My Portfolio Isn’t Big Enough for Concho

05/21/2012 5:42 pm EST


Jim Jubak

Founder and Editor,

The stock has been sinking through little fault of its own, but there will likely be a better buying opportunity down the road, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

What to do about Concho Resources (CXO)?

Answering the question depends on weighing the negative global macroeconomic trends against positive company-specific developments. I think that exercise fits a lot of stocks these days. Company- or sector-specific good news is having a hard time getting a hearing amid the headline fear from Greece, Spain, and China.

The financial results Concho Resources announced for the first quarter on May 2 had a flaw or two. But the fundamental oil exploration and production results provided exactly the solid stuff that investors own this stock for.

Adjusted earnings climbed to $1.05 a share from 79 cents a share in the first quarter of 2011. That was 11 cents a share below Wall Street estimates.

Net income on a GAAP (Generally Accepted Accounting Principles) basis was just 30 cents a share, however, as the company took a big $126 million loss on commodity derivatives. That was almost $100 more than the company’ loss on similar derivatives in the first quarter of 2011.

Revenue climbed by almost 41% to $508 million. That was above the $485 million Wall Street consensus.

In contrast to those financials, Concho Resources production record in the quarter was spotless. Production for the first quarter rose to 6.9 million barrels of oil equivalent, a 32% jump from the first quarter of 2011.

The company began drilling 210 wells in the first quarter on its leases in the Permian Basin. Of the 66 completed in the quarter, all were successful. In the Delaware Basin, a less well-explored part of the Permian Basin and an area critical to the company’s growth, Concho Resources drilled 28 wells. Both of the wells completed in the quarter were successful. That’s not a very big sample, but it is encouraging.

After the quarter ended, Concho Resources announced on May 13 that it would buy the oil and gas resources of Three Rivers Operating Company for $1 billion in cash. Three Rivers owns 200,000 acres in the Permian Basin with an estimated reserves of 58 million barrels of oil equivalent, according to Concho Resources, and production of 7,000 barrels of oil equivalent a day.

I think the first-quarter results and the Three Rivers acquisition position Concho for continued participation in the current boom in land-based US oil production. The company had 387 million barrels of oil equivalent in reserves at the end of 2011 and leases on 533,509 net acres.

Production has grown by a compounded annual rate of 43% from 2006 through 2011. Reserves are up at a 38% compounded annual growth rate during that period. But that hasn’t stopped shares of Concho from being pounded in the last few months, as investors worry about falling oil demand and prices on recession in Europe and slowing growth in China.

The stock has, in fact sketched in a classic pattern of lower highs and lower lows over the last couple of months, with the February 22 high at $116 being followed by the April 27 high at $108.20 and the April 10 low at $95.21 being followed by the May 18 low at $85.90.

If Concho Resources paid a dividend, I would be inclined to wait out these macroeconomic worries about oil demand—but it doesn’t. And after adding Schlumberger (SLB) to my Jubak’s Picks portfolio on May 18, I’ve got a little more energy exposure (with Statoil (STO) and SeaDrill (DSRL), which do pay dividends) than I’d like in that portfolio in the current environment.

I’ll be selling Concho Resources out of that portfolio on the current bounce—the shares closed up 5.1% today—and wait for the next bout of worries to re-buy later in the year.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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