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$XCO - Exco Resources: This Oversold Oil Small Cap Could Be Poised To Surge In January

Dec 12 2013, 14:20 | 9 comments | about: XCO

http://seekingalpha.com/article/1895541-exco-resources-this-oversold-oil-small-cap-could-be-poised-to-surge-in-january

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Buying depressed stocks at this time of year can lead to big gains in January, because once tax-loss selling ends, the unrelenting selling pressure can change dramatically. It is not unusual to see gains of 20% and even more in beaten-down stocks in what is known as a "January Effect Rally." I recently wrote about two cheap tech stocks that could be poised for significant gains and worth buying now, due to the coming end of tax-loss selling pressure and even a potential short-covering rally. However, there are some oil stocks that could also be worth averaging into now for a January Effect Rally. Here is one to consider now:

Exco Resources, Inc. (XCO) is an oil and natural gas company, based in Texas. It has projects in Texas, Louisiana, the Permian Basin, and other areas. This company has a number of positives going for it, but it has disappointed investors with recent financial results. This has caused the stock to drop from nearly $9 in August, to around $5. That is a big decline, which has probably made this stock a favorite for investors to sell for tax-loss reasons. However, when that selling pressure ends in late December, this stock could rebound sharply, especially since it has potential for a short covering rally.

Exco reported third quarter 2013 adjusted earnings of 4 cents per share. This excluded one-time items such as gains from asset sales and other non-cash gains and it was below analyst expectations of 10 cents per share. Results were lower due to production declines, increased capital expenditure and an impairment loss on a joint venture. However, there were some positives which include $165.3 million in revenues for the quarter which was a 16.7% gain (year over year) due to higher natural gas prices. During the third quarter last year Exco sold natural gas for $2.69 per thousand cubic feet and thanks to rising prices, it realized $3.17 per thousand cubic feet. Natural gas was nearly 94% of the total production for this company and that is why this stock could have significant upside potential, if natural gas prices continue to rise.

As mentioned above, Exco shares were trending up and trading for nearly $9, after the company announced that it would buy producing and undeveloped oil and gas assets in the Eagle Ford and Haynesville shale formations from subsidiaries of Chesapeake Energy Corporation (CHK). This deal will allow the company to significantly increase its production of oil and it gives it access to the high potential that the Eagle Ford and Haynesville regions offer. While the investor euphoria over this deal has clearly subsided, there is still a lot of future development potential that investors can buy into now for a lot less. A recent article by the "Hidden Value Investor" which is titled "Exco Resources Could Be Sitting In The Buda Sweet Spot," details why the acquisition made by Exco could be more valuable than many investors realize.

(click to enlarge)

As the chart above shows, Exco shares are oversold and now trading for nearly half of the 52-week high. According to Shortsqueeze.com, about 29 million Exco shares are short and this represents nearly 22% of the float. Many shorts have profited from the recent decline in this stock and from the continued tax-loss selling pressure. However, when that pressure ends in December, it could put shorts in a more vulnerable position. This stock appears to have stabilized at just below $5 per share and as shorts see that it is not dropping any further, many might decide to cover their positions in order to lock in profits and limit risks. If this stock is trading for just under $5 at a time when it is likely seeing a significant amount of tax-loss selling, it is reasonable to believe that once this selling pressure ends, the shares are likely to trade higher. If this stock does strengthen into January, it could spark additional gains in a short-covering rally.

It is worth noting that investment billionaire Wilbur Ross has taken a large stake in Exco Resources with about 31.5 million shares. Mr. Ross has a very strong track record of buying out-of-favor assets and stocks, which has made him one of the richest men in the world. He and many other "smart money" investors believe that natural gas prices will climb in the future as the economy recovers and as inflation kicks in. A number of other billionaires and hedge fund managers have also taken a significant stake in Exco, including names like Prem Watsa, Phil Falcone, Ken Griffin and Steve Cohen. In spite of these positives, investors should consider downside risks such as the potential for oil and gas prices to decline, as well as a substantial debt load of about $2.14 billion versus just around $33 million in cash.

With Exco shares trading at just below $5, it seems like a great time to be a contrarian and buy this cheap natural gas play for both the short-term rebound potential and the longer-term promise it holds. Exco pays a dividend of 20 cents per share, which yields about 4%. This dividend is an added bonus that will reward investors, while waiting for a higher share price.

Here are some key points for XCO:

Current share price: $4.92
The 52-week range is $4.86 to $9
Earnings estimates for 2013: 37 cents per share
Earnings estimates for 2014: 29 cents per share
Annual dividend: 20 cents per share, which yields 4%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.