Resource remains top tier; midstream, leasehold spending rising - Goldman Sachs - October 24, 2007
What's changed
XTO reported adjusted EPS of $1.06 versus First Call consensus of $1.07 and our $1.08. Total production was 1,928 MMcfe/d versus our 1,878 MMcfe/d estimate. Operating cash flow was $898 million versus our estimate of $901 million. The company raised its fourth quarter average production guidance from 1,983 MMcfe/d to 2,033 MMcfe/d and raised its expected 2008 growth rate to 17% from 15%.
Implications
XTO continues to grow production aggressively and beat guidance, and we believe guidance is conservative for 2008 – we are assuming 2,059 MMcfe/d in 4Q 2007 and almost 20% growth in 2008. We are concerned somewhat by lower-than-expected free cash flow, though given that growth targets are increasing we believe that if XTO can continue to show industry low finding and development costs it can maintain its returns advantage versus peers. Key catalysts continue to be further expansion of horizontal drilling and downspacing in the Freestone Trend, growth potential and rates of return from the Piceance Basin and upside potential from the recent Dominion acquisition in the Rockies.
Valuation
XTO shares trade at 6.9x 2008 EV/debt-adjusted cash flow, a discount to other unconventional gas E&Ps trading at 8.3x but a premium to large-cap E&Ps at 5.8x. We see 30% upside to our $82 12-month target price versus 22% upside for other large-cap E&Ps and 23% upside for E&Ps overall. Our target price is based on discounted cash flow analysis. We continue to rate XTO Energy Buy because of its triple whammy of top-tier production growth, returns and free cash flow.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are the key risks to XTO’s shares. |
