MIDLAND Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Concho Resources Inc earnings conference call or presentation Thursday, July 30, 2015 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Megan Hays Concho Resources Inc. - Director of IR * Tim Leach Concho Resources Inc. - Chairman, President & CEO * Jack Harper Concho Resources Inc. - EVP ================================================================================ Conference Call Participants ================================================================================ * David Tameron Wells Fargo Securities, LLC - Analyst * Mike Kelly Global Hunter Securities, LLC - Analyst * David Deckelbaum KeyBanc Capital Markets - Analyst * Pearce Hammond Simmons & Company International - Analyst * John Freeman Raymond James & Associates, Inc. - Analyst * Scott Hanold RBC Capital Markets - Analyst * Brian Singer Goldman Sachs - Analyst * Drew Venker Morgan Stanley - Analyst * Jason Smith BofA Merrill Lynch - Analyst * Jeffrey Campbell Tuohy Brothers Investment Research, Inc. - Analyst * Ipsit Mohanty GMP Securities LLC - Analyst * Neal Dingmann SunTrust Robinson Humphrey - Analyst * James Sullivan Alembic Global Advisors - Analyst * David Heikkinen Heikkinen Energy Advisors - Analyst * Jeffrey Robertson Barclays Capital - Analyst * Paul Grigel Macquarie Research Equities - Analyst * Michael Scialla Stifel Nicolaus - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to Concho's second quarter earnings conference call. (Operator Instructions) Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Megan Hays, Director of Investor Relations. Ma'am, you may begin. -------------------------------------------------------------------------------- Megan Hays, Concho Resources Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you very much. Good morning. Thank you for joining Concho's second quarter conference call. Joining me today in Midland is the Concho senior management team. In addition to yesterday's earnings release we have posted additional information in our earnings slide presentation that is available on our website. Before I turn the call over to Tim, please be reminded that we will make forward-looking statements this morning. Please refer to the forward-looking statement and other disclaimers contained in our earnings release and on slide 2 of today's presentation. Also we will reference certain non-GAAP measures. How we calculate these measures and reconciliations to the comparable GAAP measures are provided in the earnings release and the presentation. With that, I'll turn it over to Tim. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thank you. Good morning. Today our industry is facing headwinds as commodity prices move lower. The outlook appears uncertain. And it seems there are more variables than ever influencing corporate decisions and market volatility. At Concho, we're navigating the commodity downturn by staying committed to our business strategy, developing our high quality Permian assets, delivering profitable growth and maintaining a strong financial position. As you saw in yesterday's release, we're achieving differentiated performance and demonstrating that our strategy works through the cycles. Let's start on slide 3 with a review of the key highlights for the quarter. For the second quarter we reported record production volumes, lower cost and operational efficiencies throughout all of our assets. Total production for the second quarter averaged 147,000 BOEs per day. Production was more than 5,000 BOEs per day above the high end of our guidance range and represented an 11% increase over the first quarter. Our crude oil production increased by 45% year-over-year. During the quarter our drilling program added nearly 10,000 barrels of daily oil production compared to the first quarter. These outstanding results reflect the strength of our assets and the team's relentless focus on enhancing value by drilling and completing wells faster, improving completion techniques and increasing well productivity. The quarter's operational performance translated to a strong financial result. EBITDAX for the second quarter was $458 million. Unit cost including lease operating expense, DD&A and G&A were lower year-over-year. Both unit LOE and G&A decreased compared to the first quarter of 2015. For full-year 2015 we again raised our guidance for production growth as a result of our strong well performance and the efficiency gains we have achieved this year. We expect to deliver about 25% annual growth, up from the 20% target provided last quarter while maintaining our $2 billion capital program. Commodity price volatility is not new to the industry and Concho's got a track record of adapting and improving capital returns during challenging times, much like we've done in previous cycles. We've built a dominant position in one of the most prolific oil and natural gas basins in the United States. We've identified a deep inventory of drilling locations and maintained a strong balance sheet along the way. In the recent down cycle we demonstrated our operational flexibility by trimming the original capital budget by a third, from $3 billion to $2 billion. And due to the productivity of our wells, we've nearly achieved our original growth target. Through the first half of the year we've invested about two-thirds of our 2015 capital budget. That's resulted in dramatic performance and efficiency gains. While this optimization is a priority, so is capital discipline. Our spend rate will now slow dramatically in the second half and we expect to land our base budget within the $2 billion range. As a result of the reduced spending in the second half, you'll see flatter production for the remainder of the year and growth resuming in 2016 as we execute a drilling program that's targeted within cash flow. At Concho we manage for the long term. The cycles remind us that the industry is prone to volatility and that we can't control the price of our commodity. So we've built a scalable business with robust economics, even at these price levels. This enables us to maintain our efficient drilling machine, a benefit of our straightforward hedging strategy and our operational flexibility, so we can take a measured approach to further slowing down and focusing on maximizing efficiencies. Turning to slide 4, I'm proud of the results our team delivered this quarter. We continue to see strong momentum from our horizontal program in the Delaware basin. For the second quarter, horizontal production averaged about 82,000 BOEs per day, representing a 66% increase year-over-year and an 18% increase over the first quarter of 2015. Cash operating expenses are shown on slide 5. Per unit costs continue to trend lower, reflecting lower production costs, field-level improvements and higher volumes. Now let's review our core areas, turning to slide 6. We'll start with the Northern Delaware basin. We're running 10 rigs here today. Overall efficiency has improved with drilling days down 15% year-over-year to approximately 23 days per well. In addition to drilling faster, we're optimizing completion methods and increasing recoveries and returns. Three quarters ago we highlighted the productivity gains from enhanced completions in the second Bone Spring formation. Our team has achieved similar improvements in the oil-rich Avalon shale in Lea County, outlined on slide 7. The Avalon shale is roughly 1,000 feet thick, providing opportunity to target an upper and lower section. Our current inventory for the Avalon assumes only four to six wells per section, and we believe there's upside to further build the inventory as we test multi-zone and down spacing potential. We have at least 180 days of performance data from multiple Avalon wells where we've used the bigger completions. Our chart on slide 8 illustrates the production uplift from greater completion intensity. On average, cumulative production per well increased more than 60% over the first 180 days of production compared to the wells we've completed with the base design. Our total well cost for enhanced completions averages about $6 million, or an incremental $0.5 million compared to the base average. This is a highly profitable program for us, generating 70% rates of return at $60 oil. We plan to drill 25 wells to 30 wells in this area during calendar 2015. In the Southern Delaware basin on slide 9, we're running two rigs today. A benefit of our scale in the Permian is our ability to transfer success from one asset to another. We've shortened the learning curve in the Southern Delaware with drilling days down compared to a year ago. In addition to drilling faster we're realizing completion improvements and optimizing well spacing. On to slide 10, we're also running two rigs in the Midland basin, focusing on long lateral development and delineating the multi-zone Wolfcamp and Spraberry across our position. Our Midland basin assets are primarily held by production, which provides operational flexibility as we refine our drilling completion methods to effectively recover more oil. Moving on to the New Mexico Shelf on slide 11, where we're currently running two horizontal rigs. We're drilling faster on the Shelf with feet drilled per day increasing 11% year-over-year. And let's not forget this asset has been one of the bedrock assets for Concho since the IPO and still continues to be a workhorse that delivers solid results quarter after quarter. On slide 12, capital expenditures excluding acquisitions were $565 million in the second quarter, down 23% from the first quarter. In total we're running 16 horizontal rigs compared to a peak of nearly 40 rigs in 2014. In the first half of 2015 we completed the work from the ramp in activity that started in 2014. With the remaining work we have planned and the current service costs, we expect drilling capital and cash flow to be in balance as we continue through the second half of 2015. We've recently added to our hedge position. For crude oil in the second half of 2015 we're approximately 75% hedged at $75 per barrel. For 2016 we now have hedges covering 18 million barrels of oil at $76 per barrel. And looking ahead, I want to provide some insight into how we're thinking about next year. We're committed to executing a disciplined drilling program, ensuring that the capital we're investing delivers value to our shareholders as we maintain a strong financial position and advance operational efficiencies. The current outlook for price of crude suggests another challenging year for our industry, further impacting activity levels. At today's forward curve for oil we expect to generate another year of production growth in 2016 while targeting the capital program that's within cash flow. This implies less capital in 2015 and highlights the improving capital efficiency of our drilling program. I'll conclude on slide 13. The Concho strategy cycle-tested. We've been successful at assembling some of the highest quality assets in the Permian and growing our low-risk drilling inventory. Our balance sheet's solid, our drilling program's delivering top-tier performance, and our people are constantly improving the business. Drilling days are down, well performance is improving, the cost structure is aligning with the current reality of the commodity price environment. So we're well positioned to come out of this cycle stronger than ever. And more than ever before, choosing the right team is probably the most important part of the investment decision that you will make. So thank you for your confidence in Concho, and I'll now turn the call back over to the moderator, and look forward to the Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of David Tameron of Wells Fargo. Your line is now open. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [2] -------------------------------------------------------------------------------- Can you just, I'll go with the M&A question. Can you just talk about -- obviously you were I guess public in saying that you were out looking for assets. But so is everybody else. Can you just talk about what you're seeing in that environment and opportunities? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Tell me your preamble again. What was the first thing you said? -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [4] -------------------------------------------------------------------------------- About M&A, sorry. Just about the assets. There was -- let me rephrase then. (Laughter) There was a lot of chatter on our side that Concho was going to be out looking for assets. Part of the reason you raised equity was to go buy something. So you can address that, whether or not you choose to address that, that's fine. But, bigger picture can you just talk about the M&A, and what you're seeing in that arena? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Yes, sure. We've had the philosophy for a long time that you use your cash flow to drill and you use your balance sheet to take advantage of opportunities. And that's why we think it's important to maintain a strong balance sheet. And in this environment I think we're seeing more opportunities to do the things we like to do to grow. And historically in these kinds of down cycles it's been the time that we've been able to add good assets to our company. And so that's no different than it's been in the past and we're as active as we've ever been at trying to find good things for our shareholders. I would say that everything's still - the big deals still look expensive to us. And really the focus of where we're finding most of our opportunity is within our core areas in the smaller sized blocking and tackling things that enhance the stuff that we're already doing. So it's -- -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [6] -------------------------------------------------------------------------------- Okay. And is it fair to say you've done -- it looks like you've done a little more recent lease sales. Is that the type of blocking and tackling, so smaller pieces like that? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [7] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [8] -------------------------------------------------------------------------------- All right. I just had a couple so I'll let somebody else jump on. All right, thanks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [9] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from Mike Kelly of Global Hunter. Your line is now open. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [11] -------------------------------------------------------------------------------- Hey, good morning. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [12] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [13] -------------------------------------------------------------------------------- I'll try to figure out so I actually get an answer from you, Tim. On 2016's outlook here, if you look at 2015 you had a 35% cut in the CapEx budget and achieved 25% growth or will achieve. I'm really just curious to see on 2016 it looks like just ballpark figures that you could have a pretty similar CapEx cut, 2016 versus 2015, if you want to stay within cash flow. And I want to get a sense on the efficiency front comping maybe efficiencies you expect to see in 2016 versus 2015 and what that could ultimately translate to in terms of potential growth? Or how we should think about next year's program on a lower CapEx and what that could do ultimately for volumes. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [14] -------------------------------------------------------------------------------- I mean one thing I want to make sure that you hear me say is that we think that in this environment we can stay within cash flow in our drilling program and grow our production profile. I think that's an important bullet point. When you're comparing 2015 and 2016 I think the other thing you have to remember is 2015 we were coming off a very large ramp that began in 2014. So a lot of the work that we began in 2014 spilled over and we had lots of production coming online the fourth quarter of last year, the first quarter of this year. So timing's really important when you look at the 2015 versus 2016 versus 2014 for that matter. So I agree with you that in a lower commodity price environment, it looks like our capital budget will be smaller again in 2016 than it was in 2015 but we are making very good wells. The enhanced completions are being applied across all our assets and in almost every well that we're drilling. So I think those kind of efficiencies give us the confidence that we think we'll be able to grow in 2016 staying within cash flow. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [15] -------------------------------------------------------------------------------- Okay. Great. And, follow-up on that, just curious what we should expect to see going forward on the enhanced completion front. You've really highlighted pretty drastic improvements in Second Bone and now the Avalon. If you could highlight of whether you're targeting other formations here or you're just kind of keep hammering on these two formations for the time being? Thanks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [16] -------------------------------------------------------------------------------- No, I mean, we are having success in all of our assets in all the different zones, and highlighted two. I mean we were talking before the call that it's getting harder and harder to have a base set of data to compare enhanced completions against because everything now is kind of an enhanced completion of one type or another. I think you'll see us do more and more work in the Wolfcamp. We've had success in the Wolfcamp, in all our core areas so that's another zone that I think is going to be impactful to us. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [17] -------------------------------------------------------------------------------- Okay, great, really appreciate it. Great quarter. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [18] -------------------------------------------------------------------------------- All right, thank you. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- And our next question comes from David Deckelbaum of KeyBanc. Your line is now open. -------------------------------------------------------------------------------- David Deckelbaum, KeyBanc Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Morning, Tim, thanks for taking my questions. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [21] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- David Deckelbaum, KeyBanc Capital Markets - Analyst [22] -------------------------------------------------------------------------------- I was hoping to get some color on the Avalon shale. It looks like you guys have added maybe 10 to15 additional completions this year. One, is that coming at the expense of another program? And, two, just could you update us on some of the things that you witnessed in the second quarter because I think to-date we have the data from the first quarter's completions? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [23] -------------------------------------------------------------------------------- Okay, Jack, you want to -- -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [24] -------------------------------------------------------------------------------- Yes. David, this is Jack. I mean we've, you know, continued to allocate the capital to areas that are making higher rates of return. And as compared to our original budget, the Avalon is getting more dollars and we're drilling more wells. So, but I think that's the beauty of these completions and applying them where we can really get program economics working for us. -------------------------------------------------------------------------------- David Deckelbaum, KeyBanc Capital Markets - Analyst [25] -------------------------------------------------------------------------------- Okay. And, maybe just on the guidance, you're still - your guidance for oil mix still kind of implies a declining oil mix throughout the year. Is that still kind of risking the oil cut of the Avalon area? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [26] -------------------------------------------------------------------------------- I mean I think that we're very comfortable with that range and certainly the middle to upper part of that range and that's it. You know, the well mix makes a big difference and so yes, to answer your question. -------------------------------------------------------------------------------- David Deckelbaum, KeyBanc Capital Markets - Analyst [27] -------------------------------------------------------------------------------- I guess another way of asking, I think like in the first quarter we saw some of those oily Avalon completions in the high 70s in terms of crude cut. Is that -- but I know like in the inventory obviously it's quite lower in the areas that you're drilling now do you expect like a mid-60s or low-70s oil cut for Avalon shale wells? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [28] -------------------------------------------------------------------------------- Oh, again, it varies a bit well-to-well but the initial rates are consistent in the 70s, like you said in this particular area. But we're balancing that with the wells we're drilling in all of the different areas when we come up with that guidance. -------------------------------------------------------------------------------- David Deckelbaum, KeyBanc Capital Markets - Analyst [29] -------------------------------------------------------------------------------- Okay, thanks for the color there, guys. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [30] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from Pearce Hammond of Simmons & Company. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [32] -------------------------------------------------------------------------------- Thanks for taking my questions this morning. Tim, you -- appreciate the color on 2016, that's helpful. And if the capital budget is lower in 2016 and you're still delivering production growth, do you think your activity levels would also be reduced -- you'd do it with less rigs? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [33] -------------------------------------------------------------------------------- Well we're down to 16 rigs right now, so we've continued through the first and second quarter to cut rigs. I think we're going to try to hit an activity level in the third and fourth quarter that will carry us through 2016. But there's a lot of variables, the oil price -- it depends a lot on the oil price. It depends on service cost. We still have some time to watch and plan for that. But I think, yes, the number of rigs and all that we're using in 2016 is going to be lower certainly than it was in 2015. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [34] -------------------------------------------------------------------------------- Great, thank you. And then my follow-up is, what are your thoughts on the fall bank redetermination season and any impact to Concho? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [35] -------------------------------------------------------------------------------- I don't think there'll be any impact to Concho. Yes, we're once a year, and we've got a large borrowing base, it could be larger. And, we've got quite a bit of proved developed producing reserves and I think that's what the banks are after. So we're very thankful of the position we're in financially. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [36] -------------------------------------------------------------------------------- Well, great, thank you very much. And congrats on an excellent quarter. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [37] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Thank you. And our next question comes from John Freeman of Raymond James. Your line is now open. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [39] -------------------------------------------------------------------------------- Good morning, guys, another great quarter. First thing, I was trying to get a little bit more color on last quarter you all mentioned after bringing online, I want to say roughly just over 100 net wells in the first quarter that pace would slow to around 60 wells a quarter, kind of pretty consistent 2Q through 4Q. And it looks like you were a good bit above that pace in 2Q. So I'm just trying to get kind of an update on the well, completed well cadence the rest of the year. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [40] -------------------------------------------------------------------------------- Yes, John. For the rest of the year we're looking at more of a balance between wells drilled and completed in that plus or minus 80 wells per quarter. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [41] -------------------------------------------------------------------------------- And that's a net number, right? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [42] -------------------------------------------------------------------------------- Those are gross numbers. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [43] -------------------------------------------------------------------------------- Those are gross. Okay. And then my one follow-up question, on the Avalon, when we talk about the current spacing in your inventory right now is based on the four wells to six wells per section, then you're going to try these downspacing tests in the, later this year. Those downspacing tests, how many wells per section are you planning to test? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [44] -------------------------------------------------------------------------------- Yes. They're at the upper end of that range of four wells to six wells per section. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [45] -------------------------------------------------------------------------------- Great. Thanks, Jack. Appreciate it. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [46] -------------------------------------------------------------------------------- You bet. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Thank you. Our next question comes from Todd Hanold (sic) of RBC Capital Markets. Your line is now open. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [48] -------------------------------------------------------------------------------- Good morning. I've heard worse, right? On the oily Avalon, just to keep on that theme, obviously a pretty exciting opportunity. When we look at your box on page seven, you know, a couple things standout. One, it's a big area and there's still some, I guess, space outside of Concho. In general, big picture, do you see much acquisition opportunity in there? And if you could define what your net acreage in that box is that'd be great. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [49] -------------------------------------------------------------------------------- Yes. I mean we're not -- we don't really comment on acquisitions but like our -- all core areas we're always in search of ways to add on. The way we've talked about our inventory there, Scott, is roughly a third of our Avalon inventory of 1,500 wells, so 500 wells plus or minus is accounted for in that focus area. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [50] -------------------------------------------------------------------------------- Okay. Appreciate that color. And then, again, on the Avalon I guess I'll keep with that for my follow-up question. Tim, I think you mentioned there, it's really thick there. Could you define that a little bit for us? And you discussed there being potentially an upper and a lower section, where have your wells to date been placed and what is the near-term plan of testing the other part of that formation? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [51] -------------------------------------------------------------------------------- Yes. In that area it's about 1,000 feet thick and we have tests in both the upper and the lower section. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [52] -------------------------------------------------------------------------------- Okay. So your wells have been in both. So when you do that downspacing would they be staggered or is that four to six in just of those upper or lower? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [53] -------------------------------------------------------------------------------- Yes. Those are in one of the zones. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [54] -------------------------------------------------------------------------------- In one of the zones? Okay. So there's a possibility of stacking the wells on top of each other then in theory? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [55] -------------------------------------------------------------------------------- There is that potential. -------------------------------------------------------------------------------- Scott Hanold, RBC Capital Markets - Analyst [56] -------------------------------------------------------------------------------- Awesome. Appreciate it. Thanks, guys. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Thank you. Our next question comes from Brian Singer of Goldman Sachs. Your line is now open. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [58] -------------------------------------------------------------------------------- When we look at what's implied in production in CapEx guidance, third quarter looks down from second quarter and fourth quarter looks down from third quarter with fourth quarter looking a lot closer to where you were in the first quarter. So when we look ahead to 2016, the prospects of what looks like it would be a $1.2 billion to $1.5 billion capital program to stay within cash flow at strip prices, that's not that different a run rate than what you're projecting for the second half of 2015 during this period of sequentially declining production. Is there backlog coming on or can you reconcile this more specifically for how production would sequentially grow in 2016 when that's not being guided to in the second half of this year? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [59] -------------------------------------------------------------------------------- Sure. I'm mean you got to think about -- 2016 will be a year where you would get the full benefit of cost concessions for one, and continued efficiencies and capital allocation. So those are really the main things to be thinking about. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [60] -------------------------------------------------------------------------------- I guess when we looked at the capital program and where you are right now, are you not fully benefit, or would you not fully benefit from that in the second half of 2015, so there would be even further benefits? And is that a function of rig contracts that are coming off that would go back to lower market rates or is it more of a productivity point from where you're drilling? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [61] -------------------------------------------------------------------------------- Yes, it's probably a little bit of both. But you're right, we are getting, the costs are what they are today, but -- so it's well allocation and where you're going to spend those dollars. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [62] -------------------------------------------------------------------------------- Got it. And then in the Midland Basin, can you just give us an update there of where you're choosing, and the zones that you're choosing to drill? And then strategy importance and whether that's an area you would focus on for acquisitions. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [63] -------------------------------------------------------------------------------- Yes, like we've said in previous quarters, we like the Midland Basin. Most of our activity has been focused in the Wolfcamp but we also have tested the Spraberry. And yes is the answer to the question, would we look at acquisitions there. Yes, we would. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [64] -------------------------------------------------------------------------------- Are there any new zones there or any more recent results worth flagging from a, that would shift to more of your focus to one zone from another? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [65] -------------------------------------------------------------------------------- Not really to speak of. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [66] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Thank you. Our next question comes from Drew Venker of Morgan Stanley. Your line is now open. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [68] -------------------------------------------------------------------------------- I was wondering if you could talk a little bit more about the Wolfcamp results in the Southern Delaware basin, whether you're seeing some flatter declines. And, really just asking that because it looks like your 30-day rates were pretty comparable to your 24-hour rates. It looks flatter than before, but maybe if you could comment there. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [69] -------------------------------------------------------------------------------- Oh, it's really pretty close to where it's been in the past, and that just is a factor of that subset of wells. So I wouldn't read too much into that. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [70] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [71] -------------------------------------------------------------------------------- It's an area we like and it's got great economics. So we're going to continue to allocate money there. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [72] -------------------------------------------------------------------------------- Okay. Thanks, Jack. And then on the, going back to the prior questions about inventory and stacking wells. How much testing have you done within the Second Bone Spring to stack wells on top of each other? Do you have a good sense of whether they could produce independently? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [73] -------------------------------------------------------------------------------- Yes, we haven't really done a lot of testing in that zone. And it's not as thick as the Avalon and it's a different type of reservoir, so. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [74] -------------------------------------------------------------------------------- But on the Second Bone Spring that's in an area that we've drilled five independent zones -- -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [75] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [76] -------------------------------------------------------------------------------- -- in addition to the Bone Spring. So it's a multi-zone, lots of potential area. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [77] -------------------------------------------------------------------------------- Okay. But essentially stacking wells in Second Bone Spring would not be baked into your inventory? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [78] -------------------------------------------------------------------------------- No, no. Not necessarily. Just the spacing assumptions that we've given is really what goes into that inventory count. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [79] -------------------------------------------------------------------------------- Okay, okay. Is it fair to say that if oil prices are lower than they are today, you'd still target spending within cash flow? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [80] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [81] -------------------------------------------------------------------------------- No real change in thinking there. Okay. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [82] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [83] -------------------------------------------------------------------------------- Thanks. That's all I had. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [84] -------------------------------------------------------------------------------- All right. Thank you. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [85] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [86] -------------------------------------------------------------------------------- Thank you. Our next question comes from Jason Smith of Bank of America. Your line is now open. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [87] -------------------------------------------------------------------------------- Hey, good morning, everyone. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [88] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [89] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [90] -------------------------------------------------------------------------------- Tim, just coming back to the drilled uncompleted wells. I think so far this year you guys have completed 90 more wells than you've drilled. So can you just give an update on where that backlog stands today and what you guys are targeting there? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [91] -------------------------------------------------------------------------------- Yes, we've got about an inventory of 25 uncompleted wells today, which is, in our view, about right for the number of rigs that we're running. We're running about 16 rigs today. So that backlog that we had at the first of the year naturally worked itself down, most of that happened in the second quarter. A big part of it happened in the second quarter. And, so we think we're at a run rate now that's comfortable for us. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [92] -------------------------------------------------------------------------------- Got it. Okay. And my follow-up is on the balance sheet. Obviously the balance sheet's in very good shape, but historically you've been pretty strict about keeping net debt to EBITDA I think around two times. So under your plan of spending within cash flow, how do you see that playing out next year? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [93] -------------------------------------------------------------------------------- Yes, well we think that's an important parameter and we were in better shape when oil was $65 than when oil is $47, but we're still in pretty good shape. And we plan to keep a very close watch on that and keep our activity at a level that we don't run outside our debt fairway. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [94] -------------------------------------------------------------------------------- Okay. Great. I appreciate the answers. Thanks, guys. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [95] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [96] -------------------------------------------------------------------------------- Thank you. Our next question comes from Jeffrey Campbell of Tuohy Brothers. Your line is now open. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers Investment Research, Inc. - Analyst [97] -------------------------------------------------------------------------------- Good morning, and congratulations on the strong quarter. On slide 7, you highlighted the upper and lower Avalon and you showed four wells to six wells per section. Does that include both zones or is that a per zone estimate? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [98] -------------------------------------------------------------------------------- Yes, we're really just considering the Avalon in total when we say that. So four wells to six wells per section. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers Investment Research, Inc. - Analyst [99] -------------------------------------------------------------------------------- Okay, good. And I was wondering if you could add some color on the significant drilling efficiencies that you're seeing throughout your operations. What I'm really wondering is the degree to which performance is influenced by services components such as enhanced bits, fluids, geosteering as opposed to better logistics and retaining your very best personnel as the rig count has declined. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [100] -------------------------------------------------------------------------------- The answer is always it's a little bit of all that. But I'll tell you that when the industry is in a slowdown type of mode, the rigs, the equipment, the people that have been retained are the very best and that makes a big difference. The efficiencies, the speed of drilling, the quality of the fracs, the logistics, all that improve and that's helped us quite a bit. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers Investment Research, Inc. - Analyst [101] -------------------------------------------------------------------------------- Okay. Great. I appreciate that. And we're looking forward to seeing Matt in a couple of weeks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [102] -------------------------------------------------------------------------------- Okay. Great. Thank you. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- Thank you. Our next question comes from Ipsit Mohanty of GMP Securities. Your line is now open. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities LLC - Analyst [104] -------------------------------------------------------------------------------- Good morning. Thanks for taking my questions. Just a quick housekeeping, when you talked about 2016 and drilling within cash flows, what sort of deck are we looking at for oil and gas? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [105] -------------------------------------------------------------------------------- Well, right now we were just talking about the strip, but whatever it is when we get toward the end of the year, we'll adjust off of that and target within cash flow spending. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities LLC - Analyst [106] -------------------------------------------------------------------------------- Okay. And sorry if I missed that, but what well costs are we looking at right now in the Southern/Northern Delaware and the Midland Basin? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [107] -------------------------------------------------------------------------------- Oh, it depends on each area. And, I'd just encourage you to call our team and get that by area. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities LLC - Analyst [108] -------------------------------------------------------------------------------- Will do. Thank you. And just in terms of the non-D&C spending that when you think about 2016 versus 2015, you spent a bunch in midstream. But is that in the rearview now? Are you still looking, will you look for a much lower non-D&C spending in 2016? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [109] -------------------------------------------------------------------------------- Yes, historically the non-D&C spending has been in the kind of middle to high-single digits as a percentage of the budget and I think that's the type of range we'd be thinking about right now. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities LLC - Analyst [110] -------------------------------------------------------------------------------- Okay. And one last, this is more of a strategy question, is when you think about allocating capital in this sort of an environment or even a falling environment if you will in 2016, and as you remain prudent on balance sheet and you think across your asset base, will the allocation of rigs be similar to what we have right now in the Midland Basin and Shelf versus what you're seeing in Avalon? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [111] -------------------------------------------------------------------------------- It will be similar but there will always be movement from one area to the -- that's the beauty of having four areas that have competitive economics. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities LLC - Analyst [112] -------------------------------------------------------------------------------- Got you. Thank you. Thanks for taking my questions. -------------------------------------------------------------------------------- Operator [113] -------------------------------------------------------------------------------- Thank you. Our next question comes from Neal Dingmann of SunTrust. Your line is now open. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [114] -------------------------------------------------------------------------------- Hey, good morning Tim, Jack. Say, just two quick ones. Tim, on that slide 15, I'm just wondering, I know you haven't baked it in your sort of the guidance or expectations yet, but just your thoughts on the two things there, the wells per section. And then secondly your thoughts about doing some multi-stacked pads. Is there upside potential on both, maybe even late this year or next year, on both those sides? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [115] -------------------------------------------------------------------------------- There is, but I would tell you that as the industry slows down, as our capital budget gets smaller, we drill fewer wells, there's not as much experimentation. The data collection and experimentation will take longer, and the wells per section that you're referring to, I think the inventory is -- people aren't as on fire about how much inventory you have as much as how capital efficient are you with the capital you're putting to work in this part of the cycle. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [116] -------------------------------------------------------------------------------- Yes, very good points, Tim. And then just lastly on that slide 6 that shows the Northern Delaware, just I think somebody had kind of referred or alluded to around this, Tim, your thoughts. I know there hasn't been as much activity in that very Northwest part of Eddy County. Just your thoughts when you get further north up there. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [117] -------------------------------------------------------------------------------- Yes, we've drilled some really good wells up there. The zones are a little bit different than they are in the South, but that's -- we've got lots of acreage up there, we've had lots of success. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [118] -------------------------------------------------------------------------------- Got it. Got it. Okay. Thanks, guys. Great quarter. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [119] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [120] -------------------------------------------------------------------------------- Thank you, Neal. -------------------------------------------------------------------------------- Operator [121] -------------------------------------------------------------------------------- Thank you. Our next question comes from James Sullivan of Alembic Global Advisors. Your line is now open. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [122] -------------------------------------------------------------------------------- So obviously you guys are looking at a pretty significant deceleration in the second half of this year. Can you just comment, are there any factors out in the field that would prevent you from decelerating as fast as you might like. And I'm thinking here about a problem that I've heard described and actually was touched on a little bit earlier about the higher quality rig crews that you guys are retaining now, that you're drilling wells faster than, extremely fast, and you find yourself having to complete them and then spending money more quickly than you planned to. So it's a high-class problem to have, but it still is a problem when you're trying to control capital. So any comments you have on that would be great. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [123] -------------------------------------------------------------------------------- Okay. No, I mean one -- the first part of your question about physical constraints, I mean the way we built that into our comments is talking about our operational flexibility, meaning we don't have long-term contracts. So we don't -- that doesn't prohibit us from slowing down. There've been some things we've done in the field that allowed us to keep these crews working. Like on the frac spreads, we had a high number of 24-hour-a-day teams working out there. Almost all that's been cut back to just working in the daylight; so that leaves teams working but fewer wells completed, slows down the rate. So things like that are ways that you kind of preserve your service companies and at the same time slow down your rate of spend. But I think as we decelerate in the second half of 2015, I mean we're going to be hitting a pace with the crews, both the drilling and the frac spreads that I think we can carry into 2016. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [124] -------------------------------------------------------------------------------- Okay. That's great. That's helpful. So just one other one, we haven't really talked that much about the Southern Delaware, could you just update us a little bit on what you're doing down there? Obviously I saw that the lateral lengths are getting longer and you guys continue to drill good wells, but I was thinking a little bit about the newer acreage in Central Reeves; what's the permit situation out there? Are you getting ready to start testing stuff out there? Or, what's the state of play? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [125] -------------------------------------------------------------------------------- We continue to be active, two rigs running down there. And we've drilled essentially in the same areas in the previous quarters that we have been in this most recent quarter, so I'd say it's steady state. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [126] -------------------------------------------------------------------------------- Okay. And then any plans for the newer stuff up in Reeves? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [127] -------------------------------------------------------------------------------- Oh, probably not other than what you've described. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [128] -------------------------------------------------------------------------------- Okay. Sounds great. All right. Thanks, guys. Great quarter. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [129] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [130] -------------------------------------------------------------------------------- Thank you. Our next question comes from David Heikkinen of Heikkinen Energy Advisors. Your line is now open. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [131] -------------------------------------------------------------------------------- Good morning guys and thanks for taking my question. As I think about optimized completions and kind of balancing returns with productivity, EUR and cost, in this commodity environment, do you start reducing costs like frac stages or size that would lead to lower productivities and EURs ever? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [132] -------------------------------------------------------------------------------- Well, ever is a big word, but no, that hasn't really entered into our thinking at this point in time. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [133] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [134] -------------------------------------------------------------------------------- We're trying to make these wells the best, highest recovery, highest initial rates and optimize, we're trying to find the appropriate cluster spacing and sand loading, things like that. So no, it's not can we drill cheaper wells to keep the returns up. We haven't had to do that. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [135] -------------------------------------------------------------------------------- Okay. Not yet. And then thinking a little longer term beyond 2016 around how you think about the impact of your hedges and the value of those hedges that are benefiting this year and next year, and you're living within 10% of cash flow targets and you're less than two times debt to EBITDA. How do hedges factor into your CapEx versus cash flow thoughts and your balance sheet thoughts? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [136] -------------------------------------------------------------------------------- Oh, in the past we haven't considered the hedges as a part of our cash flow as far as our capital budget. When we say living within cash flow, it means the -- what the strip looks like. And that the hedges give us a cushion so we can be more thoughtful about speeding up or slowing down and not jerking around the big operational machine. But the value of those cash flows and the cash settlements we get on them obviously go into our drilling machine and we invest that money. We've typically built about a 18 month to 24 month book of rolling hedges and we're continuing to do that. We still -- I mentioned on the call, the average price for the remaining hedges in 2015 and 2016 We will continue to add to that. In the past, that length of book has kind of been able to bridge us across these down cycles. And our hope is that will be the case this time as well. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [137] -------------------------------------------------------------------------------- So kind of calling on the insurance policy maybe a little bit through this down cycle versus kind of the normal way you've thought about the value of hedges over time is how we should think about it. Okay. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [138] -------------------------------------------------------------------------------- Yes, and I just want to make sure that you understand that we do get the benefit of the cash flow of those settlements -- -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [139] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [140] -------------------------------------------------------------------------------- -- of hedges and we invest that money as part of our budget. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [141] -------------------------------------------------------------------------------- Yes. That's helpful, thanks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [142] -------------------------------------------------------------------------------- Okay. All right. -------------------------------------------------------------------------------- Operator [143] -------------------------------------------------------------------------------- Thank you. Our next question comes from Jeff Robertson of Barclays. Your line is now open. -------------------------------------------------------------------------------- Jeffrey Robertson, Barclays Capital - Analyst [144] -------------------------------------------------------------------------------- Thank you, Tim. Two questions. One on LOEs. Can you talk a little bit about the trend of LOEs as you see it into 2016 and whether there are things that you can do to chip away at those? And then secondly, can you talk a little bit about the midstream arrangements in the Delaware Basin and in the context of now that you've got a more normal wells-in-process inventory, are you also shortening the cycle time of spud-to-sales in tying that to infrastructure? And is that part of trying to get more efficient with your capital as you look out into 2016? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [145] -------------------------------------------------------------------------------- I'll ask Jack to address the second question. The first question on LOEs, I'll take. And, it -- we do a lot of things to try to keep our LOEs low and our costs under control, and investing in saltwater disposal systems is one of them. We've -- in previous quarters we got into a conversation about for all that infrastructure, we're a kind of a pay-as-you-go company, so we always have some activities of building out saltwater disposal systems and things like that help mitigate the cost of producing these wells. At the same time, a lot of the improvement you've seen in our LOE per unit is the fact that our units are so strong. So the production is so strong. So I do believe that we will be able to maintain a low cost structure on our oil that we produce, but growing production and concentrated and focused operations is the way we achieve all that. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [146] -------------------------------------------------------------------------------- Yes. And, Jeff, on the midstream question related to the Northern Delaware Basin, we -- as you remember, we're building a large gathering system up there that will result in almost all of the Northern Delaware Basin, the oil barrels being on pipe by the first part of next year. So that'll be a big advantage for us, moving those barrels from trucks to pipe. -------------------------------------------------------------------------------- Jeffrey Robertson, Barclays Capital - Analyst [147] -------------------------------------------------------------------------------- Jack, that will show up in the crude price, right, instead of an LOE number? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [148] -------------------------------------------------------------------------------- Correct. In the realization, you're right. -------------------------------------------------------------------------------- Jeffrey Robertson, Barclays Capital - Analyst [149] -------------------------------------------------------------------------------- Okay. All right. Thank you. -------------------------------------------------------------------------------- Operator [150] -------------------------------------------------------------------------------- Thank you. Our next question comes from Paul Grigel of Macquarie. Your line is now open. -------------------------------------------------------------------------------- Paul Grigel, Macquarie Research Equities - Analyst [151] -------------------------------------------------------------------------------- Hi. Good morning to the team there. Was wondering if you guys could provide a little bit more color on the rig plan as you guys head into the end of the year and then into the start of 2016, as much as you can provide on rig count? If you plan on holding at 16 or any further reductions in the current price environment? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc. - EVP [152] -------------------------------------------------------------------------------- Yes. I mean as Tim said, we're at 16 today. That number could bounce around a little bit, just depending on where we're drilling wells between now and the end of the year. And beyond that it'd be too early to comment. -------------------------------------------------------------------------------- Paul Grigel, Macquarie Research Equities - Analyst [153] -------------------------------------------------------------------------------- Okay. And then just generally speaking on the service cost side, it was touched on a little bit earlier but could you talk a little bit more on, is there more service cost savings to be found on the drilling side and the completion side? Or are we pretty late in the game there at this stage of the cycle? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [154] -------------------------------------------------------------------------------- Well, I mean I think at the current commodity price environment I think there's probably more savings to be had, but it still feels like it's late in the game. I don't think that the future service cost savings are going to be as -- of magnitude or the same size as what we've seen in the first half of the year. At the same time I think there's other efficiencies, and we talked about them a little bit already on this call, the slowdown helps in almost every aspect of the logistics and the equipment and the people that are working out there. And that's also helpful and will also be impactful, I think. -------------------------------------------------------------------------------- Paul Grigel, Macquarie Research Equities - Analyst [155] -------------------------------------------------------------------------------- Okay. And then one last one, have you seen the number of non-consents pick up over the last few months here as the oil's kind of returned back down to the lows at this point in time? And is that an opportunity to pick up acreage going forward in the blocking-and-tackling mechanism? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [156] -------------------------------------------------------------------------------- Yes. Yes, we have. And I mean the way I think about that is a very cheap acquisition. But in most of these arrangements in the oil and gas industry, a non-consented interest doesn't bring a whole lot of acreage with it. It's mostly the well bore that you're drilling at that time. But it's still -- I guess our view is it's an inexpensive acquisition, and the non-consents have become more meaningful than they have been in the past. -------------------------------------------------------------------------------- Paul Grigel, Macquarie Research Equities - Analyst [157] -------------------------------------------------------------------------------- Thanks. That's it for me. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [158] -------------------------------------------------------------------------------- All right. Thank you. -------------------------------------------------------------------------------- Operator [159] -------------------------------------------------------------------------------- Thank you. Our next question comes from Mike Scialla of Stifel. Your line is now open. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [160] -------------------------------------------------------------------------------- Yes. Hi. Good morning, guys. Wanted to follow-up on Brian Singer's question on how do you contemplate growing production in 2016, live within cash flow when it looks like in the second half of 2015 your forecast and sequential production declines. Jack, you mentioned in 2016 you'll get the full benefit of a full year of cost savings. I'm wondering too, is part of the answer there in that your base decline rate is going to shallow as you move into 2016, I would think, with the decelerating rig count? How do you think about that? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [161] -------------------------------------------------------------------------------- Yes. Let me take that on. Yes, I think that's part of the answer. I think the other part of the answer's timing though. And, I think for us, if you run a steady state model of what can we do within cash flow with our base of assets and our base of production, we can grow it within cash flow. That -- the world we find ourselves in today. Now the second half of this year we're coming off a very big ramp, and the production in the first and second quarter is a result of completing a whole lot of wells all at one time. So the production performance in the third quarter and fourth quarter is greatly affected by timing. And I think the thing that we get a lot of encouragement out of is if you look past the timing of that acceleration that began in 2014, we can still grow this company from that level within cash flow, so, and I think that's going to differentiate us. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [162] -------------------------------------------------------------------------------- Got it. That's helpful. And then I kind of wanted to follow-on David Heikkinen's question, too. I guess maybe in reverse, he was talking about maybe looking at ways to save on well costs. Would you cut back on your well costs there or cut back on what you're putting into your wells? I'm wondering, have you found the limits yet on where you think you've optimized the sand concentrations in particular with these wells? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [163] -------------------------------------------------------------------------------- Yes, and lots of - it's not continuing, it doesn't always continue to get bigger. So in many circumstances we think where we've found the optimal, where you have diminishing returns. And it's both spacing and amount of sand and type of fluid and all those components. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [164] -------------------------------------------------------------------------------- So you think you're there in say like the Second Bone Spring and Avalon, or are you still experimenting in some of the other formations or do you think you're pretty much there on all of them at this point? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [165] -------------------------------------------------------------------------------- Well, even in the Second Bone Spring and Avalon, we will always be experimenting and fine-tuning and you learn something just about with every well you drill, I think. And, but it's not always bigger is better. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [166] -------------------------------------------------------------------------------- Got it. And then the last one from me, Tim, you said less experimentation given the lower spending but any thoughts on, I think the service companies, talking pretty heavily about the potential of re-fracs, have you looked at those at all? And would that make any sense at all in an environment where you're going to spend less? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [167] -------------------------------------------------------------------------------- I don't think re-fracs in the short term are going to be any real part of our capital program. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [168] -------------------------------------------------------------------------------- Got it. Thanks a lot. Appreciate it. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [169] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [170] -------------------------------------------------------------------------------- Thank you. At this time, I would like to turn the call over to Tim Leach for any closing remarks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc. - Chairman, President & CEO [171] -------------------------------------------------------------------------------- Okay. Thank you. Once again, I thank you for the good questions and the large participation on this call. And the team here looks forward to visiting with you over the next several weeks. And thank you again for your interest in the Company. -------------------------------------------------------------------------------- Operator [172] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone have a great day.
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