Dallas-based Exco Resources Inc. and New York-based holding company Harbinger Group Inc. (HGI) have formed a partnership to exploit Exco assets in East Texas, North Louisiana and West Texas in a deal worth $725 million. It gives HGI a foothold in energy that is also a bet on rising natural gas prices.

Exco will contribute its conventional non-shale assets in East Texas and North Louisiana and its shallow Canyon Sand and other miscellaneous assets in West Texas to a limited partnership with HGI and will receive $597.5 million in cash, subject to adjustments and approvals with an effective date of July 1, 2012. Exco will have a 24.5% limited partner interest in the partnership and a 50% interest in its general partner.

HGI will contribute $372.5 million in cash and will receive a 73.5% limited partner interest and a 50% interest in the general partner. The remaining $225 million of cash paid to Exco will be funded by a revolving credit agreement to be entered into by the partnership.

Properties to be contributed consist of Exco’s Cotton Valley assets in its Holly, Waskom, Danville and Vernon fields in East Texas and North Louisiana. All depths from the base of the Cotton Valley and above will be included. In addition, all of Exco’s rights (excluding all depths below the base of the Canyon Sand intervals) in its Canyon Sand field in Irion and Tom Green counties, TX, and certain other West Texas conventional properties will be included.

The more than 520 Bcfe of estimated proved reserves are approximately 82% proved developed producing, with long-lived and predictable production profiles, HGI said. About 84% of the reserves are natural gas (55% of current revenues), 8% are oil (35% of current revenues), and 8% are natural gas liquids (10% of current revenues). The assets include about 1,400 producing wells and 124,000 net leasehold acres, of which 91% are held by production.

“The venture will operate and develop the existing oil and natural gas assets and pursue acquisitions of long-life natural gas and oil properties with a significant proved producing component with undeveloped upside,” said Exco CEO Douglas Miller. “This transaction allows Exco to monetize certain of its assets and maintain a significant interest in the assets and future development upside.”

Formation of the partnership results in a $725 million valuation of the oil and gas properties included. Exco and HGI will own an economic interest in the Partnership of 25.5% and 74.5%, respectively.

The addition of an energy business to its portfolio allows HGI to diversify revenues and cash flows, the firm said, adding that the oil and gas business has traditionally exhibited low correlations to consumer products and insurance and financial services, which are HGI’s other primary businesses.

“We believe this deal will create long-term value by anchoring our new energy operating business with a long-duration gas asset at a time when natural gas is trading near historically-low levels,” said HGI President Omar Asali. “Our permanent capital structure enables us to take a long-term view on the value of natural gas, while we benefit from reliable cash streams from conservatively hedged producing wells.”

As natural gas prices begin to rise from near historical lows, this joint venture is expected to allow HGI to create value through its long-term exposure to a potential cyclical upturn in the natural gas market, the firm said.

Substantially all of the acreage is held by production. Included in the West Texas area are 145 undrilled locations, which are “heavily weighted” toward oil and natural gas liquids and are economic to drill at current prices, Exco said. “There are numerous undrilled locations and exploitation projects in East Texas and North Louisiana which, at improved gas prices, can also be developed.”

The partnership will produce and develop the assets and will pursue opportunities to acquire long-life gas and oil properties. Exco will serve as contract operator. As noted above, the cash proceeds to Exco will be used to repay a portion of the company’s revolving credit facility.

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