Despite a reversal in the natural gas commodity price trend last year, XTO stock had a gain, bringing its 5-year total return to 49% a year, according to Bloomberg. Trading above its 200-day average, the stock remains in favor in 2007, justifiably so, considering our estimate of net present value [NPV] of $60 a share.
Management believes it has the drilling inventory for 10% growth in annual volume in 2007 and reserve additions equal to currently proven reserves over the next several years. Chairman Bob Simpson is proud of XTO’s “free cash flow” model that can keep production flat indefinitely by reinvesting 30% of cash flow. In our discounted cash flow framework with projected cash flow for 2007 as a base, Mr. Simpson’s model implies NPV of $70 a share.
Originally published on February 14, 2006
XTO 1-yr chart