EXCO Resources' CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: EXCO Resources, (XCO)

EXCO Resources (NYSE:XCO)

Q4 2010 Earnings Call

February 24, 2011 10:00 am ET


W. Clarke - Chief Compliance Officer and Assistant General Counsel

Douglas Miller - Chairman of the Board, Chief Executive Officer, Chairman of EXCO Holdings, Chief Executive Officer of EXCO Holdings

Paul Rudnicki - Vice President of Financial Planning & Analysis

Harold Hickey - Chief Operating Officer and Vice President

Stephen Smith - Vice Chairman, President and Secretary


Jack Aydin - KeyBanc Capital Markets Inc.

Sachin Shah - ICAP


Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2010 Earnings Release Conference Call. [Operator Instructions] Mr. Miller, you may begin your conference.

Douglas Miller

Thank you very much. Welcome everybody to our fourth quarter and year end conference call. Before I get started, one of our lawyers is going to have to read our disclaimer. So go ahead, Justin.

W. Clarke

Please note that you can go to our website at excoresources.com to access the presentation slides that will be discussed on today's call. The statements that may be made on the call regarding future expectations, plans or forecasts including future financial and operational performance, business strategies, market prices and derivative financial instrument activities and other statements that are not historical facts are forward-looking as defined in our U.S. Federal Securities laws. You are cautioned not place undue reliance on those forward-looking statements because our business plans and forecasts may change. Please refer to Slide 18 to 19 of the presentation for a complete text of our forward-looking statements.

In addition, our website has our earnings release, which contains additional information regarding the preparation of our financial disclosures including reconciliations of certain non-GAAP financial measures that will be discussed on today’s call. Doug?

Douglas Miller

We did have a great quarter. We've got everybody in the room here, so when we get into questions, we can answer quite a few questions, but I just want to tell you that we have been very busy. We are in the throes of a go-private and the only things I can even talk about are what that -- of public domain so keep that in mind when you're asking questions and we'll get started.

Slide 3. They narrowed me down to one slide, I usually have 10 or 15 but they do one in the hook.

Fourth quarter production grew year-over-year 70%, and I think you've heard me talk in the past that we had certain targets this year. We wanted to exit first quarter at 450, second quarter at 500, third quarter at 550 and fourth quarter of '11 at 600. We're on target. Actually, we have -- what were we counting our shut-ins, we do have about -- how much shut-in?

Stephen Smith

A little over 30 million.

Douglas Miller

30 million a day shut-ins and we're producing today about 415. So we're at about 445 if we can turn those on. But we'll get into the shut-in feature of our reserves here in a little while at some parts come up and ensure. But again, production growth was on target or slightly better.

Reserves replaced 576%. I want everybody to know that we spent more time on our reserves than we have in my 30 year history. March's team, for the last three months, we've been working these things with the new SEC rules and with the success these things are scrubbed as much as you can scrub a reserve. So up 56% to 1.5, F&D cost, it says $0.54 here but that includes the carry. We'll get over to that slide here in a minute.

Haynesville, we started 80-acre spacings. It's been very successful and we'll get it operationally where our plans are, but we did also make a couple of acquisitions down in that and what we consider a similar rock area down in the Shelby Trough. Initial results have been very good, Harold will get into that, we are trying to add in both areas.

We did venture, BG joint venture in Appalachia. We have two or three targeted areas up there. We did close one transaction since, even since we announced to go private and achieve. We do have a program going on, only one rig, but some pretty good results so far up there. Again, we're looking for additional acquisitions up there.

We're still running the company, we're not standing still. An acquisition, like I look at it, when we do the deal, if we weren't going private, if the answer is yes and would we do the deal if we were private and the answer is yes, we're continuing to do so.

We continue to look at deals. We're very busy around here.

And anyhow, we'll get into our operational success. And it's quite exciting. Steve, why don’t you take over.

Stephen Smith

Let's go to Slide 5 which is just a snapshot of the financial aspects of the quarter and the year. We were at $114 million of adjusted EBITDA for the quarter, which is about the same as it was for the third quarter, even though we had about $0.25 less average gas price. So good solid quarter in all respects. On the full year again, we're up into the close to $500 million of EBITDA. Adjusted EBITDA is $478 million. We're expecting that to be in excess of $675 million or so for the year. I think we're forecasting or guiding toward $683 million, which is -- would be a 4.3% increase.

Production, as Doug mentioned, were 350 Mmcfe/d for the quarter. That's up 10% over the third quarter and 70% over the fourth quarter last year. The year production is 307 Mmcfe/d average. We're expecting guiding toward 550 Mmcfe/d on average for '11, which would be a very substantial increase.

Some of the other things that we're particularly proud of, of course, is the F&D statistics and we'll get into it. But even adding back the carry, we're at about $1.03 finding and development cost overall, all in proved finding cost and finding and development and we'll talk about the proved develop.

Annually, has continued in a downward trend, which is good. We were down 16% on an Mcfe basis from the third quarter and 22% down from the first quarter, so we're still making headway in LOE. We're making headway in G&A. We're down 8.5% there from the third quarter and 20% from Q1.

So all in all, a good quarter. As Doug said, we made about $530 million net dollars in acquisitions last year, which is over $1 billion when you take into account the fact that BG had half of those. And we've done another close to $0.5 billion gross in the first quarter or will have finished in the first quarter.

On 6 is our Liquidity and Financial Position slide, I'll draw your attention to the pro forma, which reflects the $230 million that BG paid us for their half of the chief acquisition and also a distribution from our pipeline company of $125 million. So our bank debt at the end on a pro forma basis was $560 million at December 31 pro forma. And then we have a $750 million of 7.5% senior notes due in '18, we did that deal last year, paid off the '11's and paid down the revolver.

We also entered into a credit facility pipeline accounting, a $500 million credit facility. That was the source of the distribution to us during the first quarter.

And that credit facility will allow us to avoid making any capital cost to the pipeline company, which is carried on the equity method of accounting.

So net debt is about $1.1 billion. The borrowing base is $1 billion and we expect to redetermine that on or around $1.5 billion in March. So we got a lot of liquidity at this point, we’ll have a lot more once we get our borrowing base redetermined next month.

Page 7 is the Production Slide that we've shown. It shows the ramp down in production from the beginning or the end of '08 due to asset sales and then also the ramp down of the debt. The other thing we've added to this slide is the guidance, the midpoint of the guidance for each of the four quarters in '11. And like Doug was saying, we're kind of on track to the 400, 550, 600 et cetera. So we're hoping to be around 650 for the fourth quarter of '11.

Our debt will grow some just because the capital expenditures during '11. But still, it will be less than $1 billion of bank debt and $750 million of bonds. So our balance sheet is in good shape.

I'm going to turn it over to Paul and let him get into the guidance and some of the other financial matters. Paul?

Paul Rudnicki

Thanks, Steve. I'll pick up on Slide 9. Comparing our fourth quarter actuals to the guidance we put out in the prior quarter. As we pre-released our production, just showing again that we were impacted by 21 million a day of shut-ins that how we'll get into during the operating section.

Looking at differentials, GAAP differentials came in above our guidance, positively. Mainly as a result of the high BTU content in the Permian area with these low gas prices and high liquids prices it impacts our differential meaningfully.

Other operating expenses came in basically in line with our guidance. The one item that came in above gathering expense, we had a third-party firm transportation line that was ahead of schedule and so we’re reflecting the incremental cost of that gathering, although we didn't fully use it for the quarter.

Production taxes came in below our guidance as we continue to receive our severance tax abatements in the Haynesville area.

Other income was a loss of $4.2 million versus our guidance of $250,000 to $500,000. The main contributor there was an inventory valuation related to some pipe we are holding.

The other thing I want to point out is on our interest expense. We came in $1 million below the low end of our guidance, mainly as a result of increasing our capitalized interest portion.

And the final thing to point out is our equity method income in TGGT came in well below guidance, primarily resulting from some final reclamation cost and maintenance cost as we're continuing to clean that system up on the legacy assets, and we expect that to be cleaned up this year 2010.

And one last item to point out, our income tax rate for the quarter continue to be 40%, although our deferred came in at 112% of our 40% and that was the result of receiving an income tax credit for prior expenses booked.

Going on to Slide 10, laying out the details of our 2011 quarterly guidance. As Steve mentioned, we're guiding towards about $550 million a day on the midpoint, roughly 200 Bcf for 2011, a significant increase from 2010.

As the other thing to point out, as we continue to have our volumes growth at this pace, our operating expenses are expected to continue to go down on a per unit basis. The midpoint of our guidance for the year we're expecting them to come in around $0.42 per Mcfe. You can go through to guidance on a quarterly basis and receive reflecting of our drilling for this year.

Going on to Slide 11. I just wanted to walk through our year end in proved reserves. In terms of the F&D costs, the path lead calculates are total proved F&D as we have discussed before. It's primarily driven by the activity in the Haynesville where we show a $0.30 F&D. That's obviously impacted by the carry from BG, but even without the carry it was $0.92.

Rolling that forward through all of our other items, including our revisions, it has ended up being $0.54 and without having the benefit of the carry, it would've been $1.03.

Looking at our proved developed reserve costs, we've excluded cost incurred for out-of-period bookings. So if we were spending money on wells that we booked in 2011, we've excluded those costs. But again, you can see $124 million net debt still incurred in the Haynesville, 190 Bcf of proved developed reserve adds which resulted in the $0.65 F&D costs. And again, applying the portion of the BG carry attributable to those costs and excluding that benefit, our F&D cost would've been $1.98.

The conditional items, predominantly, are our Permian assets which again are heavily oil, 40% oil, 60% gas, and the gases as we discussed the high liquids content. So on an overall basis, our F&D costs came in at $1.24 on a proved developed basis and excluding the benefit of the carry, it would've been $2.30.

My final Slide on Slide 12, just going over our hedge position. This includes all the hedges that we have entered into since year end and reflecting the full year 2011 volumes. You can see we're hedged at about 45% of our expected volumes for 2011 at $5.30 on the gas and $111.32 on oil for an equivalent price of $5.78.

We're about 23% hedged for 2012 and have some small hedges out for '13 at this point. We will continue to add hedges as we feel appropriate with commodities as they're moving with the high rate of returns that we're getting in these areas where we are developing even at $4 gas price, we will continue to hedge even at these levels.

And with that, I'll hand over it to Harold to discuss the operations.

Harold Hickey

Thanks, Paul. Picking up on Slide 14. You can see the company has become very focused. This is a great set of assets to work with. We operate our three divisions, two out of Dallas, the Permian and the East Texas/ North Louisiana. One out of our Pittsburgh, the Appalachian division. This portfolio's got about 7,700 wells in it, 94% of them are operated by us, so we control our spending. Our production continues to grow, as Doug said, we're about 415 million a day and capped the shut-in, we'd be pushing 450 million. About 1.6 Tcfe of proved reserves when you look at this thing on the management price decks, which is detailed in the footnotes going from 450 million to a tale of six. Half of our assets on the proved basis are in shales, but our upside is of course dominated by the shales. Great acreage position, a significant amount of which is held by production.

We've got nearly 950 employees today, and we're continuing to add key technical people, particularly up in the Appalachia.

Slide 15 starts to hone in on the 2010 results and accomplishments. Our results as far as production growth and reserve growth were dominated by the Haynesville this year. We were replaced, like Steve said, the production monetized in '09 and '10 divestitures and JV transactions. We've really proven to ourselves that we can grow, both through the drill bit and through acquisitions. We've gone from having one rig drilling horizontal wells at the end of '08 to 22 in Haynesville today.

We've got to key areas in Haynesville. This Haynesville play in our mind has shrunk from 5.5 million or 6 million acres down about 600,000 or 800,000-acre play with a couple of key core areas. Wherein about one DeSoto Parish and one down in the Shelby Trough year.

In DeSoto Parish, we're drilling with 16 operated rigs. In the Shelby Trough area, we're drilling with six.

In Shelby, those six rigs are in a position to ensure that all of acreage we want to hold by year end will be held, so we're moving to an HBP position there. We've had some exciting, exciting results in the Shelby area.

First, we've announced some of our 23 million, 28 million a day wells in the Haynesville prior to today. But we are ready to announce that in the Bossier, our first test down there came on at $25.5 million a day and nearly 7800 psi. So great results down there. Very exciting.

In Appalachia, as you all know, we completed the JV. We got a total of $790 million in cash plus $150 million carry that's subject to some post-closing adjustments. We're moving forward with the combination of a development program and an appraisal program there. We've had two rigs operating there early this year. We're going to go to four or five by year end. Our plans are to drill 12 horizontal appraisal wells and drill 52 or so operated development well. With the operations for development focused in newly acquired Chief Area. We'd had some great results; we got a 10 million a day well there which we previously announced. And in the West Central Pennsylvania area in Jefferson, in Armstrong Counties, we're also going to move towards development.

You see, we spun 194 wells in 2010. We produced 1,125 Bcfe. One thing I want to point out is in drilling program. And I'll talk about midstream in a moment. One thing that's real key to us is getting our wells online quickly. In turn, we have a very, very low inventory of wells waiting completion. We've got about 17 to 20 at any given time. So we're really proud of that statistic, and as we've noted before the midstream being a strategic piece of business for us, allows us to get our wells to the market immediately after we complete the wells. So on average, we're turning to sales just in days after we've completed the wells.

Going over to the right side of the Slide, you can see some details on our reserve growth. Through the drill bit, we added some 646 Bcf in extensions and discoveries. In turn, that led to the 576% production replacement.

Another thing I want to point out on here is this is the first year we've really had positive revisions. What we've done is we've rested some of our declines, and in particular in the Vernon Field, where we stopped drilling because of the economics. We were able to get an analysis of the terminal decline as we see it. We added some 90 Bcf in Vernon to that asset.

So an outstanding year, we did have some sales that we reduced our reserves as a result of the BG, J.B. up in Appalachia and of course within our production, but ended the year at 1.5 Bcfe.

Now in the core DeSoto area of the Haynesville, we have been able to book reserves on 80 acres facing. And everywhere else in Haynesville, we’re booking on 160s. But in that core DeSoto area, like I said, we're booking on 80, that's allowed us to increase our proved reserves per section from 26.4 Bcf last year to 48.8 Bcf this year. So that's 6.1 Bcf per well.

We're continuing to see improvements in our production in our estimates. Another statistic I want to note is that we had some 30 or so wells online last year that we had booked at 6.2 Bcfe because of their performance we've been able to increase that EUR to 7.2 Bcf at this point. So we're getting some really good results out of our Haynesville operations.

In Slide 16, you can see a forecast of our '11 budget. The board approved a $976 million budget for our E&P operation. That's up from $500 million in 2010. In this budget, we plan to drill some 369 wells, 233 of those will be in East Texas/North Louisiana. And of those 233, 163 are operated. In Appalachia, as already noted, we're going to drill 64 operated wells, 12 of which are appraisals. And in the Permian area, where we're getting 60-plus % rates of return, we're going to drill some 72 wells. So we're going to have a very active program this year. Everything we're drilling meets our minimum hurdle rate of 20% [ph] BTRRR. And when we look at those economics, we don't consider hedges, we don't consider the carry, those economics stand on their own.

Now as we move through the year, we're going to be very conscious of what these economics are and what the prices are telling us to do. So we do have some flexibility, particular starting in the third quarter. If we need to drop rigs because the economics tell us to, we will. And what we do believe is that if prices decrease, that's going to continue to give us opportunities to look at acquisitions.

We don't budget for acquisitions. They're opportunistic, like Doug always says, we're exclusively looking, frankly, for bolt-on type acquisitions in the areas of the JVs where we have found the best rock, and where we think we're going to be able to have significant growth.

Now, I'll point out in the budget. If you look at Appalachia, you'll see about $28 million per drilling completion and about $10 million for exploration, that number is artificially low for us or frankly, it's low for us because BG's carry is going to apply there. And at this point, BG has about $125 million of carry remaining in Appalachia. So Haynesville is going to be our big focus. That's where we're going to grow. We've got the 16 rigs and into manufacturing mode in DeSoto. I do have to hesitate for just a second and say when we drill in this manufacturing mode, the drilling from multi-well pads, you've got alternate wells in some of these sections and when drill these wells that are offsetting existing wells, we do have to shut-in these producing wells for a couple of weeks or so to ensure that we don't have interference from the fracture stimulation operations.

The six rigs in Shelby, I've talked about it's going to be continuing to delineate and hold acreage. In the Marcellus, I've talked about the number of wells we're going to drill there. We've had some unbelievably good results recently. We had the best drilling performance to date in the Marcellus. We actually went from spud to rig release in nine days on one of our Marcellus horizontal wells. So big focus up there, understanding the rock, moving towards development and very key is building out infrastructure and I'll talk about that in a moment.

Permian, we're going to operate with two drilling rigs. We've been doing that since mid-year last year. We'll continue that, and we have probably three years or so of drilling left in that area and with the 60-plus percent rates return because of the high liquids content. We're going to continue that program.

And the last slide I'll talk about is on Page 17. It's addressing our midstream. I've talked about how the midstream allows us timely well hookups and good access to market. TGGT is actually flowing more than 1.2 Bcf a day now, it had some great growth. In the DeSoto area and the Shelby area, which are depicted on the map on the left side of the page, we'll be following mostly equity gas. In our Legacy system up in Northeast Texas, we've got a significant amount of third-party contribution.

Over in Appalachia where we have a limited amount of existing infrastructure, it is worth pointing out that we have a significant number, a good number of interstate pipes that go through there. So the interstate system, if we can get it to the interstates, we're going to be in great shape. All of our drilling that we're going to do this year among 64 wells we have planned to either flow them to sales with pipe we’re putting in the ground now or flowing the sales through pipe that’s already in the ground. So we're in great shape this year there.

With that, I'll turn it back over to Mr. Miller.

Douglas Miller

Thank you. We're going to open this up to questions. But in conclusion, unfortunately, we're a gas company, and that's where we're going to stay. We have some spectacular areas. This company's 95% gas, we have one little oil area where there have been spectacular results. When he said 60% rate of return, that's assuming $75 oil. So I think it's better today, right, Steve?

I noticed today a couple of things, just to point out, I noticed that gas in England spiked up to $10.30 per Mcf. And I was talking to Paul before and he said he's never heard of or seen where gas was at 25-to-1 but that's exactly where we are. Obviously, the world still thinks gas is going down, everybody thinks it's easy. The short position out there is at an all-time record, and we kind of hope it stays down. We kind of think 350 Mmcfe to 450 Mmcfe for the next 12 to 18 months is where we like it to be just because I think we'll be able to make some more acquisitions. The only thing that scares me is we had a slightly different winter than normal. And so our storage, which is now down below 2 Tcf with about six weeks to go, I'm kind of thinking we might get it down to 1.5 Tcf, 1.6 Tcf and that would be kind of on the low end. I think it might create a little ruckus. And maybe we get a mini-spike up, which we really don't want right now.

With that, I'm going to turn it over to questions. Michelle, if you have any questions, we're here to answer any legit questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Sachin Shah from Capstone Global.

Sachin Shah - ICAP

In your slide, you haven't put up an update on what you think NAV for the company is. So I just want to get an update, an approximate range on where you see the NAV value?

Douglas Miller

I think it's 20 to 50 -- I'm kidding a little. And I had that question yesterday. A guy called me and he said your old slide showed 25 to 30. The thing about it is with prices where they are, clearly values of these companies go down. It doesn't matter what model you run. If you run the forward strip and I would say, somewhere between 20 and 22 is exactly where it's going to be and it would be tough for us to do that because the prices are so volatile right now. But I think you're going to see 20 to 22.

Sachin Shah - ICAP

As far as the kind of timing, is there kind of any update on the Special Committee? They haven't said anything since a few months. Over the past few weeks a lot of confidentiality agreements have been signed including yourself, Wilbur Ross as well. So a lot of the shareholders, including Wilbur Ross, have signed a confidentiality agreement. So I just want to find out if there was an update on the Special Committee side, when we should expect them to say something in addition to the confidentiality agreements that have been signed?

Douglas Miller

One of the things I've learned here is that I can't speak to the Special Committee. We have signed some CAs, we're aggressively working towards getting our data put together. Special committee is out trying to get third-parties in here as fast as they can. So I would -- we have a board meeting next week, which will be the first time I'd talk to the Special Committee since they teed off. So if they have a progress update, I'd say it started out slower than I had hoped to get the CA signed, took us a couple of months as you can tell in the press. And since we got them signed, it's picked up steam and we're moving right along and they're doing a good job. We're getting people in. CA signed and groups gathering and I think when I said it was six months to a year the last time, I'd say we're hoping that it might be closer to the six months. But I think the Special Committee, if they want to say something, and we'll push them to, to try to get something out in the press next week.

Sachin Shah - ICAP

You mentioned six months from November or the last quarterly results. So are we on track for approximately another three months?

Douglas Miller

If everything winds up, I'm hoping to shoot fireworks off to celebrate.

Sachin Shah - ICAP

Within three months?

Douglas Miller

When's the Fourth of July?


[Operator Instructions] Your next question comes from Jack Aydin from KeyBanc.

Jack Aydin - KeyBanc Capital Markets Inc.

Operational equation, could you share with us how many horizontal wells you'd be able to put online in 2011?

Stephen Smith

About 15 wells per month in the Haynesville/ Bossier area. And up in Appalachia, you can assume probably 75% or 80% of those we spuds.

Douglas Miller

What's the number?

Stephen Smith

We're going to spud 64.

Jack Aydin - KeyBanc Capital Markets Inc.

What is your current corporate decline rate, in horizontal wells or in Haynesville?

Douglas Miller

Haynesville, in our core area, we have a special type curve. It's a three-phase type curve. It's 99% the first 30 days. And so then after that, we go to 70% decline for 14 months and then we go to a B factor of 1 with a terminal decline rate of 8%. So 99%, 70% and then a B factor of 1, which just slopes down. So these things crash the first month. But I'd say, if we shut down today, no rigs, we'd be on a 40% decline rate.


I have no further questions at this time. I turn the call back over to you, Mr. Miller.

Douglas Miller

That was pretty easy, you guys minded the lawyers, I appreciate it. I just can't say. I think we're going as fast as we can. Everybody around here is working their rumps off. So we are in board meetings next week, so if anything comes out of that, it will be announced, but the team has been doing spectacular. Again, I think I told you the reason I'm trying to buy this thing is really the assets and the people and hopefully gas stays down where we can make some additional acquisitions.

With that, I'm going to sign-off, and we'll see you next time. Thanks.


This concludes today's conference call. You may now disconnect.

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