Concho Resources (CXO) Update - April 5

[dan_s]

From TPH: CXO Stock Thoughts 4-5-2019

Focused on 2019 execution; Expecting 2020 FCF inflection to drive incremental shareholder returns

Sector: NAm E&P | Ticker: CXO | Recommendation: BUY | Target: $157 | Close: $109.21

We've updated our model for Q1 and see the quarter as ~in-line on production (TPHe 306.9mboepd / 200.9mbpd oil vs. Street 306.9 / 200.4) and capex (TPHe $848MM / Street $827MM).

Roll-off of rig activity (32 in Q1, 26 in Q4) and completion crews (10 in Q1, 8 by YE) are expected to shape Q1 as the peak from a quarterly capex perspective in 2019, but completion activity is likely to peak towards mid-year driven by timing of large-scale development projects management has laid out. What we're most focused on in the quarters ahead is execution on the 2019 program, maintaining capital discipline, and following through on increasing FCF as a means of increasing shareholder returns in the longer-term. The monetization of Oryx 1 earlier this week ($300MM proceeds expected to pay down the credit facility) is a step in the right direction as it allows the timeline of a potential increase to the shareholder returns program to be brought forward, while ~$1.1B of FCF in aggregate in '19-'20 at current strip leaves flexibility for CXO to bump the dividend closer to the S&P yield over the next few years. We see +44% upside to our $157/shr PT at $54/bbl WTI LT, a 5.6x EV/EBITDA, a 8% ROCE, a 6% FCF yield, and a ~15x P/E ratio in 2020 for the equity.

[dan_s]

TPH's target price of $157 compares to my valuation of $158. Based on my forecast (at lower oil prices than where the strip is today), CXO should generate approximately $3.3 Billion in Cash Flow From Operations, which compares to the Company's capex budget for 2019 of $2.8 to $3.0 Billion. If WTI stays over 60/bbl, CXO should be generating Free Cash Flow ("FCF") in Q3 2019.

CXO and PXD are about the same size.

[dan_s]

RBC Capital has issued a new report showing the following Net Asset Values. These are included in the list of upstream large-caps that RBC covers.

CXO = $190/share
PXD = $230/share
CLR = $73/share
EOG = $133/share

Net Asset Value = what the current liquidation value of each company is today.

RBC rates all four companies as "Outperform".