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Concho Resources Is Way Too Expensive


  • Concho Resources reported its Q3 results on Tuesday.
  • Investors liked the results, bidding up the stock price by 4.5% in the past couple of days.
  • From a discounted cash flow perspective, CXO is worth half, or less, of its existing market capitalization.

Concho Resources (NYSE:CXO) reported its Q3 results on Tuesday, October 31. The market seems to have liked the news. In the past 3 days, CXO’s stock price has climbed around 4.5%.

Here’s my problem, though. CXO has a market capitalization between $20 and $21 billion. And based on the numbers I see, I would struggle to justify half of that valuation.

Nowhere close to funding their own capital expenditures

Before we get into some valuation arithmetic, let’s look at CXO’s broader financial performance. Since 2012, CXO has consistently outspent its cash flow, as you can see in the chart below. The yellow line shows capital spending. The blue, orange, and gray bars show cash from operations, new debt, and new stock, respectively. The data are from CXO's 2016 and 2014 10-K reports.

We can see that cash from operations falls considerably short of funding capital expenditures. In each of 2012 through 2015, CXO took on $4.3, $3.3, and $2.1 billion in debt, respectively. In 2015 and 2016, CXO captured $1.5 and $1.3 billion in cash from issuing new stock. These are the only reasons CXO has been able to fund its capital spending program. Cash from operations simply hasn’t cut it.

What about 2017? Have we seen improvement year to date?

Not really. So far in 2017, CXO has generate $1.2 billion in cash from operations, but has spent $2.0 billion in capital expenditures. How has the company filled the gap? By selling $0.8 billion in assets and taking on $2.3 billion in debt.

That’s a classic growth play. Grow with other people’s capital. Forego profit dollars today, so you can capture many more profit dollars in the future.

The question is, where are these future profit dollars coming from? And at what cost is CXO capturing them? CXO is devouring other people’s

This article was written by

Oil and gas analyst with an quantitative background. I use data to tell the real market story. No hindsight bias. No confirmation bias. Just the data-driven truth about oil and gas markets and corporate financial performance.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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