XTO Energy Fairly Priced

XTO Energy, Inc. (XTO - Analyst Report) is expected to maintain its impressive production-growth momentum in 2008. The company’s move into the oil-rich Bakken Shale area of North Dakota and Wyoming with a $1.85 billion purchase of producing properties and undeveloped acreage has now established the company as a leading producer and leasehold owner in this emerging oil shale play.

We have increased our 2008 and 2009 EPS estimates to reflect increased production volumes and a higher price deck. However, we believe that the stock’s current valuation already reflects XTO’s strong production-growth profile and competitive cost structure.

The current-year budget is expected to be $3 billion (up from $2.6 billion), which will give XTO a 10%-12% growth rate. The management is targeting a growth rate of approximately 23% in 2008. Looking ahead, we expect the company to continue to post strong financial and operational results, but as the company begins to wind down its operations in the Eastern region, it will be difficult to continue to grow at its historical rate without increasing investment costs.

We believe that XTO shares are fairly valued at current levels and adequately reflect the company’s growth prospects and commodity-price leverage. The stock trades in line with its large-cap exploration-and-production (E&P) peers based on conventional valuation metrics. We are maintaining our Hold recommendation as we continue to see better value elsewhere in this space.

Read the full analyst report on XTO