EXCO CEO has no plans to lever up, has held no discussions on debt funding for buyout offer

By Paul Deckelman

New York, Nov. 3 - The chairman and chief executive officer of EXCO Resources Inc., Douglas H. Miller, said Wednesday that he would "back off" from taking the energy company private if the equity partners for his proposed management-led buyout wanted him to take on a lot of leverage to fund the deal.

He also said that - although his proposal specifically mentioned "as needed, third-party debt financing" as a possible funding source for the estimated $4.4 billion buyout transaction - he has, as yet, held no discussions with potential lenders.

Miller also told analysts on the Dallas-based independent exploration and production company's conference call following the release of its third-quarter earnings that any transaction arising from his Nov. 1 offer - either his own deal or a better deal from some other potential buyer now that the company is in play - would take at least six months to a year to complete because of all of the steps that need be followed.

And he said that he had formulated no plans for taking the company private at the time EXCO did a big bond offering in September - he began thinking about that option only afterward, when "the stock price underperformed" as natural gas prices remained at low levels.

Lawyers can't hush feisty CEO

At the top of the conference, Miller actually advised participants that his proposal to acquire EXCO for $20.50 a share in cash, a 38% premium over the stock's closing price the previous Friday, Oct. 29, was before a special committee of the company's board of directors, and he probably should not say anything further about it on the advice of "the lawyers all over the room."

But as analysts peppered the CEO with questions about the buyout proposal, he quickly broke his silence and talked about the deal anyway.

The veteran oilman - making folksy asides about how "the lawyers are shaking their heads," and "the lawyers are going ape" - even further teased the legal eagles by telling an analyst who asked how long it might take him to get a firm bid on the table, "if you tell me how long the goddamn lawyers will take, I'll tell you long It'll take. I'll be there 30 days after the lawyers let me sign" a confidentiality agreement.

He continued to skirt the bounds of corporate political correctness when an analyst asked him why his proposed bid of $20.50 was well below the company's own previous estimate of its net asset value - between $25 per share on the low side and $37 on the high side, issued over the summer and then lowered to around $20 to $25 currently to reflect the continued decline in natural gas prices.

"The stock was trading at $13 to $15" before he made his bid, Miller asserted. "If nobody wants to own the stock, and I do, why do I have to pay $35? We went out all summer, talking to everybody we could talk to [about getting an offer for the company] to see if we could help it. Nobody gave a s - -t, so I figured it was time to buy it. He impishly added "oh, I can't say that, can I? Sorry."

No link to bond deal timing

But Miller turned somewhat less jolly when an analyst questioned whether it was "fair to the bondholders to propose such an obviously pretty significant change in the structure of the company" so soon after the bond deal, which saw EXCO price $750 million of 7½% senior notes due 2018 on Sept. 10 at 98.53 for a yield of 7¾% and net proceeds after expenses of $724.4 million.

"Who said I was proposing a change to the capital structure?" he demanded, bristling that the questioner was "making some assumptions that you shouldn't be making" about the likelihood of his increasing the company's leverage as part of the deal - although the analyst then pointed out that this was raised as a possibility in Miller's own letter to the board.

"It could be that there's no offer either" at the end of the day, the executive said. "There's a lot of 'could-be's in that statement." He acknowledged the need, legally, to include the possibility of debt funding in the letter, but added "Why don't you wait and see the [capital] structure before you spank me?"

Answering another analyst's query about the timing of the go-private offer so relatively soon after the bond deal, Miller explained that "I always am looking at ideas and entertaining" options for the company. "There was no contemplation of a go-private when we did the deal, trust me on that. The bankers went through due diligence. You know the stock under-performed, and I just thought there was an opportunity with gas prices going down."

No debt funding lined up

When asked whether he had lined up any debt financing for use "as needed" to fund the deal, Miller declared that "the answer is no - I have not had any discussions on any debt financing. I have had discussions only on equity financing."

In his letter to the board of directors, Miller said that he had held preliminary discussions with such potential backers as Oaktree Capital Management, LP and Ares Management LLC, on behalf of one or more of those private equity companies' funds under management, as well as with legendary oil industry deal-maker T. Boone Pickens, "and each has expressed an interest in pursuing the acquisition with me." All are current EXCO shareholders - according to published reports, Oaktree is the biggest with a 16% stake in the company, Ares has 6%, Pickens around 5% and Miller himself just over 2%.

Miller told an analyst that "I can't tell you how much equity I'm putting in. I'm putting in a significant amount of mine, and I think the management group will be putting in a significant amount of theirs." He said that he would not reduce his bid proposal, even if already low natural gas prices continue to decline. "My bid stands, and didn't have any contingency on gas prices," he vowed.

Miller said that EXCO has "almost $1 billion of liquidity today, and I would expect that if I put a deal together, I would maintain that."

He recounted how, when he and other some other investors last took EXCO private several years ago, around the middle of the last decade (a transaction later followed by EXCO going public, its current status), "I got into an argument with one of my co-investors" about levels of equity and debt in that deal.

After that experience, he said that "I don't want to start with too much leverage, and I'm not gonna. If investors say we gotta put a lot of leverage on this, I'm gonna back off. We need a lot of equity in this thing and we need a lot of [borrowing] availability. There's two or three ways this company can go - that is drilling faster, making acquisitions, or all of the above."

Miller also raised the alternate possibility that with the company now in play, another potential buyer could emerge - a prospect that he, as a sizable shareholder, and the other even larger shareholders like Pickens, Ares and Oaktree would welcome. "The special committee will shop it around, our employees will put on data rooms for them, and if there's a higher bid out there, we welcome them and we will take it."

EXCO improves balance sheet

Apart from the discussion about the Miller buyout offer, which dominated much of the conference call, company executives noted that, in the words of its president and chief financial officer, Stephen F. Smith, EXCO has "done a lot in terms of shoring up the balance sheet."

The company embarked upon a program last year to either sell and monetize, or do joint ventures, involving about 36% of its former production. The proceeds from those transactions helped to bring its net debt level down to under $1 billion from around $3 billion at the end of 2008.

The company's vice president for financial planning and analysis, Paul B. Rudnicki, told the conference call that as of the end of the third quarter on Sept. 30, EXCO had total debt of $1.04 billion, consisting of the $750 million of 7½% notes issued in September as well as $254 million of bank debt. The bond deal proceeds were used to pay for the redemption of the company's $444.7 million of 7¼% senior notes due 2011, which took place in mid-October, and to pay down a portion of its outstanding credit agreement balance.

EXCO had $151.3 million of cash and equivalents on hand at the end of the quarter, for a net debt figure of $853 million. The company and its bankers went through a redetermination process last month, resulting in a new borrowing base on its revolving credit agreement of $1 billion. Current availability under that revolver is $730.4 million, leaving the company with unused availability plus cash of just under $882 million.

Rudnicki also said that TGGT - EXCO's 50-50 East Texas/Northern Louisiana midstream joint venture with the British energy concern BG Group, a frequent JV partner - is evaluating a credit facility, looking to set it up by year-end. He said that will allow the joint venture to be self-funding going forward, without depending upon its parents.

CFO Smith announced that for the quarter, EXCO had adjusted net income of $34.38 million, or 16 cents per share, in line with prior guidance.

"We had another good quarter," he said. "We are very pleased with where we are."

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