Q3 2004 XTO Energy Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the Q3 2004 XTO Energy Earnings Conference Call. My name is Candice, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star, followed by 0, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Louis Baldwin, Chief Financial Officer and Executive Vice President. Please proceed, sir.

LOUIS BALDWIN, CFO, EXECUTIVE VP AND CFO, XTO ENERGY: Thanks for your time as we review XTO's third quarter financial results and the operations outlook for the balance of the year.

In Forth Worth with us today are Bob Simpson, Chairman and CEO; Steve Palko, Vice Chairman and President; [technical difficulty] -- describe the quarter's financial results. Steve and Keith will update you on our operations, and Bob and Vaughn will add their comments. Then we'll open it for questions.

The third quarter of 2004 marked a milestone for XTO with the closing of our largest acquisition ever. On August 16, we closed the acquisition of producing properties from ChevronTexaco for $912m prior to final purchase price adjustments. Importantly, the acquisition benefited operating results only for one-half of the third quarter. We expect to see continued production increases in the fourth quarter as the full effect is reflected. Even so, we will record production earnings and cash flow for the quarter.

To focus on the cash flow trend in XTO for a moment, first quarter was $265m; second quarter was $286m; third quarter, $334m; and we expect further significant increases in the fourth quarter of 2004 and going into 2005. Clearly, we continue to benefit from our efficient developer program, economic and well-timed acquisitions of quality-producing properties, and finally, higher producing or higher commodity prices.

Looking at the financial results, comparing First Call estimates --

Earnings per share, consensus on First Call was 55 cents. On an adjusted basis, we had 58 cents on both basic and diluted earnings per share.

First Call cash flow estimate, $1.23 per share; ours was $1.29 actual on basic and $1.28 on diluted.

GAAP earnings net income, $141m, 54 cents on a basic and diluted basis.

The adjusting items for the third quarter for the after-tax effect of stock-based incentive compensation, $9.9m, and derivative fair value loss of $300,000. Adjusted earnings was, again, $151m, or 58 cents per share.

Looking at production and average price comparison, our gas production was 847m cubic feet per day, and that did include the effect of about 16m of reduced production due to curtailments during the quarter; natural gas liquids, 7,070 barrels per day; and oil production, 25,984 barrels per day.

Our average price for natural gas for the quarter was $5.02; natural gas liquids, $27.95; and oil, $38.58.

Revenues for the quarter totaled $507m, up 58 percent from the same period of 2003.

Cash flow from operations before changes in operating assets and liabilities and exploration expense, 333.7m, a 57-percent increase from the same period of 2003. And, again, as we've mentioned, $1.29 per share.

We had a gas gathering and processing margin of $4.8m for the quarter.

If we turn our attention to a unit-cost analysis and guidance, total expenses per Mcfe for the quarter were $2.72 per Mcfe compared with third quarter guidance of $2.71 per Mcfe. This occurred as increased production costs resulted primarily from additional maintenance activities and was primarily offset by lower-than-expected interest costs for the quarter.

Cash operating expenses, $1.56 per Mcfe, compared to guidance of $1.55 per Mcfe.

Turning towards fourth quarter guidance, we do expect production expense to run about 70 cents per Mcfe as we have the full quarter effect of share [indiscernible] Texaco acquisition, which had a higher proportion of oil versus gas production.

Taxes, transportation, and other should increase due to the higher commodity prices we're seeing. We're putting in an estimate of 50 cents per Mcfe.

The other components of our production guidance -- production expense guidance will remain relatively positive for the fourth quarter.

If we look at capital expenditures for the third quarter -- development, $164.3m; producing property acquisitions, just under 800m and 785m; undeveloped properties, 26.7m; and gas gathering and other property additions, 5.4m. Capital expenditures for the quarter totaling $981.6m. We also had to sell the producing properties of $25.5m during the quarter.

Looking at balance sheet data, assets totaled $5.8m; long-term debt, $2b; shareholders' equity, 2.3b.

If we look at debt to cap prior to other comprehensive income, 46.1-percent debt to cap, and after adjusting for other comprehensive income, 44.8-percent debt to cap. So you can see that even with the acquisition of the ChevronTexaco properties, we will remain well within our expectations in terms of balance sheet strength.

With that, I'll turn it over to Steve Palko to give you an update on the operating results for the quarter.

STEFFEN PALKO, PRESIDENT, XTO ENERGY: Okay, thank you very much, Louis.

We had a very good quarter in terms of development, in the results of the development activity. Currently, we have 34 active rigs running. We have completed or have in progress about 450 out of the total well count of 550 wells, so we've got about a remaining 100 wells to drill through this year. We looked in detail at the results of our drilling for this quarter and so far this year, and we are very much on target. We're a little low with respect to the guidance that we gave last quarter for this quarter's production. Sixteen million (16m) a day of curtailment was something that we experienced during the quarter.

The big problem was we ran into capacity restraints in East Texas. Our anticipated time of completion of infrastructural improvements, that being a [Ferrar][ph] plant, upgrade of the [Boa][ph] plant, and a [sour gas][ph] processing plant, which we are constructing in the northern part of the field, that came slower than what we had anticipated, so we were not able to overcome curtailments with additional development activity or accelerated development activity, as we have in the past. Some contractor delays occurred there.

But I think the good news is we did develop the capacity. Our capacity is 16m a day more than the quarter's production, and as I've mentioned earlier, we did thoroughly evaluate the results of the drilling activity, and everything was right on target in terms of the production that was developed and the capacity that was developed.

Our anticipation of production growth in the year 2005 is unchanged. We should by December of this year have the sour plant up. The Ferrar plant is, as we speak, currently operating and going ahead. And so we're working through and we will have the takeaway capacity as we move through the fourth quarter to be able to actualize all of the volumes that we are developing with our development activities, both rework and drilling.

The production, as Louis said, for the quarter was, in fact, about 847m a day, 26,000 oil. And in terms of Mcf-a-day equivalents, about a Bcf a day, a little over a Bcf a day.

We're guiding because of the continued curtailment activity --we are still curtailed as we speak -- 860 to 865 in terms of gas, and oil, 26.5 to 27 are the range that we're talking about. But we're -- oh, I'm sorry, yeah, I screwed up -- 910 to 920 for natural gas, and for oil, 31.5 to 32. Mindlessly reading the wrong thing here, sorry.

But we, as I mentioned earlier, continue to be enthusiastic and excited about the development results. We've just completed our first range of review of the ExxonMobile that we're starting on ChevronTexaco and are real excited about we see. We've been able to improve [hard/soft draws][ph]. In the first 60 days, we improved it 500 barrels a day through investment activities that are related primarily to reworking existing wells. We were able to get on that fairly quickly.

We've looked at several of the other assets and are pretty enthusiastic that the amount of development is going to be more than what we had anticipated at the time we did our acquisition evaluation.

In particular, several of the fields seem to have more development than even what we thought at the time of acquisition evaluation. And ChevTex looks like a wonderful acquisition from a development point of view. And certainly, from a price point of view, the timing of that acquisition was certainly poignant.

But let me turn it over to Keith to fill in some of the details on -- in specifics.

KEITH HUTTON, EVP-OPERATIONS, XTO ENERGY: Thanks, Steve.

If you look at our Freestone Trend volumes, we were talking about being curtailed. If you …