- EXCO delivered operational and financial results within or better than guidance for fourth quarter 2016 and full year 2016.
- Produced 263 Mmcfe per day, or 24 Bcfe, for fourth quarter 2016 and produced 285 Mmcfe per day, or 104 Bcfe, for full year 2016, within guidance.
- GAAP net loss was $35 million, or $0.12 per diluted share, and adjusted net loss, a non-GAAP measure, was $2 million, or $0.00 per diluted share, for fourth quarter 2016. GAAP net loss was primarily due to unrealized losses on derivative financial instruments and impairments of equity investments. GAAP net loss was $225 million, or $0.81 per diluted share, and adjusted net loss was $41 million, or $0.15 per diluted share for full year 2016.
- Adjusted EBITDA, a non-GAAP measure, was $26 million for fourth quarter 2016, 4% above adjusted EBITDA for third quarter 2016, primarily due to higher commodity prices partially offset by lower production. Adjusted EBITDA was $96 million for full year 2016, 59% below adjusted EBITDA for full year 2015, primarily due to lower commodity prices and production.
- Proved reserves were 477 Bcfe and Standardized Measure and SEC PV-10, a non-GAAP measure, calculated using the prices prescribed by the Securities and Exchange Commission (“SEC”) were $311 million as of December 31, 2016. Proved reserves were 1.5 Tcfe and PV-10 based on NYMEX futures prices, a non-GAAP measure, as of December 31, 2016 (“NYMEX PV-10”) was $970 million(*).
- On March 15, 2017, EXCO executed a series of transactions that significantly improved its liquidity and capital structure. This included the issuance of $300 million 1.5 Lien Notes, as defined below, and the exchange of $683 million Second Lien Term Loans for a like amount of 1.75 Lien Term Loans, both as defined below, providing the Company with the option to pay interest in cash, common shares or additional indebtedness.
Strategic plan update
EXCO’s strategic plan continues to focus on three core objectives: 1) restructuring the balance sheet to enhance its capital structure and extend structural liquidity, 2) transforming EXCO into the lowest cost producer, and 3) optimizing and repositioning the portfolio. The three core objectives and the Company’s recent progress are detailed below:
- Restructuring the balance sheet to enhance its capital structure and extend structural liquidity – The Company remains committed to improving its financial flexibility and enhancing long-term value for shareholders through the continued execution of its comprehensive consensual restructuring program (the “Restructuring Program”). The focus is to establish a sustainable capital structure that provides the Company with the liquidity necessary to execute its business plan.
In March 2017, the Company closed a series of transactions that significantly improved its capital structure, including the issuance of $300 million in aggregate principal amount of senior secured 1.5 lien notes due March 20, 2022 (“1.5 Lien Notes”), exchanges of $683 million in aggregate principal amount of senior secured second lien term loans due October 26, 2020 (“Second Lien Term Loans”) for a like amount of senior secured 1.75 lien term loans due October 26, 2020 (“1.75 Lien Term Loans”), and the issuance of warrants. The 1.5 Lien Notes and 1.75 Lien Term Loans provide the option, subject to certain limitations, to pay interest in cash, common shares, or additional indebtedness. The Company is required to obtain shareholder approval to permit the exercisability of the warrants and issuance of common shares in connection with the payment of interest on the 1.5 Lien Notes and 1.75 Lien Term Loans. See further information related to these transactions in the Form 8-K filed with the SEC on March 15, 2017.
The proceeds from the issuance of the 1.5 Lien Notes were primarily utilized for the repayment of the entire amount outstanding under EXCO’s credit agreement (“Credit Agreement”), transaction fees and general corporate purposes. The Credit Agreement was amended to reduce the borrowing base to $150 million, permit the issuance of the 1.5 Lien Notes and the exchanges of Second Lien Term Loans, and modify certain financial covenants. Liquidity, which represents cash plus the unused borrowing base under the Credit Agreement, improved by $116 million on a pro forma basis compared to December 31, 2016, after incorporating the impact of the transactions. The option to pay interest in common shares on the 1.5 Lien Notes and 1.75 Lien Term Loans has the potential to reduce annual cash interest payments by approximately $109 million, subject to certain restrictions. EXCO anticipates the transactions will enhance its capital structure, provide the optionality to improve future cash flows and establish structural liquidity to implement its business plan. The reduction in cash interest expenses will increase the cash flows from operations available to fund its future capital expenditures and acquisitions, if any.
- Transforming EXCO into the lowest cost producer – EXCO continues to exercise fiscal discipline to transform itself into the lowest cost producer. Lease operating expenses decreased by 35% in 2016 compared to 2015 primarily due to the renegotiation of saltwater disposal contracts, modifications to chemical programs, enhanced use of well site automation, optimization of work schedules and less workover activity. In addition, in the Appalachia region, the Company divested most of its conventional assets, which had the highest lease operating expenses per Mcfe in its portfolio. The divestitures contributed to reduced field headcount in the region by 85% since December 31, 2015.
GAAP general and administrative expenses decreased by 17% in 2016 compared to 2015. Adjusted general and administrative expenses (excluding equity-based compensation, restructuring and severance costs), a non-GAAP measure, decreased 39% in 2016 compared to 2015. The Company’s cost reduction efforts and recent divestitures have resulted in a decrease in total employee headcount to approximately 180 persons, a decrease of approximately 40% since December 31, 2015 and approximately 70% since December 31, 2014.
EXCO is dedicated to the continuous improvement and innovation of well designs in order to maximize its return on capital. The Company reduced its drilling and completion costs through modifications to well designs, renegotiated contracts with vendors, and other efficiencies. In addition, the Company improved well performance through the use of extended laterals and increased use of proppant while reducing both capital and operating costs.
The Company’s enhanced completion methods in North Louisiana achieved strong results during 2016, including a 13% increase in the estimated ultimate recovery (“EUR”) to an average of 2.3 Bcf per 1,000 lateral feet for certain proved developed locations in the Haynesville shale within the Company’s core area of North Louisiana. The Company drilled three gross wells in North Louisiana with lateral lengths of approximately 4,300 feet during 2016 featuring completion methods that included the use of approximately 2,700 lbs of proppant per lateral foot for an average total well cost of $5.9 million, representing a 13% decrease compared to wells drilled in this region with similar lateral lengths in prior year despite increased proppant use. The Company also drilled three gross wells in North Louisiana during 2016 with lateral lengths of approximately 7,600 feet featuring completion methods that included the use of approximately 2,650 lbs of proppant per lateral foot for an average total well cost of $8.8 million. The Company will continue to focus on operational initiatives to enhance its well designs including the use of an average of 3,500 lbs of proppant per lateral foot for completions during 2017 and the potential to extended laterals up to 10,000 feet.
In the Company’s East Texas region, the two most recent wells turned-to-sales in the southern area continue to exceed expectations and resulted in a 73% increase to an average EUR of 2.6 Bcf per 1,000 lateral feet as compared to December 31, 2015.
- Optimizing and repositioning the portfolio – The Company continues to execute its disciplined capital allocation program to ensure the highest and best uses of capital, including the completion of a series of asset divestitures as part of its portfolio optimization initiative. In October 2016, the Company closed a sale of its interests in shallow conventional assets located in West Virginia following the sale of its interests in shallow conventional assets located in Pennsylvania in July 2016. EXCO retained all rights to other formations below the conventional depths in the Appalachia region including the Upper Devonian, Marcellus and Utica shales. The Company is also evaluating other divestitures of assets, including its assets in South Texas, to generate capital that can be deployed to projects with high rates of return. EXCO’s technical team is performing an evaluation of prospective locations to unlock additional value in its portfolio, including the dry gas window of the Utica shale in Pennsylvania and the Bossier shale in North Louisiana. The Company drilled an appraisal well in the Bossier shale in North Louisiana with enhanced completion methods during first quarter 2017 to further evaluate the potential of the formation.
Table 1: Summary of operating activities and operational results
Historical vs. guidance; mixed measures
|Rig counts (1)||#||—||—||—||3||(100||)||1||4||(75||)||—||1|
|Net wells drilled (1)|
|Appalachia and other||#||—||—||—||—||—||—||—||—||N/A||N/A|
|Total net wells drilled||#||—||—||—||2.7||(100||)||5.2||17.8||(71||)||—||5.2|
|Net wells turned-to-sales (1)|
|Appalachia and other||#||0.4||—||100||0.5||(20||)||0.4||0.5||(20||)||N/A||N/A|
|Total net wells turned-to-sales||#||0.4||2.7||(85||)||4.3||(91||)||9.2||29.2||(68||)||—||8.8|
|Appalachia and other||Mmcfe/d||27||33||(18||)||37||(27||)||36||46||(22||)||N/A||N/A|
|Total daily production||Mmcfe/d||263||288||(9||)||319||(18||)||285||340||(16||)||255-265||280-300|
|(1)||Includes rigs and wells operated by EXCO and excludes rigs and wells operated by others.|
- Produced 149 Mmcfe per day, a decrease of 10 Mmcfe per day, or 6%, from third quarter 2016, and a decrease of 25 Mmcfe per day, or 14%, from fourth quarter 2015.
- Enhanced completion methods resulted in a 13% increase in the EUR to an average of 2.3 Bcf per 1,000 lateral feet for certain proved developed locations in the Haynesville shale within the Company’s core area of North Louisiana, reflecting improved performance of the wells turned-to-sales during 2016.
EXCO’s decrease in production compared to the third quarter 2016 was primarily the result of normal production declines since its most recent well in the region turned-to-sales in July 2016.
The Company plans to drill 5 gross (3.9 net) wells during first quarter 2017 that will be completed and turned-to-sales in second and third quarter 2017. This includes 4 gross (3.0 net) wells in the Haynesville shale with lateral lengths ranging from 4,500 feet to 7,500 feet and 1 gross (0.8 net) well in the Bossier shale with a lateral length of 7,500 feet. The development program during first quarter 2017 will continue to build on the successful modifications to the Company’s well design, which includes enhanced completions using an average of 3,500 lbs of proppant per lateral foot.
The cost per well for the wells drilled during first quarter 2017 is expected to be $6.8 million to $9.3 million in the Haynesville shale based on the lateral length and $11.2 million in the Bossier shale. EXCO is targeting rates of return ranging from 57% to 100% for these Haynesville shale wells based on the lateral length and a flat natural gas price of $3.00 per Mmbtu. EXCO’s development plans in this region subsequent to the first quarter 2017 may feature drilling extended lateral length wells up to 10,000 feet. The Company’s inventory in its core area of North Louisiana includes 103 gross (37 net) operated undeveloped locations in the Haynesville shale based on lateral lengths ranging from 4,500 feet to 10,000 feet.
The Company will evaluate the results of the Bossier shale well featuring enhanced completion methods to assess the potential for future development of Bossier shale locations in North Louisiana. If the results are successful, the Company’s extensive infrastructure could allow for efficient development of its inventory of 168 gross (78 net) operated undeveloped locations in the Bossier shale in North Louisiana based on average lateral lengths of 7,500 feet.
- Produced 60 Mmcfe per day, a decrease of 9 Mmcfe per day, or 13%, from third quarter 2016, and a decrease of 4 Mmcfe per day, or 6%, from fourth quarter 2015.
- EXCO’s most recent two wells drilled in the southern portion of the region continued to exhibit strong performance and resulted in a 73% increase to an average EUR of 2.6 Bcf per 1,000 lateral feet as compared to December 31, 2015.
EXCO’s decrease in production compared to the third quarter 2016 was primarily due to natural production declines since its most recent well in the region turned-to-sales in March 2016.
EXCO’s development activities in the East Texas region during first quarter 2017 will primarily include the participation in wells operated by others. This includes the development of a well by a third-party that will satisfy a continuous drilling obligation on certain acreage in the southern portion of the region. The Company remains encouraged by the potential to develop its 122 gross (30 net) operated undeveloped locations within this southern portion of the East Texas region.
- Produced 4.5 Mboe per day consistent with third quarter 2016 and a decrease of 2.8 Mboe per day, or 39%, from fourth quarter 2015.
Production remained consistent with the third quarter 2016 as a result of lower downtime. EXCO is evaluating the potential divestiture of its properties in the South Texas region and does not anticipate allocating development capital to this region during 2017.
- Produced 27 Mmcfe per day, a decrease of 6 Mmcfe per day, or 18%, from third quarter 2016, and a decrease of 10 Mmcfe per day, or 27%, from fourth quarter 2015.
- Turned-to-sales 1 gross (0.4 net) Marcellus shale well during fourth quarter 2016.
EXCO’s decrease in production compared to the third quarter 2016 was primarily attributable to the sale of its shallow conventional assets located in West Virginia on October 3, 2016, and was impacted by 0.6 Bcfe shut-in due to low regional natural gas prices in Appalachia during early fourth quarter 2016. However, regional differentials in Appalachia improved in late 2016 from NYMEX less $1.52 per Mcfe during September to NYMEX less $0.45 per Mcfe during December. As a result, predominantly all of the production previously shut-in was turned on-line as prices improved in fourth quarter 2016.
In recent years, the Company has limited its development of the Marcellus shale due to wide regional natural gas price differentials. These differentials began to narrow in late 2016 and have the potential to be favorably impacted by the expansion of infrastructure and other sources of demand for natural gas in the Northeast region as early as 2018. EXCO has an extensive inventory of undeveloped locations prospective for the Marcellus and Utica shales that have potential to provide attractive rates of return in an improved commodity price environment. EXCO’s position in the Appalachia region requires low maintenance capital and approximately 90% of the acreage is held-by-production, providing the optionality for future development activities with minimal cost to hold the position. The Company is currently evaluating the potential of its acreage in the Utica shale and is encouraged by its ongoing technical analysis and successful results from other operators in the region. EXCO owns Utica shale rights in approximately 40,000 net acres predominantly located in the dry gas window. The Company expects to participate in certain Utica shale wells operated by others during 2017.
Table 2: Summary of operational earnings
Historical vs. guidance; mixed measures
|Natural gas revenues||
|Total oil and natural gas revenues||
|Realized oil prices||
|Oil price differentials||$/Bbl||(2.86||)||(3.57||)||(20||)||(4.57||)||(37||)||(4.30||)||(4.78||)||(10||)||(3.00-4.00)||(3.50-5.50)|
|Realized gas prices||
|Gas price differentials||
|Derivative financial instruments|
|Cash settlements (payments)||
|Cash settlements (payments)||
|Costs and expenses|
|Oil and natural gas operating costs||
|Production and ad valorem taxes||
|Gathering and transportation||
|Oil and natural gas operating costs||
|Production and ad valorem taxes||$/Mcfe||0.09||0.14||(36||)||0.21||(57||)||0.15||0.18||(17||)||0.15-0.20||0.15-0.20|
|Gathering and transportation||$/Mcfe||1.10||1.06||4||0.86||28||1.02||0.80||28||1.05-1.10||1.00-1.05|
|General and administrative (1)||
|Adjusted EBITDA (2)||
|GAAP net income (loss) (3)||
|Adjusted net income (loss) (2)||
|GAAP diluted shares outstanding||
|Adjusted diluted shares outstanding||MM||280||280||—||278||1||279||274||2||N/A||N/A|
|GAAP diluted EPS||
|Adjusted diluted EPS||
|(1)||Excludes equity-based compensation expenses of $0.2 million, $1.4 million and $3.2 million for the three months ended December 31, 2016, September 30, 2016 and December 31, 2015, respectively, and $14.8 million and $7.2 million for the years ended December 31, 2016 and 2015, respectively.|
|(2)||Adjusted EBITDA and Adjusted net income (loss) are non-GAAP measures. See Financial Data section for definitions and reconciliations.|
|(3)||GAAP net income (loss) included impairments of oil and natural gas properties of $205 million for the three months ended December 31, 2015, and $161 million and $1.2 billion for the years ended December 31, 2016 and 2015, respectively.|
EXCO’s GAAP net income decreased from $51 million in third quarter 2016 to a GAAP net loss of $35 million in fourth quarter 2016. The net loss was primarily due to unrealized losses on derivative financial instruments and impairments of equity investments. Net income in third quarter 2016 included a net gain on extinguishment of debt of $57 million.
EXCO’s increase in Adjusted EBITDA compared to the third quarter 2016 was primarily due to higher commodity prices partially offset by lower production. The Company’s general and administrative expenses during fourth quarter 2016 were impacted by $4 million of legal and advisory fees associated with the Company’s Restructuring Program.
Table 3: 2017 Guidance
Q1 17; mixed measures
The Company is currently incorporating the impact of the recent financing transactions into its development plans for the remainder of 2017. The Company’s guidance for first quarter 2017 includes the following:
|Total daily production||Mmcfe/d||(235-245)|
|Realized price differentials|
|Oil price differentials||$/Bbl||(3.00-4.00)|
|Gas price differentials||$/Mcf||(0.50-0.60)|
|Oil and natural gas operating costs||$/Mcfe||0.40-0.45|
|Production and ad valorem taxes||$/Mcfe||0.15-0.20|
|Gathering and transportation||$/Mcfe||1.20-1.25|
|General and administrative (1)||$MM||9-10|
|(1)||Excludes equity-based compensation expense.|
|Cash Flow Results|
Table 4: Summary of key cash flow items
Historical vs. guidance; mixed measures
|Cash flow provided by (used in)|
|Net increase (decrease) in cash||$MM||6||(24||)||(125||)||(8||)||(175||)||(3||)||(34||)||(91||)||N/A||N/A|
|Other key cash flow items|
|Adjusted operating cash flow (1)||$MM||12||11||9||28||(57||)||35||144||(76||)||N/A||N/A|
|Free cash flow (1)||$MM||(6||)||(65||)||(91||)||(41||)||(85||)||(80||)||(184||)||(57||)||N/A||N/A|
|(1)||Adjusted operating cash flow and Free cash flow are non-GAAP measures. See Financial Data section for definitions and reconciliations.|
EXCO’s increase in operating cash flows in fourth quarter 2016 compared to third quarter 2016 was primarily the result of more favorable working capital conversions. During fourth quarter 2016, EXCO primarily used its cash flows from operations to fund limited development activities and acquisitions of certain assets. EXCO’s financing activities in fourth quarter 2016 included $14 million of borrowings under the Credit Agreement primarily utilized for payments related to the Second Lien Term Loans.
EXCO’s decrease in operating cash flows for 2016 compared to 2015 was primarily the result of lower revenues, lower cash receipts on derivative contracts and less favorable working capital conversions. During 2016, EXCO primarily used its borrowings under the Credit Agreement to fund drilling and development. EXCO’s financing activities during 2016 consisted of $161 million of net borrowings under the Credit Agreement, partially offset by payments of $51 million related to the Second Lien Term Loans and $53 million of cash payments used to repurchase a portion of its 2018 Notes and 2022 Notes at a discount to the principal amount.
EXCO Resources, Inc.
Tyler Farquharson, 214-368-2084
Vice President, Chief Financial Officer and Treasurer