In 1985, Bob Simpson had been with Southland Royalty Co. for nearly a decade when it was bought in a hostile takeover by Burlington Resources. He and colleagues Steve Palko and John Brumley took their knowledge and formed Fort Worth, Texas-based Cross Timbers Oil Co. with operations in Major County, Oklahoma. The company, now known as XTO Energy Inc., grew quickly to become the largest producer in Major County, and then the largest producer in the Freestone Trend of East Texas. Operations have expanded outside of Texas and Oklahoma to New Mexico, Arkansas, Kansas, Wyoming, Colorado, Alaska, Utah and Louisiana. And, through the recent $685-million purchase of Antero Resources Corp., it has increased its holdings in the Barnett Shale, and become the No. 2 producer in that promising North Texas gas play. Today, it has proved reserves of 5.9 trillion cubic feet of gas equivalent, and 2004 production was 916 million cubic feet of gas and 42,122 barrels of liquids per day. None of this surprises chairman and chief executive Simpson, however. He knew when he left Southland that he would create a valuable oil and gas producer. Investor - We've heard that XTO's first acquisition was a statue. Simpson - Back in 1986, Steve Palko and I went to a fund-raiser for the March of Dimes. They were auctioning this statue titled "I'll Be Back." It's a cowboy riding his horse out of town-he's lost his hat, he's lost his gun, he's shaking his fist back at the town. He's obviously been run out of town. We thought that was analogous to Southland's hostile takeover in 1985 where they ran us out of town and took our company. We didn't have a stitch of production; the statue was our first purchase of anything. It's become our mascot. At 10 years, we had the same artist sculpt another statue, "I'm Back," which is of a guy tying his horse up to a hitching post, fixing to go back into the saloon. He's got his gun, he's got his hat. "I'll Be Back" was our slogan, and we did it. Investor - How did you do it? Simpson - We had the good fortune of selling out (of Southland) when oil was $30, even though it was against our wishes, and starting Cross Timbers when oil was $10. We were lucky against our wishes, which is often the case in life, I guess. We started with capital raised by Bob Ruben-co-chair of Goldman Sachs at the time. Ruben raised $35 million for the initial capital in about two hours. He was personally an investor. There weren't a lot of people that contributed at first; he just had a lot of well-connected friends. He believed in us at a time when oil was out of vogue and everyone was wondering if the oil industry was even going to be an industry; he was there to raise the money and get us going. We eventually went public in 1993 and Goldman was the underwriter. Investor - What areas did you want to focus on? Simpson - Texas, New Mexico and Oklahoma are the three big states, and then Arkansas, Louisiana and Kansas. Initially our main holdings were in Oklahoma's Major County; we became the largest producer there. Our story has been: Let us into the area and we'll grow from there. Today, we're the largest player in the Freestone Trend in East Texas, and now we're the No. 2 player in the Barnett Shale. We see the Barnett Shale as being analogous to East Texas in becoming a very important part of this company and certainly a major growth arena. Fifteen months ago we didn't have anything in the Barnett Shale. Investor - What drew your interest to the Barnett in particular? Simpson - It has all the criteria we seek: long-lived reserves, decent development costs, gas, high-margins, but what we were waiting on was the validation that it was more than just a new field that Devon Energy owns. We had to believe there was no possibility of doing anything but make money there. Once we became convinced it was a basin and not just a field, we became highly interested. Investor - XTO has been very successful at acquiring large asset packages from major oil companies. How do you do this? Simpson - It goes all the way back to our culture. We are an acquire-and-exploit culture, so to start with, we're always thinking about acquiring. I personally have been doing acquisitions almost 30 years. We have lots of contacts within the industry and we stay in tune. We actively work at developing relationships with the majors so that when they decide to sell something, we know about it. That's very important-only a very small group of companies may even know about it. After that, the XTO game is that, when we get involved and we want to own something, we have a closing percentage above 90%. When we want it, we want it. We're very focused and most acquisitions are already screened. We are very selective of and very disciplined on where we buy. If it drops into our target zone, we're very fierce competitors. We don't try to make life difficult once we start the deal, in principle. We're a known aggressive bidder and a good closer. It's this reputation that helps us get into the elite group that gets to bid on certain projects. It takes all of that working together to get deals. It starts with the culture. That's the way we think. Investor - Did you ever pay too much? Simpson - After the downturn in 1998 and 1999, there were a lot of apologies made to Wall Street by oil and gas companies. One thing I am proud of here at XTO is that we didn't have to make that apology. We didn't do acquisitions that I regret. In fact, a lot of the groundwork for our success today was built starting in 1996, 1997 and 1998. Our discipline is so tight and the acquisitions were so right. We didn't get too carried away. I could name a few that got away, but I'm not unhappy with anything I caught. Investor - Which deals got away? Simpson - We would have liked to have bought El Paso's East Texas position two or three years ago, but we were simultaneously doing a very complicated three-way with Marathon. Another opportunity was a piece of the Pinedale Anticline from Williams that was sold one weekend to EnCana. We would have liked to have had that; we just didn't hear of it. The fact is, when your expectations are high, you take them all personally. You just hate to not get what you go after. Investor - What are investors expecting from XTO this year? Simpson What we've promised is that we'll grow production between 23% and 25%, and that's the only absolute promise we've made. Within that, there's the ongoing pledge that there will be quality and we will have upside within the acquisitions we do. Investor - What makes XTO stand out from the crowd of other E&P investment opportunities? Simpson - Probably the single most interesting statistic about XTO is that we replace production and reserves with less than 30% of cash flow. That leaves 70%-plus to grow with. That's probably the best in the industry. This one statistic alone says XTO is going to grow. We can take that 70% of cash flow, buy more production, buy shares, pay dividends-real value creation. Good things are going to happen when you have available cash flow. Even though oil and gas prices have exploded, we've pretty much preserved our cost structure. So when you combine the two, it's just dynamite. Investor - Will you buy back stock? Simpson - I'd rather buy good production. My rules of thumb are always: buy good production before you drill, then always drill high rates of return before you buy stock. Between those, we haven't gotten around to buying back shares, but we can always turn to that option. Investor - Will you expand to assets abroad? Simpson - As long as we can deploy all of our resources in our backyards, we're staying there. Investor Is this business as easy as you make it look? Simpson When we buy, we pay more than anybody else. So, some would think we probably paid too much, but that's where you've got to have confidence and believe in what you're doing. That's why you need to be focused, understand your area and be aggressive enough to own it when it comes up. It's a game of inches; there will be two or three people around you, and you've got to beat them. It takes a while to figure all that out. People who think they can just walk in and do this are facing a challenging learning curve. That's no different in any other business. Every business that looks easy is probably going to clean your clock before the day's out.
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