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WIKI ANALYSIS
XTO (NYSE:XTO) is an onshore oil and natural gas company that operates primarily in the United States, focusing on regions that have proven reserves of oil and natural gas. In the past XTO had expanded through the acquisition of companies with proven reserves and an established production record. XTO then profited through the acquisitions by producing more from the properties than previous owners had anticipated. However, since 2008, XTO has switched over from primarily acquiring companies to primarily investing in capital expenditures to drill and explore the more traditional way.
XTO competes with all other oil and gas companies, and specifically its performance can be measured against other independent U.S. oil production companies like Chesapeake Energy (CHK) and Noble Energy (NBL). In terms of revenues, operating margin, and return on invested capital, XTO is among the top independent producers, earning $9.0 billion in revenue and net income of $2.0 billion in 2009.[1] It holds positions in a number of the United States' largest oil-producing regions, and has successfully invested capital in developing existing properties instead of pushing to acquire new ones.
Exxon-Mobil is acquiring XTO in a deal worth 31 billion dollars. The proposed merger is an all-stock deal with the merged company assuming 10 billion dollars in debt. The deal contains a clause that nullifies the agreement if Congress passes a law that prohibits or makes "anti-fracking" commercially unviable. "Anti-fracking" refers to the controversial technique hydraulic fracturing, where water, sand, and hydraulic fluids under great pressure are used to create fractures that allow the gas to be collected.[2]
Company Overview
XTO owns and operates land based natural gas and oil wells in the southern and central United States. A majority of its revenue comes from natural gas wells in Eastern Texas/Louisiana and the Permian region, with the two regions accounting for half of the company’s revenue in 2009.
XTO’s business plan has focused on obtaining more from existing reserves than what other companies anticipated for the properties, rather than on locating new reserves. The company invests a majority of its capital on existing wells and drilling known reserves, avoiding the riskiest part of the industry, exploration.
XTO operates primarily natural gas wells, producing 532 million Mcfs of natural gas, and only 17 million barrels of oil.
Note: An Mcf is one thousand cubic feet of natural gas at room temperature and 14.5 bar. 1 Barrel of Oil is equivalent to 6.04 Mcf. Both barrels of oil and barrels of liquid natural gas have been converted to Mcf of natural gas (Mcfe) to allow for a comparison of production levels.
XTO’s average sale prices differ from the national average as a result of a varying sales distribution for the year and the effects of hedging.
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net revenue increased 18% to $9 billion.
- Net income increased 6% to $2 billion.
Trends and Forces
XTO's Proposed Merger with XOM
Exxon-Mobil is acquiring XTO in a deal worth $41 billion dollars. The proposed merger is an all-stock deal with the merged company assuming 10 billion dollars in debt. XTO will receive 0.7098 XOM shares for each common share of XTO stock[3]. There is a slight uncertainty whether the deal will even go through since the deal contains a clause that nullifies the agreement if Congress passes a law that prohibits or makes "fracking" commercially unviable. "Fracking" refers to the controversial technique hydraulic fracturing, where water, sand, and hydraulic fluids under great pressure are used to create fractures that allow the gas to be collected. The technique has come under public fire recently as claims of water contamination have grown louder.
Since the deal involves a stock-for-stock transaction, XTO's stock price should very closely track that of XOM in the .7098 to 1 ratio. Therefore, from this point onwards, XTO's stock price will be affected largely by the trends and forces that affect XOM's stock.
Rising Oil and Natural Gas Prices Increase XTO’s Revenue
As an oil and natural gas supplier, XTO’s revenue rises and falls with commodity prices. The company's growth over the last several years is in line with the increase in commodity prices over the same time. During this period the sale price of oil and natural gas has increased faster than the cost of operation, thus increasing the company's operating margins. These price increases have come as a result of a greater world demand for energy, as both China’s and India’s economies grow, leading to increased concerns over future supply. The turmoil in oil producing areas as well as the limited supply of oil have raised questions over its future availability.
After oil and natural gas prices peaked in the summer of 2008, there was a steep drop in prices, before they once more stabilized at the end of 2009, but it does show that there is immense volatility to the market and while some of XTO's contracts are hedged to reduce the volatility, violent swings in prices could still hurt the bottom line, either through reduced profits because of hedging caps, or through lower earnings due to lower prices.
Hedging Agreements Affect XTO's Income
The company entered into fixed agreements for 43% of its gas equivalent production at weighted average prices of $10.05 per Mcfe and $74.40 per barrel of oil. Hedging helps to stabilize the company’s revenue against market fluctuations, but the company stands to lose if prices rise faster than predicted, as occurred in 2005 with Hurricane Katrina.
XTO Has Less Investment Capital than Larger Competitors
The drilling industry requires a large capital investment to drill new wells and to upgrade existing wells. The substantial initial costs of expansion puts XTO and smaller firms at a disadvantage. The limited capital means that for large scale projects or acquisitions XTO must acquire capital through loans, bonds and stock offerings.
Competition
XTO has a greater focus than its competitors on developing existing reserves and increasing yields of existing wells. Unlike its competitors, the company spends only a small amount of its annual capital spending on exploration, and primarily in low risk areas.
- Anadarko Petroleum (APC) is a larger oil and natural gas drilling company than XTO. Although its natural gas production does not exceed XTO’s by a substantial amount, it produced 698 Bcf of natural gas. In 2007 APC produced more oil than XTO, ending the year with 48 million barrels of oil.
- Apache (APA) is one of XTO's closest competitors. The company operates under a similar business plan, focusing on improving existing wells and not exploration. Apache produced 655 Bcf of natural gas and 90 million barrels of oil.
- Chesapeake Energy (CHK) is another independent drilling company. The company’s production levels are below that of XTO, producing over 500 million cubic feet of natural gas and over 8 million barrels of oil annually.
- Devon Energy (DVN) is an international drilling company focused on natural gas production, collecting 863 Bcf of natural gas and 55 million barrels of oil.
- Noble Energy (NBL) produces more oil than XTO, but only about half the amount of natural gas annually. The company produced 250 Bcf of natural gas and 30 million barrels of oil.
- Unit (UNT) is a smaller oil and natural gas drilling company than XTO, producing only about a quarter of the oil and a tenth of the natural gas of XTO. The company also operates 676 miles of pipeline.
References
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