CXO: Upside Potential, Trading at a Discount

12/24/2015 9:03 am EST


Michael Berger

President & Founder,

Even though shares have fallen 40% from its highs in July 2014, Michael Berger, of, outlines the reasons he still sees significant upside potential in this exploration and production company that is trading at a discount.

Weakness in the energy sector has created a great opportunity for investors to buy quality companies that are trading at a discount. Of such companies, we see significant upside potential in Concho Resources, Inc. (CXO). The company is an independent oil and natural gas company engaged in the exploration, development, and acquisition of oil and natural gas properties.

CXO is our favorite exploration and production company for the following reasons: 1) its premier asset base in the Permian Basin, 2) it is well positioned for another beat-and-raise performance during 2016, 3) its proven acquisition model, and 4) its attractive valuation.

Sits on Top-tier Asset Base in Permian Basin

Concho owns approximately 535,000 net acres in the Delaware Basin/New Mexico Shelf (located in the Permian Basin). Operators continue to delineate acreage in the Delaware Basin and we believe that the rate of change (i.e. improving EURs and costs per well) in the region will be the highest. During 2016, we expect to see meaningful improvement in the type curve and cost efficiency gains.

We believe that acreage prices are currently understated in the Delaware Basin relative to the Midland Basin (Midland is $20,000 higher per acre). Over the next year, improving economics and increasing M&A activity in the Delaware Basin should narrow the gap between acreage values. Due to the size of CXO’s acreage position, this will further strengthen the company’s balance sheet.

2016 Is Set up for Another Beat-and-raise Performance

Over the last several years, CXO has been able to beat production and cost expectations on a consistent basis. We do not expect this theme to end during 2016. In fact, we believe that CXO will highlight its best-in-class operational capabilities. During 2015, CXO was able to grow north of 25% despite spending $1 billion less than it had initially planned so as to deliver that growth.

Looking forward to 2016, CXO set preliminary guidance of flat production on a year-over-year basis with $1.4 billion in spending. Given CXO’s ability to scale based on pricing and our expectations of an oil recovery during the back half of 2016, we expect capital expenditures to trend higher than expected during the second half of the year.

Expect to See Inorganic Growth During 2016

To date, CXO has acquired around 25,000 net bolt-on acres in the Delaware basin, Midland basin, and New Mexico Shelf. Management plans to continue making opportunistic acquisitions during 2016. CXO has a reputation of acquiring high quality acreage from companies that do not have enough capital to execute.

Valuation Is Attractive

CXO has outperformed many of its peers during 2015 but shares still fell 3.2%. Shares have fallen 40% from its highs in July 2014 (traded as high as $148.30) and we expect to see CXO approach these levels during late 2016.

Michael Berger, Founder and President,

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