On August 1, Credit Suisse and TD Securities reduced their target prices on Concho Resources (CXO) stock by $15 to $105 and $100, respectively. On July 31, CXO reported its second-quarter results. Its adjusted earnings reached $0.69 per diluted share, $0.02 less than the analysts’ consensus estimates.
On July 29, Raymond James reduced its target price by $15 to $185. Susquehanna and RBC cut their target prices by $2 and $13 to $141 and $145, respectively.
Analysts’ mean target price for Concho Resources is about $142.26. This implies a potential upside of approximately 45.6% based on its last closing price. Among the 36 analysts tracking Concho Resources, 92% recommended a “buy” or “strong buy.” None of the analysts recommended a “sell” on the stock.
Last quarter, Henry Hub natural gas prices averaged at their lowest level since Q2 2016. CXO’s realized natural gas prices excluding derivatives impact reached $1.16 per thousand cubic feet, which was more than halved on a sequential basis. A year ago, it realized $3.16 per thousand cubic feet of natural gas sell.
The bottleneck in the Permian Basin’s gas transportation infrastructure might have sharpened this fall. Henry Hub natural gas prices averaged 12.2% lower in Q2 2019 than in the previous quarter. However, stronger oil prices in Q2 2019 than in Q1 2019 helped CXO overcome natural gas’s losses. Last quarter, CXO operated with a production mix of 37% in natural gas and the rest in oil.
CXO’s guidance and hedging
In Q3 2019, total production is expected to reach between 316 Mboepd (thousand barrels of oil equivalent per day) and 322 Mboepd. As of July 31, 2019, CXO has hedged around 89.6% of oil production in the third quarter with its swaps contract at $56.96 per barrel. This calculation assumes that the production mix remains constant and total production is at the company’s guidance midpoint.
Concho Resources hedges around 85.3% of its oil production at a negative price differential of $2.32 per barrel than WTI at Cushing. Price differential factors such as the WTI at Cushing-Midland spread also impact the company’s profitability due to a transportation bottleneck.
CXO has hedged approximately 28.7% of its estimated total natural gas production by implementing swaps at $2.87 per MMBtu (million British thermal units). As a result, CXO’s stock price could react to any change in natural gas prices.