It's almost impossible to believe, but XTO Energy (NYSE:XTO) actually got a better price on its crude oil sales this quarter than in the same period last year. Last year's realizations were no pushover, either, at a touch more than $90 per barrel.

Thanks to the most masterful hedging program executed among any of the leading independents, and perhaps any publicly traded E&P, XTO locked in a crude oil price of over $107 per barrel. Compare that to Devon Energy's (NYSE:DVN) $52.44 a barrel or Anadarko Petroleum's (NYSE:APC) $45.84. XTO's natural gas realizations were fat as well, topping $7 per 1,000 cubic feet (Mcf). These huge hedging gains provided XTO a cash flow margin of 67%, which doesn't put it far short of low-cost king Ultra Petroleum (NYSE:UPL).

Hedging gains can mask mediocre cost control, so it's important to take a look at unit operating cost trends as well. XTO's per-unit production expense dropped nearly 10% sequentially. That puts the firm ahead of Devon (which is not a surprise), though a bit behind Anadarko and Chesapeake Energy (NYSE:CHK) in terms of sequential improvements. In absolute terms, XTO's unit costs are tracking within a penny of those sported by Chesapeake. At less than a buck per thousand cubic feet equivalent of gas, these lifting costs are competitive.

Continuing the trend of producers prolonging the downturn in natural gas by doing more with less, XTO's daily gas production rose nearly 6% sequentially. Chesapeake's not holding back, and neither is XTO. As we discussed on Wednesday, one of the big motivators for Chesapeake to keep the drill bits turning is the fact that partners are picking up part of the tab, enhancing the firm's drilling economics. XTO's hedges are having a similar, if less powerful, effect.

I expect that each individual firm's choice not to curtail production in a significant way will result in fresh lows for natural gas prices sometime this fall, as storage gets filled to the brim. I wouldn't be surprised to see a "two-handle" on the Henry Hub natural gas benchmark price, meaning $2 and change. For less well-hedged gas producers, that's going to hurt. XTO's hedges should prevent this pain.

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