Let's cut right to the chase: If gas prices keep falling, you don't want to own XTO Energy (NYSE:XTO), or any other natural gas play for that matter.
But is that going to happen? Honestly, if I knew precisely where gas prices were headed, I'd be loaded to the gills with futures contracts, and selecting which small country I wanted to buy. Sure, it's possible that we'll have beautiful weather from here on out, we won't have any hurricanes this summer, and there won't be any more international tension or fear. Wanna bet on those possibilities?
Whatever the future of natural gas, this past quarter was a good one at XTO. Revenue jumped 96% as the company increased production by 21% and saw a 71% boost in average realized prices. Profitability improved, too, with operating income jumping 141% and adjusted earnings climbing about 146%.
So why do I like XTO? First of all, the company is a low-cost driller. While Ultra Petroleum (AMEX:UPL) did post lower finding and development costs for 2005, it's not as though XTO's organic level of about $1.10-$1.20/Mcfe is anything other than very good. Second, I like the production growth here, along with the company's history of making very favorably priced asset acquisitions (including recent ones from the likes of ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and Total SA (NYSE:TOT)). Last but not least, the cash-on-cash returns here look very good.
So there you have it -- very efficient, good reserve growth, and good return on capital employed. The only hitch (isn't there always one?) is the fair bit of debt here -- not a problem given high energy prices and good production, but a risk factor nonetheless. I suppose you could also count XTO's reliance on ongoing M&A as a hitch, but the company doesn't seem to be hard up for reserves, and management sounds rather confident about the ability to add future reserves at attractive prices.
Whether or not you like XTO, I'd encourage all of you to listen to a replay of the company's conference call. In particular, I found management's discussion of the current environment for natural gas prices to be both realistic and interesting. In the meantime, investors who were waiting for a second crack at energy stocks like this one might just be getting that chance.
Total SA is a Motley Fool Income Investor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
