The X Man: Meet the Man Who Opened the East Texas Field for XTO – the Man Who ‘Knows the Rock’

By Dan Piller, Fort Worth Star-Telegram, Texas

Oct. 9–XTO Corp. has a new Mr. Outside.

The role of the company’s head engineer, held by Steffen Palko from XTO’s founding in 1986 until his retirement last year, has been filled by new XTO President Keith Hutton. The son of a petroleum engineer, Hutton grew up in Houston and Odessa and has taken over Palko’s old task of “knowing the rock,” as he calls it, and bringing in oil and gas production.

Hutton, 47, is no stranger to the gas fields, XTO or the energy industry. After earning his engineering degree from Texas A&M University in 1982, he worked for Sun Oil for four years. He was on the fast track, assigned to London, when Fort Worth headhunter Breck Ray asked him to sit down with a new outfit called Cross Timbers Oil Co.

“I didn’t know much about them, and it looked a little speculative to me,” Hutton says. But some research persuaded him. Cross Timbers — which would change its name to XTO a decade later — was founded by Jon Brumley, Bob R. Simpson and Palko. The trio had also operated and then sold the old Southland Royalty to Burlington Resources in 1986, getting out just before oil prices crashed.

“When I learned what kind of guys I would be working with, I decided that Cross Timbers would be a pretty good deal, and it has turned out to be that way,” says Hutton.

Hutton opened the East Texas field for XTO and, as its top engineer, became known as the man who “knows the rock.”

He has been the company’s voice in conference calls with analysts to explain the performance and status of the company’s various fields and had been the heir apparent long before he was promoted to company president in April 2005 when Palko decided to fulfill a longtime dream and pursue a later-life career as an educator.

“Steve was able to take retirement when he did because we had Keith standing by,” Simpson said last week.

While Hutton inspects more than 1,000 new drilling sites for XTO each year and supervises production from the company’s more than 9,700 producing wells, longtime Chairman Simpson, 58, stays back in the office in the historic W.T. Waggoner Building in downtown Fort Worth and continues to be XTO’s Mr. Inside, employing the numbers skills he learned as a finance major at Baylor University.

Judging by the company’s performance, Hutton and Simpson have done their jobs this year, both inside and out. XTO’s production was up 15 percent in the first half of the year, ahead of the 10 to 12 percent Simpson promised Wall Street. Simpson, meanwhile, jumped into the frothing natural gas market earlier this year and arranged to hedge most of XTO’s gas production to sell at $10 per thousand cubic feet and about half of next year’s gas sales at $11 per thousand cubic feet.

Against the current prices for natural gas, which hit a four-year low of $4.20 last month and now sits around $6 per thousand cubic feet, those tactics make Bob Simpson look like “a real genius,” according to independent energy analyst Kurt Wulff.

As hard as it may be to believe now, Simpson came under some criticism from Wall Street late last year for taking the hedges when some so-called “experts” were predicting $20 for natural gas on CNBC and other forums.

“I suppose I could have looked pretty bad if we’d had a real cold winter or if there were more hurricanes this year like we had with Katrina and Rita in 2005,” Simpson said last week. “But, you know, I didn’t get any thank-you notes from those analysts who criticized me when we still made their investment firms a lot of money last year.”

XTO has been making a lot of money for a lot of people for years. The company’s stock has grown, mostly through splits, more than 2,000 percent since it went public in 1993. XTO was named to the gilt-edged Standard & Poor’s 500 in late 2004.

Last year’s warm winter reversed the soaring natural gas prices and made Simpson’s hedges look good. Simpson said he is glad prices went down for another reason.

“If gas had gotten up to $20 the way some people were saying, then we’d be getting beat up for the high prices and ending up in front of Congress and all that, just like the oil companies,” Simpson said, referring to the much-publicized congressional testimony of oil-company executives when retail gasoline hit $3 per gallon a year ago.

Thanks to Simpson’s hedging strategy, XTO can maintain its cash flow even though natural gas prices have declined and continue its drilling program of up to 75 rigs under contract, including 23 in the Barnett Shale near Fort Worth. Better yet, XTO can take advantage of any softening in the rig-leasing market — where day rates have more than tripled to $20,000 in the last three years — if other producers back off in the face of weak gas prices.

One major independent producer — Chesapeake Energy of Oklahoma City — has said it will curtail some gas production until prices improve. Similar announcements are expected in many quarters when the publicly traded producers check in with their third-quarter earnings later this month.

But XTO plans to continue its current pace, drilling for natural gas in its mainstay fields in East Texas, the Barnett Shale, the Arkoma Basin of Oklahoma and Arkansas, the mid-continent field stretching from the Texas Panhandle to Kansas, the San Juan Basin in northern New Mexico, the Piceance Basin in western Colorado (where it partners with Exxon Mobil) and the Powder River Basin in Wyoming. XTO is also coaxing oil from old fields in the Permian Basin of West Texas, primarily the venerable Yates and Russell fields.

Natural gas remains XTO’s prime business. The company ranks comfortably in the top five of independent domestic gas producers, along with Anadarko Petroleum of Houston, and Devon Energy and Chesapeake of Oklahoma City. In 2005, only Devon produced more natural gas statewide and in the Barnett Shale than XTO.

Both Devon and XTO now outproduce longtime stalwarts such as Exxon Mobil, Chevron and ConocoPhillips, the principal sign of the retreat of the multinationals from Texas.

Although XTO operates in many states, Texas remains the core of its operations. Of more than 375 billion cubic feet of gas produced last year, 287 billion was produced in Texas.

During the first half of 2006, XTO produced 157 billion cubic feet of gas in Texas, with almost 95 billion from its East Texas fields. An additional 36 billion cubic feet came from the Barnett Shale, where XTO became a major player early in 2005 when it bought the assets of Antero Resources of Denver.

“East Texas is still the real heart and soul of the operation,” Hutton says. “There has been great production there. But we will double our operations in the Barnett Shale.”

XTO has prospered in the Barnett Shale by sticking to the so-called “core area” close to Fort Worth in Tarrant and northern Johnson counties. Wells in Tarrant and Johnson counties, Simpson says, will make $30 million over their estimated 20- to 30-year lives.

“When it costs $2.5 million to drill, who is going to pass up the chance to make $30 million?” Simpson said. The answer to that question, he says, explains why XTO and other producers will continue to drill inside Fort Worth and risk the backlash that comes from any occasional mishaps. Last April, a valve accident killed a contract worker at an XTO well in Forest Hill and set off a round of public hearings on drilling close to residences and businesses.

Simpson and Hutton said that accidents in the Barnett Shale have been rare, despite more than 4,300 wells drilled since the late 1990s. Simpson adds that the principal fear — an explosion from a gas well — would logically be less likely from a Barnett Shale well than from a gas well dug from conventional underground limestone and sandstone formations.

“The very nature of the shale is that it is less permeable, meaning the gas doesn’t flow as easily from it,” Simpson says. “That’s why we have to fracture [high-pressure water injections to crack the rock] to get production. You don’t have underground pools or bubbles of gas in the Barnett Shale just waiting to explode, the way some people think.”

Simpson and Hutton, like everybody else in the energy business, are closely watching emerging new natural gas fields such as the Fayetteville Shale in Arkansas, the Woodford Shale in Oklahoma, the Piceance Basin in Colorado and the highly speculative deep gas plays along the New Mexico border in West Texas.

“There are several plays that look promising, and we’re taking positions and watching them closely,” Simpson said. “But we don’t see another Barnett Shale yet. The Barnett is still the gold standard.”

“When I learned what kind of guys I would be working with, I decided that Cross Timbers would be a pretty good deal, and it has turned out to be that way.”

Keith Hutton

Title: XTO Energy president

Age: 47

Graduated from: Texas A&M

Years with the company: 20

Previous experience: four years with Sun Oil (some in London)

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Dan Piller, 817-390-7719 danpil@star-telegram.com

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Copyright (c) 2006, Fort Worth Star-Telegram, Texas

Distributed by McClatchy-Tribune Business News.

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