XTO Energy Will Differentiate Itself in Profitability

Buy-recommended XTO Energy (XTO) offers unlevered appreciation potential of 8% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $47 a share. On July 14 we reduced NPV from $60 when we reduced estimated Present Value of North American Natural Gas by 20%.

In the second quarter conference call today, Chairman Bob Simpson emphasized XTO’s record cash flow despite low natural gas price, thanks to hedging. Addressing skepticism that the results can be reproduced, Mr. Simpson declares that the outlook for XTO’s 2010 cash flow starts to exceed 2009 when natural gas price exceeds $7 a million btu. The futures market currently prices 2010 deliveries at $6.20. Record short interest in natural gas futures may contribute to a sharp rebound when sellers start to cover, he suggests.

Longer-term, the XTO founder believes that natural gas will trade at $7-8 and not spike to $15 while some of the best new supply may be profitable at perhaps $4. Companies like XTO, on the cutting edge with experience and ability to develop unconventional gas at low cost, will differentiate themselves in profitability. More broadly, Mr. Simpson believes that this is the first time in his career that the natural gas industry can say that supply is bountiful. As a result, XTO has become uncharacteristically active in meeting with legislative leaders, including during the Senate recess this month, to communicate the powerful advantage the U.S. has in natural gas. Natural gas growth at a reasonable price is good for all.

Originally published on August 5, 2009.

Comments

[Mad Hedge F...:]

fyio. XTO Energy (XTO) CEO Bob Simpson sees natural gas bottoming around here and then spiking up to $7 next year (see their website ) . It was a perfect storm of a collapsing economy, huge new discoveries, and the coolest summer on record that took us from $13.50 to $3.10. Since then companies have slashed gas exploration and drilling budgets, taken the rig count down from 1,600 to 700, and that number is still falling at a precipitous rate. Total onshore production is down by 3% and will plunge by 10% by the winter. XTO is one of the largest independent oil and gas producers in the country, and Simpson is one of the savviest players in the space. He hedged all of his firm’s 2009 oil production at $96/barrel, and 40% of his gas production at a stunning $9/BTU. NG has sold off 15% in the past week, as I expected, and this could be the beginning of the final wash out if no hurricanes show up. Keep that natural gas ticker (UNG) ticker glued to your desktop. There certainly isn’t much else to buy out there right now.

Sep 10 02:21 PM