XTO: Cross Timbers Oil Co. Message Board

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

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To: Dennis Roth who wrote (23)	2/13/2008 8:53:06 AM
From: Dennis Roth	Read Replies (1) of 28

XTO Energy Inc. (XTO): Drillbit cost advantage continues; acquisition strategy to test returns - Goldman Sachs - February 13, 2008 What's changed XTO reported 4Q 2007 adjusted EPS of $0.95 versus consensus $0.92 and our $1.00. Production was 2.05 Bcfe/d versus our 2.06 Bcfe/d. Operating cash flow was $1.16 billion versus our $1.03 billion estimate. Drillbit finding and development costs were $1.76/Mcfe, only slightly greater than last year's $1.60/Mcfe and the lowest among the large-cap E&Ps that have reported so far. Success from a deep horizontal well in the Freestone Trend late in the quarter boosts confidence in resource potential. We are revising our estimates. Implications XTO continues to show top-tier growth, top-tier returns and strong before-acquisition free cash flow. This has largely been accomplished through extracting additional reserves at low drillbit finding and development costs from acreage generally acquired alongside producing properties. XTO’s resource base continues to grow, which we expect to be a key positive takeaway from the company’s February 26 analyst meeting that can drive the shares higher, a key reason for our Buy rating. Beyond the meeting, the key catalyst for the company is whether XTO can maintain its capital cost and returns advantage as management shifts towards acquiring more unproved properties. The ability to swiftly add low-cost proved reserves from acquired properties is likely to be essential to avoid returns erosion. Valuation XTO trades at 7.4x 2008 EV/debt-adjusted cash flow versus 6.2x for EOG Resources, 5.6x for Chesapeake Energy and 7.5x for EnCana (ex-oil sands). We believe XTO’s premium valuation is justified. We rate the stock Buy relative to an Attractive coverage view and see 19% upside potential to a $66 12-month discounted cash flow based target price. Key risks Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks.

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