Dallas-based Exco Resources Inc. is expected to significantly ramp up its Marcellus shale drilling activities following its recently closed joint-venture with BG Group Plc (London: BG), says KeyBanc Capital Markets Inc. senior managing director Jack Aydin.

KeyBanc has reaffirmed its Buy rating and price target of $29 per Exco share and sees "further upside to the company's potential reserves as it derisks its Marcellus and Bossier acreage."

The companies recently closed a joint venture forming a 50-50 operating company to develop Exco's assets in Appalachia, specifically in the Marcellus shale play, for approximately $835.2 million. Pro forma, BG will increase its estimated net gas resources by 2.4 trillion standard cubic feet. Exco estimates the Marcellus position includes more than 5,000 undrilled locations.

Given the current gas pricing environment, Aydin considers the deal to have an "excellent" price. With more than 80% in upfront cash, the transaction was "in line" with the recently announced joint venture between Atlas Energy Inc., Pittsburgh, (Nasdaq: ATLS) and Reliance Industries Ltd., India, valued by KeyBanc at some $10,800 per acre.

In Aydin's view, Exco's improved balance sheet and focused acreage positions of approximately 68,500 net acres in the Haynesville shale and 93,000 net acres in the core of the play will significantly grow the company's proved reserves and net asset value in the near and long term.

KeyBanc projects that Exco's second-quarter 2010 production will be approximately 286 million cubic feet equivalent per day and about 318 million cubic feet per day for full-year 2010.

Aydin says, " the company's operational excellence and continued success in the Haynesville shale speak to the stronger-than-expected full-year guidance." Further, Aydin believes Exco's initial 2011 full-year production guidance of 500 million cubic feet equivalent per day is "on the conservative side" for 2011, and maintains that the company's production should reach "approximately 523 million cubic feet equivalent next year, representing 64% year-over-year growth."

Goldman, Sachs & Co. was advisor to Exco in the transaction.