XTO's Ongoing Excellence

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If you're trying to figure out whose incremental demand is going to help prop up ailing land drillers like Patterson-UTI (Nasdaq: PTEN) and Grey Wolf (AMEX: GW), don't look to XTO Energy (NYSE: XTO) for help. It's not that the natural gas-focused firm is slowing down -- it's just that it doesn't want to grow so fast it exceeds the build-out of compressor stations and other necessary infrastructure.

Production for the third quarter was anything but sluggish. Output rose a robust 24% and surged 14% sequentially. A little more than half of that quarter-on-quarter boost came from the company's large Dominion (NYSE: D) acquisition, but the rest came the old-fashioned way -- through the application of elbow grease (and the drill bit).

After tacking on sales price gains across gas, natural gas liquids, and oil, we're looking at a 30% rise in revenue. Expenses took quite a bite and pared the earnings-per-share gain to 13%.

Looking at lifting costs, though, we come up with a $0.93/mcfe figure, which is nothing to fret about. That's akin to an oil producer like Arena Resources (NYSE: ARD) or Denbury Resources (NYSE: DNR) paying about five and a half dollars to pump a barrel of oil out of the ground. Arena, which has the lowest costs of any oil-oriented producer I know of, pays about $10/BOE in lifting costs.

Natural gas gunners like XTO and Southwestern Energy (NYSE: SWN) may have an advantage when it comes to keeping costs down, but their pricing has been weaker than that of the oil barons. XTO mitigates quite a bit of downside by hedging. About half of expected gas sales for this quarter are locked in at roughly $9, well above the futures price. That should give anyone antsy about a warm winter a certain degree of solace.