The Fruits of XTO's Wisdom

Yesterday, we saw that Chesapeake Energy (NYSE: CHK  ) had learned to stop worrying and love low gas prices. XTO Energy (NYSE: XTO  ) has perhaps even less to worry about.

Just like Chesapeake, XTO's oil and gas production is largely hedged for 2009. Specifically, 80% of production is hedged at $10.70 per million cubic feet on a natural gas equivalent basis. On account of its Bakken acquisition, XTO is a bit oilier than Chesapeake, and those triple-digit oil hedges do wonders for the overall take.

So did XTO just have a flash of brilliance in 2008, prompting its skillful hedging? Not really. This has been part of the program for a long time. As explained in this piece, "management is comfortable with hedging one-half to two-thirds of its production" in order to minimize distractions from volatile commodity prices. XTO locked in about 50% of 2009 volumes by early September, and has continued to ratchet up the protection as prices have plunged. There was no prescience here -- just a levelheaded response to observable deterioration. Now we observe the fruits of XTO's wisdom, to borrow a phrase from the informative conference call.

As with Pioneer Natural Resources (NYSE: PXD  ) and Breitburn Energy Partners (Nasdaq: BBEP  ) , hedging has provided XTO an added benefit beyond the ability to project record cash flows in 2009. The firm has been able to monetize a portion of these derivative positions, freeing up $1.7 billion for debt reduction purposes. So even after a monster year of acquisitions, XTO's net debt position is comparable to that of the prior year's end.

No E&P is impervious to the current depressed environment, of course. Like EOG Resources (NYSE: EOG  ) , XTO is dialing back in the Bakken, to a level just adequate to maintain leasehold acreage and keep production within hedged oil volumes. The firm is also reducing work in places like the Barnett shale.

At the same time, however, XTO is picking up activity in the other "big four" shale plays, as Chesapeake has dubbed them. This will allow the firm to figure out just what it's sitting on, so it will be ready to rock and roll when gas prices take their next rocket ride.

Chesapeake Energy is an Inside Value selection. Hedge your subscription commitment with a free 30-day trial of any of our Foolish newsletters.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 22, 2009, at 2:43 PM, susan400 wrote:

    Toby, An XTO with hedge protection helps their 2009,

    but are you aware of current forward prices?

    CHK highly leveraged and spent billions on leases in 08 now worth 20 cents on the dollar , is good somehow in a 4& gas clime?

    XTO it looks like spent $9 billion on lease etc acquistions in 08, why didn't they get spend crazy in 05, 06 or 07? They bought acreage etc at the high !!

    SWN sold assets to then.

    Again, why do you think XTO has merit?

  • Report this Comment On February 23, 2009, at 5:22 PM, XMFSmashy wrote:

    It's not my intention to be the great CHK or XTO defender by any means, but no one has a bulletproof business plan in this environment.

    While I prefer companies that go the organic route, XTO has long demonstrated its ability to "acquire and exploit" its way to gains. I have a hard time seeing XTO running into serious trouble, unless natural gas stays at this level for several years. Given decline rates and the pace of rig laydowns, that seems like a remote prospect.

    You're right to be skeptical about buying acreage at the high, but if you buy CHK's argument that there's not likely to be any further shale discoveries to match the Haynesville, Fayetteville, etc in North America, then it's possible that these were once in a lifetime opportunities, and worth the elevated cost. We shall see.

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