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EXCO Shuts Down South Texas Drilling, Reduces Debt

EXCO Resources Inc. said it has shut down its drilling program in the Eagle Ford Shale in South Texas due to low commodity prices and plans to divert the remainder of its capital expenditures (capex) to East Texas, in the Haynesville/Bossier Shale, where returns are expected to be above 25%.

Meanwhile, the Dallas-based company said it has executed a series of transactions this month to boost its liquidity and financial flexibility -- reducing its total net debt by $270 million, or 18% -- as it continues to fight for its survival.

"We cannot control commodity prices or the markets, but we can control the decisions we make in this current commodity price environment and we can control the execution of our strategic improvement plan," CEO Hal Hickey said during a conference call Wednesday to discuss third quarter results.

Last week, EXCO executed an agreement with subsidiaries of Fairfax Financial Holdings Ltd., the company's third-largest equity holder, for an infusion of $300 million in senior secured second-lien term loans. It also agreed to repurchase $577 million of senior unsecured notes through an arrangement where noteholders will become lenders under a $291 million senior secured second-lien term loan.

EXCO was also able to amend its credit agreement, reducing its borrowing base to $375 million. That, in turn, provided covenant flexibility, including a reduction in its interest coverage ratio from 2.0 to 1.25 times, and the removal of its total leverage ratio.

Hickey said the company's shareholders will be asked to consider, at a special meeting on Nov. 16, a proposal by EXCO's board of directors to initiate a reverse stock split if the board deems such a move is necessary. The board could also be authorized by shareholders to reduce the total number of outstanding common shares.

"The proposal, if approved by shareholders, would authorize our board to effect a reverse share split at a ratio of up to one per 10 common shares, with the exact ratio to be decided by the board," Hickey said. "Our board will factor the current share price into their decision to implement the split if approved by shareholders. The proposed reverse share split would affect all shareholders uniformly and will not affect any shareholder's ownership percentage."

EXCO had four operated rigs deployed during 3Q2015 -- three in East Texas, one in South Texas -- exactly half of what it had during the previous third quarter. The company said it drilled nine gross (5.2 net) wells in 3Q2015, which included 2.4 net operated horizontal wells targeting the Haynesville/Bossier Shale in the Shelby County area of East Texas. It also drilled 2.8 net wells in South Texas.

The company said it turned nine gross (4.6 net) operated horizontal wells into sales, which included 2.8 net wells in the Haynesville/Bossier in East Texas and 1.8 net wells in the Eagle Ford Shale in South Texas.

Although EXCO didn't drill or turn any wells into sales in the Appalachia region, the company said its position in the Marcellus Shale requires low maintenance capital, and added that about 82% of its acreage position there is held by production.

By comparison, EXCO drilled 11.6 net wells and turned 6.9 net wells into sales during 3Q2014.

EXCO said it has suspended its development program in South Texas, citing low commodity prices. During 4Q2015, the company will run three operated rigs, all in East Texas.

Hickey said the company may consider dropping another rig if commodity prices don't recover. He said two of the three rigs are under long-term contract into 2016 -- with one extending beyond that -- but the third rig was effectively on a well-to-well contract.

"If we got north of $60 oil, we'd have some very, very acceptable returns, but even at that it's not a guarantee that we'd begin drilling again," Hickey said. "We'll continue to look at our best deployment of capital and our best opportunities and we'll work it from there."

Hickey also revealed that EXCO is in continuing talks "with multiple companies" over firm transportation, sales contracts and gathering lines. "Whether or not they will come to fruition remains to be seen, but we are working on those every day," he said.

Daily production averaged 340 MMcfe/d in 3Q2015, an amount at the low end of the company's guidance range of 340-350 MMcfe/d for the quarter. Production for 3Q2015 was also 5% below 3Q2014 (358 MMcfe/d) and decreased 5.8% from 2Q2015 (361 MMcfe/d). EXCO attributed most of the decline to the timing of completion activities and higher downtime. Total production fell 5.1%, from 33 Bcfe in 3Q2014 to 31.3 Bcfe in 3Q2015.

EXCO's production -- between 3Q2014 and 3Q2015 -- dropped off in North Louisiana (from 217 to 197 MMcfe/d) and Appalachia and other areas of operation (81 to 47 MMcfe/d), although the 3Q2014 numbers for Appalachia include 25 MMcfe/d produced by Compass Production Partners LP. EXCO sold its interest in Compass in October 2014.

Production increased in East Texas (from 25 to 52 MMcfe/d) and South Texas (35 to 44 MMcfe/d) between the two aforementioned quarters, as did overall oil production -- by 18.2%, from 537,000 to 635,000 bbl. But natural gas production fell 7.4% (from 29.7 to 27.5 Bcf).

EXCO spent $64 million on capital expenditures (capex) during 3Q2015, a 38.5% decrease from the $104 million spent on capex in 3Q2014. The company's capex guidance for the full-year 2015 is $295-305 million.

The company reported adjusted EBITDA of $62 million in 3Q2015, down 34% from $94 million in 3Q2014. EXCO reported an adjusted net loss of $11 million (minus 4 cents /share) in 3Q2015. By comparison, it reported adjusted net income of $2 million (1 cent/share) in 3Q2014.

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