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What happened
EXCO Resources' (NYSE: XCO) stock slumped on Monday, falling more than 13% by 2:45 p.m. EST. That was after it received a notice from the New York Stock Exchange (NYSE) that it was in noncompliance with the exchange's continued listing standards. The natural gas driller is exploring several options to regain compliance, including undertaking a reverse stock split.
So what
The NYSE requires that companies listed on its exchange abide by certain rules, including closing above $1 per share to avoid the appearance of being a "penny stock." If any stock closes below that threshold for more than 30 days, it is no longer in compliance with the exchange's listing rules. It then has six months to regain compliance; it can do so by closing above that level on the last trading day of any month, and having a 30-trading-day average price above $1 per share.
Companies like EXCO Resources have a range of options to regain compliance. They can hope that reporting positive financial results or other good news causes investors to bid the stock up above $1 per share; EXCO is considering the sale of its South Texas properties and issuing additional debt to improve its liquidity, which could lure buyers.
However, the quickest solution to regain compliance is to complete a reverse stock split, which would reduce the number of outstanding shares and increase the stock price. For example, if EXCO completed a 1 for 10 reverse split, its stock price would theoretically increase tenfold, going from its current trading price of $0.71 per share to $7.10 per share, thus crossing the $1 threshold and regaining compliance.
One recent example of a reverse stock split in action is Halcon Resources (HK +0.00%). The oil and gas producer completed a prepackaged bankruptcy last year, which handed over 96% of the company's equity to creditors. That resulted in such a significant amount of dilution for existing shareholders that Halcon Resources needed to complete a 1 for 34 stock split to remain in compliance with the NYSE's listing standards, once the new shares started trading on the exchange after the restructuring. In this case, the reverse split worked, as Halcon's stock currently trades at more than $8 per share, instead of the less than $0.25 per share the stock would likely trade for without the reverse split.
Now what
The noncompliance notice from the NYSE is another reminder that EXCO Resources remains a troubled company. Even if it does complete a reverse split, that will not address the company's financial woes, so the announcement has investors spooked that EXCO might eventually share Halcon's fate and restructure via bankruptcy.
