated in 3 gross (0.2 net) wells operated by others (OBO) during the second quarter 2013. We had an overall drilling success rate of 100% for the second quarter 2013.
Our actual capital expenditures for the six months ended June 30, 2013 are presented in the following table:
|(in thousands)||Q1 2013||Q2 2013||YTD 2013|
|Capital expenditures (1):|
|Gas gathering and water pipelines||—||—||—|
|Lease acquisitions and seismic||—||2,449||2,449|
|Corporate and other||4,596||4,310||8,906|
(1) Excludes capital expenditures related to our partnership with HGI.
Our capital budget for the remainder of 2013 will be significantly impacted by the acquisitions of assets in the Eagle Ford and Haynesville shale formations. Management is currently finalizing our development plans and related capital expenditures for the remainder of 2013 as a result of these acquisitions.
As of June 30, 2013, our Haynesville/Bossier shale operated production was 971 Mmcf per day gross (283 Mmcf per day net) and with the addition of production from our OBO wells, we had 302 Mmcf per day of total net Haynesville/Bossier shale production. We operated three drilling rigs in the play during the second quarter 2013. We currently have 39 units fully developed in the Haynesville in DeSoto Parish. Including the 11 sections acquired from Chesapeake, we have an additional 40 units to be developed in our core DeSoto Parish area. We completed and turned to sales 15 gross (5.0 net) operated Haynesville horizontal wells in the quarter. We spud seven operated horizontal wells and participated in three OBO wells during the quarter. In total, we have 411 operated horizontal wells and 181 OBO horizontal wells flowing to sales.
Excluding the recently acquired drilling locations from Chesapeake, we plan to drill 26 gross (15.5 net) operated wells with our three-rig program for the full year 2013. Including completions carried into 2013 from wells drilled in late 2012, we plan to complete and turn to sales 42 gross (22.1 net) wells for the full year 2013. The drilling and completion activities on the recently acquired sections from Chesapeake are subject to a number of factors, including BG Group's election to participate in the acquisition and agreement on a related drilling program.
The average initial production rate from the 15 operated Haynesville horizontal wells completed and turned to sales in the second quarter 2013 in DeSoto Parish was 12,090 Mmcf per day with an average 7,389 psi flowing casing pressure on an average 18/64ths choke. This maximum choke size is indicative of our modified restricted choke management program in DeSoto Parish.
Our cost reduction and efficiency program is delivering positive results. We continue to see improvements in drilling times, stimulation costs and overall capital efficiency. Our current DeSoto Parish well costs are averaging approximately $7.7 million per well.
Our gross operated Marcellus shale production at the end of the second quarter 2013 was 169 Mmcf per day (49 Mmcf per day net). Our focus through 2013 has been to complete and turn to sales our remaining drilled well inventory while reducing the size of our drilling program due to low natural gas prices. In the second quarter 2013, we spud two development wells in Central Pennsylvania and completed three gross operated (1.5 net) Marcellus wells in Central and Northeast Pennsylvania. During the remainder of 2013, we plan to turn to sales an additional 9 gross (3.2 net) Marcellus wells, two in our Central Pennsylvania area and seven in Northeast Pennsylvania. Our development planning for 2014 is underway and will be a combination of development drilling in our highest rate of return areas and selective appraisal drilling to delineate more of our acreage base.
In addition to the Marcellus shale production in Appalachia, we averaged 33 gross (14 net) operated Mmcfe per day of conventional production in the region.
The following discussion of operating results, capital expenditures and planned operations addresses the EXCO/HGI Partnership in which we own a 25.5% economic interest.
During the second quarter 2013, the partnership drilled and completed 8 gross (7.9 net) wells in the Sugg Ranch area with 100% drilling success. Additionally, there was 1 gross (0.3 net) well successfully drilled in the Ackerly area in Dawson County. Economics for this drilling activity typically have high rates-of-return driven by oil and NGL content. The partnership expects to run one operated rig intermittently at Sugg Ranch for the remainder of 2013. At the end of the second quarter 2013, production from the 451 partnership wells averaged approximately 3,650 net Boe per day. This average production rate consisted of 1,240 net barrels of oil, 6,500 net Mcf of natural gas, and 1,320 net barrels of natural gas liquids per day.
East Texas/North Louisiana
The Vernon Field in Jackson Parish, Louisiana is the most significant producing field in this group of assets. At the end of the second quarter, net operated production averaged approximately 43 Mmcfe per day from the lower Cotton Valley and Bossier Sand formations. With current low commodity prices, the primary focus in the Vernon Field is to minimize our operating expense while maintaining production.
At the end of the second quarter, net operated production from other fields in East Texas/ North Louisiana averaged approximately 39 Mmcfe per day. Capital spending during the quarter was focused on maintaining our base production performance and on the recompletion of five wells in the Holly and Kingston fields with the addition of Cotton Valley and Hosston sands. During the remainder of the year, we will continue our recompletion program working on four additional wells.
In East Texas/North Louisiana, the EXCO/HGI Partnership currently has 915 wells flowing to sales with a total gross operated production rate of approximately 120 Mmcfe per day (82 Mmcfe per day net). In addition, net production from OBO wells averaged 2 Mmcfe per day.
TGGT's average throughput was approximately 1.3 Bcf per day during the second quarter 2013, compared with 1.5 Bcf per day in the second quarter 2012. TGGT's capital spending for the second quarter 2013 was $8 million. Capital spending has transitioned from major facility and pipeline projects to primarily installation of field infrastructure pipelines to support producer drilling activity in North Louisiana and East Texas.
Our consolidated balance sheets as of June 30, 2013 and December 31, 2012, consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 and consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, are included on the following pages. We have also included reconciliations of non-GAAP financial measures referred to in this press release.
EXCO will host a conference call on Tuesday, August 6, 2013 at 9:00 a.m. (Central time) to discuss the contents of this release and respond to questions. Please call (800) 309-5788 if you wish to participate, and ask for the EXCO conference call ID#14766051. The conference call will also be webcast on EXCO's website at www.excoresources.com under the Investor Relations tab. Presentation materials related to this release will be posted, after market close, on EXCO's website on Monday, August 5, 2013.
A digital recording will be available starting two hours after the completion of the conference call until August 20, 2013. Please call (800) 585-8367 and enter conference ID#14766051 to hear the recording. A digital recording of the conference call will also be available on EXCO's website.
Additional information about EXCO Resources, Inc. may be obtained by contacting Chris Peracchi, EXCO's Director of Finance and Investor Relations and Treasurer at EXCO's headquarters, 12377 Merit Drive, Suite 1700, Dallas, TX 75251, telephone number (214) 368-2084, or by visiting EXCO's website at www.excoresources.com. EXCO's SEC filings and press releases can be found under the Investor Relations tab.
We believe that it is important to communicate our expectations of future performance to our investors. However, events may occur in the future that we are unable to accurately predict, or over which we have no control. We caution users of the financial statements not to place undue reliance on a forward-looking statement. When considering our forward-looking statements, keep in mind the cautionary statements and the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission, or the SEC, on February 21, 2013 and our other periodic filings with the SEC.
Our revenues, operating results and financial condition substantially depend on prevailing prices for oil and natural gas and the availability of capital from our credit agreement, or the EXCO Resources Credit Agreement. Declines in oil or natural gas prices may have a material adverse effect on our financial condition, liquidity, results of operations, the amount of oil or natural gas that we can produce economically and the ability to fund our operations. Historically, oil and natural gas