Shares of Concho Resources (CXO) tumbled more than 23% by 10:45 a.m. EDT on Thursday. Driving the downdraft in the Permian Basin-focused driller's stock was its second-quarter report and guidance for the balance of the year.
Renewed oil price volatility is wreaking havoc on Concho Resources' operations in the Permian Basin. Slumping crude prices during the quarter, as well as weaker prices for natural gas and NGLs, weighed on Concho's earnings. While the company posted $139 million, or $0.69 per share, of adjusted net income, that missed analysts' expectations by $0.03 per share. This underperformance came even though Concho's production rocketed 43% year over year thanks to a needle-moving acquisition and the company's drilling program.
The weakness in commodity prices is forcing Concho Resources to alter its 2019 drilling plans. The company will moderate its well completion activities in the second half. That will enable it to build up an inventory of drilled but uncompleted wells that it can bring online when pricing improves. This approach will negatively affect output in the near term. After producing 329,000 barrels of oil equivalent per day (BOE/D) during the second quarter, Concho sees this declining to a range of 316,000 BOE/D to 322,000 BOE/D in the third quarter. On top of that, weaker natural gas prices in the Permian will result in the company only realizing 60% to 80% of the national benchmark price during the quarter.
Concho Resources is battling several headwinds. Not only has oil-price volatility picked up, but gas prices have also been under pressure, due in large part to the lack of infrastructure in the Permian, which should get better as new pipelines come online in the next year.
Concho's being prudent in addressing these issues by moderating its activity level. This more conservative approach sets the company up to produce free cash flow even though pricing is weaker. It could eventually use those funds to buy back its cheaper stock.