Image source: Getty Images.
Continue Reading Below
EXCO Resources' (NYSE: XCO) stock slumped on Monday, falling more than 13% by 2:45 p.m. EST. That was after it received a notice from the New York Stock Exchange (NYSE) that it was in noncompliance with the exchange's continued listing standards. The natural gas driller is exploring several options to regain compliance, including undertaking a reverse stock split.
The NYSE requires that companies listed on its exchange abide by certain rules, including closing above $1 per share to avoid the appearance of being a "penny stock." If any stock closes below that threshold for more than 30 days, it is no longer in compliance with the exchange's listing rules. It then has six months to regain compliance; it can do so by closing above that level on the last trading day of any month, and having a 30-trading-day average price above $1 per share.
Companies like EXCO Resources have a range of options to regain compliance. They can hope that reporting positive financial results or other good news causes investors to bid the stock up above $1 per share; EXCO is considering the sale of its South Texas properties and issuing additional debt to improve its liquidity, which could lure buyers.
Continue Reading Below
However, the quickest solution to regain compliance is to complete a reverse stock split, which would reduce the number of outstanding shares and increase the stock price. For example, if EXCO completed a 1 for 10 reverse split, its stock price would theoretically increase tenfold, going from its current trading price of $0.71 per share to $7.10 per share, thus crossing the $1 threshold and regaining compliance.
One recent example of a reverse stock split in action is Halcon Resources (NYSE: HK). The oil and gas producer completed a prepackaged bankruptcy last year, which handed over 96% of the company's equity to creditors. That resulted in such a significant amount of dilution for existing shareholders that Halcon Resources needed to complete a 1 for 34 stock split to remain in compliance with the NYSE's listing standards, once the new shares started trading on the exchange after the restructuring. In this case, the reverse split worked, as Halcon's stock currently trades at more than $8 per share, instead of the less than $0.25 per share the stock would likely trade for without the reverse split.
The noncompliance notice from the NYSE is another reminder that EXCO Resources remains a troubled company. Even if it does complete a reverse split, that will not address the company's financial woes, so the announcement has investors spooked that EXCO might eventually share Halcon's fate and restructure via bankruptcy.
10 stocks we like better than EXCO Resources
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and EXCO Resources wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017