05
Aug

XCO Blows Out Numbers; Frankly Discusses Rising Operating and Cash Costs; Increasingly Targeting the Shales: Pre Call Note

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2Q Numbers:

  • Revenue of $458 mm (ex item) vs $324 mm expected. This may or may not be comparable to analyst estimates as you can't tell if they backed out the hedge loss)
  • EPS of $0.34 vs $0.24 expected (this should be comparable)
  • CFPS of $2.21 vs $1.47expected (range was $1.01 to $1.70), (this too should be comparable with analyst estimates)
  • Operating Costs on the rise: LOE up from $0.95 per Mcfe in 1Q to $1.13 in 2Q. This is a warning flag. If you don't grow fast enough, increased fuel and other operating costs will eat you alive. In a stagnant or declining commodity price environment this is going to start hurting.
  • Production: 394 MMcfepd, in line with guidance, up 2% seq, current production > 400 MMcfepd.
  • Capital budget increased to target their shale positions.

Other Notable Items

  • Capital Costs are Rising:
    • Casing and tubular costs are up 40 to 80% since the start of the year. Wow.
    • Rig dayrates are up from $18,000 at beginning of year to $21,500 with some of the 1,500 hp rigs moving up from $23,500 to $27,000.
    • they said many of their rigs are on longer term contracts so not as much of an impact yet.
  • Guidance: They are now planning to drill fewer wells, refocusing from Shallow Cotton valley and Appalachian wells to more shale wells.
  • Haynesville Shale now increasing focus.
    • 119,800 acres mostly held by production
    • 17 vert and 3 horizontals planned for this year
    • seeing shale thickness of 200' in Harrison, Tx and Caddo and DeSoto, La. vs 350' seen by (GMXR) in their Tx shale
    • But also getting IPs of 800 to 2,800 Mcfgpd from the first 4 verts which is not too shabby.
    • Signed long term deals for 5 1,500 hp rigs
  • Appalachia - refocusing on Marcellus and Huron shales now, drilling 229 instead of 330 planned conventional wells in the division.
    • 1.1 mm acres with 395 K in the Marcellus, largely HBP
    • First horizontal Marcellus will complete during 3Q; found 194 feet of high porosity, high organic content section.
  • In a Nutushell: Great quarter by the numbers. No cost guidance but several ominous cost statements. Not happy with the operational cost side of the income statement and while I think the stock is overly beaten up, numbers are likely to come in given the less zealous gas price environment analysts are now looking for which could yield some near term weakness, especially when analysts bring down their conventional growth assumptions from Appalachia, a region which garners higher differentials to NYMEX than elsewhere in the U.S.
  • Conference Call: Wednesday, 2:30 pm EST.

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