EXCO RESOURCES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 0-9204

EXCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)

Texas (State of incorporation)		74-1492779 (I.R.S. Employer Identification No.)
6500 Greenville Avenue Suite 600, LB 17 Dallas, Texas (Address of principal executive offices)		75206 (Zip Code)
(214) 368-2084 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ý NO o

The number of shares of common stock, par value $0.02 per share, outstanding at April 30, 2003 was 7,031,993 shares (excludes 248,434 treasury shares).

EXCO RESOURCES, INC.

INDEX


PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets December 31, 2002 and March 31, 2003
		Condensed Consolidated Statements of Operations Three Months Ended March 31, 2002 and 2003
		Condensed Consolidated Statements of Cash Flow Three Months Ended March 31, 2002 and 2003
		Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2002 and 2003
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosure About Market Risk
Item 4.		Controls and Procedures
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 5.		Other Information
Item 6.		Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

EXCO RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

				December 31,			March 31,
				2002			2003
							(Unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	1,942		$	2,238
	Accounts receivable:
		Oil and natural gas sales			12,299			17,517
		Joint interest			1,889			1,941
		Interest and other			7,343			7,902
	Oil and natural gas hedge derivatives				—			26
	Marketable securities				1,823			1,870
	Other				902			1,077

			Total current assets		26,198			32,571
Oil and natural gas properties (full cost accounting method):
	Unproved oil and natural gas properties				4,979			5,240
	Proved developed and undeveloped oil and natural gas properties				314,517			347,613
	Allowance for depreciation, depletion and amortization				(109,545	)		(117,221	)

	Oil and natural gas properties, net				209,951			235,632
Office and field equipment, net					1,030			986
Deferred financing costs					1,100			1,869
Oil and natural gas hedge derivatives					140			26
Other assets					2,755			2,755

			Total assets	$	241,174		$	273,839

EXCO RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

				December 31,			March 31,
				2002			2003
							(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities			$	21,821		$	22,183
	Revenues and royalties payable				3,353			3,734
	Accrued interest payable				95			169
	Income taxes payable				—			2,560
	Oil and natural gas hedge derivatives				7,924			11,523

			Total current liabilities		33,193			40,169
Long-term debt					97,943			108,173
Asset retirement obligations					2,176			13,151
Deferred income taxes					7,978			9,690
Oil and natural gas hedge derivatives					—			1,099
Commitments and contingencies					—			—
Stockholders' equity:
	Preferred stock, $.01 par value:
		Authorized shares—10,000,000
		Issued and outstanding shares—5,004,869 and 4,989,869 at December 31, 2002 and March 31, 2003, respectively			101,175			100,872
	Common stock, $.02 par value:
		Authorized shares—25,000,000
		Issued and outstanding shares—7,262,953 and 7,277,952 at December 31, 2002 and March 31, 2003, respectively			145			146
	Additional paid-in capital				53,107			53,410
	Deferred compensation				(705	)		(649	)
	Notes receivable—employees				(173	)		(175	)
	Deficit eliminated in quasi-reorganization				(8,799	)		(8,799	)
	Retained earnings (deficit) since December 31, 1997				(35,600	)		(32,564	)
	Accumulated other comprehensive income (loss):
		Hedging activities			(5,024	)		(8,409	)
		Foreign currency translation adjustments			(938	)		981
		Unrealized gain (loss) on equity investments			258			306
	Treasury stock, at cost: 248,434 shares at December 31, 2002 and March 31, 2003				(3,562	)		(3,562	)

			Total stockholders' equity		99,884			101,557

			Total liabilities and stockholders' equity	$	241,174		$	273,839

See accompanying notes.

EXCO RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

			Three Months Ended March 31,
			2002			2003
Revenues:
	Oil and natural gas sales, before hedge settlements		$	11,845		$	34,718
	Oil and natural gas hedge settlements			645			(7,708	)
	Derivative ineffectiveness			(115	)		(2,544	)
	Other income			2,211			847

		Total revenues		14,586			25,313
Costs and expenses:
	Oil and natural gas production			6,348			8,520
	Depreciation, depletion and amortization			3,792			5,079
	Accretion of discount on asset retirement obligations			—			295
	General and administrative			1,872			3,548
	Interest			508			1,108

		Total costs and expenses		12,520			18,550

Income before income taxes				2,066			6,763
Income tax expense				—			2,669

Income before cumulative effect of change in accounting principle				2,066			4,094
Cumulative effect of change in accounting principle, net of income tax				—			255

Net income				2,066			4,349
Dividends on preferred stock				1,314			1,311

Earnings on common stock			$	752		$	3,038

Basic earnings per share:
	Income before cumulative effect of change in accounting principle		$	.10		$	.39
	Cumulative effect of change in accounting principle, net of income tax			—			.04

	Earnings on common stock		$	.10		$	.43

Diluted earnings per share:
	Income before cumulative effect of change in accounting principle		$	.10		$	.33
	Cumulative effect of change in accounting principle, net of income tax			—			.02

	Earnings on common stock		$	.10		$	.35

Weighted average number of common and common equivalent shares outstanding:
	Basic			7,115			7,022

	Diluted			7,545			12,544

See accompanying notes.

EXCO RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited, in thousands)

			Three Months Ended March 31,
			2002			2003
Operating Activities:
Net income			$	2,066		$	4,349
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation, depletion and amortization			3,792			5,079
	Accretion of discount on asset retirement obligations			—			295
	Cumulative effect of change in accounting principle, net of income tax			—			(255	)
	Deferred income taxes			—			379
	(Income) expense from derivative ineffectiveness and terminated hedges			(2,020	)		1,396
	Other operating activities			1			150

Cash flow before changes in working capital				3,839			11,393
	Effect of changes in:
		Accounts receivable		1,870			(5,059	)
		Other current assets		(3,004	)		(152	)
		Accounts payable and other current liabilities		1,733			2,383

Net cash provided by operating activities				4,438			8,565
Investing Activities:
Additions to oil and natural gas property and equipment				(9,218	)		(14,374	)
Proceeds from dispositions of property and equipment				—			3,050
Other investing activities				—			(32	)

Net cash used in investing activities				(9,218	)		(11,356	)
Financing Activities:
Proceeds from long-term debt				8,000			16,077
Payments on long-term debt				(1,000	)		(10,711	)
Proceeds from exercise of stock options				130			—
Preferred stock dividends				(1,314	)		(1,311	)
Deferred financing costs				(66	)		(972	)
Issuance of treasury stock				29			—
Other financing activities				(19	)		(2	)

Net cash provided by financing activities				5,760			3,081

Net increase in cash				980			290
Effect of exchange rates on cash and cash equivalents				47			6
Cash at beginning of period				1,856			1,942

Cash at end of period			$	2,883		$	2,238

Supplemental Cash Flow Information:
Interest paid			$	608		$	914

Income taxes paid			$	—		$	—

See accompanying notes.

EXCO RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

			Three Months Ended March 31,
			2002			2003
Net income			$	2,066		$	4,349
Other comprehensive income:
	Hedging activities:
		Effective changes in fair value		(7,580	)		123
		Reclassification adjustments for settled contracts		(469	)		(2,533	)
		Amortization of terminated contracts		(2,135	)		(975	)

	Total hedging activities			(10,184	)		(3,385	)

	Foreign currency translation adjustment			(12	)		1,919
	Unrealized gain on equity investments			—			48

Total comprehensive income (loss)			$	(8,130	)	$	2,931

See accompanying notes.

EXCO RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)

1. Basis of Presentation

In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the financial position of EXCO Resources, Inc. as of December 31, 2002 and March 31, 2003, and the results of operations and cash flows for the three month periods ended March 31, 2002 and 2003.

We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We have omitted certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to those rules and regulations, although we believe that the disclosures we have made are adequate to make the information presented not misleading. You should read these financial statements in conjunction with our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2002.

The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results we expect for the full year.

Certain prior year amounts have been reclassified to conform to current year presentation.

Stock Options

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for employee stock compensation plans, but allows for the continuation of the intrinsic value based method of accounting to measure compensation cost prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). For companies electing not to change their accounting, SFAS 123 requires pro forma disclosures of earnings and earnings per share as if the change in accounting provision of SFAS 123 has been adopted.

We have elected to continue to utilize the accounting method prescribed by APB 25, under which no compensation cost has been recognized, and adopt the disclosure requirements of SFAS 123. As a result, SFAS 123 has no effect on our financial condition or our results of operations at March 31, 2002 and 2003. Stock based compensation expense reflected in the table below for the three months ended March 31, 2002 and 2003, is a result of options issued under our 1998 Stock Option Plan that were issued subject to our shareholders' approval and, for the three months ended March 31, 2003, options that were issued to the management and key employees of Addison.

Had compensation costs for these plans been determined consistent with SFAS 123, our net income and earnings per share (EPS) would have been adjusted to the following pro forma amounts:

		March 31,
		2002		2003
		(In thousands, except per share amounts)
Stock based compensation expense (net of taxes)	As Reported	$	31	$	264
	Pro Forma	$	420	$	666
Net income	As Reported	$	2,066	$	4,349
	Pro Forma	$	1,677	$	3,947
Basic EPS	As Reported	$	.10	$	.43
	Pro Forma	$	.05	$	.38
Diluted EPS	As Reported	$	.10	$	.35
	Pro Forma	$	.05	$	.31

2. Asset Retirement Obligations

Prior to 2003, we provided for future site restoration costs on our Canadian oil and natural gas properties based upon management's estimates. The costs were being recognized over the remaining life of proved reserves by a charge to depreciation, depletion and amortization in the statement of operations with a related increase in the non-current deferred abandonment liability. Actual expenditures for site restoration were charged to the deferred abandonment liability when incurred.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". The statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. We adopted the new rules on asset retirement obligations on January 1, 2003, for both our U.S. and Canadian operations. Application of the new rules resulted in an increase in net proved developed and undeveloped oil and natural gas properties of approximately $11.4 million, recognition of an asset retirement obligation liability of approximately $10.4 million, an increase in deferred income tax liability of approximately $690,000, and a cumulative effect of adoption that increased net income and stockholder's equity by approximately $255,000.

The following pro forma data summarizes our net income and net income per share as if we had adopted the provisions of SFAS 143 on January 1, 2002, including an associated pro forma asset retirement obligation on that date of $7.1 million:

		Three Months Ended March 31,
		2002			2003
		(In thousands, except per share amounts)
Net income, as reported		$	2,066		$	4,349
Pro forma adjustments to reflect retroactive adoption of SFAS 143			(85	)		(255	)

Pro forma net income			1,981			4,094
Dividends on preferred stock			1,314			1,311

Pro forma earnings on common stock		$	667		$	2,783

Earnings on common stock per share:
	Basic-as reported	$	0.10		$	.43

	Basic-pro forma	$	0.09		$	.39

	Diluted-as reported	$	0.10		$	.35

	Diluted-pro forma	$	0.09		$	.33

The following is a reconciliation of our asset retirement obligations at March 31, 2003 (in thousands of dollars):

Deferred abandonment costs at December 31, 2002	$	2,176
Cumulative effect of change in accounting principle		10,434

Asset retirement obligation as of January 1, 2003		12,610
Activity during the three months ended March 31, 2003:
Liabilities incurred during period		120
Liabilities settled during period		(340	)
Accretion of discount		295
Effect of foreign exchange differentials		466

Asset retirement obligation at March 31, 2003	$	13,151

We have no assets that are legally restricted for purposes of settling asset retirement obligations.

3. Earnings Per Share

SFAS No. 128, "Earnings per Share", requires presentation of two calculations of earnings per common share. Basic earnings per common share equals net income less preferred stock dividends divided by weighted average common shares outstanding during the period. Diluted earnings per

common share equals net income divided by the sum of weighted average common shares outstanding during the period plus any dilutive common stock equivalents. Common stock equivalents are shares assumed to be issued if (1) outstanding stock options or warrants were in-the-money and exercised, and (2) our outstanding 5% convertible preferred stock was converted to common stock.

The assumed conversion of our 5% convertible preferred stock to common stock is considered to be anti-dilutive for the three month period ended March 31, 2002 and is therefore not included in the diluted earnings per share calculation. Our 5% convertible preferred stock would have increased the diluted weighted average number of shares outstanding by 5,004,869 shares for the three months ended March 31, 2002.

		Three Months Ended March 31,
		2002	2003
		(In thousands)
Weighted average number of basic shares outstanding		7,115	7,022
Effects of:
	Employee and director stock options	430	525
	Convertible preferred stock	—	4,997

Weighted average number of diluted shares outstanding		7,545	12,544

4. Oil and Natural Gas Properties

We have recorded oil and natural gas properties at cost using the full cost method of accounting. Under the full cost method, all costs associated with the acquisition, exploration or development of oil and natural gas properties are capitalized as part of the full cost pool.