2010-05-12-2010-05-10-2010-05-10

Entered JV for 50% WI in 654,000 total acres in Appalachia Basin in PA & WV, with 186,000 prospective for Marcellus shale, gaining 265 Bcfe proved, 35 MMcfe/d, 5,000 drilling locations.

Exco Resources Inc., Dallas, (NYSE: XCO) and BG Group Plc (London: BG) have closed a joint venture forming a 50-50 operating company to develop Exco's assets in Appalachia, specifically in the Marcellus shale play, for approximately $835.2 million.

The deal was originally announced for $950 million, which consisted of $800 million in upfront cash and a $150-million drilling carry to be satisfied in 2011 and 2012.

BG has acquired assets involving membership interests in companies that hold 50% of Exco's producing and nonproducing assets in the Appalachian Basin, primarily in Pennsylvania and West Virginia, and will increase its estimated net gas resources by 2.4 trillion standard cubic feet.

Exco was expected to receive approximately $2,905 per acre, based on 327,000 net acres, and $10,215 per acre in the Marcellus play, based on 93,000 net acres.

As of year-end 2009, the existing assets comprised 654,000 net acres, with approximately 186,000 prospective net acres in the Marcellus shale; net production of 35 million cubic feet equivalent per day from primarily shallower conventional horizons; and roughly 265 billion cubic feet equivalent of net proved reserves. Exco estimates the Marcellus position includes more than 5,000 undrilled locations.

Exco and BG's jointly-owned operating company will retain operatorship of the acquired properties, of which the Marcellus acreage is currently being developed with one rig. The joint venture will pursue additional opportunities in Appalachia, where the companies will accelerate an ongoing development program for the remainder of 2010.

Additionally, a newly formed, 50-50 midstream joint-venture company will construct and expand gathering systems, pipelines and treating and processing facilities.

Exco will use cash proceeds received at the closing to reduce its credit facility, to fund an operating account for the JV and to pay general expenses.

Goldman, Sachs & Co. was advisor to Exco.

Given the current gas pricing environment, analyst Jack Aydin at KeyBanc Capital Markets considered the deal to have an "excellent" price. With more than 80% in upfront cash, the transaction was "in line" with the recently announced joint venture between Atlas Energy Inc., Pittsburgh, (Nasdaq: ATLS) and Reliance Industries Ltd., India, valued by KeyBanc Capital Markets at some $10,800 per acre.

Conversely, analysts at Tudor, Pickering, Holt & Co. Securities Inc. rated the transaction of approximately $10,000 per acre for 186,000 Marcellus acres as "below" recent Marcellus joint-venture metrics. The Atlas-Reliance JV valued at $1.7 billion consisted of $14,000 per acre for $120,000 net acres, while the $1.4-billion JV between Anadarko Petroleum Corp., Houston, (NYSE: APC) and Mitsui & Co. Ltd., Japan, (Nasdaq: MITSY) was valued at $14,000 per acre for 98,000 net acres.

According to TPH, the median price for Marcellus transactions over the past two years was $3,500 per acre.

Pritchard Capital Partners analyst Ray Deacon also noted, "If the value of the shallow reserves is allocated at $265 million, or $1 per million cubic feet equivalent, the price of roughly $7,000 per acre is still positive."