We are an independent oil and natural gas company engaged in the exploration, exploitation, acquisition, development and production of onshore U.S. oil and natural gas properties with a focus on shale resource plays. Our principal operations are conducted in certain key U.S. oil and natural gas areas including Texas, Louisiana and the Appalachia region. The following is a brief discussion of our producing regions.

In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures. The results of operations for the interim periods are not necessarily indicative of the results we expect for the full year.

These unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. Our liquidity and ability to maintain compliance with debt covenants have been negatively impacted by the prolonged depressed oil and natural gas price environment, levels of indebtedness, and gathering, transportation and certain other commercial contracts. We define liquidity as cash and restricted cash plus the unused borrowing base under our credit agreement ("Liquidity").

Our Liquidity is currently significantly constrained. As of September 30, 2016,2017, our Liquidity was $105.8 million and the Company had $3.5 millionprincipal amount of our outstanding indebtedness was $1.4 billion. During the nine months ended September 30, 2017, our cash flows used in investing activities exceeded our cash flows from operating activities by $86.3 million. We expect cash flows used in investing activities to continue to exceed cash flows from operating activities during the remainder of 2017 and future periods. Our Liquidity is not expected to be sufficient to fund this cash equivalents, $75.4 millionflow deficit and conduct our business operations unless we are able to restructure our current obligations under our existing outstanding debt and other contractual obligations and address near-term liquidity needs. The significant risks to our Liquidity and ability to continue as a going concern are described below.

During the third quarter of 2017, we borrowed substantially all of our remaining unused commitments under our revolving credit agreement ("EXCO Resources Credit Agreement"), and, as of September 30, 2017, we had $126.4 million of outstanding indebtedness and $23.6 million of outstanding letters of credit under the EXCO Resources Credit Agreement. As a working capital deficit of $131.1 million. We have substantial interest payment obligations related to our debt over the next twelve months. The next borrowing base redeterminationresult, we had no availability remaining under the EXCO Resources Credit Agreement, including letters of credit, as of September 30, 2017. The borrowing base under the EXCO Resources Credit Agreement remains subject to semi-annual review and redetermination by the lenders pursuant to the terms of the EXCO Resources Credit Agreement. The redetermination of the borrowing base scheduled for November 2017 is expected to occurcurrently in November 2016.process. The lenders party to the EXCO Resources Credit Agreement have considerable discretion in setting our borrowing base, and we are unable to predict the outcome of any future redeterminations.the redetermination.

The EXCO Resources Credit Agreement does not permitrequires that our ratio of senior secured indebtednessaggregate revolving credit exposure to consolidated EBITDAX ("Senior Secured IndebtednessAggregate Revolving Credit Exposure Ratio") to be greater than 2.5cannot exceed 1.2 to 1.0 as of the end of any fiscal quarter. Senior secured indebtedness utilized inAs of September 30, 2017, our Aggregate Revolving Credit Exposure Ratio exceeded the Senior Secured Indebtedness Ratio excludesallowed maximum of 1.2 to 1.0. In anticipation of the Second Lien Term Loans (as defined below) and any other secured indebtedness subordinated topotential default, on September 29, 2017, we obtained a limited one-time waiver from the lenders under the

The EXCO Resources Credit Agreement also requires that our EBITDAX, generate positive free cash flows and/or find other sources of capital to reduce indebtedness(as defined in the agreement) plus unused commitments under the EXCO Resources Credit Agreement.

If we deliver to our lenders or obtaining additional debt and/or equity financingan audit report prepared by our auditors with respect to repay outstanding indebtedness under the EXCO Resources Credit Agreement. These factors raise substantial doubt about our ability to continue as a going concern.

If we are unable to comply with any of the financial and other covenants inunder the EXCO Resources Credit Agreement, orthere will be an event of default, and our indebtedness under the EXCO Resources Credit Agreement will be accelerated and become immediately due and payable. This would result in an event of default under the indenture governing the 1.5 Lien Notes, the credit agreement governing the 1.75 Lien Term Loans and the indenture governing the 2018 Notes and 2022 Notes. If this occurs and our indebtedness is accelerated and becomes immediately due and payable, our Liquidity would not be sufficient to pay such indebtedness.

The principal purpose of issuing the 1.5 Lien Notes and Second Lien Term Loan Exchange was to alleviate our substantial cash interest payment burden and improve our Liquidity. Our initial expectation was to make PIK Payments in common shares on the 1.5 Lien Notes and the 1.75 Lien Term Loans throughout the remainder of 2017 and 2018. However, under our Registration Rights Agreement with the holders of the 1.5 Lien Notes and lenders of the 1.75 Lien Term Loans ("Registration Rights Agreement"), our ability to make PIK Payments in common shares is subject to a resale registration statement related to the common shares issued as PIK Payments and all of the shares underlying the warrants issued in connection with the 1.5 Lien Notes and 1.75 Lien Term Loans being declared effective by the SEC by October 11, 2017 ("Resale Registration Statement"). We did not anticipate the Resale Registration Statement would be declared effective as of October 11, 2017, and, as such, we provided a notice of a delay of effectiveness for the Resale Registration Statement to the holders of the 1.5 Lien Notes and lenders of the 1.75 Lien Term Loans, as permitted under the Registration Rights Agreement, extending the requirement for the Resale Registration Statement to be declared effective to no later than December 8, 2017. As of the date of the filing of this Quarterly Report on Form 10-Q, the Resale Registration Statement has not been declared effective and there is no assurance we will be able to satisfy this condition.

The accompanying unaudited Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

We consider significant accounting policies to be those related to our estimates of proved reserves, oil and natural gas properties, derivatives, business combinations, equity-based compensation, goodwill, revenue recognition, asset retirement obligations and income taxes. The policies include significant estimates made by management using information available at the time the estimates were made. However, these estimates could change materially if different information or assumptions were used. These policies and others are summarized in our 20152016 Form 10-K.

Our asset retirement obligations are determined using discounted cash flow methodologies based on inputs and assumptions developed by management. We do not have any assets that are legally restricted for purposes of settling asset retirement obligations.

At the end of each quarterly period, companies that use the full cost method of accounting for their oil and natural gas properties must compute a limitation on capitalized costs ("ceiling test"). The ceiling test involves comparing the net book

We did not recognize an impairment to our proved oil and natural gas properties for the three and nine months ended September 30, 2017 or for the three months ended September 30, 2016, and we recognized impairments to our proved oil and natural gas properties of $160.8 million for the nine months ended September 30, 2016. We recognizedThe impairments to our proved oil and natural gas properties of $339.4 million and $1.0 billion for the three and nine months ended September 30, 2015, respectively. The impairmentsduring 2016 were primarily due to the decline in oil and natural gas prices.  Furthermore, the fixed costs associated with certain gathering and transportation contracts continue to have a significant impact on the present value of our proved reserves. Oil and natural gas prices are volatile and we may incur additional impairments during 2016 if future oil and natural gas prices result in a decrease in the trailing twelve-month reference prices compared to September 30, 2016. The possibility and amount of any future impairments is difficult to predict, and will depend, in part, upon future oil and natural gas prices to be utilized in the ceiling test, estimates of proved reserves, future capital expenditures and operating costs.

During 2016, all of ourOur proved undeveloped reserves, other than the proved undeveloped reserves associated with certain wells drilled and/or completedprior to September 30, 2017, remained reclassified in 2016, were reclassified to unproved primarily due to the uncertainty regarding the financing required to develop these reserves. These reserves remained classified as unproved due to our inability to meet the reasonable certainty criteria for recording proved undeveloped reserves, as prescribed under the SEC requirements, as the uncertainty regarding our availability of capital required to develop these reserves still existed at September 30, 2017. A significant amount of our proved undeveloped reserves that were reclassified to unproved remain economic at current prices, and we may report proved undeveloped reserves in future filings if we determine we have the financial capability to execute a development plan.

The evaluation of impairment of our oil and natural gas properties includes estimates of proved reserves. There are inherent uncertainties in estimating quantities of proved reserves including projecting the future rates of production and the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data, and engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of

Our primary objective in entering into commodity derivative financial instruments is to manage our exposure to commodity price fluctuations, protect our returns on investments and achieve a more predictable cash flow from operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits we would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of our commodity derivative financial instruments consists of non-cash income or expense due to changes in the fair value. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if we terminate a contract prior to its expiration. We do not designate our commodity derivative financial instruments as hedging instruments for financial accounting purposes and, as a result, we recognize the change in the respective instruments’ fair value in earnings.

Settlements in the normal course of maturities of our derivative financial instrument contracts result in cash receipts from, or cash disbursements to, our derivative contract counterparties. Changes in the fair value of our derivative financial instrument contracts, which include both cash settlements and non-cash changes in fair value, are included in earnings with a corresponding increase or decrease in the Condensed Consolidated Balance Sheets fair value amounts.

Our oil and natural gas derivative instruments are comprised of the following instruments:

We place our commodity derivative financial instruments with the financial institutions that are lenders under the EXCO Resources Credit Agreement that we believe have high quality credit ratings. To mitigate our risk of loss due to default, we have entered into master netting agreements with counterparties to our commodity derivative financial instruments that allow us to offset our asset position with our liability position in the event of a default by the counterparty. Our current credit rating and financial condition may restrict our ability to enter into certain types of commodity derivative financial instruments and limit the maturity of the contracts with counterparties. We have historically entered into commodity derivative financial instruments with the financial institutions that are lenders under the EXCO Resources Credit Agreement. Therefore, our ability to enter into commodity derivative financial instruments is limited beyond the maturity of the EXCO Resources Credit Agreement in July 2018. As a result, our exposure to commodity price fluctuations will increase in 2018 due to lower oil and natural gas volumes covered by derivative contracts compared to historical levels. Our derivative contracts also contain rights that could result in the early termination of our derivative contracts and cash payments to our counterparties due to an event of default under the EXCO Resources Credit Agreement.

At September 30, 2016,2017, the average forward NYMEX WTI oil prices per Bbl for the remainder of 2016 and calendar year 2017 were $48.53 and $51.30, respectively,$51.74 and the average forward NYMEX HH natural gas prices per Mmbtu for the remainder of 20162017 and calendar years 2017 andyear 2018 were $3.02, $3.09$3.05 and $2.91,$3.05, respectively.

Our commodity derivative financial instruments covered approximately 60%56% and 69%60% of production volumes for the three months ended September 30, 20162017 and 2015,2016, respectively, and 55%59% and 66% of production volumes55% for the nine months ended September 30, 20162017 and 2015,2016, respectively.

The carrying value of our total debt is summarized as follows:

TermsThe terms and conditions of our debt obligations are discussed below.

The maturity date of the EXCO Resources Credit Agreement is July 31, 2018. The interest rate grid for the revolving commitment under the EXCO Resources Credit Agreement, as amended on September 29, 2017, ranges from London

On March 15, 2017, we issued an aggregate of $300.0 million of 1.5 Lien Notes due March 20, 2022 to affiliates of Fairfax Financial Holdings Limited ("Fairfax"), Bluescape Resources Company LLC ("Bluescape"), Oaktree Capital Management, LP ("Oaktree"), and an unaffiliated investor. The 1.5 Lien Notes bear interest at a cash interest rate of 8% per annum, or, if we elect to make interest payments on this matter.the 1.5 Lien Notes with our common shares or, in certain circumstances, by issuing additional 1.5 Lien Notes, at an interest rate of 11% per annum. Interest is payable bi-annually on March 20 and September 20 of each year, commencing on September 20, 2017. On September 20, 2017 we paid the interest due on the 1.5 Lien Notes in-kind with approximately $17.0 million of aggregate principal amount of 1.5 Lien Notes, resulting in $317.0 million of total aggregate principal amount of 1.5 Lien Notes outstanding as of September 30, 2017.

The Second Lien Term Loan Exchange was accounted for as a modification of debt, and no gain or loss was recognized on the exchange. As described in “Note 7. Derivative financial instruments,” in connection with the issuance of the 1.75 Lien Term Loans, maturewe also issued the Amendment Fee Warrants. The combined fair value of the Amendment Fee Warrants issued to the lenders of the 1.75 Lien Term Loans on March 15, 2017 of $12.6 million and $8.6 million of cash paid to the lenders who elected to receive cash in lieu of warrants was recorded as a discount to the 1.75 Lien Term Loans, and is being amortized to interest expense over the life of the loans. The transaction costs related to the Second Lien Term Loan Exchange of $6.4 million were recorded in "Gain (loss) on restructuring and extinguishment of debt" in our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017.

The 1.75 Lien Term Loans are due on October 26, 2020, withbear interest payableat a cash rate of 12.5% per annum, or, if we elect to pay interest on the last day1.75 Lien Term Loans with our common shares or, in each calendar quarter. certain circumstances, by issuing additional 1.75 Lien Term Loans, at an interest rate of 15.0% per annum. On September 20, 2017 we paid the interest due on the 1.75 Lien Term Loans in-kind with approximately $26.2 million of aggregate principal amount of 1.75 Lien Term Loans, resulting in $708.9 million of total aggregate principal amount of 1.75 Lien Term Loans outstanding as of September 30, 2017.

The Secondindenture governing the 1.5 Lien Notes and the credit agreement governing the 1.75 Lien Term Loans allow us to make PIK Payments subject to certain restrictions and limitations. See further discussion of the limitations on our ability make PIK Payments in "Note 1. Organization and basis of presentation".

The 1.5 Lien Notes and 1.75 Lien Term Loans are guaranteed by substantially all of EXCO’s subsidiaries, with the exception of certain non-guarantor subsidiaries and our jointly heldjointly-held equity investments with BG Group,Shell. The 1.5 Lien Notes and 1.75 Lien Term Loans are secured by second-prioritysecond priority liens and third priority liens, respectively, on substantially all of EXCO’s assets securingand the indebtednessassets of such guarantors. Subject to certain exceptions, the covenants under the EXCO Resources Credit Agreement. The Secondindenture governing the 1.5 Lien Term Loans rank (i) junior to the debt under the EXCO Resources Credit Agreement and any other priority lien obligations, (ii) pari passu to one another and (iii) effectively senior to all of our existing and future unsecured senior indebtedness, including the 2018 Notes and the 2022 Notes, to the extent of the value of collateral.

In addition, the term loan agreementindenture governing the Exchange Term Loan prohibits us from incurring,1.5 Lien Notes includes restrictions on our ability to incur additional indebtedness, including debt under the EXCO Resources Credit Agreement in excess of $150.0 million, among other things and subject to certain exceptions:

In connection with the offering of the 1.5 Lien Notes and the Second Lien Term Loan Exchange, we entered into an amended and restated intercreditor agreement, under which the lenders of the remaining outstanding portion of the Exchange Term Loan agreed to subordinate their security interest in the collateral (ii)to the borrowing baseinterests of the holders of the 1.5 Lien Notes, the 1.75 Lien Term Loans and the lenders under EXCO Resources Credit Agreement. In addition, the lenders of the 1.75 Lien Term Loans agreed to subordinate their security interest in the collateral to the interests of the holders of the 1.5 Lien Notes and the lenders under the EXCO Resources Credit Agreement, and (iii) 30%the holders of modified adjusted consolidated net tangible assets (as definedthe 1.5 Lien Notes agreed to subordinate their security interest in the agreement);

The 2018 Notes are guaranteed on a senior unsecured basis by a majority of EXCO’s subsidiaries, with the exception of certain non-guarantor subsidiaries and our jointly held equity investments with BG Group.Shell. Our equity investments, other than OPCO, have been designated as unrestricted subsidiaries under the indenture governing the 2018 Notes.

The 2022 Notes were issued at 100.0% of the principal amount and bear interest at a rate of 8.5% per annum, payable in arrears on April 15 and October 15 of each year. In the fourth quarter ofDuring 2015 EXCO repurchased an aggregate $277.2 million in principal amount of the 2022 Notes in exchange for certain holders of the 2022 Notes becoming lenders under the Exchange Term Loan. On August 24,and 2016, we completed the Tender Offer that resulted in the repurchases of an aggregate of $101.3 million in principal amount of the 2022 Notes for an aggregate purchase price of $40.0 million. As of September 30, 2016, through the Tender Offerexchanges and a series of open market repurchases we had repurchased a total of $152.7 million in principal amount of the 2022 Notes for an aggregate of $46.5 million. As a result of the repurchases,significantly reducing the aggregate principal amount of outstanding 2022 Notes was reduced to $70.2 million asoutstanding. As of September 30, 2016.

The 2022 Notes rank equally in right of payment to any existing and future senior unsecured indebtedness of the Company (including the 2018 Notes) and are guaranteed on a senior unsecured basis by EXCO’s consolidated subsidiaries that are guarantors of the indebtedness under the EXCO Resources Credit Agreement. The 2022 Notes were issued under the same base indenture governing the 2018 Notes and the supplemental indenture governing the 2022 Notes contains similar covenants to those in the supplemental indenture governing the 2018 Notes.

We categorize the inputs used in measuring fair value into a three-tier fair value hierarchy. These tiers include:

We evaluate commodity derivative assets and liabilities in accordance with master netting agreements with the derivative counterparties, but report them on a gross basis in our Condensed Consolidated Balance Sheets. Net commodity derivative asset values are determined primarily by quoted futures prices and utilization of the counterparties’ credit-adjusted risk-free rate curves and net commodity derivative liabilities are determined by utilization of our credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates of our counterparties are based on an independent market-quoted credit default swap rate curve for the counterparties’ debt plus the LIBOR curve as of the end of the reporting period. Our credit-adjusted risk-free rate is based on the blended rate of independent market-quoted credit default swap rate curves for companies that have the same credit rating as us plus the LIBOR curve as of the end of the reporting period.

The valuation of our commodity price derivatives, represented by oil and natural gas swaps collars and swaptioncollar contracts, is discussed below.

See further details on the fair value of our derivative financial instruments in “Note 7.6. Derivative financial instruments”.

Our financial instruments include cash and cash equivalents, accounts receivable and payable and accrued liabilities.  The carrying amount of these instruments approximates fair value because of their short-term nature.

The carrying values of our borrowings under the EXCO Resources Credit Agreement approximate fair value, as these are subject to short-term floating interest rates that approximate the rates available to us for those periods.

The estimated fair values of our 2018 Notes, 2022 Notes, Exchange Term Loansenior notes and Fairfax Term Loanterm loans are presented below. The estimated fair values of the 2018 Notes and 2022 Notes have been calculated based on quoted prices in active markets. The estimated fair valuesvalue of the Exchange1.5 Lien Notes, 1.75 Lien Term LoanLoans and the FairfaxExchange Term Loan have been calculated based on quoted prices obtained from third-party pricing sources that lack significant observable inputs and are classified as Level 2.