The markets have been under pressure as oil and gas prices have remained persistently high. Political tensions in the Middle East, North Korea and Iran have created an acute awareness that U.S. oil dependence is very much linked to foreign supply. This price increase has seen oil companies report a 40% increase in Q2 earnings, and analysts expect a 15% increase for Q3.



One of the major issues facing U.S. oil companies is finding reserves to replace its stepped up production. Chevron (CVX) is one of the largest energy companies with record profits. Yet it has not replaced its production (excluding acquisitions) in 5 years.

One of the most successful companies at finding new reserves is a small oil and gas company with activities in Texas, Oklahoma, Arkansas, Kansas, New Mexico, Alaska and Louisiana, which goes by the name of XTO Energy Inc (XTO).

XTO has some of the lowest finding and development costs in the energy business. XTO now operates 70 drilling rigs and is on target to reach 12% organic production growth in 2006.

Additionally, XTO has a reserve life of around 14.5 years compared to the industry average of 13 years. Also, its strong record of drilling has allowed XTO to have one of the lowest depletion rates in the industry. XTO's approximate depletion rate is around 14%, well below the industry average of 30%.

XTO has a strong balance sheet with a debt/total capitalization ratio of under 39% and will produce approximately $670 million in free cash flow in 2006. Earnings are expected to be $4.05/share this year and $4.30/share in 2007. XTO is a solid investment value as a stand alone company, but it certainly may also be a very attractive target for other oil companies wishing to increase their production and reserves. Although, I would caution that the company has not indicated or acknowledged its willingness to be acquired. Regardless, the results of XTO for finding and acquiring low cost oil is outstanding, making its shares an attractive investment at this time.



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Tickers in this Article: CVX, XTO

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