XTO Energy Inc. (XTO): Flat well costs boost confidence returns advantage can continue - Goldman Sachs - February 27, 2008
What's changed
XTO held its annual analyst meeting on February 26. The company raised its low-risk unbooked resource to 11.3 Tcfe from 7.3 Tcfe and higher risk potential to 12.0 Tcfe from 9.5 Tcfe. Management indicated it expects flat finding and development costs in 2008 with a range of $1.50-$1.65/Mcfe.
Implications
While there was no “smoking nugget” from the meeting, minimal change to regional well costs versus last year was impressive. This brings to light: (a) the potential for XTO to maintain its returns advantage versus other E&P companies which is key for the stock’s premium cash flow multiple to expand; and (b) the highly bullish outlook for 2008 as a year of higher natural gas prices, higher oil prices, strong production growth and relatively flattish costs that we believe can lead E&P stocks including XTO to continue to perform well. The opportunity for XTO over the course of the next year is to accretively expand into new areas as a second mover. Interestingly, some legacy regions such as the Barnett Shale seemed to get little attention at the meeting.
Valuation
Our 12-month DCF-based price target is $68. XTO trades at 7.4X 2008 EV/debt-adjusted cash flow vs. 5.9X for large-cap E&P peers. We believe this premium is deserved due to XTO’s strong returns, growth and free cash flow.
Key risks
Commodity prices, well results, costs and government pronouncements.
Impact on related securities
Management indicated it is looking to gain a position in the Marcellus Shale and Bakken oil play, and made positive comments regarding the James Lime play, Woodford Shale and Fayetteville Shale. This is bullish for Cabot Oil & Gas (CL-Buy), EOG Resources (Buy), Newfield Exploration (Neutral) and Southwestern Energy (Neutral), among others. |
