Drilling Costs Dampen Flame at EXCO Resources

(MoneyWatch) 

• The Company: EXCO Resources, an independent energy producer focused primarily on onshore natural gas properties in the United States.
• The Filing: Form 10-Q filed with the SEC on August 8, 2008
• The Finding: The process of digging fossil fuels out of the ground is getting more expensive. EXCO Resources said drilling and development capital expenditures alone increased almost 34 percent to $136 million for the second-quarter ended June 30, compared with the prior year quarter.

The Upshot: Lease operating expenses and gathering/transportation costs, increased year-over-year 31 percent to $1.13 per million cubic feet (per Mcfe) and 43 percent to $0.10 per Mcfe, respectively. Management attributes the jump in spending to competitive demand for leaseholds, equipment (such as drilling rigs and tubular goods), fuel and utilities.

Fuel costs and casing and tubular costs rose 40 percent and 50-60 percent, respectively, since the first of the year, according to Chief Operating Officer Hal Hickey.

General and administrative expenses climbed year-on-year 28 percent to 55 cents per million cubic feet, related to staff expansion necessary for the exploitation of new fields.

During the first six months of 2008, EXCO expanded its activities in two of its core operating areas, the Haynesville/Bossier shales in East Texas/North Louisiana and Marcellus and Huron plays in Appalachia. Despite a decrease in the number of aggregate wells originally planned to be drilled in the back half of 2008, the company increased its 2008 capital budget by a greater-than-anticipated $318 million to $943 million, to focus more time and capital on its difficult to access unconventional shale resources.

Average daily production rose three percent to approximately 394 million cubic feet, with 28 rigs running a day.

The Question: Could competing demands for limited pipeline capacity and/or other equipment shortages, including trained personnel to run the rigs, result in production curtailments?