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Watsa, Ross and Marks Following the Success of EXCO's Transaction
Posted by: Victor Selva (IP Logged)
Date: January 24, 2014 11:15PM
This first month of the year has been successful for EXCO Resources Inc. (XCO) as three hedge fund managers have invested in it. They are: Prem Watsa (Trades, Portfolio), which added the stock at an average price of $4.88 and currently holds 17.538.912 shares, Wilbur Ross (Trades, Portfolio) also added the stock at $4.74 holding 51.107.800 shares and finally, Howard Marks (Trades, Portfolio) at an average price of $4.99 and 45.251.182 shares of the stock.
The company is an independent oil and natural gas company engaged in the exploration, exploitation, development and production of onshore U.S. oil and natural gas properties with a focus on shale resource plays. The company’s principal operations are conducted in certain key U.S. oil and natural gas areas including East Texas, North Louisiana, Appalachia and the Permian Basin in West Texas. In addition to its oil and natural gas producing operations, the company owns 50% interests in two midstream joint ventures located in East Texas, North Louisiana and Appalachia.
This oil company recently announced preliminary results of its rights offering. The transaction was successful because the participation was reasonably high. Of the 54.5 million total shares of common stock expected to be issued, it believes that approximately 60% will be issued in the rights offering. The transaction makes core shareholders increase their beneficial ownership, to exercise more control.
Few months ago the firm announced a series of actions to increase revenues and improve profitability. In January 2013, it acquired certain conventional oil and natural gas assets in the Danville, Waskom and Holly fields in east Texas and north Louisiana, including and above the Cotton Valley formation, from an affiliate of BG Group plc.
The company's focus is on development of its acreage in the Haynesville shale play where it holds approximately 65.000 net acres. The Haynesville shale is at depths of 12,000 to 14,500 feet and is being developed with horizontal wells that typically have 4,000 to 5,500-foot laterals resulting in 16,000 to 20,000 feet of total measured depth. These acreage positions are key drivers for long-term growth.
Severe Warning Signs
We found three severe warning signs issued by GuruFocus: the firm keeps issuing new debt (over the past 3 years USD1.1 billion); revenue has been in decline over the past five years; and gross margin has been in long-term decline (the average rate of decline per year is 3.3%).
In terms of valuation, its price-to-book ratio of 4.19 indicates a premium versus the industry average of 1.4 while the price-to-sales ratio of 1.88 is below the industry average of 3.31 and close to 3-year low. The current dividend yield is 3.78%, which is considered well enough to protect the purchasing power and is above the industry median of 3.5%.
Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago and it has demonstrated a positive trend until last year. We include in the next graph the stock price because EPS often lead the stock price movement.
The price has done poorly compared to where it was a year ago. It is close to 10-year low of $4.88.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of strength and is attractive for investors.
Competitors such as Sandridge Energy Inc. (SD), Penn Virginia Corp. (PVA), Newfield Exploration Co. (NFX) also have a negative ROE. An alternative could be Cabot Oil &Gas Corp. (COG), Range Resources Corp. (RRC), SM Energy Co. (SM), Pioneer Natural Resources Co. (PXD) or Whiting Petroleum Corp (WLL), Berry Petroleum Co. (BRY), but for investors searching for a higher ratio, Continental Resources Inc. (CLR) will be the best option.
Although severe warnings we discussed previously, taking into consideration the P/S ratio, Wall Street values good every dollar of the company's sales (the lower the ratio, the more attractive the investment). Moreover, the firm’s EPS and ROE growth, revert past performance while the market expects an improvement for this year. In addition, the company demonstrates its commitment to return cash to investors. Finally, the stock's decline last year, is positive for future investors.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Howard Marks: Current Portfolio, Stock Picks
Jim Simons: Current Portfolio, Stock Picks
Stocks Discussed: XCO, SD, COG, PVA, RRC, SM, SWN, NFX, PXD, WLL.CLR, BRY,