Acquisition-minded XTO Energy now admits the art of deal-making has been accomplished largely through chief executive Bob Simpson’s experience and gut feeling. Still, analysts wonder how the Fort Worth, Texas-based independent continues to execute on the kind of large property transactions that have fueled XTO’s rapid growth over the past few years.
Perhaps that’s why Simpson and his team dedicated so much time during XTO’s July 19 second-quarter 2005 conference call attempting to justify or rationalize the company’s insatiable spending appetite. This year XTO expects to buy four major packages totaling $1.3 billion. Within the past two months alone, the company closed on $600 million worth of deals.
Simpson, whose multi-million dollar compensation package last year rivaled that of ExxonMobil chief executive Lee Raymond, uses the tried and proven good old boy approach to attract prospective sellers, like super-majors ExxonMobil, Chevron and ConocoPhillips.
“Mr. Simpson had personal meetings, whether it be luncheons or dinners or football games or baseball games or whatever it takes,” said Vaughn Vennerberg, XTO’s senior executive vice president and chief of staff. “It leads to future business.”
Company has doubled in size
Indeed. XTO, which has purchased hundreds of properties over the past two decades, has essentially doubled in size in just the past three years, largely on the foundation of coveted U.S. properties once owned by the major oil companies. XTO also entered into several joint ventures, which also helped fuel growth through added reserves and production.
“Over the last two or three years we’ve probably created, just on a financial purchase basis, about three to four billion dollars in value for our shareholders,” Simpson said, explaining the gain represents the difference between what XTO paid for reserves and what they are now worth due to the phenomenal run up in oil and gas prices.
XTO’s reserves and production statistics for the 2005 second quarter reflect the company’s increasing reliance on acquisitions. Daily production increased 9 percent from the previous quarter to 1.303 billion cubic feet of natural gas equivalent, with two-thirds of the increase coming from property acquisitions and just one-third from the company’s own drill bit. This year’s second-quarter output also was up 37 percent from the same period last year.
Benefiting from high commodity prices
And like many of its peers, XTO is rolling in the cash on the back of exceptionally high commodity prices. Total revenues for the 2005 second quarter hit a record $748.7 million, up 68 percent from $444.7 million in the prior year’s second quarter. Profit also reached a record $219.7 million, or 61 cents per share, a 122 percent increase from 2004 second-quarter earnings of $99.1 million or 30 cents per share.
“This quarter’s results reflect outstanding performance from our producing regions where we operated 54 drilling rigs and merged new acquisitions into our operations,” XTO President Keith A. Hutton said.
XTO’s properties are concentrated in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah and Louisiana.
Hutton noted that in East Texas, for example, the Freestone Trend averaged 480 gross million cubic feet of gas per day, up about 6 percent from the first quarter. And with the recent completion of pipeline and processing projects, XTO is looking to grow above 730 million cubic feet per day in the Freestone over the next few years.
Second largest producer in Barnett Shale
In the Barnett Shale, among the hottest unconventional gas plays in the United States, he said daily gross production hit 165 million cubic feet per day during the 2005 second quarter, up from 32 million cubic feet per day from the previous quarter, making XTO the second largest producer in the Barnett behind fellow U.S.-based independent Devon Energy.
In the Permian basin region of West Texas and southeast New Mexico, another core area for XTO, well workover and drilling efforts on the properties acquired by XTO in 2004 increased oil production another 4 percent over first quarter gains, Hutton said.
“Recent Permian acquisitions from ExxonMobil will add further volume growth and future development opportunities,” he added. “Overall, from coalbed methane production to tight-gas, to shale, to oil, our team has built a production base positioned to grow.”
XTO management figures the company will have roughly $1.25 billion in discretionary cash flow to invest in 2006. The team already has amassed proven reserves of 6.5 trillion cubic feet of gas equivalent reserves and probable and possible reserves of 3.8 trillion cubic feet.
“If I were building a model, I would say I hope next year (growth) is 20 percent plus,” XTO’s Simpson said. “In terms of probability, I would say it’s becoming more and more likely we go that direction.”
