Wednesday, July 1, 2009

EXCO: Big Deal with BG Group

The big gushers have paid off for EXCO Resources. On Tuesday the company announced a big 50-50 joint venture agreement with British gas producer BG Group to develop EXCO's Haynesville Shale assets.

In a painfully worded press release that was likely written by tired lawyers, EXCO announced the deal for its Haynesville/Deep Bossier assets in Louisiana and Texas and some of its shallower Cotton Valley and Hosston assets. The deal did not include property in the Vernon (LA), Redland (LA), Gladewater (TX) and Overton (TX) fields (the TX fields were sold yesterday - more on that below). The deal covers about 120,000 acres in Louisiana (65K) and Texas (55K), of which 84,000 acres are prospective for the Haynesville/Deep Bossier Shale. Most of the property is in Caddo and DeSoto Parishes, LA and Harrison Co., TX. EXCO estimates that the Haynesville acreage in the deal can accommodate 1,600 potential well locations and contains net reserves of 4 to 6 Tcfe.

EXCO will continue to be the operator of these assets. As part of the deal, BG will pay EXCO $655 million up front and will pay 75% of EXCO's drilling costs up to $400 million. Additionally, EXCO is selling BG a 50% interest in the relevant midstream assets. In total, EXCO will receive $904 million upfront cash that will be used to pay down debt.

The deal is very similar to those done by Chesapeake Energy for the development of its shale assets all over the country. It is especially similar to Chesapeake's Marcellus Shale deal with StatoilHydro of Norway in that another deep pocketed European operator will gain technical expertise in shale fields and horizontal gas drilling.

On Monday, EXCO agreed to sell acreage in Texas, Oklahoma and Kansas deemed to be non-core to Encore Operating, LP for $355 million. The company has been busy strengthening its balance sheet.

On the whole, this is a great deal for Exco. They got lots of cash to put a huge dent in the company's debt and they got funding to accelerate their Haynesville drilling program. Exco's 2009 budget now calls for 34 Haynesville horizontal wells, 27 of which will be operated by Exco.

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