Shares of Concho Resources Inc. nosedived after the company's CEO said it will take a "more modest" approach to production growth and capital spending as it focuses on free cash flow and returning money to investors.
Concho's stock was down $23.73, or more than 24%, on the New York Stock Exchange on Aug. 1 shortly after Chairman and CEO Timothy Leach said Concho would look to sell off noncore assets and operate within a smaller budget range.
"This year was a transition year for us, and we entered the year harder on capital and also harder on production," Leach said. "And so when oil prices came down from where they were, like last year, we've reduced our capital budget and our capital budget range."
Leach said the company's response to a lower price environment this year would help it in 2020 and beyond.
"We feel very confident that landing '19 where we said … sets up for the 2020 and beyond as the way we described it in the past, as a more modest capital deployment on our properties, double-digit growth, and increasing amounts of free cash flow," Leach said.
After acquiring RSP Permian in 2018 to become one of the largest producers in the Permian Basin, Concho is now looking for ways to reduce its asset base to add capital and focus on its core production areas.
"We are focused on actively managing our portfolio to bring value forward to shareholders and reinforce our flexibility in a lower price environment," Leach said. "Last year, we completed the RSP acquisition, enhancing free cash flow generation of our machine. And this year, we are looking to high-grade portfolio through trades and sales."
Concho is transitioning to full-field development across all of its assets, Leach said. While the company surpassed its guidance with average production of 329,000 barrels of oil equivalent per day in the second quarter, the CEO noted that extremely low gas and NGL prices had proved to be a drag on the company's earnings.
Leach said Concho's two major objectives are to complete 2019 within its announced budget range and to set the company up for a "free cash flow inflection" in 2020.
"Our outlook for oil growth and cash flow in 2020 gives us confidence in our building to reduce debt and deliver increasing returns to our shareholders," the CEO said. "Our assets are in the best part of the Permian and support our commitment to delivering value to our shareholders now and in the future. That means prioritizing capital discipline, focusing investments to deliver the greatest return, finding ways to increase productivity and decrease cost, and maintaining financial strength and flexibility."
For the quarter, Concho reported $139 million in adjusted net income, or a profit of 69 cents per share. That was down from $185 million, or $1.24 per share, in adjusted net income in the second quarter of 2018 and missed the S&P Global Market Intelligence consensus estimate of 71 cents per share.