Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Steven H. Pruett – Senior Vice President of Corporate Development

Timothy A. Leach – Chairman, President and Chief Executive Officer

Matthew G. Hyde – Senior Vice President of Exploration

Analysts

John Freeman – Raymond James

Neal Dingman – SunTrust Robinson Humphrey

Brian Singer – Goldman Sachs

William Butler – Stephens

Scott Hanold – RBC Capital Markets

Jessica Chipman – Tudor, Pickering, Holt & Co.

David Deckelbaum – KeyBanc Capital Markets

Pearce W. Hammond – Simmons & Company International

David R. Tameron – Wells Fargo Advisors LLC

Sven Del Pozzo – IHS Herold

Richard Tullis – Capital One Southcoast

Mario Barraza – Tuohy Brothers Investment Research, Inc.

Abhishek Sinha – Bank of America Merrill Lynch

Concho Resources Inc. (CXO) Acquisition of Three Rivers Operating Company Conference Call May 14, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Concho Resources Incorporation to Acquire Oil and Gas Assets of Three Rivers Operating Company Conference Call. My name is Bhupendra, and will be your operator for today. At this time all participants are in listen-only-mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the call over to Mr. Steve Pruett, Senior Vice President, Corporate Development. Please proceed, sir.

Steven H. Pruett

Good morning, everyone, and thank you for joining us. Today, we are joined together for our conference call to discuss our pending acquisition of the oil and gas assets of Three Rivers Operating Company.

Before we get started, I’d like to direct your attention to the forward-looking statement disclaimer and oil and gas disclosures contained in the first two slides of our presentation that are available on our website at conchoresources.com.

In summary, the forward-looking statements says that statements in the presentation and on this conference call that state the company’s or management’s expectations or predictions of the future are forward-looking statements and tended to be covered by the Safe Harbor provision under the Federal Securities Laws.

There are many factors that could actual results to differ materially from our expectations including those we described in the presentation and we will discuss this morning. Please refer to our 10-K, our 10-Q, our press release, and other filings with the SEC. And I would encourage you to download our presentation now from our website, conchoresources.com.

On today’s call, I’ll be joined by Tim Leach, our Chairman and CEO, and Matt Hyde, our Senior Vice President of Exploration along with the rest of our management team how is here with me in the conference room and will be available to answer questions after the call.

Please turn to page four. And again, we will be going through the presentation that is available on our website. Concho Resources is acquiring all of the oil and natural gas assets of Three Rivers Operating Company, as such we will realize a full step up in our tax basis. We are not assuming debt. Transaction is $1.0 billion cash, which will be funded from borrowings from our revolving credit facility, which has $2 billion commitment and a $2.5 billion borrowing base with availability of $1.8 billion as of March 31, 2012.

The effective date of the transaction is April 1, 2012 and we expect to close in early July. The cash flow is in production from the period of the effective date of closing will be an adjustment to purchase price.

This time I’ll turn the discussion over to Tim Leach, our Chairman and CEO.

Timothy A. Leach

All right. Thanks, Steve. Good morning, everyone. We’re all here in the conference room in Midland, we’re anxious to discuss with you this acquisition we’ve been working on, we really are excited about this.

Three Rivers has a very high asset quality that first attracted us to the company. This is an asset deal where we will be acquiring 58 million proven barrels, the acreage that 200,000 net acres are strategically located in and around many of our core areas. It gives us a lot of drilling upside, and when you think about the – how this builds our acquisition models of the past, it’s very similar to what we did with Marbob, Henry and the Chase.

This was a privately negotiated transaction, this will provide us a property set that we can bring our drilling and operating machine to accelerate the activity, optimize the activity. And what we’re seeing here is another transaction that in a very short period of time will be able to self-fund itself, and then when you look at the peak production rate that we think we can achieve from applying our drilling to it, we think this will be a – the way we have been engineered today of 6 hecs or 7 hecs type of growth from production. And it is an acquisition as we talk about in the past that is immediately accretive on all our metrics. And as you go out into the future, we think it will even continue to get better.

These assets are strategically located around areas that we’ve been having a great amount of success, both in the Delaware Basin, and then over in the Midland Basin as well. And I’m going to talk in a future slide about the Delaware Basin, but the Midland Basin assets are in areas where we are continuing to expand and have more drilling and exploration activity planned.

And when you think about the acceleration, Three Rivers currently has, three rigs running on their assets. We plan to step that up to have seven rigs by the end of the year. And this gives us a platform to continue to develop our Wolfcamp and Cline horizontal shale plays.

So it’s something we’re very excited about. We think it’s going to be very good for our shareholders. We are able to do this transaction under our existing revolver. We’ve announced our intention to sell some properties. So when you consider these properties and the borrowing capacity they bring, plus property sales we’re very comfortable with our capitalization position as we go forward.

If you all turn with me now to slide number six. This gives the location of the acreage we’ll be acquiring. You can see that, the things we think, you’ll find most attractive and a quick sped into what we’re continuing to develop are in the Delaware Basin and the Midland Basin.

These assets currently have 1,500 locations identified in those areas. Of those 1,500 locations, about 400 of them are over in the Delaware Basin, where we’ve had the greatest amount of success with our horizontal drilling program. The balance of these locations – the remainder of the locations then are over in the Midland Basin. The way it’s currently engineered, those locations are exclusively vertical drilling, but as I think, as we go forward and continue to work these properties, you’re going to see a number of those locations migrate into the horizontal category as we continue to work the property base.

You can also see on slide number six, the rig count as it steps up on these properties and we continue to aggressively develop them, our rig count in the second half of the year gets up into the low 40s.

If you turn to page seven with me now, this is one of my favorite slides of the presentation; it shows the northern Delaware Basin. We have highlighted here the two areas where we’ve been having the greatest amount of success in the northern Delaware Basin. This acquisition will give us a 23% increase in our acreage position, these two circled areas, you can see is where Concho has the rigs running currently today, these are the areas that we’ve talked in previous conference calls about the success we’ve had, 1000 barrel a day plus wells from the Wolfcamp, from the second Bone Spring.

You could also see strategically that over in Lea County, on the eastern side that area that circled up, we’ve had great success over there in the second and third Bone Spring, sand plays and this is an area that we’ve really been focused on, and this will give us a really good increase in acreage over there.

As we’ve engineered this for acquisition, most of these areas only have single zone economics applied to them, and the acquisition economics we think that, that is a big source of upside in the future, because as we’ve talked about numerous times, that we think this is a area of multi-zone potential.

You’ll notice there is one rig in red here over in Lea County that is the one rig that Three Rivers currently has running. I think this is their first or second well that they attempt to drill horizontally, so they are very early in the stage of attempting horizontals and Cline shale will bring its rigs and expertise and accelerate all this development.

If you turn with me to page 8, for the Delaware Basin this points out some things that are obvious, I think that both of our production in the Delaware Basin has been dramatic and will continue to be dramatic. And the bottom chart shows the number of horizontal wells that we’ve drilled, so it’s the dramatic increase in our production, and also how much experience we have drilling these wells horizontally in the Permian Basin.

Page 9, moves over into the Midland Basin, we will have a 42% increase in our acreage position over in the Midland Basin. And in areas that we’re very familiar with and are very excited about, let me point out that as we outline the Midland Basin, as generally we outline a Permian age rock and much of the activity that’s going on for horizontal Cline extends beyond the boundaries of the Permian age rock in the Midland Basin.

There’s been a lot of activity over on the eastern side of the Midland Basin. I’m going to ask Matt Hyde, in a moment to talk more about that, but you can see that as we look at the acreage in the Midland Basin, there is two or three different shocks. On the Western side, we’re continuing to get more acreage in our Wolfberry play that currently is in vertical development.

And then up to the north, we’re picking up a strategic piece of acreage in Terry County in and around that new development we have for Cline and Wolfcamp up in the northern part of Midland Basin. And then in the south, we get a very attractive block of acreage down in the Southern Midland Basin. This will greatly complement our effort to increase horizontal drilling in the Midland Basin.

And as I said, in the acquisition engineering, all these locations over in the Midland Basin are vertical, and as we continue to work this, I think you’re going to see more and more horizontal opportunities come out of this acreage set.

Okay as you turn to slide 10, this is the Midland Basin, this kind of zoom down on some of that acreage; I’m going to turn it over Matt Hyde to talk about this a bit.

Matthew G. Hyde

Thank you, Tim. The Three Rivers acquisition is a really nice build on our recently announced position in the North Midland Basin that we talked about at the Howard Weil conference collectively. These give us over 100,000 growth acres of additional exposure to the Midland Basin emerging play.

But before we talk specifically about the horizontals, this particular acreage that you see on slide 10 is currently in vertical development by Three Rivers. If you will a shallow Wolfberry type play target zones being Wolfcamp, the Dean, the Clearfork, the Canyon and the Strawn, no horizontal wells have been drilled to-date on this particular acreage. But you can see its approximate location to some industry activities, specifically Laredo, EOG, El Paso and Approach, all which are targeting horizontal opportunities in two zones of primary interest, the Wolfcamp and the Cline. You’ll also note that through those various releases, they’re now starting to target multiple zones within the Wolfcamp.

So we’re excited about how this acreage fits into our overall Midland Basin exposure, and specifically how this acreage in Irion County area overlaps and is close to some very encouraging industry activity. I should note that no acquisition value was specifically attributed to the horizontal potential associated with this particular acreage in the Midland Basin.

So with that, I’ll turn it back over to Tim.

Timothy A. Leach

Okay, thanks. Slide 11 is kind of the icing on the cake in some ways. It shows the Yeso position that we have and that this acquisition brings additional acreage to us in the Yeso, which if you’re familiar with Concho, it’s the lowest risk, highest rate of return activity, I think that’s has going on in the Permian Basin. So we’re pretty excited to pick up more acreage in the Yeso, and then this is virtually undeveloped acreage as well.

If you flip to slide 12, 12 describes some of the conventional assets they have upon the platform.

I’m going to turn it over to Steve Pruett to talk about this a bit.

Steven H. Pruett

Yes, thanks, Tim. If you look at the graphic on page 12, there is a blue dotted outline that roughly describes the conventional Permian asset position. We are targeting divestitures of $200 million to $400 million primarily in this area from the newly acquired assets post-closing and from some existing properties that, of course will help finance this transaction, and we expect to consummate these sales within nine months, and have hopes of doing that closing at before year-end.

These assets noted in the blue outline produce about 1,500 barrels of oil equivalent per day. They’re long-lived reserves and largely proved developed producing. They require minimal development capital, about 70% of these assets that are show in the red acreage are on live production.

Turning to page 13, we’ve got guidance in the appendix that we would like to draw your attention to related to capital. In the second half of 2012, we expect to expand about $145 million of development, drilling and completion capital.

Our guidance on production over that same period is 1.2 million to 1.3 million barrels of oil equivalent per day, so roughly flat. In 2013, with the rig ramp that Tim described, we will have about $4.25 million of developmental activities in our capital budget, and expect and have provided guidance of about 4.6 million to 5.1 million of barrels of oil equivalent per day or just over 13,000 barrels of oil equivalent per day on the mid-point. And of course these figures for 2013 do not reflect any divestitures, we don’t expect divestitures to have a material impact on the second half of 2012 results.

I would draw your attention to the right pie chart; with this acquisition, we’re seeing a balance of almost a third each in the important Delaware Basin, where most of the activity is horizontal drilling; and the New Mexico Shelf, which of course is our Yeso vertical drilling along with some horizontal drilling there; and then another 30% in the Texas Permian, which is traditional been Wolfberry, we could see that more towards horizontal drilling in the Cline shale among other targets.

Timothy A. Leach

Okay. I’m now turning to page 14. This is one of the slides that we talked about. The proof our business plan, the growth in both production and reserves of the company since the time we started the company.

If you look at our estimated production in 2012, we’ve put the additional production from Three Rivers on that chart, and shown the range of that – this thing will close kind of mid-summer, so we’ll get about half the year’s worth of production from Three Rivers. But I think the main point is here, the kind of growth we’ve seen year-over-year on an absolute basis, when you look at it on a per share basis, it’s been kind of mid-30s type of compounded growth. And we think this kind of acquisition is the kind that will continue to drive these curves at this kind of pace into the future.

And we really feel good about that, that this is the type of acquisition that has enough proved developed producing production that we can get our capital back from the existing production, we can get a return on our capital from the drilling we’re going to do on this acreage. And I think that, the position of this acreage will make it such that, we will be able to deliver the kind of performance that we’ve delivered in the past, and we will be able to do a transaction that will be immediately accretive to our shareholders.

If you flip over to the last page, why should you invest in Concho page. One of the things I really like about this, it’s been the same reason since the day we went public. We’ve done a string of acquisitions that have had similar characteristics. I think this acquisition of Three Rivers will be as good as anything we’ve ever done in terms of creating value for our shareholders. We’re executing the same business plan in terms of bringing a big development drilling machine onto a set of properties that we think that we can accelerate and enhance.

And we think, when you think about the value proposition for our shareholders, we’re able to do this within our existing cash flow, within our existing capital structure, and we’re growing so rapidly that we very usually grow into the leverage that we’re putting on, and within a right back in the middle of the fairway by next year.

So with all that, I’m telling you that the management team here is very pleased with this opportunity, we’ve recognized that there will be a digesting period for us, we will be focused on the transition of this acquisition in the Concho throughout the rest of this year. So we think that this is one of the great opportunities in the Permian and one of the reasons we really like to focus here.

So with that let me – that concludes the comments we have on these slides. Let me turn it back to the moderator and I look forward to taking your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay. And the first question comes from the line of John Freeman from Raymond James. Please go ahead, John.

John Freeman – Raymond James

Good morning guys.

Steven H. Pruett

Hey John, how are you?

John Freeman – Raymond James

Good, thanks. Congrats on a really good transaction. First question, I had just had to do with the locations, that you all signed to the Three Rivers deal [convince], it is a good bit below I think with they sort of kind of talked about in the past and obviously, I’m assuming, you’ll risk them even further, but I just want to make sure, a couple of things I’m looking at the rate, it looks like the majority, if not all of may be the conventional locations have been excluded from your numbers, is that right.

Steven H. Pruett

That’s correct.

John Freeman – Raymond James

And then the other thing, I noticed is it looks like at least to me at first glance that at least at this point, you all have at least signed any locations to 20 acre Wolfberry.

Steven H. Pruett

That correct. Okay.

John Freeman – Raymond James

And then just the last question I had when we sort of think about the financing of the transaction. Typically, you all like to have almost nothing drawn on your facility to kind of have a lot of dry powder to be able to make deals like this. Should we assume there will be some sort of a more maybe permanent financing in the near term?

Timothy A. Leach

Well, John, I think that the way our capital structure is set today, we’re pretty comfortable with that. We have plenty of room on our revolver, we can expand our revolver, and so I’d just say that, I think we’re comfortable with the way we sit today.

John Freeman – Raymond James

Okay. So I’ll turn it to over to somebody else. Thank a lot guys.

Timothy A. Leach

All right. Thanks, John.

Operator

Thank you. Next question is from the line of Neal Dingman from SunTrust. Please go ahead.

Neal Dingman – SunTrust Robinson Humphrey

Good morning, guys. Steve, just wondering on that slide 13, when you gave your updated capital budget, I was wondering on the 10 rigs in the Shelf, and then the 10 in the Delaware and then 23, I mean, I’ll assume most of in the first two will be just drilling horizontal, and I was wondering that Permian, how many, Texas Permian, how many of those will be drilling horizontally in the second half, I should say?

Steven H. Pruett

Well, most of the Texas Permian rigs will be drilling vertically in the second half. We have a handful of test wells that we’re drilling the second half horizontally, but most of the wells in the Texas Permian will be vertical.

Neal Dingman – SunTrust Robinson Humphrey

And then the Delaware and New Mexico, I assume will be, mostly just all horizontal?

Steven H. Pruett

Yes. That’s right.

Neal Dingman – SunTrust Robinson Humphrey

Okay. And then did you guys wondered, I guess on something like this, I was just looking at the slide that kind of shows the acreage that you said, it does look like there is a great fit, maybe there is a fewer holes there is, there is still I guess some – I guess, I’d call it just some bolt-on acquisition, or is most of this now leased up at this point?

Steven H. Pruett

Well, most of it’s leased up, but you’re correct, there is always kind of bolt-on acquisition opportunities, which we will be looking at everything that’s going on in the Permian, but I’d say for right now, taking our acreage up as much as this acquisition does and giving us this many opportunities to work on, I think we’re pretty well set.

Neal Dingman – SunTrust Robinson Humphrey

I would agree. Thanks, guys. Great, acquisition.

Steven H. Pruett

All right. Thanks, Neal.

Operator

Thank you. Next question is from the line of Brian Singer from Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Thank you, good morning.

Steven H. Pruett

Good morning, Brian.

Brian Singer – Goldman Sachs

You’ve historically grown, and to talk about organic growth of about 20% or so and given that you are forecasting about the 13,000 BOE a day in production from the acquired asset next year versus about seven this year. I wondered if we should expect Concho to exceed that 20% organic growth in 2013 or should we expect some lower levels of organic growth in spending from based assets?

Steven H. Pruett

Well we haven’t given guidance on ‘13 yet, but yeah I think this acquisition kind of uses our trajectory.

Brian Singer – Goldman Sachs

On both in organic and on absolute basis, I mean obviously you’ve got the acquired, the acquisition impact, but from an organic perspective as well?

Steven H. Pruett

Right. That’s right.

Brian Singer – Goldman Sachs

Great, thanks. And then are you getting employees and associated SG&A costs or you just acquire any assets?

Steven H. Pruett

Well, we’re just acquiring the assets but we’re making offers to the field employees, and I would expect those field employees to come with the transaction, Three Rivers is headquartered in Austin. I think most are the headquartered employees, are off-limits to us, so we’ll have to supplement that outside. But we do have a transition services agreement with Three Rivers where they will continue to help us transition these assets for some period of time in 2012. I’d also say that these are assets or such a good fit into our existing asset base that are the field people are the most important.

Brian Singer – Goldman Sachs

Great, thanks. Can you just give us an update on people need broadly and any – the extent of the tightness given all the Permian growth we’re seeing from others?

Steven H. Pruett

Yeah, as we talked in the past, we currently have in the Permian Basin about 630 or 640 employees I think. Every year it seems that we have about 200 open positions that we fill about a 100 off. But I think hiring people while positions up and down the chain or all in demand. It seems like Concho has became a higher profile type of company, and I think we’ve have been successful in attracting people to our company. So I would expect that to continue in the future.

Brian Singer – Goldman Sachs

Great, thank you.

Steven H. Pruett

All right, thanks.

Operator

Thank you. Next question from the line of William Butler from Stephens. Please go ahead.

William Butler – Stephens

Good morning, congratulations.

Steven H. Pruett

Thank you.

William Butler – Stephens

I was wondering on the oil and NGL break out, if you look at the – S-1 from Three Rivers, it look like production was more or like 38% oil, 20% NGLs and the rest gas. How does that compare to the, I think 50% gas you all disclosed? Is it, you all talked in the past or last quarter about sort of wet gas stream in your – the NGLs being in your gas stream, how do we need to think about that with this deal?

Steven H. Pruett

We have in this engineering the way we’re reporting it. We’re reporting two streams. We’re reporting the crude oil and then the wet gas. I think that’s different than what Three Rivers did in their S-1 filing. So the difference between production and reserves is primarily due to us putting the NGL liquids in the gas stream, and then them in their S-1 putting the liquids in barrel form.

William Butler – Stephens

Okay. And so we should expect sort of a similar uplift on the economics as you all received or have received in your wet gas stream?

Steven H. Pruett

Yes. Yeah, I would model it the same way.

William Butler – Stephens

Okay. And then were there competing bids on this deal, you all mentioned it was a negotiated transaction?

Steven H. Pruett

Well, you never know for sure what’s going on behind the scenes, but we think this was a privately negotiated transaction similar to the ones we made in the past, and there is always some sniffing around, it’s a very, but we were very happy with the exclusivity we had on this deal.

William Butler – Stephens

And are you all still seeing more deal flow out there?

Steven H. Pruett

All right. Yes, it seems like that there is a – as we talked about in the past, there is a consolidation going on in the Permian, and it’s a consolidation to those companies that actually have the ability to execute and run a lot of rigs and a lot of operation.

William Butler – Stephens

Okay. And one final question on the asset sales, you all talked about a 1500 BOE a day, any sense of the gas, percent gas that might be?

Steven H. Pruett

No, I think it’s too early for us. We still especially in all these acquired Central Basin Platform assets, we’re still evaluating these things for upside, and the properties we pick to divest up, that package generally have been determined yet.

William Butler – Stephens

Okay, I appreciate it. Thank you all.

Steven H. Pruett

All right. Thank you.

Operator

Thank you. Next question is from the line of Scott Hanold from RBC Capital Markets. Please go ahead.

Scott Hanold – RBC Capital Markets

Thanks, guys. Hey, can I ask you a question again on the sort of IPO filing by Three Rivers, they did indicate it’s time the following, it’s kind of their lowest, their proved reserves about 74 million barrels, and I know you guys came on, and I’m sorry that was with – little over 700 to 800 barrels a day production, and numbers you’ve reported last time were a little bit less than, can you explain what the difference is there?

Steven H. Pruett

Yeah, I’m not go into great detail on it, but I’ll tell you the majority of it is this difference between two stream and three stream reporting. The economics are exactly identical to ours versus theirs, that the majority of the difference is two stream versus three stream reporting. The remainder of the difference, some of its timing from the date they’ve reported to the date that we had effective engineering, there were some run-off. And quite frankly, the reminder of its just difference of opinion on – we’ve always done our own engineering internal, and that’s what we’ve reported on.

Scott Hanold – RBC Capital Markets

Okay. So the stream reporting had an impact on the – I guess the volumetric assessment, but obviously the PV-10 type value assessment should change?

Steven H. Pruett

Right. The economics stay the same. The volumes just look a little bit different because of the – where the NGLs are showing up.

Scott Hanold – RBC Capital Markets

Okay, understood. And then a lot of the, I guess, the acreage it looks like just from a map perspective when you look at it from your presentation slides, it looks like it’s in the Southeastern part of the Midland Basin in Irion, and I guess Schleicher County. I guess that’s an area, you traditionally haven’t been and then – and its a little bit east of other activity. Can you give us a sense of what you’ve seen based on the information we’ve kind of looked at it down there, is that very similar to what EOG, El Paso, Approach has seen in some of their wells when you look at sort of the geology?

Steven H. Pruett

Right. We think that play is – the well performance is continuing to improve, and that geology, we’ve carried all the way to the north, that’s why we have been buying acreage up in Terry County and Hockley County.

So we think there is and will continue to be a large play in the Midland Basin with horizontal Cline and Wolfcamp type of zones. And this is another step in our effort to get a bigger exposure to that play.

Scott Hanold – RBC Capital Markets

Okay. And then I know you mentioned, but I apologize that, I missed it from a prior question, so you’re going to step this up to seven rigs running by the end of the year, and in the Midland Basin, how many of those, I think there is two rigs in Midland now. How many will there be by the end of the year in the Midland Basin?

Steven H. Pruett

There’s five, I’m being told.

Scott Hanold – RBC Capital Markets

Five, and those will all be vertical, is that correct?

Steven H. Pruett

Yes.

Scott Hanold – RBC Capital Markets

And when do you think you could, I mean it’s – is it basically a 2013, you think you’ll start looking at horizontal or could one maybe slipped into 2012, that you feel comfortable enough?

Steven H. Pruett

Well certainly, I mean the quicker we can get comfortable turning them sideways, the better. So I think you’ll see us – have a strong push on accelerating that activity.

Scott Hanold – RBC Capital Markets

Okay, thanks.

Steven H. Pruett

Yeah.

Operator

Thank you. Next question is from the line of Jessica Chipman from Tudor, Pickering, Holt. Please go ahead.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Hey, good morning.

Steven H. Pruett

Good morning.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Just first question, could you help us think high level on some of the milestones that might give you more confidence to provide an update on horizontal inventory expected in the Midland Basin for both the Wolfcamp and the Cline?

Timothy A. Leach

In the Midland Basin?

Jessica Chipman – Tudor, Pickering, Holt & Co.

Yes.

Timothy A. Leach

Okay. I think for us, I mean you can use the Delaware Basin as a model, I mean we’ve drilled many wells over there now, and we’re just reaching the level of comfort where we’re talking about having an Analyst Day and bring everybody out and kind of showing all our results.

I think the other factor is the competition, and you want to make sure that you captured as much opportunities you can before you talk about any proprietary information. So it’s real early for us in the Midland Basin, it’s still very competitive, we’re still putting our acreage position together. We haven’t really – we talk about one Cline well we’ve drilled in the Midland Basin, but that’s about it. And so, I think a good model for how we will handle it is how we’re handling the Delaware Basin.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Okay, that’s helpful. Secondly, just would you mind giving a break down by region for the $425 million the incremental capital expected to be spend in 2013.

Matthew G. Hyde

No, we haven’t done our 2013 budget yet, so I think it’d be early for us to break that down.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Okay. I just mean in terms of the acquisition, I think there was $425 million, associated with that.

Matthew G. Hyde

That’s right.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Okay. I guess the third question, I’ll just try to ask it in a different way, it’s been asked a couple of times, I know that you said you are comfortable with your capital structure as it stands, but thinking about future acquisitions you’re bumping against the two times that the EBITDA number right now, will you be more opportunistic in issuing equity. Only way until you had an acquisition in mind for doing that?

Matthew G. Hyde

I think we are very comfortable with our capital structure today, we’re very comfortable with that we put these edges on this production to lock in the cash flow that we’re acquiring, so Scott I think we have a lot of work in front of us to accelerate mine the assets that we just acquired, and that’s going to take probably a significant portion of our attention going forward and we think with a little bit of pruning and divestiture that everything is in pretty good shape.

Jessica Chipman – Tudor, Pickering, Holt & Co.

Okay, I appreciate it. Thank you.

Matthew G. Hyde

All right. Thank you.

Operator

Thank you. Next question is from the line of David Deckelbaum from KeyBanc. Please go ahead.

David Deckelbaum – KeyBanc Capital Markets

Good afternoon and thank you for taking my questions.

Matthew G. Hyde

You bet.

David Deckelbaum – KeyBanc Capital Markets

Just broadly I guess on reserves, could you disclose what PV-10, was as of April 1?

Steven H. Pruett

No. Sorry, but we typically don’t talk about that from our evaluation standpoint. I mean we can’t go into. This is a unique situation where they have some information out there in public domain as far as their numbers, and you kind of look at that.

David Deckelbaum – KeyBanc Capital Markets

Okay, fair enough. And I guess, just adding on to Jessica’s question. So I guess, I understand the $425 million associated in CapEx for this acquisition, does this assumes that there are five rigs in Midland and two in Delaware Basin remain running throughout 2012?

Steven H. Pruett

Yeah. And most of that capital will be going into the Delaware Basin for horizontal drilling?

David Deckelbaum – KeyBanc Capital Markets

Okay. So that could potentially have a change in rig count into it?

Steven H. Pruett

No. It’s just those horizontal rigs require more capital.

David Deckelbaum – KeyBanc Capital Markets

Okay. I guess just lastly on reserves, are there anything similar to what we’ve seen in the past where if you overlay some of the internal assumptions that you’re all using for bookings perhaps in different areas like the Yeso with different spacing and things like that, but though you could see an uplift on reserve bookings just from using different assumptions that you’re around in terms of spacing?

Steven H. Pruett

Are you talking about a specific area or…

David Deckelbaum – KeyBanc Capital Markets

I suppose a similar, Yeso already been booked down to 10-acre spacing or different assumptions incurred in what’s been booked in the Wolfberry that you’d look at and you see immediate opportunities to write up those reserves at year-end pursuing the conscious assumption?

Steven H. Pruett

Yeah, well I think one thing that John Freeman pointed out on it, on the first call there are lot of categories of value that we haven’t put in this evaluation yet. So I think the answer to your question is, yes, that as we move forward, we would expect the value of these assets to grow as we continue to identify more upside.

David Deckelbaum – KeyBanc Capital Markets

Great, thank you guys, congrats.

Timothy A. Leach

Thank you.

Operator

Thank you. Next question is from the line of Pearce Hammond from Simmons & Company. Please go ahead.

Pearce W. Hammond – Simmons & Company International

Hi, good morning, guys congratulations on the transaction.

Timothy A. Leach

Thanks, Pearce.

Pearce W. Hammond – Simmons & Company International

Tim, can you provide some color about how the deal came about as just been percolating for a while or did it come about fairly quickly?

Timothy A. Leach

For a deal of this size, it probably came together more quickly than the other deals, larger deals we’ve done in the past. They were a company that was on a track to go public and so when they got off that track, if the Concho option was it going to become a real option it had to happens pretty quickly.

Pearce W. Hammond – Simmons & Company International

Great, and then how would you compare this particular deal the like Marbob, or the Chase transactions in the past?

Timothy A. Leach

I think it’s very similar, I mean it probably has more acreage of this perspective that we feel good about, but it has the same characteristics of having enough production where you know you can get a return of your capital through existing production. And then I think the opportunities to really get a higher rate of return, when we fully evaluate and do some, we’ll prune some assets, we’ll aggressively drill other assets, but I think when you look at the accretion to our shareholders out three, four, five years out this becomes pretty significant relative to the size of the investment we’re making today.

Pearce W. Hammond – Simmons & Company International

Great, and then finally after this transaction, it is kind of some aided. What will be your pro forma debt to cap at that time?

Timothy A. Leach

After the transaction closes in July, it’s approximately in the range of 2 to 2.1 debt-to-EBITDA.

Pearce W. Hammond – Simmons & Company International

And do you what that –what’s all that to be on a debt-to-cap?

Matthew G. Hyde

Low 50s.

Timothy A. Leach

It’s somewhere in the low 50s.

Pearce W. Hammond – Simmons & Company International

Low 50s. Thank you.

Timothy A. Leach

Yeah, yeah.

Operator

Thank you. Our next question is from the line of David Tameron from Wells Fargo. Please go ahead, David.

David R. Tameron – Wells Fargo Advisors LLC

Hi, good morning, again. I’d add my congrats as well again on the acquisition. Can you spend a little more and may be I missed this if you did, but you talked about the play, for the Permian kind of heated up, northern Midland for the Cline and Wolfcamp. Can you give a little us a little more detail or any more color there?

Timothy A. Leach

On the Midland Basin the Cline and Wolfcamp play (inaudible)?

David R. Tameron – Wells Fargo Advisors LLC

Yeah, yeah, you made a comment early during Q&A, I think about north of a little bit, it’s heating up?

Timothy A. Leach

Yeah. Matt is the best one for answering that question, he is out there in trenches. So…

Matthew G. Hyde

Hi, David, this is Matt. I think we gave some insight into the northern Midland Basin potential with our announcement of our acreage position up there in Terry and Hockley. Genuinely, as you know, there has been a very little information out about that specific portion of the Midland Basin. Although, I can tell you, there are lots of people that are active up there including some fairly large operators at this point in time. Most of the public information out there is specific genuinely to the southern Midland Basin at this point in time, and then just recently, more over into the Eastern Shelf. But I can assure you, there is quite a bit of activity behind the scenes going on – on the northern portion of the Midland Basis, both with respect to the Wolfcamp and the Cline.

David R. Tameron – Wells Fargo Advisors LLC

Okay. Let me ask a bigger picture question. As you guys think about future acquisitions, I mean, when you look at your inventory today and I don’t what the official number is, but I think just under 11,000 location, going forward as you – I mean, what’s the plan from here, do you continue to add-on, when do you think you get to a point where, you start at a point where why we are bothering because we are serving 15,000 and 18,000 locations, or is that buy and sell, just continue to high grade, how should we think about that as far as the future?

Timothy A. Leach

Yeah, I think the way you should think about it, this is a bit of an art instead of a science. But as you think about modeling the company on the future, what we’re trying to do is have an idea of how much cash flow this company can produce and make sure that we have enough high rate of return projects and inventory that you know what you’re going to do with your cash flow for the next four or five years, and that’s the balance we’ve always try to keep.

So we’ll always be looking to replenish that inventory, and high grade that inventory, and as the company grows the amount of cash flow we through off in the future increases every year. So we’re really fortunate that we’re positioned this way with the horizontal drilling, because those wells are more capital intensive, they are very high rate of return, but it answers the question, how you’re going to be able to invest much larger capital budgets out in year ’14 and ‘15. We’ve got the inventory to do that and we’ve got a plan where we have enough rigs and people to do that as well.

David R. Tameron – Wells Fargo Advisors LLC

All right. That’s all I got. Thanks.

Timothy A. Leach

All right. Thank you.

Operator

Thank you. Next question is from the line of Sven Del Pozzo from IHS. Please go ahead.

Sven Del Pozzo – IHS Herold

Yes, hello.

Timothy A. Leach

Good morning.

Sven Del Pozzo – IHS Herold

Good morning. Looking at the last couple of deals we’ve just talked about, you’ve mentioned one in Terry County and in Lynn and then down in – the bottom right hand corner Reeves and Pecos County. It seems like you’re buying stuff for cheaper that’s away from activity whether it might there might be greater uncertainty associated with the quality of the acreage that’s being acquired. So – and you mentioned also at least for this stuff at Terry County and Lynn County, the Wolfcamp and the Cline Shale, in the same Senate’s. I’m wondering if it’s generally true what I said that there is not as much drilling in those areas. Can we think about these plays being much more expensive than the way that we know them today based on current drilling and would you agree with that and does that mean there is more acreage out there to grab?

Timothy A. Leach

Yes, I would agree with that, so would just about every one of my competitors. And the acreage grab, I mean, you rightly point out that a lot of things we’re doing, we’ve had a great amount of success in the northern part of the Delaware Basin and there has been some success over in the southern part of the Midland Basin. And the real question is, where can you find rocks that look like that in other parts of the Permian, and that’s what’s driving all this activity.

And so it is, you step out, the acreage is a less expensive than if I was buying a block of acreage right next to one of my really highly productive horizontal program, but it’s riskier. But at the Permian Basin with it stacked plays, it’s a level of risk, I think you can get comfortable with and that’s what is going on in our industry today. And we think that we’ve got some pretty good signs here in Concho and we’re pretty excited about the opportunities there in front of us.

Sven Del Pozzo – IHS Herold

Okay. And finally, you did take care to mention that you were happy about what’s going on in Central Lee County zone, northern Delaware Basin, there is a rig there right now, Three Rivers, more than I can see on the map. Yeah, so tell me a bit about why you are happy with the results there and what you plan to do with the Three Rivers stuff?

Timothy A. Leach

We’ve got two rigs running in that same area. We’ve had high level of success in the Bone Spring sands, both the 2nd and 3rd Bone Spring sands over there as well as some success in the Delaware zones, which are shallower. So that is an area that has been very prolific. That is an area where we picked up a lot of acreage from our last acquisition. And so it’s the one that we’ve really targeted to try to grow in, because think that, it’s going to be a stack pay area that’s generates very high rate of return.

Sven Del Pozzo – IHS Herold

Okay. And then increasing debt there is – you’ve dealt with that fine, I mean, there is a….

Timothy A. Leach

Yeah.

Sven Del Pozzo – IHS Herold

Yeah, okay.

Timothy A. Leach

All right.

Sven Del Pozzo – IHS Herold

All right. Thank you.

Operator

Next question is from the line of Richard Tullis from Capital One Southcoast. Please go ahead.

Richard Tullis – Capital One Southcoast

Hi, thank you. Good morning, everyone.

Timothy A. Leach

Good morning.

Richard Tullis – Capital One Southcoast

Tim, I’m not sure, if you had mentioned this, I apologize if you did. I know you had talked about 1,500 barrel a day of production in the conventional Permian area. Can you give the split of the remaining 55, 100 barrels a day by general area?

Matthew G. Hyde

Somebody has a hand I’ll take it – if you ask the next question, we will move that up.

Timothy A. Leach

Yeah, do you have another one and can we come back after that?

Richard Tullis – Capital One Southcoast

Yeah, sure. On the call, the 1Q call, Tim, I know you had talked with a pretty good confidence that you felt the midstream takeaway capacity would be there for your growing production based on what you saw in the time? I mean do you still have that same level of confidence adding in this new production going in through at least next year?

Timothy A. Leach

Yeah, we haven’t seeing anything that has caused us to be less confident and in fact it seems like the investment in the midstream is accelerating. So I think what we said in the past is still was to be true. I think it will be tight for a while, but I think there will be ample capacity in the future.

Richard Tullis – Capital One Southcoast

Okay.

Timothy A. Leach

Yeah, to answer you question on the production, it’s evenly split between the Delaware Basin and the Texas, Permian.

Richard Tullis – Capital One Southcoast

Okay, that’s helpful. Thank you.

Timothy A. Leach

[30,000 new lease] at each.

Richard Tullis – Capital One Southcoast

And then just lastly from me, you’re still planning to do one or more multilateral horizontal this year?

Timothy A. Leach

Yes.

Richard Tullis – Capital One Southcoast

And still planning on 3Q?

Timothy A. Leach

Yeah, it’s the plan.

Richard Tullis – Capital One Southcoast

Okay, all right. Thanks very much, I appreciate it.

Timothy A. Leach

All right. Thank you.

Operator

Thank you. Next question is from the line of Mario Barraza from Tuohy Brothers.

Mario Barraza – Tuohy Brothers Investment Research, Inc.

Hey, good morning guys. All my questions have been answered.

Steven H. Pruett

Okay, great. We look thanks for listening in.

Timothy A. Leach

No problem.

Mario Barraza – Tuohy Brothers Investment Research, Inc.

Thank you.

Timothy A. Leach

All right.

Operator

Next question is from the line of Abhishek Sinha from Bank of America Merrill Lynch. Please go ahead.

Abhishek Sinha – Bank of America Merrill Lynch

Hi, guys. Sorry, I joined the call little late. I just have a couple of questions in a very basic one. So out of the 58 MMBoe proved, how much is can I consider as a proved developed producing in terms of million barrels was it proved developed are not producing?

Steven H. Pruett

Yeah, I think we’re showing 55% of proved developed producing, as someone to (inaudible) somewhere.

Abhishek Sinha – Bank of America Merrill Lynch

That are proved developed producing, okay, does that all proved developed versus it’s all producing that?

Steven H. Pruett

That’s proved developed; but 55% includes some PDNP as a minor component of the total.

Abhishek Sinha – Bank of America Merrill Lynch

Got it. Okay, the minor component. And how should I consider these 7,000 barrels like what kind of age of these wells, I don’t know what should I depend to as a decline rate for these?

Steven H. Pruett

Well, it’s a mix bag of recently drilled wells, and then of course in the conventional Permian or Central Basin platform, conventional or more mature wells in general. So it’s really hard to generalize, since you’ve got a mixture of recently drilled wells and more mature wells that are typical PDP Permian decline rates.

Abhishek Sinha – Bank of America Merrill Lynch

Okay.

Steven H. Pruett

I wish there was a simple answer, but it’s not.

Abhishek Sinha – Bank of America Merrill Lynch

Great, great. (Inaudible) Well, that’s all I have, thank you very much.

Steven H. Pruett

Okay, thank you.

Timothy A. Leach

Thank you.

Operator

Thank you. We have no further questions in the queue. (Operator Instructions)

Steven H. Pruett

Okay. If there aren’t any further questions, I appreciate everyone’s participation in the call. This is a great acquisition, and I look forward to talking about this with you more in the future. So thank you very much.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Concho Resources' CEO Discusses Acquisition of Three Rivers Operating Company Conference (Transcript)
This Transcript
All Transcripts