Dallas-based exploration and production (E&P) company EXCO Resources Inc. is withdrawing its proposed offer of units in a master limited partnership (MLP) to own a "substantial" portion of mature producing oil and natural gas properties in the Appalachian, East Texas, North Louisiana, Midcontinent and Permian Basin areas.

EXCO chairman Douglas H. Miller said market conditions do not support the completion of the offering in a manner that would result in the value enhancement to EXCO and its shareholders that was anticipated upon the initial filing of the registration statement.

When it announced the MLP in July 2007, EXCO said an MLP would give it the opportunity to "enhance the valuation of a substantial portion" of its mature properties and allow it to acquire additional properties, "either from EXCO or from third parties" (see NGI, Aug. 6, 2007).

EXCO had planned to offer about $1.5 billion of the MLP's common units to the public. Proceeds from the initial public offering (IPO) were to have been used to retire debt and provide working capital.

The E&P holds about 836,114 net acres in the United States. About 42% of its reserves are in the Appalachia area, with 25% in East Texas and North Louisiana, 16% in the Midcontinent, 9% in the Permian Basin and 7% in the Rocky Mountains. At year-end 2005, EXCO had 684 Bcfe in total proved reserves, and it was producing 119 MMcfe/d.

For 3Q2007 EXCO's production was 34.5 Bcfe, up 190% from 3Q2006, despite the negative impact of approximately 3.5 MMcfe/d from shut-in of a third party pipeline due to flooding in the Mid-Continent producing area.

Ironically, EXCO's announcement was released the same day a report issued by analysts at Friedman, Billings Ramsey (FBR) indicated that upstream MLPs are becoming more attractive to investors.

"Upstream MLPs have taken a round trip in 2007, but we believe that 2008 should be a good year for the stocks, with very little growth factored in the valuations, credit spread issues better reflected in the stocks, and accretive growth continuing (despite higher acquisition costs and lower accretion)," the FBR analysts said.

"The upstream MLP business model is acquisition-driven, and, although both equity and debt financing costs have increased as a result of wider spreads, we believe that 2008 should result in price appreciation of about 20% through acquisition-driven growth. The positive return outlook, which is on top of the 7-10% yields that are backed by hard assets, decent coverage ratios in most cases, and subordination in some cases, provide a positive outlook for 2008. If spreads widen further (based on historical cycles), we estimate that the average MLP would have to grow its asset base by 6% to offset a 100-basis-point increase in spread."

Analysts at Sanders Morris Harris said last month that while there are still worlds to conquer for MLPs, access to capital is more difficult to obtain than it was just months ago, making consolidation among players a more likely scenario in the months ahead (see NGI, Dec. 10, 2007).

In November, Devon Energy Corp. said it was shelving its plans to form a publicly traded MLP, which was to have owned a minority interest in the company's considerable U.S. onshore marketing and midstream businesses (see NGI, Nov. 12, 2007). According to CEO J. Larry Nichols, "markets today are just less receptive than when we announced our plan, so we're putting it on hold."

Other companies continue to enter the MLP arena. In a single week in November El Paso Corp launched an IPO for an MLP that will own and operate a portion of its natural gas transportation pipelines, storage and other midstream assets (see NGI, Nov. 12, 2007); Southern Union Co. said it planned to form a stand-alone MLP to house a portion of its natural gas gathering and processing assets; and EnCana Corp. said an as-yet unformed MLP could be a potential buyer of some of the company's U.S. assets (see NGI, Nov. 19, 2007).

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