EXCO Resources (NYSE:XCO) announced on Friday that they would delay the filing of the MLP shares associated with the acquisition of Winchester Energy earlier this year. The reason given by CEO Doug Miller was, “the filing would preclude EXCO from considering several transactions in its area of operations”. I indicated in a November 19 report that the filing might be delayed sighting:
• Accelerating activity in the Cotton Valley Trend as discussed on the recent XCO conference call.
• The recent breakouts of Goodrich Petroleum (GDP) and GMX Resources (GMXR) as clear indications of heightened interest surrounding horizontal drilling in the trend.
• The pipeline business is also seeing new activity and opportunities, as a result of recent drilling success and subsequent production increases.
A new report on the Cotton Valley Trend, issued by Harry Chernoff of Pathfinder, caught the eye of Melissa Davis at TheStreet.com last week.
Financing for the Winchester Energy acquisition is all off balance sheet in EXCO Partners. The debt is secured by the Winchester (and other XCO Cotton Valley assets) in the form of EXCO Partners LP shares. This almost assures an eventual MLP filing and offering to reduce the debt, some of which is a “bridge loan”. It has also been their intention to do a rights offering to existing XCO shareholders once the MLP is filed. This would likely take 60-90 days, delaying the actual MLP offering into Q1 2007.
Boone Pickens, Doug Miller and other management are significant shareholders in XCO. It is their deal making expertise that originally attracted me to the stock. I think that something significant might be going on in East Texas. If the MLP were filed, it would preclude them from adding assets or entering new ventures until the offering was completed early next year.
I believe the recent pullback in XCO shares is a buying opportunity as shareholders, disappointed with the delayed MLP offering, are pressuring the stock. I'm looking for a flurry of good news from EXCO before yearend.
Disclosure: The author is long XCO. He has no position in other companies mentioned in this report.