XTO Energy’s (XTO) second-quarter results came in better-than-expected, primarily due to rise in production volumes and lower cash costs. Earnings per share, excluding one-time items (non-cash derivative fair value loss and gain on debt extinguishment), came in at 88 cents, 7 cents above the Zacks Consensus Estimate.

On a year-over-year basis, XTO’s adjusted earnings per share fell 17%, reflecting lower realized natural gas prices. However, revenues were up 17% to $2.3 billion, mainly on the back of the company’s attractive hedges. During the quarter, operating income was down 11% year over year to $898 million, while cash flow from operations was up 23% to $1.51 billion.

Healthy Volume Increase

Production during the quarter increased 32% year over year and 6% sequentially to a record 2.9 billion cubic feet equivalent (Bcfe) per day. Average daily gas production increased 31% year over year to 2.4 billion cubic feet (Bcf), daily oil production increased 35% year over year to 69,190 barrels, and daily natural gas liquids (NGL) production increased 33% year over year to 20,723 barrels.
 
Realized Prices Down
 
Natural gas equivalents average realized price for the quarter was $8.50 per thousand cubic feet equivalent (Mcfe), down 10% from the prior-year level. The average price realization of natural gas during the quarter fell 17% year over year to $7.08 per thousand cubic feet (Mcf), whereas average NGL price realization was down 57% to $25.52 per barrel. The average oil price for the quarter increased 18% year over over to $107.14 per barrel.

Capital Expenditure & Balance Sheet

During the quarter, XTO spent $828 million on capital expenditures. As of Jun 30, 2009, the company had long-term debt of $10.4 billion, representing a debt-to-capitalization ratio of 37.1% versus 35.9% as on March 31, 2009.

Company outlook

XTO has set an annual production growth target of 20% (up from 16% before) in 2009, with a development budget of $3.1 billion. XTO has allocated another $500 million for pipeline infrastructure, compression and processing facilities. The company is targeting free cash flows of over $2 billion for the year.

On the call, management guided towards unit costs for the remainder of 2009. We currently rate XTO shares as Neutral.

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