Concho Resources, Inc. :CXO-US: Earnings Analysis: Q3, 2016 By the Numbers : November 10, 2016

Concho Resources, Inc. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of Concho Resources, Inc. – Linn Energy, LLC, Pioneer Natural Resources Company, Legacy Reserves LP, Laredo Petroleum, Inc., Energen Corporation, Apache Corporation, ConocoPhillips, Clayton Williams Energy, Inc. and Memorial Production Partners LP (LINEQ-US, PXD-US, LGCY-US, LPI-US, EGN-US, APA-US, COP-US, CWEI-US and MEMP-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 430.55 million, Net Earnings of USD -51.15 million.
  • Gross margins widened from -1.61% to 3.64% compared to the same period last year, operating (EBITDA) margins now 61.11% from 56.96%.
  • Year-on-year change in operating cash flow of -30.99% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from -14.57% to -8.79%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-09-30 2015-12-31 2016-03-31 2016-06-30 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 463.47 389.15 283.56 396.3 430.55
Revenue Growth (%YOY) -33.81 -34.51 -31.43 -26.26 -7.1
Earnings (mil) 177.81 -0.78 -1020.48 -265.69 -51.15
Earnings Growth (%YOY) -41.05 -100.6 -13819.82 -120.52 -128.76
Net Margin (%) 38.36 -0.2 -359.88 -67.04 -11.88
EPS 1.49 -0.01 -7.95 -2.04 -0.38
Return on Equity (%) 11.78 -0.05 -62.31 -17.62 -3.12
Return on Assets (%) 5.76 -0.02 -33.96 -9.58 -1.82

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Market Share Versus Profits

Revenues History
Earnings History

CXO-US‘s change in revenue this period compared to the same period last year of -7.10% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CXO-US is holding onto its market share. Also, for comparison purposes, revenues changed by 8.64% and earnings by 80.75% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus


Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from -1.61% to 3.64%, while operating margins improved from 56.96% to 61.11% over this period. For comparison, gross margins were -4.52% and EBITDA margins 57.87% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost


Cash Versus Earnings – Sustainable Performance?

CXO-US‘s change in operating cash flow of -30.99% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings


Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from -14.57% to -8.79%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 58.59% to -18.93%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Concho Resources, Inc. engages in the acquisition, development and exploration of oil and natural gas properties. Its operations focuses on the Permian Basin region of Southeast New Mexico and West Texas. The company was founded on February 22, 2006 and is headquartered in Midland, TX.

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