CXO, SM and LPI
CXO, SM and LPI
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: CXO, SM and LPI
Stifel:
Raising NAV and Target
We are raising our target price and NAV estimates to $160 and $170 from $141
and $134 (Figure 1) based the performance of CXO's Midland and Delaware
Basin wells, which are generating strong field level returns (Figure 2). Further
delineation (including new zones) and tighter spacing tests on the company’s
newly acquired Midland Basin acreage (see our note: Expanding Midland Basin
Core Holdings) are likely to be accretive to our estimate.
We are raising our type curves for CXO’s horizontal Yeso to 210 MBoe from 140
MBoe, Bone Spring - State Line to 600 MBoe from 520 MBoe, Bone Spring - et al
to 550 MBoe from 460 MBoe, and Midland Basin Wolfcamp to 900 MBoe from 700
MBoe based on state production data (Figures 2, 4, and 8). Early results from two
1H16 completions in the latter play are tracking ~77% above our curve.
Strong Growth and Balance Sheet
We forecast 2017 production growth of 20% y/y (in line with company guidance),
including oil growth of 22% y/y, and cash flow to exceed capital expenditures by
$280MM. Accordingly, we look for the balance sheet to remain strong with
2016/2017 interest coverage and YE 16/17 debt/TTM EBITDA of 12.0x/11.8x and
1.8x/1.5x, respectively. YE16 liquidity should approximate $2.8B (vs $3.2B at
mid-year) consisting primarily of an undrawn bank line.
Discounted Valuation to Permian Peers
CXO has performed roughly in line with our Permian peer group this year (up 41%
vs median of ~44%) (Figure 10) although the stock is valued at a 7% discount to
the group average based on equally weighted EV/2017 EBITDA and price/NAV
multiples. We expect the stock to outperform over the next 12-18 months and the
valuation gap to narrow as the company delineates one of the largest positions in
the Permian Basin.
Raising NAV and Target
We are raising our target price and NAV estimates to $160 and $170 from $141
and $134 (Figure 1) based the performance of CXO's Midland and Delaware
Basin wells, which are generating strong field level returns (Figure 2). Further
delineation (including new zones) and tighter spacing tests on the company’s
newly acquired Midland Basin acreage (see our note: Expanding Midland Basin
Core Holdings) are likely to be accretive to our estimate.
We are raising our type curves for CXO’s horizontal Yeso to 210 MBoe from 140
MBoe, Bone Spring - State Line to 600 MBoe from 520 MBoe, Bone Spring - et al
to 550 MBoe from 460 MBoe, and Midland Basin Wolfcamp to 900 MBoe from 700
MBoe based on state production data (Figures 2, 4, and 8). Early results from two
1H16 completions in the latter play are tracking ~77% above our curve.
Strong Growth and Balance Sheet
We forecast 2017 production growth of 20% y/y (in line with company guidance),
including oil growth of 22% y/y, and cash flow to exceed capital expenditures by
$280MM. Accordingly, we look for the balance sheet to remain strong with
2016/2017 interest coverage and YE 16/17 debt/TTM EBITDA of 12.0x/11.8x and
1.8x/1.5x, respectively. YE16 liquidity should approximate $2.8B (vs $3.2B at
mid-year) consisting primarily of an undrawn bank line.
Discounted Valuation to Permian Peers
CXO has performed roughly in line with our Permian peer group this year (up 41%
vs median of ~44%) (Figure 10) although the stock is valued at a 7% discount to
the group average based on equally weighted EV/2017 EBITDA and price/NAV
multiples. We expect the stock to outperform over the next 12-18 months and the
valuation gap to narrow as the company delineates one of the largest positions in
the Permian Basin.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group