Concho Resources (CXO) Update - August 10

[dan_s]

Since Concho Resources (CXO) published their Q2 results and had a lively Q2 conference call, ten analysts have updated their reports and submitted them to Reuters/First Call. The analysts' new price targets range from $70.23 (Morgan Stanley) to $188.00 (Stifel).
> The average price target of the ten updated reports is $125.77.
> There are 31 analysts' price targets in the First Call official price target of $127.74. < 21 are dated prior to the company's Q2 results came out.

How can smart analysts at highly respected firms have such a wide range of opinions on a company of this size?

The primary reason is that analysts at some Wall Street Firms are required to use their firm's official commodity price deck for all valuations. All of the price targets being put out by the Morgan Stanley team are extremely low compared to "the pack". They must be using an oil price under $50/bbl for all future periods. For CXO, the next lowest valuation is $92.50 from Johnson Rice.

The reason for this post is that from time-to-time I will get an email from one of our members that goes something like this: "Have you seen the new report on ABC Oil Company from XYZ Wall Street firm. Why is their valuation of ABC so much lower than your price target?

Just remember that forecast/valuation models are only as good as the assumptions in the models used to forecast future periods' earnings and cash flows. This is why all of the forecast/valuation models I post to the EPG website are "macro-driven" Excel spreadsheets.
> You can see the oil, gas and NGL prices that I am using in each model at the bottom of the spreadsheet.
> You can download the spreadsheet to Excel and change any of the commodity prices or other assumptions in the forecast periods to what you think is appropriate.

PS: Specific to Concho, they did report disappointing results from a large project in the Delaware Basin that raises some concern about the quality of their leasehold in the western basin in the Permian. I am lowering the multiple of operating cash flow used to value CXO from 8X to 7X to compensate.

"Large-Scale Projects Accelerating Development Optimization: In the Delaware Basin, Concho completed the 23-well Dominator project, a well-spacing test targeting multiple landings within the Upper Wolfcamp. The average lateral length for the project was approximately 4,400 feet, and all 23 wells were drilled, completed and put on production safely and ahead of schedule. While the Dominator project accelerated the Company’s understanding across the project lifecycle (logistics, lateral placement, well spacing and facilities design), performance from the project indicates the well spacing was too tight. The Company has already incorporated learnings from this project into its second half of 2019 program and future Delaware Basin projects."

"In the Midland Basin, Concho put on production the Marion Benge project, consisting of 18 wells targeting the Spraberry and Wolfcamp zones with an average lateral length of 9,900 feet. The Marion Benge project has demonstrated strong initial performance."

[dan_s]

Concho Resources oversold after yesterday's pullback, says Stifel on 8-2-2019

"Concho Resources is oversold on fundamental and technical measures following yesterday's 22% pullback, Stifel analyst Derrick Whitfield tells investors in a research note. The company began earnings as a "quality stock with a mild execution overhang" and exited Q2 with a "modest execution overhang" due to one large-scale project misstep and elevated second half of 2019 capital expenditures, Whitfield contends. He believes Concho's execution issues are explainable and addressed by management's actions. Whitfield estimates investors have priced in a $3.2B asset impairment as a result of one "sub-optimal" density pilot that costs $100M. Fundamentally, Concho trades at a "considerable discount" to peers on cash flow and acreage despite offering "superior" capital efficiency metrics and "arguably the most sought after Permian acreage position," says the analyst. He keeps a Buy rating on Concho Resources with a $188 price target."