Thursday, July 11, 2013

Look for More EXCO Deals

Throughout Monday's conference call to explain the company's acquisition of Chesapeake Energy assets in the Haynesville and Eagle Ford shales, EXCO Resources CEO Douglas Miller made numerous references to the fact that EXCO is actively seeking new deals and that his company (and others) have a unique window of opportunity to make favorable acquisitions, especially in natural gas.  Miller said that EXCO sees lots of upcoming demand for natural gas, as the company gets "numerous calls" each week from industrial users, power generators and foreign countries.  As Miller said on Monday's call, he sees a big increase in demand coming, but he can't promise there will be any commensurate price increase.

But that's still good news for EXCO because the company is focused on "factory production" in its core areas like the Haynesville and will be able to generate prodigious quantities of gas while constantly suppressing costs.  In its acquisitions, the company is targeting doubles rather than home runs, and that is the proper perspective to have to be successful in the current natural gas market.

EXCO is looking at deals mostly in its core operating regions, especially ones that come with existing production.  There is a lot of acreage on the market across the country, even in EXCO's sweet spot, but the company is focusing on adding to its core areas and is not doing speculative acquisitions. The downside is that these deals often come at a higher price and have to be carefully negotiated to be able to achieve good upside.  But with this kind of deal, the acreage can be plugged into the proverbial production machine and monetized immediately.

Given that liquidity is an issue for natural gas producers in this price market, future deals may not be as significant as the Chesapeake transaction, but I would definitely expect to hear of more acquisitions from EXCO in the next six to twelve months.

We should expect more details on the Chesapeake acquisition on EXCO's August 2 quarterly earnings call, especially guidance about any increase in Haynesville rig count.

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