Oil and natural gas company EXCO Resources Inc (OTCMKTS:XCOOQ) has filed for Chapter 11 bankruptcy protection.
The paperwork was filed in U.S. Bankruptcy Court for the Southern District of Texas, and was completed voluntarily by EXCO. One of the reasons for such a move is the slumping commodity environment, which is making it more difficult to earn high margins. EXCO has filed the paperwork to restructure its balance sheet and to work with its lenders to deal with its debt.
In order to work through the bankruptcy process and ensure that the company survives, EXCO is looking at shrinking its overall size. This will include selling off company assets.
The CEO and president, Harold L. Hickey said, “We believe that this financial restructuring process will enable us to strengthen our balance sheet as we continue to operate in the ordinary course of business. With our strong asset base and operational expertise, we remain confident in our ability to deliver value for the benefit of our stakeholders.”
Was Bankruptcy in the Cards for EXCO Resources?
It is not common for a natural resources company to have debt on its balance sheet. However, in order to succeed as a business, the commodity market should be booming. Otherwise, there isn’t enough revenue being earned to pay back the debt. This happens to be the case for EXCO Resources.
There were two big clues that bankruptcy was a high possibility for the company. The first is the declining commodity market and the second is the company’s stock price
A year ago, the stock was trading above $13.00 per share. Today, the shares are trading below $0.50. This shows that investors were losing hope in the company and didn’t have confidence that their capital would grow.
Looking deeper into the financial statements, the debt-to-capital ratio of EXCO is 227%. This simply means that, for every dollar of equity, there is $2.27 in total liabilities. This is not sustainable over the long term. Also, when the ratio is above 50%, it means that the company is over-leveraged and that debt is an big issue for the company. EXCO was more leveraged than its industry peers, which have an average debt-to-capital ratio of 37%. That means EXCO’s debt was being using strategically to grow the company.
What’s Next for EXCO Resources?
Since the CEO has said that the company will be looking to sell off assets, it means EXCO’s market share against its competitors will shrink. There is a possibility that its direct competitors will purchase the assets at a cheap valuation. The reason for this is that EXCO holds no negotiation power, since it has filed for Chapter 11, which is done as a last resort.
One possibility after all the restructuring paperwork is complete is that EXCO could become a private company, since it’s currently a small-cap company, with a market cap of around $8.0 million. Selling off assets will make the company smaller, heightening the chances of this occurring.
“EXCO Resources, Inc. Files Voluntary Petitions for Chapter 11 Reorganization to Facilitate Financial Restructuring,” EXCO Resources Inc, January 15, 2018.
“EXCO Resources Inc.,” MarketWatch, last accessed January 18, 2018.