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Morningstar | Concho Lifts 2019 Guidance After Barnstorming 1Q, but Shares Fairly Valued

Concho Resources delivered production of 328 thousand barrels of oil equivalent per day in the first quarter, which was 7% higher sequentially and 44% higher year over year. This beat our forecast of 313 mboe/d and was well above the previously guided range of 300-306 mboe/d.

The surprise was attributed to strong production from large-scale projects that came online earlier than expected. As a result, management increased guidance for full-year production growth to 23%-27% from 21%-25%. There was no change to the annual budget of $2.8 billion-$3 billion, even though the first-quarter outlay exceeded the top end of guidance. Concho’s spending was always intended to be front-loaded this year, and management insists that the firm will stay within budget. It still plans to drop the rig count from 33 to the low 20s going into summer and is willing to go even further if necessary (despite the recent uptick in crude prices). The firm also has the option to reduce participation in nonoperated projects to ensure that spending stays on target.

After incorporating these results, we have increased our fair value estimate by $5 per share to $112. This was primarily driven by expectations for higher near-term crude prices as well as improved long-term basis differentials. Concho has already secured waterborne pricing for about 25% of its oil output beginning in late 2019, locking in Brent-like pricing. For the remainder, expanding pipeline capacity should keep Permian pricing at or above West Texas Intermediate from 2020.

We are more bearish on the benchmark itself, as the recent surge in pricing does not look sustainable based on U.S. activity levels (see "OPEC and U.S. Shale: The Great Tug of War Continues" for details). Our midcycle price for WTI is unchanged at $55/bbl, and at that level Concho shares look fairly valued. That said, at $60 WTI our fair value estimate would be $135 per share, almost 20% above the current level.