CXO's reaction to their earnings

[jb2257]

Dan please take a look at the great earnings out of CXO yesterday. Is there something I'm missing with the stock price down more than 5%?

[dan_s]

I just finished updating the RRC profile. Working on CXO now.

[dan_s]

This is amazing to me: "Following the closing of the RSP transaction, Concho is running 32 horizontal rigs, including 16 rigs in the Northern Delaware Basin, six rigs in the Southern Delaware Basin, nine rigs in the Midland Basin and one in the New Mexico Shelf. Additionally, Concho is currently utilizing ten completion crews."

I worked at Hess Corp. for 18 years and I do not recall that we ever had more than ten operated rigs running.

GAAP Net income for second-quarter 2018 was $137 million, or $0.92 per diluted share, compared to net income of $152 million, or $1.02 per diluted share, for second-quarter 2017.

Adjusted net income (non-GAAP), which excludes non-cash and unusual items, for second-quarter 2018 was $185 million, or $1.24 per diluted share, compared with adjusted net income for second-quarter 2017 was $77 million, or $0.52 per diluted share. < This compares to my forecast of $179.9 million net income for Q2.

[dan_s]

My SWAG is that the market's initial negative reaction may be a response to the increased capital expenditures. I have no problem with it because their stunning growth is fully funded by cash flow from operations. Growth of this magnitude is incredible for a company of this size. - Dan

Outlook

Concho updated its 2018 production and capital program outlook to reflect the RSP transaction. The Company’s guidance for third-quarter and full-year 2018 includes production (on a two-stream basis) and capital from RSP beginning on the acquisition closing date of July 19, 2018. For third-quarter 2018, Concho expects production to average 280 to 285 MBoepd (65% oil); and for full-year 2018, Concho expects production to average 260 to 263 MBoepd (64% oil).

A key benefit of the RSP transaction lies in the large-scale development potential of the assets. Concho plans to begin drilling several development projects on the acquired acreage in the second half of 2018. In addition, Concho will complete several infrastructure and facility projects in Loving County, Texas, that facilitate large-scale development. The Company’s updated full-year 2018 capital program of $2.5 billion to $2.6 billion includes this activity. Importantly, Concho’s framework for executing a disciplined capital program within cash flow remains unchanged, and the Company expects 2018 capital spending to be fully funded with cash flow from operating activities.

Detailed guidance for full-year 2018 is provided under “2018 Guidance” at the end of the release. The Company’s capital guidance for 2018 excludes acquisitions and is subject to change without notice depending upon a number of factors, including commodity prices and industry conditions.

[dan_s]

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

I am comfortable with my valuation of $195.00/share.
> First Call's price target today is $186.93, but only one analyst has updated his forecast/valuation model for Reuters/First Call.
> This morning Gabriele Sorbara at Williams Capital submitted a new forecast to Reuters. His valuation / price target is $189.00. Gabriele is one of the more conservative energy sector analysts, so this makes me feel good about my forecast/valuation.

Concho is a large-cap that is "in transition" following a $9.5 Billion merger. Since RSP Permian was in our Sweet 16 and because I have followed it closely for several years, I have a HIGH level of confidence in my post-merger forecast for Concho. It is hard to do what I do if you are not familiar with the merger process. Most of the Wall Street Gang is "lazy", so it will take awhile before the numbers that they submit to Reuters make sense. This is why you pay the Big Bucks to be an EPG Member.

Keep in mind that Concho (post-merger) now has the largest leasehold position in the Permian Basin and it is growing production and proven reserves at a much faster pace than Pioneer Natural Resources (PXD). This is what I call a "Core of the Core Holdings" for a growth portfolio. Hang Tough, this is an incredible growth company and it has a lot of upside (especially if oil moves over $70/bbl).

[jb2257]

Thanks Dan. I hope the analysts will come out with an upgrade. Did they address the Permian issues?

[dan_s]

I am up to my gills right now in Q2 results, so can't spend anymore time on CXO. They have firm takeaway capacity in pipelines for most of their production. I think there is enough "cushion" in my valuation model to compensate for that very short-term issue.

Concho holds some of the most valuable real estate on this planet.