EXCO Resources: Stay Cautious Despite the Rally

EXCO Resources (XCO) has delivered an impressive rally on the stock market in the past few weeks. For instance, in the past one month, the stock is up almost 19%. This strong run is a result of the improvement in oil prices, but there is more to EXCO that investors need to take a look at.

EXCO is reducing costs

To improve its operating margins, the company will considerably focus on its cost structure going forward. To achieve a lower cost base, it will improve its drilling and completion performance through the implementation of best practices and advanced techniques.

Likewise, it will also reduce its G&A and operational cost, which will consequently boost its corporate rate of return.

In addition, EXCO intends to put its capital to the best use, and therefore, it will strategically deploy it to achieve the highest returns from its plays. As per Business Wire, “The Company will deploy its capital to each incremental well based on prices, cost and performance and will make real-time decisions to modify its development plans based on returns.” Once these improvements start yielding results, EXCO will be able to generate a higher rate of return that will enhance its financial performance over a long-term horizon.

Moreover, in a bid to turnaround its business, the company has taken various measures. Its strategic plans involve six key focus areas with ten improvement plans, which should help EXCO emerge out of the downturn in a better manner.

Apart from these improvements, EXCO has also hedged its oil and natural gas, which will protect it from any steep volatility in pricing going forward. The company has hedged different volumes of both oil and gas at higher prices for this year and 2016 as well. Thus, it will be able to mitigate some of the impact of the fluctuations in commodity market.

A risk to watch

However, despite these efforts, we cannot expect a quick turnaround. On account of the prevailing headwinds, Moody’s Investor Services has downgraded EXCO’s credit risk to its lowest rating categories. According to a report “XCO’s downgrade reflects the steady erosion in its credit profile and increased pressure on liquidity, a function of the impact chronically weak US natural gas prices has had on its core natural gas operations.”

Moreover, the company does not have either trailing or forward P/E and analysts anticipate negative growth in the coming years. Although EXCO’s P/S multiple of 0.66 is favorable as compared to the industry average of 10.83, investors must not be fooled by this metric. Before investing, it is important to look at its prospects, which are quite depressing at the moment. Therefore, investors should not fall for the uptick in EXCO’s share price in recent weeks.

Published on Oct 22, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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