For an energy company to be successful, it must first replace declining production volumes and then build appreciable growth on top - a daunting proposition in the long run. This is why a sound strategy is essential in building a successful, ongoing energy franchise; that is, one that consistently builds value for the owners.

So how does XTO Energy's strategy generate value for its shareholders? 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.

STEP 1 - PROPERTY ACQUISITION:

XTO Energy acquires properties located in the major producing areas of the United States. These properties typically have been productive for many years and often have been owned by major oil companies. Most importantly, the properties are expected to produce oil and gas for many years to come (referred to as "long-lived" properties) which makes them low-risk by nature. These assets exhibit a common set of characteristics:

	Proven production history with shallow rates of decline
	Relatively low costs that maximize profit margins
	Geologically complex reservoirs that offer up additional potential
	Development opportunities and extensive upsides that promise to increase reserves

The advantage of acquiring properties of this type is that they have established production histories, which makes it much easier to forecast future production. The chart illustrates the natural decline in production that you'd expect from a typical well. Note that in the early life of a well production is at its highest, but the rate of decline is very steep and difficult to estimate. The "X" represents the point in a well's life at which XTO Energy would normally acquire it. Note that the future expected rate of decline is much more gradual. Through this combination of acquiring mature onshore properties, in well established areas, from quality operators, XTO Energy has a very stable, predictable base of production that should be economic for many years to come.

STEP 2 - DEVELOPMENT ACTIVITIES:

We look to increase production and reserves through low-risk means including the reduction of operating costs, recompletions and development drilling. By increasing production or lowering the rate of production decline, we are able to generate cash flow that is over and above the forecast used to acquire the reserves. The incremental cash flow creates value for our shareholders.

THE RESULTS

Our strategy has been very successful. From our inception in 1986 through 2004, XTO Energy acquired 4,504 billion cubic feet of gas equivalent (Bcfe; where six Mcf of natural gas equals one barrel of oil). Through our exploitation and development efforts, we have been able to add 3,826 Bcfe, or 85%, to that original amount. Importantly, the 3,826 Bcfe is more than 100% greater than the 1,910 Bcfe actually produced during that time, and was achieved through the investment of only 60% of our cash flow from operations.

HOW DO WE COMPARE?

According to research conducted by Banc of America (BAS) between 2000 and 2004; XTO Energy's ability to add significant reserves through acquisition and development activities at a low cost has been among the best of our peers. The following graph compares our performance against 60 companies in the BAS E&P universe.