XTO Energy: Portrait of a Super Stock

In the middle of February 1999, XTO Energy (XTO) closed (adjusted) at less than $1.00 a share. That same share would now be worth about $60.00. How did this happen?

XTO is primarily a natural gas exploration and production company. It also has proven reserves of oil. I personally have followed and owned this company for a number of years. I believe its success is based on three primary tenants:

One is limited exploration costs. One of the best ways of doing this is to wisely acquire property on which there are proven reserves. XTO does this better that it’s competitors. XTO relies on its experienced team of geologists, seismologists and drillers. They have proven ability to know what they are purchasing, its potential value and recoverable assets. They have a true talent for efficiently extracting the reserves, and therefore creating value far in excess of the purchase price and development costs.

Two, XTO is proficient in drilling and production. The company’s well-head costs of natural gas are among the lowest in the industry. Therefore, the increased profits can be used for additional drilling and landholdings.

Three, understanding that North America has only about 3% of the world’s natural gas supply and that natural gas cannot be easily imported. There have been no new natural gas facilities to come online for a number of years.

It is a reasonable conclusion that supply and demand will cause the price of natural gas to gradually rise. This is exactly what has happened. XTO has generally been able to increase its reserves by 20-25% year over year.

They have recently booked their largest acquisition to date, a $2.5 billion dollar natural gas and oil producing property from Dominion Resources. Their previous purchase of just over a billion dollars turned out to yield significantly more reserves than was anticipated. With XTO’s record I would not be surprised in the least, if this latest purchase results in similar results.

Therefore, with its steady growth, ever increasing reserves, and superb management, there is every reason to expect that XTO will be a strong stock for the foreseeable future.

Disclosure: Author has a long position in XTO

XTO 5-yr chart

Comments

[Richie]

I believe you have selected another winner in XTO (in addition to HERO). I also believe that BRNC (a land oil and gas driller), while not as well seasoned as XTO will prove, in the long run, to be a great beneficiary of the trend toward higher gas prices that you suggest are coming.

[leojbourne]

How is XTO better than other companies, such as NGAS?

[dwolf]

Hi Leo,
Thank you for your question. You are dealing with two very different companies. One has an enterprise value of almost $24 Billion dollars and has a 15 year history. The other is a small-cap with an enterprise value of just over $200 million dollars. The profit margin on NGAS is 1.58%; the profit margin on XTO is over 33%. NGAS has a quarterly revenue growth of minus 34% and XTO has a quarterly revenue growth of 25%. NGAS is beta is approximately twice that of XTO. I would regard NGAS as a moderately volatile small-cap with significant downside risk. XTO on the other hand is a small Large-cap with a long history of stability, good management, increasing revenues and increasing reserves. I hope that answers your question.