Highlights:
— Oil and natural gas production was 36.3 Bcfe, reflecting record daily production of 404 Mmcfe per day for the first quarter 2009 compared with the oil and natural gas production of 35.1 Bcfe (386 Mmcfe per day) in the year-ago quarter. This record daily production was achieved despite decreases in drilling and completion activity due to low commodity prices. Net production from EXCO Resources Haynesville shale drilling contributed 1.9 Bcf (21 Mmcf per day) for the first quarter 2009 from three producing horizontal wells drilled during the fourth quarter 2008 and first quarter 2009 and nine vertical test wells drilled during 2008. EXCO Resources current net production from the Haynesville shale, including wells completed in April, exceeds 45 Mmcf per day.
— Oil and natural gas revenues for the first quarter 2009 were $172 million, exclusive of the impacts of derivative financial instruments (derivatives), compared with the first quarter 2008 oil and natural gas revenues of $325 million. The lower revenues reflect realized price declines of 47% for natural gas and 61% for oil from the prior year’s first quarter. When the impacts of cash settlements from our oil and natural gas derivatives are considered, the oil and natural gas revenues, as adjusted, would have been $271 million for the first quarter 2009 compared with $328 million for the first quarter 2008.
— 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 $0.19 per share for the first quarter 2009 compared with $0.28 per share for the first quarter 2008 and $0.13 per share during the fourth quarter 2008.
— Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, depletion and amortization and other non-cash income and expense items for the first quarter 2009 was $195 million compared with $254 million in the first quarter 2008.
— Midstream operating profit, before the effect of intercompany eliminations, was $7 million for the first quarter 2009, equal to the prior year’s first quarter.
— EXCO Resources first quarter 2009 loss was negatively impacted by net non-cash after-tax losses of about $1.3 billion representing ceiling test write-downs and income tax valuation allowances, which were partially offset by unrealized gains on derivatives, resulting in a GAAP loss of $1.1 billion. See our Net Income section, which presents details for each of the aforementioned significant non-cash items. EXCO Resources ceiling test write-down in the first quarter 2009 was based on March 31, 2009 cash spot market prices of $3.63 per Mmbtu for natural gas and $49.64 per Bbl of oil computed in accordance with current guidelines established by the Securities and Exchange Commission (SEC).
— In light of the continuing price declines in natural gas, the company has adjusted its capital expenditure program and is effectively limiting capital projects to Haynesville shale drilling, limited drilling in the Marcellus shale in Appalachia and midstream pipeline projects to assist delivery of Haynesville volumes. EXCO Resources approved capital budget for 2009 is $582 million, of which $326 million is for drilling and completion. The company presently expects to reduce its budget needs to about $500 million, of which $266 million is for drilling and completion.
Douglas H. Miller, EXCO Resources’ chairman and chief executive officer, commented, “I’m very pleased with the progress we have made toward our goals of managing our spending, accelerating our development of the Haynesville shale and strengthening our balance sheet. We have completed six operated horizontal wells in the Haynesville shale and results have been outstanding. Our first five wells in DeSoto Parish averaged initial production rates of almost 24 Mmcf per day, with one recent completion exceeding 26 Mmcf per day. Our first Caddo Parish well is one of the best in the area, with an initial production rate of nearly 9 Mmcf per day. These results have been accomplished while reducing our drilling days from 75 days to less than 50 days in some cases. We reaffirmed our borrowing base at nearly $2.5 billion, have initiated a sales effort on non-core properties and continue to pursue joint venture opportunities in our Haynesville shale area, including the midstream operations. During the remainder of 2009, we will continue to aggressively develop the Haynesville, will continue to ramp up our activity in the Marcellus shale in Appalachia and focus on our balance sheet.”
“With our current asset base and our success in the Haynesville shale we expect to maintain and grow our production despite our reduced drilling activity in other areas. Our cash flow for 2009 and 2010 will be greatly enhanced by our strong hedge position and the positive results from our drilling program.”
Cash Flow:
First quarter 2009 cash flow from operations before changes in working capital and settlements of derivative financial instruments with a financing element (adjusted cash flow) was $165 million, a 26% decrease from the prior year’s first quarter due primarily to lower product prices.
Operations activity and outlook
EXCO Resources has spent $113 million on development and exploitation activities, drilling and completing 34 gross (27.9 net) wells in the first quarter 2009, compared with 118 gross (99.5 net) wells during the fourth quarter 2008. The company has an overall drilling success rate of 94% for the first quarter 2009, as it has concluded 34 of the 36 wells drilled. The company’s total capital expenditures, including leasing, midstream and corporate activities, were $152 million in the first quarter 2009. As commodity prices continued declining, EXCO Resources continued to reduce its drilling activities. The company currently has eight drilling rigs operating across its portfolio, which it has reduced from 32 drilling rigs late in the third quarter 2008 in response to lower commodity prices. Anticipated 2009 capital spending, when compared with 2008, on drilling and leasing in EXCO Resources exploration and production operations is reduced in all operating areas while midstream capital has been increased as it has begun building additional throughput in the East Texas/North Louisiana area.
EXCO Resources is continuing with plans to sell certain non-core assets during 2009. The company has completed asset sales of about $21 million through April 2009. It also continues to pursue joint venture opportunities. 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 the company’s largest division in terms of production and reserves, and its primary targets across this region have been the upper and lower Cotton Valley, Travis Peak, Pettet and Hosston formations. While the company has continued to drill and exploit these formations, EXCO Resources is reducing most of this activity in response to low commodity prices, but the company is increasing emphasis and expanding activity in its Haynesville shale play position. EXCO Resources 2009 budget for the division totals $284 million, with $189 million allocated to Haynesville shale activities (primarily drilling and completion activity). In East Texas/North Louisiana, EXCO Resources drilled and completed 21 gross (16.8 net) wells in the first quarter 2009.
