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Gold/Mining/Energy : XTO: Cross Timbers Oil Co. -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (14)	1/26/2006 6:38:34 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 28

XTO Energy (OP/A): Analyst meeting likely to focus on extensive resource upside - Goldman Sachs - January 25, 2006 We believe that XTO's January 27-28 analyst meeting will highlight the company's superior drilling inventory and boost confidence that the company can grow production organically by 10% in both 2006 and 2007. We believe that investor concerns regarding both XTO's ability to continue to generate 10+% growth from existing assets without further acquisitions and the level of management cash compensation have eroded the company's premium multiple. XTO now trades at a discount on an EV/debt-adjusted cash flow basis to EOG Resources and EnCana Corp., in contrast to its historical premium multiple. Because XTO has, in our view, a superior combination of growth, returns and free cash flow, we believe a greater relative valuation is deserved. We see 13% upside to a $55 traditional peak value and 35% upside to a $66 super spike-adjusted peak value. We rate XTO OP/A. KEY CATALYSTS FOR STOCK THAT COULD EMERGE FROM ANALYST MEETING (1) Belief in sustainability of organic growth beyond 2006. We believe XTO has the potential to grow at 10% per year organically in both 2006 and 2007, with some exploratory success or additional inventory via acquisitions necessary to grow at 10% beyond 2007. We believe investors increasingly are skeptical on XTO's ability to grow organically in 2007 without reloading inventory via acquisition, a function of the XTO's growth to a size rivaling other large-cap E&Ps. Regionally, we believe East Texas has been overshadowed by "fill-in-the-blank" shale plays, when in reality East Texas continues to hold multi-year drilling opportunities for XTO among others. Newer fields in the Freestone Trend hold more of the upside versus legacy fields, but that is not just cause for discounting growth potential in our view. (2) Timing of drilling and ultimate potential from Piceance Basin. We continue to believe that XTO is not receiving credit for exploration upside in the Piceance Basin, and we expect management to provide more details on a potential drilling schedule during the analyst meeting. XTO's first well as part of its joint venture with ExxonMobil is currently drilling, and we expect results to be announced later this quarter. EnCana and Williams in particular have already made Piceance a major producing field, and while the 70,000 acres that comprises the XTO/Exxon joint venture is exploratory in that it has been untested, we believe that XTO shares can rally based on relatively few successful wells. We expect management to provide more details on the timing of additional drilling at its analyst meeting. Ultimately we believe the Piceance Basin could be worth $5 per share for XTO. More importantly, success in the Piceance would likely boost confidence that XTO could continue to grow 10% per year beyond 2007. (3) New exploration/development plays. We believe credible announcement of new exploration or development plays could be perceived positively by investors. We would note that XTO has taken increased interest in shale opportunities in Arkansas and West Texas. Additionally, prior to its analyst meeting in 2005 the company in our view had not fully delineated the potential from joint ventures with Exxon and Chevron, principally in the Permian Basin. We see the Permian and West Texas generally as having the potential for upside. We expect management to provide an update on estimated drilling opportunities by region in addition to reporting at least preliminary proved reserves. Overall, we estimate proved + probable reserves of 10 Tcf excluding Piceance potential and 12 Tcf assuming Piceance potential. (4) Greater acceptance of corporate governance/compensation. We believe that XTO shares are discounted somewhat because of concerns regarding the level of cash compensation for top managers, a concern that morphs into general concerns regarding corporate governance. While we do not expect XTO to alter any compensation practices, the company's board in the future could provide greater disclosure regarding the process by which the level of compensation is determined to help avoid or allay fears of a less independent board. Considering XTO's track record we would expect that compensation should be high as long as the company maintains its superior growth and returns position versus its peers. (5) Confidence in use of cash. We continue to see XTO as having a superior combination of growth, returns and free cash flow. While we do not believe that management will be forced into doing acquisitions, we expect management will be active in pursuing acquisition opportunities. This is despite recent comments from management that the acquisition market is overheated and indications that the company could buyback shares. We believe management will prioritize dividend increases, acquisitions and debt paydown ahead of share repurchase. Increased confidence that the company can continue to make acquisitions of assets that hold meaningful additional profitable drilling opportunities can further boost XTO shares. VALUATION XTO trades at 5.8x 2006 EV/debt-adjusted cash flow versus 6.5x for EOG Resources, 5.8x for EnCana Corp. and 6.0x for E&Ps. We believe that XTO should trade at a premium to EOG and EnCana, a function of XTO's superior combination of production growth, returns and free cash flow. Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti.