Oil & Gas Stocks

Concho Resources Inc Valuation – March 2019 #CXO

Company Profile (excerpt from Reuters): Concho Resources Inc., incorporated on February 22, 2006, is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company’s four operating areas include the Northern Delaware Basin, the Southern Delaware Basin, the Midland Basin and the New Mexico Shelf. As of December 31, 2016, the Company’s operations were focused in the Permian Basin, which underlies an area of Southeast New Mexico and West Texas approximately 250 miles wide and 300 miles long. The Permian Basin is an oil and natural gas producing region in the United States and is characterized by multiple producing horizons and enhanced recovery potential. The majority of the rigs running in the Permian Basin are drilling horizontal wells. As of December 31, 2016, the Company produced approximately 55.1 million barrels of oil equivalent (MMBoe) of oil and natural gas.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CXO – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $20,771,509,312 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.04 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 97.50% Pass
6. Moderate PEmg Ratio PEmg < 20 23.04 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.10 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.04 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 79.13 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $4.49
MG Growth Estimate 8.54%
MG Value $114.93
Opinion Fairly Valued
MG Grade D+
MG Value based on 3% Growth $65.17
MG Value based on 0% Growth $38.20
Market Implied Growth Rate 7.27%
Current Price $103.55
% of Intrinsic Value 90.10%

Concho Resources Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $2.86 in 2015 to an estimated $4.49 for 2019. This level of demonstrated earnings growth supports the market’s implied estimate of 7.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Concho Resources Inc revealed the company was trading above its Graham Number of $83.04. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 23.04, which was below the industry average of 58.42, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-30.71.

Concho Resources Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$30.71
Graham Number $83.04
PEmg 23.04
Current Ratio 1.04
PB Ratio 1.10
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $1,409,000,000
Total Current Liabilities $1,356,000,000
Long-Term Debt $4,194,000,000
Total Assets $26,294,000,000
Intangible Assets $2,243,000,000
Total Liabilities $7,526,000,000
Shares Outstanding (Diluted Average) 199,155,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.27
Dec2018 $13.25
Dec2017 $6.41
Dec2016 -$10.85
Dec2015 $0.54
Dec2014 $4.88
Dec2013 $2.39
Dec2012 $4.15
Dec2011 $5.28
Dec2010 $2.18
Dec2009 -$0.12
Dec2008 $3.46
Dec2007 $0.38
Dec2006 $0.59
Dec2005 -$0.70
Dec2004 -$3.48

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.49
Dec2018 $4.35
Dec2017 $0.16
Dec2016 -$1.90
Dec2015 $2.86
Dec2014 $3.94
Dec2013 $3.24
Dec2012 $3.44
Dec2011 $2.80
Dec2010 $1.48
Dec2009 $0.99
Dec2008 $1.05
Dec2007 -$0.32
Dec2006 -$0.69
Dec2005 -$1.16
Dec2004 -$1.16

Recommended Reading:

Other ModernGraham posts about the company

Concho Resources Inc Valuation – June 2018 $CXO
Most Overvalued Stocks of the S&P 500 – March 2017
Concho Resources Inc Valuation – Initial Coverage $CXO

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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