XTO Energy: Maintaining view on relative returns, valuation; IL/A Goldman Sachs April 20, 2005
We continue to rate XTO Energy In-Line relative to an Attractive coverage view following in-line 1Q 2005 earnings and better-than-expected operating cash flow. While we expect XTO to remain best-in-class among E&P companies in per-share growth, returns and free cash flow, we are concerned that the premium valuation has expanded much more quickly than the company's relative advantage in returns. Both cash costs and DD&A expense rose sharply from 4Q 2004 to 1Q 2005, and we expect costs to continue to rise this year. With XTO being the first E&P to report 1Q 2005 results, it remains to be seen whether the cost increases are related to XTO's acquisitions versus simply indicative of industry trends. Regardless, we do not expect a major increase in XTO's returns relative to other E&Ps, and we see better opportunities among other E&Ps such as STR, NFX, ECA, DVN, PXD and BBG. (all rated OP/A). Please see our April 5 report on XTO titled, "Best in class and premium deserved" for greater detail on our field-by-field analysis of XTO's future costs as well as relative returns versus relative valuation.
CONTINUE TO EXPECT PRODUCTION ABOVE GUIDANCE, THOUGH WE NOTE THAT COSTS ARE RISING
We believe that XTO's production guidance for the remainder of the year remains conservative, even as we have raised our estimates for oil and NGL production. We believe that potential increases from the Freestone Trend, other East Texas properties and the Barnett Shale make company guidance conservative. We continue to believe that XTO must notably beat its guidance on a quarterly basis, considering the consensus positive view of the stock and the company's base of growth investors. Despite our bullish commodity price forecasts which are coupled with expected increases in operating and finding and development (F&D) costs, we have further increased our cost projections for XTO. From a cash flow perspective, this is offset by expectations for a higher deferred tax rate but goes to our thesis that XTO's valuation premium may have moved up too quickly relative to the company's premium in returns.
ADJUSTED EPS IN-LINE ON HIGHER REVENUES, HIGHER COSTS
XTO reported adjusted 1Q 2005 EPS of $0.47 and adjusted EPS of $0.54, in-line with our estimate, and slightly below First Call consensus estimate of $0.57. Total production was 199.8 MBOE/d, higher than our estimate of 195.7 MBOE/d, primarily due to increased oil production and unannounced acquisitions. Realized oil and gas prices of $41.78 per barrel and $5.60 per Mcf were higher than our estimates of $39.57 per barrel and $5.55 per Mcf, respectively. Total unit costs came in at $16.90/BOE, excluding non-cash incentive compensation and the effects of a derivative fair value loss, versus our expected $15.89/BOE on higher-than-expected production costs, exploration expense, DD&A, and SG&A. The higher DD&A coupled with the higher deferred taxes contributed to a greater-than-expected operating cash flow of $408 million versus expected $372. We note that we expect costs to be the wild card this quarter in determining whether E&P companies beat consensus estimates.
UPDATED ESTIMATES
We are updating our 2Q, 3Q, 4Q, and full-year 2005 EPS estimates following reported 1Q 2005 results to incorporate $200 million in previously unannounced acquisitions, higher SG&A, higher DD&A and slight changes to costs and production estimates. Our new estimates are $0.52 ($0.56 previously), $0.64 ($0.68 previously), $0.72 ($0.76 previously), and $2.44 ($2.56 previously). We are also updating our 2006E, 2007N, 2008N, 2009N, and 2010N EPS estimates to $3.34 ($3.38 previously), $1.62 ($1.71 previously), $1.74 ($1.84 previously), $1.84 ($1.95 previously), and $1.95 ($2.06 previously), respectively.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
