A&D Intelligence

XTO Energy is on fire in the acquisitions market this year, surmounting a company record of $4 billion annually on acquisitions with $4.3 billion to date in 2008—before the end of May. 

XTO has grabbed up assets scattered across the U.S. in several sizeable deals this year, including a recent one from Linn Energy introducing them to the Marcellus shale, but company execs seem particularly pleased with their most recent one, an initial foray into the Bakken play.

Company president Keith Hutton says, “We’re very excited about this. It’s one of the few acquisitions ever where you’ll hear us say we expect a 12-15% annual growth with a third of the cash flow. That’s a pretty phenonomenal build.”

The Fort Worth producer is paying $1.85 billion for 352,000 net acres (215,000 undeveloped) in the Bar Trend and Nesson Anticline in Montana and North Dakota, picking up producing properties in Elm Coulee Field in Montana. XTO estimates the proved reserves at 68 million barrels of oil equivalent (60% proved developed), but is clear that they think they are being way conservative. Production tops 10,000 BOE/d, mostly oil, which they think they can double in five years.

Says Hutton, “We’ve been watching the Bakken for a long time but didn’t see a position to get into Elm-Coulee with upside toward the Nesson anticline. This deal set us up for that.”

CEO Bob Simpson points to being able to grow production at up to 15% per year for about a third of cash flow at the current strip price as the “sleeper” point of the deal.  ”That’s an unusual thing,” he says. Additionally, at the current strip, the acquisition is about four times cash flow, which is “some really good news to enter a basin at that kind of price.”

Normally to get into a new area you have to pay a “franchise” fee, he says. “We bought it on great economics.” And as the production is already 50% hedged and will be 100% incrementally, Simpson gloats that the deal is a cash cow. “In 30 months (hedged) we’ll get more than half our money back.”

Similar to the BreitBurn-Quicksilver deal last year, Dallas-based seller Headington Oil is taking close to half of the purchase price in equity, giving XTO the opportunity to pay more for the assets without coming out of pocket for the whole wad, and exposing the little private company to half the upside as XTO moves forward drilling out the undeveloped acreage and infilling on the developed. XTO has ramped up from two rigs running to four on the acreage, and plans up to eight by the end of 2009.

Headington, interestly, began buying up acreage in the region back in 2000 after hiring college students to count tanker trucks hauling oil from a Halliburton experimental horizontal well. The students should have taken equity in pay rather than cash.

Map of XTO-Headington deal assets: XTO Bakken Presentation

Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

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