Repeatable

When thinking of "Top of Class" among E&P executives, XTO Energy Inc. chairman and chief executive Bob R. Simpson comes to mind. In interviews and formal corporate presentations, the Texas native seems relaxed and in no hurry, but there must be some determination in the background for XTO to have remained among the strongest independents in the U.S. In March 2005, Barron's named Simpson one of its top 30 CEOs. He was profiled in Oil and Gas Investor as well (see "Simpson's Success," May 2005). Under his leadership, the Fort Worth company's reserves and production have grown in each of 12 straight years, and total shareholder returns since the company's 1993 initial public offering have outpaced peers: shares have risen 40-fold. In 2005, the company posted a 66.4% total return, ahead of Devon Energy Corp., EnCana Corp., Anadarko Petroleum Corp. and Apache Corp., according to data from John S. Herold Inc. That was on the heels of a 56% return in 2004. All the while, XTO has not deviated from its original focus: purely domestic, unconventional and long-lived natural gas plays onshore. Simpson says he'll stick to what he calls The Big Four: tight gas, shale gas, coalbed methane and "tight" oil. These have given XTO a long reserve life, thousands of drilling locations in repeatable resource plays, and one of the lowest drillbit finding costs in the industry. Since January 2002 the company has acquired more than $4.3 billion of such reserves-some 1.3 trillion cubic feet equivalent (Tcfe) from the majors alone. It ended 2005 with about 7.5 Tcfe of reserves versus 5.9 Tcfe the year before, and at press time, it made another acquisition in its core East Texas area, for $300 million. "If you believe in $9 gas, paying $3 is not crazy. And we have so much inventory here, we can be patient," Simpson says. Apart from deal-making, at which it excels, XTO has low-risk upside already in inventory of another 4.2 Tcfe. Historically it has grown 50% through acquisitions and 50% by the drillbit, usually doubling acquired reserves through exploitation. This year it aims to drill 865 net wells and perform 620 net workovers and recompletions. It plans to have at least 66 rigs running, some 20 in the Barnett Shale alone. It is targeting 10% to 12% production growth this year. Despite a successful track record, XTO did not sit on its laurels last year. But like other E&P companies chasing reserves, it faced a seller's market where buyers were willing to set new records. Even so, Simpson closed several transactions that increased XTO's position in its core holdings. The first, in April, saw XTO acquire 440 billion cubic feet equivalent of proved Barnett Shale reserves from Antero Resources for $685 million, elevating XTO to the No. 2 spot among producers in the hot play. In March, XTO traded some assets with ConocoPhillips to acquire additional properties in the East Texas Freestone Trend, where the company dominates gas drilling and production. It also picked up interests in the San Juan Basin and in the Permian Basin's Goldsmith Field. Later in the year, XTO agreed to farm into significant acreage in ExxonMobil's Piceance Creek Unit, which is a longer-term growth area. XTO will develop more of the acreage and be exposed to 2- to 4 Tcfe of additional gas potential. The first well was spud this quarter. Simpson's relationships with the majors paid off again in July when XTO bought 21 million barrels of oil reserves from ExxonMobil in the Permian Basin. As the largest gas producer in Arkansas, and holder of 100,000 acres in the budding Fayetteville Shale play, XTO will watch carefully as the latter more fully develops this year, Simpson says. This year XTO will see cash flow from operations of around $3 billion-but it need spend only 25% of that to keep production flat. It ended 2005 producing 1.4 billion cubic feet equivalent per day, up 21% over the prior year. Says Simpson, "I tell investors the best value creation comes from the companies that require the least maintenance capital. If you can keep your production flat by using only a quarter of your cash flow, you can grow." This year, XTO will use about half its projected $8 per share of cash flow to grow some 10% to 12% through the drillbit. And, it intends to make a special one-time distribution of units in its Hugoton Royalty Trust, equal to about $2.20 per share. "As for the remaining cash flow, our priority at XTO is to buy quality assets. If I can't do that, I'll devote a little more to exploitation or share buybacks. In my 20-year career, I've never gotten beyond spending on the first two choices." The company celebrates its 20th anniversary this year. "I look hard at whether we are creating value, and I'm not selling my stock. We're still excited here."