XTO Energy Inc.
XTO Energy Inc.
Incorporated: 1990 as Cross Timbers Oil Company
Sales: $838.7 million (2001)
Stock Exchanges: New York
Ticker Symbol: XTO
NAIC: 211111 Crude Petroleum and Natural Gas Extraction
XTO Energy Inc., formerly known as Cross Timbers Oil Company, is a large independent Fort Worth, Texas, oil company that has made its mark by exploiting proved natural gas and oil properties divested by others. The company’s principal holdings are located in Alaska, Arkansas, Texas, Kansas, New Mexico, Oklahoma, and Wyoming. In recent years XTO has thrived because of an early decision to focus on natural gas, buying properties at the bottom of the market, thereby achieving a lower cost structure and a competitive edge as the natural gas market has made significant gains. XTO is known for its innovative spirit, from the way it structures its many acquisitions to the way it is able to exploit properties that others had essentially abandoned. The company is also meticulous, conducting a thorough review of each well twice a year.
Working for Southland Royalty First: 1967-85
The predecessor to XTO Energy, Cross Timbers Oil Company, was founded by three friends—Jon Brumley, Bob R. Simpson, and Steve Palko—former executives of Southland Royalty Company who lost their positions following a hostile takeover. The oldest, Brumley, came to Fort Worth-based Southland in 1967 after earning an M.B.A. from the University of Pennsylvania’s Wharton School of Business, starting out as a risk analyst. At that time, Southland was an exploration company, but in 1976, two years after Brumley ascended to the presidency, it became acquisition driven and focused on exploitation efforts. It was in that year that Southland purchased San Juan Basin gas properties, holding a trillion cubic feet of gas reserves, from Aztec Oil & Gas.
Also in 1976 Bob R. Simpson went to work for Southland as a tax manager. Raised in west Texas, the son of a cotton farmer, he grew up enamored with the oil business. Interviewed for a PBS series on small businesses, Simpson recalled how his father “would drive up and down the road, and he would point at pump jacks. And he said, ’Son, I almost bought that land, and if I had, we’d have been wealthy as royalty.’ And so, I ended up associating success and prosperity with oil… and I liked the smell of the gas tank when we were filling up.” Coupled with his desire to become involved in oil was an instinctive entrepreneurial spirit: By the age of four he had an egg route, selling his produce door to door. He was also a gifted student who went to Baylor University on academic scholarships, earning an undergraduate degree in accounting and later an M.B.A. At Southland he quickly established himself as an important part of the team and with Brumley serving as a mentor he rose to the rank of vice-president of finance and corporate development in just three years.
The third cofounder of Cross Timbers was Palko, who supplied the engineering expertise. He was the last of the three men to join Southland. After earning an electrical engineering degree from the University of Texas in 1971, he went to work for Exxon. After several years he grew tired of the big corporation environment and decided to try life at a smaller company. He applied for a job with Southland and in 1982 became manager of reservoir engineering. Two years later he was named vice-president of reservoir engineering.
In 1985 Southland was a successful and stable business when management learned that Burlington Northern Railroad had acquired a significant stake in the company. Burlington soon forced a sale and Southland’s management team found itself suddenly out of work. After recovering from the surprise and disorientation of having their professional lives turned upside down, Brumley, Simpson, Palko, and assistant treasurer Louis G. Baldwin decided to form their own oil and gas business, pursuing the same strategy that worked so well for them at Southland: acquiring underdeveloped properties and exploiting their maximum potential. In 1986 they formed Cross Timbers Oil Company as a partnership. The name was an allusion to the stretch of land between east Texas and west Texas called Cross Timbers, a no-man’s land that in the 1800s separated settlers from the plains Indians. Although the founders of the company were well connected in their field and able to quickly raise $20 million in seed money, Cross Timbers remained a shoestring affair for some time. At first it employed just eight people, the office furniture drawn from their own homes, and space was at such a premium that Palko and Simpson had to share desk space with a secretary. During the early lean years, moreover, the founders received no salary.
Operating Strategy Formulated in Early Years
In this formative period for Cross Timbers, management developed an operating strategy. It sought to hire talented personnel at all levels in the company, luring away a number of colleagues at Southland, then created an environment that encouraged innovation. Cross Timbers also decided to pay top dollar for properties with long-lived reserves, and to resist the temptation to sell quality acquisitions if they failed to show immediate results. In identifying acquisition candidates, Palko and his team made a thorough evaluation of the properties to determine upside potential, relying on a wealth of geologic information, including well logs, production histories, and two- or three-dimensional seismic studies. Once a promising property was identified, Simpson stepped in to make the acquisition, often devising a creative approach to financing in order to salvage a deal. Palko then followed the company’s established approach to exploiting a new property. In the first stage, productivity of existing wells was increased through relatively simple upgrades, such as lowering system pressures, adding compression, changing line sizes, or installing pump-off controllers. Cross Timbers then sought to “exploit and extend” the property through a number of drilling methods. The final step was for Cross Timbers to drill its own wells on the property, again relying on its staff of skilled engineers to determine choice locations. Knowledge gained from drilling was then used to determine if the company should acquire greater interests in a leased property or acquire nearby property in order to take advantage of a perceived trend. The company also instituted a policy to review each well twice a year, and despite the fact that Cross Timbers operated thousands of wells, it developed a specific plan for each one.
In 1990 Cross Timbers Oil Company was incorporated to act as the managing general partner of the business, which now included six limited partnerships and two corporations. The company was well established and prospering, but after five years the original backers were looking to harvest their investment and the founders wished to continue in business. To satisfy both parties, management in 1991 formed Cross Timbers Royalty Trust, which received a portion of the profits made on the company’s properties. Units of the trust were then sold publicly, allowing the original investors to cash in should they desire. Then in 1993 Cross Timbers took a more decisive step by making an initial public offering (IPO) of its stock, allowing investors to sell their shares while at the same time giving the company the flexibility to use stock in future acquisitions. At this point, Cross Timbers had about 40 million barrels of oil reserves and in 1992 generated $92 million in revenues and net income of $7.1 million. After the IPO it had a $200 million market cap, roughly twice the size of Southland when the Cross Timbers founders had been ousted.
Now a public company, Cross Timbers announced that it planned to spend $250 million over the next five years acquiring new properties, targeting those in the $5 million to $50 million price range. The strategy was facilitated by a greater willingness of larger companies to divest non-essential assets. The company’s first major deal soon followed its IPO, the $37.1 million purchase of west Texas and southeast New Mexico properties from Atlantic Richfield Co. In less than two years Cross Timbers reached its $250 million goal, capped by the 1995 $123 million acquisition of 375 wells from Santa Fe Minerals located in the Hugoton Field of Kansas and Oklahoma. According to Simpson, this group of properties represented the crown jewels of Cross Timbers’ holdings.
In 1996 Brumley decided to step down as chairman of the board in an amicable parting. He indicated that because his day-to-day involvement in the business was no longer necessary he felt he could now leave to pursue other interests. Several months later, in fact, he was asked by T. Boone Pickens and Richard Rainwater to chair Mesa Inc. Simpson replaced Brumley as chair while retaining his post as CEO, and one of his first decisions in his new capacity would have a major impact on the future of Cross Timbers. In 1995 the company’s assets were divided half oil and half gas, but Simpson now opted to change that ratio to two-thirds natural gas, which he hoped would generate higher profits, due in large part to the lower costs of handling the commodity compared to oil. In addition, because gas was a closed North American market it was less vulnerable to the actions of OPEC, as well as fast becoming the fuel of choice for electric generation. Simpson’s timing proved to be perfect, as Cross Timbers was able to buy a substantial number of properties before the natural gas market began to take off, thereby achieving a lower cost structure to provide a competitive edge and increased profitability.
Our approach follows a disciplined and time-tested philosophy. We acquire the best natural gas and oil properties and employ “A-Level’’ science teams to develop hidden upsides. We use the newest technology, innovate solutions and work hard in the field. As a result, production grows, reserves grow and value grows.
In 1997 Cross Timbers spent $256 million on acquisitions, primarily gas-producing properties. The most significant was a $195 million purchase of 170,000 acres in the San Juan basin in New Mexico from Amoco Production Co., a deal that epitomized the trend of major oil companies unloading domestic properties in order to focus on international plays that held the potential for blockbuster results. Also in 1997 Cross Timbers spent $39 million to acquire properties in Oklahoma, Kansas, and Texas. With oil prices down, the company on the strength of its gas operations was able to produce revenues of $198.2 million in 1997, a 24 percent increase over the previous year, and post net income of nearly $24 million.
Growing out of a Slump: 1998-99
Like the rest of the industry, Cross Timbers was tested during the price crash of 1998-99, when oil prices reached their lowest levels since the 1930s. Unlike many of its competitors, however, Cross Timbers had a strong gas business and could better weather the storm. Rather than sell assets and focus on debt reduction, it opted to grow out of the downturn and acquire even more gas properties. During a two-year span, from the end of 1997 to the end of 1999, it spent nearly $1 billion on new properties, most of which were gas assets. Recalling this period, Simpson told the American Oil & Gas Reporter, “Wall Street was telling us to pull back, sell properties and reduce debt. But this company is nothing if not opportunity-driven, and opportunity after opportunity kept sticking its head up. We decided to take on more debt, turning our back to (Wall) Street and taking the heat because we knew the next part of the up-and-down price cycle would require us to grow. We absolutely ripped our balance sheet to shreds all through ’99. We bought properties with the idea that by the time our competition was back in the ’buy’ mode, we would already be done and could tidy up our balance sheet during the up cycle.” Simpson even took the unusual step in 1998 of buying stock in energy companies he felt were undervalued as a way to take a position in promising assets. Simpson also displayed his innovative edge by finding a way to salvage major deals that appeared dead. In the summer of 1999 he landed two major acquisitions, paying $235 million to Spring Holding Co. for properties in Arkoma Basin, an area that Cross Timbers has been attracted to for years. A subsequent $231 million purchase of properties in the same area from Ocean Energy Inc. instantly made Cross Timbers the largest producer of gas in Arkansas. In order to pay for these transactions, Simpson essentially fabricated a financial instrument out of whole cloth. He convinced Lehman Brothers Holdings Inc. to provide an equity-based bridge loan, in effect making Lehman a financial partner. It proved to be a smart decision for both parties: Within months Cross Timbers was able to buy out Lehman Brothers’ share of the properties. Cross Timbers also defied conventional wisdom in 1999 when it decided to cut its dividend 75 percent, to just a penny a share, in order to address its high debt. The company lost nearly $71.5 million in 1998, then returned to profitability in 1999, recording net income of $45 million on revenues of $343.2 million.
Not only did a rebounding market, driven by natural gas, allow Cross Timbers to immediately clean up its balance sheet, acquisitions made during the lean months poised the company for spectacular results going forward. In 2000 revenues ballooned to more than $600 million, and net income more than doubled, totaling $115.2 million. As a result, a little more than a year after slashing its dividend, Cross Timbers was able to announce a three-for-two stock split. Moreover, in only a matter of a few years the company went from nowhere to becoming the fourth largest independent owner of domestic natural gas reserves in the country. Results in 2001 were even more spectacular, with revenues improving to $839 million and net income to nearly $250 million.
In 2001 Cross Timbers also elected to change its name, which for years had confused many investors who thought that the company was involved in the timber business. The ticker symbol XTO was adopted and the company now became XTO Energy Inc. It also continued to buy more gas-producing properties, spending $242 million in 2001. With almost all of the new U.S. power plants planning to rely on natural gas, leading to an expected 40 percent increase in demand by 2015, XTO with its considerable gas reserves, as well as demonstrated expertise, was well positioned for many more years of solid growth.
Cross Timbers Energy Services, Ine; Cross Timbers Trading Company; Ring wood Gathering Company; Timberland Gathering & Processing Company, Inc.; WTW Properties, Inc.
Apache Corporation; BP p.l.c; Exxon Mobil Corporation.
- Cross Timbers Oil Company is formed as a partnership.
- Cross Timbers is incorporated.
- Company goes public.
- Jon Brumley steps down as chair, replaced by Bob Simpson.
- Cross Timbers changes name to XTO Energy Inc.
Beims, Tim, “Natural Gas Reserves Give Cross Timbers the Winning Hand,” American Oil & Gas Reporter, March 2001.
Bronstad, Amanda, “Acquisitions Bolster XTO to Record Growth,” Business Press, October 30, 1998, p. 3.
Haines, Leslie, “XTO Energy Matures,” Oil and Gas Investor, July 2001.
Maxon, Terry, “Texas-Based Cross Timbers Oil Reaps Benefits of Expanded Natural-Gas Activity,” Dallas Morning News, November 24, 2000.
Rhodes, Anne, “Cross Timbers’ Acquisition Strategy Underpins Explosive Rate of Growth,” Oil and Gas Journal, June 1, 1998, p. 25.
Suggs, Welch, “Cross Timbers Joins the Ranks of Top Independents,” Dallas Business Journal, October 24, 1997, p. 8.
Willis, Belinda, “Cross Timbers Is ’Long on Opportunity,’ Analysts Say,” Business Press, March 1, 1996, p. 4.