EXCO Resources (NYSE: XCO) shares were heading higher today, likely being fueled by the quick exit of CEO Douglas Miller. The market's excitement, however, might be directed to the fact that with Miller out of the way the company can entertain other suitors.
Miller, as investors might remember, attempted to acquire control of the company back in 2010. At the time he offered $20.50 per share in cash. The company's board solicited other potential suitors, but none came forward. At that time natural gas prices were falling, and in the end the proposed deal's financing fell through as well. Miller came in with a lower bid, but the board chose not to move forward with the transaction and Miller gave up. As the chart shows, it has been a rough ride for EXCO Resources.
There is no doubt that any would-be acquirer would be picking up a company with assets that are loaded with potential. The company has positions in the Marcellus, Haynesville, Eagle Ford, and Permian Basin. While it's gas-heavy due to the Haynesville, EXCO is getting oilier thanks to a recent deal with Chesapeake Energy (CHKA.Q).
The problem for a would-be acquirer is that EXCO has an array of complex deals with private equity firms and international oil companies. The following slide from a recent investor presentation details its current Eagle Ford drilling program.
Source: EXCO Resources Investor Presentation
As the slide shows, there are a lot of moving parts. That makes it tough for the average investor to follow the company. It's also tough for a potential suitor to be interested when it would have to share so many of the company's assets.
The issue is that a would-be acquirer would be stuck with these legacy deals. Not that these are bad deals, but they do reduce some of the control premium that an interested party might be willing to pay. Not only that, but the gas-heavy nature of a lot of EXCO's assets make it a tough sell with gas prices still low.
However, what we might now see is EXCO doing something more unique in order to unlock value and boost its share price. This is a company with T. Boone Pickens and Wilbur Ross sitting on its board, both of whom are known for extracting value. A sale of a prime asset, followed by a leveraged tender offer for some of its shares, just might be the next best thing to an outright sale.
The company has been doing a lot of maneuvering this year. As mentioned, it bought $1 billion in assets from Chesapeake Energy. At the same time it exited its midstream business and entered into a partnership with Harbinger Group (NYSE: HRG) on some conventional assets in the Gulf Coast.
The core of the company is increasingly focused on its operations in the Haynesville and the Eagle Ford. The company has, on the other hand, apparently given up on the Marcellus Shale. Earlier this year, EXCO slashed its rig count and its staff in the region. The company just doesn't have the low costs that peers like Range Resources (RRC 3.25%) have, which is why it can't make the triple -igit returns that Range can produce from the Marcellus.
Bottom line, even if EXCO put up the "for sale" sign now that its CEO has resigned, it's not likely to attract too many bidders. Even if it did, the value would be depressed. Instead, the company is much more likely to shed assets like its properties in the Marcellus in an attempt to rebuild value. It could use those proceeds, plus take on some debt and buy back a nice chunk of shares. Maybe in a few years, after it has cleaned up a bit of the complexity, it might be a bit more attractive to a future suitor.
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