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Concho Resources: A Sign Of Industry Consolidation

Apr. 05, 2018 2:07 PM ETConcho Resources Inc. (CXO)EGN, EOG, PXD, RSPP, XOM10 Comments
Jennifer Warren profile picture
Jennifer Warren


  • With Concho's acquisition of RSP Permian, a larger firm can lead as an American low-cost producer.
  • The role of consolidation and activism in the industry may bring other opportunities.
  • With oil prices in a moderate station, the drive for efficiency and shareholder value will continue.

When the news of Concho Resources (NYSE:CXO) purchasing RSP Permian (RSPP) was released, the consolidation theme I had expected was finally confirmed. The idea of consolidation in the Permian was floated during the oil price rout of 2015-2016. Former CEO of Pioneer Natural Resources (PXD), Scott Sheffield, suggested this would take time for consolidation to fully materialize, owing to challenged balance sheets deterring would-be purchasers. Any purchaser would not want to be saddled with another's debt unless the value proposition far outweighed the liabilities.

With oil prices in a more or less predictable pattern, the industry is finding its new rhythms. Consolidation also can be seen as contiguousness. Trading acreage also is a practice happening more often in the shale patch to achieve more favorable swathes of acreage to drill longer laterals. Concho spoke of this in its merger transcript, and Pioneer in an earlier interview with me. The asset consolidation between Concho and RSP Permian illustrates what an optimal strategy is:

Note how RSPP's assets combine with Concho's to drill longer laterals, bring efficiencies in terms of shared infrastructure, and add scale to the enterprise in general. Importantly, scale of operations matters more in an oil price band of $50-65. And for the foreseeable future, even if oil prices rose to $70-80, this consolidation would be happening. The Bass acquisition by Exxon (XOM) was another proof of concept. Exxon both affirmed the operating rationale and the necessity of having scale and efficiency in operations.1 (Pioneer has had this modus operandi for a number of years, having both asset size/locations and contiguous acreage locations). The prospects are lower cost producers have a place in U.S. oil markets in the years ahead.2

Additionally, the role of the investment community cannot be ignored. Recently activists have engaged in the shale patch. This was first observed

This article was written by

Jennifer Warren profile picture
Jennifer's areas of expertise include energy trends —their economic and geopolitical implications—and resource sustainability issues. She considers her investment approach eclectic, drawing from a multidisciplinary pool of work. Lately, she is working on market making in an impact area, trying to match capital to beneficial projects. With partners, she works from the ground-up through to a final end game, with some projects that are enduring or long-lived.Other interests include the energy transition, the impact of shale oil and natural gas, climate change, clean and efficient infrastructure, China, India, and the energy-water-resources nexus—all interrelated in various ways. Her work has been published in various academic, policy and business publications such as Far Eastern Economic Review, Economist Intelligence Unit’s Executive Briefing, Journal of Structured Finance, Lloyd's List, D CEO, Energy Trends Insider, Financial Sense, and many others. From Dec 2010 to April 2013, she was the CEO/President of a global affairs organization focused on cutting edge geopolitical and macroeconomic trends. She organized and moderated panels on global gas, energy security, energy infrastructure finance, and urban development. She has a master's degree from London School of Economics, and bachelor's in finance/marketing. She is principal of Concept Elemental, a strategic communications consultancy focusing on knowledge work, and includes over fifteen years of financial services industry work. She works with a top University, "translating" cutting edge research as well.Recent interview:https://podcasts.apple.com/us/podcast/wednesday-may-10-montana-world-affairs-council/id1511606812?i=1000612517083

Analyst’s Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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