Concho Resources, Inc. (NYSE:CXO)
Bank of America Merrill Lynch 2013 Global Energy and Power Leveraged Finance Conference Transcript
May 14, 2013 11:10 AM ET
Ben Rodgers - VP and Treasurer
Darin Holderness - Chief Financial Officer
Ready to go for our next presentation and the next presentation is from Concho Resources. From the company we have Ben Rodgers and Darin Holderness. So, Darin go ahead and take away.
Thanks for the invitation at the conference. I thought that the minute of silence is going to be deafening in here. But if [get through all the lawyer] stuff here today. I assume lot of you know our story but here we are pure Permian Basin player, focused on all players in West Texas, South East and Mexico. You hear a lot about Permian Basin these days. It’s a very active area and it seems to be the place to be.
Concho’s, we’re currently making about 90,000 BOEs a day out there, mostly -- most of the value that is in the form of crude oil and liquids. We've grown our production reserves on sort of a 40% CAGR over the last five years since we’ve been public. But if you divide that up, I’d say half of that’s from organic growth and roughly half of that is from acquisition growth.
Shown here few highlights here from the first quarter, one thing to notice our production has increased over the comparable quarter since 2012. And we have over 630,000 net acres, 1.2 million growth acres. We have over 12,000 identified drilling locations.
[This portfolio] take a look at what happened in 2010 and 2012. In 2012, we grew organically over 20% which would be our fifth year in row growing in excess of 20%. And I think -- we think that our growth rate is characteristic of the assets we own in the Permian basin.
We closed the significant acquisition of 2012 that being Three Rivers which added a significant acreage position forth in the Northern Delaware Basin which we’ll talk about here shortly. We completed our 2012 capital budgets going over 800 wells with a lot of that activity focused in the Delaware Basin.
I think that focus has allowed us to delineate what we own out there and identify even more locations. We’ll touch on locations here in a minute. But in the Northern Delaware Basin, we’ve more than doubled our location placement like location head count last year. That are the significant amount of horizontal locations in our historical Yeso vertical play. In Yeso, still in our world is to give, it keeps on giving as far as performance.
We continue to have oil growth, specifically on our Horizontal Delaware basin oil. Basin oil has grown over 10% this quarter over the comparable quarter to the previous quarter in the Delaware Basin. It is -- and it’s going to continue to be a significant contributor to our growth.
Focus 2013 basically, it’s going to be an execution year as we talk about it. We have the largest number of growing opportunities we’ve ever had in our history. We’re running over 30 rigs with over half of those being horizontal. We’re seeing focused on the Northern Delaware Basin and continue to identify multiple opportunities with multi-zone potential in the Northern Delaware basin.
We’re starting to ramp up -- starting to ramp up our large execution machines which will help us ultimately drive down costs and improve efficiencies. We have what we would identify as two exploration plays that will be, first one will be in the Southern Delaware Basin and the other would be in Midland Basin in the Wolfcamp play.
We’re primarily doing through cash flow. And from that environment, we believe that we’ll naturally delever by virtue spending our cash flow and the gross effect, the growth that we get from investing that cash flow.
Okay. There is a map here. It is showing you all the activities happening in the Permian Basin. You can see the green dots are the horizontal rigs. The blue stars are the vertical rigs that you see out there. This also represents about 25% of the U.S. rig count is out in the Permian Basin.
Another thing to notice is, if you follow the progression of the map like this over time, it’s -- all the horizontal drilling is taking place. The majority of it is taking place in the Delaware Basin. Originally, the activity started up in the north up here and has started to push itself down into the southern part of the Delaware Basin.
As you can see here that basically you have twice the horizontal drilling activity happening in the Delaware Basin versus the Midland Basin over here, which most of that is focused down in the Southern part of the Midland Basin.
If we look over last couple years over two times the number of horizontal wells has been drilled in the Delaware Basin than in the Midland Basin. The amount of productive zones that have been discovered over here in the Delaware Basin is pretty phenomenal, if you put that in comparison to the Midland Basin. So I’m not here to accrue crude through the Midland Basin, I think, it could be very -- in the very early stages of what -- what’s happened in the Delaware Basin, but the Delaware is where all the horizontal activity is happening now, and we are still very enthusiastic about things going on in the Midland Basin.
This year sort of illustrates why we feel the way we do about the Delaware Basin, got a map, on the map here we are showing you since first part of 2000 all the horizontal Permian Basin wells drilled that had oil production, the first 30 days oil production that was over 500 barrels per day and you add all that up that’s about 200 wells over that period of time, 167 of those were in Delaware Basin, which Basin life was just based on more royalty and drilled over there, you’d like to see that result.
But then who drilled those wells and so if we look at that, Concho drilled 41 of those wells. And if you look at the sort of look at the peer group down here people who throughout drilling let say it’s the OXYs, the Patches, SimEx’s, I mean, it’s a high quality list of names that we are competing with -- competing with out there and doing very well against on that. So, I think, this is one of the big reasons why we are focused in the Delaware Basin. This is what we are seeing as far as results.
So how does that translate to capital allocation? This year we have a $1.6 billion capital budget, $1.4 billion of that is drilling and completion capital, and of that 67% that’s going to drilled horizontally, 54% of that’s going to be directed towards Delaware Basin and then if we look down within the Delaware Basin, where is that focus going to be.
We are going to spend over 60% of that on the Bone Spring formation, which is our highest rate of return, which is the area of highest rate attained today. I’ll tell you that sort of in the 60% rate of return range. And the other big chunk of that being spent is in the Wolfcamp in the Southern Delaware Basin which is the exploratory play, I mentioned earlier.
In the Delaware Basin one of the deficiencies out there or -- be a deficiency but we lack a lot of infrastructure. And so we have like $125 million allocated to sort of building the facilities in the Delaware Basin, that’s primarily going to be Salt Water Disposal System, which will help bring, ultimately bring our operating cost down there. In the Delaware Basin you are probably correcting that, you corrected it for $3 or $4 a barrel, you put a system in place and you’ll be putting away your water for something less than $1.
The Delaware Basin, gets our original entry into the Delaware Basin was Marbob acquisition in 2010 was our significant entry into that. You can see in 2012 that was about 25% of our capital budget and as we’ve continued to see performance and get happy with and get happy with it, it’s now over 50 -- today it’s over 50% of our activity.
On the right hand side you will see the production quarter-over-quarter from the horizontal wells that we drilled out in the Delaware Basin. Back in the second quarter of last year we sort of talking about the ramp up and as you can see, we had a pretty significant ramp up in rigs and I think, the ultimate results of that as you can see the production performance -- the production performance followed that that ramp up and activity. The Delaware Basin represents about 30% of our corporate production today. So it’s is about 30,000 Boes out of the 90,000.
Looking forward, this is slide I really like, sort of showing the -- our growth acres and our locations. And shown you where we acquired those acres. We had three significant acquisitions, the Marbob acquisition, the OGX and the Three Rivers acquisition, that’s a substantial part of where the acres came from.
And it’s the time we bottomed and we had -- we are showing, what we identified is the location counts that we associated with the Delaware Basin there. And as you see, today it’s pretty much double across the board. I mean, this is what I view is sort of a prototype acquisition that Concho looks for to buy something where you think you can put your technical expertise and your execution machine on it and drive more value by identifying more locations within the great multizone pay that you have out there.
Just little bit deeper into our northern Delaware basin acreage position here. In 2010, we probably only had about thousand locations and today we’ve got over 4,200 locations. Originally, when we -- we identified the locations over single zone locations today, over half of our locations, they are multizone potential within those locations. I think as we’ve drilled and learn more out there, I think we will see this continue to grow over time.
On the right-hand side, here you will see sort of a strat column of all the potential out there. Most of our drilling has been focused, as you can see here by the number of wells drilled but in the Bone Spring and the Avalon. That’s where the drilling activity is, as well as drilling locations inventory -- is translated into inventory location. So we are doing a lot of beginning work in the Brushy Canyon, which by another name might be -- you might know that as a Delaware sands. There is some real success out there by the people and the industry in that area. And we seem to have the Delaware sands.
The Delaware sands may not be as prolific across all our acreage. But I think we view as we have lot of bit of opportunity to add locations there in the future. And within the Wolfcamp formation in the northern Delaware basin, so I think there is room for upside potential in location counts as we continue to drill out there.
Here is the Southern Delaware basin, one of the exploration play types. We are showing you the -- this is a -- I think it’s like 30, 40 miles between all these wells in this cross section across the acreage positions. We are trying to show you here is here too, you also have multi strat potential. Most of wells that we are -- initially and since across the border and you are now into Texas, these wells generally in order to maintain ownership you have to drill from the deepest formation.
So, first most of the wells we’ve drilled out there today are Wolfcamp wells, but you have the Bone Spring potential up above it. But it’s a matter of maintaining ownership. We don’t have comparable issue in the Mexico where it’s mostly federal and state land. You run all depths for extended -- once you drilled a well in New Mexico. One thing, we will point out here is this well has sort of got lot of press out there. Its wells are drilled back at the single section lateral. We drilled back in April 2012 and today that’s produced over 1,000 barrels of oil. I think this is the one well. I think this is the one well that helped my friends at ComStar, so our acreage goes out for a good price. So where do we improve? The royalty check coming on that particular transaction but that’s a great well we had out in the area.
We are currently running about -- currently, as I said in this scenario, we are spending -- we are going to spend about $200 million. We are currently running three rigs out there and I think you will continue to see that rig count ramp up as we have success out there.
This play here, we went and looked where can we find similar rock like found in Northern Delaware Basin with multi-zone potential and the Southern part was an area we found that sort of met that criteria.
As we’re watching the development out there between us and industry, if you followed how the activity started in the Northern Delaware Basin, this has all the fields of developing just like we did in the Northern Delaware Basin which is now moving south.
We’ve got companies down here Clayton Williams drilling down there OXY is drilling down there. I think currently they’re still looking at in a vertical program sense but we believe this will be developed on a horizontal basis down there.
And the one thing to point out is on this acreage position, we talk about the 12,000 drilling opportunities, we’ve included no -- there is no account associated with this 150,000 acres in the Southern Delaware Basin in our inventory account. So these two would be upside to what we’ve identified out there.
Over to the Midland Basin, in the exploratory play, we could gets a little comment, exploratory play, we kind of going over there, we are drilling horizontally on our existing acreage.
One of the things we’ve got and we -- we’re showing the well we are trying out drilling for this year, but one of the things we hope to find out there is we have a lot 20-acre locations out in the Wolfberry play here, the 20-acre location does not have the economics. It still have good economics, but didn’t have the economics to support its 40 acre -- it's a historical 40-acre down space to play those.
So we’re experimenting with this, can we prosecute those 20-acre locations to horizontal drilling techniques and use the rate of return on those. That’s sort of the beginning of the exploratory type of stage we are playing with down here.
The Yeso play, this is a gift that keeps on giving. I think if you ask our team today, they got to start all over again, how they develop this, we’re drilling down to 10 -- we’re on 10-acre space in our vertical rig development, our program of how historical in develop but today they would tell you they want to go back and develop on a horizontal basis.
I think the payback is quicker. The rates of return are more robust on horizontal programs versus than that. We are -- since it’s been developed vertically, where a lot of our horizontal activities going on, if we’re trying to extend the field down to the Southwest, a lot of this has been drilled horizontally as we’re drill into the planks of the field, the edge of field, you’ll see that we’re drilling horizontally there.
A quick snapshot of our liquidity, as said here today, we have about $2 billion worth of availability under our credit facility and to note that we do have a $3 billion borrowing base, but we’ve only taken down commitments for $2.5 billion, so we have room to improve our liquidity through the credit facility. Most people in this room would rather see us take out notes to improve that or realize that but that is a lever that we have available too.
In general, when we talk about debt -- our debt target, I think we view -- refer debt-to-EBITDA of two times and below is our ultimate target. In our industry, most bad things has happened in this industry or people who weren’t afraid of leverage or were not real cautious about the use of leverage and then, so we sort of targeted two times debt-to-EBITDA, which as we said here today and think about how ’13 would play out, we’re probably right at that level as we said here today.
The other thing, one of the things we also do as far as maintain a disciplined hedge program. Currently we hedge for two reasons; one to protect our capital budget that we are in, we are generally work in 18 to 24 months out at all times on a pretty robust hedge program. But also and historically we’ve made acquisitions. We’ve hedged the PDP in those acquisitions, they will help lock in the economics of that.
I think protecting capital budget is important because it’s a very inefficient, to put the switch on and off on a drilling program, the consistent running of a program is very important.
As I said it for the rest of 2013, we’re probably about little over 50% hedged on a BOE basis and we prior got hedged over 75% of oil for the remainder of 2013. One thing that we have -- historically we haven’t done but we have started doing it is everybody is aware of the Midland-Cushing blowout that we saw in the fourth quarter and first quarter.
We have now started hedging that. That’s -- in my opinion, it’s a relatively recent phenomenon to have the ability to hedge that to very liquid market. It’s hard to go very far out on time period and lock that down. I think we’ve now began to do that and you’ll see us continue to do that in the future as to take that volatility out of our pricing world.
Well, we’re just trying to hedge as close as we can to our fiscal sales point. So for hedging natural gas, we’re probably hedging this all the way down to an El Paso Permian type index, not just NYMEX index. But today, we are -- I think we all know that Midland-to-Cushing differential is back to its normal historic level. It’s actually credit positive a few days over recent time.
And I associate the blowup that we’ve had, they roll unplanned to advanced hurricane Sandy, the border refinery taken twice as long for its turnaround. So we can’t predict when that will happen. So we’re putting a little insurance in place to protect yourselves against that. It seems to be prudent decision.
So in conclusion, why invest in Concho. I think it’s still the same for debt and equity, holders have visibility on growth. Your financial discipline is spending within cash flow. The exciting developments of everything gone out in the Permian basin has dropped horizontal drilling in the completion technologies. I think our ability has been consolidator in the Permian basin. And we operate -- and we currently are operating large fleet of rigs and have the rates and people on the ground out there.
At this point, I guess -- we have to take any questions, we’ll give them the answer.
Question and Answer Session
Sure. I’ll start with the couple. And you guys have traditionally spend within cash flow. And is that still the target cash flow with your spending and it’s been able to grow 10% or 15% a year. I think it’s going to been the target going forward. Is that kind of still the plan going forward with your opportunities are such that, it makes people reconsider that in terms of many spending a little bit incremental to accelerate growth even more.
I think, as we get bigger our views on the period of -- when you spend within cash flows, when I first started that was sort of quarter-to-quarter look and that’s grown bigger, so. It’s grown more -- length of time, you can’t dive until you nail it every time within very discrete periods of times. But I would say, as we’ve gotten bigger and that’s up. The time horizon has changed but I would still say that’s still a reasonably cool philosophy of basically spending your cash flow, which -- if you do that I would say that’s sort of mid-teens production growth.
Okay. That’s how you view that. And then, can you give any color on kind of the M&A environment out in the Permian right now, or it seem compared to chart that there are lot of packages for sales kind of towards at the end of last year, but how does that look right now?
I think there were a lot of packages within last year. I think, if you go back and do a little postmortem on that, there were a lot of failed processes too. I think in expectation to what they possibly can give versus, maybe what was offered towards the difference there. But I would still say the deal flow is great out there.
As we think about it -- versus a company changeover versus just bolt-on type acquisition, so think about the portfolio, the inventory we have. High rates of return of that inventory, so buying anything got to compete with been able to displace something they already have in this large inventory. So, I’d say, I view as this being a little more peaky, large than peaky let’s say service. Pretty high hurdles overcome to displace something in our portfolio today.
Just talk about your kind of your current view on your ratings, kind of what your expectations are -- but just, how you view those now and if you have any targets in mind or kind of what your thoughts on where you want those may go?
My opinion is with S&P, we probably belong there. With Moody’s, we are looking forward and hard on trying to narrow the gap. I guess if I look back in time, it used to be a further gap than it was basically. We have made progress over time and looking to make continued progress. But I can’t say that failure today, one, I think back in March when that’s was with both agencies and there is no noise that I have not seen an upgrades just around the corner but we are working. I should say Ben is working hard toward to the issues and convince them otherwise. I will take this bonus is type to it.
Okay. Well, if we don’t have any questions from the audience, we will wrap it up. Thank you very much for coming.
Thank you, guys.
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