Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



XTO Looks Extraordinary

As I anticipated in my forecast, XTO Energy (NYSE: XTO  ) produced profits for pleased shareholders this quarter. The company beat its own production guidance, with gas and liquids output up 12% over the prior year. Along with strong pricing, particularly for natural gas, this output growth led to a 35% rise in adjusted earnings. This figure backs out one-time items such as last year's large gain on a distribution from Hugoton Royalty Trust (NYSE: HGT  ) , a high-yielding company spin-off.

Part of the reason for the torrid production growth was the backlog in the Barnett Shale. Some infrastructure projects were delayed within this prolific unconventional gas play, which prevented a lot of wells from being completed. Completion is the last stage before a well can start pumping out the hydrocarbons. Once the infrastructure came online, so did a whole lot of wells. Barnett's output rose a massive 24% sequentially, a gain that's unlikely to repeat itself.

Lest you be concerned about XTO's exposure to recently weakening natural gas prices, there's actually a large hedging program in effect here. Hedging, in this case, means that the company caps its exposure to commodity price fluctuations, both to the upside and the downside. Management is comfortable with hedging one-half to two-thirds of its production.

This program doesn't just limit risk. It also "keeps an orderly shop," allowing the company to go about doing what it does best -- increasing production with minimal expense -- without having to worry too much about timing that level of production to the commodity cycle. This hedging program could certainly hold XTO's shares back in the event of a sharp rise in the natural gas price, but I find the reasoning here very sound.

Given the hedge program, I'm surprised to see XTO's shares dragged down with smaller E&Ps like Cimarex Energy (NYSE: XEC  ) . XTO, which I believe is a low-risk operator, has actually fallen more than 9% in recent days. If this keeps up, I may count myself an XTO shareholder sooner than I would have anticipated.

Related Foolishness:

Cimarex is aMotley Fool Inside Value selection. Inside Value shows subscribers what Wall Street is overlooking now. A free trial gives you all the picks and how they're doing.

Fool contributor Toby Shute doesn't own a functioning beard trimmer, nor shares in any company mentioned. The Motley Fool keeps an orderly disclosure policy.

Read/Post Comments (0) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 532650, ~/Articles/ArticleHandler.aspx, 10/28/2016 6:42:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/25/2010 4:02 PM
XTO.DL $41.81 Down +0.00 +0.00%
XTO Energy, Inc. CAPS Rating: *****
HGT $2.32 Down -0.02 -0.89%
Hugoton Royalty Tr… CAPS Rating: *
XEC $133.10 Down -0.62 -0.46%
Cimarex Energy CAPS Rating: **