XTO’s Hedges a Key Positive

Earlier this week, Texas-based independent oil and gas player XTO Energy (XTO - Analyst Report) updated its price hedges for future sales of oil in 2010. The company has now hedged approximately 95% of its projected 2010 oil production at an average price of $95.70 per barrel.

On the natural gas front, XTO has hedged approximately 730 million cubic feet per day (MMcf/d) at an average price of $8.67 per million cubic feet equivalent (Mcfe). The company has already hedged the bulk of this year’s volumes at very attractive price points: nearly 80% of its expected natural gas volumes at an equivalent price of $8.79 per Mcfe and more than 75% of its expected liquids volumes at $117.11 per barrel.

We believe this would smooth out the commodity price risk for XTO. As such, the company remains better positioned than most of its peers to operate in the current low commodity-price environment, especially that of natural gas, which accounts for more than 85% of XTO’s reserves.

The storage overhang in the U.S. natural gas market shows no sign of easing. With domestic production continuing to outpace recession-hit demand, despite the sharp retrenchment in the rig count, the commodity appears to be on track to exit the summer injection season with an all-time high storage build.

To play this natural gas outlook, we continue to rely primarily on E&P players such as XTO, as it has the bulk of this year’s production hedged at attractive prices as well as access to resource-rich assets that can be profitably operated in the current low-price environment.

Longer term, XTO’s positive attributes include the company’s strong operational and financial results, robust production-growth prospects, lower risk profile and impressive acreage holdings in some of the best basins in the U.S. As such, we see substantial upside potential in XTO shares and therefore maintain our Buy recommendation.

We continue to view XTO as a core natural gas E&P holding. Our other Buy-rated names in this space are EnCana Corp. (ECA - Analyst Report) and Chesapeake Energy Corp. (CHK - Analyst Report).