Wednesday, April 21, 2010

Exco to Buy Common Resources

Exco Resources announced today that it has agreed to purchase Common Resources, LLC, which has a small but strong position in the Haynesville Shale.  Exco joined with its joint venture partner BG Group in the acquisition, which will be governed by the JV agreement between the two companies.  Exco and BG will each own 50% of Common Resources.  The all cash purchase price is approximately $446 million and covers around 29,200 acres in Shelby, San Augustine and Nacogdoches Counties along with seven operating wells. The price looks to be roughly $15,300/acre. 

The purchase doesn't include Common's Eagle Ford Shale assets, which will be sold or distributed to another party before closing. 

Common Resources was created about three years ago and remains a private company with private equity backing from EnCap Investments and Pine Brook Road Partners.  The company was founded with $500 million equity funding original funding, but because it is still private there is not much public information available and I'm not sure if the entire commitment was drawn.  Although the Exco deal doesn't sound like a home run, it likely is a good enough deal for the founders and investors.  Of course, that depends on how much equity was actually invested and the value of the remaining Eagle Ford acreage. 

Common has been a part of some good wells, and its acreage is in the now stylish southwestern portion of the Haynesville Play, which includes the Shelby Trough.  The land also has lots of overlap with the Mid-Bossier Shale.  Given the good quality land and strong results, I imagine management sat down with the investors and said, "either we raise more money or sell the company/assets."  I guess they chose the latter. 

Although it might be early to draw conclusions about this particular deal, a sale like this indicates to me that the Haynesville Shale will be a play for big, well capitalized companies.  With the potential for sinking gas prices and the high cost of drilling and producing the wells, a successful Haynesville E&P company is going to need a rock solid balance sheet to weather the vagaries of the market.  I would expect more transactions - joint ventures, asset sales, acquisitions, etc. - in the next year or two as companies need to drill their acreage to hold leases.

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