| XTO ENERGY INC Item 1A RISK FACTORS The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time |
| Such factors, among others, may have a material adverse effect upon our business, financial condition, and results of operations |
| The following discussion of our risk factors should be read in conjunction with the consolidated financial statements and related notes included herein |
| Because of these and other factors, past financial performance should not be considered an indication of future performance |
| Oil, natural gas and natural gas liquids prices fluctuate due to a number of uncontrollable factors, and any decline will adversely affect our financial condition |
| Our results of operations depend upon the prices we receive for our oil, natural gas and natural gas liquids |
| We sell most of our oil, natural gas and natural gas liquids at current market prices rather than through fixed-price contracts |
| Historically, the markets for oil, natural gas and natural gas liquids have been volatile and are likely to remain volatile in the future |
| The prices we receive depend upon factors beyond our control, which include: • political instability or armed conflict in oil-producing regions, such as current conditions in the Middle East, Nigeria and Venezuela; • weather conditions; • the supply of domestic and foreign oil, natural gas and natural gas liquids; • the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; • the level of consumer demand; • worldwide economic conditions; • the price and availability of alternative fuels; • domestic and foreign governmental regulations and taxes; • the proximity to and capacity of transportation facilities; and • the effect of worldwide energy conservation measures |
| Government regulations, such as regulations of natural gas transportation and price controls, can affect product prices in the long term |
| These external factors and the volatile nature of the energy markets make it difficult to reliably estimate future prices of oil and natural gas |
| To the extent we have not hedged our production, any decline in oil and natural gas prices adversely affects our financial condition |
| If the oil and gas industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned capital expenditures |
| 14 ______________________________________________________________________ [40]Table of Contents Our use of hedging arrangements could result in financial losses or reduce our income |
| To reduce our exposure to fluctuations in oil and natural gas prices, we have entered into and expect in the future to enter into hedging arrangements for a portion of our oil and natural gas production |
| These hedging arrangements expose us to risk of financial loss in some circumstances, including when: • production is less than expected; • the counterparty to the hedging contract defaults on its contract obligations; or • there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received |
| In addition, these hedging arrangements may limit the benefit we would otherwise receive from increases in oil and natural gas prices |
| We have substantial capital requirements, and we may be unable to obtain needed financing on satisfactory terms |
| We make, and will continue to make, substantial capital expenditures for the acquisition, development, exploration and abandonment of our oil and natural gas reserves |
| We intend to finance our capital expenditures primarily through cash flow from operations, bank borrowings and public and private equity and debt offerings |
| Lower oil and natural gas prices, however, would reduce our cash flow and could affect our access to the capital markets |
| Costs of exploration and development were dlra1dtta4 billion in 2005, dlra587 million in 2004 and dlra462 million in 2003 |
| During 2005, we spent dlra1dtta7 billion on proved property acquisitions |
| Our exploration and development budget for 2006 is dlra1dtta7 billion |
| An additional dlra100 million has been budgeted for the construction of pipeline, compression and processing infrastructure in 2006 |
| We believe that, after debt service, we will have sufficient cash from operating activities to finance our exploration and development expenses through 2006 |
| If revenues decrease, however, and we are unable to obtain additional debt or equity financing, we may lack the capital necessary to replace our reserves or to maintain production at current levels |
| We have substantial indebtedness and may incur substantially more debt |
| Any failure to meet our debt obligations would adversely affect our business and financial condition |
| As a result of our indebtedness, we will need to use a portion of our cash flow to pay principal and interest, which will reduce the amount available to finance our operations and other business activities and could limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate |
| Our bank revolving credit indebtedness is at a variable interest rate, and so a rise in interest rates will generate greater interest expense to the extent we do not have applicable interest rate protection hedges |
| The amount of our debt may also cause us to be more vulnerable to economic downturns and adverse developments in our business |
| Together with our subsidiaries, we may incur substantially more debt in the future |
| The indentures governing our outstanding public debt do not contain restrictions on our incurrence of additional indebtedness |
| To the extent new debt is added to our current debt levels, the risks resulting from indebtedness could substantially increase |
| Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we are unable to control |
| If our cash flow is not sufficient to service our debt, we may be required to refinance the debt, sell assets or sell shares of common stock on terms that we do not find attractive if it can be done at all |
| Further, our failure to comply with the financial and other restrictive covenants relating to our indebtedness could result in a default under the indebtedness, which could adversely affect our business, financial condition and results of operations |
| 15 ______________________________________________________________________ [41]Table of Contents Competition in the oil and natural gas industry is intense, and some of our competitors have greater financial, technological and other resources than we have |
| We operate in the highly competitive areas of oil and natural gas acquisition, development, exploitation, exploration and production |
| The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies |
| We face intense competition from independent, technology-driven companies as well as from both major and other independent oil and natural gas companies in each of the following areas: • seeking to acquire desirable producing properties or new leases for future exploration; • marketing our oil and natural gas production; • integrating new technologies; and • seeking to acquire the equipment and expertise necessary to develop and operate our properties |
| Some of our competitors have financial, technological and other resources substantially greater than ours, and some of them are fully integrated oil companies |
| These companies may be able to pay more for development prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit |
| Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can |
| Our ability to develop and exploit our oil and natural gas properties and to acquire additional properties in the future will depend upon our ability to successfully conduct operations, implement advanced technologies, evaluate and select suitable properties and consummate transactions in this highly competitive environment |
| The failure to replace our reserves could adversely affect our financial condition |
| Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable |
| Our proved reserves generally decline when oil and natural gas are produced unless we continue to conduct successful exploitation or development activities or acquire properties containing proved reserves, or both |
| We may not be able to economically find, develop or acquire additional reserves |
| Furthermore, while our revenues may increase if oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase |
| Reserve estimates depend on many assumptions that may turn out to be inaccurate |
| Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated |
| Estimating quantities of proved oil and natural gas reserves is a complex process |
| It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors |
| Any significant inaccuracies in these interpretations or assumptions or changes of conditions could cause the quantities and net present value of our reserves to be overstated |
| To prepare estimates of economically recoverable oil and natural gas reserves and future net cash flows, we analyze many variable factors, such as historical production from the area compared with production rates from other producing areas |
| We also analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary |
| The process also involves economic assumptions relating to commodity prices, production costs, severance and excise taxes, capital expenditures and workover and remedial costs |
| Actual results most likely will vary from our estimates |
| Any significant variance could reduce the estimated quantities and present value of reserves shown in this annual report |
| 16 ______________________________________________________________________ [42]Table of Contents You should not assume that the present value of future net cash flows from our proved reserves shown in this annual report is the current market value of our estimated oil and natural gas reserves |
| In accordance with Securities and Exchange Commission requirements, we base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate |
| Actual current and future prices and costs may differ materially from those used in the earlier net present value estimate, and as a result, net present value estimates using current prices and costs may be significantly less than the earlier estimate which is provided in this annual report |
| Property acquisitions are a component of our growth strategy, and our failure to complete future acquisitions successfully could reduce our earnings and slow our growth |
| Our business strategy has emphasized growth through acquisitions, but we may not be able to continue to identify properties for acquisition or we may not be able to make acquisitions on terms that we consider economically acceptable |
| There is intense competition for acquisition opportunities in our industry |
| Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions |
| Our strategy of completing acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals |
| Our ability to pursue our growth strategy may be hindered if we are not able to obtain financing or regulatory approvals |
| Our ability to grow through acquisitions and manage growth will require us to continue to invest in operational, financial and management information systems and to attract, retain, motivate and effectively manage our employees |
| The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth |
| Our financial position and results of operations may fluctuate significantly from period to period, based on whether significant acquisitions are completed in particular periods |
| Acquisitions are subject to the uncertainties of evaluating recoverable reserves and potential liabilities |
| Our recent growth is due in part to acquisitions of producing properties, and we expect acquisitions will continue to contribute to our future growth |
| Successful acquisitions require an assessment of a number of factors, many of which are beyond our control |
| These factors include recoverable reserves, exploration potential, future oil and natural gas prices, operating costs and potential environmental and other liabilities |
| Such assessments are inexact and their accuracy is inherently uncertain |
| In connection with our assessments, we perform a review of the acquired properties, which we believe is generally consistent with industry practices |
| However, such a review will not reveal all existing or potential problems |
| In addition, our review may not allow us to become sufficiently familiar with the properties, and we do not always discover structural, subsurface and environmental problems that may exist or arise |
| Our review prior to signing a definitive purchase agreement may be even more limited |
| We generally are not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities, on acquisitions |
| Normally, we acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties |
| If material breaches are discovered by us prior to closing, we could require adjustments to the purchase price, or, if the claims are significant, we or the seller may have a right to terminate the agreement |
| We could also fail to discover breaches or defects prior to closing and incur significant unknown liabilities, including environmental liabilities, or experience losses due to title defects, for which we would have limited or no contractual remedies or insurance coverage |
| There are risks in acquiring producing properties, including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of management attention, and costs of increased scope, geographic diversity and complexity of our operations |
| Increasing our reserve base through acquisitions is an important part of our business strategy |
| Our failure to integrate acquired businesses successfully into our existing business, or the expense incurred in consummating future acquisitions, could result in our incurring unanticipated expenses and losses |
| In addition, we may have to assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions |
| The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition |
| In connection with future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations |
| 17 ______________________________________________________________________ [43]Table of Contents Possible future acquisitions could result in our incurring additional debt, contingent liabilities and expenses, all of which could have a material adverse effect on our financial condition and operating results |
| Drilling oil and natural gas wells is a high-risk activity and subjects us to a variety of factors that we cannot control |
| Drilling oil and natural gas wells, including development wells, involves numerous risks, including the risk that we may not encounter commercially productive oil and natural gas reservoirs |
| We may not recover all or any portion of our investment in new wells |
| The presence of unanticipated pressures or irregularities in formations, miscalculations or accidents may cause our drilling activities to be unsuccessful and result in a total loss of our investment |
| In addition, we often are uncertain as to the future cost or timing of drilling, completing and operating wells |
| Further, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including: • unexpected drilling conditions; • title problems; • restricted access to land for drilling or laying pipeline; • pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions; and • costs of, or shortages or delays in the availability of, drilling rigs, tubular materials and equipment |
| The marketability of our production is dependent upon transportation and processing facilities over which we may have no control |
| The marketability of our production depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing facilities |
| Any significant change in market factors affecting these infrastructure facilities could harm our business |
| We deliver oil and natural gas through gathering systems and pipelines that we do not own |
| These facilities may be temporarily unavailable due to market conditions or mechanical reasons, or may not be available to us in the future |
| For example, during 2004, we experienced temporary curtailments of our natural gas production in the San Juan Basin and in East Texas due to infrastructure limitations and plant closings for maintenance reasons |
| We are subject to complex federal, state and local laws and regulations that could adversely affect our business |
| Extensive federal, state and local regulation of the oil and gas industry significantly affects our operations |
| In particular, our oil and natural gas exploration, development and production, and our storage and transportation of liquid hydrocarbons, are subject to stringent environmental regulations |
| These regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning oil and natural gas wells and other related facilities |
| These regulations may become more demanding in the future |
| Matters subject to regulation include: • discharge permits for drilling operations; • drilling bonds; • spacing of wells; • unitization and pooling of properties; • environmental protection; • reports concerning operations; and • taxation |
| Under these laws and regulations, we could be liable for: • personal injuries; • property damage; • oil spills; • discharge of hazardous materials; • reclamation costs; • remediation and clean-up costs; and • other environmental damages |
| 18 ______________________________________________________________________ [44]Table of Contents Although we believe that our operations generally comply with applicable laws and regulations, failure to comply could result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties |
| Further, these laws and regulations could change in ways that substantially increase our costs |
| Any of these liabilities, penalties, suspensions, terminations or regulatory changes could make it more expensive for us to conduct our business or cause us to limit or curtail some of our operations |
| We currently own, lease or expect to acquire, and have in the past owned or leased, numerous properties that have been used for the exploration and production of oil and natural gas for many years |
| Although we have used operating and disposal practices that were standard in the industry at the time, petroleum hydrocarbons or wastes may have been disposed or released on or under the properties owned or leased by us or on or under other locations where such wastes were taken for disposal |
| In addition, petroleum hydrocarbons or wastes may have been disposed or released by prior operators of properties that we are acquiring as well as by current third party operators of properties in which we have an ownership interest |
| Properties impacted by any such disposal or release could be subject to costly and stringent investigatory or remedial requirements under environmental laws, some of which impose strict joint and several liability without regard to fault or the legality of the original conduct |
| These laws include the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as “CERCLA” or the “Superfund” law, the federal Resource Conservation and Recovery Act and analogous state laws |
| Under these laws and any implementing regulations, we could be required to remediate contaminated properties and take actions to compensate for damages to natural resources |
| In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury or property damages allegedly caused by the release of petroleum hydrocarbons or wastes into the environment |
| We currently do not expect any remedial obligations imposed under environmental laws to have a significant effect on our operations |
| Our operations in the coastal waters of Cook Inlet of Alaska are subject to the federal Oil Pollution Act, which imposes a variety of requirements related to the prevention of oil spills and liability for damages resulting from such spills in United States waters |
| The Oil Pollution Act imposes strict joint and several liability on responsible parties for oil removal costs and a variety of public and private damages, including natural resource damages |
| Liability limits for offshore facilities require a responsible party to pay all removal costs, plus up to dlra75 million in other damages |
| These liability limits do not apply, however, if the spill was caused by gross negligence or willful misconduct of the party, if the spill resulted from violation of a federal safety, construction or operation regulation, or if the party failed to report the spill or cooperate fully in any resulting cleanup |
| The Oil Pollution Act also requires a responsible party at an offshore facility to submit proof of its financial ability to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill |
| We believe that our operations are in substantial compliance with Oil Pollution Act requirements |
| The Department of Transportation, through the Office of Pipeline Safety and Research and Special Programs Administration, has implemented a series of rules requiring operators of natural gas and hazardous liquid pipelines to develop integrity management plans for pipelines that, in the event of a failure, could impact certain high consequence areas |
| These rules also require operators to conduct baseline integrity assessments of all applicable pipeline segments located in the high consequence areas |
| We are currently in the process of identifying all of our pipeline segments that may be subject to these rules and are developing integrity management plans for all covered pipeline segments |
| We do not expect to incur significant costs in achieving compliance with these rules |
| 19 ______________________________________________________________________ [45]Table of Contents Our business involves many operating risks that may result in substantial losses, and insurance may be unavailable or inadequate to protect us against these risks |
| Our operations are subject to hazards and risks inherent in drilling for, producing and transporting oil and natural gas, such as: • fires; • natural disasters; • explosions; • pressure forcing oil or natural gas out of the wellbore at a dangerous velocity coupled with the potential for fire or explosion; • weather; • failure of oilfield drilling and service tools; • changes in underground pressure in a formation that causes the surface to collapse or crater; • pipeline ruptures or cement failures; and • environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases |
| Any of these risks can cause substantial losses resulting from: • injury or loss of life; • damage to and destruction of property, natural resources and equipment; • pollution and other environmental damage; • regulatory investigations and penalties; • suspension of our operations; and • repair and remediation costs |
| We do not insure against the loss of oil or natural gas reserves as a result of operating hazards or insure against business interruption |
| Losses could occur from uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage |
| The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operations |
| Terrorist activities and military and other actions could adversely affect our business |
| On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope, and the United States and others instituted military action in response |
| These conditions caused instability in world financial markets and generated global economic instability |
| The continued threat of terrorism and the impact of military and other action, including US military operations in Afghanistan and Iraq, will likely lead to continued volatility in crude oil and natural gas prices and could affect the markets for our operations |
| In addition, future acts of terrorism could be directed against companies operating in the United States |
| The US government has issued public warnings that indicate that energy assets might be specific targets of terrorist organizations |
| These developments have subjected our operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on our business |
| We have limited control over the activities on properties we do not operate |
| We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund for their operation |
| Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns or lead to unexpected future costs |