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Analyst Blog

On Aug 21, Zacks Investment Research downgraded independent oil and natural gas company, EXCO Resources Inc. (XCO - Snapshot Report), to  Zacks Rank #3 (Hold).

Why the Downgrade?

On Aug 5, the Texas-based energy explorer reported second quarter 2013 adjusted earnings of 10 cents per share, missing the Zacks Consensus Estimate by a penny. This was the company's second miss in the last four quarters.

A 23.6% year-over-year drop in overall production volume due to normal field declines and conventional properties’ contribution to the EXCO-HGI partnership affected the results. However, revenues increased 27.4% y-o-y to $150.3 million, beating the Zacks Consensus Estimate of $140.0 million on the back of a sharp rise in the commodity prices.

Despite its disciplined cost control measures, capex budget is expected to be on the rise. EXCO plans to increase its well count which will also be a contributor to its rising costs.

A silver lining is that dry-gas focused EXCO’s liquid-weighted Eagle Ford and Haynesville acquisition is expected to increase production volumes and strengthen the company’s portfolio. Favorable commodity prices also act as a positive for the company.

The Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), for the third quarter and full year are negative 7.14% and 5.77% respectively. The Zacks Consensus Estimate for the full year is currently pegged at $0.52, after moving down a penny in the last 30 days. 

Stocks That Warrant a Look

While we expect EXCO to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at other exploration and production (E&P) companies such as Range Resources Corp. (RRC - Analyst Report), Clayton Williams Energy, Inc. (CWEI - Snapshot Report) and Matador Resources Company (MTDR - Snapshot Report) as good buying opportunities. These stocks sport a Zacks Rank #1 (Strong Buy) and offer tremendous value.
 

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