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XTO's Chairman Sees Possible Further Upside to Oil, Gas Prices

Fast-growing XTO Energy last week reported earnings for the first quarter up 122% over the same quarter last year, but that's not all she wrote, according to Chairman Bob R. Simpson. He puts a 30% chance on oil prices going to $90 a barrel which would put natural gas in the neighborhood of $10/MMBtu, and increase XTO's earnings by...?

It's not impossible that gasoline at the pump could go up by another 70 cents a gallon to about $3.00, which translates to $90/bbl oil if the increase is primarily passed through, Simpson said in an earnings conference call. Given the multiple possibilities of major disruptions to supplies through accidents or incidents in the world, he advised there are "at least 30% odds" of reaching that level. "I don't say it's going to happen, but..." XTO doesn't "have any hedging to speak of. Hedging hasn't been profitable for anybody in the last few years. Commodities continue to surprise people on the upside."

And not only that, but "the pundits seem surprised the world economy continues to grow rather nicely in the face of high prices," Simpson said. The answer is productivity growth which means that every unit of incremental growth takes about half the energy it did during the energy crisis 30 years ago. The XTO chairman said his strategy of "going long and hard and grab all the acquisitions you can because prices will go up," was simplistic. But it reflected his view several years back that "commodities were entering a different era. We made a lot of money on acquisitions and aggressive drilling."

Earnings for the Fort Worth-based producer for the quarter reached a record $219.7 million, or 61 cents per share, a 122% increase from second quarter 2004 earnings of $99.1 million, or 30 cents per share. Second quarter 2005 production of 1.303 Bcfe/d, almost all gas, was up 37% from 2Q 2004 level of 954 MMcfe/d. Simpson said that given the current environment the company should be able to grow 20% next year "one way or another."

The company increased guidance for annual production volume growth to 27-29% for 2005, which includes between 1,045 MMcf/d and 1,060 MMcf/d for Q3 and 1,060 to 1,080 MMcf/d in Q4. Its realized natural gas prices are expected to be $0.65 to $0.75 below the Nymx Henry Hub price, assuming a $7.00/Mcf gas price and before consideration of hedging activities.

XTO increased its proven reserves 40% in 2004 and has four major transactions under its belt so far this year. Two deals with ExxonMobil were announced earlier this month. Just days after signing a major farm-in agreement to develop some ExxonMobil Corp. properties in the Piceance Basin, XTO said it had purchased some Permian Basin properties in West Texas and New Mexico from the oil giant for a closing price of $200 million (see NGI, July 11). Earlier in the year the company acquired $336 million in producing properties in East Texas and Louisiana from Plains Exploration and exchanged properties in Texas and New Mexico with Conoco/Phillips (see NGI, April 4).

Another company executive told analysts XTO has become known as the "go to" entity for property sales, "able to act when opportunities become available," and as a "closer" who gets the deals done. While there may be some other expansions down the road, Simpson said the company may need to take some time off from its aggressive pace.

XTO "added $3-4 billion in value for shareholders in the last three years and basically doubled the organization at breakneck speed; it could use a little digestion," Simpson said, while not ruling out bidding for attractive deals that might come along.

On Tuesday, XTO (formerly Cross Timbers Oil) reported total 2Q revenues were a record $748.7 million, a 68% increase from $444.7 million the prior year. After adjusting for the after-tax effects of performance share compensation and derivative fair value loss, adjusted earnings for second quarter 2005 were $220.1 million, or 61 cents per share. Second quarter 2004 adjusted earnings were $134.6 million, or 41 cents per share.

Operating income for the quarter was $385.3 million, a 105% increase from second quarter 2004 operating income of $187.8 million. Operating cash flow, defined as cash provided by operations, before changes in operating assets and liabilities and exploration expense, was a record $478.6 million, up 68% from 2004 second quarter comparable operating cash flow of $285.6 million.

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