Concho Resoures (CXO)

[dan_s]

Below are notes taken from TPH morning report. PXD and CXO are the two large-cap Permian Basin companies in the Sweet 16. IMO CXO is the better value today, but they both have significant upside if oil gets back to $65-$75 range (where I think it will settle by year-end):

CXO Update – Remains top pick on Delaware rate of change and relative NAV upside following model true-up; TPH's estimated 2017 growth is achievable ($116.17 – B) – Model update, primarily truing up productivity and moving laterals to 1.5mi, increases our 3P NAV at $75/bbl long-term from $124/sh to $162/sh, implying 40% upside from Friday’s close (77% upside to $206/sh 3P NAV at TPHe long-term deck). Refresh allows for a better comparison to our recently updated PXD NAV (8% upside to $180/sh at $75/$3.25; 44% to $240/sh at TPHe deck) and supports our relative preference for CXO. When comparing our updated model to company guidance, we see double-digit growth in 2017 as achievable and model +12% y/y for capex in-line with cash flow at strip. Sensitizing towards a maintenance program in 2017, we see flat production within cash flow and ex-hedges as achievable at ~$45/bbl WTI, one of the lowest amongst our coverage. Please contact your TPH sales representative for our TOD highlighting our Latest Delaware vs. Midland Productivity Thoughts.

High-grading of the Northern Delaware supports capital efficiency ($116.17 – B) – In the Northern Delaware where CXO holds 250k net acres, the company has historically drilled a combination of 1st, 2nd, and 3rd Bone Spring wells. However, we think the company will focus capital allocation plans by primarily drilling the 2nd Bone Spring, where we model better productivity (~200boepd/1,000ft lateral 30-day rates vs. ~110 and ~150 in the 1st and 3rd benches, respectively). We also think the Wolfcamp in Lea County could be a much bigger part of their program going forward, where acreage is offset to EOG which has shown to be tracking 1.0-1.5mmboe EURs (on 4,500ft laterals!) based on our analysis. Further, we believe the company will target 1.5mi laterals vs. historical lengths of 4,500-6,500ft, for which we model 1.5mmboe EURs in the oily Wolfcamp.

Southern Delaware acreage quality ($116.17 – B) – Over the last year, CXO has high-graded their portfolio (now 125k net acres) via M&A transactions toward what we now think is a core position in Reeves County. North Harpoon has shown some of the best results we’ve seen, not only in the Delaware Basin but also across all the assets we cover. For context, CXO’s recent long-laterals have produced ~235mboe (adjusted to 1.5mi laterals) over the first 180 days which compares to ~130-155mboe for T1 Midland wells using similar laterals over the same time frame. The most prolific asset in CXO’s portfolio is the Wolfcamp A where we model 1.5mmboe EURs on 7,500ft laterals for $8mm/well, resulting in 10% ATROR breakevens at $30-35/bbl WTI. This could further improve as the company moves towards 2mi laterals in 2017. In this same area over time, we think that the Wolfcamp B/C (TPHe $5-6/sh at $75/bbl WTI long-term) and Bone Spring (TPHe no value currently baked in) will all become commercial, providing additional NAV upside.

Don’t forget the Midland ($116.17 – B) – We continue to model 7,500ft laterals for CXO’s Midland position (110k net acres), but it is important to note the company will be primarily moving toward 2mi laterals later this year. In particular, as they’ve high-graded their Midland Basin drilling into the northern part of Upton and Midland County (offset PXD and PE), we think they’ll focus primarily on the Lower Spraberry and Wolfcamp B (TPHe $40-45/bbl breakevens), but the Wolfcamp A and Wolfcamp D have potential (TPHe $50-55/bbl breakevens), as well. For context, what we model for CXO’s total undeveloped Midland position accounts for just $21/sh, ~13%, of our 3P NAV at $75/bbl WTI long-term.