Concho Resources (CXO) Update - May 2

[dan_s]

Comments below from TPH:

CXO Q1'19 Follow Up
Spending within the FY budget is critical for performance; management is committed
Sector: NAm E&P | Ticker: CXO | Recommendation: BUY | Target: $151 | Close: $108.77

Equity underperformed yesterday (-6% vs. E&Ps -3%) on concerns that capex may overshoot (or get increased) for the FY given the elevated Q1 print, despite what was an excellent quarter operationally. As expected, capex was by and large the focal point of yesterday's conference call. Management hit the issue head on that they fully expect to be within their $2.8-3.0B guidance range for 2019 while outlining the avenues and flexibility available to them to execute on the plan. Ultimately, we think CXO can cut back on a combination of non-op and operated activity to make up for the $40MM overshoot in Q1 while still being able to maintain their FY production guidance increase. Our updated model calls for $3.0B of capex for 332mboepd (+26% y/y) for the FY, with Q2 at $794MM of capex / 322mboepd.
While some investors may be skeptical around the budget we feel comfortable with our model and are buyers of CXO on yesterday's dip given valuation (+39% NAV upside; 5.7x 2020 EV/EBITDA), line-of-sight to ~$1.1B of FCF in 2020 at ~$60/bbl WTI, asset quality, and management's historical track record of capital discipline and execution.