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Shale King XTO Adds Bakken to its Crown

June 2, 2008
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XTO Energy Inc. has moved into the Bakken Shale big time in a $1.85 billion cash-and-stock agreement with a private producer that will give it a leasehold with estimated proved reserves of around 68 million boe. The transaction follows on the heels of XTO's $600 million purchase in April that gave it entry into the Marcellus Shale (see NGI, April 21).

The agreement with privately held Headington Oil Co. would give XTO producing properties and undeveloped acreage that includes 352,000 net acres of Bakken Shale leasehold in Montana and North Dakota. About 60% of the leasehold's reserves are proved developed. Upon closing, the acquisition would add about 10,000 boe/d to XTO's production base. The Fort Worth, TX-based independent agreed to pay Headington $1.06 billion in cash and trade 11.7 million shares of XTO common stock valued at $790 million ($67.35/share).

"Since 2004 XTO has aggressively pursued the best shale basins -- in terms of geology, productivity and economics -- to stake a claim for long-term growth," said CEO Bob R. Simpson. "With this acquisition in the Bakken Shale, our company is now established as a leading producer and leasehold owner in this emerging oil shale play," which he called a "complex" basin.

During a conference call last week to discuss the transaction, Simpson noted that XTO will have spent close to $4.3 billion to buy properties in this year alone -- already ahead of the $4 billion it spent in 2007. The year's not even at the midpoint, and Simpson said XTO may consider more acquisitions before the end of 2008.

"Production [from this transaction] puts us among the top three producers in the basin," Simpson told financial analysts.

Marathon Oil Corp. and EOG Resources Inc. are said to hold the largest position in the shale. EOG, which has around 320,000 net acres in the play, was encouraged enough by its initial results in the Bakken to redirect some of its capital to explore for oil in its extensive leasehold this year (see NGI, March 3). Marathon in April 2006 completed a series of land acquisitions giving it nearly 200,000 leasehold acres in the Bakken (see NGI, May 1, 2006).

"When we enter one of these plays, we want to be a significant player," said Simpson. "We've looked at this basin for a couple of years, the conception of it, and considered whether we should add it.

"Yes, we are a gas company, we are still a gas company, but if you look at the aggregate, it takes our oil production to over 60,000 bbl/d. We think we can grow this 12-15% a year...and we think we can do that with about a third of the gas flow at the current strip. We usually like to keep things flat, and the reason we can do that with the base production here is that it has a very low decline rate...It's almost all pure margin. We've got a lot of drilling to do."

Simpson said that "great shales take time, and industry is a little timid on the recovery rates." However, "this kind of franchise, we are buying it on a conventional proved reserve stream at a good price."

"Across the 15,000-square-mile Williston Basin, results from new Bakken wells, utilizing progressive horizontal drilling and completion techniques, are revealing the true potential of this extraordinary hydrocarbon target," said XTO President Keith A. Hutton. "With over three billion barrels of oil held in place within our acreage position, our team expects to more than double the acquired reserve volumes over time."

Drilling and operational activities "should grow our production in the region by 12% to 15% annually, with about one-third of cash flow," Hutton noted. "Given the $3 per barrel production cost and high economic margin of these flowing oil wells, this expansive shale acquisition is a superb addition to XTO's portfolio of premier properties."

XTO's acquired properties are located in the Bar Trend and Nesson Anticline of the development. The primary producing field is Elm Coulee in Montana. XTO's undeveloped leasehold would comprise about 215,000 net acres of the total. Production volumes are 88% oil, but the associated natural gas is Btu rich in composition, realizing a 30% premium to New York Mercantile Exchange pricing, XTO noted.

The acquisition is scheduled to close by July 15. The cash portion of the transaction will be funded through a combination of cash flow and commercial paper. The number of shares of XTO common stock is not subject to adjustment. The final closing price is subject to typical closing and post-closing adjustments.

"XTO Energy sure knows how to make an entrance," said Motley Fool's Toby Shute. The analyst noted that in April "the shale player was making moves on Mr. Marcellus. Now the firm has entered the Bakken oil shale play in a major way."

The U.S. Geological Survey (USGS) recently published an assessment of the Bakken Shale play and reported that 3-4.3 billion boe is technically recoverable with current technology and industry practices. In addition, the USGS has estimated total oil-in-place at 200-400 billion boe. If the USGS is on target, Shute said the Bakken may be the largest oil accumulation in the Lower 48 states.

"At first glance, the purchase doesn't come cheap," said Shute. "Continental Resources, which was early into the play, topped up its position in January with a $60 million purchase of producing properties from Chesapeake Energy. Continental picked up four million barrels of proved reserves at $15 million a pop. XTO just paid close to twice that amount. Still, at $100 oil, the firm is only paying a little over six times projected annual cash flow."

Like its Marcellus Shale purchase, "XTO tends to bide its time, gather data and wait for a fat pitch," said Shute. "Continental may have gotten in cheaper, but the size of XTO's foothold shouldn't be underestimated. The company follows a low-risk, manufacturing-type approach to drilling, as opposed to going after fewer, higher-impact wells. XTO thus needs some elbow room to achieve economies of scale."

The "entire play appears largely prospective and hugely economic," Raymond James & Associates Inc. analysts said in a note to clients last week. Operators in the Bakken are finding the most success to date in the Three Forks/Sanish formation (TFS), which is immediately below the lower Bakken. "A few wells have been drilled down to the TFS with some very encouraging flow rates, which may add meaningfully to resource potential from the entire area," said the Raymond James team.

"Needless to say, drilling success -- combined with strong crude prices -- has spurred an acceleration of activity in the North Dakota Bakken," said the Raymond James analysts. "Clearly, the North Dakota Bakken has shown indications of becoming one of the largest oil-producing basins in the U.S."

Williston Basin Interstate Pipeline Co. (WBIP) plans to launch a open season in mid-June for the Bakken Pipeline, a 100-mile pipe that would transport gas from the Bakken Shale to an interconnect with Alliance Pipeline (see NGI, May 26). The proposed 16-inch diameter pipeline would originate at an interconnect with WBIP's existing system in Mountrail County, ND, and run northeasterly to interconnect with Alliance in Bottineau County, ND. Initial capacity would be 100 MMcf/d with flexibility to expand to 200 MMcf/d. Service could begin in mid-2010.

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