At last, E&P independents have a problem they will enjoy solving: how to spend the additional billions they are pocketing from the unprecedented run up in oil and gas prices.
The traditional options for producers during good times include buying back their own stock, paying down debt, acquiring property or other companies, increasing capital spending or saving the cash for a rainy day.
Burlington Resources and XTO Energy, first of the larger independents to report 2004 third quarter earnings, happen to be reaping the double benefit of strong commodity prices further supported by increased production.
Burlington’s 2004 third-quarter daily production jumped 10 percent from the prior year quarter to 2.815 billion cubic feet of natural gas equivalent. That performance helped push the company’s profit in the recent quarter to $389 million or 98 cents per share, a 46 percent increase from the year-ago period.
It also established a new quarterly earnings record for Burlington and left the company with a cool $1.8 billion of excess cash in the bank, a hefty $500 million increase just from the prior quarter.
XTO, which thrives on property acquisitions, saw its daily natural gas production in the 2004 third quarter increase a record 19 percent from a year earlier to 847 million cubic feet per day, while its oil production rocketed 105 percent to a record 25,984 barrels per day.
Consequently, the company’s net earnings for the third quarter also set a record, jumping 37 percent from a year earlier to $140.8 million or 54 cents per share. If current prices hold, XTO expects to generate $1 billion above the investment required to keep the company on its 28 percent growth rate in 2004 and anticipated 18-20 percent growth rate in 2005.
So what do these two high-flying independents intend to with their respective windfalls? Well, XTO is quick on the draw when it comes to acquisitions, while Burlington can be expected to take a more conservative tack.
Burlington has repurchased stock
“We still believe that being patient and getting the timing right on investment decisions is a key part of achieving our goals of growth and sector leading returns,” Steve Shapiro, Burlington’s chief financial officer, told industry analysts in an Oct. 20 conference call.
Translated, that means Burlington is keeping its options open, believing the good times, as history has demonstrated time and again, can’t be expected to last forever.
“We are clearly acting today as though we expect cycles to continue in the future,” Shapiro said. “So we continue to allocate capital prudently and carefully.”
Shapiro also told analysts not to expect a dramatic increase in capital spending next year above this year’s roughly $1.7 billion. He said the budget would reflect increases in service costs and would be in line with the company’s projected 3 to 8 percent annual production growth.
He said Burlington remains interested in property acquisitions and “is constantly evaluating things on the horizon that might fit our business model and skill set whether it is for sale or not.”
However, oil and gas properties in today’s commodity price environment are getting pricey, Shapiro said, adding that “in a lot of cases we couldn’t get the math to work on many of the deals we’ve seen this year. Fortunately, because of the depth of our inventory, we don’t feel pressure to make acquisitions for growth.”
He said that in the absence of acquisitions, Burlington is looking to spend more dollars on leasing additional acreage for future trend extension work and to enhance the company’s unconventional resource exploration programs, particularly in North America.
Shapiro said that stock dividend programs including share repurchases “continue to make sense for us and our shareholders.”
Since late 2000, Burlington has repurchased about 58 million shares of its stock for $1.4 billion, at an average cost of about $24.30 per share. The stock currently trades at around $42 per share.
“We view our share repurchases as a value play,” Shapiro said, noting that Burlington is currently authorized to spend an additional $400 million on share repurchases.
XTO noted for acquisitions
In contrast, XTO has proven to be far bolder with its money, spending $2.5 billion on property acquisitions during the past few years alone.
With a little over half the year gone, XTO already had done 46 deals amounting to over $1.8 billion, nearly three times the $650 million the company had planned to spend on acquisitions in 2004. The take included $1.1 billion worth of ChevronTexaco properties spread across seven states, including Texas and New Mexico, and $340 million worth of ExxonMobil onshore assets.
However, Bob Simpson, the company’s chief executive officer, is sounding a bit cautious these days given the pricey acquisition market.
Simpson told analysts in an Oct. 20 conference call that he believes the acquisition market is in transition from “yesteryear’s” $1 per thousand cubic feet of natural gas to current values of $2 to $2.25 per thousand cubic feet. “And I think deals will increasingly reflect that transition,” he said.
He said that in addition to using the company’s expected $1 billion windfall on acquisitions next year, options include repurchasing shares and reducing the company’s debt load.
“All we can tell you is that we’ll play the hand out smartly and that it will create value,” Simpson said.
Nevertheless, with a pot load of cash in the bank, XTO “is set up to do a major acquisition next year,” he said, adding that the company would have the financial clout to “comfortably” do between $1 billion and $1.5 billion in acquisitions.
In fact, Simpson disclosed that XTO is currently working on 10 separate deals worth about $100 million. “I would say they’ve moved to the likely category of being done and that is above a 50 percent chance,” he said.
Unlike Burlington, XTO tends to favor acquisitions over share repurchasing as a tool to create value for shareholders. XTO’s $2.5 billion in acquisitions the past few years would be worth about $4 billion in today’s market, Simpson said.
“I can say with confidence that if we can find good growth opportunities at reasonable prices, as we have in the past, we’ll buy those before we buy our stock, as we have been doing for a number of years,” he said.
