We hope that our readers are well aware of the opportunities presented by the reduction of total crude oil supply in 2017 and 2018. Many in the market are aware that the oil price is set to creep up after OPEC decided to remove 1.2m barrels a day from global oil production.
Back in 2016, a few market participants said that the OPEC was dead and many members were going to cheat, so the cut in production would not be real. It was a serious possibility, as many countries like Iran and Venezuela needed to sell crude oil to avoid bankruptcy. However, as of today, we believe that almost everybody in the market understands that this thesis was wrong.
The production was finally drastically reduced. Have a look at the following chart issued by Deloitte:
Once again Saudi Arabia has shown to the world that it can collaborate with other OPEC members and non-OPEC members even if those countries don’t talk about other matters. An example is Russia, a non-OPEC member, which decided to help push up the crude oil price by cutting 600,000 b/d.
The effects on the crude oil price are extraordinary. After a setback in June and July, wherein the Brent price was pulled back to $45, the price rapidly spiked up to $55 in October and then, thanks to another strong impulse, hit the 52-week highs of $70.
The next OPEC meeting will be held on June 22, 2018. Thus, we will need to be alert on the commentaries given by the Oil Ministers. They tend to heat the market with announcements about their expectations before the meeting goes live so that opportunities may appear.
Check the following chart:
What happened to the industry in the U.S.?
Oil and gas operators in the United States have experienced an awful period in the last four years. They had to see the oil price at the $40 mark for a long while, which destroyed many projects in the one-time flourishing oil shale industry. Many operators went bankrupt, while others needed to restructure their balance sheets.
We believe that the companies which did not close their doors and were able to maintain their operations are the real winners in this story. A few have resisted the crisis, but those who have done it will now experience not only increases in profitability but also the oil price increases. They will also see that the amount of actors has drastically diminished and doing business in the new sector is easier now than it used to be back in 2012.
If you appreciate what you read, you will like the following name, EXCO Resources Inc (OTCMKTS:XCOOQ), which is an independent operator with several attractive assets and is restructuring right now.
EXCO Resources Inc. Business Overview
EXCO Resources Inc., headquartered in Dallas, Texas, is focused on the exploitation and development of the shale resource as well as the pursuit of leasing and acquisition opportunities. The company has three primary long-term goals; restructuring the balance sheet, transforming the business into the lowest cost producer, and optimizing as well as repositioning the company’s portfolio.
The stock of the company shows that XCOOQ was very severely harmed by the decline in the crude oil price that commenced five years ago. The share price declined from the level of $8 in 2014 to hit the $1.00 mark in 2015.
The interesting point is that the stock price has still not risen with the increase in crude oil. We believe that the restructuring process and the state of the balance sheet are the main reasons for this strange behavior in the share price. In our opinion, the market is forgetting that the company has exciting oil and gas assets that will be worth millions if the crude oil price continues going up.
Check the following stock chart before we provide more information about the resources of XCOOQ and the recent restructuring:
The company owns the following assets:
– Haynesville and Bossier shale assets: located in East Texas and North Louisiana, they are part of a joint venture agreement with a wholly owned subsidiary of ROYAL DUTCH SHELL (OTCMKTS:RYDAF). According to the last annual report received for the year 2016, the average natural gas production in North Louisiana was approximately 140 net Mmcfe per day during December 2016. Additionally, in East Texas, the average natural gas production was about 57 net Mmcfe per day during December 2016
– Eagle Ford shale assets: located in the South Texas region, the company serves as the operator in the area. The average oil production was approximately 4,100 net barrels of oil equivalent per day during December 2016. We could read that the company had been evaluating the sale of these properties. We believe that the price of these assets should be much higher now given that the crude oil price has exploded up to $70 per barrel. If the company can negotiate a reasonable price, the cash received could enhance the balance sheet situation. It could be a catalyst for the stock price.
– Marcellus shale assets: located in the Appalachia region, these assets are part of a joint venture with ROYAL DUTCH SHELL (OTCMKTS:RYDAF). EXCO owns 50% interest in the Appalachia JV and 49.75% working interest in the Appalachia JV’s properties. The production in the Appalachia region was approximately 33 net Mmcfe per day during December 2016.
Be ready to assess the next annual report for the year 2017. It will include audited production numbers, which may surprise the market and create share price increases.
Some Market Participants are buying – Are they right?
If you have had a close look at the share price explosion that occurred in June 2017, let us tell you what happened. On June 20, 2017, FAIRFAX FINANCIAL HOLDINGS LTD released to the market the acquisition of a massive position in the company. According to several documents that we consulted, it holds a large number of shares and rights to acquire shares of the company.
The announcement created an astonishing market reaction. From below $1.00, an incredible momentum pushed up the share price to cross the $4 mark. We believe that demand for the stock created it.
We cannot discount that other acquisitions by the same market participant or other market participants have pushed up the stock price again. So, we consider it a catalyst for the stock.
The restructuring process
On January 16, 2018, the company released that it had filed voluntary petitions for a court-supervised reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. It was the right decision, which, we believe, will help the company negotiate in better terms with creditors.
Additionally, we could read that the company is preparing strategic alternatives to maximize value for the benefit of its stakeholders. We will be expecting assets sales, which would help increase the liquidity ratios in the balance sheet and improve the company continue its operations. Furthermore, we appreciate the commitment of $250 million in debt by several lenders -including Fairfax Financial Holdings Limited – that has been received.
The company seems optimistic about these deals. Check the words of Harold L. Hickey, EXCO’s CEO and President:
“We believe that this financial restructuring process will enable us to strengthen our balance sheet as we continue to operate in the ordinary course of business. With our strong asset base and operational expertise, we remain confident in our ability to deliver value for the benefit of our stakeholders.” Source
Currently trading with a market cap of $11 million, XCOOQ is an exciting story among small caps. With $358 million in properties, $163 million in Goodwill and $82 million in net receivables, the company seems to have still many assets to sell. We believe that the restructuring process is the last chance for the company. If it can obtain an attractive price for the assets and the restructuring goes well, the company will continue its operations.
We also need to note that sometimes companies are not able to exit the restructuring process and stockholders are wiped out.
To sum up, we believe that this is a company to be monitored closely.
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Disclosure: We have no position in XCOOQ and have not been compensated for this article.
Image courtesy of BLM via Flickr