EXCO Resources (XCO) Q4 2011 Earnings Call February 24, 2012 10:00 am ET Executives Douglas H. Miller - Chairman of the Board, Chief Executive Officer, Chairman of EXCO Holdings, Chief Executive Officer of EXCO Holdings J. Douglas Ramsey - Treasurer and Vice President of Finance Stephen F. Smith - Vice Chairman, President, Chief Financial Officer and Director Paul B. Rudnicki - Vice President of Financial Planning & Analysis Harold L. Hickey - Chief Operating Officer and Vice President Harold Jameson - Vice President and General Manager of East Texas/North Louisiana Joint Venture area Unknown Executive - Analysts William B. D. Butler - Stephens Inc., Research Division Subash Chandra - Jefferies & Company, Inc., Research Division Leo P. Mariani - RBC Capital Markets, LLC, Research Division Brian Singer - Goldman Sachs Group Inc., Research Division Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division Gil Yang - BofA Merrill Lynch, Research Division Unknown Analyst Joseph D. Allman - JP Morgan Chase & Co, Research Division Jack N. Aydin - KeyBanc Capital Markets Inc., Research Division Howard Flinker - Flinker & Company David Neuhauser Alex Heidbreder Presentation Operator
J. Douglas RamseyThanks, Doug. I would like to remind everyone that you can go to www.excoresources.com, click on the Presentations link in the Investor Relations section at the bottom of our homepage to access today's presentation slides. Statements that may be made on this conference call regarding future financial and operational plans, projections, structure, results, business strategies, market prices and derivative activities or other plans, forecasts, statements that are not historical facts are forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on a variety of assumptions that may change depending on future events, which are difficult to predict. Actual results may differ materially from those forward-looking statements. We caution you not to place undue, if any, reliance on such statements. Please refer to Pages 23 and 24 of the slide presentation for the complete text regarding our forward-looking statements, as well as the cautionary information set forth in our most recent Form 10-K, Form 10-Q, and other SEC filings, which are available on our website at www.excoresources.com. In addition, the slide presentation contains information, including reconciliations regarding certain non-GAAP financial numbers, which will be discussed on today's call. Doug? Douglas H. Miller Is that longer than normal? It seems like it. Okay, we'll get started. With me here, Steve Smith, Paul Rudnicki, Ramsey, of course, Hal Hickey, Marcia Simpson, Mike Chambers, Mark Wilson and our 2 lawyers to keep me quiet, Lanny Boeing and Justin Clarke. So with that, we'll get kicked off. It has been a wild year, to say the least. A year ago at this time, we were going private, and here we are public, with $2.02 gas or whatever it's trading at. So it's been a challenging year, even though we had quite a few accomplishments. Our operating guys set all kinds of records. They hit their targets. We averaged 552 million a day in the fourth quarter with quite a bit shut in because of the plants still not being on, averaged over 500 million for the year, which is up significantly over the year before. They've -- we have kind of unpicked the lock on the manufacturing in DeSoto Parish, so we have continued to upgrade and change and we'll get into that as we go. We delineated Shelby but what -- because gas fell below $4, we have ceased drilling down there. It takes $4 to make our 20% rate of return down there. And so all rigs have been released from there. Hal will get into that. We do have 14 to 16 wells coming on here over the next month or so.
Marcellus, the guys are doing a good job up there, especially in the Northeast. We'll get into some of the results there. We're over 100 million a day of production up there. And it looks like -- we were thinking at year end, because we worked our first budget back in the fall, it looks like we could get a 20% rate of return down to $3. But since it's gone under $3, we're going to slow that drilling down also.I'd say that part of the reason for going private last year, we wanted, we had a group that wanted to be a buyer and consolidator of gas. We didn't think it was appropriate to be a public company at the time, so we were going to take the fair and full price. We -- I thought gas would be a $3 to $4 commodity for a couple of years, until e-vehicles or power started using it. I think what's happened is gas has gone down a lot farther than we thought. Clearly, if we had gone private, we'd be down 25% right now. But with gas going down farther, I think what it's done is accelerated what I expected to be some demand increase, the power which we expected to really be a gas user by the end of '12 and really getting into '13, you're starting to see it already. There's a lot of people that are really benefiting from low natural gas price, chemical companies, fertilizer companies and I kind of expect those guys to start beginning hedging at these prices right here, because many operators are shutting in. Hal will get into that. We're not going to be shutting in our Haynesville gas, but we are looking at the rest of our portfolio and we do have uneconomic conventional gas wells and Hal, we are going to be shutting those in. And I think, across the industry, if everybody'll look at their portfolio on conventional gas, especially the ones that make water, I'll bet we have 10% to 15% of the production that's out there that should be shut in just because they're losing money at these prices.
The other thing that we've done since the beginning of the year is it's all hands on deck on looking at costs across every venue, especially on the operating side and we're starting to find some. Well, I expect during '12, we'll have some fairly significant cost cutting going on. We're already seeing that. For this year, we're working on our balance sheet. As we explained, we have an unrestricted subsidiary, TGGT pipeline a joint venture with BG. We have signed an exclusive agreement to sell 1/3 of that. We're marching on that and that is an unrestricted subsidiary, cash that comes in here. We will just go to reduce debt and again, what I'm trying to do is get as much cash available as we can because there's a lot of opportunities out there. I mentioned to the banks a week ago that I thought there was at least $20 billion of deals in the marketplace today. I think that's expanded by about $10 billion since I made that statement. So there's a lot of deals in both oil and gas. We have been approached by a couple of large institutions to do joint ventures in acquiring conventional gas. We're working on that as we speak. We think there are some opportunities out there to buy conventional gas and obviously, all you would be doing is buying it. You wouldn't be drilling any of it. We've also been approached recently to do a joint venture on buying shale gas with somebody that will be putting up some drilling dollars. We're evaluating that. So we have a lot of things cooking that we'll be getting done. Four or 5 oil deals are on the market. We've had people in the field this week, reviewing those. I expect we'll be making bids on that in the next, not-too-distant future. Again, we're going to be focusing on liquidity and we're going to be focusing on some M&A that was out there. With that, I'm going to turn it over to Steve.
Stephen F. SmithAll right, let's go to Page 7 in the slide book and talk a little bit just about the year of '11 and the fourth quarter. As Doug has already mentioned, we had a good, an excellent year, really, in terms of production. We averaged 501 million a day. That was a huge increase over last year, 63%. We also increased revenues. We increased EBITDA. So it -- year-over-year, was a very good performance and our operating people have done an outstanding job. Our operating costs are really down between years like 39% and we expect that trend to, not that kind of decrease, but we expect to maintain those operating costs at a very low level. Our operating costs in the Haynesville right now are about $0.08. And so that tells you that -- why we have no interest in shutting in that production. And the Marcellus operating costs are also low. So we're looking forward to continuing that trend. The quarter of '11 versus '10 is also about that, those same kind of growth numbers in terms of revenues and all the rest of it. As far as Q4 versus Q3, there was a tremendous decrease in gas price by 17% between Q3 of '11 and Q4 of '11. So obviously, the fourth quarter wasn't exactly what we anticipated it would be, but on the other hand, it was still a good quarter. We made $0.64 of cash flow from operations, which was strong and so in spite of, as Doug mentioned already, the curtailments that we have at the TGGT facility, we should be back online by the end of March. Cash G&A costs are down a lot, 36%. And so all in all, it was a pretty good year and a pretty good quarter. Read the rest of this transcript for free on seekingalpha.com