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XTO Prowls for More Gas Assets, Expects $10/Mcf through 2008

XTO Energy Corp., which holds leases in some of the biggest natural gas prospects in the United States, is on the prowl for even more acquisitions, fueled by an expectation of $10/Mcf gas prices through at least the rest of the year.

During a conference call to discuss quarterly results, CEO Bob Simpson said last week that XTO's continued bullish view on gas prices has paid off handsomely. "We thought it would be stronger for longer," he said, a philosophy that has guided the company's buying decisions in the past year.

The CEO said he senses even more "excitement" for gas markets over the short-term. "Now if it doesn't happen, we are already very profitable, very robust, very dynamic...but we are just talking about what possibly could explode even further."

XTO increased its production guidance by 3% to 23% for the year based on several acquisitions in key shale basins of the country.

The independent has added a sizeable amount of gas shale acreage to its portfolio in just the past 10 months, including producing properties in the Woodford, Fayetteville and Barnett shales (see NGI, April 7; Feb. 18; Oct. 29, 2007), as well as Marcellus Shale acreage in the Appalachian Basin (see NGI, April 21). A $2.5 billion purchase from Dominion last June bulked up its prospects in the Rocky Mountains, along the Gulf Coast, in the San Juan Basin and in South Louisiana (see NGI, June 11, 2007).

"The challenge is how do you balance all this," Simpson said. "I have never seen this ability to grow this fast with this size. Certainly five years ago it just wasn't possible. Now it is and if you're minding the stores, it [promises] all kinds of things to do." The trick "is to not throw up a bunch of air balls...So what you see with XTO is sort of an interesting balance of acquisitions that come heavy with exciting acreage...Now it's going to take some capital, something that's coming faster than you might think. It depends on what your target is."

Even with its buff portfolio, XTO likely will spend "at least another couple of billion this year" for more properties, most likely bolt-ons to its current land positions. In the past four months the company already has spent almost $2.5 billion to buy assets. "What happens eventually is, will they all work? Our job is to stay away from those that don't... And so it's an interesting challenge; it's an interesting time to be in the business."

From the acquisition side, "we are seeing sort of a strange phenomenon," said Simpson. "Credit prices dried up some of the easy money that comes into our business, particularly in the high yield area...and so we are finding excellent values in the deal market that are surprisingly good values, given the commodity environment...When you talk about cost pressures, I certainly think of the acquisition capital allocation as a cost pressure area. And for some reason... there is sort of an anomaly in the market that it will pass, and so we are going to be optimistic, go hard" for more purchases.

XTO is betting that gas prices remain in their current range at least through 2008.

"We've got storage at a five-year average, and if you look at last year, when we got over the five-year average, it was...isolated with the LNG [liquefied natural gas] imports...All of that got eaten this winter. Now...five-year average imports on LNG are less than 1 Bcf/d versus an average of over 2 Bcf/d last year." There are reasons to be bullish, he said.

"I think, should we have an event this summer, like extreme heat or the hurricane bug, we really could see gas prices to $13 to $16/Mcf, which I hope we don't have," said Simpson. "But I do think there will be pressure on the strip up to $11 to $12 for next year. This summer I hope it's not more spot than that. We don't need those kind of prices to be prosperous, but it could happen...You can build theoretical $20/Mcf," which he noted would be the historical 6:1 ratio with oil prices.

XTO reported record quarterly production, with gas output up 35% from the same period a year ago. Oil and gas production in the first three months jumped 32% to 2.11 Bcfe/d versus 1.60 Bcfe/d a year earlier. Gas output averaged 1.71 Bcf/d, compared with 1.26 Bcf/d in 1Q2007. Oil production rose 13% from a year ago, and natural gas liquids jumped 48%.

On higher production and stronger commodity prices, XTO's quarterly profit rose 21% to $465 million (92 cents/share), compared with $383 million (82 cents) in 1Q2007. Excluding a noncash derivative fair value gain, XTO posted an adjusted profit of $456 million (91 cents/share) versus $406 million (87 cents) a year earlier. Revenue jumped 43% to $1.67 billion from $1.17 billion. Wall Street analysts' consensus had pegged XTO's profit at 92 cents/share on $1.57 billion in revenue.

XTO had banked most of its exploration budget in the Barnett Shale until this year, when it moved a big portion of its capital funding to East Texas (see NGI, Nov. 19, 2007). The move already appears to be paying off, said President Keith Hutton. Daily production from the Freestone Trend in East Texas averaged 677 Mcfe/d in 1Q2008. In the Barnett Shale, gross output to date is around 620 MMcfe/d. Other basins also are yielding strong output, Hutton noted.

"Our drilling in the Woodford and Fayetteville shales yielded several new wells with daily production rates averaging 3 MMcfe and 2 MMcfe, respectively," said Hutton. "From our efforts in both West and South Texas oil production increased by 6% over the last quarter as significant wells came on-line. Overall, the company is now operating 84 drilling rigs. Looking ahead in 2008, we are increasing our development budget from $2.6 [billion] to $3 billion to accommodate XTO's expanding growth opportunities."

The producer's average gas prices in the quarter increased 4% to $7.70/Mcf from $7.37 a year earlier. Average oil prices were $80.74/bbl, up 21% from $66.62 in 1Q2007.

XTO now expects to produce 1,790-1,810 MMcf/d of gas in 2Q2008, and it is forecasting 1,875-1,960 MMcf/d in gas volumes in the last six months of the year. Development and exploration spending for 2008 has been increased to $3 billion from $2.6 billion, and spending for pipeline infrastructure, compression and processing facilities was increased to $500 million from $400 million.

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