Concho Resources' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 9.12 | About: Concho Resources (CXO)

Concho Resources, Inc. (NYSE:CXO)

Q2 2012 Earnings Call

August 7, 2012 10:00 am ET

Executives

L. Price Moncrief – Vice President of Capital Markets and Strategy

Timothy A. Leach – President & Chief Executive Officer

E. Joseph Wright – Chief Operating Officer & Senior Vice President

Steven H. Pruett – Senior Vice President, Corporate Development

Matthew Glover Hyde – Senior Vice President, Exploration

Analysts

John Freeman – Raymond James & Associates

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

Brian Singer – Goldman Sachs & Co.

William Butler – Stephens, Inc.

David Tameron – Wells Fargo Advisors LLC

Neal Dingmann – SunTrust Robinson Humphrey, Inc.

Scott Hanold – RBC Capital Markets

Irene Haas – Wunderlich Securities Inc.

Pearce Hammond – Simmons & Company International

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

Mike Kelly – Global Hunter Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Concho Resources earnings conference call. My name is Fab and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Price Moncrief, Vice President of Capital Markets and Strategy. Please proceed.

L. Price Moncrief

Thank you, Fab. Good morning everyone. We’re glad you could join us today for Concho’s second 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 last night’s press release and on this conference call, that state the company’s or management’s expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under the Federal Securities Law. 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; Joe Wright, our Chief Operating Officer; and Steve Pruett, Senior Vice President of Corporate Development, who will discuss our second quarter results. We are also joined by other members of our management team, who’ll be available to answer your questions later in the call.

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

Timothy A. Leach

Good morning, everyone. Thanks for joining our second quarter conference call. I’m joined in Midland today by our officer team, who look forward to taking your questions later in the call.

Before I turn things over to Joe and Steve, I’d like to spend a few minutes talking about our performance and accomplishments during the quarter, as well as our expectations going in the second half of the year. As you most likely read in our earnings release last night, during the second quarter production was curtailed by about 3,000 Boe’s per day, due to gas plant turnarounds. And our oil realizations were negatively impacted by the widening of the Midland Tucushion basis differential. So, this created a tough quarter for Concho. The good news is that both of these challenges appear to be behind us and our fundamentals remain intact.

In addition, we are still on track to achieve the targets we set for 2012 production growth and capital spending. The Permian Basin remains the place to be in terms of profitability and oil growth. Although, price realizations were negatively impacted due to takeaway disruptions during the quarter, we still delivered a 74% cash margin, which remains one of the best in the industry.

Activity in the Permian reached unprecedented levels during the second quarter with rig count surpassing the 500 mark previously set in the early 80s. As the second largest oil producer in the Permian Basin, with over a million gross acres, we’re exposed to some of the highest rate of return plays in the country. And against a backdrop of an increasingly unpredictable economy, it’s encouraging to know that Concho has the ability to organically grow profitably in a broad range of commodity price environments.

One of our most significant accomplishments during the second quarter was the acquisition of the Permian assets from Three Rivers Operating Company. The Three Rivers acquisition represents our largest and most strategic acquisition since Marbob in 2010. And just like the Marbob, Henry and Chase acquisitions, this slightest deal was privately negotiated and provides an opportunity to deploy our big drilling and operating machine to accelerate and optimize the activity on these assets.

We expect that the acreage we acquired from Three Rivers in the Northern Delaware Basin and the Southern Midland Basin, will provide us an additional source of growth over the next five or six years. As you know, we elected to finance the acquisition with a combination of bank debt in a planned asset divestiture.

As we continue to evaluate the non-core divestiture candidates, we’re confident that expected proceeds will not only enable us to reduce borrowings and bring our leverage more inline with our optimal target, but also will provide an opportunity to redeploy capital into higher growth areas in the form of additional acreage in our more strategic areas and accelerated drilling in our horizontal plays.

Over the last few quarters, I’ve spoken to you about our ongoing horizontal development efforts across our portfolio. And I think this is a major new theme as we continue to experience both faster drilling times and better well results. The drilling and capital efficiencies realized through horizontal development are compelling, and I expect Concho’s mix of horizontal rigs will continue to increase, as early as like the Delaware Basin and other emerging areas, evolve into full scale development.

During the second quarter, we completed our first horizontal Cline well in Terry County in the Northern Midland Basin and plan on spudding our second horizontal Cline latter this year. Over in Upton County, we just completed our first horizontal Wolfcamp Shale Well that well drive in the heart of our Wolfberry play. And our second horizontal Wolfcamp Well in Upton County will spud in the third quarter.

Moving East over into Glasscock County, we’ve drilled one horizontal Cline well, which continues to produce in line with our expectations. And we just spudded our second horizontal Cline in the area last week. And before the end of the year, we will move into our newly acquired Erian county position and test horizontal concepts on that acreage targeting either decline or the Wolfcamp shale. While, all these wells are in the early innings, there is clearly a lot going on and that’s just in the Midland Basin.

Over the Northern Delaware Basin, our signs and understanding of the stack pay nature of the play continues to improve, which is evident in our mid year drilling location count, which Joe will highlight later on the call. At the beginning of 2012, we had identified of approximately 1,400 horizontal locations on our Northern Delaware Basin acreage, 10% of these were identified as second zones and multi-zone locations.

At mid year, our total horizontal count in the Northern Delaware Basin was over 2,300. 30% were identified as second zones in multi zone locations. So clearly we’re making progress on quantifying the stack pay opportunity within our Northern Delaware Basin portfolio, and I expect that there is going to be more to come. Our confidence in the stack pay potential is supported by our continued drilling success. Since the beginning of the year, we’ve added 36 Northern Delaware Basin horizontal wells that now have 30 days of production data, bringing our total horizontal wells completed by Concho to 91 targeting 7 unique zones.

In total, the average 30 day IP rate of those 91 wells continues to increase and remains comfortably above 700 Boe’s a day from single zone completions. And as I’ve said in the past, we do plan to drill our first do a lateral well in the Delaware Basin before the end of the year.

The last area that I’d like to highlight is our Southern Delaware Basin position. The vertical wells we drilled and the data we collected, suggest multiple horizontal targets within the Wolfcamp Shale and Bone Spring. Today, we drilled and completed three horizontal Wolfcamp shale wells, two of which have been producing for more than 30 days.

One of those wells in particular has received some public attention and while we do not comment on individual well performance, we’re encouraged by early horizontal results in this area, as they’ve been similar to our success in the northern part of the basin. While our horizontal success in the Southern Delaware basin is concentrated in Reeves County, we intend to test other portions of our 140,000 acres in this play before the end of the year.

So as you can tell there is a lot going on and despite a challenging quarter, we’re right on plan to the first half of the year, and on track to meet both our capital and production guidance for the full year. But more importantly, the opportunities and sources of sustainable growth in the Permian Basin are abundant. I’m confident that Concho’s position to take full advantage.

So I look forward to taking your questions at the end of the call. And now I would like to turn things over to Joe.

E. Joseph Wright

Today I’m going to address production and [price realizations] operating and capital cost trends, our mid year drilling location update and our expected drilling program for balance of 2012.

Let me start with the production for the second quarter, which was negatively impacted by both scheduled and unscheduled gas plant processing maintenance and expansion work at the Linam Ranch plant and the Halley Gas processing plant.

We estimate their production curtailments during the second quarter were 3,000 Boe’s per day, causing us to report an average rate for the second quarter below consensus expectations. Both the Linam and the Halley plants have returned to normal operating levels. So we expect the recent turnaround challenges to be isolated events.

From a planning and annual guidance standpoint schedule turnarounds in the Permian occur annually. And so Concho specifically takes this into account. As a result, we are not changing our annual production guidance of 28.7 million to 29.8 million Boe’s. Going forward, activity levels across the Permian will likely remain at elevated levels and NGL takeaway capacity will remain tight until additional capacity like the Lone Star pipelines and Sandhills pipeline are operational.

During the first quarter conference call, I talked about the expected impact of the widening Midland-to-Cushing basis differential on our oil realization. That differential averaged approximately $5 per barrel deduct during the second quarter. Historically, the five-year average differential was $0.22 per barrel with very little volatility. Fortunately, the events that led up to the unprecedented differentials in the second quarter are largely resolved, and the current differential sits at less than $1 per barrel.

Our unhedged realized price for the quarter was 92% of NYMEX oil, which is just below our annual guidance of 93% to 95%. But as I said on our first quarter call, we do not expect the widening differentials during the second quarter to have an impact on our annual guidance. Longer-term, we will need projects like the West Texas Gulf expansion, the Longhorn reversal and the BridgeTex Pipeline to provide additional oil takeaway capacity in order to avoid another widening in our basis differentials.

In the second quarter, we reported per unit LOE slightly above our annual guidance. The biggest contributor of our higher LOE expense has been related to work overs. In fact, our direct LOE per barrel has been declining since the fourth quarter of 2011. Our annual guidance is based on historical data, and the work over component is the most difficult to project.

Going forward, we will need to digest the impact of the Three Rivers integration and planned asset divestiture to have a better understanding of longer-term LOE trends, including work overs. In the meantime for 2012, I would guide you toward the upper end of our annual lease operating expense guidance, which is $7.50. But expect the third and fourth quarters to average $7.50 to $8 as we reflect the impact of the Three Rivers assets.

On the service cost side, we’re seeing softening in pricing, especially large ticket items like pipe, pressure pumping and rigs. In addition, we are experiencing cost savings due to improved logistics and scheduling thanks to drilling efficiencies, getting wells online faster and an increasing supply of services.

Shifting gears now to our midyear inventory update, we have identified over 10,600 locations across our portfolio, which compares to approximately 8,900 locations at year-end 2011. The acquisition of the Three Rivers and PDC are reflected in our midyear numbers. It’s worth noting that the midyear inventory account no longer includes the 364 vertical Wolfbone locations that were reflected in our drilling location inventory at the beginning of the year.

Our expectation is to replace these vertical locations with horizontal wells by year-end. In addition, our midyear inventory does not reflect horizontal opportunities in our other emerging areas in the southern Delaware Basin, the northern Midland Basin, eastern shelf in the Midland basin, our newly acquired acreage in the southern Midland Basin, or our legacy Wolfcamp acreage.

With that, let me give you some detail on what we identified across our portfolio, starting with the Delaware basin. Substantially all of the 2,375 locations identified in this area target horizontal objectives like the Avalon, Bone Spring and Wolfcamp in the northern Delaware Basin.

As Tim noted in his comments, our drilling success in this part of the basin has translated to greater confidence in our multi-zone potential, which is why 30% of our northern Delaware Basin locations are classified as multi-zone. That compares to 10% at the end of 2011.

In New Mexico shelf area, we have currently identified 2,470 locations, which includes 1,559 verticals Yeso locations. The most significant development with respect to inventory in the shelf area is identification of 369 horizontal Yeso locations.

Concho has drilled 15 horizontal wells this year and will drill at least 15 more before the end of the year. We are still testing horizontal Yeso concepts in the shelf and in the Southwest extension of the shelf, which may lead to additional horizontal locations. These wells cost $3 million to $4 million, and the early results have been encouraging, which is why we continue to add horizontal rigs in the shelf.

Over in Texas, we have identified 5,772 locations, 2,064 of which target the vertical target the vertical Wolfberry play through 40-acre spacing and 2629 of which target the Wolfberry owned 20-acre spacing.

We also have included 927 vertical shallow Wolfcamp locations in Irion and Schleicher Counties that were part of the Three Rivers acquisition. As we discussed on the acquisition conference call, we expect to develop these horizontally going forward. Instead, we will begin testing horizontal concepts targeting the Wolfcamp or client shale’s later this year in those counties.

The last topic I’d like to discuss is our drilling plan and capital budget for the remainder of the year. While our 2012 capital budget remains the same at $1.5 billion, we are planning to shift a greater portion of our remaining capital towards horizontal drilling.

As Tim suggested in his comments, relative to our vertical program, we are seeing greater efficiencies in our horizontal program in terms of capital dollars per flow and barrel. As we move forward. So as we move forward through the balance of 2012, our overall rig count is going to average around 30 to 35 rigs, about 40% of which will be horizontal. And as we continue to de-risk the emerging plays across our portfolio, I expect our horizontal mix will continue to increase.

And now I would like to turn it over to Steve.

Steven H. Pruett

Thank you, Joe. The Three Rivers acquisition closed on July 2 for $1 billion, and was funded with borrowings under our credit facility. Given the timing of this closing, this acquisition did not impact our second quarter results. We are pleased to report the integration of the Three Rivers assets is going smoothly.

Going forward, Concho remains committed to its core philosophy of financial discipline in maintaining a conservative capital structure. Proceeds from our non-core asset divestiture will be applied towards reducing borrowings under our credit facility and will reduce our pro forma debt to EBITDAX ratio within our targeted level. We expect our non-core asset divestitures to close before year-end.

During the second quarter, we successfully increased the commitments under our credit facilities $2.5 billion. Taking into account the proceeds used to fund the Three Rivers acquisition, we currently have approximately $1.4 billion drawn on our credit facility, leaving $1.1 billion in available liquidity.

Costs incurred for the first half of 2012 were $730 million for exploration and development capital. We also invested $227 million in property acquisitions, which excludes the Three Rivers acquisition that closed after the end of the quarter.

Concho continues to maintain an active oil hedging program. Approximately 80% of our expected oil production in the second half of 2012 is hedged at $96 per barrel. In conjunction with the Three Rivers acquisition, you’ll recall that we added oil hedges on $2.4 million barrels of oil and a weighted average price of about $93 per barrel for the remainder of 2012 through 2017.

A key component of our growth strategy is the ability to reinvest high margin cash flow into high rate of return projects. In these exceedingly volatile times, it’s encouraging to know that Concho was able to maintain strong cash margins as a primary source of reinvestment capital.

During the second quarter, our unhedged realized price was $63.43 per BOE with a 74% cash margin. Our cash flow and profits continue to be significantly tied to oil, which comprises 62% of our total volumes and 84% of our revenues for the quarter. When combining our oil and NGL revenue, liquids represent 96% of our revenue in the second quarter.

Oil price realizations, excluding the effects of derivative settlements, were $85.62 per barrel, a decline of 13% from $98.16 per barrel realized in Q1. NYMEX WTI Cushing prices declined 9%, while the previously noted increase in the Midland-Cushing differential made up the balance of the decline in oil price quarter-over-quarter.

Gas price realizations, excluding the effect of derivative settlements, were $4.58 per McF in Q2, which declined 21% from Q1 due to a 21% decline in Mont Belvieu NGL prices and a 20% decline in the El Paso Permian Basin pipeline index, which is used in form of those pricing some of the company’s natural gas.

The realized natural gas price differential to NYMEX was 195% for the quarter. We expect this premium in Henry Hub to decline in the second half of the year with the decline in NGL prices and the recent improvement in NYMEX natural gas prices.

At this time, we would like to turn the call over to our moderator who will take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question will come from the line of John Freeman with Raymond James.

John Freeman – Raymond James & Associates

Good morning, guys.

Timothy A. Leach

Hey, John.

John Freeman – Raymond James & Associates

The first question, you were good enough to give the average 30-day rates on the Northern Delaware basin horizontals you’ve drilled to-date. I was wondering if you can do the same thing for the 15 horizontal Yesos that you’ve done that gave you the confidence to add those locations?

E. Joseph Wright

John, this is Joe. Those average rates on those horizontal Yeso, let me pull that together and get that to you so I get a better number, but we’ve seen a variety up to as much as 400 barrels plus associated gas and then we’ve seen some down about 180 to 200 barrels. So, there is a pretty good range in there. I’d like to pull those numbers together there for you.

John Freeman – Raymond James & Associates

Okay, sure. And then, if I’m sort of thinking about the way you went about testing the Yeso before kind of putting out the horizontal locations. If I’m thinking about the Southern Delaware where right now, conservatively you’re not providing horizontal locations. If you’ve done three so far, you’ve got seven more, puts you around 10 at the end of the year. I guess, kind of thinking about it should be when you report, I guess, fourth quarter results is when we would get the horizontal locations for the Southern Delaware, does that timeline sound about right?

E. Joseph Wright

Yeah, and John, that would give us a chance to run it by our third-party engineers as well and run all those results, because it’s a new area. It’s horizontal drilling. So we would really like to get the backup of a third-party before we talk about it too publicly.

John Freeman – Raymond James & Associates

Okay. And then, last question for me and I’ll turn it over to somebody else. I just want to make sure I’m looking at the rig number on an apples-to-apples basis, but after you did the Three Rivers deal, the thought was you would be running 43 rigs on average second half ‘12. Now its 33, but you’re able to basically maintain a production guidance because just how much more prolific these horizontals are, is that right?

E. Joseph Wright

Yes. I think that’s a good way to think about it. And the other point on that, I think is that, our rig count is more reflecting landing our budget on the number that we projected and not a reflection of economics in the projects. It’s just we had more activity in the front half of the year. The horizontal wells, as we said on the call, are more efficient as far as dollars per flowing barrels. So you get more bang for the buck there.

John Freeman – Raymond James & Associates

Great. I appreciate guys. Thanks.

E. Joseph Wright

Thanks, John.

Operator

Your next question will come from the line of Brian Lively with Tudor, Pickering, Holt.

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

Hi, good morning.

E. Joseph Wright

Good morning, Brian.

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

Tim, on the reiteration of your annual volume guidance, just thinking about the second quarter and being down sequentially. Doesn’t that imply that you’ve actually increased guidance over the second half of the year, and is that related to just more confidence around the horizontal program going forward or was it just reflective of you guys having some kind of fat already in those numbers?

Timothy A. Leach

Well, I would say we do have more confidence on our horizontal drilling, I don’t know, the way I think about it is not that we are increasing our guidance. So I tend to think about it in terms of, we knew these turnarounds. I mean they’ve happened this time of the year for the last several years. And we kind of built that into our estimates. So, while these turnarounds lasted longer and some of the things were not planned that happened when they started [the plants] back up. We still think this is well within our comfort zone that we planned for, and in fact, we still feel pretty good about the top of the range on production numbers.

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

And this is more of a timing question, but it looks like in the second quarter you completed about 30% more wells than what you completed in the first quarter. And I was just wondering from a timing standpoint, were those completions more weighted to the end of the quarter, given you guys were already planning some maintenance downtime?

E. Joseph Wright

Yeah, this is Joe. I think as you kind of think in between quarters, sometimes just timing of getting those wells on production, finishing up stimulation jobs, frac jobs, and getting them on production kind of sometimes pushes them to where one quarter may have more than the other. Just from a timing standpoint of getting those on production, I would say they probably are a little more weighted towards the end than they are in the first part, so.

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

Okay, that’s helpful. Last question for me is just on the Midland Wolfcamp side. I know it’s early, I know you guys have drilled one wells, but when you look at some of the industry well results, we also look at some of the JVs, at least one of the JVs that have been done already. Shouldn’t it be reasonable for us to assume that your Wolfcamp wells and Upton and your greater Wolfberry play should be similar to what the industry has posted already?

E. Joseph Wright

We don’t know, so I’m going to tell you, I wouldn’t assume anything yet. We really like our acreage the Wolfcamp on our acreage is really strong, but as you get up to the western boundary of that shelf edge in the Midland Basin, the Wolfcamp changes, it becomes a better reservoir actually. And I think we said publicly that we think at least half our acreage is really prospective for that horizontal Wolfcamp, but we’re just drilling our first well. So I would most of the industry data that I think you are referring to is more in the center of basin and it’s deeper and it’s thinner there. And so, I expect ours to be somewhat different, it could be better, it could be worse.

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

And Tim just on timing, how long do you think it will take for you guys to get some confidence to at least put out some cursory inventory numbers?

Timothy A. Leach

That’s probably latter part of next year sometime, I think with everything we’ve got going on. I mean to get an update of where we start counting inventory horizontally. My hope and I’ve said this publicly is, all of those 20 acre space locations that we’re carrying that overtime that you convert those into more profitable horizontal locations.

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

That’s great. Thanks.

Operator

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

Brian Singer – Goldman Sachs & Co.

Thank you, good morning.

Timothy A. Leach

Good morning.

Brian Singer – Goldman Sachs & Co.

Can you give a little bit more color with regards to the Southern Delaware Basin what drove the removal of the vertical locations and what would it takes for you to actually assume the horizontals there in your inventory given that you’ve been encouraged generally so far?

Timothy A. Leach

Sure. When we started acquiring acreage down there that play was, and still is for some operators a vertical play. Lot of the vertical wells, we drilled, we collected a lot of scientific data and we completed each zones separately as we came up the whole the test of productivity of each zone more as a science experiment. And I think what we discovered was that we really like the horizontal potential of that area.

And as I commented on the previous call, I think we’ve got three wells there that were encouraged by. We’ll have more by the end of the year plus we’ll have a chance to review with our outside engineers and get another set of eyes looking at it. And then I think it will be properly appropriate for us to start talking about location counts, because it’s a lot of acreage and its spread over a pretty big extent. And typical as these things work, we won’t count probably all the locations on that acreage, initially. The locations we will start building around the areas where we’ve drilled and had success and it will probably take a few years to get that thing fully dotted up.

Brian Singer – Goldman Sachs & Co.

Got it, thanks. Just to confirm on the verticals, is the removal because of your preference to move towards horizontals or because you don’t see the economics of verticals, as strong as you previously did?

Timothy A. Leach

Well, it’s our preference. We still think that there is positive economics on those verticals.

Brian Singer – Goldman Sachs & Co.

Okay, thanks. And then bigger picture if you look out there with relatively stuff fragmented in Permian Basin. Do you see and is it your priority to do continued acquisitions or is time better spends on integrating the Three Rivers assets, since you just acquired that or both?

Timothy A. Leach

Well, I mean we have a priority of integrating assets and this divestiture is very important to us to complete the Three Rivers process, but I’ll tell you the acquisitions are in our blood and there is a lot going on in the Permian right now. So, we’re very picky and the things we do we want them to be immediately accretive and I think the answer to your questions both, but right now if I had to prioritize, I said priority is integrating Three Rivers and getting this divestiture completed.

Brian Singer – Goldman Sachs & Co.

Thanks. I could ask one more, any update on Terry county drilling?

Timothy A. Leach

No, just that we’ve completed one well and we’re planning the second.

Brian Singer – Goldman Sachs & Co.

Great. Thank you.

Operator

Your next question will come from the line of William Butler with Stephens.

William Butler – Stephens, Inc.

Good morning.

Timothy A. Leach

Good morning.

William Butler – Stephens, Inc.

Similar question over in the Southeast Midland Basin and the Erian county, you’ve got in the current inventory the vertical Wolfcamp’s I mean – so for conservatism should we just think about it on that basis for now too early yet to be thinking on Wolfcamp and Cline, and again, when would you expect that data?

Timothy A. Leach

Yeah, I mean that was what they were doing when we bought those assets. That activity was making money, but our view is becoming increasingly horizontal. And we’re going to jump down there and test some of that here between now and the end of the year. And I think if had asked us our view today, I think that’s what we think will be the highest and best use of those assets.

William Butler – Stephens, Inc.

On the horizontal?

Timothy A. Leach

Right.

William Butler – Stephens, Inc.

Okay. And then, can you all give us a little hint into 2013 rig count outlook. I guess another thing is, speaking more broadly, with all of the horizontal drilling that you all are doing, is it still the company’s strategic goal to deliver that double-digit growth within cash flow? Any reason that should be further enhanced by horizontal drilling, or we should change our view on that?

Timothy A. Leach

Well, I think that philosophy of reinvesting our cash flow into these high rate of return projects, the horizontal stuff does compete very well with anything we’ve ever done vertically. It’s more capital efficient. We can get more capital invested with fewer rigs and that’s influencing our thinking. When we started this capital budget process for 2013 as we have done in the past, the first thing we will do is try to make a reasonable estimate of our cash flow and build our drilling budget around that . And I don’t think it’s going to take as many rigs to get that invested as it has taken in the past, because of the horizontal nature. It wouldn’t surprise me if half our rigs weren’t drilling horizontally in 2013.

William Butler – Stephens, Inc.

Okay. Great. That’s all from me. Thank you.

Timothy A. Leach

Thank you.

Operator

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

David Tameron – Wells Fargo Advisors LLC

Hi, morning. Most of the questions have been answered, but can you just talk about, you guys had previously indicated you may try to do a lateral in the second half of this year. Can you just talk about, is that still on the board? What do you think would be a cost advantage, and can you talk about some of the operational difficulties, of many, in doing that?

E. Joseph Wright

This is Joe. So let me handle that question. Just from a timing standpoint, I believe we will spud that well this quarter, in the third quarter. That is our timeline. Anytime you run more than one lateral, you add some complexity, but this is something that’s been done in other places. It’s not something new to the industry. I think the reward outweighs risk easily. As you think about the cost of that, you have so much sunk into vertical section of a well, and we can add a second lateral for much less than the full cost of the first lateral. So when you think about efficiencies there of reserves, and the development cost of those reserves, it’s significant. It’s worth the risk.

David Tameron – Wells Fargo Advisors LLC

All right. So, Joe, can you talk about savings of a couple of million dollars a well type of thing if you were to be in development mode?

E. Joseph Wright

Well, I’d like to get my first one done before I tell you what I think that real savings is going to have to be.

David Tameron – Wells Fargo Advisors LLC

Right. Fair enough. Tim, can you talk about, if you’re to think about what your crown jewel today, as far as your asset base, how would you characterize that or what asset would that be?

Timothy A. Leach

That’s really hard to answer, to differentiate. The Yeso has been such a wonderful asset for a such long period of time. And just when you think that you might have it becoming fully developed, this horizontal opportunity appears to be working. But I have to tell you that the Delaware basin and the multi-zone potential and the kind of rates and the kind of economics we are making on it and the geographic extent of all that is really exciting right now. So, while it’s probably our smallest asset in terms of production today, I think potentially that’s the thing that is really going to drive our growth in the future.

David Tameron – Wells Fargo Advisors LLC

Okay. And then, one follow-up there. So just because infrastructure is important in all of these plays, can you talk about Southern Delaware? What infrastructure is in place? How would you characterize it relative to the other parts of the basin? Assuming Wolfcamp holds up, are those results and you start to get more (inaudible) talk about that.

Timothy A. Leach

I’m going to let Joe do that.

E. Joseph Wright

Yeah, this is Joe. Some areas you'll find absolutely no infrastructure in some parts of that play in the Delaware Basin and others that you have pretty good infrastructure. As we develop that northern part of the Delaware Basin down in South Eddy in South Lea County that didn’t have a whole lot of infrastructure to start with either. And so you have to build roads, you have to build disposal systems, you have the electricity, and then of course your gathering facilities in terms of gas and oil. So really sometimes starting from scratch is easier than taking these old systems and trying to modify them in an area that you do have the infrastructure. So it’s a big part of our planning going forward. Part of our budget, we always budget dollars that will go straight to infrastructure that we call non-revenue generating CapEx. So we’ll continue to do that, last year I think that was close to $100 million, this year about the same kind of number and next year I’m not going to do probably going to be in that same range.

David Tameron – Wells Fargo Advisors LLC

All right, that’s all I got thanks for the color.

Timothy A. Leach

Thank you.

E. Joseph Wright

Thanks, David.

Operator

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

Neal Dingmann – SunTrust Robinson Humphrey, Inc.

Good morning guys. Tim maybe a question just for you, Joe first, just one when you look at some of the mid-stream, as you look at the remainder of the year you see still a fair amount of maintenance and expansion work for some of the mid-stream or is that now after this last quarter pretty much behind us just for at least what you know about?

E. Joseph Wright

This is Joe again. I think we are going to stay tight in both our NGL takeaways and really accrued too and I’d say I mean that is a full base in the full industry. So any County interruptions kind of have a hiccup through the system and I think we’ll see some more of those as we go through the – from now to the end of the year. I feel like though that we have plane for those and I think we’re again feel very good about our guidance range and really guides towards the upper end.

Neal Dingmann – SunTrust Robinson Humphrey, Inc.

Great and then just one follow-up I could. You continue to do great job just on overall well cost, Joe, I guess now when you kind of look at the, the horizontal is kind of two questions I guess just maybe in just the Delaware Basin in general. Just overall what you are seeing and sort of on service cost. Are you seen it continued general trend of those coming down and then beside just those general cost, will you continue to see because of some efficiencies that you still have upcoming, where you continue to see cost, do you believe, decline because of that also?

E. Joseph Wright

I think both we have seen some softening, as I said before in the bigger ticket items. Some where larger than others I think generally as you think about it today that’s probably 5% to 6% kind of number. Efficiency wise we are getting faster and that always helps from a cost standpoint. Everyone will have a long wells but for the most part we are getting much faster, some wells we are drilling in less than 15 days from surface to TD. That’s setting three strings pipe, so that’s a pretty good, a pretty short period of time. So we are starting to see those efficiencies take hold.

Neal Dingmann – SunTrust Robinson Humphrey, Inc.

That’s great color. Thanks, Joe.

E. Joseph Wright

Thank you.

Operator

Your next question will come from the line of Scott Hanold with RBC Capital Markets.

Scott Hanold – RBC Capital Markets

Good morning.

Timothy A. Leach

Good morning.

Scott Hanold – RBC Capital Markets

Obviously, it’s pretty clear you are all looking at a lot more horizontal activity going forward because it seems like the economics are looking strong. Can you just in general give us a sense of, when you look back at the new traditional vertical plays versus some of the stuff that’s going on horizontally? How do those economic stack up against each other and so obviously the horizontal basin look very strong but how do the economic stack up?

Timothy A. Leach

Yeah, well I think we are about to put out a slide. That we’ll compare some of the economics, but I think it’s important to point out that when we started the year we were drilling more Avalon shale wells in Eddy County on the western side. They tended to be gas here. And as we discovered that we moved more of the drilling to the Bone Spring sand wells, which were oilier. And just because of the difference in oil price and gas price those have much stronger economics. I'd say, and this is going to be a growth generalization, but typically those horizontal oily sand wells have probably a rate of return that’s 10 points higher than our normal stuff, and the gas wells are about 10 points lower than our normal stuff. In the normal stuff, I’m talking about Wolfberry and Yeso vertical wells.

Scott Hanold – RBC Capital Markets

Okay. So you are seeing stronger economics as you go for horizontal oily parts of the basin?

Timothy A. Leach

Yeah, and I think that’s based on well cost today. It really don’t have the benefit of moving into that kind of manufacturing operation, I still think there is a lot of room for us to drive down the cost.

Scott Hanold – RBC Capital Markets

Okay, okay. Good to hear. Thanks for that. And when you look at obviously, potentially, you said your acquisitions are in your blood. Are you still primarily looking at the Permian Basin or is there any thought like bigger picture over time that you strategically having another large core area makes sense?

Timothy A. Leach

I mean, I’ll tell you today that all our focus is on the Permian, but from time to time, we see opportunities that include assets outside the Permian. So I think we have to at least be familiar enough to answer the questions in other areas, in other parts of the country that you believe compete with the Permian and where Concho would have an advantage. And right now, I think we have such a strong advantage here close to home, that’s hard to make anything compete.

Scott Hanold – RBC Capital Markets

Understood. Thank you, guys.

Timothy A. Leach

All right. Thank you.

Operator

Your next question will come from the line of Irene Haas with Wunderlich Securities.

Irene Haas – Wunderlich Securities Inc.

Hi, I have two questions. Firstly, in the Midland basin, you are active in Terry County. Just kind of want to know the competitive landscape, who else is around. And I assume your first well is Red Headed Stranger and has it hit 30 days yet. And the second well, you’re going to drill, would you consider drilling more wells in Terry County? So that’s my first question. The second one is Pecos County. My quick question for you is, do you like it as much as Reeves County. And then, how do you pick zones that you that you like sort of 1000 plus for the feet of section?

Timothy A. Leach

That was more than two questions, I think Irene.

Irene Haas – Wunderlich Securities Inc.

Okay.

Timothy A. Leach

All right, let’s go, Terry County. We are being pretty guarded on what we say about that for competitive reasons and that is just early. So now our first well hasn’t been on for 30 days. The competitive nature of it. There are operators from very small independents to major oil companies that have acreage in that play. And on your question about Pecos and Reeves, all our wells are in Reeves. We have considerable amount of acreage in Pecos, but we haven’t the drilling hasn’t moved in that direction across the County line yet. So I think that will happen more towards the end of the year. And Matt Hyde has done a great job of, while I was encouraging him to hurry as fast as he could, we drilled vertical test holes first, we took a lot of core, we tested lot of zones coming up the hole and those wells are kind of as I said on the call both Wolfcamp and Bone Spring sand looks like our potential target in that area.

Irene Haas – Wunderlich Securities Inc.

And how many zones have you picked? You know it’s pretty thick section there. So I mean how many have you kind of arrived at for your shortlist?

Timothy A. Leach

Well, we only completed in one zone. I’m looking at Matt, he is sitting down the table. And we probably tested – we tested a couple in the Wolfcamp and the three sands and the Bone Spring from a vertical standpoint.

Matthew G. Hyde

We are talking Southern Delaware basin at this point.

Timothy A. Leach

Right, right.

Matthew G. Hyde

At this point our horizontals are in the Wolfcamp, but we had verticals zone test in several other zones that you indicated.

Irene Haas – Wunderlich Securities Inc.

Great, thanks.

Timothy A. Leach

All right, thank Irene.

Operator

Your next question will come from the line of Pearce Hammond with Simmons.

Pearce Hammond – Simmons & Company International

Good morning

Timothy A. Leach

Good morning

Pearce Hammond – Simmons & Company International

Can you provide an update on where current production is right now, post Three Rivers close, and then where you think the exit rate will be at the end of the year?

Timothy A. Leach

Yeah. Pearce, we typically don’t provide exit rate data, we’re comfortable as Joe mentioned that the disruptions we had from the gas plant turnarounds or behind us. So, things are back more to steady-state, but we don’t do exit rate guidance or current rates.

Pearce Hammond – Simmons & Co. International

But to clarify, you are biasing your production to the high-end of the guidance for this year.

E. Joseph Wright

That is correct. That’s what Tim stated in his comment.

Pearce Hammond – Simmons & Co. International

Okay. And then…

Timothy A. Leach

I stated that, while everybody around the table, look like they had fear in their eyes.

Pearce Hammond – Simmons & Co. International

And then Tim, if you can do a little compare and contrast on your Texas Permian acreage between Cline and the Wolfcamp formations? And what you see in the product mix, IP rates is one zone and bit more attractive than the other et cetera.

Timothy A. Leach

In which area are you referring to?

Pearce Hammond – Simmons & Co. International

The Texas Permian and specifically, the Cline and the Wolfcamp.

Timothy A. Leach

The Texas Permian, in the Midland Basin you are talking about?

Pearce Hammond – Simmons & Co. International

Yeah, the Midland Basin, exactly.

Timothy A. Leach

Okay. Well the, firstly here, we have drilled mostly Cline wells in the Midland Basin. I don’t think we have any Wolfcamp production to contrast it with. And those Cline wells, we don’t have many of them completed with very much data, but I would tell you that they tend to look like, what you’re seeing other members of industry do in the southern part of the Midland Basin.

Pearce Hammond – Simmons & Co. International

Thank you very much.

Timothy A. Leach

Yeah, sorry for the fogginess of my answer.

Operator

Your next question will come from the line of Mike Scialla with Stifel Nicolaus.

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

Good morning guys.

Timothy A. Leach

Good morning.

E. Joseph Wright

Hi Mike.

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

I got on the call late, so I apologize if you answered any of these questions already, but your inventory 10,617 gross locations. Do you have a corresponding net number for that?

E. Joseph Wright

No, I do not Mike right now with me.

Timothy A. Leach

And that has continued to go up on these locations. We tend to have a much higher interest than what we’ve had in the past.

L. Price Moncrief

Hey Mike, it’s Price. If you want to give me a call, we can go through that.

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

Okay. As a ballpark, would just taking your net versus gross acreage, keep me close or is it…

Timothy A. Leach

Yes.

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

Okay. And then Tim you mentioned replacing a lot of the vertical Wolfberry wells, the 20-acre spacing with – your hope is anyway that those get replaced with horizontal Wolfcamp. Is it fair to say that over the next year or so the absolute inventory might go down in terms of number of locations, but the resource potential would increase.

Timothy A. Leach

Yeah, I think that’s directionally correct. I mean it’s a little bit tricky when you replace a number of vertical locations with a horizontal, because you’re counting the one horizontal, but it maybe replacing, in some cases that does in vertical locations.

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

Okay. And in terms of the horizontal Yeso locations that you talked about, what spacing assumption are you using there?

Timothy A. Leach

Well our verticals were spaced on 10-acre spacing.

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

In terms of the horizontals though that you have talked about now?

E. Joseph Wright

Yes, it’s Joe. We had drilled some one the – on 10 acres spacing and we drilled some that would be what I call 160s right now that we have in field down to that small spacing. We got a mixture.

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

Okay. So the horizontals themselves you’d say you’re spacing at 160, but you’ve also drilled in within the area that where you have. Tim you are speaking vertically?

E. Joseph Wright

Where you would call a 10 acre top spacing, that’s correct. And I think that’s where we will go down to ultimately.

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

With the horizontals?

E. Joseph Wright

Yes.

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

Okay. And then last one for me on the Permian sale. Have you looked at putting those assets into a trust or you prefer to just do an outright sale?

E. Joseph Wright

We’ve talked about it, but we prefer to just do an outright sale.

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

Okay. Thank you.

E. Joseph Wright

Okay.

Timothy A. Leach

Okay. Thanks Mike.

Operator

Your next question will come from the line of Mike Kelly with Global Hunter Securities.

Mike Kelly – Global Hunter Securities LLC

Thanks guys. Good morning.

E. Joseph Wright

Good morning Mike.

Mike Kelly – Global Hunter Securities LLC

Really I just have a question following up on Irene’s question on the Southern Delaware Basin. If we are taking a look at the data provided in the Texas Railroad commission website, it appeared that the three Wolfcamp wells were likely drilled on your northern acreage block in Reeves County, was just hoping you could either confirm or deny this, and just really kind of talk about your confidence that if the results were realized up here in the Northern portion of that acreage block that it's going to be rough to pull on your larger southern acreage block on the border there of Reeves and Pecos.

Timothy A. Leach

Yeah, two of the wells were in the North and one was in the South.

Mike Kelly – Global Hunter Securities LLC

Okay, great and maybe talk about just initial results, how the south compares to the north?

Timothy A. Leach

It’s probably too early all those wells look very similar and as I said in the call they are encouraging to us, because they look similar to the stuff all the way up in the Mexico.

Mike Kelly – Global Hunter Securities LLC

Got it. Okay, thank you.

Timothy A. Leach

Okay, thanks.

Operator

And there are no further questions in the queue. I would now like to turn the call back over to Mr. Tim Leach for closing comments.

Timothy A. Leach

All right, thanks. I don’t have any further comments, but I appreciate. I know today is a busy day, it’s been a very busy season and I appreciate all the attention in questions. Thank you very much.

Operator

Thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful 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!