XTO Energy (XTO – NYSE)

Dear Bottarelli Research Member,

I’m not sure how many of you heard T. Boone Pickens speak live on CNBC last week, but I make sure to tune in to everything the man has to say.

In his latest interview, he made it perfectly clear that natural gas and wind power could become significant technologies that’ll eliminate our dependence on foreign oil. “This is not about the money,” he said, “it’s about saving the American people from the tyrants we’ve come to depend on.”

I wholeheartedly agree.

How can the U.S. spend over $800 billion dollars importing foreign oil when we now have cost effective alternatives?

In fact, this point was driven home over the weekend when I caught up with an old buddy who just returned home from Iraq. He was a firefighter hired by the private sector to put out oil field, pipeline, and building fires. As he shared his experience with me, I asked him (out of curiosity) how much gas sold for in the OPEC nations where he was stationed.

Hold on to your seats, because his response was utterly shocking.

He told me that the average price of gas was somewhere around $0.50, sometimes even less. I was astounded to hear this. As I sat in stunned silence, he went on to tell me that the oil sheiks basically have their own printing presses for U.S. dollars. This sparked a feeling of outrage that hit me square in the heart, and it only strengthened my viewpoint that alternative energy sources need to be brought into our lives as soon as possible.

I firmly believe that the companies responsible for weaning us off foreign oil will truly be the next major winners on Wall Street, and I know for a fact that there are breakthrough companies spearheading a move into alternative energy sources as we speak.

As you can tell, I’m extremely passionate about this topic, and that’s why I’ll continue accumulating these top companies for attractive valuations. So on that note, let’s dive into this week’s newest pick.

Located right here in our own backyard, today’s pick will help deliver our great country from our OPEC dependence. I have been chomping at the bit over the timing of this pick, meaning I’ve been patiently waiting for the right opportunity to strike. And now, I’ve noticed that insiders started re-buying shares after selling off over the last three months. This signals we’re at a bottom.

Not only that, but this company will soon show the American people just how vast our untapped natural gas reserves truly are. I promise you, this company will be a key leader in energy produced right here in the United States.

With a P/E of 11, this week’s gem is a domestic natural gas producer with properties located in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana, Mississippi, Montana, North Dakota, Pennsylvania, and West Virginia.

Thanks to our Brigham Exploration (BEXP – NASDAQ) and Northern Oil & Gas (NOG – AMEX) picks from April 28^th, you’re already aware of the tremendous potential in North Dakota’s Bakken formation. As a quick refresher, USGS released a report on April 10^th which estimated that the amount of technically recoverable, undiscovered oil in the Bakken formation could be 3.0 to 4.3 billion barrels. That is utterly massive, and today’s pick just acquired a substantial footprint in the heart of this formation.

Not only that, but their other projects in the Marcellus, San Juan, and Piceance basins are blockbusters as well. As additional reserves of natural gas are evaluated and proved out, these projects will help empower America for many years to come. In fact, this company’s footprint covers 9,600 “low-risk, high production” wells which will greatly help reduce our foreign oil dependence. They’re also involved with smaller “wildcatters” whose job is to drill and prove out reserves in higher risk/reward locations. If these wildcatters hit pay dirt, then today’s pick pays them a percentage on their findings. This enables the company to generate income on the best producing regions of the U.S., while at the same time allowing wildcatters to search for new reserves without incurring any financial risk. It’s the best win/win strategy I know of.

So on that note, today’s new pick is XTO Energy (XTO – NYSE). As you’ll see below, a severe drop in natural gas prices has pushed this stock from its highs in the mid $70s to current levels around $45.00. But with winter just around the corner, XTO is poised to come back with a vengeance.

REMEMBER: T. Boone is spending millions promoting the use of natural gas, which is why I feel that the recent price declines are only a short-term trend. In fact, T. Boone is asking for each presidential candidate to meet with him on this subject! It’s a trend that’ll be “in play” for years to come, and that’s why using recent stock price weakness to establish a position in XTO can hand you a sizable reward very quickly. Take a position now and get ready for some fireworks!

UPDATES

Huaneng Power International (NHP – NYSE): Shares continue to be range bound, but as of June 30^th the company announced that their total power generation amounted to 91.448 billion kwh, an increase of 13.43% over the same period last year. They’re expanding in other parts of China, so let’s give this pick a little longer to pan out. As the population grows, so will the need for power. Hold.

RAM Energy Resources (RAME – NASDAQ): Very strong numbers were reported! Earnings increased 91%, sparked by a 222% increase in sales of oil, natural gas liquids (NGLs), and natural gas. Also, EBITDA (which is a non-GAAP measure) came in at $56.0 million for the first half of 2008 compared to $17.7 million for the same period last year. That’s an increase of 216%! Looking forward, they’re now drilling six of 14 horizontal wells on their West Virginia acreage, and this should offer an upside trigger come September. Although the stock has fallen back from our original alert, the outlook remains strong. Buy.

Isis Pharmaceuticals (ISIS – NASDAQ): They also reported earnings last week, and the numbers represented the strongest financial position in ISIS history! They now have $535 million in cash. They also announced a new collaboration with Genzyme (GENZ – NASDAQ), which is a biotech company that Bryan has played with a high level of success in his options service. They’ve begun a Phase III study of “mipomersen,” which treats a genetic disorder that causes exceptionally high levels of LDL cholesterol. This gem just keeps amazing me. I feel holding the last fourth of our position will prove very worthwhile. As I’ve said before, I smell a buyout coming. It’s only a matter of time. Hold.

Gran Tierra Energy (GTE – AMEX): Talk about amazing! They reported Q2 revenues of $33.1 million, compared to $3.8 million for Q2 2007. Quite a difference a year makes! Plus, GTR has no long-term debt. If you are not yet an owner of GTE, buy some now! Buy.

InterOil Corporation (IOC – AMEX): They also reported stellar earnings, which included a record $27.4 million in net profits. These are the numbers that every investor wants to see. Moving forward we should see some further gains. Hold.

PowerShares Agriculture (DBA – AMEX): DBA shares have once again pulled back, but with the outlook for food prices getting scarier by the day (just look at the price of eggs or milk!), I remain bullish. I fully expect DBA to trade above $40.00 by January 2009. Buy.

Stillwater Mining Company (SWC – NYSE): Continuing the earnings train, SWC reported Q2 net income of $17.2 million ($0.18 per share) on revenues of $218.8 million. That’s quite strong, considering that Q2 of 2007 produced a loss of $2.5 million ($0.03 per share) on revenues of $161.0 million. Their recycling business is doing very well, and they’re expanding this program to help offset their mining costs. We’re also entering a seasonal period that’s bullish for metals, so I would suggest taking advantage of this sell-off and buying SWC at these extremely attractive levels. Buy.

NOTE: Many of you that still own shares of Graham (GHM – AMEX) have written in to ask whether or not it’s time to take profits. I must admit, the stock has been much stronger than we realized. After locking in a 78.71% profit by selling at $74.70 per share, the stock has continued to run up past $100.00. Amazing. If you will own GHM, I would sell all but a quarter of your position and continue riding the stock’s tremendous upside momentum. Congratulations to any of you who stayed the course.

Next week, we’ll have another great addition to our small-cap ledger. But until then, have a good weekend, and be sure to give thanks for the abundance in you life.

Sincerely,

“The sharp drop in oil and natural gas prices has produced an even sharper pullback in energy stocks, creating what may be one of the best buying opportunities in the sector in several years.”

- Barron’s, August 11^th 2008

Today’s pick on XTO Energy (XTO – NYSE) isn’t necessarily a small cap, per say.

You see, in bear market conditions, you often witness super-strong companies like XTO move down to super-attractive valuations. In cases like this, Mark and I simply cannot help but make a buy recommendation.

Therefore, although today’s pick trades on the S&P 500 and carries a $25.55 billion market cap, investing in XTO at today’s values represents one of the top money-making opportunities available. And when it comes down to it, making money of our #1 goal. That’s why we’ll temporarily deviate from our small-cap pool to pick up one of the best domestic oil and gas plays for dirt-cheap.

So let’s dive right in!

According to the August 11^th issue of Barron’s, shares of independent oil and gas plays (like XTO Energy) are now trading at half their net asset values. These are valuations that we haven’t seen in many, many years. Therefore, taking advantage of this price dip is an opportunity we cannot afford to pass up.

As Mark mentioned above, XTO Energy engages in the acquisition, development, exploitation, and exploration of producing oil and gas properties in the United States – with properties located in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana, Mississippi, Montana, North Dakota, Pennsylvania, and West Virginia.

This large footprint has helped make XTO the dominant producer of natural gas in the U.S. In fact, since their IPO in 1993, shares have gained more than 5,200% by implementing their low-risk, high-return strategy of growth through oil and gas property acquisition. Their game-plan is simple: Increase production, increase reserves.

By putting this simple strategy into practice, XTO has enjoyed a compound annual growth rate between 24% and 30%. And in the process, they’ve built a domestic reserve base with greater than 1.84 billion barrels of oil equivalent.

As of December 31^st, XTO’s 9,600 wells had proven reserves of 6.94 trillion cubic feet of natural gas, 67 million barrels of natural gas liquids, and 214 million barrels of oil. And looking ahead, they’re showing no signs of slowing down. XTO expects 29% production growth in 2008 and 22% growth in 2009, and this growth could easily help share prices recover from their current sell-off.

Plus, it’s important to note that 79% of XTO shares are held by institutions. This tells you that the stock has a very strong ownership base. But what really gets me excited is the high level of acquisitions that XTO completed this year.

According to their Web site, 2008 was a banner year because they expanded their dominant position by completing over $10 billion in acquisitions which project to return 4.5 times the cash flow. The list of properties they’ve acquired this year is as follows:

Add up all of their 2008 additions, and you get $8.6 billion of estimated 2009 cash flow (estimate based on NYMEX prices of $11/Mcfe for natural gas and $130/bbl for crude oil). This will double XTO’s production and reserves by 2011.

And now that this so-called “year of building XTO for the future” is complete, shares are poised to benefit from major production increases.

Just their Bakken Shale acquisition (which was purchased for $1.06 billion in cash and 11.74 million XTO shares) contains 68 million barrels of oil equivalent. That gives XTO the leading position in this potentially massive oil basin, setting the stage for years of upside stock price appreciation.

All things considered, we’re now experiencing a temporary pullback within a long-term trend – making XTO a screaming buy at current levels. Let’s take advantage of this pullback and add shares to our small-cap ledger now!

PLAY: Buy shares of XTO Energy (XTO – NYSE) at market, good for the day.

P.S. Congratulations to all of you who were able to lock in a 71.43% return on the Dow 30 Ultra Short September 61 Calls (DXD II). Adding these “ultra-short” positions is a fantastic way to protect your portfolio in a downside market. Therefore, whenever the conditions warrant, we’ll continue implementing this protective strategy going forward.

Sincerely,