XTO Energy Inc. is taking no prisoners in its quest for more oil and natural gas reserves. The independent, which already this year has announced more than $4 billion in U.S. acquisitions, last week bagged privately held Hunt Petroleum Corp. in a $4.186 billion deal.
Hunt has estimated proved reserves of 1.05 Tcfe, 62% proved developed. Production is estimated at 197 MMcf/d of gas, 8,500 b/d of oil and 2,300 b/d of natural gas liquids. XTO would pay Hunt $2.6 billion in cash and trade 23.5 million shares of XTO common stock worth $1.6 billion ($67.50/share).
The transaction prompted XTO to up its 2008 production growth target by 28-30%.
"With the quality of these assets and the strong energy prices, this transaction reflects a defining moment in building our company's future and creating value for our shareholders," said CEO Bob R. Simpson. "Hunt Petroleum is an 80-year-old, private franchise founded on long-lived legacy properties. The majority of these producing assets extend across East Texas and Louisiana where XTO is the leading natural gas producer. They are a natural complement to our operations."
Founder H.L. Hunt drilled his first well in El Dorado, AR, in 1921, and at one time he was considered the world's wealthiest man. He died in 1974, and since his death his nephew Tom Hunt, who had been his right-hand man, has been the company's chairman.
About 70% of the properties to be acquired are concentrated in East Texas and central and northern Louisiana -- an area where XTO has stepped up production (see NGI, Nov. 19, 2007). Another 28% of the reserves, both onshore and offshore, are located along the Gulf Coast of Texas, Louisiana, Mississippi and Alabama. Nonoperating interests, reflecting more than 300,000 net acres of potential in the North Sea and the balance of proved reserves, also would be conveyed in the deal. In addition, XTO would gain about 15,000 net acres of leasehold in the Bakken Shale region of North Dakota.
"This is a cash machine," Simpson said during a conference call last week. "This has been a lot of hard work, but we are crafting a company that didn't exist, that wouldn't be available at this price," he said of the "new" XTO. "We are projecting $1.2 billion in cash flow next year, which is robust...To get that relative cash flow for this type of asset, a legacy asset, long-life asset...this is a phenomenal opportunity, and it fits like a glove with most of our operations."
Some might scoff at the price, but Simpson said he was "not convinced that gas prices are through going up. When you look at the economics, as an owner and a business man, you look for secure rates of return...and not debate the wisdom of commodity prices any further...In aggregate, we have strong equity and a good deal of leverage. The cash flow from next year's strip is approaching $9 billion...Not that long ago we were talking about having $3 billion in cash flow, think that was last year. Things are working so fast, and XTO is sort of exploding right here."
XTO has been in the hunt for oil and gas assets since the beginning of the year. Late last month XTO bought into the Bakken Shale in a $1.85 billion cash-and-stock agreement with privately held Headington Oil Co. (see NGI, June 2). XTO agreed to pay Linn Energy LLC $600 million in April to acquire Appalachian Basin acreage spread across the Marcellus Shale in western Pennsylvania and West Virginia (see NGI, April 21). Southwestern Energy Co. sold about 6% of its holdings in the Fayetteville Shale for $530 million to XTO earlier this year (see NGI, April 7). And in February XTO bought a set of producing properties in the Woodford, Fayetteville and Barnett shales for $1 billion from multiple sellers (see NGI, Feb. 18).
Not one to shy from the deal, XTO has more transactions in the works, said Simpson.
"It's June," he said. "Will we stay on this pace for the rest of the year? I doubt it. But I do expect we will do some more...another $1 billion to $1.5 billion. Beyond that, we'll see. I'm happy with where we are. We've secured a couple of the best deals in the company's history in the last two announcements..."
"Simply put, the majority of these properties equate to a super-charged bolt-on for XTO," President Keith A. Hutton told analysts. "With our knowledge of these assets, we already see the potential to realize more than twice the allocated reserves. Over the past decade our team has aggressively developed the tight-gas sands and carbonates of our eastern region. The Hunt assets overlap and align with our substantial operated positions."
XTO already has "identified hundreds of locations to expand recovery and access the multi-pay targets -- including the Pettit, Rodessa, Travis Peak, Cotton Valley and Bossier formations," Hutton said. "For instance, in the Freestone Trend, several fields are primed for infill development while specific acreage offsets our Gail King lease where XTO has just completed a horizontal Cotton Valley Lime well at 21 MMcf/d. Farther east, the acquired leasehold includes prime positions in the emerging Haynesville Shale and James Lime horizontal plays. Along the Gulf Coast, both onshore and offshore, we are acquiring many high profile, producing properties and acreage which includes ownership in Mobile Bay Field off Alabama."
XTO currently focuses on onshore basins in the United States. Asked how the company would change with the addition of Gulf of Mexico and North Sea assets, Simpson said XTO's basic philosophy would remain intact.
"We will look at these assets [offshore and overseas] as cash cows," Simpson said. XTO has no plans to sell any of the new assets "for at least two years." Over the coming months XTO's management team plans to review all of the operations and see what works and what doesn't work. Then it will make a decision.
One thing XTO wants to keep is Hunt's workforce. The private company now has around 300 employees, and Hutton said he hopes XTO is able to convince most of them to stay. Hunt is headquartered in Dallas, but its onshore and offshore operations are based in Houston. XTO, based in Fort Worth, TX, likely will expand its Houston offices, Hutton said, by combining Hunt with the Dominion staff acquired following the $2.5 billion acquisition last year (see NGI, June 11, 2007).
"Our organization, coupled with the talent and experience of the Hunt team, will assess the asset base for further development, continuing operations and other potential opportunities," said Hutton. "The economic strength of the portfolio will allow XTO to grow the eastern region production by 15% per year with 35% of its cash flow and hold the Gulf Coast and offshore production volumes flat with about 30% of its respective cash flow."
Most of the acquired properties, representing 48% of daily production and 114 producing fields, are located in XTO's eastern region of operations. In the Gulf Coast and offshore regions, production equals about 48% of the total volumes and is focused in five dominant properties offshore and six significant onshore fields. The balance of the production is in the North Sea. Total acreage for both the producing properties and undeveloped leasehold is 919,409 net acres.
"All told, these legacy properties were discovered, acquired and developed over many decades," said Simpson. "They have yielded robust production, reserves and income for private family interests. Now in XTO's hands, we plan to accelerate the activities and know that the assets will achieve even more."
In conjunction with this transaction, XTO has initially hedged 100 MMcf/d of gas production, for 28 months, at a New York Mercantile Exchange price of $11.08/Mcf.
The acquisition is scheduled to close by Sept. 3, XTO said. Funding of the cash portion of the transaction is expected to be provided by a combination of cash flow, commercial paper and debt capital market transactions. The number of shares of XTO common stock is not subject to adjustment. The final closing price is subject to typical adjustments.
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