The Exploration Company (TXCO) gives update...CAPEX concerns?

by: Michael McAllister

Operations update posted by The Exploration Company (ticker: TXCO). 

TXCO has one of largest acreage holdings of a company its size.   It has amassed over 700,000 acres on the Maverick Basin in Southwest Texas.  Being a small company, enterprise value of close to $150 million, its trying to evolve from being an exploration company into a repeatable development company.  Management believes the Maverick Basin has multiple plays that they can be organically leveraged to increase the drilling of higher reward (risk) plays.   

TXCO has guided for 60+ wells to drilled in the Maverick Basin this year at a budget of $26 million to $33 million.   Currently the consensus cash flow estimate for 2005 is $21 million, which means the company will have to go fund externally its game plan.  Its not a negative for it does maintain a solid balance sheet. 

So far TXCO has drilled 18 wells, with some waiting on completion.   I did notice that the through presentations management has increased the possible cost per well for some of the plays.  Especially, for the Georgetown play where the high end of cost per well went to $1.1 million.  TXCO plans on drilling 34 of these wells and that would come to a $37.4 million.  Now, I do not believe that every well will cost that and actually the company is highly experienced in that play and should be able to have created efficiencies but it should be pointed out and addressed in their next conference call.

Service cost inflation is inevitable in this high price environment and comes with the territory.   Just be aware.

Txco