This is "short" and hopefully sweet for a trade. We believe EXCO is a short, which is easy to borrow if you are inclined, or has traded put options. As if no one has noticed, we have a LOT of excess gas. Production cut backs, producers flaring their gas "byproduct", and speculative juices in the NGL space are all testament to this. If you are familiar with Rob Raymond of RR Advisors in Texas, you would know : He has a great track record. He does not equivocate in his opinion when in a public forum (search under Robert Raymond on CNBC, Bloomberg, etc for clips). He has nailed gas prices directionally for some time. Suffice it to say, that along with Boone Pickens, he firmly believes we will see gas in 2012 with a $1 handle. If you believe this thesis, you could short natural gas outright, or short an overleveraged producer, who's main product is dry natural gas, run by a promotional CEO who is experiencing financial distress. This would be EXCO (XCO).

 

At around $7, XCO is implying approximately $1.55ish on an EV/proved Mcfe. In a market where credit providers and some strategics are assigning zero value to PUDs, then the current price could have room to fall. At year end, XCO was approximately 45% PUD.

 

If you assume the PUDs hold no value presently, we estimate the stock is work the following:

 

Assumed EV/Mcfe (ex-PUD)

 

Gas            Fair Value/Share

 

.75              -1.00

 

1.00              -.08 

 

1.25               .88

 

1.50              1.80

 

1.75              2.75

 

2.00              3.70

 

2.25              4.65

 

2.50              5.60

 

XCO has an approximate blended hedge rate for 2012 of approximately $4.00/mcf, and are essentially unhedged for 2013. They recently experienced a downgrade by S&P, and of their approximate $170mm in cash, $117mm is restricted. We are supposing that they will hit covenant violations in late 12 or early 2013.

 

One curiosity to ponder is that Wilbur Ross keeps buying. That said, CEO Doug Miller recently blew out 1.2mm shares (about half his stock) to meet a margin call supposedly related to a soured investment in a wine and spirits chain. 

 

 

Ongoing weakness in natural gas prices.

 

Strategic buyers and lenders unwilling to assign value to PUDs.

 

Covenant violations.