Why Is Concho Resources (CXO) Down 56.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Concho Resources (NYSE:CXO). Shares have lost about 56.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Concho Resources due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Concho Resources Posts Strong Q4 Results, Ups Dividend

Concho Resources reported net income per share (excluding special items) of $1.03, ahead of the Zacks Consensus Estimate of 77 cents and the prior-year period earnings of 94 cents. The outperformance can be primarily attributed to better-than-anticipated production volumes. Precisely, the upstream player’s output of 337,288 barrels of oil equivalent per day (Boe/d) surpassed the Zacks Consensus Estimate of 325,265 Boe/d.

The Permian-focused player generated revenues of $1.2 billion, topping the consensus mark by 7.8% and rising 16.8% from the year-ago level.

In more good news for investors, the crude and natural gas explorer raised its quarterly dividend by 60% to 20 cents per share (or 80 cents per share annualized), to be paid out on on Mar 27 to shareholders of record as of Feb 28.

Volume Analysis

Concho's average quarterly volume increased 9.8% year over year to 337,288 Boe/d (63.7% oil). Total output exceeded the high end of the firm’s forecast of 318,000-325,000 Boe/d.

Daily oil output increased 8% to 214,859 barrels and natural gas production totaled 734,576 thousand cubic feet (Mcf), up 13.2% year over year. The 2018 acquisition of RSP Permian led to the expansion of its position in Midland and Delaware Basins, thereby attributing to the production rise.

For the full-year 2019, Concho’s production averaged 331,086 Boe/d (63.2% oil), reflecting an increase of 25.9% from 262,937 MBOE/d a year ago.

Realized Prices (Excluding Derivatives Effect)

The average realized natural gas price decreased from $2.82 per Mcf in the year-ago quarter to $1.88. However, average oil price realization came in at $56.63 per barrel, higher than $49.10 in the year-ago period. Overall, the company fetched $40.17 per Boe compared with $37.78 a year ago.

Operating Performance

Operating expenses in the quarter amounted to $1.8 billion, resulting in operating loss of $558 million against a profit of $1.9 billion in the year-ago period. Last year, derivative gains and asset sale proceeds resulted in the significant reduction in total costs. Meanwhile, Concho’s fourth-quarter production, exploration & depreciation, as well as gathering, processing & transportation expenses marked an increase on a year-over-year basis.

As part of its efforts to improve costs and margins, the Midland, TX-based oil and gas producer managed to lower its drilling, completion and equipment costs in 2019 to $999 per feet, down from $1,224 in the previous year. Concho also succeeded in cutting its controllable expenses 17% year over year to $8.43 per Boe.

Balance Sheet

As of Dec 31, Concho had a long-term debt of $4 billion, representing a debt-to-capitalization ratio of 18.2%.

Guidance

Production for the first quarter is expected within 316,000-325,000 Boe/d, including the impact of its New Mexico property disposition. Concho expects 2020 overall volumes to grow 6-8% y/y, with oil output increasing 10-12%. Full-year capex budget is forecast to be between $2.6 billion and $2.8 billion, 10% below the 2019 spending at the midpoint of the projected range. The company’s controllable cash costs are expected to clock in at $9 per Boe, down from $9.44 in 2019. Finally, Concho has set itself the target of increasing the length of the company’s laterals by 10% in 2020 to 10,000 feet, up from 9,000 in 2019 – reflecting improved efficiencies.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -11.76% due to these changes.

VGM Scores

Currently, Concho Resources has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Concho Resources has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.