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EXCO Resources, Inc. Reports Second Quarter 2012 Results

Stocks in this article: XCO

"We had another successful quarter drilling in the Haynesville shale in Louisiana and East Texas and we continued our successful drilling in the Marcellus shale in Lycoming County in Pennsylvania. We also experienced encouraging results from four successful Marcellus completions in Central Pennsylvania. Our cost containment efforts across the company were very successful in the second quarter with continued reductions in operating expenses and general administrative costs as well as continued decreases in drilling and completion costs.

"We continue to review a number of possible producing property acquisitions in our existing operating areas. Also, we continue to market an interest in our conventional assets to equity partners, and we have been working with BG Group and a strategic advisor to begin marketing our TGGT midstream entity.

"We are encouraged by the better than expected performance from our base production and are also encouraged by the recent strengthening of the natural gas price. Although the natural gas market remains challenging, we believe our financial position and liquidity are sufficient to allow us to continue to meet the challenges presented."

Net income

Our reported net income (loss) shown below, a GAAP measure, includes certain items not typically included by securities analysts in their published estimates of financial results. The following table provides a reconciliation of our net income (loss) to non-GAAP measures of adjusted net income:

  Three months ended   Six months ended
June 30, 2012   June 30, 2011 June 30, 2012   June 30, 2011
(in thousands, except per share amounts) Amount   Per share Amount   Per share Amount   Per share Amount   Per share
Net income (loss), GAAP $ (496,433 ) $ 82,362 $ (778,082 ) $ 104,303
Non-cash mark-to-market (gains) losses on derivative financial instruments, before taxes 77,073 (20,056 ) 73,353 3,458
Non-cash write down of oil and natural gas properties, before taxes 428,801 704,665
Adjustments included in equity income 18,799
Non-recurring other operating items 6,673 2,980 8,625 5,955
Deferred finance cost amortization acceleration 3,000 3,000
Income taxes on above adjustments (1) (206,219 ) 6,830 (323,377 ) (3,765 )
Adjustment to deferred tax asset valuation allowance (2) 198,573   (32,944 ) 311,233   (41,721 )
Total adjustments, net of taxes 507,901   (43,190 ) 796,298   (36,073 )
Adjusted net income $ 11,468   $ 39,172   $ 18,216   $ 68,230  
Net income (loss), GAAP (3) $ (496,433 ) $ (2.32 ) $ 82,362 $ 0.39 $ (778,082 ) $ (3.63 ) $ 104,303 $ 0.49
Adjustments shown above (3) 507,901 2.37 (43,190 ) (0.20 ) 796,298 3.72 (36,073 ) (0.17 )
Dilution attributable to stock options (4)   (0.01 )   (0.01 )
Adjusted net income $ 11,468   $ 0.05   $ 39,172   $ 0.18   $ 18,216   $ 0.09   $ 68,230   $ 0.31  
Common stock and equivalents used for earnings per share (EPS):
Weighted average common shares outstanding 214,164 213,888 214,154 213,710
Dilutive stock options   3,625     3,603  
Shares used to compute diluted EPS for adjusted net income 214,164   217,513   214,154   217,313  
(1) The assumed income tax rate is 40% for all periods.

(2) Deferred tax valuation allowance has been adjusted to reflect the assumed income tax rate of 40% for all periods.

(3) Per share amounts are based on weighted average number of common shares outstanding.

(4) Represents dilution per share attributable to common stock equivalents from in-the-money stock options.

Cash flow

Our cash flow from operations before changes in working capital was $97 million for the second quarter 2012. We use our cash flow and available borrowing capacity in our credit agreement to fund our drilling and development programs.

  Three months ended   Six months ended
June 30, June 30,
(in thousands) 2012   2011 2012   2011
Cash flow from operations, GAAP $ 135,345 $ 148,960 $ 280,468 $ 228,033
Net change in working capital (45,355 ) 372 (96,934 ) 31,611
Non-recurring other operating items 6,673   2,980   8,625   5,955
Cash flow from operations before changes in working capital and non-recurring other operating items, non-GAAP measure (1) $ 96,663   $ 152,312   $ 192,159   $ 265,599

(1)  Cash flow from operations before working capital changes and non-recurring other operating items are presented because management believes it is a useful financial indicator for companies in our industry.  This non-GAAP disclosure is widely accepted as a measure of an oil and natural gas company’s ability to generate cash used to fund development and acquisition activities and service debt or pay dividends.  Operating cash flow is not a measure of financial performance pursuant to GAAP and should not be used as an alternative to cash flows from operating, investing, or financing activities. Non-recurring other operating items have been excluded as they do not reflect our on-going operating activities.

Operations activity and outlook

We spent $97 million on development and exploitation activities, drilling and completing 36 gross (19.6 net) operated wells in the second quarter 2012, compared with 42 gross (18.4 net) operated wells during the first quarter 2012. In addition, we participated in 5 gross (0.2 net) wells operated by others (OBO) during the second quarter 2012. We had an overall drilling success rate of 100% for the second quarter 2012. Our total capital expenditures, including leasing and net of acreage reimbursements from BG Group, were approximately $114 million in the second quarter 2012.

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