2010-06-16-2010-06-16-2010-07-01

Bought Haynesville & Bossier shale deep rights in 20,063 net acres in Shelby, San Augustine &Nacogdoches counties, TX.

Dallas-based Exco Resources Inc. (NYSE: XCO) has acquired deep rights in the East Texas Haynesville and Bossier shales from Houston-based Southwestern Energy Co. (NYSE: SWN) for approximately $355.8 million ($177.9 million net).

The assets include deep rights only in 20,063 net acres, producing assets and gathering lines and equipment in Shelby, San Augustine and Nacogdoches counties. Southwestern has retained the drilling and producing rights covering all other depths in the acreage, including the company's current James lime and Pettet drilling programs.

Exco estimates production from the acquired zones at 51 million cubic feet of gas per day gross (17 MMcf net) from nine producing wells. Southwestern reported production of approximately 10 MMcf per day as of April 1. Net proved reserves were approximately 31 billion cubic feet equivalent as of year-end 2009. Upside includes more than 900 gross drilling locations.

The development of these properties will be governed by the existing East Texas/North Louisiana joint venture between British company BG Group Plc (London: BG) and Exco. BG has the option to purchase 50% of the acquisition.

In May, Exco and BG jointly acquired 29,200 net acres in the same counties for $442 million from privately held, Houston-based Common Resources LLC.

The deal was announced on June 17. Exco financed the deal with borrowings under its credit agreement. The effective date is April 1.

Southwestern will continue to have an active drilling program in East Texas, which includes approximately 10,500 additional net acres prospective for the Haynesville and Middle Bossier shale intervals. The company is currently drilling its second Haynesville/Bossier well in this additional acreage and expects initial production to occur in the fourth quarter upon the completion of pipeline infrastructure.

Pro forma the sale, Southwestern has revised its capital program in East Texas for 2010 to approximately $185 million, which includes participating in approximately 35 to 45 gross wells, down from $230 million, which had included 50 to 60 wells.

Pritchard Capital Partners analyst Ray Deacon says, assuming that proven reserves are worth approximately $70 million and that the other assets and production are worth $20 million, "we estimate that Exco paid approximately $13,000 per acre for Southwestern's acreage."

According to KeyBanc Capital Markets analyst Jack Aydin, Exco will pay $20,882 per flowing Mcf of net daily production and $17,694 per net acre. Adjusting for the reserve value and gathering system, the price per acre is $14,700 to $15,000 per acre. This compares to the $37,167 per flowing Mcf of net daily production and $15,274 per net acre that Exco and BG recently paid for the Common Resources production and acreage.

"We believe this is a positive bolt-on transaction, as it increases the company's interests in the prolific East Texas side of the Haynesville shale play and emerging Bossier shale play."

Analysts at Tudor, Pickering, Holt & Co. note that severing shallow and deep drilling rights isn't Exco's standard playbook, "but it's safe to say Exco likes what they are seeing because they keep adding more." They paid $15,300 per acre for the Common Resources acquisition, and are now increasing working interests in the same assets for about $17,700 per acre.

Regarding Southwestern, the TPH analysts say the move illustrates the company is willing to "swap, sell, or acquire" Haynesville or Marcellus acreage as neither area is big enough yet to balance its Fayetteville holdings. "We believe Southwestern has something new up their sleeves."

Morgan Stanley analyst Stephen Richardson calls the deal metrics "solid" at $17,500 per acre or $12,000 per acre assuming average peer multiple of $11,500 per flowing Mcfe.