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

All totaled, these deals have brought about $3.6 billion to Chesapeake Energy Corporation (NYSE:CHK)’s coffers, which will enable the company to fully fund its capital budget this year. It’s done so by selling assets, which, while non-core to Chesapeake, were extensions of core assets to the buyers. For example, in the asset sales to EQT Corporation (NYSE:EQT) and Southwest, Chesapeake sold acreage that was a much better strategic fit for those buyers than for Chesapeake, so it made sense to part with those assets. Likewise, the Haynesville asset is a perfect fit for EXCO.

That being said, the Eagle Ford assets are a real coup for EXCO. While not being core totally for Chesapeake, these are high-margin, and therefore high-return, assets. However, with a 10-year drilling inventory of more than 3,500 wells, Chesapeake could spare to monetize these assets to have the capital it needs to drill those future wells. So, while the optimal solution would have been for Chesapeake’s operations to be able to fund its drilling program, the company is trying to make the best of its situation without giving away its most prized assets.

EXCO Resources Inc (NYSE:XCO) was lucky enough to be in the position to take advantage of that situation to both strengthen and extend its operations. It was able to pick up exceptional cash flow assets, at a reasonable price. That, in my opinion, makes EXCO a clear winner in this deal, as it looks like the company spent its billion dollars wisely.

The article Why Did EXCO Resources Just Spend a Billion Dollars? originally appeared on Fool.com and is written by Matt DiLallo.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool has options on Chesapeake Energy.

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