S-16 Updates: Concho (CXO) - Feb 4

[dan_s]

CXO is trading for $76.46 as I post this. First Call's price target is $106.82.

I've updated my forecast model for CXO and it will be posted to the EPG website this afternoon.
Here are some key points:

> CXO has ~54% of its 2020 oil hedged at an average price of $56.96. Plus, regional differentials in West Texas have narrowed thanks to increased pipeline access.

> You need to know the hedging strategy of each upstream company you hold to make rational decisions. I put a table of each company's hedges an the bottom of the forecast models.

> Thanks to the price spike in the January NYMEX contract for oil, the Q1 realized oil prices are not going to be as low as people think.

> CXO reports natural gas and NGLs on a combined basis, therefore the recent weakness in natural gas prices will not impact them as much as you might think.

> For all of my forecasts, I am assuming that the recent dip in oil prices will be short-lived and that oil prices will rebound sharply in 2H 2020. Why? I believe the corona virus will not have a significant impact on global oil demand. I also anticipate a spike in oil demand this summer and that U.S. oil production will flat line in 1H 2020 because of much fewer well completions during the winter months (this happens each year). In general, I am lowering my full-year WTI forecast from $60/bbl to $57/bbl.

> Note that I do adjust realized oil, gas and NGL prices for regional differentials and for individual company hedges.

> I am rolling forward my forecast models through 2021. As a result, my stock valuations will now be based on a reasonable multiple of each company's operating cash flow from operations for 2019 to 2021. Because adding four more quarters of estimates to the models adds more uncertainty, I am lowering the multiples used to value each company's stock. For example, I am lowering the multiple from 7X CFPS to 6X CFPS for Concho.

Forecast models are only as good as the assumptions used in the models. All of the forecast/models on the EPG website are just "tools" that you should learn how to use. If you take 30 minutes to understand one model, you will be able to use all of them.

During January, nine Wall Street firms have published new reports on CXO. Their updated price targets range from $83 to $120. Today, my valuation is $94.00/share, but it has a lot more upside for us when oil prices rebound and they will.