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This Oil Stock Has Quickly Gotten Back on Track

By Matthew DiLallo - Updated Oct 30, 2019 at 5:26PM

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Concho Resources' third-quarter results show a dramatic improvement from the prior period.

Concho Resources (CXO) stumbled badly in the second quarter, which caused its stock to plunge earlier this year. However, the energy company seems to have quickly straightened things out. That was one of the key takeaways from the Permian Basin-focused oil producer's third-quarter earnings report.

Drilling down into Concho Resources' third-quarter numbers


Q3 2019

Guidance or Expectations


330,000 BOE/D

316,000 to 322,000 BOE/D

Adjusted earnings (loss) per share



Data source: Concho Resources. BOE/D=barrels of oil equivalent production per day.

Concho Resources delivered an unexpected gusher of production during the third quarter, as its output came in well above the top end of its guidance range. That was quite a surprise, because the reason the company's stock plummeted following the release of its second-quarter results was that it expected weaker output in the second half of the year. Instead, total production rose 15% year over year as the company's focus on drilling wells farther apart paid dividends. Concho Resources also benefited from a notable uptick in gas production, which surged 21% thanks to greater availability of infrastructure. Oil output, meanwhile, rose 12% to an average of 206,000 barrels per day.

The company also did an excellent job driving down costs. Overall, it reduced its controllable cash costs per unit by 3% year over year. Meanwhile, it surpassed its year-end 2019 target for well-cost reduction, which fell 20% compared to the first half of the year. It sees that metric falling another 6% for 2020.

Those two factors helped the company somewhat offset the impact of lower commodity prices, though weak gas prices caused its earnings to fall short of expectations. Concho, however, did generate $706 million of operating cash flow, which more than covered its $670 million of development costs.

The sun setting behind an oil pump

Image source: Getty Images.

What's ahead for Concho Resources

The oil company does expect its production to slide during the fourth quarter to a range of 318,000 to 325,000 BOE/D. However, that's entirely due to the planned sale of its assets in the New Mexico Shelf. Without that impact, Concho's production would likely be in the range of 334,000 to 341,000 BOE/D during the fourth quarter.

That asset sale, however, will give the company the cash to pay down debt and return more money to investors above its current dividend. It intends to use 60% of the $925 million in proceeds to pay off debt, and the rest to jump-start its recently authorized $1.5 billion stock buyback program. That's enough to retire about 11% of its outstanding shares at the current price.

Concho Resources then plans to use its growing free cash flow to buy back more shares over the next year. In its view, it can generate $350 million to $750 million in free cash flow next year if oil is between $50 and $60 per barrel, which it could funnel toward the repurchase program. Driving its ability to produce a gusher of excess cash at those oil prices is its rising production against falling costs.

Back in the driver's seat

Concho Resources' third-quarter results prove that its slight strategy shift is paying dividends. The company refocused its efforts on drilling wells that were farther apart, which enabled it to produce stronger results. Add in its cost-reduction initiatives, and the company is on track to generate a lot of free cash flow next year, which it can use to buy back its beaten-down shares. That approach could drive big gains in Concho's stock over the coming year.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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