Point of View: XTO Energy focuses on long-life US gas reserves

Oct. 25, 2004
XTO Energy Inc., Fort Worth, made acquisitions worth almost $2.5 billion across the US during the last 2 years, with an emphasis on expanding the East Texas operations that account for half of its oil and natural gas production.

XTO Energy Inc., Fort Worth, made acquisitions worth almost $2.5 billion across the US during the last 2 years, with an emphasis on expanding the East Texas operations that account for half of its oil and natural gas production.

"What really explains the success of XTO is production volumes because most of these years we didn't have big commodity prices to help us," said Bob R. Simpson, chairman and CEO. "XTO is a volume-driven, low-cost manufacturing story."

XTO, formerly Cross Timbers Oil Co., started up in 1986 and completed its initial public offering in 1993. It now holds a property portfolio that ensures growth for years.

"We are not under pressure to buy for production growth, although a lot of competitors are struggling with that. We will keep our discipline, and we will make acquisitions that make sense, or we will do something else with the money," Simpson said.

XTO tries to increase production through both drilling and acquisitions. Simpson emphasized that a key to success is the company's ability to keep finding costs lower than the industry average. Currently, XTO produces more than 1 bcfd of gas equivalent, of which 80% is natural gas.

Acquisitions

Simpson expects that acquisitions will become too expensive given high oil and natural gas prices, and he forecasts that XTO primarily will buy additional interests in its existing properties rather than acquire new properties in coming months.

"We tend to buy additional interests every year, rain or shine," he said.

The company made $1.7 billion worth of acquisitions in 2004. Previously, the most it had spent in 1 year on acquisitions was $625 million.

"We are on quite a pace; about two thirds of that was the ChevronTexaco Corp. acquisition. The rest was from ExxonMobil Corp. and independents. This year has been a year to buy from majors for XTO. We've done almost $1.5 billion from majors this year," Simpson said.

In August, XTO closed on a $912 million acquisition from ChevronTexaco, expanding its operations in East Texas, the Permian basin, and Midcontinent areas. The deal also brought XTO new coalbed methane operations in the Rocky Mountains and a new operating region in South Texas (OGJ Online, May 17, 2004).

"This watershed event set the stage for years of continued profitable growth," Simpson said of the ChevronTexaco deal. In addition, XTO bought producing properties from ExxonMobil in the Permian basin of Texas and in the Powder River basin of Wyoming. The closing price will range from $336 million to $341 million, subject to revenue adjustments and depending on property performance over the ensuing 12 months.

XTO is set up for 28-30% production growth in 2004, Simpson said, adding that production growth for 2005 is expected to be 18-20% even without additional property purchases.

"We look for cash flows to be $1.5-2 billion in total next year, so we are just adjusting to this," he said. "You've got to remember that this company in 1997 had $50 million/ year in cash flow. The same people still run the company, but our options are much larger. These numbers are astounding."

Operations

XTO is developing extensive holdings in the Freestone Trend of East Texas, where XTO it works mainly in Freestone and Limestone counties. The company entered the region with a $250 million acquisition in 1998.

Since then, XTO executives have commingled production from various zones in East Texas, lowering development and completion costs.

"We might take a well that would make 1 MMcfd from a single zone and end up making 3 MMcfd from all the zones put together, so it changed the landscape of the play and made it much more economical. We stick with areas where there is multipay opportunity," Simpson said.

XTO continues to expand its gas processing and pipeline capacity for the Freestone Trend. In January, the company entered the Barnett Shale play in north Texas. Elsewhere, it is the top gas producer in Arkansas.

The ChevronTexaco and ExxonMobil acquisitions helped XTO expand its long-life oil reserves in West Texas. The company also has production from Middle Ground Shoal field in the Cook Inlet of Alaska.

Coalbed methane in Colorado, New Mexico, and Utah accounts for 20% of the company's production. XTO has identified 580-780 well locations in the San Juan and Raton basins. Its coalbed methane production rose from 2 MMcfd in 1997 to almost 140 MMcfd today.

Development costs range from 15¢/Mcfe to 50¢/Mcfe, Simpson said. In 2004, XTO plans to drill 60 coalbed methane wells, of which 25 are in the San Juan basin and the rest are in the Raton basin.

Decline curves

"If you look at the industry in general, we think the national decline curve is 25-28%," Simpson said. "If you didn't do any drilling for a year, gas production would fall off that much. What I would have told you 20 years ago was that the number was 12%.

"That says we are having to run faster and faster to try and replace production, and we are losing."

Without drilling anything in the next year, XTO's decline curve would be 13%, he noted.

"We have a much lower production decline profile than the industry in general. We were buying long-life, low-decline properties as a philosophy back in the mid-80s. It's becoming more in vogue now. People understand the rapid decline properties set you up on a treadmill where it is almost impossible to grow."

Simpson recalled how XTO used half of its cash flow to replace production and half to grow 10 years ago.

"With commodity prices exploding and our drillbit costs staying low, it currently takes 25% of our cash flow to replace production. We have 75% of our cash flow with which to grow, giving us a stronger growth model than we've ever had. That is part of the reason why we are able to continue to grow while the industry shrinks."

Simpson said XTO will continue its focus on long-life reserves, particularly gas reserves having much upside and low production costs.

Chairman, CEO Bob R. Simpson
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Career highlights
Bob R. Simpson is the chairman and CEO of XTO energy Inc. A cofounder, he has been a director of the firm since 1990. He has been chairman and CEO, or held similar positions with the company and its predecessors, since 1986.

Employment
Simpson was vice-president of finance and corporate development at Southland Royalty Co. during 1979-86 and tax manager at Southland Royalty in 1976-79.

Education
He holds a BS in accounting and an MBA from Baylor University.