Will Concho Resources’ Free Cash Flows Improve?



Concho Resources’ cash flows

Having discussed Concho Resources’ (CXO) production and debt level over the past 13 quarters, we will now analyze its cash flows here. In 2Q15, Concho Resources’ operating cash flow (or CFO) improved significantly to $363 million from $126 million a quarter ago. However, on a year-to-date basis, it fell by 43%. The fall was primarily due to lower oil and gas revenues. In comparison, Laredo Petroleum’s (LPI) 1H15 CFO dropped 52% over 1H14. SM Energy’s (SM) 1H15 CFO decreased 23% over 1H14. Gulfport Energy’s (GPOR) CFO decreased 31% over the same period. Concho Resources makes up 1.5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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Concho Resources’ free cash flows

Concho Resources’ free cash flows (or FCF), defined as operating cash flows less capital expenditure, have remained negative in the past 13 quarters. In 2Q15, despite falling energy prices, its FCF improved to a negative $357 million from a negative $673 million recorded in 1Q15. Compared to 2Q14, however, it displayed cash flow deterioration, when CXO’s FCF was a negative $136 million.

CXO’s capex decreased from 1Q15 to 2Q15. This combined with the improvement in CFO reflects higher 2Q15 FCF. Strong capex was driven by faster cycle times, strong well performance, and increased working interest in operated wells. CXO managed to generate $270 million in cash from financing activities in 2Q15, but used $632 million in investing activities during the quarter. Given its cash balance is negligible and energy prices remain low, CXO’s draw on cash appears unsustainable, unless it goes for additional funding or sells assets.

Free cash flow trend

Given its increasing capex trend since 4Q12, improvement in FCF seems unlikely in the immediate next quarters. Also given higher production guidance for 2015 and assuming no increase in CFO absent a recovery in energy prices in the short term, FCF should stay negative.


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