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Concho Resources Inc. (NYSE:CXO)

Q4 2011 Earnings Call

February 23, 2012 10:00 AM ET

Executives

Price Moncrief – Director, Corporate Development

Tim Leach – Chairman and CEO

Joe Wright – Chief Operating Officer

Jack Harper – Senior Vice President and Chief, Staff

Matt Hyde – Explorations, VP

Analysts

John Freeman – Raymond James

Neal Dingman – SunTrust

Scott Hanold – RBC Capital Markets

Jessica Chipman – TPH

Pearce Hammond – Simmons & Company

Bob Morris – Citigroup

Rhys Williams – Global Hunter Securities

Irene Haas – Wunderlich Securities, Inc.

Richard Tullis – Capital One Southcoast

Operator

Good morning, ladies and gentlemen. And welcome to the Fourth Quarter 2011 Concho Resources Incorporated Earnings Conference Call. My name is, Chris, and I’ll be your conference moderator for today. Presently, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions)

At this time, I would now like to turn the conference over to your presenter for today, Mr. Price Moncrief, Director of Corporate Development. Sir, you may proceed.

Price Moncrief

Good morning, everyone. We’re glad you could join us today for Concho’s fourth quarter and year end 2011 conference call. Before we get started, I’d 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 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 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.

On today’s call, I’m joined by Tim Leach, our Chairman and CEO; and Joe Wright, our COO. He will discuss our 2011 results. We are also joined by other members of our management team, who will be able to answer questions later on the call.

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

Tim Leach

Thanks, Price, and thanks everyone for joining the call. The management team is with me here in Houston, where we just concluded our quarterly board meeting and we’re looking forward to spending some time at the [late] conference.

I was pleased at this meeting to welcome Gary Merriman to the Concho Board. Gary’s careers included 26 years at Conoco, where he ultimately retired as President of Conoco ENP in 2002, and he recently served as a Board member of Petrohawk. So we’re very pleased to add his talent to our team.

Before I turn the call over to Joe to discuss the operational highlights, let me comment on what I think are some of the important achievements for the year. 2011 will be remembered as the year that natural gas prices collapsed and everyone tried to get oily.

As a result, more attention was directed toward the Permian, where a combination of new technology, courage and luck unlocked new sources of oil from overlook formations. The industry discovered vast new resources. Concho finds itself right in the middle of the action. People and equipment are moving to the Permian, we are reaching record levels of activity.

Profit margins remain high even with the lower natural gas prices. Our cash margins are as strong as they’ve ever been. To that point, it’s worth highlighting that less than 10% of our revenue came from the sale of residual gas in ‘11.

The main challenge at Concho in the short-term is to capture as much of this opportunity as possible without over extending. We’ll have to be very selective in the opportunities that we choose to pursue and there are now many, many opportunities.

Now for the more mundane achievements. We ended the year with record levels of production, reserves and cash flow. Production grew 51%, 27% organic organically. Reserves were up nearly 20% and we drilled over 800 wells.

To put things into perspective, Concho is now the second largest producer on a gross operated basis in the Permian. While it seems like an uneventful year for Concho, we signed up over $600 million in acquisitions. We added 185,000 new acres to our inventory through leasing and acquisitions. We sold our Bakken assets for $200 million. We completed a $600 million bond offering and we hired 219 new employees. That’s a lot of activity for such quiet year.

Let me talk a moment about our assets. We continue to be encouraged by our result in the Delaware Basin. This core asset now is contributing 16% of the company’s total production. That’s up from just 7% in the first quarter.

Our team has now drilled about 180 horizontal wells here since 2009 and continued to expand our knowledge and confidence in this play. This opportunity is quite large, both geographically and from the standpoint of multi-stack pays. We’re continuing to identify highly productive pay zones up and down the strake column.

There’s been a lot of excitement lately on the Wolfcamp play primarily in the Midland Basin. But we are enthusiastic about our recent success with the Wolfcamp in the Delaware Basin where we just drilled and completed two horizontal wells that have an average 30 day IP of 1,241 BOEs a day.

We currently have four other wells targeting the Wolfcamp that are either completing or drilling and another 14 horizontal Wolfcamp wells ending in ‘12. This is all additive to the Bone Spring and Avalon success that we’ve also had.

As we discussed in the past, the Wolfcamp is present across the entire Permian, we believe that we currently have over 100,000 net acres perspective for the Wolfcamp in the Delaware Basin. There will be a lot to do here for many years and with our position and our infrastructure, we’ll continue to be a leader.

Over in Texas, we previously announced our PDC Wolfberry acquisition which is set to close at the end of February. This deal will help us reload our Wolfberry inventory, increase our interest, expand our presence in the play to the north. This type of smaller bolt-on opportunities seem to be coming to us more frequently than ever.

And with all this change that we’re experiencing, we remain committed to the philosophies that build Concho, drilling within cash flow, maintaining a strong and simple capital structure, producing high profit margins and reinvesting in high rate return projects.

Let me now hand the mic over to Joe for an operations update and I look forward to taking your questions during the Q&A.

Joe Wright

2011 was a challenging year for operations in the Permian. Mainly around issues like takeaway, service cost, weather conditions and logistics. But 2011 was a great year for us. Our year end results demonstrate our ability to execute when faced with challenges and either meet or exceed our goals for the year.

As we complete our 2011 budget and are now moving into implementation of our 2012 plan, there seems to be an easing of the pressure of our product sales, cost and manpower. I believe our contractors have done a good job of increasing capacity. At the same time that the number of drilling rigs continues to increase.

We’ll continue to see the rig count grow though as these rigs that are capable of drilling the oily horizontal plays move out of the gassy plays and into the Basin. Our company is ready to meet any challenges in 2012.

Now to our year end results. We grew proved reserves approximately 20% to 386 million barrels, while producing 23.6 million barrels. This production volume was 51% above our 2010 production and above the high-end of our guidance of 23.3 million barrels for ‘11.

At the end of 2011, 61% of our proved reserves were classified as proved developed, which is up from 57% in 2010. The oil and gas mix of both our proved reserves and our production was 62% oil and 38% wet gas, which has remained steady since the Marbob acquisition. As you recall, Marbob had some legacy gas production from the Morrow and Atoka intervals which caused our oil percentage to be slightly reduced.

All three of our core assets contributed to the production and reserve growth in 2011, with the largest contribution coming from our Delaware Basin assets. We’re proved reserves and production more than doubled in 2011.

Since closing the Marbob transaction, we’ve completed 55 horizontal wells with an average 30 day IP of greater than 720 barrels a day. 31 of these wells had a peak one day IP of greater than 1000 barrels a day. So you can understand why we’re excited about the potential of this play.

So -- one of our goals for the Basin in 2011 was to identify and better understand the multi-pay horizontal targets ranging from the Delaware formation through the Bone Springs and Wolfcamp intervals and into the Penn Shale. That’s why we drilled several initial tests in these targets over a large aerial extent.

The results have been very encouraging and lead us to believe that multiple targets exist across most of our acreage position and we plan to test different development methods such as multi-lateral drilling in 2012.

As a result, we have allocated a greater portion of our 2012 drilling capital, relative to 2011 to the Delaware Basins. Another area of focus in 2012 is our most Southern Delaware Basin acreage where we now own over 100,000 net acres. We have drilled several vertical Wolfcamp, Bone Spring wells and we will be drilling at least seven horizontal wells in that area during 2012.

Over the Midland Basin, we drilled our first horizontal Cline well in Glasgow County, which is on the eastern side of the Midland Basin. Our early production tests are in line with our initial projections. We’ll evaluate this acreage with another horizontal well this year and in 2012 we plan to drill two horizontal wells on the western side of the Midland Basin’s well.

Lastly, I want to comment on our lease operating expense for 2011. Our lifting cost in the fourth quarter was higher than the last guidance I gave you in November and caused our full year 2011 LOE to be higher than forecasted.

This increase is primarily driven by higher than normal contract labor costs, lease maintenance and service work on our shale properties, as our production related activities increased with the Marbob acquisition.

Also contributing to the overall increase were higher wages and cost of services. But a significant amount was non-recurring cost. The asset team has and will be working hard to reduce these expenses in 2012.

Despite the higher per unit LOE in the fourth quarter and for the full year, our business remains as profitable today as it has in the past and even with our revised 2012 LOE guidance of $6.80 to $7.20, I expect our profitability and margins to remain consistently strong.

Overall, I’m very pleased with our operational success in the fourth quarter and for 2011.

I would now like to turn the call over to the moderator and we can answer any of your questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of John Freeman with Raymond James. You may proceed.

John Freeman – Raymond James

Good morning.

Tim Leach

Hey, John.

John Freeman – Raymond James

Just wanted to follow up, Joe, on what you were discussing on the higher end and some of the reasons for the higher LOE. Has any of that carried over on to just sort of the complete well cost side, the last quarter you’d said costs had been pretty flat on the well costs, you expected that to remain flat in ‘12. Should we also start assuming that the well costs a little bit higher now?

Joe Wright

No. I wouldn’t assume that at all. 2011 we had a slight increase in the first quarter to the second quarter, but have kept those costs pretty much flat through the last three quarters of ‘11. I anticipate the same moving into ‘12 now and that’s the way we modeled our budget for 2012.

John Freeman – Raymond James

Okay. And then on the two recent, the horizontal Wolfcamp wells, the really strong 30-day rates is and I know this is obviously very early. But is there anything that you’ve seen in those two wells that would indicate that the general decline curves are any different than what you’ve had on the Avalon and the Bone Springs? I guess, another way to say it is, in your prior guidance, you’ve said that the northern Delaware Basin, if you had a 30-day rate that was somewhere around 1,200 to 1,300 that would indicate an EUR of around 600 to 700, is that kind of the ballpark assumptions that we could use on the first two wells?

Jack Harper

Hey, John. This is Jack. I’d say it’s probably too early to make the assumptions on the EURs. But clearly that kind of rate is strong and higher than we’ve seen out of some of the other formations.

John Freeman – Raymond James

Okay. And then last question, I’ll turn over to somebody else, you mentioned the Cline shale that you tried on the Midland side. Are there any plans to or if you’ve already done any Penn Shale wells on the Delaware side?

Joe Wright

Yeah. We’ve got one drilling right now, John.

John Freeman – Raymond James

Okay. Great. Thanks, guys.

Joe Wright

Okay. Thank you.

Operator

Our next question comes from the line of Neal Dingman with SunTrust. You may proceed.

Neal Dingman – SunTrust

Good morning, gentlemen. Just a couple questions. First, just on well design, as you look now, are you about on, when you look at sort of, I guess, just looking at the Mexico Shelf first, on sort of this stages lateral if those set are just on the completions, are you trying to said where you are or are you still sort of tweaking that?

Joe Wright

We’re still tweaking that. I mean, I think that’s parts of the cycle, part of the evaluation.

Tim Leach

He’s talking about the shelf?

Joe Wright

Well, I think in general, I’m answering for even the Delaware plays well.

Neal Dingman – SunTrust

Yeah. That’s exactly. I’m just kind of in general.

Joe Wright

Yeah. It and -- it’s -- we will continue to look at ways to increase our EUR and increase those rates of return and lower those cost. So I think we will see longer, longer and longer laterals. That’s a good example that you mentioned.

Neal Dingman – SunTrust

So, I guess that’s what I was getting at. So it seems you’ll continue to see improving results and it’s fair to say that based on some of the modifications you’re still doing, it’s fair to say, I guess, you wouldn’t be surprised to see these results continue to improve as they have over the last couple of quarters?

Joe Wright

Yeah. I mean, they’re good, the results are really strong and have exceeded our expectations. So predicting they’ll even get better, I think it’s a little dicey, but we’ve been very pleased with what’s happened so far.

Neal Dingman – SunTrust

And then, Tim, just lastly and then I’ll turn it over, just, you’ve done a great job of just doing some of these, not just bolt-on acquisition, but even mixed with some of these large ones, is there still things available that you are seeing, now you have been approached with things are now given the environment are things just getting a little too pricy to make that, where it getting right?

Tim Leach

Well, I mean, we’re in a really hot area, so everything, there’s pressure on pricing when we look at deals and everything of course. But, as we talked in the past, I think having the ability to execute and drill and put these things online, really, gives us an advantage. And I think that causes us to see a lot of deals and have things come our way, and I don’t ever remember a time where we had more deals lined up in the queue than we got right now.

Neal Dingman – SunTrust

Well and last with that, last one if I could, just you did mention on the takeaway, I know infrastructure continues to be an issue throughout the play. It seems like though you are in better position than a lot of your peer. Is that just something you continue to work on as far as just continuing to add the infrastructure or do you have enough now to add the capacity that you’re growing into or will you just continue to add that infrastructure?

Tim Leach

Well, we don’t really own much infrastructure. But we are a very large producer and we have good relationships with the midstream guys, whether it’s oil transportation or NGLs or gas. So we’ve been able to move our product when others haven’t.

And I think that the midstream guys have done a good job because there’s so much profit in it of racing to keep the capacity up with the activity. So I think, we think that we will continue to have adequate takeaway capacity and I think over the next three or four years, it will even -- there will be more capacity for the entire Basin.

Neal Dingman – SunTrust

Got it. Thanks Tim for the answer.

Tim Leach

Thank you.

Operator

Our next question comes from the line of Scott Hanold, RBC Capital Markets. You may proceed.

Scott Hanold – RBC Capital Markets

Thanks. Hey, guys.

Tim Leach

Hey, Scott.

Scott Hanold – RBC Capital Markets

Question on the Cline well that you indicated that you drilled and saw some results that were, I guess encouraging. I mean, could you give us a little bit more context to color, maybe there is a pay zone or sort of I know you guys tend not to like give initial production rates, but some general color on what that means?

Tim Leach

Yeah. You guys, anyone want to address that?

Matt Hyde

Sure. This is Matt Hyde, Explorations VP. We are in that area on the Eastern Midland Basin. Our thickness is in that Penn Shale Cline interval are similar to what other operators are operating in back to the west of us and to the north of us and actually to the south, so we’re pretty surrounded by similar thicknesses.

The total section thickness is several hundred feet thick and obviously the net pay age within that is the variable component of that. But we’re very enthusiastic about what we’re seeing in terms of rock over there at this point in time.

Scott Hanold – RBC Capital Markets

So, based on what you see, I mean, how, I guess, I mean earlier, you are in the process here and this is an area that you could be more active yet some time this year?

Matt Hyde

Well, I think, as Joe intimated, it probably will be following up with the second well on this almost 10,000 acre block on the eastern side of the Midland Basin. So the answer would be yeah to that.

Scott Hanold – RBC Capital Markets

Okay. And then, in the Delaware Basin on the horizontal Wolfcamp well you drilled, it sounds like those rates were, I think it was 1,241? How much gas is there? Are you seeing it a little bit more gassy than like the Bone Springs and Avalon, and can you give us a sense of…

Tim Leach

Right.

Scott Hanold – RBC Capital Markets

… kind of what you saw with those?

Tim Leach

Well, it’s shaley. And as we’ve said in the past, the shaley producers produce a little bit more gas. So it’s more in line with the Avalon production. Although we do think in the Avalon there is an oil window. But these Wolfcamp wells tends to be a third, a third, a third, a third crude oil, a third NGLs and a third dry gas.

Scott Hanold – RBC Capital Markets

Okay. Okay. Great. And one last question, if I could, when you’re looking at sort of your development program here in 2012, obviously a lot more focus in the Delaware Basin? What do you expect from the Yeso and the Texas Permian in general? I mean, is that production going to see sort of a modest growth in general and most the activity or most of the growth is going to be happening in the Delaware Basin?

Tim Leach

Yeah. Well, I think, that’s a way to characterize it. I mean, we are taking cash flow out of both those areas to help fund the Delaware Basin. At the same time, in the Wolfberry, for example, we’ve been able to do more and more bolt-on acquisitions that give us higher interest and higher economics. And so that you’ll see a ramp-up in rigs there in the Wolfberry.

And also, in the Yeso, I mean, we’re doing a lot of horizontal work in the Yeso and I think there is still a lot of oil in place there. In addition, there are some acquisition opportunities there as well. So it’s not like those things are on autopilot.

Scott Hanold – RBC Capital Markets

Got it. Okay. Thanks.

Tim Leach

Yeah.

Operator

Our next question comes from the line of Jessica Chipman with TPH. You may proceed.

Jessica Chipman – TPH

Hey. Good morning, guys.

Tim Leach

Good morning.

Jessica Chipman – TPH

Just a couple of quick questions. I think you mentioned you’re drilling two horizontals this year in the Midland Basin. One would be Cline and the other would be Wolfcamp more south in Upton County?

Joe Wright

We’re going to really be drilling more than that. We’re looking at another well on the eastern side in the Cline. And then we’ll drill two Wolfcamp horizontals on the western side of the Midland Basin, around our existing production base there.

Jessica Chipman – TPH

Okay. And then you mentioned a 10,000-acre block in Glasscock, I guess, prospective for the Cline. Have you any sort of idea around what acreage would look like around the Wolfcamp in the western Midland Basin at this point, I know you have yet to total it out?

Joe Wright

Yeah. That’s where our core Wolfberry position is and we have a substantial acreage position there.

Jessica Chipman – TPH

And then just following up on an earlier question on infrastructure, I know you have good relationships with the midstream guys. I’m just wondering, do you have specific plans to add incremental processing or oil takeaway capacity over the next two years?

Joe Wright

Well, we’re not really in that business, but there is a considerable amount of incremental capacity being added. I mean, there is -- there are projects right now that are being completed. There are projects under construction and there is project still on the drawing board.

Jessica Chipman – TPH

And just last, I think there are couple operators out with some more variable results in that southern part of the Delaware Basin around Wolfbone acreage and I know you give a wide range from 100,000 to 400,000 barrel EURs. I mean is it reasonable to assume the midpoint of that range or do you just at this point don’t see a lot of variability?

Tim Leach

Yeah. There’s definitely still a lot of variability and most of the activity has been vertical. But as Joe said we’re going to test some horizontal well there this year, so it’s most certainly evolving at this point.

Jessica Chipman – TPH

Okay. All right. Thank you.

Joe Wright

Thank you.

Operator

Our next question comes from the line of Pearce Hammond with Simmons & Company. You may proceed.

Pearce Hammond – Simmons & Company

Good morning.

Tim Leach

Good morning.

Pearce Hammond – Simmons & Company

Could you elaborate on the attributes of targeting the Wolfcamp in the Delaware Basin versus the Midland Basin as far as well costs, rates of return, IP rates, et cetera?

Jack Harper

Sure. This is Jack. I’ll take a shot at that. That’s a lot of questions.

Tim Leach

Yeah. Everybody pointed at Jack because no one else wanted to answer that question.

Jack Harper

It’s, again, early and all, and there’s still science involved in both areas. Generally, the wells in the Delaware targeting the Wolfcamp are going to be more expensive and we would expect higher initial rates and so it’s hard to compare economics but they both appear to have economics at this point.

Pearce Hammond – Simmons & Company

Do you think that the Delaware Basin is more attractive, at least from your perspective than the Midland Basin for the Wolfcamp?

Tim Leach

I’ll take that one. That’s more kinds of up my alley, I think. I like the Delaware Basin because it’s deeper, thicker. I think you have more potential stack pay zones there probably than you have in the Midland Basin.

At the same time, when we look at our projects in the Midland Basin and look at the rates of return there, they are real competitive. But on the margin, I like having multiple pay opportunities and we really haven’t started baking in the impact of having multiple pay opportunities yet into the economics that we’re talking about.

Pearce Hammond – Simmons & Company

Do you think you could have the largest acreage position in the Permian that’s perspective for the Wolfcamp?

Tim Leach

In the entire Permian, no, probably not, I mean, there are major oil companies that have bigger acreage footprints than we have and Pioneer may have a bigger acreage footprint than we have in the Midland Basin anyway.

Pearce Hammond – Simmons & Company

And then lastly, if you could just touch on service costs and service availability, and how that has changed here thus far in this quarter and…

Joe Wright

Yeah. This is Joe. It really has been a little bit of relief there in terms of just that in Cline. I think we’ve done a really good job of maintaining those costs on the capital side and of course. I’ve already commented on the LOE side. The capacity has increased, a lot of it depends on how the rig count, what happens with the rig count as we kind of move forward in the increased demands in that basin, but right now, it feels very good.

Pearce Hammond – Simmons & Company

Thank you.

Tim Leach

All right. Thank you.

Operator

Our next question comes from the line of Bob Morris with Citigroup. You may proceed.

Bob Morris – Citigroup

Good morning.

Tim Leach

Good morning, Bob.

Bob Morris – Citigroup

Good morning. You had mentioned that you have more bolt-on opportunities than ever before. Why is that that all of a sudden with the hot environment, people are more willing to let lose their properties. And in that regard, is there anything other than price that would restrain your appetite to significantly add to your inventory this year, like just manpower availability or anything else?

Tim Leach

Yeah. I don’t know that I can know the answers why everybody wants to sell. But I think, I mean, there’s a combination of things. It’s tougher to be a smaller operator right now and get the services necessary to go out and drill the wells. And so I think our size and scope has an advantage that causes things to come our way. I think that also that you’ve got companies that are redeploying capital from one area to other that kind of drives things as well.

And you also, I mean there’s, on the last 10, 15 years, there’s been more private equity firms that and companies that are back with private equity that have a limited life on how long they are going to stay in these things and that causes this smaller deals to come our way.

Bob Morris – Citigroup

And then just anything that would restrain other than price or appetite to significantly add to your inventory this year or…

Tim Leach

I mentioned trying to capture as much inventory or opportunity as possible without over overextending. So we always keep an eye on our balance sheet. I want to keep a strong balance sheet. I want to make sure that we drill within cash flow, so I want to make sure that we buy things that we have immediate plans to drill on and immediate cash flow to drill with. So those are, it’s more of an art than it is a science maybe.

Bob Morris – Citigroup

Sure. Then on a separate topic, you mentioned last quarter, you planned to average 35 rigs for the year. Is that still the plan and when do you expect to begin adding those or putting those rigs to work?

Joe Wright

That is still the plan to average that. We have already started adding to our rig fleet and we have scheduled the additional rigs to meet that budget.

Bob Morris – Citigroup

Okay. Great. That’s helpful. Thanks.

Tim Leach

Yeah.

Operator

Our next question comes from the line of Rhys Williams, Global Hunter Securities. You may proceed.

Rhys Williams – Global Hunter Securities

Most of my questions have been answered, guys, but can you talk about how much exposure you have to the oily part of the Avalon shale and at least what portion of your exposure there you think is expected for oil.

Tim Leach

Yeah. I may turn in the middle of this answer over to somebody else to finish up. But in general, we don’t have a bright line defining where the oily section is yet. There’s not enough data, but generally it’s over on the eastern side of New Mexico, mostly in Lee County.

And we’ve been adding a lot of acreage there recently in our OGX acquisition and other acquisitions. I don’t -- does anybody around here know how much acreage we have over on that side or do we have a way to answer that question.

Joe Wright

I’d say, it’s hard to define right now.

Tim Leach

Yeah.

Rhys Williams – Global Hunter Securities

All right. Thank you.

Tim Leach

Yeah.

Operator

Our next question comes from the line of Irene Haas. You may proceed.

Irene Haas – Wunderlich Securities, Inc.

Kinds of want to focus on Cline Shale in specific, which county are you active in, are you at the Glasscock County area? And my second question is, how deep it is and what’s the potential aerial extent, I mean, shale should be pretty kinds of extensive throughout the Midland Basin, so what are your constraints? Are you just trying to hit the oil window, something like that?

Tim Leach

Yeah. Hi, Irene. Good morning.

Irene Haas – Wunderlich Securities, Inc.

Yeah.

Tim Leach

I’m going to turn it over to Matt to fill all those questions but its good hearing from you.

Irene Haas – Wunderlich Securities, Inc.

Yeah.

Matt Hyde

Hi, Irene. Good questions. The Cline in the Glasscock County area where our acreage block is in that 9,000 plus range which is comparable to other operators in the area. As you know, the Penn Shale or Cline has a fairly wide geographic extent across the greater Midland Basin even into the eastern shelf area. So industry is fairly early in evaluating this opportunity, but Glasscock County is certainly the focus area at the moment from a drilling standpoint.

Irene Haas – Wunderlich Securities, Inc.

And what’s the big attraction, is it -- does it have really good porosity, high carbonate content and things of that nature, you see good TOC, et cetera, et cetera? Can you give us a little more color, really Cline versus the Wolfcamp, are you seeing comparable sort of attractive attributes?

Matt Hyde

I think given some of the production volumes that are being reported or seen out of it, obviously, we think it has the quality of rock attributes that we like. We’re still in the process of gathering data from a core that we took over there at the moment Irene. So we’ll be just drilling and probably providing you little more information go forward on that.

Irene Haas – Wunderlich Securities, Inc.

Great. Thank you.

Tim Leach

Thanks Irene.

Operator

And the last question comes from the line of Richard Tullis with Capital One Southcoast. You may proceed.

Richard Tullis – Capital One Southcoast

Hi. Thank you. Good morning. Just a couple quick questions here. What are the oil price differentials you’re seeing currently in the Permian?

Tim Leach

We’re still guiding to like 95% on NYMEX, so it’s kind of holding in there where it has been historically.

Richard Tullis – Capital One Southcoast

Okay, Tim. Thank you. I know you’re currently, I guess, around 31 rigs heading to 35 this year and I assume that budget was probably built on lower oil prices than what we’re seeing currently. What’s your ability to add rigs going forward and what areas could possibly see some higher activity if these sort of prices hold for most of the year?

Tim Leach

All right. That 35 rig counts is an average for the year, so I think we’ll end at a higher number than 35 as we continue to develop a program to reinvest our cash flow. So oil -- we budgeted around $85 oil and $4 gas, and the commodity prices have moved off that obviously. We have pretty aggressively hedged our oil as we have had in the past, so the current oil prices. I think our oil price hedges we provide that information that you can go look it up.

Richard Tullis – Capital One Southcoast

Sure.

Tim Leach

I think it averages kind of the mid 90s and so that dampens the effect of $100 plus oil, at the same time with the much lower gas price at $4. I think when you stew it altogether, we have more cash flow than what we budgeted for, but it’s not as extreme as just if you think 85 versus 105. All the extra cash flow that we generate we’re going to reinvest in the drilling program and probably most of that will go into the Delaware Basin.

Richard Tullis – Capital One Southcoast

Okay. And then lastly, could you talk about the well cost you’ve seen so far for your initial Wolfcamp and Cline wells?

Tim Leach

I think it’s, we don’t really want to talk too much about that. It’s still kind in the early competitive stages. But they’re in line with what we’ve kinds of indicated for other horizontal activity out there. But Wolfcamp and the Cline are deeper zones, so there’s a marginal increase in cost due to the depth.

Richard Tullis – Capital One Southcoast

Okay. Thanks.

Tim Leach

The completions are roughly the same.

Richard Tullis – Capital One Southcoast

Okay. Thanks, Tim. Appreciate it.

Tim Leach

Thanks.

Operator

And we have no further questions at this time. I would now like to turn the conference back over to Mr. Tim Leach for any closing remarks.

Tim Leach

Well, thank you everyone. I know you have a busy schedule, I think there were several other calls going out the same time. I appreciate your participation in this one and look forward to talking to you in the future. Thank you.

Operator

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

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