Francis Chou Comments on EXCO Resources

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Mar 24, 2017

In 2015, we initiated the position in EXCO Resources second-lien term loan 12.5%, maturing in 2020. This term loan did quite well in 2016, rising in price from 55.8 cents on a dollar at December 31, 2015 to 72.9 cents on a dollar at December 31, 2016, an increase of 30.7% excluding interests received.

EXCO Resources is an independent oil and natural gas company that engages in the acquisition, exploration, development and production of onshore oil and natural gas properties with a focus on shale resource plays in the United States.

We liked this security because it met our criteria for investing in the Oil & Gas sector. The criteria that we considered in analyzing this type of investment is that the security should be:

1.A first or second lien loan or note;

2.Issued by a company with a significantly limited ability to add senior or pari-passu debt to its capital structure; and

3.Of a type that if the company restructures or goes into bankruptcy, the recovery value of the bond is likely to be greater than the current price of the bond.

As of December 31, 2016, the Fund owned about $19 million worth of EXCO’s second-lien term loan ($26 million in par value). This is the largest position in the portfolio, comprising more than 20% of the assets of the Fund (at market value). In addition to the security being very senior in the capital structure, we also hold the view that management seems to be making good decisions with respect to the allocation of capital in a tough environment.

From Francis Chou (Trades, Portfolio)'s Opportunity Fund fourth quarter 2016 shareholder letter.