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.
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.
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