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EXCO Developing Two Shale Plays

Posted: Sep 29, 2009 11:32 AM by Eric Fox

Tickers in this Article: SM, FST, GDP, XCO

EXCO Resources (NYSE:XCO) presented the investment case for its stock, based primarily on its strong acreage position in the Haynesville Shale, at its annual investor meeting held last week.

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Reserves
EXCO Resources has 1.5 trillion cubic feet equivalent (Tcfe) of proved natural gas reserves located in four areas in the United States:

Appalachia - 0.3 Tcfe
Permian Basin - 0.1 Tcfe
Mid-Continent - 0.3 Tcfe
East Texas/ North Louisiana - 0.8 Tcfe

Although the company already has large proved reserves in East Texas and North Louisiana, there is considerable upside here as most of these proved reserves are not from the Haynesville Shale, but from the Cotton Valley formation, which lies near the Haynesville Shale.

Haynesville Shale
EXCO Resources' most promising assets are in the East Texas/North Louisiana area, where it has 168,000 net acres under lease. Forty-four thousand of these acres are prospective for the Haynesville Shale. A majority of the acreage is held by production, so EXCO Resources is not under any time pressure to develop the acreage.

Proved reserves in the Haynesville Shale are only 120 Bcfe, but EXCO Resources believes its total proved, provable and possible reserves, or 3P reserves, to be 1.2 Tcfe. An even more optimistic scenario by the company has reserves as much as 2.3 Tcfe from the Haynesville Shale.

EXCO Resources also holds the honor of operating two wells in the Haynesville Shale that came in with the highest initial production rates, at 30.1 and 29.6 million cubic feet per day (Mmcf/d).

Like all operators in emerging shale plays, EXCO Resources has focused on drilling efficiencies to reduce costs. The company has cut drilling days per well from the high 60-day range down to only 40 days. This has led to a drop in drilling and completion costs per well from $13 million at the beginning of the year down to $9 million currently. The company's goal is to reach $8 million.

EXCO Resources is in a joint venture in the Haynesville Shale with BG Group. EXCO Resources received approximately $727 million from BG Group, which also agreed to pay part of the capital expenditures needed to develop the acreage.

Other exploration and production companies with positions in the Haynesville Shale include Goodrich Petroleum (NYSE:GDP) with 63,500 net acres, Forest Oil (NYSE:FST) with 11,000 net acres, and St. Mary Land and Exploration (NYSE:SM) with 50,000 net acres.

Marcellus Shale
EXCO Resources is not content with just the Haynesville Shale, and is operating in the Marcellus Shale as well. The company has 348,000 net acres under lease, and has been drilling vertical test wells to perfect its technique. The company will begin its horizontal drilling program in 2010.

The transaction with BG Group and a divestiture of some non-core assets has put EXCO Resources back on track financially. The company has reduced its net debt from $2.8 billion to $1.43 billion, and has approximate liquidity of $600 million to fund its capital program.

EXCO Resources has a significant acreage position in two of the largest natural gas shale plays in North America, along with some legacy assets in the Permian and mid-continent area. The company has also righted itself financially and is ready to develop its shale acreage over the next couple of years. (To learn more, check out our Oil And Gas Industry Primer.)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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