Exco’s $300 Million Eagle Ford Deal Unravels

Exco Resources Inc.’s (NYSE: XCO) $300 million Eagle Ford sale to Venado Oil and Gas LLC has been scuttled and the company may find liquidity challenges ahead, such as its ability to make debt interest payments.

The deal, which was to have closed in June, was sidetracked by a wrangling over a natural gas contract with a Chesapeake Energy Corp. (NYSE: CHK) subsidiary that ended up in federal court.

Venado and Exco extended the close to Aug. 15, when the agreement was terminated after the terms, including the natural gas contract, could not be met.

Exco had earmarked the Eagle Ford proceeds for use in the Haynesville Shale. The company now faces a financial bind after making two deals despite potential liquidity challenges.

On Aug. 16, Exco said it had been notified on Aug. 10 that it could be delisted from the New York Stock Exchange because its average global market capitalization fell below $50 million over a trailing consecutive 30 trading-day period while its shareholders’ equity was also less than $50 million.

Exco shares dropped 10.4% to a new 52-week low at $1.03 on Aug. 16, Baird Energy Research said.

That spells additional problems for the company, as it discussed on an earnings call earlier this month.

Exco management said that in June the company had made interest payments with equity while directing $23 million in cash to operations. Because share prices have dropped dramatically, Exco will be unable to meet future interest payments with shares without a dramatic change in share value.

Harold L. Hickey, Exco president and CEO, said on the Aug. 9 earnings call that if the Eagle Ford assets weren’t divested, the company’s liquidity “will be significantly limited and being able to comply with near term covenants in our debt agreements will be challenged.”

Despite its troubled financial condition, Exco closed on the purchase of North Louisiana assets on June 2 and Aug. 4 for a total of $19.1 million.

Asked on the earnings call why management had made the purchases despite potential liquidity problems, Hickey said the bulk of the assets are already operated by Exco.

“We got a very accretive acquisition that creates a lot of value for the company regardless of what situation we may end up in,” he said. “So [the] decision was made. Good assets, we like them, it creates value, move on.”

In regulatory filings, Exco put much of the blame for its botched Eagle Ford sale on Chesapeake.

Exco said closing the deal was initially delayed after Chesapeake Energy Marketing LLC sought to end a natural gas sale and purchase contract with Exco affiliate Raider Marketing LP.

The company also said in June it was forced to shut in a “large number” of oil and gas wells as a result. Chesapeake’s contract purchases associated gas from Exco oil wells in the Eagle Ford under an April 2013 agreement. Chesapeake has said it did not act improperly.

On May 31, Chesapeake sought to cancel the contract, which was set to expire in 2032. Venado required a contract to be in place to go through with the sale.

In response, Exco and Raider unsuccessfully petitioned a Dallas County court judge for a temporary injunction.

“Chesapeake now wants to walk away from the contracts because it is unhappy with the price/cost structure it previously agreed to,” Exco said in a court filing. “In an effort to force Raider to renegotiation … Chesapeake is attempting to hold up the impending $300 million sale of Exco Resource’s South Texas oil and natural gas properties.”

Exco said its Chesapeake Energy Marketing’s “refusal to purchase Raider’s gas has caused Exco’s oil-producing wells to be shut-in, reducing Exco’s oil production.”