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Concho Tries to Keep the Recovery Going

Posted on Thursday, February 20th, 2020 by Sam Quirke

Concho Resources (NYSE: CXO), the Texas-based energy company, was one of the top-performing stocks in the S&P 500 on Wednesday after the company released promising Q4 results before the session that sent the stock up almost 8%. Non-GAAP EPS comfortably beat analyst expectations as did revenue while the latter showed year on year growth of more than 16%. The real headline-grabber, however, was the dividend raise that management announced. It’s one of the most positive signs a company can give to investors and Wall Street and says that they’re confident in the company’s future. And going off this week’s raise, management is super confident.

They declared a $0.20 quarterly dividend which is a full 60% increase on the previous dividend of $0.125. That helps explain why shares gapped up over 3% on Wednesday and kept going right into the session’s close. It’s great news for investors who might now breathe a little easier as it looks like the post-summer recovery might be able to continue.

Double Whammy

After trending down 40% from what had been close to all-time highs from October 2018 through last July, the stock took a double hit on the first day of August. Despite solid double-digit percentage growth in revenue, they missed on their earnings per share and a surprise tweet from Trump concerning an increase in tariffs sent energy stocks spiraling. Concho gapped down 20% to start the day and fell as much as 35% from pre-release and pre-tweet levels in the days that followed. There was damage done industry-wide and many names took even more heat, with the likes of Whiting Petroleum (NYSE: WLL) falling close to 40%.

Concho shares had managed to recover somewhat in the second half of last year and by the start of January had filled in most of that gap from the first of August with a 46% rally. However, through the start of this week, they’d dipped again and were down 20% from January’s peak recovery level. Wednesday’s action and management’s signals should do a lot to keep the stock on good terms with investors.

The company’s CEO, Tim Leach, spoke in detail about his plans to continue delivering returns to investors in the coming quarters; “During the fourth quarter, we delivered strong operational and financial performance, with oil volumes exceeding our guidance range and cash flow from operations totaling $801 million, excluding working capital changes. Our strategic priorities are to grow margins, grow free cash flow, grow distributions and advance our sustainability progress. We are off to a strong start with a disciplined, returns-focused capital program that is expected to increase oil production 10% to 12% year over year on a pro forma basis for asset sales. The capital program also enables us to strengthen distributions to shareholders, with a 60% increase to our quarterly dividend. With improving capital efficiency and a strong foundation of high-margin drilling opportunities, Concho is well-positioned to deliver strong returns for investors.”

Compared to Peers

For an industry that’s been under serious pressure in recent years, Concho’s stock is performing relatively well compared to many of its energy peers. For example, Whiting Petroleum has been unable to arrest the slide that started last July and its shares are down 80% in that time while Concho’s are only down 14%. Compared to many of the big energy names, Concho can hold its head high with a 530% increase in its stock since it IPO’d in 2007. In the same timeframe Chevron (NYSE: CVX) is only up 36%, ConocoPhillips (NYSE: COP) is flat and Exxon (NYSE: XOM) is down 25%. Many other energy names have gone out of business or are on the way out as suppressed energy prices have wreaked havoc with margins and profits.

For now, at least, Concho seems to be weathering the storm as well as any of them and better than most. With management raising the dividend, even with oil prices down 60% from 2008’s high, investors can consider getting involved with a degree of confidence that’s lacking in many other names.

Concho Tries to Keep the Recovery Going

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