Continued confidence in growth, returns and free cash trifecta - Goldman Sachs - July 25, 2007
What's changed
XTO reported adjusted 2Q 2007 EPS of $1.14 per share, below our estimate of $1.19 but above the First Call consensus estimate of $1.13. Operating cash flow was $870 million versus our estimate of $876 million. Total production was 1,698 MMcfe/d versus our estimate of 1,669 MMcfe/d. Net debt/tangible capital was 28% at quarter-end. Management raised production growth guidance for full-year 2007 to 17% from 15%.
Implications
XTO continues to show higher than expected production and in-line cash flow. Barnett Shale production continues to beat expectations, while drilling results in the San Juan Basin, Freestone Trend (downspacing and horizontal drilling) and Woodford Shale boost confidence that the company can continue to grow organically at high single digit/low double digit rates into and beyond 2008. While spending on a number of smaller unidentified acquisitions has caused net debt to trend higher than expected, we continue to believe XTO will maintain its advantage as having superior growth, superior returns and superior free cash flow versus other large-cap E&Ps. This underlies our Buy rating on the stock.
Valuation
XTO trades at 6.5x 2008 EV/debt-adjusted cash flow. This represents a premium to each of the large cap E&Ps except EnCana (Sell rated) ex-oil sands at 6.6x. We believe XTO deserves a premium valuation due to the top-tier growth, returns and free cash flow trifecta. We see 8% upside to a $62 12-month discounted cash flow based target price versus 7% downside for large-cap E&P stocks and 3% upside for large-, mid- and small-cap E&Ps.
Key risks
Commodity price volatility, drilling results, and cost pressures are key risks. |
