Troubled EXCO Resources Buyout Is Bearish for Natural Gas Stocks

| About: EXCO Resources, (XCO)

According to The Wall Street Journal, the proposed management led buyout of natural gas producer EXCO Resources (NYSE:XCO) is at a crossroads. The company's special committee is anxious for a resolution on the matter but CEO Douglas Miller has run into problems securing the financing for the deal. As a result, there is talk of a possible "public stub" portion which would allow shareholders take choose between cash and a minority equity stake in the company. Considering the restraints discussed, we would speculate that the deal is subject to proration.

We are surprised by the current state of affairs. We thought that this management led buyout was a textbook situation and, as such, we have been bullish about this deal and suggested buying stock on weakness. While we meaningfully reduced our position when the stock priced traded above the $20.50 buyout offer, we are still long the stock in large part because of our constructive view of the natural gas markets. We previously wrote about Douglas Miller's strong incentive to complete the deal, but it appears the financing aspect is the main stumbling block and that is outside of his control.

From the outside looking in, this management led buyout should have been a strong candidate to secure the necessary financing. Not only did the management buyout coalition control around 30% of the shares outstanding, effectively reducing some risks and the potential size of the financing needed, Douglas Miller has previously executed a successful management buyout. For the deal to fall through in the presence of a such a seemingly constructive set of circumstances, this may signal a dramatic sentiment in the markets towards the commodity industry, specifically natural gas producers.

If the trouble surrounding the EXCO Resources buyout is really a symptom of shift towards bearishness in the commodity and natural gas industry, investors should be especially cautious of the following stocks. They each have significant exposure to natural gas spot prices and overall sentiment: Petrohawk Corp (NYSE:HK), Southwestern Energy (NYSE:SWN), Chesapeake Energy (NYSE:CHK) and United States Natural Gas Fund (NYSEARCA:UNG).

Disclosure: I own XCO shares and may buy more on stock price weakness. I may initiate a long position in HK, SWN, CHK over the next 72 hours.