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Analysts: Credit Uncertainty Around EXCO Buyout

The board of EXCO Resources Inc. has formed a special committee to consider a buyout proposal from CEO Douglas H. Miller. Evaluation of the offer -- and any others that might come -- is expected by analysts to take anywhere from six to 12 months.

Miller wrote to the board late last month with his offer of $20.50/share for al of the company's outstanding shares (see Shale Daily, Nov. 2). In Miller's camp are oilman T. Boone Pickens and the investment firms Oaktree Capital Management LP and Ares Management LLC.

The board's committee has retained Kirkland & Ellis LLP and Jones Day as its legal counsel and is in the process of retaining financial advisers, the company said, noting that no decisions have been made on the proposal. "There can be no assurance that any definitive offer will be made or accepted, that any agreement will be executed or that any transaction will be consummated," the board said.

While the potential for an offer is up in the air, it creates uncertainty for the company, analysts at Standard & Poor's Ratings Services (S&P) and Moody's Investors Service said in recent notes.

"We believe the management buyout proposal set in motion a series of events that are likely credit negative," said Stuart Miller, a senior analyst with Moody's. "Until a decision is made, the evaluation process will be a distraction to the company's management and employees, which increases the risk of a decline in operating performance."

S&P analyst Patrick Lee said if a buyout does happen, increased leverage at the company could harm credit quality. "Depending on how the buyout proposal is ultimately structured, we could lower the ratings by one or more notches if leverage and capital protection materially worsen," S&P said.

Dallas-based EXCO is active in East Texas and North Louisiana, particularly in the Haynesville/Bossier Shale, the Vernon and Kelleys fields and the Cotton Valley Area. It is also active in the Permian Basin in West Texas and in the Marcellus Shale in Pennsylvania and West Virginia. EXCO also has interests in midstream assets in East Texas and North Louisiana.

"With the large amount of capital needed to develop its shale gas properties, any non-productive increase in leverage would have a compounding negative effect on EXCO's credit profile," Miller said.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) cited a 21% decline since June in the 2011 New York Mercantile Exchange gas futures strip asked in a note: "How do the buyers make money at $20.50/share?" They said the proposal contains "an inherent bet on higher commodity prices."

TPH said a competing bid from a strategic buyer wasn't likely, "but good assets at the right price and opportunity for cost synergies makes a competitive bid possible."

Moody's said "a more highly rated entity may be willing to pay a premium to gain access to EXCO's large natural gas asset base." Such a scenario could be a positive for the company's credit, Moody's said.

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