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

To: Dennis Roth who wrote (25)	4/24/2008 8:54:29 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 28

XTO Energy Inc. (XTO): Higher commodity prices = higher costs; commodity upside wins - Goldman Sachs - April 24, 2008 What's changed XTO reported adj. EPS of $0.91 vs. our $0.91 and consensus $0.92. XTO raised guidance for ‘08 production growth to 23% from 20% (partly due to acquisition), E&P budget to $3.0bn from $2.6bn and cash costs to $2.05-$2.25/Mcfe from $1.85-$2.03/Mcfe. We are lowering our estimates by ~ 4%. Implications The increase in XTO's cost guidance appears to mostly reflect the tenet, not often appreciated during the first leg of a commodity bull market, that higher commodity prices will yield higher costs. Management indicated on the conference call that it is now assuming $10/MMBtu Henry Hub gas and $100/barrel WTI oil in its guidance. To be fair, XTO's costs are higher than our estimate despite our attempt to assume higher costs in response to our $10+/MMBtu commodity price forecasts through 2009. However, we still see upside to consensus commodity forecasts and believe that now Street cost estimates for XTO are likely going to be moved higher more quickly vs. commodity price forecasts, representing a buying opportunity. Valuation We believe the 2% underperformance on April 23 was deserved due to a neutralish operational update, midstream constraints in the Barnett Shale, higher costs and recent strength. However, we believe XTO will be able to maintain its returns advantage vs. peers which is key to its premium valuation (6.3X 2009 EV/DACF vs. 5.4X for large-cap E&Ps). We rate XTO Buy with 18% potential upside to a $78/share 12-month DCF-based target. Key risks Commodity price volatility, drilling results, cost pressures, gov’t rulings. Impact on related securities XTO and ECA’s weakness following 1Q2008 results shows high Street expectations for E&Ps. We see 1Q results as less of a catalyst vs. previous quarters but would continue to own E&Ps due to natural gas price upside.