Concho Resources Inc.'s Sept. 3 announcement that it had reached an agreement to sell its New Mexico assets for $925 million and would initiate a $1.5 billion stock buyback program was met largely, but not entirely, by analyst approval.
In their reviews of the Concho's moves, industry observers credited the company for reducing its asset base to its core positions in the Permian Basin and for undertaking a move that would likely please its shareholders. The agreed-upon sale price with privately-held Spur Energy Partners LLC also impressed, as it was higher than many had anticipated.
"CXO agreed to sell its New Mexico Shelf (Yeso) assets … for $925 million, above our $725.0-$875.0 million valuation," Williams Capital Group Principal Gabriele Sorbara said. "The assets sold for $37,000 per flowing boe/d. Based on $30,000 per flowing boe/d, we estimate Spur paid $1,750 per undeveloped acre and about 5.3x 2020 cash flow, which is rich for mature, higher cost assets."
Concho said in a statement announcing the deal that 60% of the proceeds from the transaction would go towards debt reduction, with 40% going to its new share buyback program.
"The share repurchase program," CEO Timothy Leach said, "demonstrates our continued confidence in our strategy to generate sustainable oil growth and strong cash flow, and reflects our commitment to delivering long-term value to our shareholders.”
SunTrust Robinson Humphrey gave somewhat mixed reviews to Concho's plans, calling it a "responsible … decision in today's tumultuous energy market." After having its stock pummeled as a result of a less-than-inspiring production update during its second quarter earnings call, Concho now appears to be honing in moves it believes will re-instill investor confidence. While the stock has rebounded somewhat after losing $31 in just three trading days after its Aug. 1 call, it remains well below its July 31 closing price of $97.68.
"While we believe today's asset sale, share repurchase program, and returns focus could boost the stock in the near term, we remain slightly skeptical on the longer term result," SunTrust said.
Other analysts were more positive. Sorbara said he expects Concho's shares to "outperform" with the announcement of the asset sale and stock buyback program, while Mizuho analyst Paul Sankey said the company remained on solid footing for the long term.
"We see the issues having faced CXO that manifested with 2Q19 as resolvable, and the company's resource length as providing optionality/opportunity to bring value forward," he said. "The update today is a good first step to getting the stock back on track."
The stock, however, did not get on track immediately. Instead, it was down 4.2% to $70.08, largely due to Concho's Sept. 3 revisiting of its poor second quarter results. The company said the combination of less drilling activity and spacing test underperformance made its oil growth guidance from a range of 27% to 31% to a range of 22% to 26%.
