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Exco Focuses on Improving Economics in 2Q; Edits Completions

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   |    Monday,July 27,2015

EXCO Resources, Inc. announced operating and financial results for the second quarter 2015.

2015 Second Quarter Highlights:

• Drilled 9 gross (4.4 net) and turned-to-sales 22 gross (5.7 net) operated horizontal wells in the second quarter 2015, consistent with the capital budget.
• Produced 361 Mmcfe per day, or 33 Bcfe, for the second quarter 2015, which exceeded the midpoint of guidance. Production increased 22 Mmcfe per day from the first quarter 2015.
• Adjusted EBITDA, a non-GAAP measure, was $69 million for the second quarter 2015, 19% above adjusted EBITDA for the first quarter 2015, primarily due to higher production as well as lower operating and general and administrative costs.
• Cost saving initiatives resulted in general and administrative costs and gathering and transportation costs that were 7% and 6%, respectively, below the low-end of guidance, as well as operating costs within guidance. Reduced drilling and completion costs through negotiations with key vendors.
• Enhanced completion design in East Texas Shelby area yielded strong results as evidenced by a 15% increase in estimated ultimate recoveries for undeveloped Haynesville shale locations to 1.5 Bcf per 1,000 lateral feet. The Company believes further upside is achievable based on certain of its proved developed producing wells in this area with EURs of 1.75 Bcf per 1,000 lateral feet.
• Adjusted net income (loss), a non-GAAP measure, was a net loss of $12 million, or $0.05 per diluted share, and GAAP net income (loss) was a net loss of $454 million, or $1.67 per diluted share, for the second quarter 2015. The GAAP net loss was primarily due to the $394 million impairment of the Company's oil and natural gas properties pursuant to the ceiling test in accordance with full cost accounting.
• Pro forma liquidity was $368 million as of the end of the second quarter 2015, after giving effect to the amendment to the Company's credit agreement that is anticipated to close this week. EXCO is evaluating transactions that would enhance its liquidity and provide additional financial flexibility.

Operational Results

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North Louisiana

Highlights:

• Produced 231 Mmcfe per day, an increase of 24 Mmcfe per day, or 12%, from the first quarter 2015 and a decrease of 4 Mmcfe per day, or 2%, from the second quarter 2014.
• Turned-to-sales 4 gross (1.4 net) Haynesville shale wells in Caddo Parish.

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EXCO's increase in production compared to the first quarter 2015 was primarily the result of the timing of completion activities. The Company entered 2015 with three operated rigs drilling in this region and subsequently moved these rigs to the Shelby area of East Texas. EXCO does not have plans for further development in this region during the remainder of 2015. EXCO is analyzing data and assessing potential modifications to its Haynesville shale well design in this region, which includes enhanced completion methods that have proven to be successful in its East Texas region, including the use of more proppant, modified well spacing and longer laterals. These initiatives have the potential to increase the rates of return^(*) in the Holly area by approximately 20%.

The Company continues to monitor and analyze the results from its re-frac stimulation tests and remains optimistic about the potential. EXCO plans to resume its re-frac program in 2016.

East Texas

Highlights:

• Produced 40 Mmcfe per day, a decrease of 5 Mmcfe per day, or 11%, from the first quarter 2015 and an increase of 18 Mmcfe per day, or 82%, from the second quarter 2014.
• Drilled 6 gross (2.9 net) operated horizontal Haynesville and Bossier wells in the Shelby area and turned-to-sales 2.0 gross (1.0 net) wells in the Haynesville and Bossier shales in the Shelby area.

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EXCO's decrease in production compared to the first quarter 2015 was primarily the result of normal production declines in excess of the production from the wells turned-to-sales during the quarter and higher downtime. The Company's 2015 drilling program in this region is designed to result in a higher percentage of the overall number of wells turned-to-sales later in the year. The higher downtime was due to various factors including drilling and completion activities, workovers and flooding.

The enhanced completion methods in this region continue to yield strong results as evidenced in the performance from wells included in EXCO's 2014 and 2015 drilling programs. The improved well performance in this region resulted in an increase in the EUR to 1.5 Bcf per 1,000 lateral feet for certain undeveloped Haynesville shale locations compared to 1.3 Bcf per 1,000 lateral feet as of year-end 2014. The increase in the EUR was reviewed by a third-party reserve engineer. EXCO continues to refine its completion techniques in this region, which will include up to 2,700 lbs of proppant per foot in certain wells to be drilled during the remainder of 2015, compared to an average of 1,400 lbs of proppant per foot in the Company's 2014 drilling program. The estimated cost for the Haynesville shale wells included in the Company's plans for the remainder of the year is $10.3 million per well based on an average lateral length of 6,900 feet and 2,700 lbs of proppant per foot.

The East Texas region is the primary focus of EXCO's 2015 development program, which includes an average of 3 rigs for the remainder of 2015. This will allow the Company to drill 11 gross (4.4 net) operated horizontal wells and turn 10 gross (4.9 net) wells to sales during the remainder of 2015. EXCO is targeting a rate of return^(*) of approximately 30% to 35% for the East Texas Shelby wells included in its 2015 drilling program.

South Texas

Highlights:

• Produced 7.2 Mboe per day, an increase of 1.2 Mboe per day, or 19%, from the first quarter 2015 and an increase of 0.7 Mboe per day, or 10%, from the second quarter 2014.
• Drilled 3 gross (1.5 net) operated horizontal wells and turned-to-sales 16 gross (3.3 net) operated horizontal wells.

EXCO's increase in production compared to the first quarter 2015 was primarily due to the timing of completion activities and lower downtime. The wells turned-to-sales during the year-to-date 2015 were concentrated late in the first quarter 2015 and early in the second quarter 2015. The decrease in downtime was due to construction and maintenance of central production and storage facilities and offset frac activities that occurred during the first quarter 2015 and partially offset by flooding in the second quarter 2015. Development included 2 gross (0.8 net) wells drilled and 15 gross (2.7 net) wells turned-to-sales in the Eagle Ford shale. The wells turned-to-sales in the Eagle Ford shale averaged initial production rates of 672 Bbls per day. EXCO continues to reduce its drilling times and is currently averaging 10 days to drill an average total measured depth of 14,200 feet. Also, the Company has been able to extend the lateral length up to 9,500 feet on recent wells. As a result of the Company's development activities, its core area of 11,300 net acres in Zavala County, Texas is entirely held-by-production. The Company's plans for the remainder of the year include drilling 3 gross (1.3 net) wells and turning-to-sales 4 gross (1.6 net) wells. The estimated cost for the wells included in the Company's plans for the remainder of the year is $6.5 million per well based on an average lateral length of 8,500 feet.

Development included 1 gross (0.7 net) Buda well which was drilled and turned-to-sales. This was the Company's second operated Buda well and the maximum 24-hour production rate was 520 Bbls of oil. The Company's first operated Buda well had cumulative production of 60 Mbbls in its first five months of production. The relatively low costs of drilling the Buda provide an attractive near-term development opportunity, even in a low commodity price environment. Therefore, the Company's plans for the remainder of 2015 include drilling 7 gross (6.6 net) and turning-to-sales 6 gross (5.8 net) wells in the Buda formation. The additional wells included in EXCO's plans for the remainder of 2015 are expected to cost $2.9 million per well based on an average lateral length of 10,500 feet. EXCO is targeting a rate of return^(*) of approximately 40% to 50% for the Buda wells included in its 2015 drilling program.

Based on the recent success of nearby results, the Company leased an additional 11,000 net acres in Zavala County, Texas. The Company did not acquire any interests in wells under its participation agreement with a joint venture partner in the Eagle Ford shale during the second quarter 2015 due to low commodity prices. EXCO's current strategy is to allocate its capital to development opportunities with higher rates of return compared to the acquisition of producing properties.

Appalachia

Highlights:

• Produced 47 Mmcfe per day, a decrease of 4 Mmcfe per day, or 8%, from the first quarter 2015 and a decrease of 14 Mmcfe per day, or 23%, from the second quarter 2014.

EXCO's decrease in production from the first quarter 2015 was primarily the result of normal production declines and higher downtime due to a third-party pipeline disruption in Northeast Pennsylvania. The pipeline disruption resulted in approximately 300 Mmcf of production volumes being shut-in while the pipeline was repaired. EXCO's plans for the remainder of 2015 include drilling 1 gross (0.3 net) operated horizontal well in the Marcellus shale and turning-to-sales 1 gross (0.5 net) well that is awaiting gathering lines that are currently being constructed. The Company's position in the Marcellus shale requires low maintenance capital and approximately 80% of the acreage is held-by-production, which provides flexibility in the timing of the development of this region.

Key Developments

Strategic Plan Update

EXCO recently implemented a transformational strategy that focuses on six core areas: 1) liability management, 2) operational performance, 3) capital deployment, 4) risk management, 5) portfolio repositioning, and 6) performance management. The Company believes the execution of this strategy will create long-term value for its shareholders. The six core areas and the Company's recent progress are detailed below:

1. Liability management - The Company is focused on improving its capital structure and providing structural liquidity. The Company is currently evaluating transactions that would further enhance its liquidity and provide additional financial flexibility. This may include, but is not limited to, plans to refinance its existing indebtedness, incur additional indebtedness, issue equity or divest assets. EXCO expects to close this week on an amendment to its credit agreement that will facilitate these plans and had pro forma liquidity of $368 million if the amendment would have occurred at the end of the second quarter 2015.
2. Operational performance - The Company's operational team is dedicated to the continuous improvement and innovation of well designs in order to maximize the return on capital. During the second quarter 2015, EXCO's well performance in the East Texas Shelby area resulted in a 15% increase in EURs for undeveloped Haynesville shale wells to 1.5 Bcf per 1,000 lateral feet. The Company continued to achieve strong results in the Buda formation during the second quarter 2015. EXCO demonstrated fiscal discipline during the second quarter 2015, as evidenced by gathering and transportation and general and administrative costs below the low-end of guidance and operating costs within guidance.
3. Capital deployment - EXCO has implemented a disciplined capital allocation approach to ensure the highest and best use of capital. The Company will deploy its capital to each incremental well based on prices, cost and performance and will make real-time decisions to modify its development plans based on returns. As a result of the Company's ability to generate higher returns due to recent improvements to drilling and completion performance and cost reductions, EXCO is currently evaluating potential increases to its development plans.
4. Risk management - EXCO utilizes derivative financial instruments to protect returns on the capital deployed and provide additional downside protection on its current base production. The Company plans to significantly increase the percentage of production volumes and time frame covered by derivative financial instruments. The strategy is designed to hedge proved developed production for a period of time that protects 85% of the value associated with new wells as they are brought on-line.
5. Portfolio repositioning - The Company is focused on allocating capital to drilling to generate value and increasing its drilling inventory through leasing and acreage acquisitions. In May 2015, the Company's board of directors approved a $25 million increase to its 2015 capital budget to pursue certain oil and natural gas leasing opportunities in EXCO's core operating areas of East Texas and South Texas. During the second quarter 2015, the Company leased an additional 11,000 net acres in Zavala County, Texas.
6. Performance management - The Company plans to rigorously manage to high performance levels to ensure high productivity. The Company is performing an analysis to benchmark its performance against its peer group and identify further areas for improvement.

Services and Investment Agreement

In April 2015, Bluescape Resources Company LLC deposited $10 million in escrow to be paid to EXCO upon acquisition of 5,882,353 common shares from EXCO, par value $0.001 per share, at a price per share of $1.70, pursuant to the services and investment agreement. The acquisition of the shares will occur upon the effectiveness of a resale registration statement. In addition, Bluescape will be obligated to purchase at least $40 million of additional common shares through open market purchases during the one year following the closing such that Bluescape will own common shares of EXCO with an aggregate cost basis of at least $50 million as of the first anniversary of the closing date, subject to certain extensions and exceptions. The shareholder approval required to close the services and investment agreement will be voted on during EXCO's annual meeting on August 5, 2015. At the closing, C. John Wilder, Executive Chairman of Bluescape, will become Executive Chairman of EXCO's Board of Directors.