Jim
In this week's Barron's, one of their Roundtable participants recommended XTO. I'd be interested in knowing your
opinion of what he said.
Thanks, John
My next recommendation is also in the Southwest -- XTO Energy, the old
Cross Timbers Oil. The ticker symbol is XTO. The stock is 16 a share and
there are 123.6 million fully diluted shares, which means a $1.98 billion market
value. The company historically has had a very good record of growing its
revenues, earnings and production. From 1996 on, the top line has grown at
about a 39% annual clip. Earnings grew from 33 cents a share to $1.62, and
daily production grew from 159 thousand cubic-feet equivalent to 448 million.
Proved gas reserves went from 800 billion cubic feet to 2.25 trillion cubic feet.
In 2000 the company earned 29.7% on book.
For 2001, XTO will earn about $2.15 a share, using successful-efforts
accounting. That means when you hit an empty hole, you write it off. Even with
a depressed earnings estimate of $1.35 a share in 2002, they will earn an 18%
return on equity. XTO ended 2001 with 2.7 trillion cubic-feet equivalent, of
which 82% was gas and 18% oil. They want to end this year with three trillion
cubic-feet equivalent. The company hedges most of its production. About 64%
of 2002 gas production is hedged at $3.88 per mcf [thousand cubic feet]. We
give a $6-per-barrel net present value on 81 million barrels of oil, which is $486
million. The residual value of their gas-gathering pipeline is about $50 million.
Then they have 2.21 trillion cubic feet of gas reserves worth $2.76 billion. So
the gross value is $3.3 billion. Take out $903 million of debt and deferred taxes,
and the residual value of everything is about $2.4 billion, or $19.36 a share.
Most of the bigger oil companies sell at big premiums to a conservative breakup
value. This one is selling at a discount. It is selling at about 83 cents on the
dollar on a knock-down value. The debt-to-equity ratio is manageable. In the
last quarter they had 12.5-to-1 debt coverage, or $162 million of EBITDA
[earnings before interest, taxes, depreciation and amortization] against $13
million of interest expense.
Q: How much does management own?
Black: About 8%-9% of the company.
Q: Not enough to prevent a merger.
Black: I don't think they are for sale.
Neff: But if somebody comes after them, what can you do?
Black: That is true. We've done a breakup calculation based on proven, not
probable, reserves. There are another 1.7 trillion cubic feet of probable reserves
here. XTO is most prominent in the East Texas Basin; they have 1,200
locations with a possibility of 1.2 trillion cubic feet. They are going to drill
roughly 500 of those locations. In the Arkoma Basin they have 250 billion cubic
feet of oil-equivalent, and in the San Juan Basin they have another 250 billion
cubic feet. Production is rising. In the third quarter of 2001 they were producing
426 million cubic feet of gas per day, up 25% year-over-year. They were
producing 13,309 barrels of oil a day, up 5%, and about 4,500 barrels of
natural-gas liquids, which is flat. The forecast for this year is that gas
production will rise another 17%, while oil and natural gas liquids will be flat.
The exit rate [yearend rate] on gas will be more than a half-billion cubic feet a
day, which means overall production on a barrel-of-oil equivalent is up 13% to
14%.
Gabelli: Will they hedge prices in 2003?
Black: They're only hedged through 2002. At $2.50 per thousand cubic feet,
the company's pre-tax internal rate of return is 30%. They are economic
[profitably] drilling down to $2 per mcf, not that they want to do a lot of those.
Their hurdle rate [or required return] is about 14%-15%. XTO will generate
$450 million of discretionary cash. The capital budget is only $400 million, which
should leave free cash of about $50 million. The reserve life index is 13 years;
these are really long-lived reserves. In the old days the company was
dependent on making acquisitions. Now they have a big enough portfolio to
keep the company growing at a double-digit rate. So that's XTO. |
