The Wall Street Journal has an update about the EXCO Resources (XCO) management-led buyout. Among other things, the newspaper is reporting that several oil and gas firms, as well as private equity firms, have signed confidentiality agreements, but that overall interest in the company is lower than the special committee had expected. The paper is also reporting that the special committee would reject a buyout at the current offer price of $20.50, but that CEO Douglas Miller has been open about his willingness to increase the price if necessary.
We continue to view this stock as an interesting special situations stock. Natural gas companies' stocks have been strong performers since Miller's initial November buyout announcement. For example, Chesapeake Energy (CHK) has risen around 50%. As a result, EXCO Resources will likely trade above the pre-announcement deal price even if the deal falls through.
But considering that Miller is a motivated buyer with a track record of success -- and the financial backing -- we think there is a strong possibility that a deal with occur. During the Q4 2010 conference call, he estimated that the company NAV was between $20 to $22 per share. While this is a significant drop from the company's July 2010 investor presentation, which estimated a NAV per share of $25 to $37, it was still a small hint of his willingness to increase his bid.
Investors should also be mindful of Wilbur Ross' involvement in this buyout. Ross, who is a successful distressed investor, purchased a 7.5% stake in XCO shortly after Miller's announcement. Regardless of whether Ross teams with Miller or forces the buyout team to increase his offer, his involvement will be interesting. If he teams with management, this would reduce a potential catalyst for additional value for shareholders -- but it would also signal Ross' endorsement of the natural gas industry.
We think investors should accumulate shares of XCO on any significant stock price weakness. For investors who want exposure to the buyout but not the industry, they should consider FCG, Southwestern Energy (SWN), CHK and Petrohawk (HK) as possible hedges.