About a week ago, oil and gas producer EXCO Resources (XCO) announced it was looking into certain restructuring activities in light of the continued low commodity price environment. The analysts and markets interpreted this "restructuring" as a sign of a potential bankruptcy filing. Over the next few days, EXCO shares tumbled more than 75% from $1.75 to $0.56 per share. Five years ago, EXCO shares traded for nearly $20, so it's hard to find many investors who have made money on the company.
To be sure, the market's reaction to the restructuring wasn't completely off base. EXCO's balance sheet shows approximately $1.4 billion in total debt and $73 million in cash as of March 31. Shareholders equity is negative to the tune of nearly $800 million.
But there is a saying that the market sells on the rumor, which is basically saying the market tends to react right away before digesting all the facts.
And the facts here are more qualitative in nature, but still interesting. Notably, EXCO has some very shrewd investors including Wilbur Ross, Howard Marks and Prem Watsa of Fairfax. These investors consist of both equity and debt holders. And when you have smart, powerful investors in the corner, it bears watching, as was the case today.
EXCO announced some changes that continue to make this a particularly interesting idea. First, the board of directors has reduced its size so that a majority are shareholders, around 50% to be exact. The company is reducing its spending budget by approximately 70% to $85 million. In addition, EXCO initiated a cost reduction program that began some months ago. To date, the company has been effective in its efforts. I encourage all interested investors to read the company's press release that was issued this morning for more detail.
EXCO has approximately $250 million of available liquidity and no debt maturities until 2018. So it's a good bet that a bankruptcy is off the table until then, unless we have a catastrophe in the natural gas market. And I suspect the company is going to get very efficient from this point forward. So if you believe the commodity environment will improve by 2018, EXCO may be a very interesting idea.
Today, Mr. Market didn't disappoint either: EXCO shares jumped by over 60% on the news of management's efforts. Understanding the risks and opportunities in the energy industry creates a chance for immense upside if patience and diligence can be applied.