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XTO Energy (XTO)Stock (Energy Industry, Independent Oil & Gas Industry)
 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 $5.5 billion in revenue and almost $2.9 billion in operating income in 2007. 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. There are significant risks involved in XTO's business, most notably the volatility of petroleum prices. Natural gas prices have been on the rise since the 1990s, increasing both the value of XTO's reserves and its sales revenue. Should this trend reverse, XTO's operating cash flow and income would decrease, causing investors to lose interest - a costly problem for a firm that depends heavily on external financing to fund the acquisition and development of oil-producing properties.
[edit] Business FinancialsXTO 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 Southern Texas, with the two regions accounting for 60% of the company’s revenue in 2007.[4]
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. In 2006 XTO spent only $22 million on exploration, much less than its competitors.[5] Anadarko Petroleum (APC) spent over $1 billion on E&P, while Noble Energy (NBL) spent $168 million on exploration in the same year.[6] [7] XTO operates primarily natural gas wells, producing 532 million Mcfs of natural gas in 2007, 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. [edit] Hunt AcquisitionOn June 11th, 2008, XTO announced that it would acquire privately-owned Hunt Petroleum Corporation for $4.19 billion - $2.6 billion cash and $1.6 billion stock. The deal is expected to increase XTO's production by 28-30% over previous estimates. [edit] Trends and Forces[edit] Rising Oil and Natural Gas Prices Increase XTO’s RevenueAs 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. From 2005 to 2007 the company’s revenue increased from $3.5 billion to $5.5 billion; at the same time, the average cost per barrel for natural gas increased from $34.1 to $45.37 and for oil from $47.03 to $70.08.[8] 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. [edit] Hedging Agreements Affect XTO's IncomeThe 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.[9] 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. In 2005 hedging decreased realized prices for the company by $0.34 per Mcf of natural gas and $5.25 per barrel of oil because the company could not take full advantage of the substantial rise in market price at that time. In 2006 and 2007 hedging worked in the company’s favor as it resulted in an increase in realized prices for natural gas by $1.43 and $1.24 per Mcf and for oil by $.17 and $1.40 per barrel.[10] If the company’s production were to decrease substantially, it could face penalties for failing to meet the hedging agreements.[11] [edit] XTO Has Less Investment Capital than Larger CompetitorsThe 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.[12] The company has a $2.6 billion development budget for 2008, while the larger APC has a planned a capital budget of $4.7 billion for the year.[13][14] [edit] Continued Growth Depends on New Acquisitions Rather than Oil Exploration and ProductionIn 2007 XTO had a net increase in proven reserves from acquisitions and development that was 308% of its production for the year.[15] The company has expanded primarily through acquisitions of smaller competitors. As the company grows larger, the number of desirable firms decreases, and it will become more difficult for XTO to expand in the same manner. To maintain its present growth rate, the company will have to find new ways to cut cost and increase production in its existing holdings.[16] If acquisitions are not available, the company could increase investment in exploration to promote growth; however, the existing business plan for XTO focuses on investing in proven resources and not exploration, and so a substantial change in its business plan would be necessary. Exploratory drilling is inherently risky, with modern estimates of reserve location proving unreliable. In 2007, 9 of XTO's 61 exploratory wells ended up being non-productive.[17] The estimates of reserve size also contain uncertainty and adds risk to acquisitions; however, acquiring proven reserves with a successful production history has been more predictable for XTO than exploratory drilling has been. [edit] CompetitionXTO 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.[18] The company is planning to spend approximately $125 million of its $2.6 billion development budget on exploration.[19] This represents an increase from previous years, but still falls short of APC’s $1 billion, and NBL’s $168 million spending in 2006.[20] [21]
 XTO Energy2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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