Exploration & Production | Quarterly / Earnings Reports
Exco Highlights Haynesville, Eagle Ford Acquisition in Q2
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EXCO Resources Inc. has reported second quarter results for 2013.
Highlights include:
- 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.
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."
Operations Activity & 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 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.
Exco Keeps Tri-Rig Strategy in Haynesville/Bossier; Completes 15 Wells
Exco Hits 169 Mmcf/d in Marcellus; Plans Drilling Reduction
Exco Details Production from Permian, East TX Partnership
Cash Flow
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.
Recent Developments
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.
TGGT
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.