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Concho Resources (NYSE:CXO)

Q2 2011 Earnings Call

August 04, 2011 10:00 am ET

Executives

E. Wright - Chief Operating Officer and Senior Vice President

Toffee McAlister -

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

Jack Harper - Chief of Staff and Senior Vice President

Analysts

Brian Singer - Goldman Sachs Group Inc.

Daniel Morrison - Global Hunter Securities, LLC

Scott Hanold - RBC Capital Markets, LLC

David Tameron - Wells Fargo Securities, LLC

Eric Hagen - Lazard Capital Markets LLC

Pearce Hammond - Simmons & Company International

Irene Haas - Wunderlich Securities Inc.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

John Freeman - Raymond James & Associates, Inc.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Concho Resources Inc. Earnings Conference Call. My name is Akia, and I'll be your operator for today. [Operator Instructions] I would now like to turn the presentation over to Toffee McAlister, Director of Investor Relations. Please proceed.

Toffee McAlister

Good morning. Before we get started, I would like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under the federal securities laws. There are many factors that could cause actual results to differ materially from our expectations, including those we've described in the press release, our 10-K and other filings with the SEC. In addition, we will reference certain non-GAAP measures, so be sure to see the reconciliations in our earnings release.

With that, I would like to turn the call over to Tim Leach, Concho's Chairman and CEO.

Timothy Leach

Thanks, Toffee. I hope everyone has had a chance to see the copy of our second quarter release that came out yesterday afternoon. In addition to Toffee, Joe Wright and Jack Harper are with me on this call and you will hear their comments in a moment.

First, I'd like to give you a bit of an overview and my perspective. It was a good quarter, and I'm pleased with the results for the first half. We're on track to reach our goals for 2011, both for growth and profitability. During the second quarter, we achieved record levels of production, drilling and cash flow. We produced 5.6 million equivalent barrels. We drilled 229 wells, and we recorded $311 million of EBITDAX. The capital budget is going well too. We're running about 36 rigs today, and we're on track to drill almost 900 wells this year in some of the most economic plays in the country. And I'm encouraged by the opportunity set that's in the pipeline, whether it's traditional private opportunities or acreage acquisitions in our core areas, the Permian seems to be the gift that just keeps on giving. I have no doubt that our prospects for future growth are better than they have ever been.

Before I turn it over to Joe for an operational overview, let me first summarize a few of the recent achievements. Our production is growing as expected, but the Bone Spring production has grown 40% compared to the first quarter. As I've mentioned before, there's a lot of new oil and gas development in the Delaware Basin, and this will be a big driver for our future growth. Also important is the increase in our inventory of drilling locations. We've added about 2,500 new locations to our inventory of identified future drill sites. And our reserves are growing as demonstrated by the mid-year proven growth.

In addition to the operational metrics, Concho continues to increase its financial strength. During the second quarter, we successfully executed a senior notes offering, and after the dust settled, we increased our liquidity to about $1.8 billion on our bank line. This is the most firepower that we've had in the history of our company. Lastly, while our operational metrics and our financial condition are strong, the lifeblood of our success begins with the talent of our people. It's really encouraging to see all the new talent that's coming to Concho. Many of these are top people in the industry, and we're lucky to have them. With the staff we have today, we're ready to do much more in the future. So as we begin to think about the possibilities for 2012 and beyond, I'm more confident than ever that we're in the right place at the right time. Now let me hand the mic over to Joe for an operational update.

E. Wright

Thanks, Tim. As we have seen over the past few quarters, activity levels in the Permian Basin continue to increase. Rig count across the Permian for the second quarter increased about 20% over the previous quarter to approximately 420 rigs. Today, Concho is operating 36 of those rigs and represents one of the most active drilling programs in the Permian.

For the second quarter, we drilled and participated in 229 wells, which represents a record level of drilling in the company's history. Importantly, our completion groups made good strides during the quarter in reducing our backlog of wells that were waiting on completion. At the end of the quarter, the number of operated wells waiting to start the completion process stood at 59. This represents a 26% improvement over the first quarter. The increase in activity has certainly applied pressure from the service providers and on takeaway capacity in the Permian.

I have been very pleased with our efforts to control costs and get our product to sale. We spent over $300 million in the second quarter drilling new wells and, on the average, held our costs flat relative to the first quarter. I believe this is a reflection of the strong list of vendors we have assembled, our long-term relationship with those companies and advantages that come with being one of the most active operators in the basin. While infrastructure concerns have been a hot topic, the industry has moved quickly to reduce short-term bottleneck and initiate major takeaway projects for the program. But we will continue to remain focused on this issue.

Our second quarter production was an all-time high for Concho. Despite ongoing external challenges, we still averaged over 61,000 equivalent barrels per day in the second quarter. Notably, this represents a 14% increase in production from continuing operations as compared to the fourth quarter of 2010. This level of organic production growth is indicative of the strength of our field personnel and the resilience of our asset base.

Our reserves also showed encouraging growth through just the first half of 2011. We replaced over 354% of our production through a combination of our active drilling program, increased understanding of the Bone Springs play and our active -- I'm sorry, and -- pardon me, and also our acquisition of the additional Wolfberry assets in the first quarter. We also added significantly to the drilling inventory, which is over 8,700 locations as of July 1. This represents an incremental 2,500 locations, net of acquisitions, divestitures and drilling through the first half of 2011. The increase is due primarily to our ongoing drilling program in the Delaware Basin, which has resulted in newly identified locations across the Avalon Shale, Bone Springs sand interval and the Wolfbone subplay and the addition of 2,400 20-acre Wolfberry locations. While the addition of the 20-acre Wolfberry locations is significant, we still have nearly 1,900 locations through 40-acre spacing, which we expect to drill prior to initiating a large-scale 20-acre drilling program. However, as we are continuing our 20-acre pilot program and expect to have more than 30 20-acre wells drilled by the end of 2011, the results to date of our pilot program are encouraging. Given that we are still early in this pilot program, we are not ready to discuss our expected model. But with these types of plays, you can generally expect a 20% to 40% decrease of reserves to the 20s versus the 40s.

The Midland Basin continues to see increased levels of activity with new concepts emerging, thanks to technology. We are currently operating 16 rigs across the Texas Permian asset, primarily targeting the Wolfberry play, and we'll continue to evaluate emerging opportunities with a focus on rate of return.

I'd like to move on to the Delaware Basin, which continues to be an area of intense focus to Concho. Currently, we are operating 6 rigs. Most of our focus for the second quarter was on the Avalon Shale and Bone Spring sand intervals, but we have continued to evaluate the Wolfbone and Wolfcamp intervals in the Delaware Basin. As a result, drilling locations in the Delaware Basin increased significantly in the first half of the year. We have identified 1,039 locations that target horizontal objectives like the Avalon Shale, Bone Spring sands and the Wolfcamp Shale. Additionally, we have identified 332 locations that target our emerging Wolfbone play in Texas. Only a fraction of these identified locations are booked as PUD, and we remain encouraged by the potential to grow our reserve base in the Delaware Basin. Net production for the quarter from this core asset was 5,600 Boes per day and is a 40% increase over the first quarter of 2011. The team has done a good job of driving our drilling and completion efficiencies in this play. For example, our 24-hour completion operations continue to improve, and we're seeing more frac stages pumped per month by our crews, which helps eliminate backlogs and drive improving pricing.

Finally, the New Mexico Shelf has 12 rigs currently operating in the Yeso play and 2 rigs in Abo play. As you recall, the Marbob acquisition significantly enhanced our scale on the shelf. I'm very pleased with the smooth transition of the Marbob property and personnel to Concho, which is completed. Going forward, we plan to devote greater attention to the Marbob assets which are relatively undeveloped as compared to our legacy shelf asset and should contribute to our proved reserve growth during the second half of 2011. Overall, I'm very pleased with our operational success in the second quarter and through the first half of 2011.

I will now turn the call over to Jack Harper for an update on our financial position guidance and business development.

Jack Harper

Thanks, Joe. I'm going to hit on 3 items before turning the call back over to the moderator for questions. First is our capital structure and liquidity. We did complete a 2.5-year $600 million bond offering at 6.5% during the quarter. And after retiring the $150 million Marbob note, we now have a total of $1.5 billion of fixed rate debt at quarter end. During the quarter, we also amended our credit facility to extend the maturity to April of 2016, and we increased our borrowing base from $2 billion to $2.5 billion. However, the commitments remain at $2 billion. On the $2 billion facility, we had about $200 million of bank debt drawn at quarter end, so our liquidity was a comfortable $1.8 billion. In addition, at quarter end, our debt to book cap was 39%, and our second quarter debt to annualized EBITDAX was less than 1.5x. So we are positioned very well to continue to pursue the same business strategy in the future that we have in the past.

Next let's talk about guidance. For 2011, our annual guidance remains the same with respect to production, capital budget, realizations and cost structure. The only exception is interest expense, which we adjusted to account for the addition of a new bond issue and the elimination of the $300 million of interest rate swaps. In addition, we continued to experience strong natural gas price realizations due to the liquid content of our gas stream and the strength in the NGL market. Through the first 6 months, our gas realizations averaged about 175% of NYMEX. And while we're not moving up our guidance at this time, the NGL market remains robust. And one last item to mention is related to the quarter's interest expense. For the quarter, our interest expense was reduced by about $8.5 million due to the retirement of the Marbob note I previously mentioned. As for 2012, we plan to issue guidance in November after we announce our third quarter results.

The last topic I wanted to touch on is business development, which is as active as I can remember. And we remain actively engaged in all 3 of our core areas of operation in this regard. In addition to the traditional acquisition opportunities, we are seeing substantially lease hold acquisition opportunities in and around our existing acreage. This again was a strong quarter for the company, and we're on track to achieve our operating plan for 2011. As always, we appreciate your support and look forward to your questions. I'd now like to turn the call back over to the moderator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Jessica Chipman of Tudor, Pickering.

[Technical Difficulty]

Operator

Your next question is from the line of Scott Hanold.

Scott Hanold - RBC Capital Markets, LLC

So just on the last point that Jack touched on, some of the, I guess, corporate development that you're all looking at. Could you try to speak to where you think the most opportunity exists? Is it the Delaware Basin in Texas or is it up in New Mexico? And the potential size of some of the transactions that you all feel there right now.

Timothy Leach

Yes, Scott, fortunately, we've been seeing opportunities in all 3 of the core areas. You saw our deal on the first quarter that was related to the Wolfberry. It was the acreage adjacent to our existing acreage and added some good inventory there. And that's the style we seem to be seeing the most. And that was a $85 million deal. That range of transaction seems to be out there at the moment, but as we always say, that's hard to predict. And the good news is though there's no lack of opportunity.

Scott Hanold - RBC Capital Markets, LLC

Okay. And so when I look at you all, I mean, what's your general appetite here? Do you feel the need or desire to do something here for the course of the next, say, 6 or 12 months, or with obviously the new inventory you got with Marbob, I mean, is that something you feel content with? I mean, how should I sort of gauge your appetite right now?

Timothy Leach

I'd guess the way that I think about this is that really our game plan, our business model hasn't changed since the start of the company. I mean we have a pretty substantial inventory, a drilling inventory on our existing properties. But the Permian is a place of consolidation opportunities and acquisition opportunities, and we think we can do that and continue to add a lot of value to our shareholders. So I think you should think about it that yes we've got lots of inventory. We're satisfied with our inventory. We can grow like we've talked about in the past at compelling rates for several years, but we're always looking for good acquisition opportunitues.

Scott Hanold - RBC Capital Markets, LLC

Okay, fair enough. And then I know you all gave a little bit of detail on some of that 20-acre downspacing. And it sounds like you're not quite ready yet to talk about it. But can you just sort of give me a general sense in terms of when you look at this pilot, remind me how long some of these wells have been on, and what specifically -- at what point do you feel comfortable where you made the determination to add that inventory? And again, another part of this question would be would you consider those like more engineered type locations? Or is it kind of like acreage math to kind of put it, generally speaking?

Timothy Leach

Yes, Scott, just to answer the first piece, we drilled our first 12 wells last year, so we're getting up to a year's worth of data on some of those wells, and we're going to drill another 25 or 30 throughout the remainder of this year. And to your question about is it just acreage math, the answer is no. There's little more rigor put into than that. And if you did the acreage math, you can come up with a higher number than what we’ve put out there. So there's definitely been more rigor put into than that. Do we expect a big portion of our proved reserves at the end of the year to be 20-acre Wolfberry? The answer is no. But I would say over the next 12 to 18 months, we'll watch [ph] the performance and that's when I would expect some movement on that.

E. Wright

I think it's also important to keep in mind that we still have about 1,900 40-acre locations that are in the proven category to drill before you'd ever get around to a complete 20-acre program. So that's -- at the rate we're drilling today, that's a lot of years of inventory before you'd ever get to the 20s…

Scott Hanold - RBC Capital Markets, LLC

Back to your question that -- or back to your response on the reserves because they’re not going to be necessarily in your near-term inventory, the booking of that as PUDs probably won't be meaningful here for the next couple. Is that right?

E. Wright

That's right.

Timothy Leach

Yes. That's right.

Operator

Your next question is from the line of David Tameron of Wells Fargo.

David Tameron - Wells Fargo Securities, LLC

A couple of quick questions. How many -- the 20-acre spacing, how much -- how many locations did you add -- over what percent of your acreage did you add i.e. how many acreage do you have in the Texas Permian? And what did you add exactly to that total? I'm sorry, how many of the 20-acre locations -- or it was across what percentage of your acreage?

Timothy Leach

It's across the majority of our Wolfberry acreage where we've identified different locations. But not every single acre that the Wolfberry acre has been identified as a 20 [ph]. I don't know if that -- does that make sense to you?

David Tameron - Wells Fargo Securities, LLC

Well, my question didn’t make a lot of sense, so yes, believe it or not, your answer does, so that makes sense. Your current rig count, 35, 36 rigs, what's -- is that a good go-forward rate for the second half of the year? Or given some of the infrastructure comments, are you slowing down, speeding up, or maintaining? Can you just talk about what type of activity we should expect the rest of the year?

E. Wright

David, this is Joe. The level we're at today, I think that's kind of where we'll be for the rest of the year. You may have rigs in some areas that drop off and pick up in others. A lot of that it just trying to pick up better and better rigs as we move forward. But 35, 36 level rig count, that's kind of where we'll be through the end of the year.

David Tameron - Wells Fargo Securities, LLC

Okay. And then on the infrastructure, it always catches up, but if you look at your operations today, is it the drought? Is it takeaway capacity? Is it service constraints, as far as equipment? I wouldn’t think it’s that. But can you talk about what the biggest hurdles are today?

E. Wright

Kind of everything you've mentioned there is -- the answer is yes. But we kind of look at it and when I think about the largest in the second quarter, our constraint's around oil hauling I think were probably the bigger issue. And that has -- a lot of relief has come to that as we kind of move into the very end of the second quarter and into third quarter. But all of those we're looking at everyday and working those issues.

David Tameron - Wells Fargo Securities, LLC

And are you flaring gas like some other operators?

E. Wright

No, I mean in general, no. There are some areas as you bring new wells on and test that you will flare for a little while. But generally, no. We're not flaring also [ph] across an area.

Operator

Your next question is from the line of Pearce Hammond.

Pearce Hammond - Simmons & Company International

I was curious if you could illustrate a little bit or provide some color around rates of return on a vertical Wolfbone well versus maybe a horizontal Wolfbone well. And you've mentioned before in the last conference call that you saw vertical well cost accelerating faster than horizontal, so just curious, your thoughts on vertical versus your horizontal in the Wolfbone?

Jack Harper

Well there's right now -- this is Jack. We have a lot of information in history on those horizontal wells and while it's too early…

Timothy Leach

You mean the vertical wells?

Jack Harper

He’s talking about Wolfbone.

Pearce Hammond - Simmons & Company International

Yes. I'm talking about the Wolfbone.

Jack Harper

So I think rate of return wise, it's early to model both. I think we've probably modeled the horizontal slightly higher today based on what we know, but again, it's developing quickly in both areas.

Pearce Hammond - Simmons & Company International

So is your plan to just do vertical on the Wolfbone? Or do verticals and horizontals?

Jack Harper

Both. Yes, we're studying that and contemplating both.

Pearce Hammond - Simmons & Company International

Is there a preference at this point?

E. Wright

Pearce, this is Joe. I'd say there's not a preference at this point. We continue to work that play, and really as we've said before, we're looking at rate of return. We focus on greater return. I think as we get better understanding of the EURs, both in a horizontal and vertical sense, then we’ll start honing in on certain areas, it's going to be vertical or horizontal. But right now, we don't have that answer.

Pearce Hammond - Simmons & Company International

And then what would be the well cost on a vertical Wolfbone?

E. Wright

It's probably going to be around $4 million. Rough numbers, $4 million, $4.5 million, depending on how many stages the area that you're in, so how many stages of completion you're going to do.

Pearce Hammond - Simmons & Company International

And then what would be the EURs on a vertical?

E. Wright

I'm not ready to really talk about models in that area.

Pearce Hammond - Simmons & Company International

Okay. Follow-up question would be on the drought. Before you've said, you're not really seeing any impact from the drought. Has that changed at all?

E. Wright

So the biggest issue there with the drought has certainly been the grass fires. I mean, it’s -- but we haven't really seen that in quite some time, and it had very little effect on our production in the first half of the year.

Pearce Hammond - Simmons & Company International

And then lastly on frac crews, are you finding that increasingly difficult to get your hands on frac crews or actually a little bit easier?

E. Wright

It feels like there's a little less stress there.

Operator

Your next question is from the line of Dan Morrison.

Daniel Morrison - Global Hunter Securities, LLC

A couple of quick ones. On your backlog of I think you mentioned 59 wells waiting on completion and what was -- how does that compare to first quarter?

Timothy Leach

That was a decrease of about 25%, 26% in the first quarter. One thing we really look at there is those wells that are between being drilled and pipe set and they're waiting to be -- to start the process and for the second quarter, we had a large reduction there. So that's a very good indication as we kind of work through that backlog that we're speeding that process up.

E. Wright

I mean there will always be a bit of a backlog when you're running a drilling program. Not a backlog, but there's an appropriate amount of wells that you will have that are waiting on a completion unit. We think we've eliminated most of the backlog. And probably after the next quarter, we'll be at a run rate that is kind of a normal run rate for a company running 36 rigs.

Daniel Morrison - Global Hunter Securities, LLC

Right. Get to a steady state kind of stage. How do you see those kind of distributed? Are they across all plays? Or you're having more issues with the horizontals compared to the verticals or --

E. Wright

They're really distributed across the 3 core areas. In probably the first quarter, there was a little more pressure in the Wolfberry trend in terms of frac crews, so we probably had a little higher number there in the first quarter. But as you look at the second quarter and as we've worked that number down, it's really across all 3.

Daniel Morrison - Global Hunter Securities, LLC

One final, we've heard a couple of kind of creative proposals for crude marketing trying to tap into pricing that's based on coastal grades. Do you have anything in the works to try to depress that?

Timothy Leach

No, we're not very creative. I mean we are looking at different ways to get our crude out of the Permian and get it to different destinations than Cushing. But I mean it's -- everything we've seen up to this point is kind of on the margin, and it seems to us by the time you would actually implement something like that, the problem will probably fix itself.

Operator

Your next question is from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc.

In the Delaware Basin, the increases in locations that you reported, were they evenly spread or were there -- among the various different plays and zones? Or were there specific zones between the Avalon for second and third Bone Spring that were primary contributors?

Timothy Leach

Yes, Brian. They were pretty even. I mean, if you think about a little bit, the Wolfbone had a little bit more than the other 2 plays, the Avalon and the Bone Spring sand. And that was kind of based on -- I mean, at the first of the year, when we were counting Delaware Basin locations and we said we had 1,000 or more, they were all up in New Mexico, so we had some work to do to identify locations down in Texas.

Brian Singer - Goldman Sachs Group Inc.

Got it, and then how widely, if at all, are you assuming multiple horizontal locations on the same acreage?

Timothy Leach

Not very widely. There’s very few of those locations when we think about what we've identified locations. There’s just a handful where we've done that so far.

Brian Singer - Goldman Sachs Group Inc.

And is that because you're not ready to make that leap or you were more skeptical?

Timothy Leach

Well, in our exploration program, we're running -- we're drilling wells to zones that are not the primary target in that area. For example, in the Avalon area, we've got Wolfcamp wells being drilled, and we may have a third sand well being drilled. So I think, we're really excited about the prospect of having multiple targets in each one of these areas, but it's just really early in the game as far as identifying how much oil is in each one of these zones and how you're going to process it.

Brian Singer - Goldman Sachs Group Inc.

Got it. And then bigger picture, as you think about the right size for the company and then the right level of spending and production growth. How are you thinking about the balance between CapEx and cash flow?

Timothy Leach

We still strongly -- and we've always believed that you ought to build your drilling budget around your cash flow. So that's a principle that we believe strongly, and we will continue to believe strongly in that. We've always used a strong balance sheet then to go buy things. And we have a very strong balance sheet today, and so we're excited about all of these opportunities that we're seeing because I think we can grow the company. But we'll grow the company in the same way we've grown it in the past.

Operator

Your next question is from the line of Sven Del Pozzo of IHS Herold.

Sven Del Pozzo

Again, on the 20-acre downspacing, the 3 pilots that you mentioned, where are they located in relation to each other?

Timothy Leach

They're really spread across our acreage there in the Wolfberry trend. They're not next to each other by any means. We have one on the north side and one that is kind of in the middle and one to the south. So they’re spread really across that trend pretty well.

Sven Del Pozzo

And do each of them -- I think you mentioned 30 wells. Does that mean each of these pods is like 10 wells or not necessarily?

Timothy Leach

They’re probably pretty even as you think about our plans in those areas, yes, they’ll be pretty evenly distributed.

Sven Del Pozzo

And it kind of sounds like the same approach you would take to de-risking development on 40-acre spacing. So I'm wondering, is 10 wells what you need to feel comfortable about de-risking that particular area?

Timothy Leach

You'd like to have more than that. But I think what it does give you is as we continue to get the production data, it does give you that level of knowledge to build that curve and start down that path as more of a larger program.

Sven Del Pozzo

Okay. Are there any other prospective zones in the Permian that you might talk about? I know you just talked about the Wolfcamp, and I think you said the third Bone Spring, but I'm not sure. Is it worth going after deeper zones in the Permian that you think may be prospective, opening up new zones with new technology? Or do you have enough on your plate with what we all know about, at least from your public disclosure thus far?

Timothy Leach

We keep up with certainly the other activity in the Midland basin, the southern part of the basin as well as on the eastern side. But as you kind of look at our acreage position, we’re always looking for those deeper targets that we could add. A good example of that is that we've taken a lot of our Wolfberry wells down to the Bend [ph] formation. Incrementally, that's about $200,000, $250,000 of incremental cost. It adds about 15,000 to 20,000 BOEs, gross to that model. By itself, it's not extremely large incrementally reserves, but it's very strong economics to do that. So we're doing that in the areas where we can and always looking for new things that we can do that with. Both shallow too. There’s areas that looked shallower than the Wolfberry.

Sven Del Pozzo

How much deeper is this? Did you say the Pan [ph] formation?

Timothy Leach

That's correct -- the Bend [ph], I'm sorry.

Sven Del Pozzo

Bend [ph], sorry. And how much deeper is that than typically where you would -- your TVD would end up?

Timothy Leach

Generally, it's about 600 foot, 800 foot.

Sven Del Pozzo

And lastly, you can get back to me later on this in the call if you want or offline. All those -- the gross locations that you listed by your different areas if -- for example, 28, 46 New Mexico Shelf, 44, 49 Texas Permian and 14, 64 gross locations Delaware Basin. If I could have some kind of idea how to the net those down to net locations.

Jack Harper

Yes. We'll get you that detail. I mean, generally speaking, the Shelf is higher interest, 70% plus or minus. The Wolfberry is roughly 50%. And the Bone Spring, it varies by area, but we're probably in that 50% to 60% range there as well. And in the Bone Spring, it's hard. You don't always know what your final interest is going to be until you start drilling those wells depending on partners and things like that.

Operator

Your next question comes from the line of Neal Dingmann of SunTrust.

Unknown Analyst -

This is Joanna [ph] for Neal. Just given the improving results in the Bone Springs, are there thoughts about adding more rigs there anytime soon?

E. Wright

We have added one rig in there. We were running 5 before. As we move into our 2012 budget, we'll give you kind of an update as we -- later in the year kind of what that rig count looks like. But right now, we'll stay with 6 through the end of the year.

Unknown Analyst -

Okay, and could you give us any color on any lease expirations you guys might have through this year and through 2012? And if there was an issue, would that make you change how you have you some of your rigs running?

E. Wright

It really isn't an issue. It's very manageable where we are. And so as we look at that, it doesn't really affect kind of where we have to go drill or anything like that. That's one of those nice things about our acreage position right now.

Operator

Your next question is from the line of Mike Scialla of Stifel, Nicolaus.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

You discussed the 20-acre Wolfberry locations a lot. But I wanted to, I guess, just a little better understand how you're viewing it. At the risk of putting words in your mouth, is it fair to say you feel more strongly about the potential there than just call it a potential inventory at this point given -- I realize you've got limited data still. But is it fair to say you really -- you need to get more data to know if it's going to be -- Joe referenced the 20% to 40% deduct from the 40s. You're not ready to put them in prove reserves, but is it fair to view it as you feel more strongly than just to say those are more potential locations at this point?

Timothy Leach

Sure. I think the way you ought to interpret this news from Concho is that we have drilled some wells. We do have production data, and it's leading us to be more confident in the 20-acre exercise of downspacing in the Wolfberry. And what's going to be required is that as we drill more wells in different places, we'll get different models so that the range that Joe has given of how much the degradation occurs when you downspace to 20, we'll refine that as we get more data and more wells. But we are more confident. And that's why I wouldn't talk about this as potential inventory. I think this is drilling inventory. And the fact is when you look at someone's reserve report, if you don't have a specific plan to get them drilled within 5 years, they won't be in the proven category. And with 1,900 40-acre locations to drill first, and we're taking them down at 250 or so a year, we've got a lot of inventory out there that’s still on 40s. I think it's important to communicate to you that we got a much bigger inventory out there of economic locations and there's a lot more oil to be produced and we have a higher level of confidence based on information we're getting out of these wells we're drilling.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

That's great. That helps. And in your last presentation, you showed the well economics for the Wolfberry and the Yeso, I guess for that matter. I think you're showing a 43% rate of return for Wolfberry, 61% for the Yeso on a pretax basis based on $90 oil. I think you're assuming the $1.6 million completed well cost for both. I want to see if that's right, and then I wanted to see what kind of EUR you're assuming now for each of those plays.

Jack Harper

Yes, Mike, this is Jack. Those rates of return at that same price are very similar now. Actually, Wolfberry may be a little higher. But in the EUR, assumptions are very similar, roughly 140,000 BOEs in the Wolfberry and a little bit higher than that in the Yeso.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

How have you seen those EURs trending over the last few years? Have those been pretty consistent? Or are you seeing them increase or any degradation in either play?

Jack Harper

They've been fairly consistent. We've have started downspacing more in both plays. But in the Wolfberry, as Joe mentioned, we're starting to drill a little bit deeper. So you're picking up some incremental reserves, which has roughly kept that aggregate at about the same.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Okay. And the Yeso inventory, did that include any 5-acre locations? Or were those all on 10s or more?

Jack Harper

It does not include any 5-acre locations.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

And with the -- I think, Sven asked you about some of the deeper potential in the Midland Basin, that inventory you've identified there, I assume you're not counting any of the deeper potential as additional locations.

Jack Harper

On the Texas Permian side and in the Midland Basin, that's just -- that's primary Wolfberry locations, and some of those do go down deeper. But outside of that, no. It does not include anything else.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Okay, and lastly, do you have any thoughts on -- you guys used to publish your actual well performance versus the type curves. Any thoughts on going back to that? I found that real helpful to see how your wells were performing.

Jack Harper

I think you will probably see us continue to include some form of rate of return chart, and that will probably be all we’ll provide.

Operator

Your next question is from the line of Irene Haas of Wunderlich Securities.

Irene Haas - Wunderlich Securities Inc.

It's really -- it's a pretty similar question. In Delaware Basin right now, your drilling inventory, I believe, is north of 1,000 from Bone Springs and Avalon. My question for you is that are there areas in the basin where you actually can hit multiple targets based on one location? And then are there room to move in terms of this tally as Concho continues to drill more wells and secure more test data aside from downspacing? What kind of upside we could expect from sort of a Wolfbone or Wolfcamp, I mean, notionally? Could we see your inventory double?

Timothy Leach

I would think in that entire inventory in New Mexico, Irene, that we -- I think in most of those locations, you at least have probably 2 targets, and many of them, you'll have more than 2. And we're doing more than -- I mean, we're continuing to add acreage both in New Mexico and in Texas. And so I think you're going to see that as a real source of growth for us in the long term and the short term.

Irene Haas - Wunderlich Securities Inc.

And how would you -- I mean, conceptually, how would kind of attack these projects? Would you actually drill 3 horizontal wells from one well pad? Or could you share the vertical? Could you commingle? I'm just really talking out loud. How would you tackle if you're fortunate enough to have 3 horizontal targets under one location?

Timothy Leach

I mean, I guess, theoretically, you could -- under today's rules in the state of New Mexico, you can't drill and produce multiple horizontal wells in the Bone Spring. So those rules are going to have to change in the future. But I think, mechanically and conceptually, you could drill in one wellbore multiple horizontal legs to capture additional reserves. I think what you'll see us do though is, in the early stages, we will drill single laterals and single wellbores to gather information because you really have to model, and when you start at the bottom at the Wolfcamp and then work up through third, the second and the first sand and then in the Avalon at the top, you really need a good understanding of each one of those zones to even [indiscernible].

Irene Haas - Wunderlich Securities Inc.

So in a way, these 1,000 or so locations could be a little understated if we have more, say, drilling information 12 months from now, we can expect a whole lot more granularity and probably some upward bias on this number?

Timothy Leach

I think if you look at this entire play, the growth of this play and the understanding of this play has changed rapidly in the last year or so. And I think it's going to continue to rapidly change.

Operator

Your next question is from the line of Eric Hagen.

Eric Hagen - Lazard Capital Markets LLC

First, on the backlog, 59 wells at the end of the second quarter. What's the normal backlog roughly? Would it be half that? Or is there a way to get at that?

E. Wright

As I look at it, when you think about the rig count, I kind of try to stay -- I think a good backlog would be 1.5x your rig count, something in that range. So I think we're pretty close to what I would call a very normal backlog of wells waiting to start the completion process.

Eric Hagen - Lazard Capital Markets LLC

Okay, that's really helpful. And then in the Wolfbone, you're not ready to give EURs. How about sort of maybe a range of rates on wells, maybe 24-hour test or 30-day average, whatever you might have?

Timothy Leach

You want to kind of give the whole thing some ranges?

Jack Harper

You can look at the public data down there, Eric, and see that there is a very broad range of initial rates, from very low to something north of 500 barrels a day on some wells down in that Wolfbone play.

Eric Hagen - Lazard Capital Markets LLC

And how much acreage do you have in the play right now?

Jack Harper

Roughly 50,000 net acres.

Eric Hagen - Lazard Capital Markets LLC

And then the last one I have is in the Avalon. Are you drilling -- I think it goes -- and correct me if I'm wrong, but I think it gets more oily as you go to the east. Maybe I'm wrong but -- so are you drilling now more to the east and the west where it's more gassy? And does your acreage lay disproportionately in either of the gassy or oily section? Or is it kind of spread out throughout?

Timothy Leach

We have a good spread across the state line down there. And we are drilling more, in fact, to the east, but we're are also testing the Wolfcamp zone in that same area. So we have a good spread of acreage.

Jack Harper

In general, Eric, we're going to drill an Avalon well, first, second, third sand well and Wolfcamp well this year. So we're testing all of the -- our acreage includes all of those targets out there.

Operator

Your next question is from the line of Jessica Chipman of Tudor, Pickering.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

This is Brian. I will try to ask a few questions. I'm sure they won't be as thoughtful as Jessica's would be, but I'll give it a shot. You guys have covered a lot of land so far. But just 2 clarifications on some of the earlier questions. One, in the Wolfberry downspacing, I just want to understand, what is different geologically between downspacing in the Spraberry, which I think the market's already paying for and other operators, versus downspacing the Wolfberry?

Timothy Leach

Geologically, there's nothing different other than the Wolfberry is a little bit different geologically than the Spraberry. Our acreage sits further to the west of the basin. Typically, it has a larger Wolfcamp section and a smaller Spraberry section and the stuff in the center of the basin. But downspacing is downspacing, the rules of thumb, the stuff that Pioneer’s talking about. I think it's pretty consistent with what we're seeing as far as our expectation and what we think is going to turn out.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, I mean, given some of the questions, it seems like there's an implied question mark on different risks, but it seems like the risk is exactly the same as you guys have already discussed. Is that correct?

Timothy Leach

That's how I would think about it.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

Great, and second question is on the Yeso, and again, this is just off earlier questions. Can you just tell us where you're going to focus the remaining program for the back half of this year within that play?

E. Wright

Yes, this is Joe. We're really going to focus on what I would call the Marbob acreage that we picked up last year. You'll see a lot more of our rig count into that undeveloped areas. That is more back to the west on that play though.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

So that's going to be pretty much the fairway acreage then going forward?

E. Wright

That's correct.

Operator

Your next question is from the line of John Freeman of Raymond James.

John Freeman - Raymond James & Associates, Inc.

Just a few follow-up questions. I just want to make sure that I understood the well cost information correctly. So last quarter, I believe the Wolfberry and Yeso were both based around $1.6 million. And then on the Wolfberry wells where deepened them and took them out of the Bend [ph], it was $1.7 million last quarter and if I heard correctly, those deeper wells are now $1.8 million to $1.85 million, if I heard that right. And then the Wolfberry and Yeso, we should just assume a little bit above the $1.6 million now?

Jack Harper

Yes. I think that's all accurate, John.

John Freeman - Raymond James & Associates, Inc.

Okay, and then is it -- when would you all anticipate being able to give an update on horizontal Paddock?

Jack Harper

That's something that we and other industry players are continuing to look at and drill some wells. It's not a meaningful part of what we're doing right now. But I'd say as we roll into the 2012 budget, if that's a meaningful part of our plan, we would probably talk in more detail at that point.

John Freeman - Raymond James & Associates, Inc.

Okay, and just the last question I had. I know that the lion’s share of your oil gets moved via pipe in the Delaware Basin. But just ballpark, what percentage of your oil do you all move via truck out there?

E. Wright

In the Delaware Basin?

John Freeman - Raymond James & Associates, Inc.

In the Delaware Basin, yes.

E. Wright

Really, the majority of that is truck. Now on the Shelf and the Yeso play and over in the Wolfberry play, we have quite a bit of oil in those plays that are on pipeline. So as the infrastructure though, I think, as it picks up and there's new pipe laid in the Delaware, you will see more and more of that moving by pipe.

John Freeman - Raymond James & Associates, Inc.

Yes, sorry, I meant that -- I knew the majority of your Permian production gets moved via pipe except for Delaware with the truck. And I think last quarter, you all had mentioned that you thought that the shortage of trucks and drivers would get alleviated pretty quickly. Is there any sort of an update on that? Is it progressing as you'd hoped, slower than you’d thought?

Timothy Leach

It is moving along about like the timeline we thought it would. We -- probably working on our properties, we picked up somewhere between 15 and 20 trucks over the last quarter, so that's good. The stress that we see on that through the second quarter is starting to ease a bit there. But again, we're going to stay focused on it. It's something that everybody is going to have to stay focused on over the next few quarters.

Operator

We have no further questions at this time. I would now like to turn the presentation back over to management for closing remarks.

Timothy Leach

Sure appreciate everybody listening in. I know this is an extremely busy day. We're happy with the quarter, and we expect the third and fourth quarter just to continue marching right along and achieve our plan for the year. So thanks for listening in, and we look forward to talking to you soon.

Operator

Thank you. This concludes the presentation for today. Thank you for participation and have a great day.

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