Concho Resources (CXO)

[dan_s]

Raised full-year 2016 production growth target to 5%. Targeting 20% compound annual growth over the next three years within anticipated cash flows.

Tim Leach, Chairman, Chief Executive Officer and President, commented, “Results for this quarter highlight the strength of our business and relentless focus on enhancing capital efficiency. We have continued to accelerate value for shareholders by driving down cash costs while simultaneously exceeding the high-end of our production guidance range through outstanding operational performance. As a result of drilling efficiencies, completion optimization and portfolio high grading, we are raising our 2016 production growth target to 5%. We also achieved several milestones during the quarter, including consolidating core acreage in the Midland Basin, calling a series of bonds which contributed to reducing absolute debt by more than $1 billion year-over-year and investing within cash flow for the fifth consecutive quarter.

“Structural cost improvement combined with our high-quality drilling inventory has a profound impact on our ability to deliver leading, capital efficient growth over the long term. While we have significant momentum heading into 2017, continued commodity price volatility reinforces our commitment to managing capital spending within anticipated cash flows. We expect to execute a $1.4 billion to $1.6 billion capital program during 2017 and deliver production growth of 17% to 20% over a more robust 2016 production outlook. Further, we are uniquely positioned to generate 20% annualized production growth over the next three years within cash flows due to the quality of our portfolio, demonstrated financial discipline and operational excellence.”

Cash flows from operating activities and net settlements received from derivatives were $1 billion for the nine months ended September 30, 2016, as compared to $1.2 billion for the same period last year.

[dan_s]

I have updated my forecast model for Concho and it will be posted to the EPG website later today.

My valuation has increased $8.00/share to $159.00. This compares to First Call's price target of $153.63, which I expect to go up after more analysts update their forecast models and submit them to First Call.

The primary reason for my increased valuation is their increased production guidance. My previous forecast assumed ~12% production growth in 2017 and Concho has raised it to 17% to 20%.

Concho has a good hedging program that locks in strong cash flows from operations. Their 3rd quarter realized commodity prices were $2.46/mcf for natural gas (includes NGLs) and $59.87/bbl for crude oil. For the first nine months of 2016 their cash settlements on hedges have been $582 million. 59% of their 4th quarter oil production is hedged at $59.38/Bbl.

Concho's capex spending is totally covered by cash flow from operations. They have 15% to 20% production growth locked in for the next three years, totally funded by cash flow from operations. < This is why CXO should be one of your Core Holding.