Wednesday, August 4, 2010

EXCO Update

Exco Resources reported its second quarter earnings earlier this week and gave an update on its Haynesville and Middle-Bossier Shale operations.  Exco is currently producing in excess of 500 MMcf/day from its Haynesville acreage, which represents  80% of the company's current production.  Obviously, the Haynesville/Mid-Bossier Shale  is an all-consuming project for the company.

The company leases 182,000 net acres in the region, 80,000 net acres of which are prospective for the Haynesville Shale (the company is in a 50-50 joint venture with BG Group, which also has 80,000 net acres).

Exco went out of its way in its discussion of results to note that because of depressed commodity prices it would be focusing on its higher returning locations in DeSoto Parish (Holly Field) and the Shelby Trough region of Texas.  It will also target areas where the company is subject to lease expiration.  As a result, Exco will defer drilling in  northern Caddo Parish, LA and Harrison Co., TX for now.  Exco says that half of its acreage is held by production.  I'm not sure where the non-HBP acreage is located outside of the focus areas,  so it will be interesting to if the company does much drilling outside of the blue circles below.

Exco has been eagerly buying acreage in the Shelby Trough (I'll have more to say about the Shelby Trough in a future post, likely next week), adding 23,800 net acres in Q2.  The company now declares it a "second major focus area" alongside the company's DeSoto Parish acreage.  Common Resources, recently acquired by Exco, had been an early prospector in the Shelby Trough, which likely motivated the acquisition by Exco.

A big deal for Exco is its multi-well pad drilling operations. Recently the company drilled four wells (80 acre spacing) from a single pad in DeSoto Parish and simultaneously fracked all four. I hear from a first hand observer that it was a awesome sight to behold.  Exco also completed a two well pad in the quarter and is planning pad development in DeSoto on 12 units.

With a chunk of  acreage concentrated in DeSoto Parish, Exco has also made a big investment in technical evaluation and long-term pressure monitoring by drilling two vertical wells near the pad pilot project noted above to monitor downhole microseismic activity during fracturing operations.  The wells will be equipped for long-term reservoir pressure monitoring in the field.

Exco currently operates 18 rigs in the Haynesville Shale and expects to have 22 operating by year-end.  The plan is to drill 140 operated wells in 2010.  The shallower Cotton Valley formation is still on the company's radar because it is a reliable, though not sexy, producer, but because of low commodity prices CV drilling has been suspended for now.

Well costs were another issue raised by Exco.  After dipping in the first quarter of 2010, costs are rising again, driven by completion costs, which have gone up approximately 50% in a year.  For Exco, Haynesville well costs have gone up from $9.3 million to $9.9 million between the first and second quarters.

Exco is also making progress on a couple of environmentally-focused initiatives. The company is building two source water pipelines and a salt water gathering and disposal project to reduce truck traffic and ease the impacts on subsurface aquifers and surface water.  Exco also is working with a paper mill, an IP plant I believe, to used discharged water in its fracking operations.  All good moves with long-term benefits.  Paired with pad drilling operations, hopefully these moves will reduce the environmental impact of drilling in the region.

Finally, management gave an update on its Mid-Bossier operations.  The company completed two wells at 11 and 13 MMcf/day (management didn't give specific well details, but I have my suspicions that I hope to confirm soon) and will be drilling another Mid-Bossier test well in Shelby Co. soon.  Management noted that the Mid-Bossier is up to 1,400 thick (5 times thicker than the Haynesville Shale) in places.  This is the first I'm hearing of this and will be interested to learn more about this.

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