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Concho (CXO) Lags Q4 Earnings Estimates, Cuts Capex View

Zacks Equity Research

After posting a string of positive earnings surprise for several quarters, Concho Resources Inc. CXO left investors disappointed this time around when it reported fourth-quarter results on Feb 19. The upstream player missed both top and bottom-line estimates on weaker-than-anticipated output and realized prices. Precisely, the largest Permian producer’s output of 307,097 barrels of oil equivalent per day (Boe/d) lagged the Zacks Consensus Estimate of 309,577 Boe/d. Further, the firm’s average crude price realization of $49.10 a barrel missed the consensus estimate of $60.  


As such, the Midland, TX-based producer posted adjusted net earnings per share of 94 cents, missing the Zacks Consensus Estimate of $1.10. Nonetheless, the bottom line improved from the year-ago figure of 66 cents. The company generated revenues of $1,067 million, lagging the consensus mark of $1,185 million. However, the top line jumped 37% from the year-ago level of $780 million. 


Concho Resources Inc. Price, Consensus and EPS Surprise


Concho Resources Inc. Price, Consensus and EPS Surprise | Concho Resources Inc. Quote


Volume Analysis

Concho Resources' average quarterly volume increased 45.5% year over year to 307,097 Boe/d. Of the total volume, 64.8% consisted of liquids. Daily oil output increased 53.2% to 198,957 barrels, while natural gas production totaled 648,837 thousand cubic feet (Mcf), up 33% year over year.


The acquisition of RSP Permian, which was completed on Jul 19, 2018 led to the expansion of Midland and Delaware Basin positions, thereby largely attributing to the production rise.


Realized Prices (Excluding Derivatives Effect)


The average realized natural gas price declined from $3.33 per Mcf in the year-ago quarter to $2.82. Average oil price realization came in at $49.10 per barrel, lower than $52.84 in the year-ago period. Overall, the company fetched $37.78 per Boe compared with $40.18 a year ago.


Operating Expenses & Income


While Concho’s production, depreciation, G&A, gathering, processing and transportation expenses increased on a year-over-year basis, the company realized gains on derivativesof $1,625 million against derivatives loss of $415 million in the prior-year quarter. This resulted in operating income of 1,937 million in the quarter under review vis a vis loss of $180 million incurred in the corresponding period of 2017. 


Dividend & Balance Sheet


Concho declared a quarterly dividend of 12.5 cents a share, payable on Mar 29, 2019 to its shareholders as of Mar 1, 2019.


As of Dec 31, Concho had a long-term debt of $4,194 million, representing a debt-to-capitalization ratio of 18.3%. The company’s liquidity ratio stands at 1.04. The Zacks Rank #3 (Hold) company currently has $242 million under its borrowing credit facility. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


2019 Guidance Revised


The recent pullback in commodity prices amid pipeline pinch, weakening demand and concerns surrounding economic slowdown has made Concho to rethink its strategy. The company now plans to slash capital expenditure view for 2019. Concho now forecasts its capex to be around $2.9 billion, reflecting a 17% decline at the midpoint of its prior guided range of $3.4-$3.6 billion, in an effort to boost cash flows and focus on shareholder value maximization. 


Concho now expects crude oil output growth to be 15% (versus prior forecast of 25%) in the fourth quarter of 2019 from the comparable period in 2018. Nonetheless, the company expects output to grow26-30% year over year in 2019.


For the first quarter of 2019, Concho foresees capital outlay in the band of $825-$875 million. Production in the quarter is expected within 300,000-306,000 Boe/d. 


Shale Earnings Hit by Meltdown in Oil Prices


Notably, another Permian pure play, Diamondback Energy, Inc. FANG, which released quarterly results on the same day, also missed earnings estimates owing to low price realizations. Also, Devon Energy Corporation DVN, which released quarterly results on Feb 19, came up with weaker-than-expected earnings amid commodity weakness. Further, the biggest Bakken producer Continental Resources Inc. CLR — which came up with quarterly results on Feb 18 — bore the brunt of falling crude prices in the fourth quarter, thereby missing earnings estimates.


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