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Concho Resources (NYSE:CXO)

Q3 2011 Earnings Call

November 03, 2011 10:00 am ET

Executives

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

Toffee McAlister -

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

Jack F. Harper - Chief of Staff and Senior Vice President

Analysts

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

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

Brian Singer - Goldman Sachs Group Inc., Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

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

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Daniel J. Morrison - Global Hunter Securities, LLC, Research Division

Gil Yang - BofA Merrill Lynch, Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Concho Resources Earnings Conference Call. My name is Lisa, and I'll 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, Toffee McAlister, Director of Investor Relations and Corporate Communications. Please proceed.

Toffee McAlister

Good morning. Before we get started, I would like to direct your attention to the forward-looking statement's disclaimer contained in the press release. In summary, it says that the statement in the press release and on this conference call that states 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 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 reconciliation in our earnings release.

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

Timothy A. Leach

Thanks. Good morning, everyone. I hope you've had a chance to take a look at our third quarter results. We're all pretty happy with them. The Concho team is here with me in Midland, and in a moment, Joe Wright and Jack Harper will discuss the details of our performance during the last quarter.

Before that, let me say a few words about the 3 main subjects of this call: The quarterly performance; our recent acquisitions in the Delaware Basin; and the capital plan for 2012.

The third quarter went well. We didn't have any significant production interruptions or curtailments, and we drilled some of the best wells in Concho's history. Joe will give you more detail on that in a moment. The production of 6.3 million barrels or an average of about 69,000 barrels a day was a new record and a 13% increase over Q2. Not only was production up, but so were earnings and cash flow. We produced $350 million of EBITDAX and strong cash margins in a quarter of falling commodity prices. And I think that's a tribute to our great property base and execution. Additionally, we're positioned to finish this year with the kind of results that we've grown to expect. The strong growth's been driven in large measure by the results of our drilling in the Delaware Basin, our newest core area. You'll recall that our position here was first established by our Marbob acquisition in October of '10, that was just a year ago. The new wells that we've drilled on these properties have been big performers and as a result, we've continued to acquire more acreage. Today, we've announced about 5 deals that in total, will add over 100,000 net acres in very strategic locations. The acreage is located both in the north and the southern areas of the basin, significantly increasing our inventory of drilling locations in both areas of the play. The production from this core area grew 59% quarter-over-quarter and we'll continue to commit more capital and increasing rig count to drill more wells here.

We're just beginning to identify all the potential in this multi-zone part of the Permian and this new acreage will allow us to extend our company's growth well into the future. So expect more activity in this area in future quarters.

Our capital plan for 2012 will have all the characteristics you've seen in previous Concho capital plans. We'll drill within cash flow, we'll grow organically about 20%. Our $1.3 billion program will require on average, 35 rigs running for the year, and we'll drill about 850 wells with an increased allocation to horizontal wells in the Delaware Basin. We can fund this program out of cash flow, if commodity prices average 85 and 4. And we can adjust spending up or down if the environment changes dramatically. We're estimating that this drilling will increase our production by about 20% next year. With our growing inventory, we believe that this is repeatable even as we get larger. So I think our strategy of being focused on the Permian has been a good one. The level of activity and discovery that we're experiencing as an industry makes me believe our opportunities to produce dramatic growth are still as numerous as they have been in the past. So with that, I look forward to discussing this further with you during the Q&A. Now let me turn it over to Joe and Jack to fill you in with more color on the quarter.

E. Joseph Wright

This is Joe, and I'll start first. As we've seen over the past few quarters, activity levels in the Permian Basin continued to increase, although that rate of growth has slowed. Rig count across the Permian for the third quarter increased by 7% over the previous quarter to approximately 450 rigs. Today, Concho is operating 30 of those rigs and represents one of the most active drilling programs in the Permian.

Given our presence and scale, Concho has been successful at keeping well cost flat over the last 2 quarters. I anticipate the same trend will continue through the balance of 2011 and into 2012. While transportation of oil and natural gas liquids in the Permian have been a hot topic, the industry continues to move quickly to reduce short-term bottlenecks and initiate major takeaway projects for the Permian. During the third quarter, several initiatives, mainly around oil hauling, have eased the necessity to curtail production. Overall, we are pleased with the efforts of our service providers and midstream partners in response to the rapid increase in demand throughout 2011, but we will continue to remain focused on this issue.

I'm very proud of our third quarter results. As Tim mentioned, our production of 6.3 million barrels is a record high for Concho. Even more encouraging, are the results we're seeing in all of our core areas, particularly in the Delaware Basin Bone Springs play. Our Delaware Basin team continues to evaluate the productive boundaries of both the aerial extent and the multi-pay opportunities of our acreage position with very good results. Since fourth quarter 2010, Concho has completed approximately 50 wells, with at least 30 days of production data. Those 50 wells have an average IP or an average 30-day IP rate of over 700 BOEs a day and several of those wells have had 30-day IP rates in excess of 1,000 barrels a day. This productive horizons of these wells include the Avalon Shale, the first second and third Bone Spring sand and the Wolfcamp Shale. In the near term, we expect to drill wells in the Delaware sand and the Pen [ph] shale. Eventually, this will bring our total count of productive horizons across our Delaware Basin Bone Springs play to 7.

The 2011 capital budget is on track, and we expect to finish the year in line with our full-year guidance. With our drilling success in 2011, we're carrying significant momentum into 2012, with a capital budget of $1.3 billion. The 2012 budget will continue to focus on our 3 core areas where we will drill 360 Yeso wells, 310 Wolfberry wells and 115 Delaware Basin wells. This budget represents an increase in Delaware Basin spending, relative to our other core areas as we expect the Delaware Basin to contribute meaningfully to our long-term growth plan. Our 2012 plan will average 35 rigs, which is very similar to the rig level to our 2011 plan.

Lastly, I wanted to touch on the lease operating expense, which you'll note in the press release was unusually high on a per unit basis in the third quarter. And for the year it's about 3.5% above the high end of our annual guidance. The increase in per unit LOE for the year is primarily due to the rapid increase in activity and demand across the Permian Basin, which has driven up production costs. Overall, I'm very pleased with our operational success in the third quarter and through the first 9 months of 2011. I will now turn the call over to Jack for an update on financial position, guidance and business development.

Jack F. Harper

Thanks, Joe. I would like to discuss in more detail, a few financial and guidance-related items for the remainder of 2011, and then summarize the 2012 budget before we begin the Q&A. As Tim mentioned, the company produced 6.3 million barrels of oil equivalent for the quarter, which represents the 73% increase over the company's production in the third quarter of 2010. Through the first 9 months of 2011, the company has produced 17.1 million barrels of oil equivalent and remains on track to reach our production goals for the year. During the third quarter, about 56% of the production came from the New Mexico Shelf assets, nearly 25% came from the Texas Permian assets and approximately 18% of the production came from the Delaware Basin. A subset of the overall Delaware Basin production came from the Bone Spring play, which as Joe mentioned, includes the Avalon Shale, the Bone Spring sand and now the Wolfcamp Shale. At just under 9,000 BOE per day for the quarter, the contribution from this play has increased over 120% since the first quarter of 2011. While we are speaking about the Delaware Basin, I wanted to add a bit of additional color on the acquisitions that we made during and after the quarter. We have added a new corporate presentation to our website this morning, which shows the acquired acreage on a map and as you will see, we were able to significantly complement both our northern and southern Delaware Basin acreage positions. The acquired acreage added over 350 identified horizontal drilling locations with a potential to identify over 500 additional locations assuming 160-acres spacing. In addition, these acquisitions have increased our average working interest in the Delaware, to almost 65% from about 55% previously. We now own approximately 420,000 gross and 270,000 net acres in the Delaware Basin. In total, today we are running 6 drilling rigs in the Delaware and plan to average 8 during 2012.

For the quarter, the company again, experienced strong natural gas differentials that exceeded NYMEX prices by more than 2x, and for the first 9 months of 2011, the company realized approximately 185% of NYMEX natural gas price. As a reminder, gas associated with the company's Wolfberry and Yeso drilling is generally 8-plus GPM gas, and the gas in the Bone Spring play generally runs in the 5% to 7% GPM range. On the oil side, our differentials were in the range of guidance for the quarter at a 4% discount to NYMEX. And for the year, we have averaged a 5% discount to NYMEX.

As for LOE, Joe had discussed this in detail, and we have provided 2012 guidance that is similar to our year-to-date direct LOE number on a per unit basis. I would expect the fourth quarter of 2011 to be in the same range of $6.40 to $6.80 per BOE.

One more item related to the quarter before we move onto 2012 guidance, and that is our capital structure and liquidity. At quarter end, the company's debt to book capital was 37% and we had about $1.7 billion of available liquidity on our credit facility. Pro forma for the acquisitions in the Delaware, all of which will be closed before December, our debt to book cap would be about 41%, liquidity will stand at about $1.4 billion. As you read in the press release, our Board approved a 2012 capital budget of approximately $1.3 billion, and the press release provided specifics around this. In addition, we have provided detailed 2012 guidance including a production estimate of 27 to 28 million barrels of oil equivalent. We have recently added to our oil hedge position such that we have over 11 million barrels of oil hedged in 2012, or over 60% of our estimated oil production. At an average price of approximately $94 per barrel, which provides a greater degree of certainty around our cash flows. In general, our guidance for expenses on a per unit basis for 2012 was in line with our year-to-date 2011 numbers.

In summary, this was an excellent quarter for the company and we are well-positioned as we move into 2012, with good inventory in all 3 of our core areas of operation. As always, we appreciate the support of our investors, many of which have owned the stock since our IPO 4 years ago. Today, we're carrying out the same strategy we outlined 4 years ago, albeit from a much larger platform. So now I'd like to turn the call over to the moderator and answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Scott Hanold with RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC, Research Division

I'm looking at 2011, so you all didn't change your 2011 guidance numbers at all, for production. And I just want to make sure I'm looking at this right. I mean, if you keep the high end of that range, it looks like 4Q is going to come off a little bit. Can you give a little color on that? And also, related to that, with your 2012 guidance, does that include the 1,500 barrels a day from your acquisition you announced yesterday as well?

Jack F. Harper

Hey, Scott, this is Jack. Yes, as for 2011, we're comfortable with the upper end of the guidance certainly. And with good performance, we could possibly exceed that. In 2012, we have factored in the barrels we acquired in these acquisitions and the capital associated with those acquisitions is just rolled into our budget, so yes, we have.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And so there's -- I mean, when I look at 4Q, there's no reason to believe your production would actually be flat to down in the quarter. Is that a fair statement?

Jack F. Harper

Well, we're continuing to run the same type of program we have over the last couple quarters. So I'm just going to stick with our guidance and tell you that I'm comfortable with the high end of it.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. Understood. And on the acquisition you all made, it does look like you added a pretty decent [indiscernible] sized position to the vertical play down in the Wolfbone. Can you give a little bit of color what you're kind of seeing down there and what your thoughts are? Is there more acreage to be had down there and you seeing up well control right now or is there still a science project at this point?

Timothy A. Leach

Scott, it's pretty early. What we're hoping for down there is a continuation of what we're seeing up in New Mexico. So that's the area of the play that I would say that, that's the direction that the play is moving. And today, most of the independent operators down there have been drilling this vertically. We think, over time, that this possibly will become a horizontal play, but there hasn't been enough wells drilled down there yet to really establish it as the factory kind of operation that we have in other places. But we're really excited by the acreage position, we're excited by the prospectivity and what we've seen so far in terms of results but it's in the very early stages.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Will you test a horizontal well sometime in 2012 there or even sooner?

Timothy A. Leach

Yes.

Operator

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

Brian Singer - Goldman Sachs Group Inc., Research Division

Following up on Scott's first question, looking at the 2012 guidance, you've always spoken about the 20% organic growth, as the kind of running room over a multi-year period. If we do assume the midpoint or the high end of 2011, and adjust that for the 1,500 barrels a day, it would seem to back into slightly lower than 20% guidance rate and I just wanted to see if there's any color on whether you feel you're being conservative or whether you're seeing any kind of inherent change and how you're thinking about long-term organic growth?

Jack F. Harper

Brian, we're not seeing any change in how we think about our long-term growth. I mean, we've pretty consistently said 15% to 20% growth out into the future and that's what this plan contemplates. Going back to the previous question though about 2011, I did want to point out that the third quarter does include a couple thousand barrels prior-period adjustment to the positive. So to achieve our goals in the fourth quarter, it does imply some growth for the quarter.

Brian Singer - Goldman Sachs Group Inc., Research Division

Got it. Thanks. And then secondly, looking at your budget for next year, pretty close to the level that you're spending here in 2011. Can you talk about some of the base assumptions. Are you seeing or assuming cost stabilization, or are you seeing or baking in cost inflation?

Timothy A. Leach

We are seeing and we are assuming cost stabilization on the capital side and on the LOE side as well.

Brian Singer - Goldman Sachs Group Inc., Research Division

Is that on the capital side a function of existing contracts that you have in place that give you that maybe more uniquely, or are you, in your conversations with the service companies getting more easy access or seeing a leveling off of whether it be rig rates or net completion cost?

Timothy A. Leach

I think it's more baked -- I mean, I think we're running the largest capital budget in the basin. And so we are seeing more equipment and availability for services show up in the basin, so it's more based on that and firm contracts that ensure that.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And then lastly, can you just talk about hiring and where you stand and whether you feel that there could be any constraints to achieve the guidance that you put out here for 2012, or if it's contingent on a ramp-up in headcount?

Timothy A. Leach

We have enough people in our company to execute our 2012 capital budget. However, we do -- we have approved now, positions for hiring in 2012. I don't remember what the exact number is but it's a dramatic -- it's 100-plus new positions at our company. We've had a lot of good success in 2011, in adding technical and professional and all types of new jobs at Concho, and we think that will continue into 2012.

Operator

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

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Just 2 quick questions. First, on the Delaware Basin, if you can just speak now with the acquisition, is there plenty of takeaway going forward on that, that you see?

Timothy A. Leach

There's plenty to get our plan -- to achieve our plan results. There's not plenty overall. I think every year, you'll look at all the releases from the companies in the Permian Basin and it's exciting how many new wells and how many new zones are being found to be productive. And I think that's the story we've been telling all along, about the potential of the Permian. The infrastructure in the Permian, there's going to have to be capital projects every year to keep up with the pace of development, but we think that, that's going on and for the plans that we put forward, we've taken that into account when we guide you on how much we think we can do and how much we think we can produce.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Got it. And then just one last one. You did mention, I know, in the operations up there today, about 30 rigs running in the Perm. Based on what you're seeing in the Del, obviously, some great results there, thoughts about would you -- on that capital budget that you have outlined for next year, would you still have 6 rigs running there or would you maybe take a rig or 2 that you've got in the Wolfberry and flip it over to Delaware?

Timothy A. Leach

Again, what we've guided toward is -- we have 6 running today, we think we'll average 8 next year in the Delaware. Today, we're running 31 rigs total in the Permian. We think the average next year will be more like 35. As a company, we do have a capacity to run more than that. So one thing to think about Concho, again, we're living within our cash flow. So this kind of activity and this kind of growth we have is produced out of our cash flow, and we can get that done with the resources we have today.

Operator

Your next question comes from the line of Pearce Hammond with Simmons & Company.

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

When we look at those well results that you mentioned earlier in the call, in the Delaware Basin, what was the average lateral income on those and the average frac stages?

Timothy A. Leach

I'm going to turn that over to Joe, so he can -- so he doesn't have to correct me later.

E. Joseph Wright

Yes, the majority of those are full section laterals, so they're in that 4,500-foot range. From a stage count standpoint, we're probably averaging about 13 stages, 10 to 13 stages.

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

And then from a well cost standpoint, you mentioned those kind of stabilized, but what's kind of an average well cost?

E. Joseph Wright

Most of that, when you look at the wells we've drilled this year are right around that $5.5 million, $5.7 million. There are few wells where we're taking pilots down and get a little more science data logging and those kind of things that will run that cost up a little bit. But for the most part, about $5.7 million.

Timothy A. Leach

Those are all single laterals, we haven't drilled a dual lateral yet.

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

And Tim, competitors have been real amped up about the horizontal Wolfcamp and the Midland basin, and if I'm correct, you're obviously looking at the horizontal Wolfcamp and the Delaware Basin. Do you think that Delaware Basin offers the same sort of potential excitement and upside, as what some of the competitors are talking about in the Midland Basin?

Timothy A. Leach

Yes. We've had success there as well and we're -- as you put it, we're amped up, too.

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

Great. And then just one last question. What is the tightest -- where are you seeing the greatest tightness in the service business, specifically in the Delaware Basin right now?

E. Joseph Wright

I think from a future growth standpoint, it would be rigs, availability of drilling rigs. We are meeting our needs very well, but when you look at long term and this play ramping up from the current rig count to doubling it over time, I think that will be the one that everybody's got to understand.

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

Is that due to people or actual rig or kind of the equipment?

E. Joseph Wright

It's always both. It's all people are always in that equation and then getting the right rig, right iron in the plays is important.

Operator

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

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

A few questions on the Delaware Basin acquisition. Are you able to give the breakout between the amount of acres that was picked up in the southern Delaware versus the northern?

Jack F. Harper

Yes John, it's about a 60-40 split on the net acres. Yes, 60% in the Texas side and 40% up in the northern Delaware Basin.

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

Okay. And then of the -- I know it was like multiple different sort of agreements with different parties. Was any of the acres that was picked up sort of in the form of a drilling carrier as opposed to just outright purchase?

Jack F. Harper

No, although we have had some deals this year come to us because of our rig count and our ability to get to acreage quickly, but in these deals, no.

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

Okay. And then just a follow-up on an earlier question just to be clear, on the acreage that was picked up in the southern Delaware Basin which obviously, up to this point, you all have characterized a lot more as the opportunity with the vertical Wolfbone. Was it picked up with knowing that the Wolfbone looks pretty good and then there's sort of horizontal upside, or is the plan to sort of be a lot more aggressive on the horizontal front on the acreage next year?

Timothy A. Leach

I think it's both those things, John.

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

Okay. So of the -- I guess, in the well counts that you all sort of gave for next year, which was 113 Bone Spring wells, I don't know, maybe it's too early. Are you able to give a sort of a split on what your CapEx assumption was on those 113 wells, sort of the breakout between vertical versus horizontal?

Jack F. Harper

Yes. John, about 10% to 15% of those will be verticals in terms of dollars, and the rest, horizontal.

Timothy A. Leach

John, a lot of those verticals too are capturing data for our future horizontals.

Operator

Your next question comes from the line of Gil Yang with Bank of America.

Gil Yang - BofA Merrill Lynch, Research Division

Could you -- you made the comment that the third quarter had to make up from prior periods, about 2,000 barrels per day. Is that mostly in gas and is that why the gas-oil ratio has sort of dropped in third quarter?

Jack F. Harper

Well, our gas, oil mix has been pretty steady really, through the year, roughly 61% to 63% oil through the year. And so I don't think that really affected it much, tough to know [ph].

Gil Yang - BofA Merrill Lynch, Research Division

Okay. So that 2,000 barrels was sort of distributed between oil and gas in that same 61-ish percent ratio.

Jack F. Harper

I'd think about it, proportionate like that, yes.

Gil Yang - BofA Merrill Lynch, Research Division

Okay. And can you talk about going into 2012, your guidance suggests 64% -- the oil cut going to 64%. Can you talk a little about the dynamics there, in terms of is it a -- the jump up is related to the acquisition or is it just sort of a smooth progression through the year of oil volumes picking up relative to gas?

Jack F. Harper

Yes, we base our production forecast on our engineering report, and that's what it would tell you. If we had better performance on the gas side, it could modify that. But today, we're looking at it in that 62% to 65% oil range, but I know the guidance is 64%. So we're fine with that.

Timothy A. Leach

And remember the liquids nature of the gas stream that puts our total company, up above 80%.

Gil Yang - BofA Merrill Lynch, Research Division

Right, sure, of course. In your guidance, you -- I'm just comparing a couple of items in the guidance versus last year. Last year, you said you drilled about 500-plus Yeso wells and this year -- or for next year rather, 350 to 360. The Yeso's low on gas here I think, and so does that change your gas mix with the reduction in Yeso drilling next quarter?

Timothy A. Leach

No, I don't think the Yeso is gas here. I mean, the Yeso has kind of the same makeup as the Wolfberry, and those 2 core areas have the same kind of mix. And again, we've talked a lot about the rate that we're drilling in the Yeso, it is a great area for us to be able to slow down or speed up, so the discipline of staying within cash flow, this allows us to devote more cash flow to the Delaware Basin by slowing down a bit in the Yeso.

Gil Yang - BofA Merrill Lynch, Research Division

Okay. Can you also talk about the increasing working interest from the acquisition, is it that you bought working interest on existing properties to some extent, or is it because what you purchased had a higher working interest than your existing properties?

Timothy A. Leach

Yes, what we purchased has a higher working interest. So that drove our average up.

Gil Yang - BofA Merrill Lynch, Research Division

Okay. So you didn't purchase any additional working interest on existing property?

Jack F. Harper

We actually did, Gil. A very small portion of this was buying additional interest in some of our existing properties. So it was really both.

Gil Yang - BofA Merrill Lynch, Research Division

Okay. And then last question, could you just go back and maybe give a little bit more color on any details as to why those wells that you highlighted were particularly good and if you could expect any predictability of that going forward?

Timothy A. Leach

Yes. I mean, that's why we're talking about it. We've put out the averages and the range and all that, which is unique for us. I mean, we've always thought that a big company shouldn't talk about individual wells because statistically, they weren't very meaningful, and especially if it was just a 24-hour rate. So what we're trying to do is talk about groups of wells with 30-day rates and of course, why we're talking about that is because we think it's predictable for what we're going to do going forward.

Gil Yang - BofA Merrill Lynch, Research Division

And can you give a little bit more insight as to what do you think -- what you're doing differently that gets you that confidence and the better results?

Timothy A. Leach

We're in a good area. And as -- and we're in a multi-pay part of the Permian. And as we've tested these different zones, I think we've been, as Joe described, we've been on the frac stages and things like that. We've been trying to optimize those, but we've gotten fairly consistent results over 50 wells. It gave us a pretty high confidence level in our 2012 plan.

Operator

Your next question comes from the line of Jessica Chipman with Tudor, Pickering, Holt.

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So first question, just a clarification on 2012, on your budget, you're spending within cash flow but that's run at really a lower commodity price than today, it's $85 oil and $4 gas. If oil price was higher, would you consider adding a rig here or there, and where would it be, would it be on the horizontal side first?

Timothy A. Leach

Well, as you know, the oil price has moved around a lot in the last couple of quarters. We're fairly well-hedged to take a lot of the volatility out of it, but the answer to your question is, yes, if we produce more cash flow, we'll reinvest it on our properties. And probably, every incremental dollar we produce will go into Delaware Basin in 2012.

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, great. So based on that commentary, it seems that you're pretty comfortable with horizontal wells producing returns, at least in line with what you're seeing from verticals. So can you talk a little bit about how those horizontal wells compare to verticals from the standpoint of returns and then capital efficiency, maybe in terms of production or reserve assets [ph] per well?

Jack F. Harper

Jessica, this is Jack. I mean, of course, it's early in the life of this whole program but we're comfortable with the rates of return in the Delaware versus our other 2 plays today, albeit it's still more risky because it's earlier. So risk adjusted, I'd say the Wolfberry and Yeso is higher, but we've certainly seen good early results that would make us feel comfortable allocating as much money as we are in 2012, to the Delaware.

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then I think what I'm trying to get at maybe, Gil, was trying to get at a little bit, just pulling public well data for different regions in the Bone Spring, particularly central Eddy and Lea Counties, I think consistently, you guys have had better results than some of -- even your nearby operators. And so, I'm just wondering why you think that might be? Has drilling really been concentrated on certain portions of your acreage or is it just slightly different completion, or any color would be helpful?

Jack F. Harper

Jessica, this is Jack again. When we look at -- the number of wells we've either drilled or participated in, it's approaching 200, so I think that helps. I think the location of our acreage helps and I think the work our technical team is doing on the completions also helps.

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then just last, I think Concho has historically funded acquisitions with equity and drilling within cash flow. So how much can you invest in the future, in acquisitions before you feel like you would need to tap the markets again?

Timothy A. Leach

Yes. That's a little bit of -- I mean, it depends on what you're buying of course. If you're buying acreage with no production, that's probably one answer. And if you're buying properties that have production, that's another answer. We've always targeted trying to stay underneath the times debt to EBITDA kind of level. We're well below that now. We probably got more financial flexibility than we've ever had in the company's history. So I think we can do a lot more without having to tap the equity markets. I will say, however, that we've got a lot on our plate from the drilling and development standpoint. We don't really need to buy anything to achieve our growth objectives for the next several years. However, it's in our nature to be opportunistic and I think you'll see us very actively, trying to add to our property base. So I hope that wasn't too confusing, but we can do a lot more and we're still actively trying to grow the company.

Operator

Your next question comes from the line of Dan Morrison with Global Hunter.

Daniel J. Morrison - Global Hunter Securities, LLC, Research Division

Quick question on your Yeso drilling. Have you all tried any of those horizontally. And if so, what are you seeing in the way it results?

E. Joseph Wright

We have, we've done some horizontals in the past couple of years, as we looked at stepping that play out, but we've been very happy with those results. If you look into '12, we're going to increase our horizontal drilling up on that northwest shelf, in that Yeso play, so you'll see a little more of that into 2012.

Daniel J. Morrison - Global Hunter Securities, LLC, Research Division

And one other question on -- over the Midland Basin and your Wolfberry position. Do you see any of the Wolfcamp Shale potential that's starting to develop over there, coming under your acreage position.

Timothy A. Leach

Go ahead, Jack.

Jack F. Harper

Yes. We do see that potential, that's something our team is studying. However, as we've said in the past, the economics we're getting vertically include some of those zones and are very competitive and I think we'll be challenged to beat those economics. But certainly if they can, we're going to -- we will keep looking at it.

Operator

Your next question comes from the line of Richard Tullis of Capital One South.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Just a couple of quick questions, I think most of everything's been hit on. But Looking at 4Q, Tim, have you seen any meaningful downtime or curtailments thus far?

Timothy A. Leach

No, not really significant ones. I mean, this is typically a good time of year in the Permian Basin, in terms of the weather improving. And if you look historically, in the second half of the year, you don't have generally, the kind of problems you have in the first half of the year, from the heat and things like that. So I would expect run times to be good from now on, throughout the year.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And then the EUR range in the presentation for Delaware Basin, the 400,000 to 700,00 barrel EURs. How is that break down roughly, between the various targets, Bone Spring, Avalon, Wolfcamp?

Jack F. Harper

We really haven't broken that out, Richard. I'd tell you that the EUR in Avalon tends to be higher but more gassy. And so the -- and the other -- the Sand being a little lower but more oily.

Timothy A. Leach

I mean, for the purpose of what you're trying to do now and your understanding, if you just kind of take the average and apply all the averages to everything we're doing, you'd probably be in good shape.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And just lastly, what was the percentage of oil in that 1,500 barrel a day component of the acquisition?

Jack F. Harper

It's about 40% oil and then the 60% is rich gas.

Operator

Your next question comes from the line of Irene Hass from Wunderlich securities.

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

I have a question for you, on the Wolfcamp Shale, on Delaware side of the Permian Basin. Now the shale is very extensive and safe, so my question for you is how do you zoom in on the right zip code, aerially speaking, once you land that, then within the very thick interval, I believe it's probably 2x, 3x thicker on the site. How do you find the sweeter intervals? And one last question is on the Midland side of the Wolfcamp Shale, it tends to be very oil-rich and liquid-rich. Are you seeing the same thing on the Delaware Basin side?

Timothy A. Leach

I'll turn that over to Jack.

Jack F. Harper

Yes. Well, let me see where to start. Our -- the technical team has done a lot of work. Certainly, in and around that traditional -- that northern sub play in the Delaware Basin and the Wolfcamp, and we've drilled and completed a few wells and we'll continue to do that into next year. So our understanding of that play up there is increasing. We see the GUR there a little higher than in, say, what they're seeing on the Midland Basin side. But certainly, very, very competitive looking economics, I would say, with what's going on in the Midland Basin.

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

And how do you -- actually, how do you go about really isolating the right zip code in area of interest? And then importantly, it's big and it's thick. And how do you actually go about looking for the sweeter intervals? Do you have sort of existing data from vertical wells that gives you some pretty good clue at this point?

Jack F. Harper

Yes, we do have vertical data. We're testing the different intervals within the Wolfcamp up there. We will potentially shoot some seismic as well. So it's -- any and all ways to hone in on the best productive zone including is one zone more or less oily than the other. And that's the process we're in right now.

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

How thick is the signals, can you give me a little range for the Wolfcamp Shale, on the Delaware side?

Jack F. Harper

Yes, I mean, it's up as much as 2,000 feet in that Wolfcamp.

Operator

Your next question comes from the line of David Deckelbaum with KeyBanc.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

I just had a quick question on the acquisition of the 350 targets that you guys originally identified, am I to assume that, that just applies to New Mexican portion of the acquisition?

Jack F. Harper

The 350 locations?

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Yes.

Jack F. Harper

Yes, those are -- there are some in Texas and New Mexico, but yes, primarily New Mexico.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Okay. So are you applying the same sort of risk factor to the 500 additional potential locations I guess, on the Texas side that you see on your existing position down in sort of the Reeves, Pecos area.

Jack F. Harper

Yes. I mean, generally speaking, the Northern, as Tim mentioned, is more de-risked today. And so the reason for not identifying those additional 500 locations is because they're in areas that have less production history and we're going to -- that's part of what we're going to do next year, is to better define that.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

And is the base case assumption then on those 500, that they would all be perspective to the Wolfbone?

Jack F. Harper

Certainly, yes, as vertical wells, but as we were talking about earlier in the call, there is -- we will test the horizontal concept down there as well.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Great. And then just lastly, on the 113 Bone Spring wells you all have planned for next year, given what you're seeing out of the gassy oily mix on the Avalon wells, what's your intention in terms of Avalon Shale wells for 2012?

Timothy A. Leach

The Avalon Shale will be part of that 113. As we've said all along, as you move back to the east in that play, it looks like it's more and more oily. And that fits in well with the acquisition that -- one of the acquisitions that we did. So you'll see us doing a lot more of that back to the East, but we'll continue to test all the areas of our acreage in 2012 as well.

Jack F. Harper

And David, it's about 1/3, probably, of those wells we'll drill in '12, or Avalon wells.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Great. And I guess lastly, you all said that you would be opportunistic in terms of expanding your inventory and your acreage position. Is there any sort of sensitivity around timing or is it more leaving some availability on your revolver, given the dry powder that you all have if you see something that picks your interest, you'd pull the trigger. Is there an impetus to get something done sooner rather than later?

Timothy A. Leach

No, I mean, we're very pleased with our progress in adding to our asset base. We're more opportunity-driven on -- when the right opportunity comes along, we're ready to take advantage of it.

Operator

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

Sven Del Pozzo

It's Sven. As some of the analysts have mentioned, in the Bone Spring and the Avalon, it's not just that your wells are bigger, they all seem to be declining at a slower pace. So I'm wondering if that has to do with completion, whether you're opening up more of the pore space. And maybe you could describe it by telling us what you learned in that -- during that period after you acquired Marbob, when you were pretty quiet about talking about the Bone Spring and the Avalon. Could you tell us how the completion technique has evolved between then and now?

Timothy A. Leach

Well, I mean we're still learning. So to describe it as if we've arrived, I think it's way too early. Completion techniques aren't different. I mean, we're running pipe and cementing pipe in place, and maybe getting better frac jobs because of that. But I can't really speak to other companies' completion techniques. I just know what we're doing. And early on, in a play like this, we tend to be conservative in making sure that we have -- we drill a hole that's -- you can work in and so it may -- our cost may be slightly higher to get pipe in the ground and get it cemented in the ground, but we want to see what the results of good frac jobs are going to be. So -- and as I think as this play matures, we'll try things -- other companies will try things to try to make the wells drill faster, drill cheaper, get the frac jobs done in less days. But right now, we want to see what those wells will do with the very best frac jobs put on them. So that's the only explanation I got today.

Sven Del Pozzo

Okay. In Southeastern Reeves County, you had that acreage there before and then you moved over into Pecos. I mean, what are the -- there's not much drilling history there, is there? And correct me if I'm wrong, and if that's true then, what attracted you to the area in the first place. And is it the same qualities in the acreage over in Pecos County as you noticed in Southeast Reeves?

Timothy A. Leach

Right, there's fewer wells drilled, but the wells that are drilled geologically, they have very similar looking rocks and thicknesses and shows. So we're pretty excited by the prospectivity of this area, just from the limited data we have from the vertical wells that have been drilled over there.

Sven Del Pozzo

Okay. And last question, looks like you have a big well. I'm assuming it's Avalon Shale well, it's north of the Red Hills area in Southwestern Lea County. If you don't know what I'm talking about then, just tell me. Otherwise, I'm wondering if it could be a new area for you guys that you -- a new sweet spot so to speak?

Timothy A. Leach

We have new sweet spots in lots of places and we don't like to speak about individual wells, but yes, there's a lot of good wells and a lot of new sweet spots. And I would never say that I don't know what you're talking about when you're talking about one of our wells.

Operator

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

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

A couple of questions. You talked about -- in your lateral lines, you're going 4,000 to 4,500, and you talked about it being 1 section. Is there opportunity to go longer then, have you tried that. Can you just give me some more color on that?

Timothy A. Leach

Yes. We have drilled longer than that. I think as this play continues to develop, we'll see longer and longer laterals. Right now, the efficient way to do this is probably in the section, 4,500-foot laterals now.

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

Okay. So -- I mean, is it just more efficient, or that it's just given the acreage makeup, and why you said you've tested it?

Timothy A. Leach

We've tested it in some areas where we didn't have access to surface locations, so we drilled longer laterals to access some areas that we couldn't have gotten to because of surface restrictions. But I do think longer-term, we'll see longer laterals.

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

Okay. What's your feeling on -- you guys are using -- I think with the new acquisition you cited, 106-acres basin. What's your feeling on that long-term?

Timothy A. Leach

I think that's a good spacing to look at. We'll continue to look at even tighter spacing than that and see what the effects are, but I think the 160 acres is a good number to use right now.

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

Okay. And then are you guys -- Jack, I don't know if you gave this, but the split of the locations at 350, did you split that between north and south?

Jack F. Harper

We really haven't. The vast majority is north.

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

Okay. And last question. If I'm thinking ahead to yearend, and Tim you talked about well cost kind of stabilizing. When I think about a PV-10 report and what we're going to get February, whenever we get it or whenever we see it, what well cost assumptions go in there. Do you just assume current well costs, do you assume the average for '11, how should we think about?

Timothy A. Leach

I think we try to use the most current well cost that we have at the time, to put on our yearend report.

Operator

[Operator Instructions] Your next question comes from the line of Jeff Robertson with Barclays Capital.

Jeffrey W. Robertson - Barclays Capital, Research Division

Tim, in 2012, can you just talk a little bit about how much of the budget for drilling and completion will go toward what you'd consider new exploratory-type projects in the Permian, not necessarily specific plays, but just some color on the new ventures' efforts and how much of the capital you spend in '12 would go toward those?

Timothy A. Leach

Yes. The way we define exploration is probably different than any other company that's out there because as we've described in the past, there's so many new things going on in the Permian. A lot of our exploration is actually testing new ideas on our existing acreage and places where we already have producing oils. So therefore, there's a little bit of gray area and how much you'd call exploration and then how much is pushed -- how much of that $1.3 billion is pushed down to the teams just to do the normal development kind of operation. But I would say, I would think in the $100 million range as far as that kind of activity.

Jeffrey W. Robertson - Barclays Capital, Research Division

And then second question on the budget next year. Can you split out or give a rough idea of how much of the drilling capital will go toward opportunities that you all would already have on your books at yearend 2011, and how much would go toward unbooked drilling locations?

Jack F. Harper

Yes, Jeff, it's probably going to be about a 50-50 mix, which is pretty traditional for us.

Operator

I would now like to turn the presentation back over to Mr. Tim Leach for closing remarks.

Timothy A. Leach

Great. Well, thank you, everyone, for listening and I know it's a busy time. I appreciate the support that you've shown for our company. As we said for many years, the Permian Basin is a great place to be. I think you'll hear other companies release good well results in the Permian. So I think what's unfolding in the future is what we hoped would happen. There's going to be lots of opportunities in lots of places, with the rig operations that we have and the 550 or 560 people that we have on the ground here in the Permian, I think we're going to be really well-positioned to take advantage of all this growth. So thanks again, look forward to talking to you again in the near future.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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