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Tapped-Out Texas Producer Struggling to Survive

The wolf could be at the door of tiny San Antonio, TX-based producer TXCO Resources Inc. any day. The company has run out of money, pledged most of its assets to creditors and is looking for options including a merger or sale. However, it does enjoy positive cash flow and could turn things around given enough time, CEO James Sigmon told investors Thursday.

TXCO is working with Goldman Sachs & Co. to explore its options and has had productive discussions with creditors regarding forbearance, Sigmon said during a conference call. A data room is to be opened shortly.

The hard times for TXCO follow "the largest capital expenditure program in its history." The company spent $182 million last year for the development and purchase of oil and gas properties, which was an increase from $117 million in 2007. While ambition and rising costs drove spending up, growing supply and a weakening economy drove commodity prices down.

For the fourth quarter of 2008 TXCO had a net loss attributable to common stock of $18 million, or 51 cents/share, compared with net income of $1.8 million, 5 cents/share, in the 2007 quarter. Revenues for the three months were $21 million, compared with $32.1 million a year earlier. Oil and gas sales were $18.4 million, compared with $28.9 million for fourth-quarter 2007. In February TXCO gave notice that it was in violation of a debt covenant and was working with creditors.

"...[L]enders may, among other things, declare all or any part of the unpaid principal and accrued interest under its bank credit facilities immediately due and payable," the company said, which would lead to a bankruptcy filing, Sigmon said.

During the call Sigmon and his executive team were asked if they would be willing to work for salaries of $1 while the company works through its troubles. The CEO said that -- unlike for executives of some of today's troubled companies -- that was not an option for himself and his team. He previously had noted that he is a major shareholder in TXCO.

Last Friday TXCO shares were trading around 50 cents; volume was heavy. The 52-week high was $14.73.

Last spring Anadarko Petroleum Corp. (APC) granted drilling rights to TXCO and St. Mary Land & Exploration Co. to explore part of APC's leasehold in the Pearsall and Eagle Ford gas shale plays in the Maverick Basin of Texas, an area in which TXCO already had enjoyed success (see NGI, April 7, 2008). "The Pearsall shale gas resource play is one of our key growth catalysts," Sigmon said at the time.

In reporting its latest results the company said it has significantly reduced drilling in light of commodity prices and its liquidity constraints. The company "is moving ahead with a limited drilling program, focused on high-impact projects, particularly the Maverick Basin's Pearsall and Eagle Ford Shale gas resource plays. It currently has two rigs operating," TXCO said.

"We are moving ahead, within our current financial constraints, to drill the Eagle Ford, Pearsall, Georgetown and other highly prospective plays," Sigmon said. "Our goal continues to be converting the extensive potential of our large acreage position with multiple plays into stockholder value."

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