MIDLAND Nov 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Concho Resources Inc earnings conference call or presentation Thursday, November 5, 2015 at 2:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Megan Hays Concho Resources Inc - Director of IR * Tim Leach Concho Resources Inc - Chairman, President and CEO * Jack Harper Concho Resources Inc - EVP ================================================================================ Conference Call Participants ================================================================================ * John Freeman Raymond James & Associates, Inc. - Analyst * Pearce Hammond Simmons & Company International - Analyst * David Tameron Wells Fargo Securities, LLC - Analyst * Michael Hall Heikkinen Energy Advisors - Analyst * Brian Singer Goldman Sachs - Analyst * Michael Scialla Stifel Nicolaus - Analyst * James Sullivan Alembic Global Advisors - Analyst * Jason Smith BofA Merrill Lynch - Analyst * Richard Tullis Capital One Southcoast, Inc. - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Concho Resources third-quarter 2015 conference call. (Operator Instructions) As a reminder, this call is being recorded. I would now which introduce your host for today's conference, Ms. Megan Hays, Director, Investor Relations. Ma'am, you may begin. -------------------------------------------------------------------------------- Megan Hays, Concho Resources Inc - Director of IR [2] -------------------------------------------------------------------------------- Thank you. Good morning and welcome to our third-quarter 2015 earnings call. On the call with me today in Midland is Tim Leach, Chairman, President and CEO; and members of the Concho senior management team. We issued the earnings release yesterday after market close. In addition, we have prepared slides to supplement our comments to this conference call. The earnings release and presentation slides are both posted on our website. Please be provided 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, some of our comments may reference non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and in the presentation. With that, I'll turn the call now over to Tim. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [3] -------------------------------------------------------------------------------- Thank you, good morning. Thanks for joining us this morning. I will start by covering highlights for the third-quarter on slide 3. During the quarter the Company once again delivered impressive results. Total production for the quarter averaged 149,000 BOEs per day, above the high end of our guidance and up more than 30% year over year. Strong operational performance in the quarter was a result of continued improvement in well results across our asset base. This was driven by long laterals and enhanced completions. Our operational success this quarter was accompanied by solid financial results as we continue to focus on our cost structure. Per-unit cost for LOE, DD&A and G&A were each lower year-over ear and we've again raised our 2015 guidance for production growth. We expect to increase production by 27% to 28% year over year while spending within our capital budget. We're approaching 2016 with a focus on funding the capital budget within cash flow, preserving a strong balance sheet and building upon our operational success, which we believe sets Concho up to continue generating differentiated value for our shareholders. Turning now to slide 4, overall production growth was led by our horizontal drilling program in the Delaware Basin. We continue to drill great wells and core up our position in the Delaware. Record production volumes were achieved with an eye on cost control. Combined cash expenses for LOE and G&A per barrel were 13% lower than last year. Moving to slide 5, we have a track record of consolidating high-quality acreage and making that acreage more valuable with our execution machine. We have been disciplined and focused on blocking and tackling in our core areas. So far this year we've been successful at adding 25,000 net acres at attractive prices. These acquisitions, shown in dark green on the maps, increase our exposure to some of the best parts within our core areas, our perspective for multi-zone potential, and provide for more efficient long lateral development. Turning now to the 2015 capital budget on slide 6. We carried a great deal of momentum from 2014 into 2015. We have steered the program to balance capital and cash flow in the second half of the year. For the third quarter we have averaged 15 rigs and cost incurred, excluding acquisitions, was 50% lower than the second quarter of this year and well within cash flow of $436 million. A key theme emerged as we moved through the year. We can deploy less capital and fewer rigs and still achieve our production goals. This is a function of several factors, including lower service cost, after cycle times, long laterals, completion intensity. With no long-term contracts and a strong hedge position, we also retain significant operational flexibility to adjust the rig count when weak prices weigh on our industry. Today we're running 13 rigs compared to almost 40 rigs a year ago. Under the initial budget for 2015 we planned to invest $3 billion and grow at least 28%. We responded quickly to fast-moving commodity prices and reduced the budget to $2 billion. At that time we thought that our annual growth would slip to less than 20%. However, our ability to adapt to challenging conditions and push for greater efficiencies drove better well productivity all across our assets. As a result, we are on track to deliver 27% to 28% production growth on $1 billion less capital than the original budget. Looking ahead to 2016 on slide 7, we expect oil price volatility to continue. We built the base budget that will help us to maintain our high production levels achieved in 2015 and to preserve significant dry powder for additional opportunities. Production has never been a problem for us it won't be now. With a flattening PDP decline curve and the flexibility to ramp up drilling quickly when conditions warrant, we can protect our balance sheet and make high-return capital allocations at the same time. We expect to fund the capital budget within cash flow and maintain leverage ratio that is less than two times and at the same time, continue to advance operational efficiencies and our understanding of the upside across our asset base. It's hard to predict the duration of the commodity price down cycle, but our execution machine, our financial strength, and capital allocation will continue to demonstrate the quality of our assets and our commitment to a strategy that builds long-term value in any commodity price environment. Now let's move to asset performance turning to slide 8. I will start with the Northern Delaware Basin where we're running eight rigs today. We show the Alpha Crude Connector, or ACC, on the asset map along with our activity during the quarter, highlighting the strategic fit of this gathering and transportation system relative to our operations. The ACC is expected to begin operations at year end. The region capacity of the system's substantial and supports our long-term development outlook for the area. Initial capacity is approximately 100,000 barrels of crude oil per day with flexibility to expand the capacity. We expect to transport a substantial portion of our crude oil from the Northern Delaware on ACC which will provide for better price realizations and performance in 2016. Last quarter we turned the spotlight on the Avalon Shale. On slide 9 the updated production plotting includes recent results. Our results in the Avalon Shale continue to generate some of the best returns in our portfolio. We are on pace to drill more than 25 wells in the Avalon this year and we're working to delineate multi-zone potential and determine optimal well spacing. In the Southern Delaware Basin shown on slide 10, we're running two rigs. Overall efficiency has improved with drilling days down 20% year over year. In addition, we continue to deliver industry-leading well results. We're also having success in the Midland Basin where we are running two rigs, shown on slide 11. We're drilling faster and longer wells in the Midland Basin with drilling days down 30% and average lateral length up 15% year over year. We're also realizing completion efficiencies. As a result of optimizing development in the Midland Basin, our well results have been consistently strong, providing confidence to position this asset for large-scale development. Moving to slide 12. Our large contiguous acreage position the Midland Basin allows for efficient long lateral development. Since launching the horizontal program in 2013, our average lateral length has increased 35%. We'll look to further increase the average lateral length with our 2016 program where we plan to primarily target two-mile laterals. Optimized lateral lengths and completion designs allow us to more efficiently develop our acreage, as shown in the chart on the right, plotting six-month cumulative oil production per 1,000 feet of lateral. Over the first six months we're recovering two times the oil compared to one-mile lateral at about 1.5 times the one-mile lateral cost. Moving now to the New Mexico Shelf on slide 13. We're running one rig on the shelf. The asset continues to produce solid results from horizontal drilling. We're also testing longer laterals here. We recently completed a 5,200 foot lateral targeting the padding zone with encouraging results. This asset continues to produce more cash flow than it consumes, making it relatively easy to hold production and acreage. To recap, the macro headwinds facing the energy industry is challenging to overcome. Concho's value drivers are unique. Our operational performance this year has been outstanding and highlights the strength of our team and our assets. Long laterals, lateral placement, zone delineation, completion techniques, each of these developments are transforming our inventory. We've been successful at acquiring and developing some the highest-quality assets in our industry. The acreage we have acquired year to date is consistent with our focus on the best parts of the Permian. Our strategic investments in midstream like the ACC pipeline protect our upstream business, provide better price realizations at the wellhead and offer optionality. The commodity price environment is uncertain but we believe that we can continue to build value through the cycle by keeping a strong balance sheet and prudently investing in our business and staying disciplined. I appreciate your continued confidence in Concho, so now let me turn it back over to the moderator and take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) John Freeman, Raymond James. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [2] -------------------------------------------------------------------------------- Good morning, guys. You went through in detail, Tim, about how when you entered this year you thought you needed $3 billion to grow 28% and ended up being able to achieve that with basically $1 billion less budget. When I look out to 2016, I'm trying to get a sense for how much additional efficiency gains or productivity improvements are embedded in that guidance. Or is it taking the current costs, current wells, or just flat-lining them? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [3] -------------------------------------------------------------------------------- Yes, John, we're using current costs and our current estimates of well performance. We haven't really baked in any of the continued efficiency gains into the 2016 program. I think it's part of the upside. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [4] -------------------------------------------------------------------------------- Okay. My follow-up question, when I'm looking at the 2016 budget, it looks like the non-D&C part of the budget is a lot larger percentage of the total budget than what we typically see. Typically that runs high single-digit, 10% range. I'm wondering if that is another source of some conservatism there. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [5] -------------------------------------------------------------------------------- Yes, and I was careful to call this a base budget. It starts at $1.4 billion but the D&C portion is $1.2 billion. In that difference we have left room for acquisitions, ACC projects, midstream projects and other unallocated capital that can go to leasehold or back to drilling. I would not call it a conservative approach to budgeting, but is our -- last year we put out a budget in November and then we modified before we got into January. This year we are setting a base and we're going to watch conditions as we roll forward. I hope it gives you a good indication of where we think we can start. -------------------------------------------------------------------------------- John Freeman, Raymond James & Associates, Inc. - Analyst [6] -------------------------------------------------------------------------------- It's very helpful. Thanks, Tim. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Pearce Hammond, Simmons and Company. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [8] -------------------------------------------------------------------------------- Thanks for taking my questions. Tim, when you look out at the potential acquisition opportunities available to you in the Permian, do think that bid ask spread has narrowed? Are the sellers becoming more realistic? Or is it still a tough environment to get things done especially on larger transactions? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [9] -------------------------------------------------------------------------------- As you might expect, it's all over the board. I would emphasize that the blocking and tackling that we have talked about at the end of this quarter and the real high-quality acreage we were able to add in our core areas at really good prices, that's the kind of activity we're going to continue to stay focused on. We live in the Permian basin, so we think we're aware of everything that's going on out here. The A&D market is quite robust right now but I would tell you that our day-to-day business is this focus on our core areas and the smaller stuff. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [10] -------------------------------------------------------------------------------- Thank you. My follow-up, I know you have not done anything in a while in the Brushy Canyon, but I wanted to your latest thoughts on that particular horizon in the Delaware Basin. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [11] -------------------------------------------------------------------------------- The Brushy Canyon is the shallowest zone in that strat column. So it's generally all held by production. As we've reduced our activity we have not really announced any Brushy Canyon results because we are focusing on the deeper stuff. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [12] -------------------------------------------------------------------------------- Thank you, Tim. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- David Tameron, Wells Fargo. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [14] -------------------------------------------------------------------------------- Good morning. Tim, did you talk about -- I'm not trying to get numbers for 2016, but I'm trying to figure out where we are at in the lifecycle, if you will, with costs coming down, with the operational efficiencies -- for this period of the cycle are we two-thirds of the way through that? Are we three-fourths of the way through that as far as seeing improving -- assuming oil stays plus or minus where it's at pretty much. How would you characterize that? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [15] -------------------------------------------------------------------------------- First of all, I'd start our by telling you that the 2016 budget has as robust economics embedded in it as anything we have done in the past, which I think is very encouraging. It's driven, as I pointed out in my prepared remarks, it's driven by longer laterals and increased frac concentration. I still think we're in the fairly early innings of driving efficiency in our business. That efficiency is also driven in large measure by the volatility of the business that we find ourselves in. I still think there's lots of room for improvement, but we've tried to give you, in this starting point on 2016, something that reflects current conditions. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [16] -------------------------------------------------------------------------------- Okay. And let me go back to the -- you guys have that stack, that chart in the appendix, that first chart that shows the different formations, different well counts, 30-day rates, et cetera. It looked like for the Avalon versus last quarter, which you give us up eight absolute well count, the 30-day average moved up considerably for eight wells and the oil percentage increased. Is that a different formation, different completion, different area? Can you give us any color as to -- or is that the typical noise you get as you drill this program? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [17] -------------------------------------------------------------------------------- I think they are getting better as we expand geographically. But I tell you, it's a relatively a handful of new wells and we plan in 2016 to drill quite a few more wells there. I think we will get more data but it is encouraging. We like it. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [18] -------------------------------------------------------------------------------- Okay. On that last -- the current Avalon Shale wells, are they coming in? To pick up the oil percentage from 4% overall, that indicates those recent wells are pretty robust on the oil side. Can you give me a, oil percentage or a split? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [19] -------------------------------------------------------------------------------- David, this is Jack. It's just a reflection of the chart in the main part of the presentation. Those oil percentages are in the 70% range. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [20] -------------------------------------------------------------------------------- Okay, thanks guys. I appreciate it. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors. -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors - Analyst [22] -------------------------------------------------------------------------------- Thanks. One thing I wanted to ask around was how are your thoughts around pad development? Are you evolving in this environment? In my recollection it hasn't necessarily been a big feature of the plan historically. I'm wondering if, particularly also as you got the ACC system up, if that fact plus the lower commodity environment trying to drive better and better efficiencies has driven any evolution on thinking on that front. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [23] -------------------------------------------------------------------------------- Pad development is becoming more and more of what we do. I think it's about one-third of the wells we drilled are on some kind of pad development right now. And more so in areas we talked about how the Midland Basin is getting more oriented toward full-scale development. We can deliver enough water now for our operations so that we can actually do a multi-well pad. In none of the previous calls we talked about it still being early innings on efficiency. I think that's one of the areas that will increasingly become more important, not just to Concho, to all the companies developing the Permian assets. -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors - Analyst [24] -------------------------------------------------------------------------------- Okay, that is helpful. It sounds like then is the Midland Basin the furthest along on that front? Then maybe Northern Delaware and Southern Delaware in that order? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [25] -------------------------------------------------------------------------------- Yes, that's probably right, directionally, yes. -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors - Analyst [26] -------------------------------------------------------------------------------- You alluded to it a little bit, but I was wondering about infrastructure investment in 2016. Are there any plans to do any ACC-like systems in the south, in Southern Del? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [27] -------------------------------------------------------------------------------- I'm not going to talk about any specific deal that we're working on but there is part of our budget that was allocated toward things like that. That's a really powerful tool to improve our economics. -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors - Analyst [28] -------------------------------------------------------------------------------- All right. The last one I had, I'm curious your thoughts on what gets you playing more offense, if you will, with the drill bit? Maybe out-spending a little, getting a little more aggressive? What commodity price environment do think is needed for that from your perspective? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [29] -------------------------------------------------------------------------------- The comments we made here are around the current circumstance. The strip and around $50 oil, anything above that would be recycled back into our activities. We will become more active. We have that flexibility, that I mentioned, to deploy a lot more capital. I think any move higher than the current strip will see more activity from us. I will tell you we are playing offense already, so don't put me in the defensive camp -------------------------------------------------------------------------------- Michael Hall, Heikkinen Energy Advisors - Analyst [30] -------------------------------------------------------------------------------- I already thought that. I appreciate the color. Thank you. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [32] -------------------------------------------------------------------------------- Thank you, good morning. I wanted to follow up on that last point with regards to how you think about flexing up in the event commodity prices move higher. Is it a goal to keep CapEx in line with cash flow? Or is that a function of the environment that we're in now? And so to the degree that we saw $55, $60 oil, would that be enough of a signal to go back to growth rates that are perhaps consistent with your former three-year plan and a level of out-spend to make that happen? Or again, are you more trying to keep cash flow balanced with CapEx more secularly? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [33] -------------------------------------------------------------------------------- I think balancing cash flow and CapEx is something that we are going to be focused on. I will point out that we have grown our CAGR for the last two years is 25%. We've been able to deliver high growth rates. I mentioned that I don't think growth is a problem for us. I think we can grow dramatically within cash flow going forward. But coming off this two years at 25% growth, and at the same time having declining capital budgets, I still think that our growth will be robust when you put it in that context. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [34] -------------------------------------------------------------------------------- Great thanks. As a follow-up, I wanted to ask a question on the Avalon Shale zone here. I'm looking at your slides here versus your last-quarter slides. It seems like there's been an improvement in well performance from a handful of wells and an increase in the oil mix there. I wondered if you could add any color, if that's something that is temporary, geographic related or something more secular. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [35] -------------------------------------------------------------------------------- Brian, it's just a continuation of the program and learning as we go and enhancing the completion similar to what's been done in the second Bone Spring and other zones as well. It's really just a continuation. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [36] -------------------------------------------------------------------------------- This has the reputation of being more of a gassy zone. Is that still likely the case or is there some change? Granted, this only a handful of wells here, but is there any change in your thought process on that zone? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [37] -------------------------------------------------------------------------------- As you move east over there into Lea County, it's much more oily. In fact, as we were saying before, about 70% plus or minus. That's what is driving the activity and the economics over there now. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [38] -------------------------------------------------------------------------------- Great thank you. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Mike Scialla, Stifel. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [40] -------------------------------------------------------------------------------- Good morning. You addressed this to some extent on the 2016 spending plan, but I was curious as to acquisitions in particular, your base plan and say 50 and 250 oil and gas price environment. What level of acquisitions would you be comfortable with? You have some room built in there in the base plan, but what level of acquisition spending would you be comfortable with putting on the balance sheet? Or is the two times debt to EBITDA a guiding metric there? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [41] -------------------------------------------------------------------------------- I think the two times is a guiding metric with a little bit of room for maneuverability. I think I have mentioned in past conference calls and things like that, there's also asset rationalization. As we continue to buy things, we might sell a few things to create additional -- so we don't lever our balance sheet. I don't think you'll see us putting any more leverage on our balance sheet for acquisitions. We've created enough room in this base budget and we have the ability to continue to high-grade our assets. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [42] -------------------------------------------------------------------------------- In terms of that high-grade would you still keep the four core areas? Or is one of those areas potentially a monetization? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [43] -------------------------------------------------------------------------------- I think having these core areas -- those core areas are really key to allocating our capital efficiently. We have got four core areas that all provide very high rates of return and so those things are key to our operation. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [44] -------------------------------------------------------------------------------- Yes, okay. In terms of the longer lateral lengths, you gave some detail on the Midland Basin. Looks like you're seeing a lot of benefit from going as long as you possibly can there. I wanted to explore that in your other areas. Have you seen anything approaching the limits of where the benefits don't make sense? Or is the push (multiple speakers) -- -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [45] -------------------------------------------------------------------------------- I think with where we are now with technology, that two miles is, I don't know if optimal is the right word, but we'd like to go two miles almost everywhere, if we could. But most of that is dictated by lease configurations. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [46] -------------------------------------------------------------------------------- Okay, and then similarly on the sand concentration side. Have you hit the limit there? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [47] -------------------------------------------------------------------------------- Every zone is different. We are constantly improving and experimenting. I think we will continue to improve as we drill wells. -------------------------------------------------------------------------------- Michael Scialla, Stifel Nicolaus - Analyst [48] -------------------------------------------------------------------------------- Okay, thanks, Tim. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [50] -------------------------------------------------------------------------------- Hey, good morning, guys. A very quick question. I don't know if you guys have given this number out or if you can give something a little bit less specific on it, but the PDP decline that you guys talked about moderating in 2016. Do you guys have that number -- what you guys worked with on that number? Or could you, if you can't, if you don't want to give that, could you give any sense of the order of magnitude of the decline in the decline, if you like? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [51] -------------------------------------------------------------------------------- We have said in other venues that in the past that the first 12-month decline rate was in the high 30%s. That was the hill we had to climb up. It appears like now going forward it's probably more like in the high 20%s. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [52] -------------------------------------------------------------------------------- Okay, sounds great, thank you for that. Switching over a little bit. Obviously the drilling cost efficiency and the cyclical cost savings have been a nice tailwind for you guys. Can you comment a little bit on the completion side of the market and whether what you guys are seeing as you do contracting out there, and whether there is more savings to be captured over there from materials and pressure pumping rates and all that? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [53] -------------------------------------------------------------------------------- In this environment we would like to send a message to our service providers that there always is a need to reduce costs. But I think a lot of that cost reduction comes through efficiency, through running crews 24 hours a day and efficiently moving equipment and scheduling and things like that. We would always, especially now, think that service costs need to come down a bit more. But we think running a program the way we do it makes it easier for us to achieve those efficiencies, maybe, than others. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [54] -------------------------------------------------------------------------------- Okay, great. So not necessarily a differential opportunity there versus the drilling side. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [55] -------------------------------------------------------------------------------- I'd tell you in general the information we put out has cost as they appear today. We don't have any aspirational cost reductions built into them. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [56] -------------------------------------------------------------------------------- Okay, great, that's good. And one quick last one. Can you guys comment on your philosophy a little more high-level about holding cash on the balance sheet? Obviously you guys did the raise at the beginning of the quarter here. And if you zero that out, you've got maybe $350 million left. And then you guys have talked about maybe there's $100 million of acquisition cash to close and some ACC and some incremental midstream. If you work all that out in the math you probably are left with maybe $100 million or $140 million or somewhere in that range on the balance sheet. Which you guys have talked about wanting as a cushion or as optionality if there are incremental bolt-on deals to do. You guys have not typically carried that kind of cash balance on the sheet. Is there any change in philosophy on that as we think about how you guys want to move through the environment here? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [57] -------------------------------------------------------------------------------- Our philosophy is centered on the leverage ratios that we've talked about. And we are opportunistic. But I would say in the near term we are focused on the leverage ratios that we have described. -------------------------------------------------------------------------------- James Sullivan, Alembic Global Advisors - Analyst [58] -------------------------------------------------------------------------------- Okay great, thanks guys. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Jason Smith, Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [60] -------------------------------------------------------------------------------- Good morning, everyone. Tim, as with the Avalon, your results in the Wolfcamp and the Northern Delaware also seem to continue to improve, maybe not as much as the Avalon but still it looks like they are getting better. I'm trying to get a sense first how that fits into your capital allocation process for next year. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [61] -------------------------------------------------------------------------------- We are not really talking -- we'll give you more insight into capital allocation on the call at the end of the year. The Wolfcamp is improving. There's lots of companies that are drilling Wolfcamp wells. Our acreage up there is very well-positioned for Wolfcamp. We just haven't thrilled as many Wolfcamp wells as we focused on other things like the Bone Spring and the Avalon. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [62] -------------------------------------------------------------------------------- Your acreage in Culberson is still checkerboarded. I'm also wondering if you had any discussions with the offset operator to potentially enable for longer laterals? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [63] -------------------------------------------------------------------------------- Nothing I'd want to report right now. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [64] -------------------------------------------------------------------------------- Fair enough. On the well backlog, can you remind us where your ducks are today and how that fits into your plan for next year? If you assume that within the $1.4 billion, that some of that is completing some of your backlog. -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [65] -------------------------------------------------------------------------------- Yes, Jason we're in the plus or minus 30 wells waiting on completion. To the extent that those carry into next year, we have assumed that in our budget. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [66] -------------------------------------------------------------------------------- Thanks, Jack, I will leave it there. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities. -------------------------------------------------------------------------------- Richard Tullis, Capital One Southcoast, Inc. - Analyst [68] -------------------------------------------------------------------------------- Thanks, good morning, everyone. A couple of quick questions. Tim, it looked like the completions in the quarter in the Midland Basin showed the best quarter-over-quarter well improvement, at least on a lateral foot basis, while still maintaining the high oil mix. Is this area improving in your eyes, the Midland Basin? And how does it rank, rate of return now versus the other areas, particularly second Bone Spring and the Northern Delaware? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [69] -------------------------------------------------------------------------------- We been really pleased with our results in the Midland Basin. We've talked in previous quarters about allocating more capital over there in the future. But the good thing about our asset base is that the rates of return on what we're doing in all the different core areas are really competitive with each other. We have the ability to -- when we allocate capital cut we can think about other factors because we have very high rates of return on all our core areas. We can use some different factors to differentiate our projects. -------------------------------------------------------------------------------- Richard Tullis, Capital One Southcoast, Inc. - Analyst [70] -------------------------------------------------------------------------------- Okay. Were any of the completions in the quarter in the lower Spraberry in the Midland? -------------------------------------------------------------------------------- Jack Harper, Concho Resources Inc - EVP [71] -------------------------------------------------------------------------------- We're really not breaking that out this quarter. -------------------------------------------------------------------------------- Richard Tullis, Capital One Southcoast, Inc. - Analyst [72] -------------------------------------------------------------------------------- Okay. Were you able to comment at all on your lower Spraberry results to date in the Midland? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [73] -------------------------------------------------------------------------------- I don't think we have enough data to really -- other operators are doing more in the Spraberry. If we think it has a great future, we haven't really drilled enough of them yet to come out with type curves and information and stuff like that. -------------------------------------------------------------------------------- Richard Tullis, Capital One Southcoast, Inc. - Analyst [74] -------------------------------------------------------------------------------- Okay, that's all for me. I appreciate it, Tim. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Pearce Hammond, Simmons and Company. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [76] -------------------------------------------------------------------------------- Tim, regarding your acquisitions made year to date, can you provide any additional color? For example, what excites you the most with these acquisitions? And what might investors not fully appreciate about them? -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [77] -------------------------------------------------------------------------------- I think the power of long laterals is pretty exciting to us. I mentioned that we can get two times the -- if you're comparing two miles to one mile, you can get two times the oil for one and half times the cost. Especially in this environment, that really drives important efficiencies. And a lot of our acquisitions set us up for longer laterals. The acquisitions that we have made were very core asset-oriented and also capture multi-zone potential in areas where you're testing one zone but you think you've got prospectivity in many more. I really think that the focus on the core areas -- as an operator we're able to drill pretty good wells pretty efficiently. In these smaller deals, oftentimes the seller will want to keep an interest in the well and let us drill them. That is good for both of us. And I think that will probably continue to drive activity. -------------------------------------------------------------------------------- Pearce Hammond, Simmons & Company International - Analyst [78] -------------------------------------------------------------------------------- Thank you, Tim. -------------------------------------------------------------------------------- Operator [79] -------------------------------------------------------------------------------- I'm showing no further questions at this time. I would now like to turn the call back to Tim Leach for any further remarks. -------------------------------------------------------------------------------- Tim Leach, Concho Resources Inc - Chairman, President and CEO [80] -------------------------------------------------------------------------------- Once again, I really appreciate you supporting our Company. I think that we're excited about what the future holds for us and we're excited about our capital budget. Look for to talking to you in the near future. Thank you. -------------------------------------------------------------------------------- Operator [81] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.
|