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Why Did EXCO Resources Inc (XCO) Just Spend a Billion Dollars?

EXCO Resources Inc (NYSE:XCO)While most investors were thinking about what was going to be served at the family Fourth of July picnic, EXCO Resources Inc (NYSE:XCO) was out shopping. The oil and gas company came away with a big haul, as it picked up $1 billion worth of assets from Chesapeake Energy Corporation (NYSE:CHK). While many investors have looked at the deal from the Chesapeake Energy side, I’m curious as to what’s in it for EXCO Resources Inc (NYSE:XCO).

When you look at it from the EXCO side of things, two main themes come to the forefront. First, the deal diversifies EXCO Resources Inc (NYSE:XCO)’s asset base by adding a strategic entry into the oil-rich Eagle Ford shale. Secondly, the acquisition fortifies EXCO’s position in its core Haynesville operations. When you add it all up, it’s a pretty solid acquisition for the company.

In breaking down the deal, EXCO Resources Inc (NYSE:XCO) is picking up 120 total producing wells on 55,000 net acres in the Eagle Ford for about $680 million. Those wells are currently producing about 6,100 barrels of oil equivalent per day. Further, the company is picking up proven reserves of about 29 million barrels of oil equivalent, with the potential for more than 92 million barrels of oil equivalent reserves as it develops the acreage. The key here is that the Eagle Ford acres add both geographic diversity and high-margin oil to the company’s reserves. The following slide sums up the asset well:

Source: EXCO Resources investor presentation.

The second part of the deal brings Chesapeake Energy Corporation (NYSE:CHK)’s interest in two Haynesville Shale packages, which EXCO Resources Inc (NYSE:XCO) is picking up for $320 million. It includes non-operated interests in 170 EXCO-operated wells, as well as operated interests in 11 Chesapeake sections adjacent to EXCO Resources Inc (NYSE:XCO)’s core operations. The key to this part of the deal is that it strengthening and lengthening EXCO’s core area:

What investors need to see here is that this is a pretty good deal for both companies. While Chesapeake is giving up oily Eagle Ford acres, these are not its highest return core acres. As investors know, Chesapeake really needs to shore up its balance sheet, and it’s turned to asset sales to make that happen. Already this year it’s signed a billion-dollar joint venture for some of its acres in the Mississippian Lime, as well as smaller deals in the Marcellus with EQT Corporation (NYSE:EQT) and Southwestern Energy Company (NYSE:SWN).