One of the companies several of the credit analysts I met with in my trip to NY last liked was XTO Energy Inc. It was also a company one of the analysts did not like. I thought I would walk you through some of the things an analyst might look at in determining whether to recommend a company or not.
XTO is a natural gas producer. All of its operations are in the USA. This eliminates one risk some companies face, the risk of political instability. Within the USA, XTO has diversified operations in 9 states which give it exposure to most of the major gas deposits in the country.
The XTO business model is to acquire known long-lived oil and gas properties. They then exploit and develop the property. The key to their success is skill in property acquisition and cost control. This is a differentiating factor for the company.
At a share price of $39.65 at 5/19/06, XTO trades about half way between its 52 week high and low. XTO has a P/E ratio of 10.09 times trailing earnings and 9.89 times forecast earnings. This is good compared to the S&P 500 average of about 16. The company's long term growth is 15.86 so the estimated price earnings growth (PEG) ratio is .62. A ratio below 1 is desirable.
A negative factor is that the company is not generating free cash flow right now and is only generating 70% of the cash it requires to maintain the company. This is typical after a large acquisition, but bears watching.
XTO has leverage typical of its peers, maybe a little more than average. It has debt to total assets of 30.58% and debt to equity of 69.95%. But its EBITDA to total interest payments is 16.04 times (this is a measure of the companies ability to service its debt and is excellent coverage.)
XTO return ratios are good. Return on Assets is high at 14.43%. Return on Common Equity is also high at 33.84%. Earnings per share has been increasing dramatically over the last five years reaching $1.26 per share at the end of the first quarter of 2006, up from $0.47 a year earlier.
XTO took advantage of the high gas prices and hedged its 40% of its 2006 production at $11 per thousand cubic feet, compared to a current price of about $7. This is very positive.
All in all, XTO is good company with desirable metrics. It is not trading too expensively and has prospects for continued growth. The company has good management, good cost controls and understands its business model. I can see why two of the three analysts who mentioned it like the company. My own bias is towards companies that are also free cash flow positive so I would watch the company some more before I personally invested.
I hope the analysis helped, now go out there and make some money. Have a great weekend, and I'll see you again on Monday.
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