During the February 24th Q4 2010 conference call (see transcript here), Q&A, Miller was expectedly quiet about the deal, but he did provide some interesting information.
When asked for an update on the company's net asset value (NAV), Miller gives a range of $20 to $22 per share. In a July 2010 corporate presentation, the company gave a $25 to $37 estimate for NAV.
When asked about the special committee's progress, he stated that he expects to meet with the special committee next week and that the committee has had third parties "in here as fast as they can." As for a timetable going forward, he's optimistic that things will resolve themselves by July 4th.
EXCO Resources bulls can't like Douglas Miller's new NAV estimate of $20-22 per share, especially since the commodity and energy markets have sharply increased since the July 2010 presentation. This new NAV estimate range from Miller may signal the upper limit to how much he's willing to pay. But still, investors should remember that the NAV estimate in the July 2010 presentation was the company’s estimate and the $20-22 range given by Miller was his personal (and possibly biased) opinion.
Considering the strength in the energy markets and the seriousness of the management offer, EXCO provides a good special situation investment. Investors should consider accumulating shares on market weakness. To minimize exposure to natural gas, investors can combine XCO with a short position in First Trust ISE - Revere Natural Gas Index (FCG). While XCO has lagged FCG during the last few months, FCG represents one of XCO's best statistical and fundamental hedges against natural gas industry price trends.
Just to review:
In November 2010, CEO Douglas Miller announced that he submitted a non-binding proposal to buyout the company at $20.50 per share in cash. His buyout would involve the company's largest shareholders: Oakmark, Ares and Boone Pickens who own around 27% of shares outstanding. In the days before the announcement, the stock was trading around $18.50.
What makes this stock interesting?
- Wilbur Ross's investment company announced on December 10 that they accumulated a 7.5% stake in the company at an average price of $18.53. His interest in the stock is uncertain. While it's possible that he's just treating this investment as a risk arbitrage or that he may join the buyout group. I think there's a possibility that he'll act as a catalyst to drive up the deal price. Wilbur Ross currently owns about 10% of the company.
- Before the management announced their buyout, they had long claimed that the stock was undervalued. In a July 2010 powerpoint presentation to shareholders, they estimate that the company's net asset value is between $25 and $37. By 2014, if natural gas prices hit $5 to $6, they think the NAV goes to $50 to $60 (see the investor presentation here).
- The company currently trades near the management buyout price, but at a discount to the CEO’s recent estimate of NAV and the company’s July 2010 NAV estimate.
- The CEO repeatedly stated that the buyout was not a bet on natural gas prices and as such he stands behind the buyout price even if natural gas falls another 10-15%.