XCO Notes

EAC Acquires Mid-Con / Texas Panhandle Assets From XCO:

• Reserves of 24.6 mm Barrel of Oil Equivalant (BOE)
  
  • 28% oil
    
  • reserve life of 11.6 years (fairly long lived)
    
  • 5,795 BOEpd, (pretty fully developed, reserves are listed as 100% proved developed producing)
    
  • LOE of $6.95 per barrel (low cost to operate)
    
• Acquisition price: $375 mm
  
  • Finding cost of $15.24 per BOE/ BOE ($2.54 per Mcfe)
    
• Nutshell: Win-Win
  • For XCO:
    • Given current gas strip pricing, the gassiness and the seemingly limited upside of the asset , that’s a pretty good sale price for XCO.
    • The deal will give XCO a little more breathing room as they focus on the Haynesville Shale (last 3 wells in the play IP’d over 20 MMcfepd.
    • New net debt to cap is still 90% due to price related writedowns but EBITDA to interest is a much less strangling 5.5x
    • This is the kind of deal you do when you have one play like the assets being sold that is pretty much an annuity and tapped out for upside and you have another play, with which you can inject new capital (like the Haynseville) and receive double digit returns even in a $4 gas price environment.
  • For EAC:
    • it makes sense as well as the fields are old, have been under capitalized of late (meaning they can spend a little and boost production or at least maintain it with less trouble
    • they hedged roughly 90% of expected volumes from the acquisition from 2010 through 2012 at an oil price in excess of $70 and a gas price of $6.99 (not too shabby)

XCO Signs JV To Accelerate Haynesville Development; Receives $904 mm Cash + Drilling Capital

• Yesterday XCO sold low upside properties to raise cash to help develop the Haynesville (see Monday post)
  
• Today XCO announces a joint development deal in the Haynesville Shale with BG Group:
  
  • deal covers 120,000 acres of XCO’s East Texas / Northwest Louisiana properties
    
  • sells down XCO’s interest to 50%
    
  • 84,000 acres are prospective for Haynesville.
    
  • XCO puts drilling locations on the play at > 1,600 with reserves ballparked at 4 to 6 Tcfe in the Haynesville Shale with additional reserve upside in the Bossier shale
    
  • "aggressive development program" planned beginning 2009
    
  • XCO says to date it has drilled 8 wells in the play with average gross initial production > 23 MMcfepd.
    
  • They see drilling another 26 wells by year end.
    
• XCO receives:
  
  • $655 mm at closing
    
  • BG will pay $400 mm of drillilng / development costs, carrying XCO on a 3/4 for a half basis. This is expected to take until 2011 to exhaust the $400 mm at which point each company will pay for half the drilling costs.
• Midstream Deal Also Penned:
  
  • XCO receives $249 mm in cash
    
  • Takeaway capacity for the partners is 440 MMcfepd, expect this to grow soon.
• Nutshell: Exceptional Deal For (XCO)
  
  • Forgetting about the development cash and the midstream deal for a moment, the Haynesville JV works out to $10,900 per acre, a heft sum given the current environment. On a proved reserves basis, the acquisition values proved only reserves at a hefty $3.16 per acre  - BG wanted in.
    
  • The drilling capital gives XCO the ability to target its acreage instead of loose it as leases expire.
    
  • Significant debt paydown. Yesterday I commented that XCO had adequate EBITDA to interest coverage but that the net debt to cap ratio "improved" to a very ugly 90% following their asset sale on Monday. This deal brings in another $904 mm cash, so they have essentially cut their debt load in half in the last 2 days.
  • They expect to have $500 to $600 mm of borrowing capacity post deal and will host an analyst meeting in the near future to update guidance (production numbers will be coming down as these are producing assets) but bringing in a parter of BG’s capacity is a big win for them.
  • The stock is likely to make a significant move today and this kind of news can give it legs, perhaps back to its recent highs and a bit beyond (see daily chart).

Notes from Haynesville JV with BG Conf Call 6/30/09:

• Started out thinking $10mm a well, moving towards, $8.5 mm, at 50 days to drill and complete they will be doing $8.5mm
• Five rigs now, 3 H.S., 1 spudder, 1 CV,
• 3 more rigs coming on this summer
• Contract drillers "much easier to talk to than they were a year ago"
• Carry gets spent at least into 2011, maybe 2012
• Pricing benefit due to BG marketing presence. BG marketing is going to be big help in pricing. "Doing fine right now, but you are looking at a Bcfgpd plus ... want to continue marketing that much gas as properly as they are now"
• Last five wells drilled at 50 day average.
• Last well set a record at 42 days
  • speed important but more important to stay in zone
• Looking at 45 to 50 days as a target

Bossier - there is nothing in the reserves listed for the Bossier, probably take a good look at it in 2010 with BG. 

• Hayensville EUR comments:
  • thought they were 3 to 5 Bcfe (5 to 10 mm ./d
  • at 10mm/d  they thought 6 Bcfe
  • now comfortable at 8 Bcfe
  • think 10 to 12 down the road (just a little early for them to claim that size of numbers)
• Hedges:
  • want to be 60 to 80% hedged as they reduce debt. Might go as low as 50% as debt gets down but for now they will keep it up given the economy.
  • 75% of production is hedged if both of this week's deals happen.
• Acreage: In DeSoto Parish they think land is worth $50 to $60,000 per acre, Caddo Parish would be down significantly from that, Panola parish too early to say

Analyst Day:

• Coming soon, have not seen the date yet.
• Will give new guidance

Marcellus Asset Sale Package:

• Early stage negotiations, could be 6 months out
• 115 Bcf being marketed, production 15 mm/d, so not that big.
• Guess at it would be worth $150mm to $200mm

Target on debt is to get it down from $1.7 billion to $500 mm in the medium term. Thinking more asset sales here including the Marcellus deal outlined above.