Survey of Concho Resources
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To: Professor YenerFrom: Junyi XuDate: Feb.27, 2019Subject: Survey of Concho ResourcesI. Executive SummaryConcho Resources Inc. is a publicly-traded company based in Texas. It focuses on oil and natural gas production. The profit of natural resources is deeply influenced by the policy of the U.S. government and OPEC or many emergency cases. In 2014, the U.S. had a revolution in oil production. It hugely increased the number of production of oil and the oil price went down a lot. As a result, CXO experienced several years’ loss. However, recently, the price of oil went up again, and the profits of COX went up either.In the perspective of Corporate Governance, overall, I gave CXO 77 points. CXO has some problems in several aspects. In the aspect of protecting shareholders, CXO lacks enough measures to protect minority shareholders. In the aspect of Board of Directors, CXO lacks necessary independence. In addition, CXO should disclose more information convenient for investors.To better improve the situation, I suggest that CXO could take several steps to make its corporate governance perform better:(1) Set up rules to make sure that minority shareholders could voice their opinions,(2) Set up rule to avoid chairman and CEO are the same person,(3) Invite external lawyers or CPA to be independent directors,(4) Disclose detailed transactions,(5) Set up responsibilities for each Directors and Executive managers,(6) Make sure that stakeholders could suggest to BoD and executive management teams.II. Company BackgroundConcho Resources Inc. focuses on petroleum and natural gas exploration. Its main business is in Texas and Delaware States. In order to achieve maximized profits, its strategy is developing and exploring activities on its multi-year project inventory and pursuing acquisitions that meet its strategic and financial objectives.From the perspective of its Financial Report in 2018, it realized a huge progress in several aspects. First of all, its total assets increased about twice what it was in 2017. Besides, in 2016, its net income was below zero. But three years later, its net income was what it was in 2017 and it made a huge progress in operations. What’s more, its cash flow experienced a huge growth and its financial situation is much healthier as it has more cash to pay for dividends and debts. Also, because the U.S found new oil recently, resources industry will face growth in the next several years. Its main financial indexes are the following:Index/Year20182017Revenue$ 4,151 million$ 2,586 millionOperating Cash Flows$ 2,558 million$ 1,695 millionStock Price$ 102.79$ 150.22ROE12.18%10.72%ROI12.09%10.64%PE ratio7.6823.29Book/Mkt ratio1.092.51Management Team includes professions in their own professional areas. Team members all have at least a Bachelors’ Degree. Among them, Brenda Schroer, the CFO, has a CPA certificate in Texas. Keith Corbett, responsible for Engineer and Planning, is a senior engineer. One problem is that the diversity is not so good as almost all of them graduated from the University of Texas or Texas A&M University.
III. Corporate Governance ResultAfter the survey, I found that the level of Corporate Governance Performance of CXO is Precarious for the score is 76, which showed that CXO still needs a lot of work in order to improve its performance. The score for each part is shown in the following chart:[pic 1]First of all, CXO did not have a good performance in protecting Shareholder Rights. For example, not all shareholders attended every meeting the company held. As the Company Laws shows, shareholders have the right to take part in the process of decision making. The process of decision making is the process of holding important meeting. If shareholders, especially minority shareholders, could not attend meetings, they could not show their opinions to protect their own rights. So, not attending meetings will harm minority shareholders. Besides, the company did not make specific rules to help shareholders, like minority shareholders, to introduce their opinions sufficiently. When companies face merge or split-up, the cases which will harm shareholders’ rights mostly, they could not show their attitudes as rules do not have enough measures to help minority shareholders maintain their statues.Secondly, there are also lots of problems in governance of Board of Directors. To begin with, the Chairman of the Board, Tim Leach, also holds a concurrent post as CEO of CXO. As we know, the Board represents the interests of shareholders. And the Board is responsible for supervising whether management implements the strategy and whether the management impairs the interests of shareholders. However, when the chairman becomes CEO, the focus of him changes from being a supervisor to be a manager. He may consider his own interests, like raising his own wages, and thus will harm the interests of the company and shareholders. Besides, the president of Audit Committee is Steven L. Beal, who has served the company for a long time and was the former CFO of CXO. It will bring negative impacts either. If the director is an independent director who serves in external Accountant firms, his or her position will be neutral and thus will provide the public with neutral recommendations on the finance or accounting problems of the company. That is responsible to stakeholders.Thirdly, the company should disclose more materials than it now does. Though, the company has disclosed all the information the NYSE requires it to disclose, I still hold the view that the company should also disclose not required information like transactions. Some transactions, though, are not so important that will affect the situation of the company negatively. Shareholders still should know what the company is doing and decides whether to continue to invest before the company suddenly announces the trend that minority shareholders neglect. Besides, in the annual report of CXO, there are no detailed records of transactions. This may lead to mis-judging of the new trend of the company. In addition, the company does not show its main shareholders, for example, the shareholders who take control of more than 5% of shares. Without disclosing this kind of information, minorities will make wrong decisions if they want to invest in a company which is controlled by a big shareholder not a group of shareholders, as minorities would think that the company owned by a person is more stable. In a word, I hold the view that the company should disclose more materials.