Concho Resources (CXO)

[dan_s]

For the second quarter of 2013, the Company reported net income of $84.7 million, or $0.81 per diluted share, as compared to net income of $319.3 million, or $3.07 per diluted share, for the second quarter of 2012. The Company’s second quarter 2013 results were impacted by several non-cash and unusual items including: (1) a $68.7 million unrealized mark-to-market gain on commodity derivatives, (2) a $65.4 million impairment of long-lived assets primarily relating to non-core natural gas New Mexico Shelf properties, (3) $2.9 million of leasehold abandonments and (4) a $28.6 million loss on the extinguishment of debt. Excluding these items and their tax effects, second quarter 2013 adjusted net income (non-GAAP) was $102.5 million, or $0.98 per diluted share. < $0.02/share below my forecast.

Production came in above my forecast. With higher oil prices in Q3, CXO is heading to another record quarter.

[dan_s]

An updated Net Income & Cash Flow Forecast model for CXO has been posted under the Sweet 16 Tab.

I have increased my Fair Value Estimate to $114/share, compared to First Call's Price Target of $109.50.

CXO was added to our Sweet 16 Growth Portfolio on 6/6/2013. I am gaining more confidence in my forecast model and now believe this one has a lot more upside for us. For now, I'm leaving my multiple for determining Fair Value at 8X CFPS, but CXO may deserve a higher multiple since it has an aggressive drilling program, a strong balance sheet and lots of low-risk development acreage in the Permian Basin.

Note that CXO uses the Successful Efforts method of accounting, which is more conservative than the Full Cost method most E&P companies use. This makes their reported earnings even more impressive. Focus on Cash Flow Per Share when comparing E&P companies.