Concho Resources Inc. (CXO)

[Timothy Smith]

Concho Resources is a Midland, TX based mid-cap E&P operator player participating in the Permian Basin of Southeast New Mexico and West Texas. Concho is one of the premier Permian operators with positions in the New Mexico Shelf, Delaware Basin (where it primarily targets the Bone Spring formation and the Texas Permian, that offer a combination of conventional oil plays and unconventional liquids-rich shale plays.

CXO is a pure Permian play with the Basin representing 100% of CXO's 386.5 MMBoe of estimated proved reserves at December 31, 2011, and 100% of the Company's 21.5 MMBoe production for the first nine months of 2012. The Company does have a diversified asset portfolio by having exposure to multiple high-return plays within the greater Permian.

Concho recently reported production growth of 24% in the third quarter 2012, but missed analyst expectations on both top and bottom lines. The stock may be oversold at currently levels, down approximately 23% from January 1, 2012 levels with a PEG ratio of 0.43.

Concho is currently feeling the squeeze of surging output coupled with limited pipeline and refining capacity, which is creating a discount for Midland crude prices relative to spot prices in Cushing, Ok, where the U.S. benchmark crude is delivered. As indicated previously in this article, this is spurring plans to build new and expand existing pipelines.

However, in the short-term, the risk is that this discount may cause smaller drilling programs.