East Texas is now getting quite a bit of attention in the industry. Several other companies, including GMX Resources (GMXR) and Devon (DVN) are also drilling horizontal wells targeting the Cotton Valley. Devon has completed its first horizontal well in the Carthage area of Panola County. The Haygood #1well tested at 9.9Mmcfe per day. Devon estimates the reserves from the well to be 8-9Bcfe. The first Goodrich well is 12 miles to the northwest of Haygood. In their Q3 press release, Goodrich estimates that a single horizontal well can add between 3-6Bcfe of reserves and thus lower finding costs by 30-65%.
EXCO recently purchased Winchester Energy from Progress Corp, for $1.1B, significantly adding to their Cotton Valley Trend assets. EXCO has combined these assets with existing properties to form EXCO Partners LP. They are expected to file a registration statement this month to sell half the MLP shares in a public offering. But given the current excitement in East Texas, perhaps EXCO should delay the offering while they evaluate their growing development options in the area.
Thanks to the steady rise in its shares, off its $23 June low, the enterprise value of Goodrich now stands at about $1.2B. It would appear from the Goodrich valuation, that EXCO made a very good deal with the Winchester acquisition. Goodrich makes an excellent comparison, as they are essentially a “pure play” in the Cotton Valley Trend. The combined EXCO Partner’s assets will have daily production of 110Mmcfe, more than twice that of Goodrich’s 47Mmcfe. Total proved reserves total are 582 Bcfe vs.173Bcfe at Goodrich. Net acreage of 160,350 acres compares to 94,000 at Goodrich. In addition, the EXCO Partner’s assets will include a large gas pipeline/gathering system in the Cotton Valley Trend.
On the conference call last week, EXCO CEO, Doug Miller spoke of the excitement coming out of East Texas due to the horizontal drilling and new fraccing techniques. They have already met with Schlumberger (SLB) and Haliburton (HAL) regarding EXCO prospects and are closely watching horizontal drilling results on properties surrounding their acreage. Miller also indicated that there were some very interesting joint venture and “low pressure” upgrade opportunities in the pipeline business. Not surprising considering the type of production increases now being generated in the area.
The recent appreciation in Goodrich Petroleum is a clear indication of the growing value of Cotton Valley assets. The current Goodrich valuation goes a long way to support a $23 (proposed offering price) for the 104MM EXCO Partner shares. This equates to $11.50 book value (net of debt) for just the EXCO Partner assets.
With over 1MM net acres, 100Mmcfe/d production and 730Bcfe of proved reserves outside the Partnership, EXCO Resources shares remain undervalued.
Disclosure: The author is long XCO but has no position in other companies mentioned in this report.