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Why ‘Buy’ Recommendations for Concho Resources Have Increased

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Wall Street analysts’ recommendations

Based on Reuters data from 36 analysts tracking Concho Resources (CXO), 89% have given the stock “buys,” 11% have given it “holds,” and none have given it “sells.”

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“Buy” recommendations increased

Last month, the number of “buy” recommendations for CXO rose, according to data compiled by Reuters. Moreover, in the last month, the WTI Cushing-Midland spread entered into the negative. On February 15, this spread was at -$0.7. The WTI Cushing-Midland spread is crucial to CXO’s oil realized prices. Because of a transportation bottleneck and the rapid growth of production in the Permian Basin, WTI Midland—the benchmark for oil produced in this region—usually trades at a discount to WTI at Cushing. In August, the spread was as high as $18. A possible slowdown in US crude oil production growth may have dragged on the spread.

The fall in the spread will likely boost CXO’s oil realized prices in the current quarter. Moreover, the Midland and Delaware Basins have the lowest break-even points among US shale plays, according to data compiled by RS Energy Group. CXO’s upstream assets are located in these two basins. If oil continues its upward journey in 2019, with the WTI Midland almost on par with WTI Cushing prices, CXO—which has a production mix of 65% in oil—is likely to rise. Its only headwind will be natural gas prices.

Mean price target

The mean price target for CXO in the next year is $164.44, implying a potential upside of ~33.7% from its last closing level. The mean price targets of Pioneer Natural Resources (PXD) and Apache Corporation (APA), two other Permian Basin oil producers that are part of the S&P 500 Index’s (SPY) holdings in the upstream subsector, suggest potential upsides of 37.6% and 11.8%, respectively.

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