On Tuesday, independent E&P company XTO Energy (NYSE:XTO) reports second-quarter earnings. Will management be exploring for excuses, or producing the profits for shareholders?

What analysts say:

  • Buy, sell, or waffle? Twenty-one out of 29 analysts say the shares are worth digging into. Not one is willing to deem the company's prospects as dusty as a dry hole, but eight need some grade B syrup for their waffles. Our Motley Fool CAPS players are at least as enthusiastic, awarding the stock the highest possible five-star ranking.
  • Revenues. Analysts are looking for sales of $1.29 billion, an increase of 21% over last year, and 10% sequentially. This is based on management guidance of 1.64 to 1.65 billion cubic feet equivalent of daily production, which is a touch higher than last quarter's record output.
  • Earnings. Wall Street wunderkinds are expecting $1.13 per share in earnings. Last year, EPS came in at $0.90. This is a pretty easy comparison, because last year's results were fairly weak.

What management says:
XTO's co-founder CEO calls the company a "top-tier growth company in the industry." This may be a surprising characterization for a company that also proclaims to pursue a low-risk strategy, but the company has indeed posted gonzo growth. Reserves per share are up over 14 times since 1993, and per-share production growth continues to rise by double digits year after year.

Management says it is committed to creating value for shareholders, and in this case, I'm ready to believe it. Compared to some other large E&P companies like Anadarko Petroleum (NYSE:APC) or Apache (NYSE:APA), XTO's insider ownership is quite high.

What management does:
XTO has been extraordinarily successful at executing its strategy of acquiring long-lived, "legacy" assets and developing them at rock-bottom costs. In recent years, this has meant moving into unconventional gas plays in the Barnett Shale, the San Juan Basin, and elsewhere. Margins are incredibly steady, and they give a lickin' to the likes of Devon Energy (NYSE:DVN) and EnCana (NYSE:ECA).

Margins

3/2006

6/2006

9/2006

12/2006

3/2007

Gross

88.8%

88.8%

88.6%

88.4%

87.8%

Operating

59.9%

60.9%

61.0%

59.8%

57.9%

Normalized Net

34.7%

34.8%

34.8%

34.0%

32.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
After picking up a huge acreage position from Dominion Resources (NYSE:D) last month, XTO now has years of growth inventory to develop. In respect of the costs involved in proving out the reserves in this land position, XTO is peerless in its ability to keep them as low as possible. According to Ben Dell, an analyst with Sanford C. Bernstein & Co., XTO's finding and development costs last year were about $10 per BOE, compared to about $15 for its competitors.

I don't own an E&P company today, but XTO is on a very short list of operators that I monitor for an opportunistic entry point. The growth profile, management alignment with shareholders, and operational excellence are all there. If Mr. Market ever kicks this one to the curb, I'm grabbing shares with both hands.

More to explore:

Fool contributor Toby Shute does not own shares of any company mentioned. The Motley Fool has a disclosure policy.