Despite prices that continue to languish at near-record lows, Exco Resources Inc. CEO Doug Miller has an upbeat view of the natural gas market.
"I think you're going to see supply coming down faster than anybody expected, and I think the other side of that is I think you're going to see demand going up a little faster than anybody expected," Miller said during a conference call with analysts last week. "We're seeing a lot of power getting turned on gas; we've had a lot of power companies in here looking for long term supply. We have not made a deal and will not at these prices, of course."
Behind Miller's market view are projections for increased power generation demand by the Energy Information Administration (EIA) (see NGI, April 16). In its monthly report for March, EIA said it expects gas consumption to average 69.6 Bcf/d, up 2.8 Bcf (4.2%) from 2011, and then climb to 70.54 Bcf/d in 2013. While it is projecting declines in residential and commercial gas use, gas consumption in the electric power sector is seen growing by about 16% this year -- accounting for an average of 24.15 Bcf/d of total gas demand -- due to the cost advantages of natural gas.
Miller said he doesn't agree with the theory that prices won't go up until liquefied natural gas exports begin. "I'm not in that camp. I think you're going to start seeing some [upward] direction maybe as soon as the second half of this year."
There are billions of dollars worth of assets on the market and "plenty of money" available to Dallas-based Exco as it pursues several potential acquisitions in the gas market, Miller said.
"We have been approached by a lot of potential partners to participate with us," Miller said. "There are a lot of deals in the market today. We are reviewing them."
Exco has bid on three oily deals for joint ventures with third parties this year but came up short in each case, Miller said. "We think that probably $40-$50 billion worth of assets are on the market today, both oil and gas, and there is plenty of money. We've been approached [by] domestic partners and more recently, some foreign partners that are interested in buying dry gas in the U.S. because they expect to be exporting to their own countries."
Exco is looking to improve its liquidity so that it can take advantage of some potential deals by selling all or part of TGGT Holdings LLC, a treating facility operated jointly with BG Group, Miller said. As many as five potential buyers for 100% of TGGT are in talks with Exco. The company rejected a previous offer for 33% of TGGT. "BG is on board, and so we continue that process."
Exco is also negotiating a joint venture (JV) for conventional assets and may sell some of those assets. "I expect something to happen there within the next 30 days," Miller said. While cutting costs is "priority one" as long as gas prices remain low, the TGGT sale and the conventional JV are also near the top of the company's priority list.
"We're looking at the two asset sales to give us quite a bit of liquidity and we're looking at acquisitions, and some sizeable ones, because we have partners lined up that want to do those."
Acquisitions are going to be a significant part of the consolidation of the industry over the next year or two, Miller said.
"I sometimes feel like we were driving across campus going 90 miles an hour a year ago with gas prices high and working as hard as we can, and about the beginning of the year we ran into a school zone, and so I think we've had to figure out how to go slower -- and we're doing it. We still have guys in our industry speeding, so some of them are starting to get tickets...what we've been doing is we have been ramping down and cutting our capital budget."
Exco's total oil and natural gas production was 533 MMcfe/d in 1Q2012, a significant increase from 408 MMcfe/d in 1Q2011. The increase was primarily attributable to volumes from the Haynesville Shale. "In most times that would be good, but it's mostly gas, so that was bad," Miller said.
The operator reported a loss of $281.65 million (minus $1.32/share) in 1Q2012, compared with a profit of $21.94 million (10 cents) in 1Q2011. The loss was driven mainly by write-downs of oil and natural gas properties and lower revenues. Adjusted net income in 1Q2012 totaled $6.75 million (3 cents/share), compared with $29.06 million (13 cents) a year earlier.
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