EXCO Resources, Inc. Reports Third Quarter 2015 Results

DALLAS–(BUSINESS WIRE)–EXCO Resources, Inc. (NYSE: XCO) (“EXCO” or the “Company”) today announced operating and financial results for the third quarter 2015.

2015 Third Quarter Highlights

• Drilled 9 gross (5.2 net) and turned-to-sales 9 gross (4.6 net) operated horizontal wells in the third quarter 2015, consistent with the capital budget.
• Produced 340 Mmcfe per day, or 31 Bcfe, for the third quarter 2015, at the low-end of guidance. Production decreased 21 Mmcfe per day, or 6%, from the second quarter 2015, primarily due to the timing of completion activities and higher downtime.
• Adjusted EBITDA, a non-GAAP measure, was $62 million for the third quarter 2015, 10% below adjusted EBITDA for the second quarter 2015, primarily due to lower commodity prices and production.
• Cost saving initiatives resulted in gathering and transportation costs below the low-end of guidance, lease operating expenses at the low-end of guidance, and general and administrative costs consistent with the mid-point of guidance.
• Adjusted net income (loss), a non-GAAP measure, was a net loss of $11 million, or $0.04 per diluted share, and GAAP net income (loss) was a net loss of $355 million, or $1.30 per diluted share, for the third quarter 2015. The GAAP net loss was primarily due to the $339 million impairment of the Company’s oil and natural gas properties pursuant to the ceiling test in accordance with full cost accounting.
• EXCO executed a series of transactions in October 2015 that enhanced its liquidity and financial flexibility. This includes the issuance of $591 million in senior secured second lien term loans that bear interest at 12.5% per annum. The proceeds were utilized to reduce indebtedness under its credit agreement and repurchase $577 million of unsecured notes at an average price of 51% of the principal amount. These transactions reduced EXCO’s consolidated net indebtedness by $270 million and would have resulted in $395 million in liquidity on a pro forma basis if these transactions had occurred on September 30, 2015.

Key Developments

Strategic plan update

EXCO is implementing 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:

• Reduced total net debt by $270 million, or 18%;
• Maintained $234 million of secured debt capacity for future exchanges or issuance of new secured debt;
• Reduced the principal amount of outstanding senior unsecured notes by $577 million, or 46%;
• Reduced the nearest unsecured debt maturity, due in 2018, by $376 million, or 50%;
• Extended weighted average debt maturity from 3.6 to 4.7 years, representing a 30% improvement; and
• Improved pro forma liquidity by $60 million, or 18%.

Issuance of Senior Secured Second Lien Term Loans

On October 26, 2015, EXCO closed an agreement with Hamblin Watsa Investment Counsel Ltd. and Fairfax Financial Holdings Ltd. (“Fairfax”) for a $300 million Senior Secured Second Lien Term Loan (the “Fairfax Term Loan”). The Fairfax Term Loan was issued at par, bears interest at a rate of 12.5% per annum and has a five-year maturity. The Company used the proceeds of the Fairfax Term Loan to reduce indebtedness under its Credit Agreement. Fairfax is currently one of EXCO’s largest shareholders and their investment in the loan demonstrates confidence in EXCO’s ability to execute its strategic improvement plan.

EXCO also closed an agreement with certain unsecured noteholders (the “Noteholders”) pursuant to which the Noteholders are lenders under a new $291 million Senior Secured Second Lien Term Loan (the “Exchange Term Loan”) in exchange for the Company repurchasing $577 million of the Noteholders’ senior unsecured notes, representing an average exchange at 51% of par value. The Exchange Term Loan was issued at par, bears interest at a rate of 12.5% per annum and has a five-year maturity. Specifically, EXCO repurchased $376 million of its 2018 Notes and $201 million of its 2022 Notes. The notes repurchased will be cancelled by the trustee following customary settlement procedures. EXCO granted Fairfax and the Exchange Term Loan lenders a pari-passu second lien security interest in substantially all of its assets under the Fairfax Term Loan and the Exchange Term Loan. The fees and other expenses associated with the issuance of the Fairfax Term Loan and the Exchange Term Loan are estimated to be $15 million.

In connection with these transactions, EXCO amended its Credit Agreement which, among other things, established a borrowing base under the Credit Agreement of $375 million. The next borrowing base redetermination is currently scheduled for March 2016. In addition, the interest coverage ratio was reduced to 1.25x and the leverage ratio was eliminated. These transactions provide the Company with the flexibility to issue up to $109 million in additional secured second lien indebtedness and up to $125 million in secured third lien indebtedness. This available liens capacity allows EXCO to pursue future exchanges or issuances of secured indebtedness.

Proposed reverse stock split

EXCO has called a Special Meeting of Shareholders for November 16, 2015 for its shareholders to consider, among other things, a proposal to grant the Board of Directors authority to effect a reverse share split and proportionally reduce the total number of outstanding common shares that are authorized for issuance. The proposal, if approved by the shareholders, would authorize the Board of Directors to effect a reverse share split at a ratio of up to 1-for-10 common shares, with the decision, timing and exact ratio of the reverse share split to be determined by the Board of Directors in its sole discretion. The proposed reverse share split would affect all shareholders uniformly and will not affect any shareholder’s ownership percentage.

Services and investment agreement

On September 8, 2015, EXCO closed the Services and Investment Agreement with Energy Strategic Advisory Services LLC (“ESAS”), a wholly-owned subsidiary of Bluescape Resources Company LLC (“Bluescape”). At the closing, C. John Wilder, Executive Chairman of Bluescape, became the Executive Chairman of EXCO’s Board of Directors. On September 8, 2015, ESAS purchased 5,882,353 common shares from EXCO at a price per share of $1.70. In addition, ESAS is obligated to purchase $13.5 million common shares through open market purchases during the one year following the closing, subject to certain extensions and exceptions.

North Louisiana

Highlights:

• Produced 197 Mmcfe per day, a decrease of 34 Mmcfe per day, or 15%, from the second quarter 2015 and a decrease of 20 Mmcfe per day, or 9%, from the third quarter 2014.

EXCO’s decrease in production compared to the second quarter 2015 was primarily the result of normal production declines. 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 and EXCO is currently evaluating plans to drill wells featuring these new completion techniques during 2016.

East Texas

Highlights:

• Produced 52 Mmcfe per day, an increase of 12 Mmcfe per day, or 30%, from the second quarter 2015 and an increase of 27 Mmcfe per day, or 108%, from the third quarter 2014.
• Drilled 5 gross (2.4 net) operated horizontal Haynesville and Bossier wells in the Shelby area and turned-to-sales 6 gross (2.8 net) wells in the Haynesville and Bossier shales in the Shelby area.
• Enhanced completion methods yielded strong results above the current proved reserve type curves.

EXCO’s increase in production compared to the second quarter 2015 was primarily the result of additional wells turned-to-sales. Development included 3 rigs that drilled 4 gross (1.9 net) wells in the Haynesville shale and 1 gross (0.5 net) well in the Bossier shale. The wells turned-to-sales included 2 gross (0.9 net) wells in the Haynesville shale and 4 gross (1.9 net) wells in the Bossier shale. EXCO continues to pursue further reductions in drilling and completion costs including renegotiating rig and completion service contracts, as well as modifications to its well design. EXCO recently renegotiated a rig contract that resulted in a reduction in the day rate of 27%. The Company achieved improved drilling times during the third quarter 2015 including drilling a Haynesville shale well in 35 days to a total measured depth of 19,860 feet. In addition, EXCO’s development of this region will allow it to realize economies of scale and increase drilling efficiency as the Company moves from an appraisal mode to a manufacturing mode. This includes reductions in road and location costs through the utilization of multi-well pad sites and lower mobilization costs due to closer proximity between well sites. The Company believes these initiatives will allow it to reduce future drilling and completion costs per well by 10% compared to the average for 2015, standardized for lateral length and proppant levels.

EXCO recently completed a Haynesville shale well in Nacogdoches County, Texas with a total measured depth of 21,289 feet, the longest in the Company’s history. The well has performed above expectations with an initial production rate of 13.1 Mmcfe per day on a 17/64th restricted choke with a flowing tubing pressure of 9,807 psi. The strong results of this well could unlock further upside as it is located in the predominantly undeveloped southern area of the Company’s East Texas position.

The wells turned-to-sales in this region during 2015 featured enhanced completion methods that have continued to yield strong results. These methods have included the use of more than 2,700 lbs of proppant per lateral foot on certain wells. The increased use of proppant is expected to generate a higher EUR as a result of improved contact and conductivity with the reservoir. The initial results for the average of the wells turned-to-sales in this region during 2015 have outperformed the proved reserve type curve based on an EUR of 1.5 Bcf per 1,000 lateral feet for Haynesville shale wells and 1.3 Bcf per 1,000 lateral feet for Bossier shale wells. EXCO also utilized longer laterals for its wells drilled in 2015, averaging over 7,000 feet.

The East Texas region is the primary focus of EXCO’s 2015 development program, which includes 3 rigs for the remainder of 2015. This will allow the Company to drill 6 gross (2.5 net) operated horizontal wells and turn-to-sales 4 gross (2.0 net) wells during the remainder of 2015. EXCO is targeting a rate of return^(*) of approximately 25% to 30% for the wells drilled in this region during the remainder of 2015.

South Texas

Highlights:

• Produced 7.3 Mboe per day, an increase of 0.1 Mboe per day, or 2%, from the second quarter 2015 and an increase of 1.5 Mboe per day, or 26%, from the third quarter 2014.
• Drilled 4 gross (2.8 net) operated horizontal wells and turned-to-sales 3 gross (1.8 net) operated horizontal wells.
• Improved cost structure through renegotiated sales contract and substantial reductions in drilling and completion costs per well.
• Suspended development program due to low oil prices in the fourth quarter 2015 in order to redeploy capital to other regions with higher rates of return.

EXCO’s increase in production compared to the second quarter 2015 was primarily due to the timing of completion activities and lower downtime. The decrease in downtime was due to more efficient field scheduling of activities and lower shut-in volumes due to offset frac activities. Development included 2 gross (0.8 net) wells drilled and 2 gross (0.8 net) wells turned-to-sales in the Eagle Ford shale. The wells turned-to-sales in the Eagle Ford shale during the third quarter 2015 averaged initial production rates of 770 Bbls per day. EXCO averaged 11.2 days to drill these wells with an average total measured depth of 15,900 feet and was able to extend the lateral length up to 8,800 feet at an average cost of approximately $5.5 million per well.

Development in the Buda formation included 2 gross (2.0 net) wells drilled and 1 gross (1.0 net) well turned-to-sales. The Company turned-to-sales its third operated Buda well at an estimated cost of $2.6 million. The Company has completed 3 gross (2.4 net) operated Buda wells as of the third quarter 2015, which averaged maximum initial production rates of approximately 450 Bbls of oil per day. In addition, EXCO’s first operated Buda well had cumulative production of 86 Mbbls in its first eight months of production. EXCO remains positive on its Buda position as it recently participated in a well adjacent to its acreage that had a maximum initial production of 658 Bbls of oil per day.

EXCO successfully renegotiated a sales contract in this region which improved EXCO’s net realized price for the related oil production and resulted in improved oil price differentials below low-end of guidance for the quarter. In addition, a third-party pipeline became operational during third quarter 2015 that will result in a higher realized price and improve the efficiency of production in the region.

As a result of continued depressed oil prices, EXCO has suspended its development program in the South Texas region for the remainder of 2015. The Company’s acreage in the South Texas region is approximately 81% held-by-production, which allows EXCO flexibility in the timing of development of this region.

Appalachia

Highlights:

• Produced 47 Mmcfe per day, consistent with the second quarter 2015 and a decrease of 9 Mmcfe per day, or 16%, from the third quarter 2014.

EXCO’s production from the third quarter 2015 was consistent with the prior quarter as normal production declines were offset by lower downtime. The lower downtime was due to a pipeline disruption in the second quarter which resulted in wells shut-in while the pipeline was repaired. EXCO’s plans for the remainder of 2015 include 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 82% of the acreage is held-by-production.

EXCO’s decrease in adjusted EBITDA compared to the second quarter 2015 was primarily due to lower revenues as a result of lower realized oil and natural gas prices and lower natural gas production. The decrease in market prices for oil was partially offset by improved differentials as a result of a renegotiated sales contract in the South Texas region. The decrease in realized natural gas prices was driven by higher differentials on recently turned-to-sales wells that EXCO does not operate in the North Louisiana region and wider differentials in the Appalachia region. The GAAP net loss in each quarter of 2015 was primarily due to impairments of the Company’s oil and natural gas properties pursuant to the ceiling test in accordance with full cost accounting.

EXCO executed on its commitment to fiscal discipline during the third quarter 2015, as evidenced by gathering and transportation below the low-end of guidance and operating costs at low-end of guidance. EXCO has implemented several initiatives to reduce its general and administrative costs, including reductions in its workforce during the second quarter 2014 and first quarter 2015, which resulted in a decrease of 21% for the year-to-date 2015 compared to the same period in 2014.

EXCO’s decrease in operating cash flows compared to the second quarter 2015 was primarily the result of lower revenues and less favorable working capital conversions. During the third quarter 2015, EXCO primarily used its cash flows from operations to fund drilling and development. The decrease in cash used in investing activities in the third quarter 2015 compared to the second quarter 2015 was primarily due to lower drilling and completion activity in the South Texas region. Financing activities in the third quarter 2015 primarily consisted of borrowings under the Credit Agreement and proceeds from issuance of common shares to ESAS.

On October 26, 2015, EXCO closed the Fairfax Term Loan and Exchange Term Loan with an aggregate principal amount of $591 million. The proceeds were utilized to reduce $300 million of indebtedness under the Credit Agreement, $376 million in principal on the 2018 Notes and $201 million in principal on the 2022 Notes. The fees and other expenses associated with the issuance of the Fairfax Term Loan and the Exchange Term Loan are estimated to be $15 million. EXCO’s net debt would have been $270 million lower on a pro forma basis if these transactions had occurred on September 30, 2015. In connection with the issuance with the senior secured second lien term loans, EXCO amended its Credit Agreement which established a borrowing base of $375 million. EXCO’s liquidity would have been $395 million on a pro forma basis if these transactions had occurred on September 30, 2015. These transactions triggered a modification of certain covenants in the Credit Agreement, including a reduction in the interest coverage to at least 1.25x and the elimination of the leverage ratio.

As of September 30, 2015, approximately 69% of the 2015 forecasted natural gas production and 53% of the 2015 forecasted oil production has been hedged. During the third quarter 2015, EXCO entered into 2016 swap contracts covering 183 Mbbl of oil at a price of $50.15 and 7,320 Bbtu of natural gas at a price of $3.09, 2017 swap contracts covering 3,650 Bbtu of natural gas at a price of $3.00, and 2018 swap contracts covering 3,650 Bbtu of natural gas at a price of $3.15.

EXCO will host a conference call on Wednesday, October 28, 2015 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#24918640. 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 on EXCO’s website prior to the conference call. A digital recording will be available starting two hours after the completion of the conference call until November 28, 2015. Please call (800) 585-8367 and enter conference ID#24918640 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 Vice President 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.

This press release contains statements that are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, among others, statements regarding estimates, expectations and production forecasts for 2015, estimates of costs and expenses for 2015, and EXCO’s drilling program. It is important to communicate expectations of future performance to investors. However, events may occur in the future that EXCO is unable to accurately predict, or over which EXCO has no control. Users of the financial statements are cautioned not to place undue reliance on a forward-looking statement. Any number of factors could cause actual results to differ materially from those in EXCO’s forward-looking statements, including, but not limited to, the volatility of oil and natural gas prices, future capital requirements and the availability of capital and financing, uncertainties about reserve estimates, the outcome of future drilling activity, environmental risks and regulatory changes. Declines in oil or natural gas prices may have a material adverse effect on EXCO’s financial condition, liquidity, results of operations, ability to fund operations and the amount of oil or natural gas that can be produced economically. Historically, oil and natural gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. EXCO undertakes no obligation to publicly update or revise any forward-looking statements. When considering EXCO’s forward-looking statements, investors are urged to read the cautionary statements and the risk factors included in EXCO’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2015, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 10, 2015 and its other periodic filings with the SEC.