EXCO Resources (XCO) has consistently moved down from last spring's highs of nearly $21 per share to $6.67 at the close on Monday April 2, 2012. Much of this down movement can be attributed to the fall in US natural gas prices. US Nymex Natural Gas prices have fallen from a high of $4.98/mmBTU last summer to today's $2.15/mmBTU. Unfortunately for XCO, it has 97% of its proved reserves (1.6Tcfe) in natural gas. At these prices it is barely, if at all profitable; and that is only because of hedges and perhaps due to its 50% ownership in TGGT Holdings (a midstream company). XCO has a net production of 540 Mmcfe/d, but again this is virtually all natural gas.
XCO has good assets:
- 379,000 net acres in Appalachia of which approximately 140,000 are in the Marcellus Shale.
- 83,000 net acres in the Permian Basin.
- 152,000 net acres in East Texas and North Louisiana.
It has been monetizing debt through divestitures and JV's. If US natural gas prices were now at reasonable levels it would likely not have to do much more of this (or only to expand). Unfortunately, US natural gas prices are very low, and many seem to think they are likely to go even lower as the US is currently very near the limit of its storage capabilities for natural gas. Some think natural gas prices will drop precipitously from the already ridiculously low levels once that storage capacity is exceeded. This is extremely bad for XCO. XCO had decent hedging in Q4 2011 with 56% of its production hedged. However, it has only 37% of its production hedged for FY2012, and it has only 2% hedged for FY2013. If natural gas prices stay low, it will be nearly impossible for XCO to hedge at higher than current levels. This means XCO will lose money. The fact that the NatGas bill was recently defeated in Congress means that there will be no near term federal buoying of NatGas prices. It means a company like XCO becomes a fire sale possibility. It means that it may lose money soon -- as soon as Q1 2012.
The current PE is 66.70, and the FPE is 166.75. This stock does pay a 2.40% dividend, but this may be in jeopardy soon too. Analysts' Average EPS estimates for FY2012 have fallen from $0.81/share three months ago to $0.21/share today. FY2013 EPS estimates have fallen from $0.61 to $0.04. These estimates could easily become significantly negative. Currently there is no significant stimulus for US natural gas prices to rise until 2015, when the first US LNG export terminal(s) is supposed to go online. XCO has missed badly (by -21.1% and -47.1% in the last two quarters). It seems reasonable to expect it to miss again in Q1 2012. The natural gas prices have continued to fall. XCO is currently only forecast to make $0.01 in Q1 2012. If it misses this target, which seems likely, it may report the first of many negative earnings quarters. With the worsening US natural gas fundamentals, XCO could easily lose -$1 or more in FY2012. This is considerably below current estimates (+$0.21 for FY2012). This likely means that the stock can fall a good deal further from its current levels as those estimates are lowered further. Yes XCO has fallen far. However, now it is likely faced with selling natural gas assets in a down natural gas environment in order to stay solvent. If XCO does lose -$1 or more in FY2012, it will likely lose even more in FY2013. XCO has only 2% of production hedged for FY2013, and it will not likely get the opportunity to improve that position demonstrably. Fundamentally XCO is still a sell. With its performance in FY2012 likely far below analysts' current estimates, XCO is probably a great short.
The two year chart of XCO provides some technical direction for this trade.
The slow stochastic sub chart is at oversold levels. This is not usually a good time to start a short position. However, XCO has spent most of the last four months at or near over sold levels. It is so weak that you can consider shorting even at over sold levels. The main chart shows XCO is in about the strongest down trend you will ever see in a stock. The 200-day SMA is heading strongly downward. The 50-day SMA is heading strongly downward parallel to the 200-day SMA, and it is far below the 200-day SMA. There are no signs of a weakening or a reversal of the downtrend.
It is nice to wish that you could have gotten into a short trade in this stock at $20. However, you cannot turn back the clock. You can only try to profit from what ever there is left of the downtrend. Am I worried that this stock will reverse upward quickly? I am not, unless I see a marked, sustainable reversal of the downtrend in US natural gas prices. XCO only made $0.09/share in Q4 2011, when US natural gas prices averaged a ballpark $3.50/mmBTU for the quarter, and the company had 56% hedging. With only 37% hedging for 2012, XCO should lose money in Q1 2012 with a ballpark average for US natural gas prices of $2.50/mmBTU. With the US natural gas prices for Q2 looking to be even weaker than Q1's prices, XCO should lose even more money in Q2 2012. I am not sure when the situation will get better.
The complete filling of all US storage capacity may well send US natural gas prices far lower. Many pundits have talked about prices breaking the $2/mmBTU level. Now that US natural gas prices are almost to $2/mmBTU level, pundits are talking about prices going to $1.34/mmBTU (or even to $1/mmBTU). It is absurd, but it may happen.
In the current environment, XCO is a short. If you own it, you should sell it. It could end up selling off many of its prime assets in order to contain its debt. Its most recent price/book was 0.91; but I would question how meaningful that is under the present circumstances. I have seen a number of companies write down natural gas assets recently. XCO has a market cap of $1.4B and an enterprise value of $3.2B. In other words, it is heavily indebted. This makes its current situation even more tenuous. US Natural gas prices will recover eventually. The question is, will XCO still exist in a form that is even a semblance of its current one? This downturn in natural gas prices is the reason leading natural gas producing companies such as EOG Resources (EOG) and Chesapeake Energy (CHK) have made such a huge effort to diversify into NGL's and oil. It is too bad for XCO that it did not follow their lead.
In addition to all of the above reasons for shorting, the overall market is currently over bought. It has been running upward since last October. With a Beta of 1.70, XCO should outperform the overall market to the downside in any pull back, and the overall market is over due for a significant pull back. I should also mention that XCO has 17.80% short interest. This means that a lot of savvy investors agree with this article. However, it also means that you should quickly cover your short positions in XCO if you see a significant rebound in US natural gas prices. HFT traders make their biggest profits squeezing shorts.
Much of the fundamental data use in this article is from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in XCO over the next 72 hours.
