X TO
      ENERGY




a timeless value

   a n n ua l r e p o r t




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xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
xto energy annual reports 2004
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  1. 1. X TO ENERGY a timeless value a n n ua l r e p o r t 04
  2. 2. A Timeless Value Geologic Time Scale Evidence of an ancient Earth is contained in the rocks that form its crust. The rock formations themselves read like pages in a long complicated history. Geologic events scarred the surface and buried ancient life forms layer upon layer. These organic structures - plants and animals dating back perhaps 3 billion years - form the origins of natural resources today. mya _ million years ago 570 mya Present Day 248 mya a). Cenozoic Era, Eocene Period ( 58-37 mya ) page 2 65 mya Diplomystus and small Priscara b). Mesozoic Era, Cretaceous Period ( 144-65 mya ) page 8 Keichousaurus c). Paleozoic Era, Mississippian Period ( 360-325 mya ) page 12 Crinoid d). Paleozoic Era, Pennsylvanian Period ( 325 to 286 mya ) page 16 Cenozoic Era: Neuropteris Powder River Basin, Green River Basin e). Paleozoic Era, Ordovician Period ( 505 to 438 mya ) page 20 Mesozoic Era: Trilobite Eastern Region, San Juan Basin, Rocky Mountains, South Texas Paleozoic Era, Devonian Period ( 408 to 360 mya ) page 24 f). Paleozoic Era: Eurypterid Permian Basin, Arkoma, Mid-Continent, Barnett Shale g). Mesozoic Era, Jurassic Period ( 208-144 mya ) page 28 Precambrian Era Ammonite xto energy a timeless value
  3. 3. (8) (9) 04 0 Our founders started XTO Energy in 1986 with a nyse: XTO strategy that had proven successful over the previous decade: acquire the best producing properties and make them better. We have held true to this discipline. Long-lived oil and gas basins offer the greatest opportunity to grow because the properties tend to outperform. We combine these assets with employees who also outperform. The end result is a process, a culture and a vision that has prospered in a volatile Cenozoic Era, Eocene Period ( 58-37 mya ) a). and sometimes chaotic industry. By staying committed Diplomystus and small Priscara to what we know, XTO Energy delivers the results Table of Contents today even as we build the foundation for future 1). introduction page 3 2). selected highlights page 4 growth. This creates value per share and, in the 3). letter to the shareholders page 6 page 7 Designed for Long-Term Profitable Growth end, our investment will endure. page 10 Achieving Record Acquisitions at the Right Time page 15 Forging Ahead with a Dynamic Property Base page 22 Our Proven Strategy Delivers Strong Results 0 page 23 Reiterating Our ‘Stronger for Longer’ Posture page 26 Executing on Our Value Creation Strategy 4). glossary and non-gaap measures page 30 5). form 10-k xto energy a timeless value
  4. 4. (5) Selected Highlights prov ed r eserv es da ily production 2004 2003 2002 2001 2000 ( in Bcfe ) ( in MMcfe ) Financial ( in millions, except per share data ) $ 1,947.6 $ 1,189.6 $ 810.2 $ 838.7 $ 600.9 Total revenues 7,500 1,500 5,860 $ 919.3 $ 501.7 $ 348.8 $ 511.0 $ 212.1 Operating income 1,016 6,000 1,200 $ 507.9 a $ 288.3 b $ 186.1 c $ 248.8 d $ 115.2 e Earnings available to common stock 4,185 Per common share f 785 3,372 4,500 900 $ 1.53 $ 0.96 g $ 0.67 $ 0.91 h $ 0.49 Basic 2,682 623 $ 1.51 $ 0.95 g $ 0.66 $ 0.90 h $ 0.46 Diluted 2,252 525 448 3,000 600 Operating cash flow i $ 1,285.6 $ 792.3 $ 515.9 $ 549.6 $ 344.6 $ 6,110.4 $ 3,611.1 $ 2,648.2 $ 2,132.3 $ 1,591.9 Total assets 1,500 300 $ 2,042.7 $ 1,252.0 $ 1,118.2 $ 856.0 $ 769.0 Long-term debt $ 2,599.4 $ 1,465.6 $ 907.8 $ 821.1 $ 497.4 Total stockholders’ equity 0 0 Common shares outstanding at year end f 347.2 312.3 282.2 275.0 258.5 00 01 02 03 04 00 01 02 03 04 Production ( in thousands, except per unit data ) Average daily production 834.6 668.4 513.9 416.9 343.9 Gas (Mcf) 7.5 6.5 5.1 4.4 4.4 Natural gas liquids (Bbls) 22.7 12.9 13.0 13.6 12.9 Oil (Bbls) 1,015.7 784.9 622.5 525.1 448.1 Mcfe Average sales price $ 5.04 $ 4.07 $ 3.49 $ 4.51 $ 3.38 Gas (per Mcf) $ 26.44 $ 19.99 $ 14.31 $ 15.41 $ 19.61 Natural gas liquids (per Bbl) $ 38.38 $ 28.59 $ 24.24 $ 23.49 $ 27.07 Oil (per Bbl) tota l r ev enues net income Proved Reserves ( in millions ) ( in millions ) ( in millions ) 4,714.5 3,644.2 2,881.2 2,235.5 1,769.7 Gas (Mcf) 38.5 34.7 25.4 20.3 22.0 Natural gas liquids (Bbls) $2,500 $750 1,948 152.5 55.4 56.3 54.0 58.4 Oil (Bbls) 5,860.3 4,184.9 3,371.9 2,681.6 2,252.4 Mcfe $2,000 $600 508 Stock Price f 1,190 $1,500 $450 $ 27.66 $ 17.58 $ 11.87 $ 9.78 $ 8.70 High 288 839 249 810 $ 15.35 $ 10.21 $ 6.61 $ 5.54 $ 1.52 Low $1,000 $300 186 601 $ 26.54 $ 16.98 $ 11.12 $ 7.88 $ 8.33 Close 115 $ 0.0900 $ 0.0240 $ 0.0180 $ 0.0165 $ 0.0100 Cash dividends per share $500 $150 2,636 1,917 1,538 2,191 1,840 Average daily trading volume ( in thousands ) 0 0 00 01 02 03 04 00 01 02 03 04 a Includes pre-tax effects of a derivative fair value loss of $11.9 million, stock-based incentive compensation of $89.5 million and special bonuses totaling $11.7 million related to the ChevronTexaco and ExxonMobil acquisitions. Stock-based incentive compensation includes cash compensation of $22.3 million related to cash-equivalent performance shares. b Includes pre-tax effects of a derivative fair value loss of $10.2 million, a non-cash contingency gain of $1.7 million, non-cash incentive compensation of $53.1 million, a $9.6 million loss on extinguishment of debt, a $16.2 million non-cash gain on the distribution of Cross Timbers Royalty Trust units, and a $1.8 million after-tax gain on adoption of the accounting standard for asset retirement obligations. c Includes pre-tax effects of a derivative fair value gain of $2.6 million, gain on settlement with Enron Corporation of $2.1 million, non-cash incentive compensation of $27 million and an $8.5 million loss on extinguishment of debt. d Includes pre-tax effects of a derivative fair value gain of $54.4 million, non-cash incentive compensation of $9.6 million, and an after-tax oper ating cash flow r et ur n on equit y charge of $44.6 million for the cumulative effect of accounting change. ( in millions ) (%) e Includes pre-tax effects of a derivative fair value loss of $55.8 million, a gain of $43.2 million on significant asset sales and non-cash $2,000 50 incentive compensation expense of $26.1 million. 38 1,286 f Adjusted for the three-for-two stock splits effected on September 18, 2000 and June 5, 2001, the four-for-three stock split effected on $1,600 40 March 18, 2003, the five-for-four stock split effected on March 17, 2004 and the four-for-three stock split effected on March 15, 2005. 30 $1,200 30 25 24 g Before cumulative effect of accounting change, earnings per share were $0.95 basic and $0.94 diluted. 792 22 $800 20 550 516 h Before cumulative effect of accounting change, earnings per share were $1.08 basic and $1.06 diluted. 345 $400 10 i Defined as cash provided by operating activities before changes in operating assets and liabilities and exploration expense. See Non-GAAP Measures on page 30. 0 0 00 01 02 03 04 00 01 02 03 04 Glossary is located on page 30. xto energy a timeless value
  5. 5. (6) (7) At about 1 Bcf per day of gas production, can you continue to grow? Of course. Our management of the key ingredients: growing a rich low-risk drilling inventory, maintaining a shallow decline curve and carefully pacing development programs should ensure resilient growth. Fellow Shareholders: ∞ As a start-up in 1986 with a handful of we believe the foundation of XTO, the acquisition 0 From all sources, we replaced 551% of 0 employees, we envisioned building a solid and development of high-grade producing 2004 production at an all-in finding cost Designed for Long-Term energy company, one well at a time. Nearly properties, continues to distinguish our of $1.26 per Mcfe. Profitable Growth two decades later, XTO Energy continues to accomplishments year after year. 0 0 With drilling alone, we replaced 195% of achieve beyond even our expectations. Today, The Company’s notable achievements for annual production at a cost of $0.88 per Mcfe. the Company owns almost 1 billion barrels of In our view, predictable growth is the key 2004 include: oil equivalent. Daily production has topped for any successful franchise. To encourage 0 The Company achieved ‘investment grade’ 1 Bcfe and more than 1,350 people call XTO hard work and then attract meaningful invest- credit status. 0 Record operating cash flow totaled $1.29 home. Perhaps most important for our owners ment, a company needs a plan that provides billion, up 62%. today, XTO has amassed a premier property base 0 XTO was added to the S&P 500. visibility for the future. We find it important that tends to generate better results with time. to discuss XTO’s growth agenda every year 0 Net income per share increased 59% to a 0 Finally, the market value of XTO increased because we work in a depleting asset business. record $1.53 per basic common share. As we close the books on 2004, we are 74% to $9.2 billion during the year. Steep production declines in America and proud to announce another extraordinary 0 Daily equivalent production averaged fewer impact plays make it challenging to keep XTO Energy has emerged in the energy year of performance for XTO Energy. In fact, 1.02 Bcfe, an increase of 29%. domestic production flat, in either natural gas sector as a large capitalization company. Today, it was a record year across the board. The or oil. The dilemma raises doubts for every our enterprise value is above $13 billion and Company achieved record earnings, cash flow, 0 Record producing property acquisitions investor. If a company must constantly drill daily gas volumes represent almost 2% of production and reserves. Reflecting these totaled $1.95 billion, adding 1.32 Tcfe of its way to growth, the challenge is daunting: overall domestic production. But size is only achievements, the stock price reached a record long-lived reserves. more wells to drill, more exploration and significant if the underlying business stays high during the year. While stronger commodity thus, increasing risk. effective, profitable and dynamic. The good 0 Proved reserves grew 40% to 5.86 Tcfe. prices are generating solid results industrywide, news is that XTO has never been better positioned. XTO’s unique quality is that we start our As evidenced by our operational success and growth profile with acquisitions that generally record acquisitions, the strategy remains do not suffer dramatic production declines. $9,212 focused and potent. Our low-cost, high-margin Then, from within these properties, we define production is driving record capital returns drilling upsides and deliver growth at a 04 and a powerful balance sheet. Our hand-picked 03 measured pace. With this balanced approach, $5,303 properties continue to deliver predictable the Company has grown production and growth. So, the direction going forward is reserves per share each year since going public m a r k et ca pita l iz ation $3,136 established and the momentum is robust. As in 1993. Even more important, the growth has ( year-end in millions ) 02 the Company enters 2005, the prospects for consistently generated healthy full-cycle economics. another record-setting year look promising. 01 Our return on equity and return on capital $2,166 00 $2,152 xto energy a timeless value
  6. 6. (8) (9) Nature’s Archives The process of growth and change continues in the natural world today. But Mesozoic Era, Cretaceous Period ( 144-65 mya ) b). along the way, it has also been permanently frozen in time. The reptile at left, fossilized in 100 million-year-old shale, represents a species forever Keichousaurus in the making. ∞ xto energy a timeless value
  7. 7. ( 10 ) ( 11 ) 04 1,323 Are acquisitions getting too pricey? 03 506 XTO has always been a premium buyer. We expect to increase acquired reserves by 50% to 100% and generate healthy economic acquisition r eserv es returns along the way. With higher commodity prices, quality 346 acquisitions are simply worth more. ( Bcfe ) 02 257 ∞ 01 32 00 employed have averaged 28% and 14%, development. Put into perspective, these low-risk 4). Old-fashioned high-margin economics to ongoing endeavor creates a pipeline of potential weather the cycles. respectively, over the past five years. wells provide another 4 to 5 years of drilling acquisitions that may take years to come to fruition. Ultimately, our low-risk development programs visibility. The unbooked reserve potential of Over time, we have seen that these assets tend In 2004, our dealmaking efforts achieved and low-cost property base are driving substantial 3 Tcfe implies upsides of more than 50% to to outperform even our projections. Since new heights, establishing XTO as a preferred amounts of free cash. Today, less than one- the Company’s proven reserve base. inception of the Company in 1986, we have pur- partner to the Majors. We purchased a record third of cash flow is required to maintain our chased 4.5 Tcfe and increased those volumes by 1.3 Tcfe of reserves for about $1.95 billion, With this in mind, we have targeted pro- production levels. The remaining two-thirds another 3.8 Tcfe, including production and overwhelming our 2003 record of $624 million. duction growth of 21% to 23% in 2005. For is available for additional development reserve additions. This means that our efforts At a price of $1.47 per Mcfe, these deals look 2006, our initial production growth, based drilling, acquisitions or return to shareholders. have increased reserves on the average XTO highly attractive in a market that today commands on a conservative drilling pace and before Regardless, with so much financial firepower, acquisition by 85% through the effectiveness of around $2 per Mcfe. All told, our team com- acquisitions, is projected at 10%. As our track ‘organic growth’ – growth through the our long-term development programs. pleted over 140 separate transactions adding record reveals, we plan to judiciously use this Company’s free cash flow – should be property interests from Louisiana to the inventory to keep growing for years to come. inevitable. We believe this economic strength Because it’s half of our business, we pursue northern Rockies. distinguishes XTO within the industry. It also acquisitions for the right reason: we know the 0 assures a steady pace of continuing growth for rock and believe that we can make it perform The majority of the purchases during the Achieving Record Acquisitions our shareholders. better. So, we stay focused on the pursuit of year came from ChevronTexaco and at the Right Time acquisitions that offer XTO this opportunity. ExxonMobil. Totaling almost $1.3 billion, Each year, a prime objective is to generate 0 Our team is working to craft deals with the these deals delivered both oil and natural gas more drilling inventory worthy of our capital Majors, independents and private players. We production in quality fields with underlying At XTO Energy, acquiring the right properties dollars. Low-risk opportunities optimize our also solicit assets that are not for sale. This production declines below 10% and significant is where value creation takes root. Our team growth trajectory. For XTO, these captured has spent its collective career working to identify drilling opportunities continue to increase and own the right reservoir rock in America. even as the Company has scaled-up in size. In For us, these properties are characterized by 2004, exploitation activities expanded producing propert y acquisitions specific traits: upsides throughout the core operating ( in millions ) regions. In conjunction, the impact of our $2,500 1). Long producing histories defined by 1,949 successful acquisition campaign brought substantial well data, $2,000 exciting new prospects in our Eastern Region, 2). Highly complex reservoirs in which to $1,500 the Permian Basin, the Rocky Mountains and apply operational and technological innovations, the Barnett Shale of North Texas. XTO $1,000 624 Energy now boasts an inventory of up to 3). Extensive resource potential embedded in 354 238 $500 3,850 new well locations which are slated for sedimentary basins, and 32 0 00 01 02 03 04 xto energy a timeless value
  8. 8. ( 12 ) ( 13 ) The More Things Stay the Same The oceans are teeming with creatures whose ancestry spans the eons, yet Paleozoic Era, Mississippian Period ( 360-325 mya ) c). whose basic design remains virtually unchanged. Despite their names, these sea lilies are actually marine animals. They spend their lives attached to driftwood Crinoid and stones on the sea floor — just as they have since the Paleozoic. ∞ xto energy a timeless value
  9. 9. ( 14 ) ( 15 ) a l l-in r eserv e r epl acement cost Why can’t others in the industry ( dollars per Mcfe ) duplicate your process? $1.50 1.26 1.01 $1.20 0.98 We have the best talent and we stay committed to what we know. We work 0.78 hard at the rock. We work hard at finding a technical advantage. We $0.90 work even harder at keeping our advantage; no distractions. 0.41 $0.60 $0.30 0 ∞ 00 01 02 03 04 upsides in place. They are the ideal complement With a renewed focus of expertise and a fresh Our leadership in this dynamic play provides 140 geoscientists and hundreds of seasoned yet another venue for future growth. operational veterans to make this happen. to XTO’s growth profile. From ChevronTexaco, injection of capital, our team foresees years of we bought 732 Bcfe for $930 million. Half development opportunities from these properties. Further acquisition opportunities in 2005 These efforts have placed us in some of the oil, these properties expanded XTO’s foot- are being pursued. With a strong commodity Moving into 2005, our acquisition efforts most dynamic resource plays in the industry print in the Permian Basin and doubled our backdrop, a unique situation has developed. remain in high gear. In January, we announced today. While others look to capture the growth daily oil production. The assets also brought Higher energy prices continue to bring quality an agreement to purchase privately held and economic advantages of a single basin fresh additions to our Eastern Region, added assets to market. In our view, Majors will likely Antero Resources Corporation, solidifying play, XTO has managed to aggregate multiple a coal bed methane operation in the Uinta rationalize more assets through divestitures, our position in the Barnett Shale play of platforms. By virtue of its complexity, XTO is Basin and established a foothold in South trades and farm-outs. Independents and North Texas. For $685 million, XTO committed a leader in tight-gas technology and production. Texas. From ExxonMobil, we increased our private owners, limited by manpower and to purchase 440 Bcfe of natural gas reserves We are prominent in the other unconventional West Texas oil holdings with additional interests capital, continue to cash out. Given our with net daily production of 60 MMcf. This production areas, both coal bed methane and in existing XTO fields or fields that predom- financial flexibility, XTO is poised to benefit transaction, which closes April 1, elevates our shale gas. With our engineering expertise in inantly offset our successful development from this scenario. Company to the second largest producer in West Texas, we are committed to enhancing oil programs. We also acquired the Hartzog Draw the Barnett Shale for all the right reasons. recovery in the great oil properties of the 0 Unit in Wyoming, marking our entry into the The holdings are anchored in the shale’s core Permian Basin. The bottom-line is that our Forging Ahead with a Dynamic Powder River Basin with a premier oil property area where well data and production history captured upsides should provide steady Property Base complete with coal bed methane upsides. Daily have established a solid outlook for a long- drilling activity, predictable growth and production from the ExxonMobil purchase was term development play. Importantly, strong 0 robust economics for years to come. about 6,600 barrels of oil. Proved reserves economic returns are competitive with the The XTO advantage is our intense focus totaled 38 million barrels of oil equivalent. robust inventory throughout the Company. 0 Tight-Gas Properties on exploiting a basin’s full resource potential. We demand complex reservoirs in need of new More than 60% of our current gas pro- technology and a fresh perspective. Importantly, duction, or about 600 MMcf per day, comes we are not distracted with other agendas: no from tight-gas formations. The dominant 551% exploration department and no international focus of this activity is within our Eastern 04 division competing for capital allocation. In Region operations. Since the initial acquisition 03 387% our perspective, the U.S. is embedded with in 1998, net daily production has grown from tremendous untapped resources. This trapped 80 MMcf to 480 MMcf. The Freestone Trend a l l-in r eserv e r epl acement r atio oil and gas awaits the right combination of remains one of our crown jewels with about 404% (%) science, technology and innovation to unleash 02 325 MMcf in net daily production and 1.9 its potential. At XTO, we empower a team of Tcfe of recognized reserves. Our application of 326% 01 00 299% xto energy a timeless value
  10. 10. ( 16 ) ( 17 ) Hydrocarbon Origins In ancient forests, an abundance of flora and fauna provided the medium that Paleozoic Era, Pennsylvanian Period ( 325 to 286 mya ) d). would be transformed into rich organic deposits. This material later became trapped between layers of rock and was eventually buried deep beneath the Neuropteris earth’s ever-changing surface. ∞ xto energy a timeless value
  11. 11. ( 18 ) ( 19 ) dr il l bit r eserv e r epl acement cost ( dollars per Mcfe ) core areas 1.08 $1.25 0.88 2004 acquisitions $1.00 0.77 0.63 $0.75 0.37 $0.50 $0.25 0 00 01 02 03 04 water-fracturing and commingling techniques Ongoing tight-gas operations in the has tapped several thousand feet of hydrocarbon- Arkoma and San Juan basins will also continue rich sediments that had remained undeveloped. to generate opportunities for future development. This trend ‘discovery’, which has grown to XTO’s ‘fault block analysis technique’ in 166,500 net acres, will continue to act as the Arkoma has provided a manufacturing-type swing-producer for the Company. On a con- approach to the region. Through advanced servative development inventory of 1,100 to logging techniques and rigorous geological 1,300 additional wells, we estimate net reserve interpretation, we find untapped reservoirs, potential at 2.6 Tcfe. Expanding pipeline drill a successful well, identify offset locations infrastructure will increase gross daily capacity and then repeat the process. Deeper, tighter 62%, from 450 MMcf to 730 MMcf, and will zones, like the Paradox formation of the San be completed in the first half of 2005. So, the Juan Basin, are providing new well locations assess well performance. Since that time, our 0 Shale Gas Properties plan for future growth is set. Our success in the with more than 2 Bcf of potential. development and acquisition programs have Freestone Trend inspired us to establish positions Since our entry into the Barnett Shale in increased daily production from 2 MMcf to 0 Coal Bed Methane Properties in two other areas with the same sequence of early 2004, enthusiasm for the challenging, about 90 MMcf. Given this success, our special tight-gas sands: the Sabine Uplift Trend of long-lived play has only accelerated. Well In 1997, the Company acquired its first projects team researched coal basins across the East Texas and the Cotton Valley Trend of performance, reservoir characteristics and CBM production in the Fruitland Coal play of U.S. to identify prospective regions that northwestern Louisiana. Our 2005 development continued improvement of completion the San Juan Basin. As in all our programs, we would fit our demanding technical and program targets increasing growth activities in techniques have confirmed that ultimate gas first initiated a pilot study to evaluate the coal economic criteria. Acquisitions to date have both of these trends. recovery, particularly in the core-area, will be seam properties, commence development and expanded our CBM positions well beyond the greater than current expectations. We solidified prolific Fruitland Coal to footholds in the our commitment to the play with the acquisition Raton, Uinta and Powder River basins. of a key producer, Antero Resources, announced Altogether, the Company has grown daily pro- in January of 2005. XTO Energy will now 195% duction to about 135 MMcf and has identified direct development of approximately 150,000 more than 400 development locations. For net acres across the basin, 50% of which is XTO, the long-lived production profile of 04 211% 03 considered to be in the core-area. This provides CBM assets merges ideally into our program XTO with upside potential of more than 1 Tcfe. of decline curve management. With extensive dr il l bit r eserv e r epl acement r atio Tighter spacing and re-fracturing opportunities 02 252% drilling opportunities, we anticipate enhancing (%) could substantially increase these upsides over our coal seam gas production while pursuing time. With post-closing daily gross production broader basin exposure. 01 191% 00 280% xto energy a timeless value
  12. 12. ( 20 ) ( 21 ) Life on the Move A simple crustacean offers a textbook example of evolution’s amazing subtlety. Paleozoic Era, Ordovician Period ( 505 to 438 mya ) e). Over thousands of millennia, the environment slowly shapes each species. It is only when we retrace the steps that dramatic changes become apparent. Trilobites ∞ xto energy a timeless value
  13. 13. ( 22 ) ( 23 ) oper ating cash flow m a rgin With so much inventory, ( dollars per Mcfe ) why not drill faster? $5.00 3.46 $4.00 Our full-cycle exploitation process takes time. With a disciplined 2.87 2.77 timeframe, we can maximize returns, generate upsides and $3.00 2.27 2.10 acquire more. Our goal is to balance present value realizations with future growth value. $2.00 $1.00 0 ∞ 00 01 02 03 04 above 130 MMcf, XTO will rank as the second prices, total revenues for XTO hit a record 0 the fatigue of more than a decade of systemic largest producer in the play. We anticipate $1.95 billion, besting the 2003 mark of $1.19 under-investment. At the same time, global Reiterating Our doubling this production rate by year-end billion. Operating cash flow increased to inventories appear to be caught at a low point. ‘Stronger for Longer’ Posture 2006 through an aggressive drilling program. about $1.29 billion, up 62% from the prior New fields and updated industry infrastructure 0 As a hometown producer in the Fort Worth year level. Equally important, reported earnings are years away; thus, no quick fix is on the horizon. Basin, we envision a decade of development hit $508 million, or $1.53 per share, compared Simply put, the outlook for robust energy Meanwhile, demand for petroleum products opportunities from the Barnett Shale that to $0.96 per share in 2003. prices endures. Since 2000, oil has averaged continues to grow. Energy consumption should complement our Eastern Region almost $31 per barrel while natural gas has Our powerful capital investment program grinds upwards in the U.S. as the economy growth activities. At 4 to 6 million acres of exceeded $4.50 per Mcf. Importantly, prices continues to fuel XTO’s prosperity. In 2004, moves ahead. Booming economies in the Far potential coverage and only 10% developed, have trended ever higher over the past few we added 2.05 Tcfe of reserves for a total of East and Asian sub-continent have accelerated the best is yet to come for this shale play. years culminating in today’s prices of about $2.59 billion. This implies an all-in finding over the past three years, with China’s hyper- $54 oil and $7 gas on the NYMEX. Market Beyond North Texas, our team is assessing cost of $1.26 per Mcfe, excluding asset retirement growth blazing the way. Projections place conjecture is contentious regarding the source shale potential across America. Due to its obligations of $0.03 per Mcfe. With an operating global oil needs at close to 84 million barrels per and sustainability of these levels. Experts and sizeable acreage holdings in Arkansas, the cash flow margin per Mcfe of $3.46, XTO was day by year end 2005. The daunting outlook for investors alike discuss geopolitical fears, the Company has a position in the Fayetteville able to add 2.7 Mcfe for each Mcfe produced, supply and demand makes a ‘squeeze’ unavoidable. OPEC agenda, the Chinese economic blitz, our Shale play in the Arkoma Basin. We plan to a leading reinvestment efficiency for the sector. strained global supply situation – and the list The scenario for natural gas in North gauge its viability throughout the course of 2005. The Company continues to generate one of goes on. From our perspective, these higher America is equally challenging. Domestic the lowest drill bit finding costs in the domestic price levels are grounded in solid fundamen- 0 production in 2004 decreased by another energy complex. For a cost of $0.88 per Mcfe, tals. Supply and demand are precariously bal- Our Proven Strategy Delivers 3%, bringing the 3-year loss to above 5 Bcf our development program added 724 Bcfe of anced, with demand gradually gaining the Strong Results per day. Even record levels of drilling activity reserves, holding true to our historic replace- upper hand. have failed to offset the estimated 25% annual ment ratio of about 200%. Overall, XTO 0 decline in underlying production. Exploration On the global oil outlook, with about 82 Energy’s proven reserves increased 40% from Once again, the Company surpassed million barrels per day of capacity, the overhang risks have accelerated. Meanwhile, the major year ago levels, to 5.86 Tcfe. Under SEC benchmarks set just a year ago. Total production of supply has finally evaporated. Production integrated companies are directing their guidelines, these reserves quantities reflect a grew almost 29% with natural gas increasing in America and the North Sea is declining. efforts to the international arena because of present value before income tax, discounted at 25% to 835 MMcf per day, oil growing by 75% The potential of the former Soviet Union the dearth of sizeable prospects in U.S. 10%, of $12.2 billion. As always, since 1986, the to about 22,700 barrels per day and natural nations has peaked in the short term and even basins. Moving forward, the fix for natural gas outside engineering firm Miller & Lents, Ltd. has gas liquids up 16% to 7,500 barrels per day. OPEC has pushed the limit with only marginal supplies appears to be liquid natural gas, prepared the reserve report for the Company. With higher volumes and strong commodity heavy and sour oil remaining in its inventory. which is also a vital global commodity facing Finally, the entire energy complex is showing increasing demand. LNG will need to be xto energy a timeless value
  14. 14. ( 24 ) ( 25 ) Adapt and Survive Under the sea, some species seem protected from the constant tide of change. Paleozoic Era, Devonian Period ( 408 to 360 mya ) f). The lobster has adapted little over time, with its success largely due to the same traits it has possessed for ages. Their design has made for an efficient creature Eurypterids capable of a wide variety of functions. ∞ xto energy a timeless value

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