Concho Resources (CXO) Update - Feb 19

[dan_s]

Concho reported Q4 results and their year-end reserves after the markets closed on Feb. 18

CXO is up this morning, trading at $80.70.

Two analysts have published fresh reports on CXO this morning:
> Stephen Richardson at Evercore ISI rates it a BUY with a price target of $105.00
> Gabriele Sorbara at Siebert Williams Shank & Co rates it a BUY with a price target of $115.00

I have updated my forecast/valuation using the detailed production and line-by-line expense guidance provided by Concho for 2020. My valuation increases from $94 to 107.

Highlights:
> Increased natural gas price: Concho reports natural gas & NGLs on a combined basis. Their combined realized price (including cash settlements on hedges) increased $0.55/mcf from Q3 to Q4 to $2.11/mcf. Despite HH gas prices pulling back, most of the increase in their realized gas price was due to increased pipeline capacity in West Texas and much better NGL prices. I'm forecasting a slight pullback in Q1 2020, but most of the increase should stick.
> Because of the sale of their New Mexico assets on November 1st, Concho's production will dip slightly in Q1 2020. In 2019 Concho's proceeds from non-core asset sales were $1.26 Billion. Don't you wish you had non-core assets worth a $Billion?
> Winter weather also impacts fieldwork. After Q1, Concho's production should ramp up steadily into year-end. Overall production should be up 6% to 8% YOY with over 10% growth in oil production.
> Concho has a SUPER STRONG Balance Sheet and they should generate over $700 million of free cash flow from operations.
> Their hedging program significantly reduces their commodity price risk.

From press release: "Our high-quality asset base and strong operating margins provide sustainable free cash flow growth that supports increasing returns to shareholders. Consistent with Concho's strategic priorities to grow margins, free cash flow and distributions to shareholders, the Company's Board of Directors approved a 60% increase to the quarterly dividend, from $0.125 to $0.20 per share. The next quarterly dividend is payable on March 27, 2020, to stockholders of record as of February 28, 2020."