EXCO Delivers Record Results, Reviews 2009 Planned Activity
EXCO Resources announced full year and fourth quarter 2008 results and 2009 planned activity.
Oil and natural gas revenues for the full year 2008 were a record $1.4 billion, exclusive of the impacts of derivative financial instruments (derivatives), compared with the full year 2007 oil and natural gas revenues of $876 million, an increase of 60%. Oil and natural gas revenues for the fourth quarter 2008 were $249 million, prior to derivatives.
Oil and natural gas production was 145 Bcfe for the full year 2008, a 19% increase from the prior year's production of 121 Bcfe, and 37 Bcfe for the fourth quarter 2008, approximately 7% higher than the prior year’s quarter. The average daily production for the fourth quarter 2008 was 403 Mmcfe per day.
Adjusted net income available to common shareholders, a non-GAAP measure adjusting for unrealized derivative gains and losses, non-cash ceiling test write-downs and other non-cash items typically not included by securities analysts in published estimates, was $0.82 per share for the full year 2008 and $0.13 per share for the fourth quarter 2008 compared with an adjusted net loss of $0.04 per share for the full year 2007 and $0.08 of adjusted net income per share for the fourth quarter 2007.
Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, depletion and amortization and other non-cash income and expense items (a non-GAAP measure) for the full year 2008 was $978 million, an increase of approximately 28% from the full year 2007 level. Fourth quarter 2008 adjusted EBITDA was $212 million.
Midstream operating profit, before the effect of intercompany eliminations, was $35 million for the full year 2008 and $8 million for the fourth quarter 2008 compared with $23 million and $6 million for the full year 2007 and the fourth quarter 2007, respectively.
Our full year 2008 GAAP earnings were negatively impacted by net non-cash after-tax losses of approximately $1.9 billion representing ceiling test write-downs and income tax valuation allowances, which were partially offset by unrealized gains on derivatives. The after-tax impact from the same non-cash items in the fourth quarter 2008 totaled $1.2 billion. See our Net Income section, which presents details for each of the aforementioned significant non-cash items. Our ceiling test write-down in the fourth quarter 2008 was based on December 31, 2008 cash spot market prices of $5.71 per Mmbtu for natural gas and $44.60 per Bbl of oil computed in accordance with guidelines established by the Securities and Exchange Commission (SEC). None of the aforementioned non-cash items affect our liquidity or compliance with bank covenants.
We completed our first Haynesville shale horizontal well in December 2008, the Oden 30 H #6 (EXCO 100% WI) located in DeSoto Parish, Louisiana, which produced at an initial rate of 22.9 Mmcf per day. The well produced 1.0 Bcf in the first 64 days of production and is currently producing in excess of 12 Mmcf per day. We spud our second and third operated horizontal wells late in the quarter and have recently completed one of the two. Our Lattin 24 #4 (EXCO 92.8% WI), also located in Desoto Parish, produced at an initial rate of 24.2 Mmcf per day with 7,350 psi flowing pressure on a 26/64ths choke. The third horizontal well in DeSoto Parish is currently being completed and should be on line in early March 2009.
Douglas H. Miller, EXCO's Chief Executive Officer commented, "EXCO had record production, revenues and cash flows in 2008. We made very good progress in exploiting our shale assets, particularly the Haynesville shale in East Texas and North Louisiana, and also began the process of exploiting the Marcellus shale in Pennsylvania. Our first two horizontal wells in DeSoto Parish, Louisiana are two of the best wells drilled in the play to date and confirmed that our core acreage, much of which is held by production, is in a very advantageous position. We plan to continue an aggressive development program in the Haynesville play in 2009 even though our overall 2009 capital expenditure budget has been reduced by over 40% from 2008 capital expenditures due to low commodity prices. Our strong production base and hedge position coupled with planned sales of non-core assets will generate substantial free cash flow in 2009 thereby allowing us to continue a significant development program and also reduce our debt."
Operations activity and outlook
We spent $204 million on development and exploitation activities, drilling and completing 118 gross (99.5 net) wells in the fourth quarter of 2008, and $989 million for the full year 2008. Our overall drilling success rate for full year 2008 exceeded 98%, as we completed 467 of the 475 wells drilled. Our total capital expenditures, including leasing, midstream and corporate activities, were $240 million in the fourth quarter 2008. As commodity prices continued declining in the fourth quarter 2008, we accelerated our reduction of drilling rigs, which reduced our growth in production. We currently have 11 drilling rigs operating across our portfolio, which we have reduced from 32 drilling rigs late in the third quarter of 2008 in response to lower commodity prices. Anticipated 2009 capital spending on drilling and leasing in our exploration and production operations is reduced in all operating areas while midstream capital has been increased as we begin building additional capacity in the East Texas/North Louisiana area.
Although our board of directors has approved our 2009 capital budget of up to $582 million, we will continue to evaluate planned projects based on current commodity prices and service costs. We may decide to defer capital expenditures in certain operating areas if those projects do not meet our economic return hurdles.
We are continuing with plans to sell certain non-core assets over the next twelve months and are also continuing to explore joint venture opportunities. Although specific additional sales have not been announced, proceeds of all sales or joint ventures will be used to reduce debt and allow more capital to be focused on our shale development and other activities.
East Texas/North Louisiana
East Texas/North Louisiana is our largest division in terms of production and reserves, and our primary targets across this region have been the upper and lower Cotton Valley, Travis Peak, Pettet and Hosston formations. While we have continued to drill and exploit these formations, we are reducing most of this activity in response to low commodity prices, but we are increasing emphasis and expanding our activity in our Haynesville shale play position. Our 2009 capital spending outlook for the division totals $284 million, with $189 million allocated to Haynesville shale activities (primarily drilling and completion activity). In East Texas/North Louisiana, we drilled and completed 38 gross (27.1 net) wells in the fourth quarter 2008. We drilled and completed 158 gross wells (117.7 net) during the year in East Texas/North Louisiana and realized a 100% success rate.
A significant amount of our Haynesville shale acreage is held by production and is within areas of the play which have been proven productive by our and our competitors' drilling and completion activities. During 2008, we strategically focused on adding to our leasehold and drilling to delineate the shale play rather than focusing on maximizing production from the shales. During the fourth quarter of 2008, our activities in the Haynesville shale play transitioned from a vertical testing and data acquisition program to a horizontal development program. By the end of the fourth quarter 2008, we had drilled nine operated vertical wells and spud five horizontal wells in the play (three EXCO operated, two outside operated). Our drilling to date in Harrison County, Texas and Caddo and DeSoto Parishes, Louisiana has identified a Haynesville shale section up to 300 feet thick. We are seeing a consistent shale section over the areas of the play delineated to date and we are very encouraged with our results.
Our first operated horizontal well located in DeSoto Parish, the Oden 30 H#6, initially flowed 22.9 Mmcf per day at 7,800 psi flowing pressure on a 26/64ths choke. Our second horizontal well in DeSoto Parish, the Lattin 24 #4 initially flowed 24.2 Mmcf per day at 7,350 psi flowing pressure on a 26/64ths choke and is performing similarly to the Oden. Our third horizontal well in DeSoto Parish, the Sammo Partnership 18 #5, is currently in the completion phase and should be on line in early March. We also have an outside operated horizontal well in the completion phase that should be on line in early March.
We are currently running four operated horizontal rigs and three outside operated rigs in the play. Our current plans in the Haynesville shale anticipate a peak of six operated horizontal drilling rigs running by mid 2009. In total, we expect to drill 34 horizontal wells, seven of which will be drilled by other operators during 2009, with 27 of these wells forecasted to be completed in 2009. We believe our Haynesville shale acreage could contain potential reserves of approximately 4.5 Tcf.
Our Haynesville shale production for the week ended February 16, 2009 was 35 Mmcf per day gross (26 Mmcf per day net). We expect significant production and reserve growth from our Haynesville shale development program in 2009 and beyond.
Recent reductions in gas prices have put pressure on Cotton Valley economics, but through high grading our drilling opportunities and expected cost reductions, certain projects continue to meet our economic hurdle criteria. We plan to drill three operated Cotton Valley wells in the Vernon Field area, nine operated wells in the Holly/Caspiana Field and two operated wells in the Danville Field. We currently have two vertical rigs drilling in our Vernon Field area and two vertical rigs operating in northwest Louisiana in our Holly/Caspiana Field. The existing rigs are under term drilling contracts and as these commitments expire, we plan to release these rigs.
In Appalachia, we primarily operate in Pennsylvania, Ohio, and West Virginia, where we have historically drilled for the Clinton/Medina sandstone, stacked Devonian sandstones, Devonian shales, Berea shale and other productive horizons. During the fourth quarter of 2008, we achieved a 100% drilling success rate on the 42 gross (40.7 net) wells drilled on our Appalachian properties. During 2008, we drilled 149 gross (139.2 net) wells and achieved a 99% success rate. At the end of the fourth quarter of 2008, we had two active drilling rigs; one pursuing conventional targets and one pursuing unconventional targets.
We hold in excess of 1,038,000 net leasehold acres which represents an increase of over 175,000 acres as compared to December 31, 2007. This increase resulted from leasing activities in the Marcellus play together with our February 2008 acquisition of shallow assets. We now control approximately 395,000 acres in the Marcellus shale fairway, with more than 249,000 acres located in the over-pressured core area of the play. A significant percentage of this fairway acreage is held-by-production by our shallow producing assets. We also hold 130,000 acres within the Huron shale play in West Virginia.
Successful testing of the Marcellus and Huron has been conducted within the over-pressured and the normal to under-pressured areas of the basin. We have identified areas with encouraging reservoir characteristics, including thickness, pressures and total organic content.
During 2008, we drilled and completed two horizontal Marcellus wells in our over-pressured area of central Pennsylvania with initial production rates of 1.0 Mmcf per day and 3.4 Mmcf per day following one-stage and four stage fracs, respectively. The number of fracs and resulting production rates were lower than expected, as our lateral sections were shortened due to geological issues. To avoid similar issues and improve drilling efficiencies, we are acquiring 3D seismic in certain areas and have ordered new-build, fit-for-purpose drilling rigs. Our primary efforts are to evaluate and plan the development of our Marcellus shale position in the core over-pressured areas of Pennsylvania and West Virginia. During the fourth quarter 2008, we spud two vertical wells and drilled and cased two horizontal wells. We plan to complete these two horizontal wells in the second quarter of 2009.
We believe our present leasehold position in the Marcellus and Huron shale fairways contains 7–12 Tcf of potential reserves.
We drilled and completed 26 gross (24.3 net) wells in our Permian area Canyon Sand Field during the fourth quarter and achieved a 96% success rate. This brings the total number of wells drilled during 2008 in this field to 118 gross (111.2 net) with a 98% success rate. In 2009, we will drill two wells to earn 11,000 net contiguous acres under a joint venture and will evaluate recently acquired 3-D seismic over approximately 35,000 net acres adjacent to the Canyon Sand Field. Our total leasehold in this area is approximately 77,000 net acres.
Fourth quarter net production of 25.9 Mmcfe per day is up from less than 20 Mmcfe per day in November 2007 when EXCO took over operations.
Our Mid-Continent division production averaged approximately 66 Mmcfe per day during the fourth quarter 2008. In the Mid-Continent, we drilled 12 gross (7.4 net) wells and achieved a 92% success rate. While we had one rig running at year end, no rigs are currently running in the Mid-Continent division.
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