"X?TO is sort of exploding,” says XTO Energy Inc. chairman and chief executive Bob Simpson in a conference call, summing up the Fort Worth-based company’s record-breaking pace of deal-making during the past year. The company topped off a phenomenal 12-month flurry with its $4-billion-plus mega-deal announced acquisition of privately owned Hunt Petroleum Corp. in early June.


“We’re in great shape,” brags Simpson. “Clearly, we’ve taken advantage of this marketplace.”


The top-10-gas-producer-that-could has been on a buying spree unmatched by any other E&P in the same period. In 12 months through late June, XTO had closed or announced an amazing $11.5 billion in deals with $8.4 billion in the first half of 2008 alone, doubling its first-half 2004 record of $4.3 billion.


The spree began in June 2007 with the purchase of 1.06 trillion cubic feet equivalent (Tcfe) of reserves from Richmond, Virginia-based Dominion Resources Inc. in the Rockies and South Texas. Following soon thereafter was a Barnett shale acquisition for $550 million; Fayetteville shale assets from Contango Oil & Gas Co., Houston, for $236 million and from Southwestern Energy Co., Houston, for $520 million; a mixed package valued at $1 billion in the San Juan Basin and Woodford, Fayetteville and Barnett shales; and a Marcellus shale deal from the MLP Linn Energy LLC, Houston, for $600 million.


When market observers may have thought the company might take a breather and digest some of its bonanza, in late May it inked a deal to gobble up privately owned Headington Oil Co. for a cool $1.85 billion to establish a new stake and dominant presence in the Bakken play.


Days later it announced the deal to buy Hunt Petroleum Corp., including another 1 Tcfe in proved reserves largely in East Texas, northern Louisiana and the Gulf Coast.


And there is more to come, the company suggests.


By comparison, at year-end 2006, XTO had a market cap of $17.3 billion. Pro forma the Hunt closing, the company will stand at $37 billion based on present market value. Proved reserves will increase from 8.5 Tcfe at year-end 2006 to an estimated 13 Tcfe by year-end 2008.


Production will about double from 1.5 billion cubic feet equivalent (Bcfe) a day in 2006 to an estimated 2.8 Bcfe a day at year-end 2008 once these current deals are digested.


Net acres from these acquisitions: 2.1 million.


When the dust settles, XTO will have about doubled itself in every way. And that’s before it gets busy dril­ling the upside of these deals, which was a significant factor in making the acquisitions.


Simpson says that, in early 2007, XTO recognized a convergence of factors that created a unique opportunity for acquisitions of high- quality properties in scale. These factors included improving commodity prices, a looming increase in the capital-gains tax rate that would incentivize sellers, tightening debt markets that would make it difficult for non-investment-grade companies to acquire, low interest rates for those that could secure financing, and a discount off traditional acquisition parameters.


“We’re taking advantage of that changing environment,” he says.


Fast-rising commodity prices have created a pause in the market with buyers that hesitate at paying higher valuations and are unable to secure returns through hedging, he adds. Hedging is a tool for larger companies that are not required to put up a bond of performance. Smaller companies must put up capital to hedge and, if wrong, “little guys could get margin-called out.”


The commodity markets will ultimately stabilize and make acquisition opportunities more expensive, he forecasts.


A possible capital-gains tax issue under a Democratic White House “will be resolved one way or the other.” He hasn’t polled Hunt family members, but “I’m sure part of their thinking was a possible tax change.” Headington was similarly motivated, he believes. “We’ll either have a tax change or we won’t. That will pass.”


Most E&P companies are busy drilling and outspending cash flow, he points out, leaving little left for acquisitions. Concurrently, when the debt markets got considerably tougher last summer, capital dried up and some buyers were forced to wait out the cycle before they could get financing.


“There’s a paucity of credit available for more speculative companies,” he says. “The advantage of being a solid investment-grade company has come to the fore. It allowed us to take advantage of it.”

XTO secures those economics with hedging. At $130 oil, he says, in three years “we’ll have better than half our money back, including development costs. That takes the risk out.

“So we’re busy about it.”


XTO used its own stock as currency to supersize the value of the Headington and Hunt deals, both privately held. Not only does using equity to fund a deal increase the deal size that is possible, but it reduces up-front taxes owed by the seller and provides an opportunity for future gains.


“That played a key role,” says Simpson. “It allows a tax-efficient structure for the sellers and provides them the ability to participate in the upside.”


He adds that XTO paper is very much in demand because there is no layaway. “We put equity in place as soon as these acquisitions are done. (Investors) appreciate that approach versus paying out over two years.”


Simpson says 2008 is a year of “excellent opportunities.”


t the end of the run, XTO will be a different company. “We’re hand-crafting a company that didn’t exist.” Looking at the deals just in 2008, Simpson says that, in essence, XTO has bought in aggregate an $8.5-billion company with about 40% of stock. “That’s how we look at it. We’re crafting a company at a price that one could hardly believe.” He calls it “an exceptional moment in time.”


Early last year, XTO’s annual cash flow was $3 billion. The company is estimating some $9 billion of cash flow by year-end 2009.


So will XTO keep up the pace the rest of the year? “I doubt it,” says Simpson. “Certainly we’ll expend at least free cash flow for the year, which will be another $1- to $1.5 billion minimum.” Combined with a pattern of using 40% equity in purchases, that suggests another $2 billion or so for 2008.


“Beyond that, we’ll see. We’re happy with where we are. We think we’ve secured a couple of the best deals in the company’s history in the last two announcements. We’ve got growth for years.”


While the company implies it is closer to the finish line than the start, “it’s just midyear,” Simpson says. “A lot of deals are coming.”

Related Document: XTO Investor Presentation

Editor’s Note:XTO announced in late July that it plans to acquire Barnett shale properties for approximately $800 million and additional producing properties in its Eastern and San Juan regions and acreage positions in the Marcellus, Fayetteville, Barnett and Haynesville shale plays for approximately $1.3 billion for a combined deal value of $2.1 billion.