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XTO Sees U.S. Gas Output Falling 3-5% in 2009

The rapid decline of the U.S. natural gas rig count -- especially in the prolific Barnett Shale -- points to a 3-5% drop in total U.S. volumes by the end of 2009, XTO Energy CEO Keith Hutton said Thursday.

The Fort Worth, TX-based independent reported record natural gas volumes in the final three months of 2008, with its Texas leaseholds doing the bulk of the work. However, Hutton said the drop in gas prices and the oversupplied market are foretelling of a big drop in U.S. output for U.S. producers this year. He made his comments during XTO's quarterly conference call.

"What we see happening on gas production, is that the gas rig count has dropped from 1,600 to around 1,030," Hutton said. "And we know of another 50-60 rigs that are to be dropped over the next month or so. We see the rig count getting down to 900, maybe 800. That's a 50% drop, and that's going to affect supply."

Some of the high rates of initial production from wells in the emerging Haynesville Shale, which straddles Louisiana and Texas, "might hold supply up, but I will tell you, if the Barnett Shale gets down to 90 rigs in the next couple of months, that's more than half cut...The core [Barnett] drilling rigs are producing 3-4 MMcf/d in sales."

The lag in time between when rigs are dropped and when production numbers are calculated will lead to steady but slowing gas production, with losses of around 3% "through April or May," but as the actual output numbers show up in the "back half of the year, ...we'll see a 5% decline toward the end of the year," Hutton said.

XTO had been planning this year to run 110 rigs across the United States, but all of those plans fizzled by the end of 2008. The company was averaging around 72 rigs at the end of December, and it will "drop down to 60" by the end of March, Hutton said. Whether XTO cuts more rigs is a question. "We'll see where we go from there. We can maintain production, be more efficient, and as we get faster and faster on our drill times and think there's no need to grow, we may drop more, but 60 is our plan now."

Once the economy gets stronger, once gas prices improve and once supply is balanced, Hutton thinks there are other problems that will face the industry.

"When you drop the rig count, it's hard as hell to get it back up," he said. "You're in decline almost the entire time," even when the rig count returns to previous levels. "It's a hard issue to get your hands around. I think we'll see a decline in 2010 as well, maybe 2011. We're set up for one of those falling gas production [periods] for quite a while."

XTO's gas output in 4Q2008 averaged 2.17 Bcf/d, which was 30% higher than in 4Q2007, when the company produced 1.67 Bcf/d. Oil output also rose 30% in the final period to 63,500 b/d from 48,800 b/d. Natural gas liquids production was up 7% from a year earlier to 15,400 b/d from 14,500 b/d.

In East Texas, XTO's leasehold in the Freestone Trend grew to an average gross rate in 4Q2008 of 756 MMcf/d, up 6.2% from 3Q2008. More drilling success was reported in the Texas portion of the Haynesville Shale, with XTO completing the New Horizons 1 well at a rate of more than 8 MMcf/d in the first two weeks of production. Barnett Shale output also was up, increasing 14% from a year earlier to reach a net daily rate of 554 MMcfe.

Meanwhile, XTO's development programs are under way in the Woodford and Fayetteville shales. In the last three months of 2008 the company drilled a combined 30 wells and had combined net production of more than 90 MMcf/d.

"Across the board, our high margin development opportunities represent extraordinary captured value," said Hutton. "With the state of the industry today, the XTO directive is to manage growth and maximize economic returns into falling costs."

In the final quarter of 2008, XTO's earnings totaled $351 million (61 cents/share), which was 24% below 4Q2007 earnings of $464 million (96 cents). After adjusting for a $39 million noncash derivative gain and an $81 million impairment to proved properties, adjusted earnings were $393 million (68 cents/share), compared with 4Q2007 adjusted earnings of $465 million (96 cents). Total 4Q2008 revenues were a record $1.96 billion, a 23% increase from $1.59 billion reported in the year-ago period. For the year, XTO reported record profits of $1.91 billion ($3.60/share), up from 2007 earnings of $1.69 billion ($3.58).

XTO's realized gas price in the final quarter was $6.79/Mcf, which was 10% below the average price received a year earlier. Average oil prices increased 13% to $85.19/bbl from the 4Q2007 average price of $75.47/bbl. Natural gas liquids prices averaged $29.46/bbl, which was 48% lower than the price received in 4Q2007.

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