STEP 1 - PROPERTY ACQUISITION: XTO Energy acquires properties located in the best major producing areas of the United States. These properties typically have been productive for decades and, most importantly, are expected to produce oil and gas for many years to come. These low-risk assets exhibit a common set of characteristics:
- Proven production history with shallow rates of decline
- Relatively low costs that maximize profit margins
- Geologically complex reservoirs that offer up additional potential
- Development opportunities and extensive upsides that promise to increase reserves
The advantage of acquiring properties with established production histories is the predictability of future production. The chart below illustrates the natural decline in production that one would expect from a typical well. Note that in the early life of a well production is at its highest, but the rate of decline is very steep and difficult to estimate. The gold dot in the chart below represents the point in a well's life at which XTO Energy would normally acquire it. Note that the future expected rate of decline is much more gradual. By acquiring mature onshore properties in well established areas from quality operators, XTO Energy has built a very stable, predictable base of production that should be economic for many years to come.
STEP 2 - DEVELOPMENT ACTIVITIES: We look to increase production and reserves through low-risk means including recompletions, development drilling and the reduction of operating costs. By increasing production or lowering the rate of production decline, we are able to generate cash flow that is over and above the forecast used to acquire the reserves. This incremental cash flow creates value for our shareholders. Our development programs also unveil additional reserves which then provide an inventory of upsides for future growth projects.
The Results
Our strategy has been very successful. From our inception in 1986 through 2007, XTO Energy acquired 7,076 billion cubic feet of gas equivalent (Bcfe; where six Mcf of natural gas equals one barrel of oil). Through our exploitation and development efforts, we have been able to add 8,686 Bcfe, or 123%, to that original amount utilizing only 74% of our cash flow from operations. Importantly, we have identified an additional low-risk inventory of 11,300 Bcfe of upsides to be added to our inventory over the next 3 - 5 years.
How Do We Compare?
According to research conducted by Credit Suisse, between 2001 and 2007 XTO Energy’s ability to add significant reserves through acquisition and development activities at a low cost has been among the best of our peers. The following graph compares our performance against the 50 companies in the Credit Suisse exploration and production (E&P) universe.
Efficiently Balance Acquisitions and Development
Diligent execution of XTO Energy’s proven strategy has generated significant reserve additions from both acquisitions and development. Having expertise in both arenas allows XTO to customize growth plans and take advantage of opportunities created by changing market conditions. Since inception, leveraging both skill sets has created a remarkable balance in our reserve additions with 40% coming from acquisitions and 60% from development efforts.
