Time to sell this oil and gas stock

Concho Resources has been pounded in the last few months on worries about Europe and China.

By Jim J. Jubak May 21, 2012 5:47PM
Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)What to do about Concho Resources (CXO)?

Answering the question depends on weighing the negative global macroeconomic trends versus positive company-specific developments. I think that exercise fits a lot of stocks these days. Company or sector-specific good news is having a hard time getting a hearing amidst the headline fear from Greece, Spain, and China.

The financial results Concho Resources announced for the first quarter on May 2 had a flaw or two. But the fundamental oil exploration and production results provided exactly the solid stuff that investors own this stock for.

Adjusted earnings climbed to $1.05 a share from 79 cents a share in the first quarter of 2011. That was 11 cents a share below Wall Street estimates. Net income on a GAAP (generally accepted accounting principles) basis was just 30 cents a share, however, as the company took a big $126 million loss on commodity derivatives. That was almost $100 more than the company's loss on similar derivatives in the first quarter of 2011. Revenue climbed by almost 41% to $508 million. That was above the $485 million Wall Street consensus.

In contrast to those financials, Concho Resources' production record in the quarter was spotless. Production for the first quarter rose to 6.9 million barrels of oil equivalent, a 32% jump from the first quarter of 2011. The company began drilling 210 wells in the first quarter on its leases in the Permian Basin. Of the 66 completed in the quarter, all were successful. In the Delaware Basin, a less well-explored part of the Permian Basin and an area critical to the company's growth, Concho Resources drilled 28 wells. Both of the wells completed in the quarter were successful. That's not a very big sample but it is encouraging.

After the quarter ended, Concho Resources announced on May 13 that it would buy the oil and gas resources of Three Rivers Operating Company for $1 billion in cash. Three Rivers owns 200,000 acres in the Permian Basin with an estimated reserves of 58 million barrels of oil equivalent, according to Concho Resources, and production of 7,000 barrels of oil equivalent a day.

I think the first-quarter results and the Three Rivers acquisition position Concho for continued participation in the current boom in land-based U.S. oil production. The company had 387 million barrels of oil equivalent in reserves at the end of 2011 and leases on 533,509 net acres. Production has grown by a compounded annual rate of 43% from 2006 through 2011 and reserves are up at a 38% compounded annual growth rate during that period.

But that hasn’t stopped shares of Concho from being pounded in the last few months as investors worried about falling oil demand and prices on recession in Europe and slowing growth in China. The stock has, in fact sketched in a classic pattern of lower highs and lower lows over the last couple of months with the Feb. 22 high at $116 being followed by the April 27 high at $108.20 and the April 10 low at $95.21 being followed by the May 18 low at $85.90.

If Concho Resources paid a dividend, I would be inclined to wait out these macroeconomic worries about oil demand -- but it doesn't. And after adding Schlumberger (SLB) to my Jubak’s Picks portfolio on May 18, I've got a little more energy exposure -- with Statoil (STO) and SeaDrill (SDRL), which do pay dividends -- than I'd like in that portfolio in the current environment. I'll be selling Concho Resources out of that portfolio on the current bounce -- the shares closed up 5.1% Monday -- and wait for the next bout of worries to re-buy later in the year.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. post. The fund did own shares of Schlumberger, SeaDrill and Statoil as of the end of December. For For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

133
133 rated 1
286
286 rated 2
441
441 rated 3
737
737 rated 4
614
614 rated 5
606
606 rated 6
621
621 rated 7
441
441 rated 8
317
317 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.