XTO: Cross Timbers Oil Co. Message Board

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Gold/Mining/Energy : XTO: Cross Timbers Oil Co.

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From: Dennis Roth	6/5/2007 8:50:22 AM
	of 28

Dominion deal slightly accretive, but future resource upside is key Goldman Sachs June 05, 2007 What's changed XTO announced on June 4 it plans to buy 1.05 Tcfe of proved reserves in the US Rockies and South Texas from Dominion Resources for $2.5 billion. Implications We see the deal as slightly accretive to EPS, neutral to the company’s EV/debt-adjusted cash flow multiple and, for now, dilutive to returns. This is not dissimilar from other deals that XTO has made historically, as XTO in our view tends to be more conservative in booking reserves upon acquisition until it drills more actively on the properties. We are generally positive on the Greater Natural Buttes field in the Uinta Basin and the Jonah field in Wyoming. What matters for XTO shares longer term from this transaction is the additional resource and inventory that XTO can add in future years, especially in South Texas where expectations for production and reserve growth are likely to be low. XTO’s track record has been quite good historically. We rate XTO Buy. Valuation XTO trades at 6.9x 2008 EV/debt-adjusted cash flow (adjusted for the deal), a premium to the average 5.9x multiple for large-cap E&Ps. We believe a premium valuation is deserved, even though XTO’s returns advantage falls slightly all else equal from this deal. Our 12-month $57 target price is based on discounted cash flow based net asset values of proved reserves and select unbooked resource. Key risks Commodity price volatility, drilling results and cost pressures. Impact on related securities XTO’s willingness to pursue a Master Limited Partnership structure for select E&P assets adds some credibility to E&P MLPs, in our view. This benefits stocks such as Pioneer Natural Resources, Encore Acquisition and EXCO Resources which have announced intentions to create MLPs.

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