XTO Energy Inc. XTO NYSE

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XTO Energy Inc. (XTO)NYSE

• Peter Fogarty
• Feb. 14, 2005
• Cornell Investment Club

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Company Profile

• Formed in 1986, had an IPO in 1993
• Headquartered in Forth Worth, TX
• Natural Gas and Oil Producer
• 100 Domestic Production
• 1,007 Employees
• Member of SP 500, replaced PeopleSoft Inc. in
  Dec., 2004
• Former member of the SP 400 Midcap
• Market Capitalization 10.16B

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Core Businesses

• Involved in the acquisition, exploitation,
  development, production, and exploration of oil
  and natural gas properties
• Also involved of marketing and transportation of
  oil and natural gas
• Classic acquire and exploit company
• Reserves 87 in gas and 13 in oil

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Property Locations
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Business Strategy

• XTO Energy acquires old oil fields already in
  production
• Most properties have been developed by major oil
  companies
• All properties are long-lived
• Devote substantial resources to increase
  production on a low cost, low risk basis
• Operate 92 of the value of the properties they
  own

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So What? Why is it Attractive?

• Competitive advantage in domestic drilling
• Doubles oil reserves at fields they acquire
• Proven double digit production levels
• Natural gas and oil in high demand
• Assets (land) unlikely to depreciate

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Value Added Process
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Acquisition and Development

• Since its inception they have acquired 3,180
  billion cubic feet of land and have developed and
  exploited an additional 6,282 Bcfe, an increase
  of 98

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Cost Structure

• Compared to competitors, XTO Energy is able to
  acquire and develop reserves at a low cost

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2004 Production Levels

• Gas production for the year was a record 835 Mmcf
  per day, up 25 from 2003
• Oil production for 2004 averaged a record 22,696
  barrels per day, a 75 increase from 2003
• Natural gas liquids production for 2004 was a
  record 7,484 barrels per day, a 16 increase from
  2003

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Fourth Quarter Production Levels

• 916 million cubic feet (Mmcf) per day, up 24
  from fourth quarter 2003
• Record oil production of 33,494 barrels per day,
  a 161 increase from fourth quarter 2003
• Record natural gas liquids production of 8,628
  barrels per day, a 32 increase from fourth
  quarter 2003.

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Estimated Production Levels for 2005

• Recently purchased Antero Resources Corporation
• New stake in Barnett Shale region
• Recently purchased 150 natural gas and oil
  properties in seven US states from ChevronTexaco
  for 912 million.
• Increased their target production to 21-23 from
  18-20
• Acquired 2 Billion of property producing
  acquisitions in 2004
• 2005 development budget set at 850 million

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2004 Energy Prices

• The average gas price the company received in
  2004 was 5.04 per million cubic feet, an
  increase of 24 from the previous year.
• The company got an average of 38.38 per barrel
  of oil last year, up 34 from the 2003 average.
• The price of natural gas liquids reached 26.44 a
  barrel, up 32 from 2003.

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Technical Analysis
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Income Statement

• Earnings for fourth quarter 2004 were a record
  173.9 million, or 67 cents per share, up from
  fourth quarter 2003 earnings of 61.9 million, or
  27 cents per share.

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Cash Flow/Balance Sheet

• Current Ratio .87
• Operating cash flow up 34

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Key Statistics

• PE 19.51
• PE of Industry 19.01
• Forward PE 1 3.99
• Short of Float 1.95
• Held by Insiders 8.54
• Held by Institutions 79.76
• Dividend Yield .51
• Beta .88

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Industry Trends

• 40 increase in crude oil prices in 2004
• Low levels of supply from Russia
• OPEC will cut production if price of crude oil
  falls under 37/barrel
• Oil demand is going to be strong with the further
  growth of India and China
• Global supplies are limited

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Competitors
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Why invest for 2005?

• 20 of production again
• Low costs/risks associated with domestic drilling
• High demand for oil and natural gas
• Strong operating cash flow for debt reduction,
  acquisitions, and expansion
• Strong revenue growth estimated

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Risks

• Short Term Warmer Weather drives crude oil
  prices down
• Long Term Decline in oil prices, inventory
  dry-out (unlikely)
• Trading at its 52 week high
• Low current ratio
• Potential drop from SP 500

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Portfolio Considerations

• Recommended purchase of 1,000 for a long term
  position
• Strong utility position
• Take advantage of global economic conditions
• Growth stock, rather than value stock