Natural gas producer XTO Energy’s (XTO) third quarter results came in better than expected, primarily due to rise in production volumes. Earnings per share, excluding non-cash derivative fair value loss, came in at 87 cents, ahead of the Zacks Consensus Estimate of 84 cents.

XTO’s adjusted earnings per share fell 11.2% year over year, reflecting lower realized natural gas prices. However, revenues were up 7.7% to $2.3 billion, mainly on the back of the company’s attractive hedges. During the quarter, operating income was down 5.2% year over year to $919 million, but cash flow from operations was up 2.8% to $1.6 billion.

Volume Gains Continue

Production during the quarter increased 23.4% year over year and 1.9% sequentially to a record 2.9 billion cubic feet equivalent (Bcfe) per day. Average daily gas production increased 24.2% year over year to 2.4 billion cubic feet (Bcf), daily oil production increased 14.2% year over year to 65,822 barrels, and daily natural gas liquids (NGL) production increased 41.8% year over year to 22,010 barrels.

Realized Prices Down

Natural gas equivalents average realized price for the quarter was $8.33 per thousand cubic feet equivalent (Mcfe), down 12.0% from the prior-year level. The average price realization of natural gas during the quarter fell 17.7% year over year to $6.93 per thousand cubic feet (Mcf), whereas average NGL price realization was down 43.0% to $30.59 per barrel. The average oil price for the quarter increased 15.7% year over year to $108.04 per barrel.

Capital Expenditure & Balance Sheet

During the quarter, XTO spent $661 million on capital expenditures. As of Sept 30, 2009, the company had long-term debt of $10.4 billion, representing a debt-to-capitalization ratio of 37.4% versus 37.1% as on June 30, 2009.

Guidance

XTO set an annual production growth target of 23% (up from 20% before) in 2009, with a development budget of $3.1 billion. The company allocated another $500 million for pipeline infrastructure, compression and processing facilities. XTO is targeting free cash flows of over $2 billion for the year.

The company remains well-positioned to provide another strong performance in 2009 on the back of its impressive portfolio of drilling inventory and industry-leading cost metrics. The company is expected to post 23% volume growth this year and generate free cash flow in excess of $2 billion. However, the company’s relatively leveraged balance sheet and exposure to the highly cyclical and capital-intensive E&P sector offset these strengths and remains key areas of concern, in our view.  As such, we see limited upside from current levels and rate XTO shares as Neutral.

Zacks Investment Research
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