Natural Gas Firm Exco Gets $4.4 Billion Offer to Go Private

Natural Gas Firm Exco Gets $4.4 Billion Offer to Go PrivateNatural gas prices have been persistently sluggish lately, but it looks like deal-making is about to rev up in the sector. A few weeks ago, the Darden family, which owns 24% of Quicksilver Resources (KWK) made an overture to take the Texas-based energy firm private at a "substantial premium to the current market price."

Now it looks like there will be another deal: The chairman and CEO of Exco Resources (EXO), Douglas Miller, has offered to buy the energy company for $20.50 per share or about $4.4 billion. To pull this off, he has obtained preliminary support from a group of major investors in the company like Oaktree Capital Management and Ares Management.

Even oil legend T. Boone Pickens is interested in the deal. Pickens, a big proponent of natural gas, has a 5% stake in Exco, and a buyout would certainly be a nice boost for his efforts.

A Look at Exco


Most of Exco's revenues derive from the production of natural gas, with its main properties in eastern Texas, northern Louisiana, Appalachia and the Permian Basin in western Texas. It also holds 50% stakes in two midstream joint ventures.

Over the past couple of years, Exco underwent a significant restructuring, selling off various divisions and changing its credit agreements. But the company's most important move was to form a broad strategic relationship with British oil and gas company BG Group to capitalize on the properties in eastern Texas, Louisiana and Appalachia. In the deal, BG Group agreed to pay up to $1.8 billion in net total proceeds, which no doubt was extremely helpful in Exco's efforts to pare down its debts.

Exco focuses on so-called shale plays. Because of the complexities of extracting fossil fuels from these sources, it's often an expensive process, so it's not uncommon for smaller firms like Exco to seek help from global energy operators like BG.

Next Steps?

After a couple years of losses, Exco has returned to profitability. In the latest quarter, net income came to $564 million, or $2.62 per diluted share. The number was inflated with divestitures and unrealized derivative gains, but it still looks like Exco has streamlined its operations.

The company has a large amount of proven gas reserves, which currently stand at 1.2 billion cubic feet. But with improved technologies and further exploration, those reserves may ultimately grow to several times that amount over the next few years.

No doubt, those numbers are attractive to long-term investors like Pickens, Oaktree and Ares -- all of whom have the wherewithal to wait until pricing gets better and yields improve. But shareholders realize this and will probably want a higher bid on a buyout deal.

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