Shares of Concho Resources (NYSE: CXO) slumped on Thursday, dropping more than 10% by 3:00 p.m. EDT after the company reported its second-quarter results.
Despite the implications of its plunging stock price, Concho Resources reported excellent second-quarter results. The Permian Basin-focused driller's adjusted net income more than doubled, to $77 million, or $0.52 per share, which was $0.09 per share ahead of expectations. Fueling that result was a 27% surge in production over the past year thanks to its high-return drilling program in the Permian.
In fact, Concho's production results have been so strong this year that the company increased its full-year guidance range. It now expects output to grow 24% to 26% versus last year, up from its prior guidance of 21% to 25% growth. Further, it can achieve that higher rate while maintaining its current spending plan.
The only red flag was that the company announced that it spent $600 million to buy an additional 12,400 net acres in the Midland Basin side of the Permian. While the company noted that this land was contiguous with acreage that it bought last year, it paid a hefty price of $48,400 per acre. For perspective, the company only paid $40,000 an acre for the land it bought in the same region last year. Meanwhile, rival Parsley Energy (NYSE: PE) recently made a huge deal on that side of the Basin, and also only paid around $40,000 an acre.
Aside from the premium purchase price, another concern is that production from this side of the Permian is turning out to be gassier than expected. That caused Parsley Energy to note that its production mix would only be 67% oil this year versus the 69% it initially expected.
That same problem plagued Pioneer Natural Resources (NYSE: PXD) this quarter, with the leading Midland Basin driller saying that it only expects its oil cut to be 58% this year. While that's up from 57% last year, it's below the 62% that Pioneer Natural Resources expected, which caused investors to pummel its stock this week.
Investors are growing worried that the Midland Basin side of the Permian might not be as oily as expected, which could impact cash flow in the future since oil fetches higher margins these days. Those concerns are weighing not just on Concho, but Parsley and Pioneer, as well. That said, this sell-off looks more like an opportunity to scoop up any one of these fast-growing oil stocks at lower prices since all three expect to deliver high-return growth for years to come at current oil prices, thanks to their prime positions in the still very oil-rich Permian.
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