Fort Worth-based independent XTO Energy Inc. last week marked the largest acquisition in its history by purchasing $1.1 billion of oil and gas properties from ChevronTexaco Corp. XTO gains approximately 88 MMcf/d of natural gas and 14,000 bbl of oil from properties in seven states — more than 90% in Texas and New Mexico.

The transaction expands XTO’s operations in its eastern region, the Permian Basin and Mid-Continent, while opening a new coalbed methane play in the Rocky Mountains and a new operating region in South Texas. XTO’s internal engineers estimate long-lived proved reserves to be 786 Bcfe, of which 88% are proved developed. About 48% of the reserves are attributable to oil. Development costs for the proved undeveloped reserves are estimated at $0.47/Mcf, and XTO will operate 67% of the producing properties.

“Through hard work and persistence this year, we have forged together high-quality properties, which are equivalent to acquiring a significant E&P company,” said CEO Bob R. Simpson. “By doing so, we have seized low-risk growth opportunities for our development programs, avoided the issues faced when acquiring whole companies and captured the full tax basis of the acquisition costs.”

XTO already has announced about $800 million in acquisitions this year, and as a result of the latest deal, the company increased its production growth target in 2004 to 28-30%, up from 20%. Production growth guidance for 2005 now has increased to a range of 18-20%, up from 10 – 12%. In 1Q2004, XTO produced about 771 MMcf/d.

The transaction also is significant for ChevronTexaco. The divestiture is part of the San Ramon, CA-based major’s long-running plan to shed most of its low-growth North American assets and concentrate on international exploration. To date, the company has shed about two-thirds of its production targeted for sale, and it expects to record a significant gain to income when the sale closes, which is now anticipated in August.

“This sale is significant,” said Peter Robertson, ChevronTexaco’s vice chairman. “It is a key step in our drive to streamline our portfolio of assets to approximately 400 core fields that represent the vast majority of our long-term value in the United States and Canada. Furthermore, the transaction allows us to focus on maximizing and growing the value of our base business.”

However, the major is not abandoning North America. Ray Wilcox, president of ChevronTexaco Exploration and Production Co., said the company will continue to strengthen its North America portfolio, noting that it is the No. 1 producer in California and the Gulf of Mexico Shelf, the No. 2 producer in the Permian Basin and the third largest natural gas producer in the United States. “The sale allows us to focus our resources on core properties and future opportunities that can add the most value to ChevronTexaco stockholders.”

In the Permian Basin of West Texas and New Mexico, XTO will acquire 80 MMboe reserves in 16 counties. Net production from the properties is about 11,500 boe/d and 40 MMcf/d of natural gas. Primary producing fields in the area include Yates, Goldsmith, Eunice Monument, Fullerton and Puckett. XTO plans to use its secondary recovery expertise to enhance operations and expand development upsides.

XTO also increased its position in its eastern region with the purchase of 102 Bcfe of proved reserves in Franklin, Freestone, Limestone and Anderson counties of Texas and Claiborne Parish of Louisiana. The net production currently attributable to the properties is about 13 MMcfe/d. XTO said it sees upside opportunities in the primary producing fields of Teague, Oletha, Bethel, Haynesville and New Hope.

New positions for XTO also will be established in the Rockies and South Texas. In the Rockies, XTO will expand its CBM presence with the purchase of 67 Bcfe of proved reserves in the Buzzards Bench Field of Emery County, UT. The prolific property, in the Ferron sand and coal play, is an offset to the Drunkard’s Wash Field and is currently producing about 12 MMcfe/d. In the South Texas area, XTO is purchasing 54 Bcfe of proved reserves in nine counties with net production totaling 20 MMcfe/d.

In the Mid-Continent region, XTO is adding 67 Bcfe of proved reserves from 11 counties in Oklahoma and the Texas Panhandle. These properties will contribute about 15 MMcfe/d of natural gas production. The remaining 16 Bcfe of proved reserves and net production of 3 MMcfe/d are contained in various royalties and other miscellaneous properties.

The transaction, subject to regulatory requirements, is scheduled to close by Aug. 6, with an effective date of Jan. 1, 2004. Funding is expected to be provided through the combination of common stock sales and bank credit facilities. Additionally, XTO may consider placement of long-term senior notes.

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