Why the Concho Resources Permian Play Could Shine Even Brighter

Print Email

The Permian Basin has become one of the go-to areas for oil and gas investors. The quality of oil and the lower costs of extraction from start to delivery all add up to oil and gas companies feeling partly insulated from huge price swings in oil.

A new research report from SunTrust Robinson Humphrey noted that EOG Resources Inc. (NYSE: EOG) just reported to the Texas Railroad Commission a big well in Loving County in the Delaware Basin. According to the analyst report, the well ranks as one of the best they have ever seen in the Delaware. They also noted how this could easily impact four other companies drilling in the region.

The Permian reaches from just south of Lubbock, Texas, to just south of Midland and Odessa, extending westward into the southeastern part of New Mexico. Several component basins comprise the greater Permian Basin, with the Midland Basin being the largest. The Delaware Basin is the second largest, but it could be a big win for four other oil and gas players if SunTrust is right.

Concho Resources Inc. (NYSE: CXO) has a market value of more than $19 billion. It is considered one of the top energy plays in the Permian Basin, and it is considered one of the Wall Street favorites for that theme.

Concho is an independent oil and natural gas company with principal operating areas in the Permian Basin of southeast New Mexico and West Texas, where it owns about 600,000 net acres. It is rated as Buy at SunTrust Robinson Humphrey, and the firm has a whopping $175 price target on this stock. If SunTrust is proven correct, that is upside of almost 35%.

Interestingly enough, Concho’s consensus sell-side analyst price target from Thomson Reuters is down at $164.29, while the street-high price target is actually above $200.

Concho Resources has 624 million barrels of oil equivalent of proven reserves. Of that, some 57% is classified proved developed and 59% is oil. The company is said to be targeting to deliver 20% oil production growth this year, while investing within its cash flow. This view has been taken as a positive trait on Wall Street — the carefully managing growth and spending.

The company also is said to be in a position to restart the double-digit production growth next year, while many peers are struggling to generate enough excess cash flow to boost output. The SunTrust analysts feel that the company’s debt load is below average, as is the firm’s commodity price sensitivity, both of which are big positives for investors.

After Concho’s earnings report earlier this year, SunTrust Robinson Humphrey said:

On the call, Management noted they believe the next major theme in the oil patch will move away from M&A and towards execution. Though they still see opportunities in the Permian, we believe the real drivers moving forward will be successful delineation and IP rates. We welcome the change as it will shed some light on who overpaid for acreage in the land grab and which benches prove to be economic across the play. In the midland basin, Concho is moving heavily towards pad development, which should cause production to be a bit lumpy but improve efficiencies.

Deutsche Bank recently named Concho Resources among top Permian picks, but its target at that time was closer to $170.

Concho shares closed on Friday at $129.22, and they were seen up 1% at $130.50 in midday trading on Monday. The 52-week range is $99.24 to $147.55.