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Concho Resources (NYSE:CXO)

Q1 2012 Earnings Call

May 03, 2012 10:00 am ET

Executives

Toffee McAlister - Director of Investor Relations & Corporate Communications

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

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

Steven H. Pruett - Senior Vice President of Corporate Development

Matthew G. Hyde - Senior Vice President of Exploration and Land

Analysts

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

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

Brian Singer - Goldman Sachs Group Inc., Research Division

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

Unknown Analyst

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

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

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q1 2012 Concho Resources, Inc. Earnings Conference Call. My name is Marita, and I'll be your operator for today. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would like to hand the call over to the host for today's call, Ms. Toffee McAlister, Director of Investor Relations and Corporate Communications. Please go ahead.

Toffee McAlister

Good morning, everyone. We're glad you could join us today for Concho's first quarter 2012 conference call. 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 federal securities laws. There are many factors that could cause actual results to differ materially from our expectations, including those we have discussed in the press release, our 10-K and our 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.

On today's call, I am joined by Tim Leach, our Chairman and CEO; Joe Wright, our Chief Operating Officer; and Steve Pruett, Senior Vice President of Corporate Development who will discuss our first quarter results. We are also joined by other members of our management team who will be available to answer questions later on the call.

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

Timothy A. Leach

Good morning, everyone. The Concho team is here with me in Midland, including the newest member of our team, Steve Pruett. Steve recently joined us as Senior Vice President of Corporate Development, coming to us from Legacy Reserves where he served as President and Chief Financial Officer. I'm sure you will all soon get to know Steve and his role here at Concho. And today, I'm going to call on him to review our financial performance with you. We’ll have Q&A at the end, but first, let me make a few comments about the quarter.

Our first quarter was a good start to what I think’s going to be a great year. We drilled over 200 operated wells in the first quarter, and you will see a steady build in our rig count as we progress through the year. Unlike last year, we were able to complete the first quarter without any weather-related interruptions, producing 6.9 million equivalent barrels, a 6% growth over the fourth quarter and a 36% year-over-year growth from continuing operations, the vast majority of which was organic.

The company continues to perform well financially even in the face of collapsing gas prices. We produced record cash flow and profits, reflected by the $362 million of EBITDAX that we generated.

The Permian Basin continues to be the place to be for new opportunity and profitability. The Permian rig count is approaching the historic mark of 500 rigs, and Permian production continues to increase. Concho is now the second largest producer of oil and gas in the Permian, with our gross operated production second only to Oxy. Also, we're one of the leading horizontal drillers, and we're well positioned to capture many of the significant horizontal opportunities, which I think is where most of the growth is coming from in the future.

When I think about the key achievements for the first quarter, 3 things come to mind: First is our profit margin, which remains best in the industry. The cash margin increased to 78% in the first quarter, generated by a rise in our realized price of $73.39 per Boe, despite a sharp decline in natural gas prices. Our cash flow and margins are significantly tied to oil and liquids as only 5% of our revenue came from dry gas in the period. In addition, per unit LOE [ph] declined 9% quarter-over-quarter.

Second, we unveiled a new play in the Midland Basin. We've leased about 67,000 gross acres in Terry and Hockley Counties that are prospective for the horizontal Wolfcamp and Cline shales. We believe these rocks should be similar in productive capacity to the same formations in the Southern Midland Basin. We're currently drilling our first well in the play and would expect to see more activity there this year. This is part of our strategy to increase our exposure and activity in the horizontal plays in the Midland Basin.

And finally, I think we've had significant accomplishments in the Delaware Basin. Not only has our science and our understanding of the potential improved, so is our well performance. The stack pay opportunities that we've been discovering lead us to believe that there will be significant upside to our current location count and a source of sustainable growth for the company.

Since the beginning of the year, we've added 16 horizontal Delaware Basin wells that now have 30 days of production data, bringing our total count to 71 wells, targeting 5 unique zones. In total, the average 30-day IP rate of those 71 wells remains over 700 Boes per day from single zone completions. This is very encouraging, considering a significant portion of our Delaware Basin drilling is focused on the identification of multizone potential, meaning we often complete in the second or third targets.

Bone Spring sand -- the work -- this kind of work is paying off. We recently identified an oil-rich second Bone Spring sand zone in Southern Eddy County, where the more gas-weighted Avalon shale has traditionally been considered the primary target. Our first 2 wells, testing the second Bone Spring, are strong, averaging in excess of 1,000 Boes per day and have a higher oil cut. That rate is even more impressive when you consider 2 things: First, these wells are about 60 miles to the south of the core second Bone Spring development area. And second, they're in the same area as the 2 horizontal Wolfcamp wells we discussed last quarter, which had average 30-day initial rates of 1,240 Boes per day each. So as a result, we're pumped about having 410,000 gross acres in an area with 2,500 feet of gross prospective rock with exposure to potentially 7 unique zones.

And I'm more encouraged than ever that our strategy has positioned Concho as the leader in multizone development. And I'm excited about the implications for our shareholders. Going forward, the key to being successful in this play is going to be having the best science and creating the greatest efficiencies in scale.

Now let me pass the baton to Joe for an operational update. I look forward to taking your questions at the end of the call.

E. Joseph Wright

First quarter was a solid quarter for Concho from an operational standpoint even as activity levels in the Permian continued to surge. Today's rig count stands at 499 and will soon pass by the record of 500 rigs previously set in the early '80s. A key trend to follow with respect to the Permian rig count is the growth in horizontal rigs. Over the last 5 quarters, the horizontal rig count has grown by 260% and now stands at over 120 rigs in the basin. Of our 37 active rigs, 11 are drilling horizontal targets. And as rigs migrate to the Permian from gas basins across the country, we'll continue to upgrade our fleet with rigs capable of drilling horizontally.

Although the rig count has steadily increased, we've seen stabilization in the cost of goods and services, and our service providers have done a great job of keeping up with the growth in activity. For example, the number of frac spreads in the Permian Basin increased approximately 30% over the last year. In our view, there still remains some tightness in key completion materials and labor cost, but we are confident that we'll continue to secure supplies and services necessary to execute our plan in 2012. With the growth in production, we remain very focused on takeaway capacity out of the basin.

The recent Midland/Cushing Differential [ph] widening is a result of 2 planned turnarounds at local refineries, an unexpected 10-day outage of another refinery and some downtime on a basin pipeline pump station. These interruptions caused an increase in oil inventory in the Permian Basin, but are temporary and are not expected to impact our 2012 annual guidance.

While we're able to continue to move our oil production, the market is tight and will remain so until projects like the Longhorn Pipeline reversal and the West Texas Gulf Pipe Line are online next year.

In the Delaware Basin, the team plays 20 new horizontal wells on production since the first of the year. 10 of these wells targeted the Avalon shale, 2 were second Bone Spring sand wells, 2 were Wolfcamp and 1 was a Delaware sand well. The number of productive intervals in the Delaware Basin stands at 7 and reflects our efforts to identify the multizone potential across the acreage position. Currently, we have 7 horizontal rigs operating in the Delaware Basin, which should steadily increase to 10 horizontal rigs by the end of the year. This is consistent with our 2012 annual budget.

Moving over to the Texas Permian. Our asset team placed its first horizontal well in production in the first quarter. That well is on our Eastern Midland Basin acreage in Glasscock County, and we continue to be pleased with the initial production results. The exploration team is also currently drilling a second horizontal well, targeting the Penn shale on our Terry County acreage in the Northern Midland Basin. In this month, we'll spud our first 2 planned horizontal Wolfcamp wells around our core Wolfberry position in Upton County. Our vertical Wolfberry drilling activity remains robust with 19 rigs, two of which are operating on our recently acquired PDC acreage.

The New Mexico Shelf team is operating 10 rigs today, 9 rigs targeting the Yeso play and 1 rig targeting the horizontal Abo play. Two of our Yeso rigs are drilling horizontal wells, and we'll be converting a third rig to drill horizontally in the second quarter. In total, we expect to drill approximately 30 horizontal Yeso wells in 2012, primarily on our newest acreage in the southwest extension of our legacy Yeso play, as well as the area to the north of the Yeso fairway. We've been encouraged thus far with the -- with our early results there.

As you will recall, last quarter, we reported a significant increase in per unit lease operating expense. I'm pleased that we've reduced our first quarter per unit LOE by 9% from the previous quarter. And while we are just above the high end of our 2012 LOE guidance, we are on the right track to finish the full year within our stated range of $6.80 to $7.20 per barrel.

Overall, I'm very pleased with our operational success in the first quarter.

I would now like to turn the call over to Steve Pruett to discuss our financial results.

Steven H. Pruett

Thank you, Joe. I would like to highlight certain operational and financial comparisons for the first quarter of 2012 to the fourth quarter of 2011 and the first quarter of 2011. We encourage you to read our press release and its tables carefully, along with our 10-Q, which we filed in the next couple of days.

Production was 6.9 million barrels equivalent or 76,000 Boes per day, which was a 6% increase from Q4 and 36% increase from continuing operations a year ago. Oil comprised 61% of our volumes, and liquids comprised 95% of our revenues. Operating revenues were $508 million, which increased 6% from Q4 and 41% from Q1 of 2011.

Prices realized for oil, natural gas liquids and natural gas were $73.39 per Boe compared to $73.24 in Q4. Including the effect of commodity derivatives cash settlements, we realized $68.78 per Boe compared to $72.17 in Q4.

Our oil differential to NYMEX WTI Cushing was 95%, and our gas differential to NYMEX Henry Hub gas was 230% in the first quarter, compared to 97% and 206%, respectively, in Q4.

We've not been impacted by delays in gathering our oil. However, we continued to experience increases in gathering system pressure and gas plant downtime in Southeast New Mexico that has impacted both oil and natural gas sales volumes in Q1 and continues to impact Q2. The routine annual maintenance shutdown of one of our primary gas processing plants on the New Mexico Shelf is in progress, but the plant turnaround was expected and we provided for this production curtailment in our annual guidance.

Lease operating expenses and workover costs, excluding production and ad valorem taxes were $7.28 per Boe in Q1, down 9% from $8.03 per Boe in Q4.

DD&A was $19.64 per Boe in Q1, an increase from $18.90 per Boe in Q4. This increase relates to the timing of reserve booking in our emerging plays, and our guidance of $18 to $20 per Boe remains intact.

As of March 31, 2012, our debt was approximately $2.3 billion, of which $185 million was drawn on our reserve base credit facility. This leaves over $1.8 billion available on our $2 billion of commitments from our lending group. Our borrowing base is $2.5 billion, which offers another $500 million of availability should we seek to expand the commitment from our lending group. We priced $600 million of 10-year senior unsecured notes at a rate of 5.5% on March 7, 2012.

Our debt-to-book capital ratio is approximately 43%, and our debt to EBITDAX ratio is approximately 1.6x as of March 31, 2012.

During the quarter, we closed the Wolfberry acquisition from PDC for $184 million. We continue to pursue and close acreage acquisitions in our core areas through leasing and property purchases. We have never been more excited about our drilling inventory and our acquisition opportunities in the Permian Basin, and we look forward to providing an update on our continued growth on our second quarter conference call in early August.

Thank you for your participation today and for your interest in Concho Resources. We’ll be pleased to answer questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] We've got our first question from John Freeman from Raymond James.

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

First question on this newer play, the second oily sort of Bone Spring zone, where you've had the 2 big wells, any thoughts on maybe shifting some of your activity at that area, maybe ahead of what you probably had budgeted before the year started?

Timothy A. Leach

Well, yes, when you look at our budget in the Delaware Basin, 2/3 of that was going to target Bone Spring sands. So I think the emphasis in that area is going to be on the Bone Spring sand. And those 2 wells in that area were kind of a new development. So we'll continue to try to expand the aerial [ph] extent of that zone. So yes, I think there’ll be some focus on that going forward. It's really exciting to have -- that's the same area we had those 2 Wolfcamp wells we talked about last quarter, and that's the area where the play really started with the Avalon. So we've got some really big zones that have a lot of productive capacity.

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

And how far apart where those first 2 wells, Tim?

Timothy A. Leach

Joe says about 1.5 miles.

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

Okay. And then, Joe, on the last call, you’d mentioned you all are going to be looking at the -- maybe doing some multilateral completions at some point this year, just any timing on when that may occur and on what specific zones you think you would try it on first?

E. Joseph Wright

We're still working that very hard. I'm hoping that in the third quarter, we'll begin that project. I hate to give you a specific time just because a -- kind of a moving target right now, as well as kind of exactly what intervals that we're going to target or do a lateral. I do feel good that we will start in the third quarter.

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

All right. And then I know you all had originally targeted average 35 rigs for the year. It looks -- at least the numbers I'm looking at, it looks like you all are tracking ahead of that number.

E. Joseph Wright

Yes, we are a little bit at this time, especially as we brought on PDC. They had an extra rig that will be leaving us, so that kind of thing. So it's going very well in terms of rig availability and execution of the plan in the first quarter.

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

But there’is not like an official change in the CapEx budget at this point?

Steven H. Pruett

Oh, there's not at all.

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

Okay, so I might just supposed to read it, maybe cost savings or whatever you're able to maybe run a few more rigs than you originally thought this year, but the CapEx budget is the same?

Steven H. Pruett

Well, we may lay a few of those rigs down in some areas that, as you said, that -- beyond that 35 rig count as we go forward. A lot of that depends on what our net is for those areas and as we look at our capital budgets. So that could happen.

Operator

We've got the next question from Brian Lively, Tudor, Pickering, Holt.

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

Sort of a follow-up to John's question previously. Seems like the production in Q1 is a little ahead of schedule. The wells are -- seem to be coming in as good, if not better than planned. Just wondering what you guys need to see in terms of increasing your full year production guidance range. And with that, are there any other logistical reasons why that trend doesn't continue?

Timothy A. Leach

Well, Brian, it's early in the year -- it's the end of the first quarter. I think as we roll forward in the year and we gauge the pace of our activity, we're going to be watching our cash flow and trying to match our cash flow. But the year is going well. And historically, kind of when we get in the summertime, we kind of reassess where we are and make any course corrections. But right now, I think we're biased toward the upside.

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

That's great. On the Cline completion in Glasscock, given that, that's on the eastern side of the Midland, you guys, I think, have a pretty small position there. Just wondering what the overall strategy is. Is that a test of concept? Or is this an area that you want to get a bigger foothold?

Timothy A. Leach

I think it's both of those things that -- we have broader a strategy in the Midland Basin that includes all that acreage up to the north that we have acquired. It also includes our historic Wolfberry acreage to the west. And I mean, we're very pumped about the Delaware Basin, as I said, but at the same time, it appears that all this Midland Basin activity is going to work as well and we want to be a major player in that.

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

That's understandable. The comments on -- I think you said testing 2 horizontal Midland Wolfcamp that -- or wells this year. If those wells work, is there any reason why you can't replicate that over a large percentage of your Wolfberry position?

Timothy A. Leach

No. We’ve said publicly before that we think that a large percentage of our Wolfberry acreage is prospective for horizontal Wolfcamp.

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

Okay. And then last for me, the 8 Yeso horizontals, it wasn't in the press release, but can you give any rates or early rates, at least on the average of how those wells are performing so far?

Timothy A. Leach

Well, it's certainly early and they're meeting our expectations. We'll continue to watch those and try to understand how that relates back to vertical drilling and where we're growing value in that -- in the horizontal wells since, so things are going well there, and we'll let you know as we firm up our results.

Operator

We'll go the next question from Brian Singer from Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

I wanted -- just wanted to make sure we have the right interpretation of the multizone Delaware progress report here. If I'm interpreting it right, you drilled the wells at the second Bone Spring area, approximate to where you've already seen Wolfcamp success. You haven't drilled the Avalon wells there, but it's in an Avalon prospective area…

Timothy A. Leach

No. We started that area by drilling Avalon. So the Avalon was the first successful completions in that area. Those were big wells, but if you'll recall, those are big wells, but they had a higher gas percentage. Then we reported last quarter on the good Wolfcamp wells that we are making and then the second Bone Spring sand wells are on the same area.

Brian Singer - Goldman Sachs Group Inc., Research Division

So I guess, the way I'll look at it then is that you have formally tested and now deemed commercial 3 non-communicative zones on the same acreage area, and I guess over what percent [ph] portion of your net acreage in the Delaware do you think this specific drilling program has delineated.

Timothy A. Leach

Your first statement is correct. The second statement’s what, we're really working to try to identify. I mean, that -- my comment about a lot of our drilling is targeting maybe not the primary zone but second and third zones, trying to identify the extent of this. We think it's widespread. But as we have laid out maps for you in the past and things like that, you could tell when we first got into this play, the prospective areas were small, where we had primary targets, and over time, they have grown. And I think today, we believe that many of these zones will overlap one another.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And then given that your confidence in the multizone potential increased and, as you said in your comments, you effectively then increased your gross acreage to more than 400,000, does that increase focus on your committing capital organically versus looking at acquisition opportunity?

Timothy A. Leach

I want to make sure I understand your question correctly. Could you ask it one more time?

Brian Singer - Goldman Sachs Group Inc., Research Division

Yes. If you’ve effectively raised your resource base organically and effectively raised your acreage position, to get more zones working that's increased your resource life, does that then reduce the need or willingness to look at acquisition opportunities and increase your willingness to commit capital organically?

Timothy A. Leach

Okay, I got it. That's kind of a complicated question because on the -- our business model has stayed the same since the very beginning. We have the ability to stay within cash flow and stay within inventory and grow this company for multiple years just drilling on our existing inventory. At the same time, we have always had an eye on replenishing that inventory and growing it. I think one of the answers to your question is we think our existing acreage position has much more inventory than what we have -- because of the multizone than what we have historically had. But the second part of the answer is that I think we're kind of at the forefront of an understanding of something in the Permian Basin that gives us an advantage. And we think we're going to be one of the leaders in developing these properties. So I don't think our appetite for acquisition has been lessened in any way.

Operator

We've got the next question from Neal Dingmann from SunTrust Company.

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

Just 2 questions. First, just on capacity. You mentioned, I think, and we've talked about this in the last call as well, just I know you continue your plan for being kind of the second biggest operator. What is sort of the plan? How much of the budget do you anticipate, kind of a percentage? Will that continue to increase or not necessarily as far as the buildout on the capacity?

Steven H. Pruett

Are you talking about infrastructure or gathering?

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

Yes, I’m actually -- the second part -- first, I’m interested on the gathering there. I guess my second question kind of tied into that with just -- you mentioned a little bit of downtime that you had on a couple of things, at least this quarter. I was wondering if that's the result of just the increased capacity? Or is that just sort of typical of what happens during the quarter?

Steven H. Pruett

Yes, it's pretty typical. Of course, when you have a lot of your gas coming online it's high pressure and you have mature production that's low pressure, and that creates some disruptions. What's happening right now is the scheduled plant turnaround by a third-party plant. Every 2 years or so, plants have to have a major turnaround that last 2 to 3, sometimes 4 weeks. So part of it, the second quarter event was planned and accounted for, the first quarter event of increasing back pressure as simply the third party gathers trying to add more compression, incremental gathering and just not keeping -- quite keeping up with all the growth in gas production in the area. But in general, we aren't in the gas gathering and processing business, and our gathering partners are investing billions of dollars and have plans to increase capacity, not only in gas gathering and processing but also in crude takeaway and NGL pipelines out of the Permian Basin towards the Gulf Coast.

Timothy A. Leach

One thing, Neal, that I would also add to that is if you remember back in past years, when you think about line -- when we talked about line pressures, we're mainly talking about on the shelf in the Yeso area in New Mexico. And in the summertime, when temperatures heat up, those line pressures kind of naturally go up. And in the spring and fall and the wintertime, the line pressures come down and you'll see a seasonal reaction from our production. It's not hugely dramatic, but it's enough that you notice it. So while I agree with everything Steve said about adding additional capacity compression and we're making more wells out there, at the same time, some of this line pressure increase is seasonal.

Steven H. Pruett

And let me add to it, Tim, as you think about our budget, we do set aside capital for infrastructure. And when you think about oil and gas, that's one of it. But things like SWD, roads, electricity, especially in these new areas as you think about the Bone Spring play pushing further and further south into Texas, those areas need a lot more infrastructure. So we do dedicate capital to that.

Operator

We've got the next question from Mario Barasda [ph] from Dohifrancis [ph].

Unknown Analyst

I just kind of want to build a bit more off the prior question on midstream capacity. If you guys are to proceed and, say, you convert the horizontal Wolfcamp in the Midland Basin from -- you take away some vertical rigs and then you add some more horizontal rigs. I mean, if you're looking to do that, say, if it were to happen late this year or early next year, do you have the sufficient midstream capacity secured from third parties to support something -- a move like this?

Timothy A. Leach

Yes, I mean we've got enough support from our midstream partners to accomplish the plans this year. And I think their capacity will be growing over time. So it's -- well, when you think about the total basin, some of the smaller operators have trouble getting connected and getting their production out, I think we have sufficient capacity to do everything we want to do.

Steven H. Pruett

Yes. It really helps to have contiguous acreage and have a strong position and have the attention as one of the largest producers in the basin from the gas gatherers and processors. And they have committed plans. They have permits. They have projects that are breaking ground. So there's tangible evidence that they're adding to the capacity. And it's a very profitable business for the midstream players with low residue gas prices and high NGL prices. So they're very motivated to stay ahead of our growth.

Unknown Analyst

Okay, all right, I appreciate the color. And then also with the couple of horizontal Wolfcamp test flow that you're looking to drill, I mean, right now, with where oil prices are, are you getting pretty solid returns on the vertical side? What exactly, I mean, would you be looking for to proceed with a horizontal development plan?

Timothy A. Leach

Yes. I think there's 2 things that I'm looking for. One is when you think -- our vertical plan development in the Wolfberry we complete in the Spraberry [ph] and we complete in the Wolfcamp. And it's a very thick section, and we drain all of that with perforations that are spaced certain feet apart and everything. So one of the questions is, when you go horizontal in a Wolfcamp shalier zone, are you draining new oil that you wouldn't have drained from a vertical well? I mean, that's a scientific question. I don't think anyone knows the answer to it right now. The second thing would be an efficiency question. We talked in previous quarters about downspacing and all the locations we have on 20s and things like that. So part of it is going to be, if you go horizontal in the Wolfcamp, can you more efficiently drain some of the oil that you would have to drill more vertical wells to get to in the downspacing situation?

Unknown Analyst

Okay, all right. And also just on the CapEx, when you're saying that you're still on the lookout for acquisitions, are you looking on both sides? Or is there one basin that you're more focusing on? Is Midland the higher priority right now? Are we still looking to possibly extend in that Delaware?

Timothy A. Leach

With all the development in the Permian Basin, I would say that we have seen acquisition opportunities in all parts of the Permian Basin.

Operator

We have the next question from Irene Haas from Wunderlich Securities.

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

I have a question on the Cline shale. If indeed is Pennsylvania in age, I want to ask you, does it behave differently from the Wolfcamp? And what I'm after is thus far, we've seen a cluster of activities, firstly is in Glasscock County, and you guys move to the north to Terry County as such. Was the basin during Pennsylvanian time more segmented compared to during Permian and therefore, the Cline might be more sort of localized, not like the Wolfcamp, which is more basin wide?

Timothy A. Leach

And that is the perfect question for me to turn over to Matt Hyde, who is sitting here. He's got a grin on his face because that's his area of expertise.

Matthew G. Hyde

A good question. As you've seen in some of the releases, industry and specifically companies focused on the Permian are looking at a pretty broad distribution for the Penn shale or Cline equivalent rock. Depositionally [ph] , it is a more -- the term we use is clastic, which means more sand-shale sequence than the Wolfcamp, which is more shale carbonate rich. So they are a little bit different. The rocks are different, but we think they both have wide geographic extent, not only in the Midland Basin but in the greater Permian Basin.

Timothy A. Leach

Would you say, Matt, that the Cline might have a larger extent than the Wolfcamp?

Matthew G. Hyde

There probably are some limitations on the Wolfcamp as we move into the platform shelf areas. But at Penn time, as Tim is alluding to, that distribution of the Cline actually extends beyond those shelf platform margins that we typically ascribe to the Permian rocks.

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

I see. Were there any sort of intrabasin carbonate in the Midland Basin that would actually divide up the basin in 2 parts for Cline? Or, as you say, it's pretty widespread?

Matthew G. Hyde

A little bit. I think actually, the Penn Shale will have a wider distribution than the Wolfcamp ultimately.

Operator

We've got the next question from Adam Lowleaf [ph] from Simmons & Company.

Unknown Analyst

You guys are no longer referring to the vertical Wolfbone and have replaced that with the horizontal Wolfcamp and the southern Delaware Basin. What are you seeing there that made you move away from the vertical Wolfbone? Is that something you’d go back to?

Timothy A. Leach

Well, I think it's just purely economics. I think -- I believe that the horizontal play in that area is going to generally be much more economic than the vertical play.

Operator

We've got the next question from Mike Scialla from Stifel, Nicolaus.

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

I just want to follow up on the horizontal Yeso. I know it's early. Can you say yet how you think the economics compare there to your vertical? And am I thinking about it right in that you're kind of extending the field there by going horizontally? Or is it just a – been a choice, where you could have drilled that vertically, but you just think the economics might be better with horizontal?

Timothy A. Leach

Yes. Let me take that. The horizontal wells we're drilling today are predominantly in that southwest extension where the Yeso gets shallower. And one -- if you remember back, the Yeso’s comprised of 2 zones. And as you go to the southwest, I think one of those zones gets more predominant than the other. So it's -- most of that horizontal is trying to process a zone in the Yeso at higher rates and a higher rate of return than the verticals would capture. Now a back around in the more traditional area, we're using horizontals to extend the play, Joe mentioned extending it to the north, and also drilling horizontally in areas where we might only have one zone.

Operator

We have no more questions. [Operator Instructions]

Timothy A. Leach

Well, let me -- since there's no more calls in the queue, let me thank you for dialing in. I know it's a busy day. I appreciate your attention to Concho, and we look forward to talking to you all in the future. Thank you very much.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a good day. Thank you.

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