EXCO Resources: Avoid This Stock Despite PositivesXCO) badly this year as its shares are down over 57%. For instance, last quarter, EXCO’s revenue was down 49% from the prior-year period. In addition, EXCO posted a net loss of $12 million as compared to a profit of $7 million in the prior-year period. However, EXCO has implemented a transformational strategy in order to improve the efficiency of its business.
A look at the transformational strategy
EXCO is executing a transformational strategy that focuses on six major areas -- liability management, operational performance, capital deployment, risk management, portfolio repositioning, and performance management.
In the second quarter, its superior well performance in the East Texas Shelby area led to a 15% expansion in EUR's for undeveloped Haynesville shale wells to about 1.5 Bcf per 1,000 lateral feet. EXCO is witnessing solid results in the Buda formation in the second quarter 2015.
The successful deep drilling of Haynesville shale wells in addition to the company’s continued execution on improving performance while minimizing its cost structure is expected to drive enhanced productions at the key wells and deliver sustainable profitable growth.
EXCO has strategically deployed its capital to achieve highest growth at minimized costs. The energy major plans to allocate its overall capital to every growing well depending on costs, price and performance and expect to make real-time choices to adjust its growth plans depending on returns.
EXCO uses derivative financial instruments to shield returns on the employed capital and allow extra declining safety on its present base production. Going forward, EXCO plans to enhance the contribution to its production volumes and maximize time frame under derivative financial instruments. This key strategy is developed to hedge proved growing production for some time that preserves 85% of the value linked with new wells as they starts production.
The well-planned approach of EXCO to uniquely deploy its entire capital across each of its growth plans while hedge these investments with derivative financial instruments is estimated to drive long-term company growth and enable the management to deliver on its continued commitment for providing superior investor returns.
Moreover, EXCO is focused on strategically distributing its capital for planned drilling to deliver superior value and grow its drilling inventory by uniquely acquiring and leasing key acreages. During May 2015, the board of directors at EXCO agreed to a $25 million expansion to its 2015 capital budget to successfully implement some oil and natural gas leasing prospects in EXCO's major operating verticals of East and South Texas. In the second quarter 2015, EXCO leased an extra 11,000 total acres in Zavala County, Texas.
Despite all these positives, EXCO’s weak profit margins, uncertainty in the oil market, and a debt-laden balance sheet, with $1.49 billion in debt, make it a risky investment. Hence, I think that it will be feasible for investors to avoid this stock until and unless there is a recovery in the oil market.
Published on Sep 24, 2015By Vinay Singh