XTO: A Machine That Marches

We've seen some tremendous results from the U.S. independent explorers and producers (E&Ps) this earnings season. Unsurprisingly, XTO Energy (NYSE: XTO  ) has onceagain secured its place on the list of enviable explorers.

Oddly enough, XTO isn't big on exploration. The firm pursues an "acquire and exploit" strategy, shifting its risk from discovery to development. As long as XTO keeps its finding and production costs low, the model works wonders.

So how did the company fare on these measures in 2007? Well, all-in finding costs -- calculated by dividing total acquisition, development, and exploration costs by reserve additions -- came in just above $2 per thousand cubic feet (mcf). Only considerably smaller firms like Equitable Resources (NYSE: EQT  ) and Quicksilver Resources (NYSE: KWK  ) sport costs lower than XTO's.

Backing out acquisitions gives us a drillbit-only finding cost of $1.64 per mcf, or about half the industry average, according to a JPMorgan (NYSE: JPM  ) report cited by management during the conference call. That's a remarkable figure, besting even exceptional EOG Resources (NYSE: EOG  ) .

Lifting costs held comfortably below a buck for every thousand cubic feet gas equivalent (mcfe) of production. This number's not rock-bottom, but it's still great. EOG, in contrast, paid only $0.76 per mcfe to hoist its hydrocarbons out of the ground. Still, XTO's excellent 68% cash flow margin is a testament to its low-cost operations.

Interestingly, XTO is on track to potentially surpass Chesapeake Energy (NYSE: CHK  ) , becoming the largest U.S. independent in terms of reserves.

Not that this is or ever was the plan. The fast-growing firm has long demonstrated its commitment to creating per-share value. Every investor presentation includes a slide that shows the company's captured reserve potential -- in other words, proved plus probable and potential reserves -- per share.

The fact that XTO is getting so gargantuan is simply, in management's words, "an outgrowth of a machine that marches."

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