EXCO Resources Q3 2007 Earnings Call Transcript

Nov. 6.07 | About: EXCO Resources, (XCO)

EXCO Resources Inc. (NYSE:XCO)

Q3 2007 Earnings Call

November 6, 2007 10:00 am ET


Doug Miller - Chairman

Steve Smith - Vice Chairman

Doug Ramsey - CFO

Hal Hickey - COO

Paul Rudnicki - VP, Financial Planning


Wei Romualdo - Stone Harbor


Good morning. My name is Heather, and I will beyour conference operator today. At this time, I would like to welcome everyoneto the EXCO Resources Third Quarter Earnings Release Conference Call. (OperatorInstructions)

Thank you. Mr. Miller, you may begin yourconference.


Thank you, Heather. This is Doug Miller. I amChairman of EXCO Resources and with me today, I have Steve Smith, he is ourVice Chairman; Doug Ramsey, who is our CFO; Hal Hickey, who is our COO; MarkWilson, who is our Chief Accounting Officer; Paul Rudnicki, who most of youknow does all our modeling, he is a Vice President in charge of FinancialPlanning; John Jacobi, who is in charge of our acquisition and divestitures. AndySpringer is also here, who is our Tax Manager; and Lanny Boeing and JustinClark, who are General Counsels, are also with me.

With that, I am going to introduce you over toDoug Ramsey and let him read our forward-looking statement, and I will get backto you. Doug?


All right, Thanks, Doug. I'd like to remindeveryone that you can go to www.excoresources.com and click on the InvestorRelations tab on the left-hand side of our home page to access today'spresentation slides. The first page that will come up after you hit theInvestor Relations tab has a presentation slide link. Just double click on thelink, it will launch a slide presentation that you can follow along with.

The statements that may be made on thisconference call regarding our future financial operating performance, structureand results, business strategies, market prices and future commodity price,risk management activities, plans and forecasts and other statements that arenot historical facts are forward-looking statements as defined in Section 27(a)of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Actof 1934. Please refer to pages four and five of the slide presentation for thecomplete text regarding our forward-looking statements. Doug?


Okay. Thanks, Doug. Before we get started, Ijust want to nip something in the bud and that is our MLP which is filed. Weare on track with the MLP. It is filed at the SEC to be able to do that eitherin the fourth quarter or the first quarter of ’08. I am not going to be able toanswer any other questions. However, the filing is on EDGAR and that’s whereyou have to get that. So, I want to get that cleaned up because lawyers have mein the penalty box.

Let me start with, kind of, an overview of wherewe are because I know, we have been running off of FAS and a lot of you arestruggling to keep up with what we are doing. And where we are, is we have justcompleted some massive acquisitions, which includes some massive growth, and Iwould say actually where we are right now compared to where we thought we aregoing to be when we went public in February, is about three or four years aheadof schedule. That happened with our ability to close two or three large, largetransactions including Progress Energy's other oil and gas assets in East Texas, a significant acquisition or two from Anadarko.But most importantly, as we were able to buy those, the people that we are ableto hire and bring along with them, gave us the ability to not only close thosethings, but set us up where we are today, where we can continue our growth.

We have restructured into four main areas, andthose four main areas are Appalachia, East Texas, West Texas and the Mid-Continent. We now have 631 employees, but wehired 200 to 300 people over the last 12 to 18 months, and Ramsey has led aneffort to consolidate all of the accounting systems, all of the engineeringsystems, all the production systems, and every one of those has gone perfect. We’recompleted with, all but one, and it is scheduled to be complete by January 1stof next year.

So, it’s been explosive growth. I know we havefogged up our financial statements, but let me tell you, 375 million a day with25 rigs running and great people in place, I want to tell you that I don’tknow, if we put out press releases yet or not, but the four people that arerunning those four areas are Mike Chambers, who we brought in from Anadarko. Heis running the entire East Texas/North Louisiana area, where we have some 240to 250 million a day, and that includes the Vernon acquisition over there. WendyStrothman, who we are able to get fromDominion; she is running our Appalachian unit and I think we are actually goingto -- we disclosed the small deal out there. She is bringing in people and thatproduction is heading towards $45 million a day over the next week or so. So that’sbeen running about 40. Charles Evans, who many of you know, who is our COO herefor a long time, has moved up to Tulsaand is running that division, and that’s between 60 and 65 million a day. Andthen, Tommy Knowles has come to work here in Dallasand he is going to be running our West Texasoperation. Most recently, we bought in a partner and we are going to have asignificant development plan out on the Sugg Ranch. Hal will get into that in alittle while.

Coupled with buying $3 or $4 billion worth ofassets, we have also set out and completed, all but one, $500 million worth ofsales in assets that really didn’t fit us. We actually have our last one, whichis about a $23 million deal, going to close on Friday. At that time, all of ourassets will be on those four areas with the slight exception of little leftoverin the Rockies, but 95% of our assets will be in areas, where we havesignificant development locations and we’ll get into that in a minute.

We also believe that because of the good peoplethat we brought on, the ability for us to grow this thing at 25% plus over thenext three to five years has been enhanced. That is what we think an equitygrowth profile should look like, and I believe that we have that, between ourdevelopment-driven program and the acquisitions we are looking at right now, Iam very confident that we can still achieve our 25% growth over the next threeto five years.

We target, and you will see on slide six, wetarget at least 25% growth in three main areas. That’s reserve, that'sproduction and that's EBITDA. Then once we are able to do that, we take about50% of our EBITDA and that becomes our capital program for the next year.

While we have been doing this aggressive growthstrategy, Hal is going crazy. We have been working on not only the S1, but wehave a capital budget meeting next week with our full board that will be goingon Tuesday and Wednesday of next week, and we expect to approach the board witha $500 million plus capital program for ’08. I think, I am not lying on that, Iwould, because we have tentatively reviewed it, and we have plenty of locationsand $500 million will be an easy transaction for us.

Going into the -- people want to know about whatwe think about commodities, oil price, who can believe that oil is about 95other than Boone called this two years ago. Nobody called 95, but Boone is onour board and he has been saying for two years that the rubber was going tomeet the road on oil in the fourth quarter of ’07, and boy, was he ever right.I can’t believe, but we wish we had a lot more production. I think we are at5,500 to 6,000 barrels a day today. So, I wish, we have more of it.

Gas, I’ll tell you little, gas, we are prettymuch hedged and you will see later on in the presentation that the hedges haveworked for this last quarter. Gas storage seems full, and I think Boone hasbeen neutral to fairly negative because of that, I think, maybe crude oil istugging it up, but I would say that two weeks ago we actually notified ofshutting up in Appalachia for a week, 2million a day. And then, as recently as last week, we had a major marketer in hereoffering us $0.10 premium per 20 million a day of gas to go to the Midwest. So, as cold weather comes, it looks like gasprices might firm up, and I heard a rumor today that Chicago actually had a freeze last night.

So, the weather has been great around thecountry. It has put a lot of pressure on gas prices, but we continue to monitorand add to our hedging program. I think, Paul, over the last two weeks, we soldgas in 2009 at 850 and we’ve sold that in 2010 at 830 and above. I think itcontinues to be there, it continues to be strong in the out. So, our hedgingprogram continues to work.

The deal flow, which we expected to slow down,now the major, major deals have slowed down, however, the number of deals hasnot. I would say we are looking at approximately 40 deals today in our four keyareas. Probably half of them are smallish deals, private in Appalachia, but weare seeing a lot of deals in East Texas, some deals in West Texas.

John Jacobi is leading that effort. We are sobusy now; we are meeting three times a week on him. We have bids out. Again, wedon’t have any closed, but we have the people available and the capitalresources available to continue to do what we have been doing.

Again, we have 25 rigs running today. One of thethings that is interesting is with these 25 rigs running, I noted yesterday wehave over 50 wells that are drilled and paid for encased, waiting on completion,and that ranges anywhere from in Appalachia, where we have 15 or 20 for thewells will come on 30,000 to 40,000 a day, to East Texas and North Louisiananormal Cotton Valley wells that will come on anywhere from 0.8 to 1.2 million aday to Vernon, where we have two of them waiting on completion, where thosewells will come on between 5 and 10 million a day. So, we have a lot of wellsthat are paid for, that are completed waiting on completion either a frac or apipeline hookup, and Hal will get into that.

With that, the slide, the thing that I love themost on the slide is the EBIDTA growth from the third quarter of ’06. Ouradjusted EBIDTA was roughly $71 million. We accomplished $215 million for thismost recent quarter, and with that I am going to turn it over to Steve and hecan go through the numbers in detail. Thanks.


All right. Thanks, Doug. Let’s focus on slide sixto start with. Obviously, our growth in revenue is very strong, 2.5 times whatwe had in the third quarter of ’06, and the nine months is about 2.5 times whatwe had in nine months of ’06, very strong. Net income, obviously in our companyis somewhat difficult to assess because of the -- we do mark-to-market on thehedges, so that kind of distorts the numbers a little bit.

The other thing in the third quarter that we hadwas, we had an $11 million valuation allowance charge to income taxes, and whatwe did was, we substituted a net operating loss from 2006 for foreign taxcredits, which we have previously used against our gain on sale of the Canadiansub. And so, because we freed up foreign tax credits that are not useful rightnow, because we don’t have any foreign operations right now, we were requiredto provide a valuation allowance.

On the other hand, it resulted in us getting a $6million cash refund, so we thought that was a pretty fair trade. The net income,we’ve got a slide back on page 25 that I’ll just refer you to, that, sort of,reconciles net income reported to what we would consider to be more normal netincome figures. But in any event, we on a preferred stock dividend basis we had$56.5 million of net income and about 10.7 after the preferred. On a normalizedkind of a basis, that’s $36 million roughly before preferred dividends, a $0.09loss afterwards.

Operating cash flow, it was also extremelystrong. Operating cash flow is simply EBITDA less interest and a fewmiscellaneous adjustments, and it was $189 million for the quarter and $415million for the nine months, extremely strong. And as Doug said, EBITDA alsowas very strong, 215 for the quarter and 538. All of these numbers, obviously,are dramatically more than they were in the '06 period.

So things are rocking along. As Doug said, we’vegot some oil around 5,200 to 5,500 barrels a day. We will get into that in justa second. But, so let’s just go on over to -- one other thing on the $375million a day, that includes or that excludes $3.5 million a day productionthat was shut in due to a flooding of a pipeline up in the Mid-Continent. So,that hit us pretty good little late in the third quarter.

Let’s going over to slide eight, the operatingresults obviously, what we have done here is we have broken out all of ourrevenues oil, natural gas, our pipeline, interest and other, and then our cashsettlements on derivatives. The revenues, we just discussed, did not includethe cash settlements on derivatives. But this slide shows all of the elementsexcept the mark-to-market, which is a non-cash type item. But this slide detailsthe adjusted EBITDA calculation. Obviously, we are up in all areas on oil andgas revenues.

In the quarter, about $143 million of the totalincrease was due to volume, and about a $9 million decrease due to price. Forthe nine months, it was $376 million, up due to volumes and $22 million downdue to price. So, that’s kind of the way that’s working.

Pipeline operating income is running about $6.6million a quarter. We have about, we are moving 440 million a day now throughour pipeline systems. These mainly came through the acquisition at Winchester, and to an extent at Vernon. And we’ve got an expansion goingabout 67 mile expansion that should increase this by at least around $100million a day. So as far as moving, gas movements.

So, that’s a strong business for us, right now,and we have decided we will break it out separately on the slide. We will getinto the operating cost and production taxes. It’s easier to explain on them ona per unit basis, but we are pretty pleased with the trend on operating costand we are making real headway there.

Obviously, G&A is tracking along with thedramatic increase in personnel. During the nine months, we increased G&A byabout $23 million of which $15 million was personnel cost, probably $5 millionwas incremental costs due to our first year of compliance with Sarbanes-Oxley,and $4 or $5 million was due to all of the changes, the dramatic changes wemade in our IT areas, the systems, the production systems et cetera. And then,we had a lot of deal cost that we had a very active nine months in terms ofdeals, and not all of them ended up being successful in terms of our bid. So wespent some money that ended up in G&A.

Now, we are on page nine. Let’s talk about this.This is to me, one of the more meaningful slides in the whole presentation. Asfar as our volumes are concerned, again, we have got dramatic increases, werepretty flat with the second quarter, but we are making real headway when allthings are considered in terms of organic growth. We have had some falloff atVernon, but not even close to being as much as wethought we would have. So, we are very pleased with where we are at 375 milliona day of volume.

Now look at pricing quarter-to-quarter, oil isup $4.40 since gas is down $0.71 and overall, were down $0.78 on Mcf. For thenine months, oil was actually down $1.54 and gas was down $0.87.

Production cost, the trend is good. We had $0.88in the third quarter of '06 compared to 86 now. That was 85 during the secondquarter. So, we are holding pretty steady in terms of our operating cost. Wehave made some very important improvements in our saltwater disposal costs inEast Texas, North Louisiana and where we should have our bids out andconstruction beginning on a pipeline to handle saltwater in that area, certainlyby the end of the year. And so, that could decrease saltwater disposal costs by40%. The trend is good on production cost and production taxes are prettystable.

Now, let’s look at the operating margin. I think,this is the key number in our whole presentation. In the second quarter of '07,we had an operating margin of $6.11. That’s where the price of about $0.12,well more than that, about $0.85 more than we are saving now. So, 507 of cashoperating margin, we had cash settlements on derivatives $1.34, for netoperating cash margin 6.41.

So, it went from 6.11 to 6.41 between the two'07 quarters. It’s down a little bit from '06. So our price is, and then forthe nine-months pretty steady. That just shows you, that’s why we hedge, wouldyou like to hear that, that says it all. Our hedges are working and our hedgingprogram is working extremely well.

So, I think, with that I’m going to turn thepresentation over to Doug Ramsey and let him talk a little bit about ourliquidity and financial position, and then we will get into the hedging even alittle bit more.


All right, thanks, Steve. Taking a look at thefinancial position for the quarter ended September 30th, we had cashon hand of $147 million. Our bank debt between the EXCO Resources CreditAgreement and the EPA credit agreement totaled just over $1.5 billion. We stillhave the senior notes outstanding which had a principal amount of just under$445 million outstanding.

So, total debt between the bonds and the bankdebt is just under $2 billion. We issued the preferred stock, which is on thebooks for just under $2 billion and then we have book equity of $1.1 billion,total cap of 5.1, and that gives us a debt-to-total capitalization ratio of 39%and the aggregate following days $2.2 billion with unused capacity net of $4.3million on letters of credit of $672 million, fast forward October 31st.

During October, we closed the 45% additionalinterest increase in West Texas for a $156.6million, and the effect or the payment for that acquisition, part of it camefrom an increase in bank debt and you see that went up by $65 million, the restcame from cash on hand.

So, at the end of October, we now have justslightly over $2 billion of total debt outstanding and availability under thecombined credit agreements of $607 million.

All right, flip into the next slide, slide 11.This just breaks down the two credit agreements by the amounts outstanding andthe respective availability under each credit agreement, and you could see thatthey add to the same aggregate totals that I just covered on slide 10.

With that, I’ll turn it over to Paul Rudnicki tocover the hedging strategy in our outstanding hedge positions.


Thanks, Doug. Slide on page 12 shows you thederivatives that we have got in place and this does include everything that we’veentered into since quarter end. As you can see, for the fourth quarter, on acombined basis, we have got about $355 million a day hedged and when we get intoour guidance it’s about 92% of the midpoint of our guidance.

For 2008, we are at about $291 million a dayhedged, which is 76% of that same midpoint number, and we really have beenfocusing on 2009 and 2010 lately. You can see those volumes are up significantlyfrom where they were last quarter. We are now at $236 million a day for 2009,which is about 61% of that production level, and 2010 we are again focusing onand it’s only at $83 million a day, which is about 22%.

As prices move around with weather coming in, wewill look to enter into some more hedges there. As Doug mentioned, prices arestrong and there is a lot of liquidity out there, and there is definitely somegood buying out there. All in all, you can see, we have got 261 Bcf hedged at aweighted average price of approximately $8.15, which more than covers the debtthat we’ve got on the books.

Page 13, just to highlight the fourth quarterguidance that we are issuing, the production guidance, as you can see, is 380to 390 million a day, a nice little uptick from this quarter. Differentials toNYMEX, oil we believe we are going to have a little bit better than what wehave been getting in the past. Gas, we are going to guide to basically the samerange of 90% to 95%.

Lease operating expenses, $30 to $33 million andthe production tax rate at 7% to 7.5%. Midstream income is the other big numberthere $6.5 million to $7 million for the quarter, and again, that will uptickas we start adding production from the expansion.

We have decided to break out our depreciationrate per Mcfe as the pipeline activity is becoming a little more significant, youcan see those numbers as well. We still believe that our tax rate is going tobe around 40%. Again, this quarter was a little anomalous with the transactionsthat Steve talked about.

And now that the preferred is all converted ortransformed, as you may to 7%, our dividends will be running $35 million aquarter.

And with that, I will hand it over to Hal forthe operations.


Thank you, Paul. Slide 15 shows a snapshot ofour third quarter activity from an operations perspective. You can see thatquarter-on-quarter, between Q3 of '07 and Q3 of '06, we had significant growthand our sales volumes were up 191% at 375 million a day range. Couple of eventsoccurred in the quarter. One, Steve mentioned earlier, where we lost 3.5million a day in the Mid-Continent area due to the shut-in of a third partypipeline following some weather related matters.

While we didn’t have any acquisitions that weclosed in the third quarter, we did close some sales. We actually closed the Cementsale that had a negative impact on our volumes of about 6.5 million a day overthe quarter. Our proved reserves remain at over 1.8 Tcf. Reserve life is about13 years. You will note that reserve life is down year-on-year, that’s justfollowing the acquisition particularly of the Vernon assets. In East Texas/North Louisiana,I would say R/P is about 10 to 11 years; Permian and Mid-Continent area it is13 to 14 years; and Appalachia remains over 25years.

Drilling locations: We have more then 7600. Willdrill more than 500 this year. We have more than 2,500 proved locationsremained having a strong acreage position over 1.5 million acres, about 800,000of that remains in Appalachia.

I will talk in a few minutes about our positionin the Shale, where we have some 350,000 acres, and about 200,000 that we arevery excited about in the Marcellus area. Well count is over 10,000. We have 8,300plus net wells. We operate more than 90% of our value based on reserves.

As noted early, we have over 630 employees, morethan 370 of those support field operations and we had 26 rigs running. At theend of the third quarter, we actually have 25 today.

You will note that our reserves are based on $8natural gas and $60 odd oil pricing and they are adjusted for differentials andexcluding the effect of hedging. And on slide 16, you can see some furtherdetail on our portfolio. Our 3P reserves are about 3.8 Tcfe and we continue tobelieve we have developing potential of about 2.7 Tcfe, that’s principally the Shaleplays in Appalachia.

More than 50% of our reserves, more than 60% ofour production is located in East Texas/North Louisiana area. We run EastTexas/North Louisiana out of Dallas, but we alsohave offices in The Woodlands, Texas which weopened up to support Vernon.We have offices in Shreveport;we have offices in Tyler and Gladewater.

Vernon,of course, is a very significant part of our portfolio in East Texas/NorthLouisiana. Volume over the last few days has been 135 million cubic feetequivalent per day, flat from the last quarter. At this point in time, when wemade the acquisition of Vernonwe thought we need to be down to having one rig, one drilling rig operating, ifnot zero. We are actually at three today, remain very optimistic about theopportunities in Vernonas it continues to grow. We have got an excellent teamwork in that area, and aswe’re drilling wells we have just drilled the well recently on the southernside of field, as the most southern most well in the field. We are very excitedabout it. The logs looked very good. So it’s going to continue to open upopportunities for us in Vernon.

In Appalachia,which is our second largest area in terms of proved reserves as 23% of provedreserves have 6,500 wells, we’ve been operating with five drilling rigs upthere most recently. It is run out of Akron, Ohio and we’ve got a significant,significant opportunity we are studying in the Marcellus shale. We’ve got over200,000 acres in the Marcellus that we’re evaluating. We’ve been in touch withservice companies. We are evaluating what some of our competitors are doing,and we are very excited about where we’re going to take this thing, so standbyfor news on that.

Mid-Continent, over 1500 producing wells, 320Bcf of proved reserves, about 17% of our overall portfolio and between 60 millionand 65 million a day of production. And in the Permian, we’ve had a recentacquisition and we will discuss on the next slide. Got about 8% of our provedreserves, 400 wells in a growing position. We’ve actually recently opened up anoffice in San Angelofollowing our acquisition, that is depicted on slide 17.

We acquired for $156.6 million additionalinterest in the Sugg Ranch field. This is in West Texas Canyon Sand that alsohas producing formations in the Clearfork and the Wolfcamp. This is locatedprimarily in Irion County, Texas. We increased our networking interestfrom 52% to approximately 97% in this field, and our NRI is about 73%. Weclosed this subsequent to the close of the quarter, closed it on 10/09; we tookover operations literally this week.

We’ve added about 10 employees to support theseassets and we had a 60 Bcf of proved reserves, 129 Bcf of 3P reserves andcurrent net production is in the 21 million to 22 million a day range. When wemade this acquisition, there were two rigs running, drilling in that field. Weare up to three today. There is a possibility we'll go to four rigs operatingearly next year.

Our scientists and engineers have said there maybe as much as 600 locations in the field. There are about 180 of these approved.In addition to this acquisition, just this last week, we closed a smallacquisition in Appalachia, where we acquiredassets from a private producer there. We spent $16.7 million and we acquiredabout 12 Bcf of proved reserves, 14 Bcf of 3P, and about 1.4 million a day ofproduction.

On slide 18, I will talk about the Mid-Continentsale, but I mentioned just a moment ago, we sold some non-operated interest ofsome wells that were as deep as 18,000 feet to a field operator. We got over$100 million for these assets. The effective date of sale was back in January, weclosed it in July. We sold 29 Bcf of total proved reserves; 3P was about 47Bcf; net production at the time of sale was approximately $8 million a day.

Slide 19 is the slide similar to what you haveseen before. It details our '07 capital budget, which exceeds $500 million. Morethan 80% of that will be spend on drilling and completion, where we stillanticipate drilling in excess of 500 wells. We are preparing for the ’08 budget.Like Doug said, we are going to present that to the board next week, it will beat least this big, if not larger. On this slide, you can see how we have brokenit down into our four divisions or regional areas, so you can see the spinningamong them.

East Texas/North Louisiana, as you would expect,where we have some 15 rigs drilling for us today is going to get the bulk ofour dollars more than $300 of the $500 million Appalachia about $70 million,where we will drill 230 wells. Permian Rockies, $32 million, where we willdrill some 80 wells of the Mid-Continent, it will spin about $33 and drill 37wells.

The midstream, which Steve referenced earlier,the $48.6 million about 80% of that is going towards the expansion of our TGGinterstate pipeline system. We are going to add some 67 miles or so of 20 inchpipeline further into East Texas and weanticipate picking up some incremental $100 million a day of production fromthird-party producers to transport on that system.

Page 20 gives us some further breakdown on thedrilling program. Third quarter ’07, we actually drilled a 135 wells, a 133 ofthose were productive. Year-to-date ’07, 334 have been drilled and completed,six dry, total of 340.

We have had actually spud 412 wells this year,and as Doug was mentioning, we have got some 50 wells that are either awaitingcompletion or turn to sales, and this is supporting our continued organicgrowth of somewhere in the range of 6%. And of these wells that are awaitingeither turns of sale or completion, the bulk of them, volume wise, are going toadd incremental volumes in East Texas/North Louisiana.

We will add about $1 million a day in Appalachia from the wells, we have spinning up about $1million a day in the Mid-Continent from wells spinning there. We could add some25 million a day or more in East Texas/North Louisiana. Now, I caution everyonethat’s an IP rate and don’t forget that in East Texas/North Louisiana, you havedeclines that are about 70% in the first year.

But these production volumes that will come onwill definitely help us offset or decline, and help continue to support ourorganic growth of 6% or 7%. But we also have some volumes that are come on inthe Permian particularly at Sugg Ranch, we think, there may be about a 3million a day or so incremental volume that will result from wells that arepending turn on in that region.

And with that, I’ll turn it back over to Doug Miller.


One of the things that we are excited about inthe West Texas is upholders quite a bit ofoil. Recently, we have had a couple of wells that came on between 100 to 200barrels a day and so none of which is booked, all of which is potential. We arein the throws of a 3D seismic shootout there, and we have a geologist, who isabout 100 years old. That has done an excellent job there, and if we can keep himalive, I think, we are going to find quite a bit of oil. And I think, thepotential there is for some pretty significant growth in both production andreserves over the next couple of years.

I want to emphasize one last time that the onlyway that we have been able to grow this company as explosive as we have, is thepeople and with 25 rigs running, we have had to really expand our legal and ourland department. When you got 25 rigs running, whether it’s in Appalachia orit’s in East Texas, you have to have titleopinions and you have to have a lot of work done and keep ahead of those.

And we try to keep about five locations aheadper rig, and that takes a lot of people and a lot of time. So, Rick Hodges has donean excellent job on that, and I don’t think we would be going to 30 rigs, butit will be a people issue more than anything else. But by year end we kind ofthink that maybe 26, 27 rigs what we’ll have running without any otheracquisition.

Let me emphasize the other thing, we areexpecting a $100 to $200 million of free cash after our capital program for '08,and Ramsey just showed you that he has got $600 million of availability, butour comp and cash on hand is something that we could use to.

So theoretically, we could do between $1 and $2billion worth of additional acquisitions here without touching the capitalmarket, and Jacobi has got enough of those deals in-house that I am sure wewill have an opportunity to do that.

With that, I am going to open it up toquestions. And I am sure we have some. Where is Heather?



(Operator Instructions) Your first questioncomes from Wei Romualdo with Stone Harbor.

Wei Romualdo- Stone Harbor

Yeah, what's your plan for the EXCO Resourcesbonds once the MLP is completed?


I’d say right now, we are probably going toleave those outstanding. As you know, they are callable at 11, and with therecent turmoil in the debt markets and a lot of the transactions that we haveout there, 7.25% debt looks awfully cheap in case we do a $1 billion or $2billion. So, right now we are planning on leaving those out.

Wei Romualdo- Stone Harbor

Okay. And does the transaction deplete therestricted payment basket if you leave them out?


I’m going to ask a lawyer to answer that onebecause we did look at this. Go ahead, Doug, do you have that?


We are working on it right now.


Yeah. We are working on all that, and we aregoing to -- we’re actually going to begin a fairness opinion for thebondholders to make sure we are all with inspects on that, okay.

Wei Romualdo- Stone Harbor

Okay. Do you plan to have a new revolver puttingafter the MLP or is that -- okay?


Yeah. We’re probably going to have two revolvers.Actually, we’ve just recently had a meeting, and there will be a revolver atthe MLP and a revolver at EXCO Resources, pretty much the way it is set uptoday.

Wei Romualdo- Stone Harbor

Okay. But at the EXCO Resources revolver, do youhave an idea what the size of that may be after the MLP?


I think it’s around a $1 billion.

Wei Romualdo- Stone Harbor



And there will be a significant amount ofliquidity left there, not that much outstanding.

Wei Romualdo- Stone Harbor

Okay, that's independent of the EPOP revolverthough?


Yes ma’am.

Wei Romualdo- Stone Harbor

Okay, got you. All right, thank you.




(Operator Instructions) There are no furtherquestions at this time.


Kelly Krenger, you got to be out there somewhere,you didn’t even ask a question. Okay so, hopefully we did a good enough job, butI think the way we were structured today, the fog is going to start liftingquarter-by-quarter here. So, we appreciate your patience. It has been explosivearound here, and I think a lot of you who are on, have to call then and come inand visit us, and so understand exactly what's going on. We bought everybodysome Newton issues,so we are getting everything consolidated and we’re going to be off and runningagain. Again, thanks very much for your patience and meeting adjourned.


This concludes today's conference call. You maynow disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


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