Dallas-based explorer Exco Resources Inc., which has been selling off onshore properties and reducing its workforce to improve financial flexibility, is counting on North Louisiana’s Haynesville and Bossier shales -- and better natural gas prices -- to improve its long-term prospects.

CEO Hal Hickey talked about the importance of higher gas prices during a conference call to discuss first quarter results. Exco’s primary assets today are in North Louisiana and East Texas, but it also produces gas in the Appalachian Basin. It sold its Eagle Ford Shale assets in April.

 “Most of our assets and activity are built around natural gas, regarding significant macro trends that impact our business,” Hickey said. He noted that calendar year (Cal) 2017 gas prices were trading Tuesday at about $3.32/MMBtu for the balance of the year. Cal 2018 was at about $3.10, while the U.S gas rig count ended last week at 173 rigs.

“The storage figures for natural gas indicate that there is approximately 2.25 Tcf in storage now, and we're currently below last year's storage level by 14%,” said the CEO. Liquefied natural gas (LNG) “exports are growing. Demand for natural gas in Mexico was increasing. Industrial growth calls for more natural gas feedstock. Opportunity for coal-to-gas switching for electrical generation exists.

“Lagging U.S. natural gas production, combined with an expected rise in export demand is lending strong support to the forward price curve,“ he said. Since the start of 2017, U.S. production “has remained at its lowest level in three years, averaging just 70.8 Bcf/d; that compares to 72.6 Bcf/d during the same period in 2016, and 73.5 Bcf/d in 2015.”

Assuming domestic gas output remains around current levels, “rising export demand is likely to put increasing pressure on U.S. gas prices this year. Export demand is approximately 7.2 Bcf/d. However, this demand is forecasted to grow to above 9 Bcf/d in October, as pipeline exports to Mexico and LNG exports to global markets accelerate. The additional gas demand could lift U.S. gas prices to levels currently unforeseen by the forward markets.”

At a gas price of around $3.00/MMBtu, “the economics of drilling and development in our core Haynesville region are strong,” Hickey said. “However, we will continue to evaluate opportunities on both sides of the balance sheet through our formal prioritized capital allocation system…to determine where and when we'll be spending our capital.”

Spending is to be directed toward the highest investment opportunities, “which could include drilling and development, acquisitions or continued program to purchase unsecured debt, among other opportunities.”

The up-and-down gas prices led to a challenging 2016 for Exco, as spot prices bottomed out at $1.73/MMBtu for gas and $30.32/bbl for oil, Hickey told analysts.

“We took decisive actions to counteract some of the impact on our operations by limiting our capital spending to maintain liquidity, focusing on sustainable cost reduction initiatives and improving our well performance. Our ability to execute on these initiatives put us in a position to close the recently announced financial transactions, positioning us to grow the business and extend our runway through at least 2020.”

COO Harold Jameson said Exco’s focus “is clearly on North Louisiana, as we are currently running four rigs targeting Haynesville and Bossier shales and plan to spud a total of 38 gross, or 15.9 net, operating wells this year. The Haynesville play has been re-energized as the industry has significantly enhanced returns by shifting to longer laterals and modifying completion designs to include higher levels of proppant, higher volumes of fluid, and tighter cluster spacing to deliver higher fracture intensity.”

Industry interest in the Haynesville Shale has been rising, with the rig count, over the last few months. For more on its re-emergence, check out the NGI special report “Haynesville 2.0,” which was released last week.

“We believe there are additional refinements to optimize the designs, and the wells we drill in North Louisiana during 2017 will feature 30% more proppant, more fluid and tighter clusters than our 2016 designs,” Jameson said. “Approximately 50% of the wells we drilled in our 2017 program will consist of longer laterals, including both 7,500 feet and 10,000 feet in lateral links. Our Bossier opportunities are held by production, but we are conducting additional appraisal work in the Bossier formation in North Louisiana.”

The first Bossier appraisal drilled this year had a 7,000-foot lateral and modified completion design.

“This well was turned-to-sales last week and is currently in the flowback phase,” Jameson said. “We are planning four additional Bossier wells in 2017 as part of our appraisal program. We are currently fracture stimulating three well group of Haynesville wells in DeSoto Parish (LA) that will be turned to sales in June.”

Exco now is running four gas rigs in North Louisiana, where most of 2017 capital spending is focused. During the first quarter Exco produced 241 Bcfe/d, within guidance, and drilled 3.5 net operated horizontal wells in its main operating area.The capital spending plan of $158 million includes $122 million for the Haynesville.

North Louisiana production totaled 134 Bcfe/d in the first quarter, down sequentially by about 10% and by 11% year/year, which Exco said primarily was because of natural production declines. The three Haynesville wells drilled in the first three months included “standard” average lateral lengths of 4,500 feet, which are to be completed with up to 3,500 pounds/foot of proppant, a 30% increase in proppant levels from other wells completed  in the region during 2016.

In East Texas, an extension of the Haynesville and various gassy formations, Exco produced 53 Bcfe/d in 1Q2017, down 12% sequentially and 16% from 1Q2016. The decline in production followed natural production declines as Exco noted that it had not turned an operated well to sales in the region since March 2016. East Texas activity this year mostly will be confined to participating in wells operated by other companies, management said.

Exco also operates in Appalachia and and in the Eagle Ford Shale of South Texas, assets that have been pared. In the Marcellus, a 0.5 net operated well is expected to be turned to sales late this year.

“Regional natural gas price differentials in Appalachia have recently narrowed, and there is potential for additional demand catalysts,” management said. “The company will monitor these conditions to determine the extent of future development of its properties in the Marcellus Shale. Exco continues to perform its technical assessment of the dry gas window of the Utica Shale and its plans for 2017 may include participation in wells with another operator to further evaluate the potential of the formation.”

Exco produced 30 Bcfe/d from the Marcellus in 1Q2017, up 11% sequentially but down 29% year/year after selling some assets in 2016. The sequential increase in production was because of lower shut-in volumes, said management.

“During fourth quarter 2016, the company shut-in approximately 0.6 Bcfe due to low natural gas prices that was subsequently turned online as prices improved during the period. The regional natural gas price differentials in Appalachia improved in late 2016 and into 2017 from an average of New York Mercantile Exchange (Nymex) less 90 cents/Mcf during 2016 to Nymex less 44 cents during March 2017.”

Meanwhile, in the Eagle Ford, production totaled 4,000 boe/d in 1Q2017, down 11% sequentially and 38% from a year ago, following more downtime on repairs to a third-party central production and storage facility.

Exco earned $8 million net (3 cents/share) in 1Q2017, versus a year-ago loss of $130 million (minus 47 cents). Operating revenue was flat year/year at $16 million. Realized gas prices in 1Q2017 averaged $2.70/MMBtu, compared with $1.54 in 1Q2016. Realized oil prices increased to average $48.92/bbl from $28.15 a year ago.