Exco Resources (NYSE:XCO) is an oil and natural gas producer with operations in the Haynesville, Marcellus, and Permian regions.
Shares of XCO are down about 60% from the initial takeout offer proposed by the current CEO in 2011. Shortly thereafter, natural gas prices tanked and the company's finances were strained; the stock dropped as low as $5.85.
Though shares have rebounded to $8.13 as of last Friday's close, the company looks cheap at a market cap of $1.75 billion, annual FCF of $1 billion, and several intermediate-term catalysts.
- Cost Cutting - Exco has been aggressively cutting capital spending and is guiding for $1 billion in 2013 FCF. Its capital budget for 2013 is 45% lower than it was in 2012 at $273 million, and well costs in the Haynesville shale have declined 12%. On a YOY basis, Q1 direct operating costs per Mcfe were down 30%.
- Sale of TGGT Holdings - TGGT is a midstream business with operations in East Texas and North Louisiana. The company has a 50% stake in TGGT, and believes it can obtain $500-$700 million for its share. Management said it's talking to a few interested bidders on its most recent conference call, so it seems more likely than not that a deal gets done before the end of the year. The proceeds would be used to pay down some of the $1.33 billion in debt.
- Significantly improved balance sheet - Exco had a severe liquidity crunch as natural gas prices were bottoming, but the company has been paying off a large portion of its debt. Long-term debt declined from $1.85 billion in Q4 2012 to the current $1.33 billion. Of this debt, roughly $750 million is in the company's 2018 7.5% senior unsecured notes, and the remainder is essentially limited to a credit agreement of about $500 million. A sale of aforementioned TGGT would leave XCO with $500-$700 million to either tender for some of the outstanding notes or pay back the credit facility. The terms of the facility state that XCO cannot pay a cumulative dividend of more than $50 million over any four consecutive quarters, so my guess is that would be the primary debt target.
- Strong Shareholder base - management also stated on the call that it knows ten people who cumulatively own 70% of the stock. Howard Marks' Oaktree owns 17%, Wilbur Ross (who also serves on the board) owns 13.7%, and Invesco (NYSE:ICS) owns 14.5% for a group total of ~45%. CEO Doug Miller owns about 1.5%, and board member/energy guru Boone Pickens owns about 4.5%. That's a little over half the outstanding shares accounted for, and most of these guys have entry points well above the current price of $8.13.
- "Shareholder friendly" management - Or at least interested in increasing the value of their equity. The current CEO Doug Miller tried to take XCO private in 2011 for $20.50 a share in a leveraged buyout proposal, and has been very open about the possibility of trying to go private again or even changing the structure to an MLP (see conf. call Q&A). The company pays a 2.3% dividend.
- Strong hedging program prevents significant downside, and natural gas price outlook is bright - 65% of the company's 2013 nat gas production has been swapped at $4.17, so a surprise collapse in prices as we move into the second half of the year shouldn't be catastrophic. I don't foresee such an event taking place anyway; if you read the quarterly reports of the other major producers like Chesapeake (NYSE:CHK) it's clear that they are being extremely cautious about bringing gas to market. Industry nat gas rigs held steady at 354 last week, four away from the lowest level since 1995.