EXCO Resources Inc. Q4 2007 Earnings Call Transcript

| About: EXCO Resources, (XCO)
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EXCO Resources Inc. (NYSE:XCO) Q4 2007 Earnings Call February 26, 2008 10:00 AM ET


Stephen F. Smith - Vice Chairman, President and Secretary

J. Douglas Ramsey - Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer

Paul Rudnicki - Vice President of Financial Planning and Analysis

Harold L. Hickey - Vice President and Chief Operating Officer


Nicholas Pope - J.P. Morgan

Jack Aydin - Keybanc

Kelly Krenger - Banc of America Securities


Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2007 fourth quarter and year end earnings conference call. (Operator Instructions) Mr. Smith, you may begin your conference.

Stephen F. Smith

Good morning everyone. This is Steve Smith, President of EXCO. Doug Miller, who normally is in this role on these calls, is absent due to the death of his oldest and closest friend, and he is a pallbearer in the funeral this morning.

With me today is Doug Ramsey, our CFO; Hal Hickey, our Chief Operating Officer; Mark Wilson, our Chief Accounting Officer; Paul Rudnicki, our Vice President of Financial Planning and Analysis.

Before we get kicked off, I am going to turn it over to Ramsey to give a brief disclaimer.

J. Douglas Ramsey

I would like to remind everyone that you can go to www.excoresources.com, and click on the Investor Relations tab on the left-hand side of our homepage to access today’s presentation slides. The first page that will come up after you hit the Investor Relations tab has a presentation slides link. Just double-click on the link; it will launch the slide presentation that you can follow along with.

The statements that may be made on this conference call regarding our future financial operating performance, structure and results, business strategies, market prices and future commodity price, risk management activities, plans and forecasts, and other statements that are not 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 Act of 1934.

Please refer to pages 3 and 4 of the slide presentation for the complete text regarding our forward-looking statements.

In addition, please refer to our website for the earnings release which contains additional information regarding our forward-looking statements, and the preparation of our financial disclosures, including reconciliations and other statements regarding non-GAAP financial numbers which will be discussed on today’s call. Steve?

Stephen F. Smith

We are going to be mainly using the slides that we posted up last night on the website as a go-by, but before we get into that, I just wanted to say a few words in general. ‘07 was an outstanding year for EXCO, both, in terms of growth, but also in terms of focus.

We started the year with a large acquisition, but most of ‘07 was spent on focusing on the assets, which we have accumulated over the past three years. Actually we spent close to $4.7 billion and made some really outstanding acquisitions. I think we have one of the premier resource bases in the country now.

In that time we also made about $1 billion worth of dispositions, including our Canadian assets, which we sold in early ‘05. And those were mainly to clean the portfolio up and get it into the four areas that we think are the appropriate areas for this company going forward, which is our East Texas/North Louisiana area, Appalachia, Mid-Continent and the Permian Basin of West Texas.

I think that in addition to accumulating a world-class asset base, we also got some really good people over the past year or so. In fact since beginning of ‘06, we’ve hired about 450 people, over 300 in ‘07 and early ‘08 alone. And of those, something like, 50 geologists, geophysicists and engineers.

So, I think we are well positioned from a staff standpoint to take advantage of our asset base. We think that at this point in time, our 2 Tcf of proved reserves, we probably have enough in the unbooked potential and the lower risk upside to certainly more than triple and probably increase those reserves by 5 or 6 fold.

Obviously, the most exciting thing we have working right now is the Marcellus shale in Appalachia, we have a tremendous asset base and we will get into the details about that. But based on what we see, our initial estimates of unbooked potential there of 2.6 Tcf could be a multiple of that. And we’re pretty excited about that whole area.

In addition to the Marcellus shale, we also have Huron shale opportunities, and we have something in excess of 120,000 acres of potential in what we think could be prospective in the Huron shale.

So, in addition to that particular area, which obviously is going to be a very strong focus area, and we are probably going to increase our budget a minimum of $50 million and probably closer to $75 to $100 million, in that area.

We are also excited about our Vernon field, which we acquired really in late ‘06 early ‘07. We have had tremendous success in there in expanding and extending that field so far. Hal Hickey will get into the details, but we’re working diligently on the Western side of the field on the Southern side of the field, and we’re also looking at expanding the whole field area with some additional acreage that we own and are evaluating.

We are working hard on our acreage in East Texas, we have got horizontal opportunities in several different areas, we have got deeper drilling opportunities in North Louisiana and in East Texas, and so that’s an area of focus as well.

In West Texas area, Sugg Ranch, in that general area, we are leasing all the time, expanding that particular area, and we’re pretty excited about that. We have had really good, strong growth by the drill-bit there, and we expect that to continue for some time.

We have got a play going in the Wind River Basin in Wyoming. I won’t spend a lot of time on that, but Hal will touch on it, but it looks very promising. We did make an acquisition that we announced in connection with this release in Appalachia. We acquired some shallow gas assets, something like 350,000 gross acres and a number of producing wells.

We did not get the Deep Rights in there. The Marcellus acreage, or any of the deep acreage, was retained by the seller in Pennsylvania that 20% of that acquisition is outside of Pennsylvania, and we do have the Deep Rights under the stuff in Ohio and West Virginia.

But with that acquisition, we got a tremendous amount of gathering infrastructure, which is going to help us in our overall Marcellus play in Pennsylvania. It’s right in the heart of everything we do in Central Pennsylvania from a shallow point of view.

So, it’s a very good tack-on tuck-in acquisition that I think that we are estimating that we will have cash flow from that of something around $6.90/Mcfe. So that’s going to be a good acquisition for us and we got it at a good price as well.

So, given those opening comments, let me go into just a few of the financial highlights and then I’ll turn it over to Ramsey and Paul Rudnicki and get into a little bit more detail.

As we said in the press release, we set records in terms of revenues, both oil and gas revenues as well as total revenues. Our EBITDA was something on the order of nearly three times what it was in the prior-year. We are at about $766 million of EBITDA for ‘07.

We are estimating, as you can see in the guidance, something in the $930 million for next year, and hopefully we can beat that on a pretty good margin.

Cash flow was strong at $600 million, that’s essentially EBITDA less interest; we expect that to continue to grow. Production for ‘07 was, obviously, substantially more than ‘06, because of acquisitions and because of the drill-bit, we are expecting a 20% increase or so in average production for ‘08 versus ‘07.

LOE has been pretty flat; we’ve done a good job of holding the line on lease operating expenses across the company and we’ve done a lot in the overall area of enhancing our production in various areas. So, I think that we are really positioned very well to take advantage of our base, but also to take advantage of the tremendous upside.

In our asset base, we had 1.2 Tcf of PUDs, probables and possibles beginning the year, we’re up to about 2.9 Tcf now. We have what we have identified is 4.4 Tcf of potential and unbooked potential of which 2.6 of that is the Marcellus. We think again that that can be tremendously greater than that if it works as well as it has for some of our competitors in the area.

So, with the consolidation that we’ve done of our acquisitions, which is essentially complete, I think we are well positioned for the future. On page 7, is a slide that goes over our performance highlights a little bit, this is a slide that I always try to focus on because the net cash margin to us is the name of the game.

That’s what we use to pay down debt; that’s what we use to drill our wells with. And as you can see we realized $6.74 of net cash margin per Mcfe during the fourth quarter of ‘07. It’s holding in there really well, obviously, our hedge program is working like a champ, and Rudnicki will talk a little bit more about our hedging.

So, that to me is the bottom line of where we are financially. Our net income, actually, was a little higher than a lot of people expected this quarter.

We have spent a tremendous amount of time and effort on the marketing effort in this company, and although the price realization is an important factor, and while the net income was a little higher than others’ estimates, it was about the same.

We worked awfully hard in our marketing area. We’ve consolidated, for instance, in East Texas and North Louisiana we market as one entity now, instead of two or three. We are probably marketing 250 million cubic feet of gas a day and we’re realizing prices relative to NYMEX that are higher than anything we have ever been able to achieve over in that area.

Again, adjusted EBITDA, we talked about and cash flow from operations, production.

The next slide on 8 is just a summary of our reserves; we normally do our planning and our financial guidance at $60 oil and $8 gas, which we think is, certainly, conservative, at least at this point in time. So I have shown that the impact of that on our SEC reserves, just for reference purposes.

We had a pretty good year in terms of reserve replacement, we replaced 159% on a drill-bit basis in ‘07 and that’s 164% for the three years. The drill-bit only planning and development cost of $2.31 is pretty much in line with where we thought we would be, a little more than the three-year average, but we are in an area such as East Texas, North Louisiana where we are drilling a lot and the finding costs are just a little bit higher over there. The all-in reserve replacement is $2.96 for ‘07; that include some revisions.

We did a lot of cleaning up in our reserves during ‘07, we took a very, very hard look at our PUDs in all areas, and we reclassified some PUDs to Probables, we eliminated some PUDs for a variety of reasons, not the least of which is culture problems, terrain problems and all of those kind of issues.

And then offsetting all of that there was about a 59.5 Bcf pick up due to the increase in pricing between the end of the last year and the end of this year. But even with those revisions, we came out pretty well from a cost standpoint, we think.

I am going to turn it over to Doug Ramsey to talk about the liquidity and financial position, and then Paul will pick it up and talk about our hedge program and our guidance after that.

J. Douglas Ramsey

Thanks, Steve. Page 9 has our liquidity position at year-end and (inaudible). At year-end we had $55.5 million of cash; total debt was just under $2.1 billion, which consists of $1.6 billion of revolving bank debt and the interest rate on that is LIBOR plus 125 to 150 basis points and that is a function of the outstandings under the two credit facilities.

And the other component of the total debt are the senior notes we still have, just under $445 million outstanding on those. And then the equity sections, we have the $2 billion of the 7% preferred, and just over $1.1 billion of common equity gives us a net debt to cap ratio 39%. The borrowing base at year-end was $2.2 billion and that gave us dry powder of $552 million.

At February 20, in conjunction with the closing of the Appalachia acquisition, we increased our borrowing base at EXCO Resources by $275 million, so that takes the combined borrowing base up to just under $2.5 billion and simultaneously, we borrowed $350 million to fund the acquisition, and so that gives us a debt to cap ratio, as of February 20, of 44%.

During the first quarter, we added some interest rate swaps on $700 million of our outstanding debt. The rate on the swaps is 2.66% for the LIBOR and that runs for two years.

And with that I will turn it over to Paul.

Paul Rudnicki

Thanks, Doug. On page 10, just want to highlight the current hedge position that we have got. We have entered into some hedges since year-end and those are all reflected here. And as you can see, we are roughly 80% hedged based on our guidance that we’ll get into in a minute; prices ranging from $8.25, roughly, to about $8.60.

For 2009, based on our fourth quarter run rate that we are expecting, we are down in the 70% hedged just over $8 on the gas and beginning to look at 2010 as well, we’re just under $8.00 at roughly 26%.

The one thing to point out on the hedges, we have updated our guidance to reflect the acquisition that we closed in the first quarter. And we entered into some hedges partly as a result of that transaction and the prices that we entered into were well above a $1 or so above the price stick that we use to evaluate the acquisitions; so those were really good hedges.

When you couple that with the interest rates swaps that we entered into and the borrowing cost that we have on that acquisition, it’s a pretty accretive transaction, we believe.

Going on to page 11. Again, just highlighting the change in the guidance. For the full-year, we expect production average between $393 million a day, and $402 million a day. We haven’t changed our assumptions for the differentials to NYMEX; and we have increased just our gross dollars of LOE to reflect that transaction.

For all intent and purposes, the rest of the guidance has stayed the same, obviously, other than the interest expense, which has gone up a little bit. And we are now guiding to roughly $935 million of EBITDA for the year.

Page 12 just goes over the quarterly assumptions. And, again, the first quarter reflects the close of the transaction during the quarter. So, a full quarter is not going to be reflected in our financials.

And to sum up, before I hand it over to Hal, just to go over couple of the metrics on the transaction. On a gross purchase price unadjusted we paid $395 million of which we allocated roughly $325 million to the proved reserves. The $325 million of proved reserves, essentially is $2 in the ground with the future capital on the proved were $2.54 per Mcfe.

Based on the $395 million and the total reserves we purchased, we believe we are buying reserves at roughly $1.16 in the ground. And with the future capital all-in developed, we think we are in the $2.32 range. So with that I will hand it over to Hal.

Harold L. Hickey

Thank you, Paul. Good morning. On slide 14, I will discuss some recent activities and results, and then I will get into some forward activity to evaluate and develop our upside. I’ll then talk about our snapshot of where we were at year-end, and then I will talk about our budget and how that’s going to grow.

So, with that, again, starting on slide 14, beginning with East Texas/North Louisiana and the Vernon field. We continue to see some success there. We have recently drilled and completed ten wells; this is over the fourth quarter and the start of 2008, the average IP on those ten wells we’ve drilled and completed 6.5 million cubic feet equivalent per day on a gross basis.

And in fact our last completion had the highest rates since EXCO took over the field and it floated over 10 million a day gross. And what these results are doing is continuing to expand the field limits, particularly around our Southern and Western fault blocks. And as mentioned earlier in some of our meetings, we’ve actually grown the number of locations drillable here at Vernon from 15, at the time of acquisition, to over 280 today.

At Vernon, we’re right on target, we are continuing with our PDP; in fact, it’s above what we have forecasted this time. We are excited about it, and we’re going to continue to evaluate the existing acreage we have and other acreage, which I will address in a second.

Holly/Caspiana over in De Soto Parish, Louisiana on the Western edge of the state, we’ve had five recent completions averaging in excess of 1.4 million cubic feet equivalent per day. And we’ve taken this area from where it was at year-end ‘06 of 42 million a day, year-end ‘07 produced over 55 million a day and we’ve actually grown it since that time.

We are continuing to see some successes in other parts of East Texas, North Louisiana, our Cotton Valley Areas. Gladewater, where we’ve begun to be more selective with our drilling; we’ve applied some geo-science to that. We’ve had two recent completions that average in excess of a million a day.

At Overton and Smith County, Texas, which we acquired about a year ago and we’ve started drilling, we’ve seen two recent completions in excess of 1.6 million a day. And overall in the Cotton Valley area of East Texas, North Louisiana, we’ve seen our drilling times come down about 20%, and our drilling completion costs come down about 10%.

The other thing I’ll say is in East Texas, North Louisiana, we continue to very actively lease acreage and we’re very optimistic, as we’ve had some initial drilling results there, that I will discuss at a later point in time that are very exciting for us.

Also in East Texas, North Louisiana, our midstream businesses is continuing to expand; we’re well underway with our 57 mile, $38 million expansion of the TGG pipeline and we are going to increase throughput from third parties by an incremental 100 cubic feet a day in this pipeline segment.

Out in the West Texas area and the Permian Basin, Sugg Ranch is located primarily in Irion County. You might recall that we completed an acquisition of about 45% of incremental working interest in that field in the fourth quarter and with that we increased the rig count to three, we have increased net production there dramatically, in my opinion, from 19.7 million cubic feet equivalent per day on the 1st of November, when we took over operations.

It was nearly 24 million a day on February 5. And actually this week, we were over 25 million a day. And the other thing that is exciting here is we’re seeing significant growth in our oil volumes. And as a company I think we are up 5,800, pushing 6,000 barrels of a day of oil.

At Sugg Ranch, we are continuing to expand our acreage position. As Steve said earlier, we are leasing; we are actually also working on a joint venture with a third-party, and we will probably add about 15,000 acres in the Sugg Ranch area.

In the Rockies on our Birdseye prospect which is in Fremont County, Wyoming, in the Wind River Basin. We recently drilled and logged this well and it’s going to earn us 3,400 gross acres and increase our prospect area to more than 7,400 gross acres, captures some 80 additional drilling locations. We have about a 47% working interest in this play.

Also in the Rockies, a significant event occurred in the fourth quarter. We actually completed the sale to some third parties. We completely exited Nebraska and Colorado. And what we had in the Nebraska was frankly some of our highest cost, most limited upside assets, so it was an area that allows us to continue to focus on growth opportunities, as we moved out of this region.

In the Mid-Continent, we continue to integrate the significant acquisition we made from Anadarko and the Golden Trend and Mocane Laverne area, and we have in fact drilled our best well in the Golden Trend since EXCO entered the area in ‘05 and it was initial gross production recently, it was 3.7 million a day that was in Grady County, Oklahoma. In this region, we will drill some 55 to 60 wells this year and that will be in, like I said, Mocane Laverne and Golden Trend.

Appalachia noted on page 16, a very exciting growth area for us. We have closed two acquisitions there in the quarter. First was a relatively small acquisition from a private party; spent $16 million and acquired about 2 million a day of production and 14 Bcfe of 3P reserves, the majority of which was proved again, in Central Pennsylvania, where we continue to have focus in growth.

And as Steve and Paul talked about a moment ago, we closed the acquisition in Appalachia that we addressed in this most recent earnings release all over 250,000 producing wells, over 2,000 drilling locations and 16 million a day of production in Central Pennsylvania predominantly, it’s where about 80% of the assets are, and then we have some assets acquired there in Ohio and West Virginia.

These assets are very strategically situated, and we believe as I think Paul said, or Steve said, these assets are going to allow us to have the infrastructure that will help in developing our Marcellus play.

But we also think there is a lot of growth just in this base assets themselves. We will start drilling there in June or so with two drilling rigs and we will likely expand that to as many as three or four rigs and we think that there is combination of drilling upside, as well as exploitation upside here.

In Appalachia, we recently set a monthly production record of 46 million a day that was in January and that’s prior to this most recent acquisition.

We have also got something that’s not going to move the meter a whole lot, but on the other hand, it’s an exciting opportunity with real strong economics. We put 25 pump jacks on some of our existing base wells in Central Pennsylvania. We are seeing production uplifted by more than 100%. And we’re going to continue to go forward with this program with these initial results are very encouraging.

So with that, let’s go to slide 17. And I’ll talk a little bit our upside evaluation and upside development plans.

First, the Marcellus. Everyone has heard us talk about how we held significant acreage position there. We’ve actually grown our net acreage to about 191,000 plus acres and that’s in fairway of the play. Overall, we have over 350,000 net acres.

And if you assume that on 80 acres spacing we’ll drill horizontal wells to recover to 2.5 Bcf of reserves per well, that shows that these holders could contain approximately 6 Tcfe of reserves, which again is significantly above our previous estimates of 2.6 Tcfe.

We are actively leasing, particularly in Pennsylvania. We have both our internal land mining and contract brokers work in this area. And we are preparing with our technical team to drill four horizontal wells this year, all in Central Pennsylvania, and we are going to drill 10 vertical wells in both Pennsylvania and West Virginia.

We’re going to start this activity in the second quarter and we will quickly advise you of our results there, but we’re very excited about this and we’re moving forward. And what we’re going to do is go to our Board in mid-March and ask for additional funding to continue to implement this evaluation and development. And we’ll let you know soon after the Board Meeting, how much we are going to increase the budget.

In West Virginia also, we have some Huron shale opportunities, particularly around our Jackson County, West Virginia holdings. There are several contagious counties where we have 120,000 plus net acres in the Huron shale prospective area and we’re going to drill a well there mid-year.

East Texas/North Louisiana, and our Cotton Valley and Vernon areas, particularly first in Cotton Valley, we are going to drill probably 8 horizontal wells that’s in our Overton, Gladewater and De Soto Parish areas. We are continuing to lease and evaluate some acreage.

We’ve got 40,000 prospective Cotton Valley acres that, like I said earlier, we have some very encouraging initial results on. And like I said, at Vernon, we are testing and expanding Vernon and we have got 65,000 acres outside of the productive field today that we have got some evaluation going on to determine its prospectivity and what we are going to do to further develop it.

But again we have grown that thing from 15 locations at the time of acquisition to over 280. About 50 of our locations are proved; we’re going to drill 24 wells there this year and we are also implementing our refrac program and we’ll continue to advise you on the developments at Vernon.

Permian, I’ve already talked about how we were going to expand the acreage position there. In the Rockies, I’ve talked about how we’ve got the encouraging results at Birdseye. We will drill 9 additional wells in Wyoming’s Wind River and Big Horn basins during this year, and we think we’ve got as much as a Tcf of potential reserves in Wyoming. In the Midstream I have talked about the pipeline expansion.

So with that on slide 18, you can see a snapshot of where we were at year-end. Reserves, and again this is on $8 natural gas and $60 per barrel oil pricing 1.9 Tcfe. Potential 4.4 and this, of course, doesn’t include the higher potential that we believe we are going to start recognizing in the Marcellus shale and Appalachia. And it doesn’t include any consideration for on the Huron shale development. But we think, we have got reserves and potential of 8.6 Tcfe and growing.

Production at year-end was 377 million a day. This week I actually had a report, we were 385 million a day, so we are seeing growth in our production base. And that does not include any of the volumes from the most recent acquisition.

Reserve life is strong. We operate about 90% of our gross in net wells, acreages about 1.5 million acres on a net basis and we have over 10,000 drilling locations. And we were continuing to grow our budget, which on slide 19, you can see some detail around the development budget $680 million, but like Steve said, we are likely to add $50 to $100 million for additional development in the Marcellus and perhaps even in some of our other areas.

And we will drill over 600 wells this year, and we continue to see positive results from all of these efforts. And we are going to implement some exploitation projects and that’s working on existing well bores and that’s some of the discussion like in the Appalachian area where we are implementing the artificial lift for the pump jacks.

So, as you can see, we’ve got an exciting and very active program on the operation side. And with that I will turn it back to over to Steve Smith for any closing comments and Q&A.

Stephen F. Smith

You can tell that we are pretty excited about where we are personnel-wise, asset-wise, where even if we increase our budget by $100 million, we are still well within our EBITDA forecasts. So, we just feel that we are in a great position.

We got nearly $500 million worth of dry powder. But our focus is going to be on exploiting this base, enhancing what we have in the base, taking advantage of all the upside that we do have.

Obviously, we’re going to look at acquisitions, because that is another way of growing this company and a way that we’ve been very successful in growing it in the past. But again, the focus is going to be on our tremendous resource base that we’ve accumulated over the past two or three years.

In the appendix, there is just some more detailed financial materials, some color around our finding and development cost calculations, et cetera, so you can review that as you will. And at this point, we will turn it over to the moderator for questions-and-answers.

Question-and-Answer Session


Your first question comes from the line of Nicholas Pope – J.P. Morgan.

Nicholas Pope – J.P. Morgan

I was hoping if you all could go into a little detail on what you all are seeing in drilling and service costs in the different regions you are operating in? What trends you’re seeing right now?

Stephen Smith

It’s certainly positive. We’re seeing a leveling off in some areas and declines in others. Hal, you might add a little color to that.

Harold Hickey

Particularly in East Texas and North Louisiana, we continue to see some positive movement on both drilling day rates and we also see some positive movement on some of our completion cost. And I say positive in the sense that the costs are coming down.

In particular, on the completion costs, some of the fracturing services, as we bid that out, we’ve realized as much as 25% cost cuts from where we were about a year ago. Drilling day rates, we were in the area of $23,000 a day for 1,000 horsepower rigs and now we’re down into the $17,500-$18,000 a day range for some of those 1,000 horsepower rigs. So we’re seeing some positive movement.

In Appalachia, things tend to have been somewhat flat to this point, although we’re anticipating there maybe some upward pressure on services because of all the activity in the shale developments.

West Texas, the Permian area, the costs have been actually decreasing slightly. We have seen some reduction recently in footage rates and day rates and we’ve actually seen some cost cutting in the OCTG type, our Oil Country Tubular Goods business as well.

So we think that, like Steve said, things are either decreasing slightly or holding flat in general and we’re anticipating some potential upward pressure in Appalachia.

Nicholas Pope – J.P. Morgan

That’s great. And another item just a little bit of maintenance: what percentage of those proved reserves from the Appalachian acquisition are developed?

J. Douglas Ramsey

It’s about 70%. That’s, obviously, just on the proved side.


(Operator Instructions) Your next question comes from the line of Jack Aydin - Keybanc.

Jack Aydin - Keybanc

Mr. Smith, you mentioned that you’re growing your production, year-over-year 2007 will be up 20%? What percent of that will be through the drill-bit and what component of it is acquisition, of that 20% year-over-year growth?

J. Douglas Ramsey

At this point we are probably still in the high teens on the organic growth and the rest of that is just folding in the acquisitions for the full-year effect.

Jack Aydin - Keybanc

Okay. The second question is, I’m looking at the Appalachian production, you mentioned that is 46 million a day in January and I know it’s coming from lot of wells, and since the industry is getting so excited about the Marcellus and everything, wouldn’t it be better off, use of capital and everything, drilling some of those Marcellus wells that’s coming in at 1 million or 700,000, whatever it is, to increase that production, because it doesn’t look like we’re moving in Appalachia that much in terms of increased of (inaudible)?

Stephen Smith

You have to drill a lot of the shallow wells to move the needle, but I think through a combination of the drilling that we’re doing in the shallow and the production enhancements, we are going to see some pretty good results there.

But there is no question that our focus in ‘08 and certainly in ‘09 and beyond will be in the shale and that’s why we’re going to increase our budget. But we feel like, first of all, drilling those shallow wells it’s pretty much a manufacturing operation, it doesn’t take a lot of personnel and any great amount of science and we are rolling reserves into the proved category every day up there, so it’s a good little asset.

Jack Aydin - Keybanc

Okay. Now on the acquisition you mentioned that you didn’t get the Deep Rights on 80%; was a private company, public company? Who was the seller?

Stephen Smith


Jack Aydin - Keybanc

So they kept the Deep Rights?

Stephen Smith


Jack Aydin - Keybanc

Okay. On the other 20% Ohio, New York, West Virginia, you got the Deep Rights.

Stephen Smith

Yes. In Ohio and West Virginia, but not in Pennsylvania; but again, that’s just the nature of the beast, and the nature of the location of that asset. EOG, obviously, is not going to sell the Deep Rights with all that’s going on up there.

But on the other hand, we did get all that gathering which will be very important to us in terms of availability, right of ways, et cetera for infrastructure in the Marcellus shale. And just the operational synergies that we are going to get out of this right in the very heart of where we are doing shallow drilling and where we are planning on our Marcellus drilling, we feel like there is some items that are a little harder to quantify but they’re very important.

Jack Aydin - Keybanc

Do you have opportunity to participate in the Deep Rights with the EOG in the event that they go for the deeper zones?

Stephen Smith

We certainly talked to them and would continue to talk to them but we don’t have any arrangement at this point.


Your next question comes from the line of Kelly Krenger - Banc of America Securities.

Kelly Krenger - Banc of America Securities

Quick one on your credit facilities, and then one on hedging. On the credit facilities, it looked like you increased the EXCO Resources’ credit facility to $1.175 billion, is that correct?

J. Douglas Ramsey

Yes, that’s right Kelly.

Kelly Krenger - Banc of America Securities

And is that all available or committed?

J. Douglas Ramsey

That is available, and then the EPOP credit facility we reaffirmed at $1.3 billion.

Kelly Krenger - Banc of America Securities

What are the maturity dates of those?

J. Douglas Ramsey


Kelly Krenger

On both of them?

J. Douglas Ramsey

Yes, they are the same.

Kelly Krenger - Banc of America Securities

Okay. And then on hedging, I know you are pretty well hedged for the next couple of years. But any thought given the move in prices, any thoughts on increasing the hedging more so in the out years or; I know you typically are pretty well hedged up 24 to 36 months out, but didn’t know how much more room you have to do or if that was something that we should anticipate?

J. Douglas Ramsey

We’ve been layering in hedges with the price run up here, and we will continue to evaluate and add and 2010 has become more of a focus for us to try to get the volumes up on our targeted three-year rolling hedge as well as begin to look at 2011.

I can’t tell you where prices are at this very moment, but this morning, 2009 was about $9.15, 2010 was about $8.75, and 11 and beyond is a minimum of $8.50 and going up. So, we are definitely taking a hard look at that as well as taking a hard look at essentially layering on some oil hedges at these higher prices in those out years.

You can see we added some hedges in the backs. We finally got an $8 in front of our hedge strike price on the oils, since we’ve been out of the market for a while. We are pulling $92 plus hedges out there. And today, 2010 is probably $93-$94. So we’re definitely keeping an eye on it.


(Operator Instructions) You do have a follow-up question from the line of Nicholas Pope – J.P. Morgan.

Nicholas Pope – J.P. Morgan

On the Appalachian shale, the 120,000 acres you have in the Huron, I was wondering how much of that overlaps with the bigger acreage number you have given for the Marcellus? And the stuff that overlaps, what are you seeing for potentially using those two different formations together?

Paul Rudnicki

When we talk about our 191,000 acres in the fairway that is totally separate from the 120,000 we’re talking about in the Huron shale. So there is no overlap there. There would be some overlap if you looked at in terms of the 350,000 acres.

Nicholas Pope – J.P. Morgan

Is there a lot of overlap there or is there 350,000 plus an additional Huron shale that doesn’t have any Marcellus in it?

Stephen Smith

I would say that there is a lot of overlap, because it’s just two different shale formations in the same area.

Paul Rudnicki

The Huron is a shallower formation than the Marcellus is. And in fact in the area where we are addressing the Huron, another third party has probably drilled 100 Huron shale wells with some repeatable success. So, we are excited about the opportunity there.

But the Huron, Nick, is more down in Western West Virginia, Jackson County and in some six contiguous counties, including Jackson. And so there is definitely some overlap with Marcellus there. We don’t feel like the Marcellus there is as thick as it might be in what we call the fairway.


There are no further questions at this time. Do you have any closing remarks?

Stephen F. Smith

Just thanks to everybody for joining our call, and we appreciate your support. And we will keep pushing to grow this company at a pace that we can all be proud of. Thank you.


This concludes today’s conference call. You may now disconnect.

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