Concho Resources – Quality Player, But Quality Has Its Price – Concho Resources Inc. (NYSE:CXO)

Despite the fact that Concho Resources´ (CXO) assets are located in the red hot Permian, it too cannot escape the headwinds created by a low oil and gas price environment.

This is despite the excellent-quality features of the business, including great acreage, low break-even costs, growing production, continued cost improvements and a strong balance sheet. While the company is able to post modest profits at around $50 per share, unlike most peers, the reality is that part of these profits are the result of artificially lowered depreciation charges following huge impairment charges in the past.

Quality has its price, and Concho still has a great track record in creating value in the long run. But unlike the many shale players that took on too much leverage in the past, it remains difficult to pull the buy trigger at such a high multiple in a rough environment.

Unless productivity gains continue, and or shares drop below the $100 mark, I am not pulling the trigger yet.

The Assets

Concho holds 600,000 net acres in the Permian, the only area in which the company is active. This acreage is in well known basins such as the Midland Basin, Southern Delaware Basin, Northern Delaware Basin and the New Mexico Shelf.

These assets contain 720 million barrels of oil equivalent in proven reserves, but hold resource potential roughly 10 times that amount, including nearly 20,000 horizontal drilling locations.

The company aims to outperform its peers by focusing on these very high quality assets through drilling long laterals, a focus on data, economies of scale and strong balance sheet – which adds flexibility to the operations of the business.

The fact that Concho is operating in the red-hot Permian is reflected in its production profile. First quarter production of a little over 181,000 barrels of oil-equivalent per day is up 30% versus last year. Meanwhile, production costs were down $4 per barrel of oil-equivalent to $10.50 per barrel.

To maintain production growth at…

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