Concho Resources Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Concho Resources (CXO)

Concho Resources (NYSE:CXO)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET

Executives

L. Price Moncrief - Vice President of Capital Markets & Strategy and Director of Corporate Development

Timothy A. Leach - Chairman, Chief Executive Officer, President, Chairman of Concho Equity Holdings Corp and Chief Executive Officer of Concho Equity Holdings Corp

Matthew G. Hyde - Senior Vice President of Exploration

E. Joseph Wright - Chief Operating Officer and Executive Vice President

Analysts

John Freeman - Raymond James & Associates, Inc., Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Irene O. Haas - Wunderlich Securities Inc., Research Division

Andrew Venker - Morgan Stanley, Research Division

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Michael Hall

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Jason Smith - BofA Merrill Lynch, Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

James Sullivan - Alembic Global Advisors

John C. Nelson - Citigroup Inc, Research Division

Jason Miller

Joseph Patrick Magner - Macquarie Research

Operator

Good day, ladies and gentlemen, welcome to the Concho Resources Fourth Quarter and Year End 2013 Earnings Conference Call. My name is Celia, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Price Moncrief, Vice President of Capital Markets and Strategy. Please proceed, sir.

L. Price Moncrief

Good morning. Thank you for joining Concho's fourth quarter conference call. I'd like to take a minute to direct your attention to the disclaimers, including the forward-looking statements disclaimer contained in our press release. In summary, the forward-looking statements disclaimer says that statements in last night’s press release and on this conference call, regarding the companies or management's expectations or predictions of the future, are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ materially from our expectations, including those we described in the press release, our 10-K and our other filings with the SEC. In addition, we will reference certain non-GAAP measures, so please see the reconciliations in our earnings release.

On today's call I'm joined by Tim Leach, our Chairman, President and CEO. Before we get started, I'd like to point out that in addition to earnings release, we have posted a presentation accompanying this conference call, which can be found on our website at concho.com.

On the agenda today, Tim will cover our fourth quarter and year end results and highlights, provide an operations update, and describe our inventory and resource potential. Members of our management team will be available at the end of the call for Q&A.

With that, I'd like to turn the call over to Tim.

Timothy A. Leach

Good morning. I'm starting on Slide 4 in the presentation. I hope you've had the chance to download it, you can follow along. It's an exciting time for Concho. We're in a unique position of hitting our execution stride just as we're beginning to find the true depth and scale of our resource opportunity that exists across our assets, and 2013 was critical in reaching this point.

We exited the year with a great deal of momentum. We delivered year-over-year production growth of 20% and year-over-year crude oil growth of 25%. In fact, our crude oil volume in the fourth quarter grew 7% over the previous quarter, despite 2 severe winter storms that impacted operators across the Permian. We replaced 266% of our production through the drill bit at an F&D cost below $17 per Boe. After another year of robust drilling activity, we're well underway in an effort to quantify our drilling inventory and resource potential.

Our drilling locations now exceed 22,000, which is nearly twice the locations identified at year end '12. The incremental locations are coming from our highest rate of return horizontal plays in the Delaware and Midland Basins. The depth of our inventory is bolstered by our expansive resource potential which is now over 6x our proved reserves. At over 0.5 billion barrels of proved reserves, we estimate that we have over 3 billion barrels of net recoverable resources potential on our existing assets. Of course, the confidence in our inventory and resource potential is driven largely by the drill bit, and our drilling success continues in the Northern and Southern Delaware Basins, as well as in the Midland Basin. All these assets will feature prominently in our 3-year accelerated growth plan, which is on track to double production by the end of '16. As we move into the first-year of our acceleration plan, it's worth noting growth and execution are nothing new to Concho.

Turning to Slide 5, we've consistently delivered oil growth. It's what we do. In fact, we delivered quarter-over-quarter oil growth for the past 16 consecutive quarters. First quarter to fourth quarter daily oil production grew 19% in '12, 18% in '13. And over that 2-year time period, we've seen our annual crude oil mix increase from 60% in '12 to 63% in '13. This trend of increased oil mix is something I expect to continue, over the next 3 years, as we move through our plan.

I'd like to give an update on the status of our acceleration plan on Slide 6, but first, let me revisit why we elected to start this plan now. Strategically, we have significant flexibility in how we choose to execute our business because of the success we delivered across our assets in both the Delaware and Midland Basins. The performance of our assets and the depth of our inventory indicate we can increase our growth rate. Combined with a strong balance sheet and scalable drilling machine, we're in an excellent position, today, to accelerate growth. We expect to double our production as a result of this plan, averaging annual growth of 25% over the next 3 years. As we described in November, our growth will be back-end weighted in '14, with our rate of growth increasing in the second half of the year. Our guidance for '14 is annual production growth of 18% to 22%, and we expect to average somewhere between 98,000 to 101,000 Boes per day in the first quarter. This back-end '14 growth profile is due to the horizontal rig ramp that has just recently been accelerated. As you can see from the slide, we have methodically increased our horizontal program over the last 3 years. Becoming the Permian Basin's #1 horizontal operator didn't happen overnight. We drilled a lot of horizontal wells all over the Permian and progressively moved up a very steep and expensive learning curve. But over the course of this transition, we've managed to deliver on our guidance year in and year out. Demonstrating consistent well performance while executing our capital program is precisely why this is the right time for Concho to accelerate the development of our inventory and create more value. And I think this is just the beginning. While we're just barely into '14, we made a strategic decision, last fall, to get an early start on our '14 rig ramp. We continue to believe that execution will be a major theme and that the key to our success was getting ahead of the competition and building the first big horizontal machine in the Permian. That move has proceeded as planned. In fact, we're actually slightly ahead of schedule with 34 rigs, 30 of which are horizontal.

Most of our rig additions went to the Northern Delaware position, and if you'll turn to Slide 7, I'd like to start there with an operational update. Our state line area in the Northern Delaware has been the poster child for multi-zone development in the Permian. Here, we have horizontal completions in 5 different zones with consistently strong results. This is the area where we completed the La Lina 802 [ph] in the second Bone Spring and had an average 30-day IP of 3,100 Boes per day. It's also the same area where we added the 30,000-acre Delaware Ranch lease. We've already drilled a couple of wells on that acreage in the second Bone Spring and we plan more activity in additional zones this year. Our second Bone Spring program in the state line area is now in development mode. We're actively extending the production boundary of the third bone spring and will test additional Wolfcamp ventures in '14.

Slide 8 summarizes our activity and results in our Lusk, Deep and Red Hills areas. Just like the state line area, we're moving into development mode for the second Bone Spring in each of these areas, especially Lusk and Deep. We're currently drilling another dual-lateral in Lusk, targeting the first and second Bone Spring zones. Our Deep area is predominantly third Bone Spring, but we're doing some interesting things here in the second Bone Spring as well. We're testing increased well density and staggered laterals in this area during '14.

Moving south to Red Hills, we drilled primarily Avalon Shale wells here and continue to see our oil cuts increase. And just across the border into Loving County, we've had some early success in the first and third Bone Spring. Between these 3 areas, we're currently running 9 horizontal rigs and will continue to add rigs here over the course of '14.

The last operational slide, in the Northern Delaware Basin, is our activity targeting the Brushy Canyon zone of the Delaware Sands, shown on Slide 9. Until just recently, this zone wasn't included in our inventory. Now we've drilled 11 horizontal wells to this formation and you can see the results of our first 6 wells with at least 30 days of production. We're very encouraged to have such early success with a relatively new concept. The Brushy Canyon is the oiliest and lowest cost zone we're targeting in the Northern Delaware Basin. But what's interesting about the Delaware Sands is that industry has targeted to formation for decades, having drilled nearly 6,000 vertical wells. As you can see from the map on Slide 9, there's quite a bit of vertical well control around significant portions of our acreage. During '14, we're dedicating 1 horizontal rig targeting the Brushy Canyon and plan to drill 12 to 15 wells in our state line, Deep and Red Hills areas.

The addition of inventory targeting the Brushy Canyon isn't the only new zone in which we've identified incremental inventory. Let's turn to Slide 10 and take a look at our inventory, by zone, in the Northern Delaware Basin. Since year-end '12, we've more than doubled our Northern Delaware Basin inventory to nearly 10,000 drilling locations. In addition to the Brushy Canyon, we're now distinguishing among the Bone Spring formations and quantifying inventory targeting the Wolfcamp shale. We've already said that our inventory follows the drill bit. You can see the bulk of our inventory is associated with zones that are supported by drilling data. And we have a lot of data. We've drilled 237 horizontal wells in the Northern Delaware that have at least 30 days of production data, and the average 30-day rate of all those wells is 745 Boes per day, 69% oil and an average lateral length of 4,210 feet. It shouldn't be a surprise that we've identified more locations in the second Bone Spring than any other zone, giving our success with this formation throughout the Northern Delaware. We're largely in development mode for the second Bone Spring, and given we now have 365,000 gross acres in the Northern Delaware, the second Bone Spring is the only zone, within our entire portfolio, that implies tighter well density than our standard 160-acre spacing. The quality of this inventory is high, as you can see from the quantity and strength of our drilling results. As we move through our acceleration plan and push additional zones closer to development mode, I have no doubt that we will continue to bulk-up our drilling locations across the Northern Delaware.

I'd like to move on to the Southern Delaware Basin on Slide 11. For competitive reasons, we've been reluctant to discuss well results, development strategy or delineation efforts. Those same competitive tensions remain, however, we're making progress not only increasing our exposure here, but also high-grading our acreage position. We were able to accomplish this through multiple transactions over the last few months and now have exposure to 165,000 gross acres. This is an area of great focus for Concho. We plan to allocate nearly $400 million to this asset in '14 and are currently running 6 horizontal rigs: 2 in North Harpoon, 3 in Big Chief and 1 in South Harpoon.

Our recent well performance has been very encouraging. Since our last update, over 6 months ago, our average 30-day IP rate on every horizontal well we drilled in the Southern Delaware Basin increased significantly to almost 1,000 Boes a day, 80% oil, and the average 24-hour peak rate was over 1,300 Boes per day. The average lateral length for these wells was just 4,378 feet.

Recently, particularly in the Big Chief area, we've been moving towards 7,000-foot-plus laterals. Most of our activity has been in the Wolfcamp A and B, but we're also testing deeper ventures as well as zones above the Wolfcamp.

We have increased our drilling inventory significantly to 800 locations, primarily within the North Harpoon and Big Chief areas, and a significant portion of those locations are extended laterals. South Harpoon continues to be an exploration project and is largely excluded from our current inventory.

Let's turn to Slide 12 and quickly touch on the Midland Basin, where we continue to find ways to optimize our completion techniques. Recently, we've been testing reduced cluster spacing and those wells have responded favorably. Our activity remains concentrated in the Wolfcamp A and B, but we have plans to test deeper benches and move up to the Spraberry in '14. While we will continue our legacy vertical Wolfberry program, we firmly believe that horizontal development is more capital efficient and provides greater returns. The average lateral length of our wells is still in the 4,400-foot range, but we're shifting to longer laterals to further increase efficiencies and returns. We're currently running 11 rigs, 7 of which are horizontal and expect to operate at that level for the remainder of '14. And, over the course of our 3-year plan, we expect to increase our horizontal activity in the Midland Basin.

From an inventory standpoint, we've identified over 2,500 horizontal locations targeting the Spraberry and the Wolfcamp A, B and C. With over 200,000 acres prospective for the Spraberry and the Wolfcamp, there's still quite a bit of opportunity to expand our horizontal Midland Basin drilling inventory.

We've clearly taken a significant step forward in the identification of our inventory and description of our resource potential, as you can see on Slide 13. Next to executing our growth plan, this is our top priority. The expansion of our drilling inventory and the scale of our resource opportunity is based on the combination of drilling and science. At Concho, we tend to be data-driven and our data is always tied to the drill bit. We drilled over 400 horizontal wells across the Permian, which has given us a great deal of confidence in the quality of our assets and the depth of our resource. It's no surprise that the incremental locations we've added to our inventory are almost exclusively horizontal within our highest impact assets. At the same time, we can apply science and geology to further define and expand our resource and inventory potential. For instance, we're using science to, one, extend the productive boundaries on our acreage; two, delineate additional zones; and three, increase our well density. Ultimately, we rely on the drill bit not only to prove up our inventory, but also identify more resource opportunity along the way.

When we apply this framework to our assets, which is based on our current interpretation of the data and science, we believe that our net recoverable resource potential is at least 6x our year-end '13 proved reserves of 0.5 billion barrels. The depth of that resource is driven by approximately 22,000 drilling locations, nearly twice as many locations identified at year end '12.

So what does this all mean? Concho is running a big horizontal drilling program. In fact, the biggest in the Permian Basin. As we move forward with our growth plan, we can run more than 50 rigs and accelerate that inventory to create more value. At the same time, the game has changed thanks to horizontal development. The opportunities across the Permian are substantial and require significant capital, such that we're likely to see a big consolidation over time. As long as we have this big drilling machine and advance our understanding of our resource base, we should be well positioned to take advantage of any consolidation play. In the meantime, we still have work to do to more clearly describe and quantify our inventory and resource potential. Over time, we plan to provide updates by core area, in which we'll describe the zones, oil extent and increase density opportunities across our acreage position.

I also expect us to continue our track record of execution and deliver the type of growth outlined in our 3-year plan. Given all the opportunity we have on our existing assets, I believe our 3-year plan is just the beginning of a much longer term growth plan.

So, with all that, I appreciate your continued interest in Concho and I and the team look forward to taking your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of John Freeman, Raymond James.

John Freeman - Raymond James & Associates, Inc., Research Division

Looking at the average lateral length in the Northern Delaware, it's been running about 4,300 feet. And I know that Joe had mentioned, previously, that kind of over 1/3 of the budget this year was going to go to long lateral. So, just sort of back in the envelope, that would sort of suggest the average lateral length, in that Northern Delaware Basin area, would go to kind of just over 5,000 feet. Is that kind of the right way to think about it, or is that likely too conservative?

Timothy A. Leach

I think most of our long laterals are going to be in the Southern Delaware Basin, John, where we've got big leases where we can drill further. We're also doing that in the Midland Basin. In the Northern Delaware Basin, we are drilling as far as we can based on the lease configuration we've got. So I think you'll continue to see that lateral length increase, but in the Northern Delaware Basin it's going to be constrained by partners and how much we can pool together acreage to create longer laterals. But I think the focus is going to be in the Southern Delaware and the Midland Basins in terms of really long laterals lease.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. And then shifting to the Avalon Shale and I think it was interesting in the way that you broke out the different prospects in the Northern Delaware, just how much oilier the Avalon was when you sort of moved a little bit more over in the kind of Red Hills area. And I'm just curious, it does look like now that's going to be a little bit more of a focus, drilling-wise, as opposed to just the second and third Bone Springs. So, kind of on a return basis, the way that you're looking at it, at least in that Red Hill area, other than the second Bone Spring and Brushy Canyon, would it be sort of right there in that next slate of zones in terms of returns?

Timothy A. Leach

Yes, I think that's right. And there are so many zones have high potential for us. And the Avalon sits right at the top of all that, so we get to see it as we go through to all these other zones. So we're collecting a lot of information. But it's continuing to be more of a focus and we've had lots of success there. So it's been a big one for us.

John Freeman - Raymond James & Associates, Inc., Research Division

And just a last question for me, on Brushy Canyon. Obviously, that's the zone that you've had the least activity in, so I'm assuming that, that inventory count of 850 provided is probably pretty heavily risked. When would you guys anticipate doing some maybe bigger step-out delineation work on Brushy Canyon as opposed to kind of -- most are clustered around that Red Hills/State Line area.

Timothy A. Leach

Yes. This year we're going to drill 12 to 15, like I said, and it's going to be scattered out between those 3 areas. So, this year, we're pushing the Brushy Canyon to a wider aerial extent. And we try to show how many vertical wells have been drilled around our acreage. So we're using vertical wells to help set up some of those prospects.

Operator

The next question comes from the line of Scott Hanold, RBC.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Good update. I was wondering on that resource update of 22,000 locations. Do you all have a general number of what the sort of the engineered number, consistent with the kind of prior reporting to be, versus the resource locations, just at a high-level?

Timothy A. Leach

Yes. Well, at a high-level, we used the same process to identify these locations. And we've been talking about this for quite some time. So we've gone through and -- every one of these locations has a location on the map and we have a pretty high degree of confidence, based on our drilling, around the number of locations and the resource potential. And we've used kind of the same type of assumptions relative to type curves per well and things like that. So this is something that we feel really good about. Most of this is coming from the Northern Delaware Basin, where we have the most information and through the drill bit. And the expansion has been driven through lateral expansion of where these zones exist, identifying more zones so that the vertical distinction that I talked about, and then also starting to understand increased density and what that could add to our property base.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, okay. All good. Understood. And when you step back -- and I think you all appreciate the size of the opportunity you have here. When you look at sort a blue sky sort of case on what this could be, I mean, how big could that 22,000 location get, just from a kind of big picture view?

Timothy A. Leach

Well, I thought 22,000 was a pretty big number. But I would tell you that we have more information in Eddy and Lea County, and so we have more locations there with the higher degree of confidence. We also, then, in the Southern Delaware Basin and in the Midland Basin, where we're just getting started testing some of these zones, we've been more conservative there. And in the Midland Basin, we haven't -- the 7 Bakkens that you read about, we haven't drilled all those zones, so we haven't really assigned reserves to many of those zones in the Midland Basin.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, okay. And then one last question. On Page 10, where you all provide the Brushy, Avalon, just the various breakdowns that's in Northern Delaware Basin. I mean, could you provide just a high-level sense of like, within each of the zones, what kind of like EURs or costs per well? Is that something that you think, over time, that you'd be willing to provide or can actually give some input on?

Timothy A. Leach

Yes. I think that's something that we can talk about over time. But, generally, the things you're familiar with there, the way we've done our type curves and the way we described the cost is similar to how we modeled it in this program. It's interesting, before you get off, I would say that we've got some of the best performing wells in the Permian Basin. But I think, when you compare our type curves to others, you might conclude that our type curves are more conservative than other companies. These type curves are things that we have a lot of data around and have a lot of confidence in, that we can deliver those type curves. So, I think if there's upside, maybe upside in the type curves compared to others in the industry.

Operator

Question from the line of Brian Singer, Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Just following up on a couple of those other questions. On the EURs, I know you're not giving the specifics there, but can you talk if there were any changes within any of the zones in the Delaware or the Midlands relative to your prior assumption for reasons other than lateral length changes?

Timothy A. Leach

I mean we've gone through our year-end engineering. There were some ups and some downs, but generally, I'd say they're all about the same.

Brian Singer - Goldman Sachs Group Inc., Research Division

So when you think about the 5x or 6x approved reserves, in terms of that unbooked inventory, that's really entirely related to locations as opposed to changes and changes in the EURs?

Timothy A. Leach

That's exactly right.

Brian Singer - Goldman Sachs Group Inc., Research Division

Okay, great. And then going to the Brushy Canyon. This just, may be an example or a bit of a microcosm, you drilled 11 wells there. Can you just talk about, given the relative concentration among those 11 wells, how, in your process, that goes from 11 wells drilled to 850 locations?

Timothy A. Leach

Yes. Well, like lots of things we've done. We start with an area where we think we'll have success. We try to make that repeatable. And then we will try to find other areas around our acreage basin in the Northern Delaware where the vertical testing indicates that the rock will be the same. And that's kind of the process we've used.

Brian Singer - Goldman Sachs Group Inc., Research Division

And so for the Brushy Canyon specifically then, I mean, does that take you all the way out to the limits of your Northern Delaware block or is that high concentration within halfway or can you provide any more color for how far your stake in that [ph]?

Timothy A. Leach

I'd say it's a high concentration around areas where you've penetrated it vertically and believe it to exist where you can capture it horizontally.

Brian Singer - Goldman Sachs Group Inc., Research Division

Lastly, any additional color as you think about the long-term guidance of 25% with regards to CapEx and CapEx specifics other than your leverage ratios will fall?

Timothy A. Leach

I think that's still the best way to think about it. And as we execute this program, we'll make adjustments as we see that we're going to have more cash flow or as we see our debt declining quicker than we expected, but I'd say our plan is right on track.

Operator

We have a question from the line of Irene Haas, Wunderlich Securities.

Irene O. Haas - Wunderlich Securities Inc., Research Division

My question is focused on Southern Delaware Basin. I noticed that you're pursuing the second Bone Spring and your Big Chief prospect area. Can you tell me where the second Bone Spring came from? Is it from the Southwest? Is it much like much the other ones? Sort of turbolite sand [ph]. And does it extend into Pecos County?

Timothy A. Leach

I'm going to turn it over to Matt, he can address that question.

Matthew G. Hyde

Irene, this is Matt. Good question. The second Bone Spring there has attributes that equate back to the Northern Delaware Basin. But there's also an element of it that looked very much like the Wolfcamp underlying it, in terms of the stratigraphic sequence. So it's a bit of the hybrid as you think about the Southern down bit [ph] limit of the Bone Spring.

Irene O. Haas - Wunderlich Securities Inc., Research Division

Does it have certain -- is it mappable? Does it have a certain sort of lateral extend that you can see, rather being a contiguous play, more like a traditional Wolfcamp shale?

Matthew G. Hyde

It has those attributes, yes. It'll allow it to be mapped in a continuous way. Yes, correct.

Irene O. Haas - Wunderlich Securities Inc., Research Division

Does it extend into Pecos area?

Matthew G. Hyde

Yes, it does.

Operator

The next question comes from the line of Drew Venker, Morgan Stanley.

Andrew Venker - Morgan Stanley, Research Division

I guess just following up on the Southern Delaware. Can you talk about your plans to delineate that Pecos County area, I guess South Harpoon and the southern portion of Big Chief?

Timothy A. Leach

Well, I addressed the number of rigs we're running down there and I addressed that we've picked up more acreage that we're really happy with. Other than that, I don't think I want to see anything more about our delineation plans.

Andrew Venker - Morgan Stanley, Research Division

Okay. So, I guess in that area, do you see Wolfcamp B and C being prospective as well?

Timothy A. Leach

Our wells are in the A and B primarily, and we're going to test deeper into the C.

Andrew Venker - Morgan Stanley, Research Division

And then you mentioned some down-spacing pilots in Big Chief. Can you provide more color on spacing or what exactly the pilots are going to test?

Timothy A. Leach

Those are generally long lateral wells, 7,000-foot wells down there, and they're being set up where instead of 4 wells per section, if you want to think about it that way, that we're setting them up where we can do 5 or 6.

Operator

The next question comes from the line of Ryan Oatman, SunTrust.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

I wanted to also stick with the Southern Delaware Basin here. Obviously, a huge improvement with the latest wells averaging almost 1,000 barrels a day with 80% oil cuts. Is that a reflection of you guys doing something different within the same target zones from a drilling or completion standpoint or do you think that is more reflective of stepping out to different zones?

Timothy A. Leach

Well, I guess the way I think about it, the rates are reflective of us improving our drilling completion techniques. I think that the oil component is reflective of what that zone will produce in that general area.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

And then in the state line area, shifting back to the North. Obviously, the second Bone Spring well that you guys drilled, that did almost 4,600 barrels a day. Wanted to see if you guys were looking at the Wolfcamp D up there, given competitive results. And then kind of a leasehold question as well, see if there was any potential to potentially unitize that or kind of create larger units with the other leaseholders out there.

Timothy A. Leach

Yes. I mean, we have experimented with the Wolfcamp D, and we are, right now, I guess drilling one-section lateral length wells up there. Every place we can, we're trying to partner with our offset operators to drill longer laterals. Some places we're having more success than others in that partnering. But these wells have substantial economics on their own at one-section laterals, so you don't have a whole lot of pressure that you have to partner.

Operator

The next question comes from the line of Mike Scialla, Stifel.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

Just a real basic clarification, on the 22,000 locations, I should know the answer to this, but is that the gross or net number?

Timothy A. Leach

That a gross number.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

Would you be able to guess at what the net might be there?

Timothy A. Leach

Can you just give Price a call off-line to get that?

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes, sure. No problem.

Timothy A. Leach

All right.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

And in thinking then, in terms of your inventory in the Midland Basin, with the vertical Wolfberry, you've got 4,300 locations there in your inventory. You mentioned your preference for drilling horizontally there. I recognize that you're still pretty early in that program. But if that goes as well as you hope, would you anticipate that those 4,300 vertical locations might be converted into horizontal locations at some point in the future or do those remain?

Timothy A. Leach

That's a real complicated question because I think the vertical locations are independent and standalone. And the resources we've identified in the horizontal Wolfcamp are kind of different resources, different oil, if you will. So we are continuing to run vertical rigs. They have good economics and the number of zones we go horizontal in is something I think that we're going to be working on over the next few years.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

You had mentioned the down-spacing test in the Lusk area, with the staggered kind of configuration. Can you indicate what kind of spacing you're testing there?

Timothy A. Leach

Well, it's denser spacing. I guess it would be one iteration more dense than 160 acres spacing with a staggered lateral, so you're varying the depth where you put the lateral.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

So, essentially, if you look at it as one package, you're kind of testing 80-acre spacing with vertical offsets?

Timothy A. Leach

Yes, by the way you mean it, but I think it's more complicated than that because, with those staggers, it's not as dense as 80s.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

And last one from me, you mentioned, too, that you're trying another dual-lateral. And any thoughts on what you learned from the first one, what you might do different with this one?

Timothy A. Leach

No, no. I don’t have anything to talk about on that. I think the dual-lateral approach is something that will be tested over long period of time. We've got plenty of good economics and plenty of rigs to kind of attack all this with single laterals and we're testing the number of things, like duals, that could enhance the economics. But it's going to be -- there's lots of variables and lots of different ways to approach it.

Michael S. Scialla - Stifel, Nicolaus & Company, Incorporated, Research Division

So it's not anything you're really counting on, I guess, it's more a little bit of a science project that may come into play over the longer term?

Timothy A. Leach

That's right, that's right.

Operator

The next question comes from the line of Pearce Hammond, Simmons.

Pearce W. Hammond - Simmons & Company International, Research Division

Yes. I wanted to follow-up on Scott Hanold's questions about the well cost. Down in the Southern Delaware Basin, how much more expensive are those wells than in the Northern Delaware Basin?

Timothy A. Leach

Let’s see. I'm going to fire off on this and if I get out of bounds, Joe you jump in. But I think, generally, the Northern Delaware Basin, if you look at average well cost, it's kind of $5.5 million to $6 million a well. Something like that. And those Southern Delaware Basins, depending on the lateral -- they're longer lateral lengths almost entirely, and they can range from $10 million to $12 million apiece to drill. And those are kind of current cost today. The Northern Delaware Basin is much more a development manufacturing kind of operation. We're further along at driving the cost down there. So there is efficiency gains to be made in the South plus just gains to be made from scale and the size of the operation. So I think, in our plan, we've planned for improved cost over this year and we are seeing that currently. And there's probably more of that in the South than in the North.

Pearce W. Hammond - Simmons & Company International, Research Division

And then, given the big horizontal rig ramp in the Permian grid [ph] large, right now, going on from the industry, are you starting to see any pressure on services, either availability or any bottlenecks?

Timothy A. Leach

Well, I think, once again, running a program the size and scope of ours, we have great advantages over the competition. And so, generally, where you might say there is price pressure in the Permian, I would say, at Concho, we're seeing increased efficiencies and we still think our cost will be coming down. And I think it's a factor of having this many rigs that are running full-time. Our frac crews are running 24 hours a day, which is much more efficient. So I think there's great advantages to having a big program.

Pearce W. Hammond - Simmons & Company International, Research Division

And then one last one from me. On differential outlook for the Permian, and maybe specifically for the Delaware Basin as you look out this year, are you starting to see increased levels of condensate have any impact on differentials?

Timothy A. Leach

No. I mean I don't think that -- I haven't seen any of that situation where I think condensates -- our differentials have been all over the place, with what's going on with the Kush [ph] differential. We've tried to hedge our way through that. I would also say, though, that there's a large number of infrastructure projects that are underway to make the gathering of this oil and gas more efficient, and I think we'll see some improvements in our pricing around that.

Operator

The next question comes from the line Matt Portillo, TPH.

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just wanted to dig a little bit more on your Midland Basin program. I was wondering if you could give a little color around the Wolfcamp opportunity that you see today, where you're focusing your drilling at the moment, in terms of the horizon. And then, obviously, given the acreage footprint across kind of Upton, Midland, Martin and Andrews County, how you think about kind of rig allocation across those plays and maybe where you may be might migrating to over time.

Timothy A. Leach

That's a lot of questions. Most of our activity, to this point, has been in the Wolfcamp A and B. And as you look around at where our properties are located and what other operators are doing, we think there's opportunities in the deeper Wolfcamp, like in the Wolfcamp C and D, and there are also opportunities up in the Spraberry. We plan to drill 70 wells on this asset this year. We plan to scatter those wells around our acreage position, to give us better information about how these things are going to perform, kind of in a widespread basis, and we plan to start testing these different zones. But, up to this point, our work has been pretty concentrated in the Wolfcamp and in the upper portions of the Wolfcamp.

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And could you remind us, I think you talked about a gross number before, but roughly how much net acreage you have in that area that you've highlighted in the presentation?

Timothy A. Leach

Hold on one second to get [ph] that number. It's about 100,000 net.

E. Joseph Wright

Little over 200,000 gross.

Matthew Portillo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And my last question is just -- you mentioned reduced cluster spacing, just wanted to see if you could give any incremental contacts on what you're testing and maybe kind of from where you're coming in terms of the number of stages to where you're going to.

Timothy A. Leach

Yes. Throughout our industry you're seeing widespread experimentation and success with the spacing on clusters and how much you're draining and the efficiency of the drainage. I think that's a really important thing and maybe a big breakthrough. We've a lot of success with it and that's kind of all I want to say at this point, that I think denser cluster spacing is going to increase the recovery efficiencies that we have in this reservoir.

Operator

The next question comes from the line of Michael Hall, Heikkinen Energy Advisors.

Michael Hall

I guess I just want to jump back to the Southern Delaware real quickly. How would describe or characterize the results, compare the results, in the Wolfcamp versus the Bone Spring? And any general differences in terms of decline curves or anything along those lines that you're seeing as of yet?

Timothy A. Leach

We've got a lot more data in the Wolfcamp than we've in the Bone Spring and we've got lot more big rates from extended length laterals. I just don't think we have enough information in the Bone Spring, yet, to really comment on what we think those wells are going to do when we get the lateral lengths out further. I'd say Wolfcamp more data, more wells, high rates. We feel real good about it but we're very optimistic about the Bone Spring as well.

Michael Hall

And then in the Northern Delaware, thinking about the Bone Spring, you've obviously been increasing inventory there substantially. How has your thinking, I guess, evolved around the risking of the Bone Spring inventory and have the actual results maybe come in with a narrower distribution than you had initially thought and that's helping to give some added confidence? Just curious, if you have any color around that.

Timothy A. Leach

Well, in the second Bone Spring, we drilled a lot of wells, we have a lot of data and it's pretty widespread, and I'd say we've lot of confidence. And we're modeling it in such a way -- when we communicate the number of opportunities and what we think the magnitude of the reserves are, we're modeling in such a way that we think it's achievable with the technology we have today. We're not normalizing to any different kind of lateral lengths or anything like that. We're communicating what we think we're experiencing, on average, today and we have a high confidence level on those averages.

Michael Hall

And then just 2014 outlook and guidance. Can you just remind me kind of how you think about lateral length in the guidance? There's a lot of variability in terms of what you're targeting, and I'm just wondering, what's kind of the assumed and how is it risked in the 2014 guidance around lateral way.

Timothy A. Leach

Well, everything we're doing in 2014 -- I mean, we picked the locations, we know the lateral lengths. So I'd tell you that a 1/3, a 1/4 of what we're doing is longer than the section long. So it's a fairly substantial portion of our program. But I think, over time, you'll see more increased lateral length than what we're doing this year.

Operator

The next question comes from the line of David Tameron, Wells Fargo.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

A couple of questions. If I look at the rig count, just what you guys have in the presentation, you're ramping on the Delaware side. Where do the majority of those rigs go?

Timothy A. Leach

Well, most of them are going in the north.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Okay. 75-25 kind of number?

Timothy A. Leach

Most of our rig ramp is going in the Northern Delaware and we'll add a few more rigs in the south, but most of this expansion -- from where we sit today -- I mean, we're at 34 rigs today, so we're just going to add couple of rigs a quarter throughout the rest of the year, and most of those will go in the Northern Delaware Basin.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

I know, in the past, you've been concerned about the amount of -- I guess not flexibility, but how taxing it's going to be on the organization to ramp from 25 rigs to 50 rigs? It looks like you guys have just in the last 3 of 4 months out of 7, 8 rigs. Any integration problems with that?

Timothy A. Leach

I'll remind you of a couple of things, one, is this organization has run 45 rigs before, albeit in a mostly vertical program. The second thing is, as we gain efficiencies -- and I think we've got something in the slide deck on that -- what we originally planned to do in the Wolfcamp and the Midland Basin, we're going to able to execute that whole plan, this year, with fewer rigs than we originally thought, just because the drilling efficiencies are continuing to drive the number of days down. And that takes some stress off the organization, you don't have to run quite as many rigs to get all your wells drilled. But I mean, we've been talking about this for quite a while, trying to build the big drilling machine. Our organization has a lot of capacity. We're going to continue to expand that capacity, but I think we've got enough in-house to do the plan that we've laid out for the next couple of years.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Last question, back to the southern. If I just look at the September presentation, you said your first 11 wells, third day rates were 700, just under 700. Now with the 21 wells, you're just under a 1,000. So I'm not very good at math, but I mean, is 1,300 kind of where those recent wells have been coming in, the last 10 or so?

Timothy A. Leach

For someone who's not really good at math that's, I guess, a pretty good estimate.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

That's all I, got everything else has been asked. But the 1,300, okay, you talked about that earlier, just a combination of learning curve, not necessarily lateral length, but just more learning curve and getting your feet underneath there, is that the right way to think about that?

Timothy A. Leach

Yes, and we're really in a very good area, We've high-graded. We think we've got the fairway. We like that spot. And we're pretty happy how we put that spot together and how the whole thing works.

Operator

We have a question from the line of Jason Smith, Bank of America.

Jason Smith - BofA Merrill Lynch, Research Division

Just a quick one, back on the Avalon, within your inventory of 1,500 locations. How should we think about the split between the gassier Avalon and state line area and the oilier Avalon and the Lusk, Deep and the Red Hills area?

Timothy A. Leach

Yes. We haven't broken that out yet. So I don't have -- that'll be something we can talk about in the future.

Jason Smith - BofA Merrill Lynch, Research Division

And, Tim, on the New Mexico Shelf, you guys have doubled your horizontal ESO [ph] locations, but obviously the rig count has gone down with some of the infrastructure issues. So what give you the confidence to increase location count there? And then also, when takeaway capacity, hopefully, improves later this year, are there any expectations that you're going to add more rigs to that area?

Timothy A. Leach

Yes. In our 3-year plan, we planned on adding rigs in '15, not so much in '14. And we've had a lot of really good success up there with horizontal drilling. So I think that inventory increase is predominantly horizontal. And we plan to get back to work up there probably next year.

Jason Smith - BofA Merrill Lynch, Research Division

One last one, I think you kind of covered this in the last question. But in terms of people and G&A, and the release you guys mentioned, that the G&A was higher due to increased staffing through the years. Do you feel comfortable with where you are from a people perspective, now, to execute on the plan or you think that you still a little bit more to go there?

Timothy A. Leach

We've got between 900 and 1,000 employees, and our plan calls for adding another 100 or so a year for the next 3 years, and that's what the track record has been in the past. So I think it's very doable and I think we're right where we want to be right now.

Operator

A question from the line of Jeff Robertson, Barclays.

Jeffrey W. Robertson - Barclays Capital, Research Division

Tim, can you talk about the rates of return across the different plays in the Northern Delaware Basin, and within that, how you you're thinking about allocating capital between the different zones, whether it's development or still delineating the opportunity set?

Timothy A. Leach

Yes. Price is flipping to a page here to help me out. But, in general, the rates of return are very robust all across the Northern Delaware. I talked to you before, about this tension between allocating capital between the -- all this inventory we have is shooting fish in a barrel and then all the trying to delineate all the additional zones and do some testing on increased density and everything. I mean, I think we're going to feel that tension for a long time, capturing additional opportunity versus just executing a big drilling machine. And I think the rates of return up there, as the cost have come down and the wells have continued to get better -- I mean, these are some of the best rate of return things that we've ever done.

Jeffrey W. Robertson - Barclays Capital, Research Division

Is the second Bone -- it sounds like second Bone from what you said earlier, is the #1 rate of return currently?

Timothy A. Leach

Yes, I think that's right.

Jeffrey W. Robertson - Barclays Capital, Research Division

And from the early results in the Brushy Canyon, where would that rank?

Timothy A. Leach

Well, I mean, Brushy Canyon, we don't have very much data on it. But as I mentioned it's the oiliest and the cheapest, and those rate of returns are very high as well.

Jeffrey W. Robertson - Barclays Capital, Research Division

Second question, in the Southern Delaware Basin. With the rigs that you're going to run, is the well count there somewhere between 70 and 75 gross wells for 2014?

E. Joseph Wright

No. it's closer to about 40. Yes, and they're all about 100% wells.

Timothy A. Leach

100% ownership.

Jeffrey W. Robertson - Barclays Capital, Research Division

And, Tim, are there infrastructure issues in that area, since I think it's more remote, that impact how quickly you're able to pursue that program?

Timothy A. Leach

It doesn't impact how quickly we can pursue it per se, but the answer is yes. There's infrastructure issues everywhere. Getting electricity, where you need electricity. The Delaware is where we are experiencing higher cost because we're still hauling a lot of salt water, we've got a lot of salt water disposal systems to build. We're going to have to generate some of own electricity for a while. Right now we're running electrical generation that we're fueling with diesel or natural gas. So there's all of that kind of stuff. Over the next several years, there will be more infrastructure that drives the cost down. But we're going to have to build some of it and then industry will build some of it coming to us. But it hasn't really, necessarily, affected the pace, it has just mainly affected the cost.

Jeffrey W. Robertson - Barclays Capital, Research Division

The pace is driven by your drilling results and the science you're doing to keep it all in check?

Timothy A. Leach

Right.

Operator

The next question comes from the line of James Sullivan, Alembic Global Advisors.

James Sullivan - Alembic Global Advisors

I just wanted to get a little bit on your thoughts about acreage acquisitions in the Northern Delaware. I know you guys always have an enormous opportunity set in front of you and you've been opportunistic already with the Delaware Ranch. But you did talk about how lease configurations were maybe limiting lateral length in that area. How important is it to you guys, as you think about being opportunistic with acreage to block up what you have? I mean would you consider asset swaps and just how does that figure into your thinking there?

Timothy A. Leach

We've done a bit of that. I would say it's not transformational up there. But on the margin, we still always pick up additional leases from the lease sales and things like that, in order to make it where we can drill longer laterals. So there's always a bit of a budget for increased land in the Northern Delaware to make our drilling more efficient. I would say, in general, there's not a big acreage play available in the Northern Delaware any longer, most of that stuff is now in the hands of the folks who I think are going to actually drill it.

James Sullivan - Alembic Global Advisors

When you guys talk about -- I mean, you spoke at a very high level kind of early in your presentation about the possibility of consolidations in the Basin, but you're thinking of that is not picking up from smaller operators or non-operators.

Timothy A. Leach

In the north, I think there's probably more opportunity in the South. There's more acreage in the South in the hands of companies that aren't going to ultimately drill it, that there's going to be more consolidation I think.

Operator

The next question comes from the line of John Nelson, Citigroup.

John C. Nelson - Citigroup Inc, Research Division

I'm just curious, with your Delaware results, it seemed to come in trending more oily every quarter. Do you think there could be upside to the 66% oil mix in 2016?

Timothy A. Leach

Yes, but you're getting close to the top I think.

John C. Nelson - Citigroup Inc, Research Division

Also with regards to your current...

Timothy A. Leach

Yes, because all these wells we're drilling, with the higher oil rate, at the end of the day, they're incremental. So you'll have incremental moves, I think, upward. But we're pretty oily already.

Jason Miller

Fair enough. And then just following up on Jason's questions earlier. I think you said you'd add a couple of rigs to the New Mexico Shelf or you'd add some more rigs to the New Mexico Shelf in '15? Can you quantify that?

Timothy A. Leach

Can I do what?

John C. Nelson - Citigroup Inc, Research Division

How many rigs will that be in 2015?

Timothy A. Leach

We haven't put our '15 budget together. So we were running -- when we started shutting it down, we had 5 rigs running there I think. So I think, generally, it'd be going back to something like that level.

E. Joseph Wright

John, the rigs that we would add to the shelf would be a combination of horizontal and vertical. So it'd be a noticeable pick up in just rig count, most likely, by the time we get to '15.

John C. Nelson - Citigroup Inc, Research Division

Fair enough. And then I guess just lastly from me. We all seem to be asking these same questions on conference calls and getting the same answers from operators. So I'll try to go about this a little differently. Just on service pricing, obviously you're most insulated from any potential service pricing increases given your size. But would it be fair to characterize the potential inflation as probably only the low single-digits, whereas the potential for efficiency gains for you over the next few years could be something along the lines of 10% to 20%? Is that a fair way to think about sort of your overall cost?

Timothy A. Leach

Yes. I think that's fair. Although I don't expect us to have cost inflation.

Operator

We have the final question from the line of Joe Magner, Macquarie.

Joseph Patrick Magner - Macquarie Research

Just one more point of clarification. The resource potential, the 6x year end '13 proved reserves, is that a gross or a net figure?

Timothy A. Leach

I'm sorry. Say that one more time.

Joseph Patrick Magner - Macquarie Research

Just curious. You referenced resource potential tied to this new inventory.

Timothy A. Leach

Yes, that's net. That's net recoverable to Concho and then the location count was gross.

Joseph Patrick Magner - Macquarie Research

Okay. And I guess as we think about the sort of ongoing evolution of your disclosure around some of the potential here, how should we expect to get updates on per well EURs or more specifics around some of these plays and some of these opportunities?

Timothy A. Leach

I think you ought to think that you'll get more information in the Northern Delaware because we'll have more information up there. That will come to you more quickly. Updates on the Midland Basin in the Southern Delaware will be a bit slower until we get enough wells that we feel comfortable, really, talking about type curves and different zones and things like that.

Operator

We will now turn the call back over to Mr. Tim Leach for closing remarks.

Timothy A. Leach

All right, thanks. Well, I appreciate all the good questions and the attention that you're paying to Concho. I think, as I've said before, this is a real exciting time for us. The acceleration that we've talked about, coupled with the growth in our inventory, I think, really puts us in a great position, and I look forward to talking to you more about it in the future. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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