Exploration & Production | Quarterly / Earnings Reports | Third Quarter (3Q) Update
EXCO to Focus on Eagle Ford, Haynesville Ops in 4Q
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EXCO Resources, Inc. reported operating and financial results for the third quarter 2014.
Highlights:
- Adjusted EBITDA was $94 million for the third quarter 2014, which exceeded the mid-point of guidance.
- Production was 33 Bcfe, or 358 Mmcfe per day, for the third quarter 2014, which was within our guidance.
- Drilled 26 gross (11.6 net) and completed 21 gross (6.8 net) operated horizontal shale wells in the third quarter 2014.
- Implemented cost reduction initiatives which resulted in oil and natural gas operating costs and general and administrative costs below the low-end of guidance for the third quarter 2014.
- Enhanced our liquidity as a result of an increase to the borrowing base under our credit agreement.
- Expect to reduce indebtedness and further enhance liquidity as a result of the pending sale of our interests in Compass Production Partners.
Jeff Benjamin, EXCO's chairman, commented, "We continue to demonstrate strong financial performance and execute on our key business objectives. The energy sector has recently experienced a decline in market valuation driven by lower commodity prices; however, we believe that our execution of several key transactions and fiscal discipline over the past year has positioned EXCO for future success. Our improved balance sheet, enhanced liquidity and hedging strategy will allow us to accomplish our business strategies through various commodity price cycles. Our financial position gives us the ability to actively pursue acquisitions as opportunities arise. We have also been impressed with the recent success of several operational initiatives that are expected to unlock additional value from our current asset base, including our enhanced completion methods and programs to optimize our base production."
Operations Activity and Outlook
EXCO has updated its third quarter operations by area, which can be accessed below.
EXCO Edits Well Design in East Texas; Refracs the Haynesville
EXCO Touts Significant Cuts in South TX Drill Times
EXCO Resources Preps for Marcellus Pad Drilling in 2015
We spent $91 million on development activities, drilling 26 gross (11.6 net) operated wells and completing 21 gross (6.8 net) operated wells in the third quarter 2014. Our development program during 2014 is focused on our properties in the Haynesville and Eagle Ford shales. Our diverse portfolio of oil and natural gas properties gives us optionality to make capital decisions to maximize our returns based on our evaluation of industry trends and commodity prices. We remain focused on efficiently managing our capital expenditures as part of our development program.
Our capital expenditure program for the fourth quarter 2014 will primarily focus on our properties in the Haynesville and Eagle Ford shales. Our development activities in the East Texas/North Louisiana region will focus on drilling and completion activities in the Haynesville and Bossier shales within DeSoto Parish, Louisiana. In addition, we will be completing wells that have been drilled in the Shelby area of East Texas. Our development activities in the South Texas region will primarily focus on drilling and completion activities in the Eagle Ford shale within our core area and limited drilling outside of our core area as part of a farmout agreement. Our first centralized production facility in the region became operational in the fourth quarter 2014 which allows us to begin production from our inventory of wells that were waiting on completion at the end of the third quarter 2014.
Our actual capital expenditures during the first, second and third quarter 2014 as well as our fourth quarter and full year 2014 forecast are presented in the following table.
Financial Results
GAAP results were net income of $42 million, or $0.15 per diluted share, for the third quarter 2014 compared with net income of $2 million, or $0.01 per diluted share, for the second quarter 2014. The increase in net income was primarily due to volatility in commodity prices which resulted in higher unrealized gains on derivative contracts in the current quarter. This was partially offset by lower revenues in the current quarter due to a decrease in production and realized commodity prices.
Adjusted EBITDA for the third quarter 2014 was $94 million compared with $105 million for the second quarter 2014. Adjusted EBITDA is a non-GAAP measure and is computed using earnings before interest, taxes, depletion, depreciation and amortization, and is further adjusted for gains from asset sales, unrealized gains or losses from derivative financial instruments, impairments of our oil and natural gas properties, other non-cash income and expenses, and other items impacting comparability.
Adjusted net income, a non-GAAP measure, was $0.01 per diluted share for the third quarter 2014 compared with $0.03 per diluted share for the second quarter 2014. The non-GAAP adjustments include gains from asset sales, unrealized gains or losses from derivative financial instruments, non-cash asset impairments and other items typically not included by securities analysts in published estimates.
Oil, natural gas and natural gas liquids ("NGLs") production was 33 Bcfe, or 358 Mmcfe per day, for the third quarter 2014 compared with 35 Bcfe, or 383 Mmcfe per day, for the second quarter 2014. Third quarter 2014 production from the East Texas/North Louisiana region was 242 Mmcfe per day compared with 257 Mmcfe per day in the second quarter 2014. The decrease in production was primarily the result of normal production declines and the timing of completions based on our drilling program. The decrease was partially offset by the additional production from the 7 gross (4.0 net) operated wells turned-to-sales during the third quarter 2014 (including 2 gross (1.0 net) operated wells that were turned-to-sales on the last day of the quarter). Third quarter 2014 production from the South Texas region was 540 Mboe, or 5,870 Boe per day, compared with 596 Mboe, or 6,550 Boe per day, in the second quarter 2014. The decrease in production was primarily due to reduced completion activity which resulted in an increased inventory of wells that were drilled and waiting on completion at the end of the third quarter 2014. The reduced completion activity and inventory of wells was primarily due to wells waiting on the construction of our first centralized production facility in the region which became operational in the fourth quarter of 2014. The third quarter 2014 production in the Appalachia region was 56 Mmcfe per day compared with 62 Mmcfe per day in the second quarter 2014. The decrease in production was due to normal production declines and additional downtime due to planned pipeline maintenance. Our proportionate share of production from Compass Production Partners was 25 Mmcfe per day for both the third quarter 2014 and the second quarter 2014.
Oil, natural gas and NGL revenues for the third quarter 2014 were $151 million compared with $183 million for the second quarter 2014. Our average sales price per Mcfe decreased to $4.58 per Mcfe for the third quarter 2014 from $5.25 per Mcfe for the second quarter 2014. Our average sales price per Mcfe for the third quarter 2014 decreased primarily due to lower market prices for oil and natural gas compared to the second quarter 2014. When the impacts of cash settlements from derivatives are considered, oil, natural gas and NGL revenues were $153 million, or $4.65 per Mcfe, for the third quarter 2014, compared with $168 million, or $4.83 per Mcfe, for the second quarter 2014.
Our direct operating costs were $14 million, or $0.43 per Mcfe, for the third quarter 2014 compared with $16 million, or $0.45 per Mcfe, for the second quarter 2014. The lower direct operating costs were primarily due to the continued execution of cost reduction initiatives in the South Texas region including decreased salt water disposal costs and reduced reliance on third-party contractors.
Our general and administrative costs were $14 million for the third quarter 2014 compared with $20 million for the second quarter 2014. The decrease was primarily due to lower headcount from the reduction in force during the second quarter 2014. Also, we incurred severance costs and lease termination fees for unused office space in the second quarter of 2014 that we did not incur in the third quarter 2014.
Cash flows from operations before changes in working capital and other operating items impacting comparability, a non-GAAP measure, were $72 million for the third quarter 2014 compared with $84 million for the second quarter 2014. During the third quarter 2014, we primarily used our cash flows from operations to fund our drilling and development program.
Recent Developments
Compass Production Partners sale
On October 6, 2014, we entered into an agreement to sell our 25.5% economic interest in Compass Production Partners, LP ("Compass") to an affiliate of Harbinger Group, Inc. for $119 million in cash. We intend to use the proceeds to reduce indebtedness under the revolving commitment of our credit agreement ("EXCO Resources Credit Agreement"). Our borrowing base under the EXCO Resources Credit Agreement will not be affected by this sale since Compass is not a guarantor subsidiary. In addition, our consolidated indebtedness will be reduced by our proportionate share of Compass's indebtedness upon closing of the sale. As of September 30, 2014, we proportionally consolidated $83 million of indebtedness related to Compass's credit agreement. The transaction is expected to close during the fourth quarter of 2014.
Borrowing base redetermination and liquidity update
On October 22, 2014, our borrowing base under the EXCO Resources Credit Agreement was increased from $875 million to $900 million. The increase in our borrowing base improves our liquidity and demonstrates the quality of our assets. EXCO had liquidity of $711 million as of September 30, 2014. On a pro forma basis as if the sale of our interest in Compass and the borrowing base redetermination had occurred on September 30, 2014, our liquidity would have been $855 million. The anticipated reduction in indebtedness as a result of the Compass sale will also improve the metrics utilized in the financial covenants under the EXCO Resources Credit Agreement.