Buy, Sell, or Hold: EXCO Resources

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at EXCO Resources (NYSE: XCO  ) today, and see why you might want to buy, sell, or hold it.

Founded in 1955, based in Dallas, and with a market cap a little south of $2 billion, EXCO is an oil and gas company, focusing these days on shale fields. Its proved reserves of gas equivalents totaled about 1.3 trillion cubic feet as of the end of 2011, and it operated some 7,872 wells, as well.

Its stock is down about 16% over the past year, and has averaged a 12% loss annually over the past five years. That might be enough to keep many people away, but sometimes, fallen stocks can represent great buying opportunities.

Buy

One plus for the company is its industry: energy. Our planet isn't likely to stop demanding it any time soon.

Another plus is that it pays a dividend, recently yielding 1.9%. That's not massive, but it's significant, and the company has raised that payout by an annual average of about 17% since the dividend debuted in 2009.

In signs of strength, the company has been upping its production lately, and cutting its costs. But high production doesn't always pay off, if prices are low, and while cost-cutting can boost a bottom line, there's a limit to how much can be cut before a company is less able to produce and profit.

The stock's valuation has its appeal, too, with the price-to-sales ratio of 2.9 well below its five-year average of 4.3. In our CAPS community of investors, it sports five out of five stars, with the vast majority of folks bullish on it.

Sell

A major negative for EXCO are the extremely low natural-gas prices that have prevailed for quite some time, and a supply glut that's built up. That has put pressure on the company and its profitability, with revenue now lower than 2007 and 2008 levels, and net income has fluctuated between gains and losses in recent years. Even more serious, free cash flow has been only negative in the past few years, though trailing 12-month losses are smaller than those for 2010 and 2011.

Stock dilution is another concern, with the number of EXCO shares outstanding having more than doubled since 2007 -- though the growth seems to have stopped in 2009. It's worth keeping an eye on, though because, while a company might report strong earnings growth, if those earnings are spread out over many more shares, the per-share growth might be wiped out, or seriously diminished.

EXCO is also saddled with sizable debt, totaling about $1.8 billion. That's down considerably from a few years ago, but the company's cash level is very low, recently at $52 million. And with negative free cash flow and dividend obligations, as well, the company seems financially stressed.

Then there's EXCO's business strategy. In the face of low natural gas prices, some energy companies, such as Enerplus (NYSE: ERF  ) and SandRidge Energy (NYSE: SD  ) , have been shifting their focus toward more profitable liquid natural gas or oil. EXCO has not, though, leaving bullish investors waiting for a recovery in dry gas prices.

While EXCO's dividend is nice, it might not be around as long as it would like. Financial pressures might lead to a cut – which wouldn't be unusual in the industry. Enerplus has already cut its payout, for example. Pengrowth Energy  (NYSE: PGH  ) cut its dividend by about 40%, and others, such as Penn West  (NYSE: PWE  ) , may also have to do some trimming. Penn West sports a payout ratio well above 100%, and is hoping to raise about $1 billion or more by selling assets, worrying some investors.

Hold (off)

Given the reasons to buy or sell EXCO, it's not unreasonable to decide to just hold off. You might want to wait for the price of natural gas to rise, and the supply glut to shrink considerably. You could wait for the company to post a few quarters' worth of growth and positive free cash flow, too, and for its debt level to be significantly decreased.


The verdict


I'm going to pass on EXCO at the moment. Everyone's investment calculations are different, though, so do your own digging, and see what you think. Remember that there are plenty of other compelling stocks out there.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitterhas no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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