An up-and-coming oil producer

Concho Resources has some risky positions, but there's good reason to believe in the company's oil projections.

By Jim J. Jubak Feb 14, 2012 4:28PM
Image: Oil derricks (© Comstock/Corbis)Back on Jan. 13 I added Pioneer Natural Resources (PXD) to my long-term Jubak Picks 50 portfolio. The logic, I argued in my post on that pick, was that Pioneer Natural Resources was part of the boom in U.S. oil production out of the tight shale formations of the Permian basin. 

Unlike wells drilled in natural gas shales, wells drilled in this region produce lots of liquids, and with oil prices stuck north of $100 a barrel and natural gas prices stuck well south of $4 a BTU, investors, I argued, want to buy liquid-rich producers such as Pioneer Natural Resources.

The market apparently agrees. This pick is up 13.5% since I made it on Jan. 13. At Tuesday's price of $110, it's closing in on the $115 target I set for December 2012. (At this point I'd say I'm likely to raise that target.)

I've got another play on the same story. Concho Resources (CXO) is a little smaller than Pioneer Natural Resources (a market cap of $11.7 billion versus $13.4 billion), a bit faster growing (with production in 2012 projected to climb by 28% at Concho versus 24% at Pioneer), slightly cheaper, and a bit riskier.

For fast-growing stocks like these, current price-to-earnings ratios aren't a good indicator of
whether they are expensive or cheap. An investor is buying growth, so the key question is at what price. The PE-to-growth rate ratio (PEG ratio) for Pioneer is a tiny 0.51. (For reference, famed growth-at-a-reasonable price investor Peter Lynch looked for stocks with PEG ratios below 1. Pioneer is way, way below that valuation target.) The PEG ratio for Concho is 0.38.

Before you buy anything that looks cheap, I think it's important to understand why. If you're buying something the market has priced as cheap, you're essentially saying the market is wrong.

So why is Concho cheap in comparison to Pioneer? It's mostly a question of higher risk at Concho because more of its operations are in relatively undeveloped parts of the Permian Basin. So, for example, Pioneer's Wolf Camp shale resource looks well on its way to proving out reserve estimates. Concho's positions in the Delaware Basin, in contrast, are still at what Australian investment bank Macquerie called the "Wild West" stage in a recent note.

The process of proving that a hydrocarbon reserve holds as much actual oil and natural gas as the seismic studies have indicated by drilling lots and lots of wells is called de-risking. And Pioneer is further along in that process than Concho at this point.

I think the geology of Concho's positions in the Delaware and other Permian basins looks good, and competitors drilling in those regions have turned in solid results. So I think the odds are that Concho really will produce the oil that management projects that it will. And if that's the case, then this is a $130 stock (target price for December 2012) selling for $112 on Feb. 14. (Macquarie thinks Concho is a likely acquisition candidate and puts the acquisition price at $165.) Concho Resources is scheduled to report fourth-quarter earnings on Feb. 22.

As of Feb. 14, I'm adding this stock to my Jubak's Picks 12-18 month portfolio with a December 2012 target price of $130.

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. The fund owned shares of Pioneer Natural Resources as of the end of December. 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. 
Tags: CXOoilPXD
6Comments
Feb 14, 2012 6:03PM
Feb 14, 2012 6:46PM
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But does this increased production reduce our dependence on foreign oil?
If not, why?
Feb 15, 2012 2:03PM
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Take a look at Statoil (STO), it's got dividends, growth and international exposure

If you're looking for stability and not gains growth.

 

STO has made some big finds this year that have made up for declining production of the last few years, but even with them, they won't be producing past their peak output.

 

I like that stock as a fixed income + foriegn capital appreciation play. It's priced in Norweigian, you'll get the gain in dollars from their stronger currency.

Feb 15, 2012 11:10AM
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Take a look at Statoil (STO), it's got dividends, growth and international exposure
Feb 16, 2012 6:56PM
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What is this I hear about Canadian stocks on the Toronto Exchange not paying dividends to foreign investors?

Mr. Jubak, could you please explain to me the correct way to invest in Canadian stocks? And am I blowing smoke that Canadian stocks are relatively safe and undervalued? I'm looking for pure plays that might not be on one of our exchanges. I am also wanting to know if Canadian companies do indeed pay less corporate taxes and if IRA's get any Canadian benefits, such as dividend payout or no foreign tax.
 
 I think it would make a good column. Just explain everything including the kitchen sink, such as the advantage of the Roth IRA for gains that appreciate markedly versus regular IRA's for the tax benefit on holdings such as cash. And it seems that regular IRA's won't help much unless there is a big drop off in reportable retirement earnings.

Also, there was a Canadian-US tax agreement passed (2001?) that supposedly made it a lot easier to invest in Canadian stocks. Please reveal the ramifications of that.

 And I see your oil stocks did nicely today. My CNQ has reversed and made about 5% the last two days and I'm in the black. I'm in the black on almost all six stocks I picked last week.


Which reminds me, another thing to talk about is selling stock. I'm a lot better at buying than selling. I know you've probably written on that subject a few times, but I'm listening. Hint, hint. And what is your take on my theory that November elections are going to cause a market effect, or is that something that can be disregarded?

And thanks for all your columns. I'm trying to get number one son set up in a Roth IRA brokerage account. He's 23 years old, and I told him I would match the first check he put in there. He's kinda amazed that I occasionally make more money during a month in stocks than in my job. I did so this week if tomorrow stays flat. I also grew my IRA 30% over the last three years. Sometimes I get tempted to leverage with puts and calls, etc. I just think I'm too old for that and ain't rich enough. And my IRA won't allow it, which is something else you can add to a column on investing in Canada.

Peace, out.

Feb 15, 2012 2:36AM
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Here is my one and a half cents worth of a cheapy oil producer: CNQ, Canadian Natural Resources, $35?

 

Today it pulled back 4%. Analysts say it's a blue chipper, but neutral on buying so it's a hold. I say Canadian stocks are going to heat up. Buy it in an IRA portfolio to avoid any foreign tax and check on it weekly. Buy more on any major downturn of say, 10% from this starting price. Sell around August and buy back in around January. I'm thinkin' there's gonna be an Obama election effect somewhere up ahead. But I'm smokin' rabbit tobacco here, so tweak the dates.

 

Legal disclosure: I don't usually know too much about what I'm talking about but I'm lucky as all get out. And I just bought 100 shares two days ago.

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