Concho Resources (CXO) Q2 2018 Results - Earnings Call Transcript

Concho Resources, Inc. (NYSE:CXO) Q2 2018 Earnings Call August 2, 2018 9:00 AM ET

Executives

Megan P. Hays - Concho Resources, Inc.

Timothy A. Leach - Concho Resources, Inc.

Jack F. Harper - Concho Resources, Inc.

C. William Giraud - Concho Resources, Inc.

Analysts

John A. Freeman - Raymond James & Associates, Inc.

Robert Scott Morris - Citigroup Global Markets, Inc.

Brian Singer - Goldman Sachs & Co. LLC

Doug Leggate - Bank of America Merrill Lynch

Michael Dugan Kelly - Seaport Global Securities LLC

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Charles A. Meade - Johnson Rice & Co. LLC

Michael McAllister - MUFG Securities America, Inc.

Arun Jayaram - JPMorgan Securities LLC

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Richard Merlin Tullis - Capital One Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Concho Resources Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Ms. Megan Hays. Ma'am, you may begin.

Megan P. Hays - Concho Resources, Inc.

Thank you. Good morning and welcome to Concho's second quarter 2018 earnings call. I'm joined today in Midland by Tim Leach, Chairman and CEO; Jack Harper, President and CFO; and Will Giraud, Executive Vice President; as well as members of the Concho senior management team.

Our earnings release and corporate presentation are both available on our website and we plan to file our Quarterly Report on Form 10-Q today after market close.

Please note that we will make forward-looking statements based on current expectations this morning. Also, some of our comments may reference non-GAAP financial metrics. Forward-looking statement and other disclaimers as well as reconciliations to the nearest corresponding GAAP metrics are in our earnings release and our corporate presentation.

We have a lot of great news to discuss with you today. Tim will start the call and then you will hear from Jack. Following their prepared remarks, we will take your questions.

Now, let me turn the call over to Tim.

Timothy A. Leach - Concho Resources, Inc.

Thanks, Megan. Good morning. With nearly half the drilling rigs and completion crews in the country running in the Permian Basin, the region is as busy as we've ever seen. We estimate that more than $50 billion in capital will be invested to drill and complete wells in the Permian in 2018. Industry's capital investment is headed even higher when you add up midstream, refining and other services. It's an environment like this where our scale, experience and being right in the middle of the action helps us deliver.

Second quarter was another strong quarter. We achieved record production of 229,000 Boes per day with oil production up 26% compared to a year ago. Our performance this quarter wasn't driven by any one asset, rather it was the outcome of strong results from large-scale development across the entire portfolio. And even with the busy environment, the team's done good work fighting inflationary trends by getting more efficient increasing our use of Permian sand.

We talked about reaching inflection points in the past. The shift to horizontal development in 2011 is one example. Establishing a position in the Northern Delaware is another. And it was about a year ago that we described another inflection point, our progression to large scale development.

Horizontal drilling and the Northern Delaware turned out to be huge value drivers for the company. And we believe manufacturing mode will do the same thing. This transition has been one of our most important operational and strategic priorities. And we're early in realizing the positive impacts to capital efficiency, returns, and recoveries that we believe large scale development will deliver.

The RSP acquisition solidifies our scale advantage and reinforces our growth platform for bigger wells and increasing returns. With the transaction now complete, our most important phase of work begins, realizing the benefits of this powerful combination by successfully integrating our teams and operations. You've heard me say before that our people are our greatest asset, and with RSP, our team grows even stronger. I welcome the 171 RSP employees to the Concho team.

The RSP assets enhanced some of the best parts of our portfolio with exceptional development potential. We started on unlocking that potential on day one by directing capital to several projects on the RSP assets. Following the closing, we're running 32 horizontal rigs, which is the largest program in the Permian and eight of those rigs are running on former RSP assets. Jack will cover the development plans for the second half of the year in more detail. The key takeaway is we're taking premium resource and making it more valuable with our operational machine.

So far 2018 has been unprecedented in terms of the transformative actions we've taken and the solid results we've delivered. In the first half of the year, we organically added 18,000 Boes per day of production, generated about $150 million in free cash flow, executed several trades to block up core acreage, sold non-core leasehold and announced the RSP acquisition. The acquisition combines two great companies focused on the highest quality resource in the Permian Basin, with the scale and expertise necessary to compete globally.

As we move forward, I'm even more optimistic and energized about the outlook for the company. We have distinct competitive advantages; execution strength, the depth of our quality resource, capital efficiency, financial strength and RSP reinforces each of these and enhances our ability to drive sustainable growth and returns for our shareholders.

Jack will now discuss the quarter in more detail and provide an update on our outlook for the year.

Jack F. Harper - Concho Resources, Inc.

Thank you, Tim and good morning. Our strategy and execution translated to strong operational and financial performance. Production for the quarter totaled 229,000 Boes per day, which was in line with the high end of our guidance. Oil production averaged 143,000 barrels per day, a 26% increase compared to the prior year and flat versus the first quarter of 2018. At this point, we're right where we expected to be.

Over the past 12 months U.S. oil production has grown considerably and the engine behind this growth was the Permian Basin. The EIA estimates that the Permian has added an average 75,000 barrels per day each month so far in 2018, with August production expected to be a record 3.4 million barrels per day. This growth is showing up faster than forecasted. And while new long haul pipe projects are being built, these new projects are slated to come online with little margin for delay.

As we described last quarter, our midstream strategy has evolved significantly over the past decade. We've made strategic investments in infrastructure that are intended to protect our upstream business by ensuring operational continuity. Approximately 90% of our oil is gathered and transported by pipe, most of which is covered by firm sales agreements, with the remaining 10% directed to regional refineries.

Our marketing strategy has always prioritized the highest wellhead price, while maximizing flexibility. As crude takeaway gets tight, we are leveraging our size and scale to secure flow assurance today. Importantly, our firm sales agreements provide near-term flow assurance without limiting long-term pricing flexibility. And just as we mitigate flow assurance risk through firm sales agreements, we also mitigate the financial risk of the Midland-Cushing differential with basis hedges.

On the other side of the margin equation, our controllable cash costs look good. Cash G&A was stable when compared to the first quarter of the year, while both LOE and interest expense decreased. In the second quarter, adjusted net income per share was $1.24 and we generated $592 million of EBITDAX.

When oil prices moved lower in late 2014, we moved quickly to align capital spending with cash flow from operations, and we've done that for 11 out of the past 12 quarters. In fact, over that time period, we've generated more than $600 million in free cash flow.

In the earnings material, we only show operating cash flow and D&C capital for the past two years, which is also impressive. We've increased production 50% and generated approximately $250 million in free cash over that period. I believe that stacks up well against our peers and I can't think of a better illustration of the commitment we have to capital discipline and of the quality of our assets.

Turning now to the balance sheet, maintaining a strong financial position enables us to deliver near-term results, invest for the long term and better manage risks. Following the RSP transaction, we maintain a strong balance sheet, which was acknowledged by the upgrades to BBB-minus by Moody's and BBB-flat by Fitch. We now have investment grade ratings from all three agencies.

We recently completed a $1.6 billion senior notes offering, consisting of both 10-year and 30-year tranches at a blended rate of 4.5%. The proceeds were used to redeem RSP senior notes for $1.2 billion and repay a portion of the outstanding balance under their credit facility. These transactions achieve a key cost savings target by reducing pro forma annual interest expense by more than $15 million.

After giving effect to the liability management actions and associated transaction costs, we would have had long term debt of $4.2 billion at June 30. Importantly, our leverage ratio remains below 1.5 times. We're proud of the RSP acquisition and the entire position we've carefully and strategically built in the Permian over the last decade.

As a result of closing the transaction, we've updated our guidance for production and capital to include RSP beginning on the closing date of July 19. Although RSP reported production volumes on a three-stream basis, we will continue to report on a two-stream basis and have converted RSP's volumes to two-stream, which results in an approximate 10% reduction in their equivalent volumes, but has no impact to cash flow.

For the third quarter, we expect production to average 280,000 Boes to 285,000 Boes per day, with RSP contributing to production beginning on July 19. The fourth quarter will be our first full quarter with RSP and we expect production will average 305,000 Boes to 310,000 Boes per day. For both third and fourth quarters, we're guiding to an oil mix of 65%. For full year 2018, we expect reported production to average about 260,000 Boes per day consisting of 64% oil.

To help calibrate models, on slide 12 in the earnings presentation, we've provided pro forma production on a two-stream basis for full year 2017 through the second quarter of 2018. On a pro forma basis, the new full year 2018 guidance equates to approximately 21% to 23% production growth year-over-year.

Moving RSP's premium assets to development mode is the most efficient way to build value in the combined company. Post transaction operations and integration activities are going well. And in the second half of the year, we plan to jumpstart large-scale projects on RSP's assets.

In the Northern Delaware, we have one planned project, the Taylor. In the Midland Basin, RSP recently achieved solid results in Glasscock County. We plan to continue this success with a six-well project there. We also plan to develop a five-well project on the Spanish Trail lease in Midland County and a 13-well project in Martin County.

We're also completing several infrastructure projects that facilitate large scale development in the Northern Delaware on RSP's assets. All of this activity is reflected in our updated capital outlook of $2.5 billion to $2.6 billion.

There are two points I want to emphasize. First, there is no change to our investment philosophy. We expect operating cash flow to fully fund the capital program which will be allocated based on rate of return. Our production growth is the output of this investment framework.

And second, the RSP transaction enhances the capital efficiency of Concho as we help define the new E&P business model. We continue to believe that leadership in our industry is defined by execution strength and capital discipline. I hope you've come to expect Concho to deliver on these principles.

We are well positioned to leverage the power of our portfolio and the strength our team to extend our track record of profitable growth and returns.

And with that, we'll turn it over to the operator.

Question-and-Answer Session

Operator

Our first question comes from John Freeman with Raymond James. Your line is now open.

John A. Freeman - Raymond James & Associates, Inc.

Good morning, guys.

Timothy A. Leach - Concho Resources, Inc.

Good morning, John.

Jack F. Harper - Concho Resources, Inc.

Morning.

John A. Freeman - Raymond James & Associates, Inc.

When I look at slide 13, clearly, you guys are hitting the ground running immediately on the RSP acreage with these large-scale projects. I know that stand-alone Concho had about two-thirds of its activity that was focused on these large-scale projects, and it looks like, kind of ballpark, it looks like on second half 2018 over half of the activity in the RSP acreage is devoted to these larger scale projects and I'm just trying to get a sense and just from a high level kind of rough estimate, of the projects that are detailed on slide 13, just kind of a ballpark rough idea of what percentage of those wells or projects don't come on line until either, call it, second half 4Q or into 2019?

C. William Giraud - Concho Resources, Inc.

Yeah. Hey, John. This is Will. All of those will come on kind of later in 2019.

John A. Freeman - Raymond James & Associates, Inc.

Perfect. And then, when I'm looking at the various kind of sizes of the projects, anywhere from kind of 5-well pads to 20-well pads. And you all do mention in the slides that, for example, on the Dominator pad like you all had to basically coordinate over a year in advance with the midstream partners with that project. I'm just kind of curious how much kind of the midstream component has an impact on the size of these kind of pads? And then, kind of longer term, if we should sort of think that these projects are likely going to kind of gravitate toward the larger end of that range over time?

C. William Giraud - Concho Resources, Inc.

Sure. I mean, midstream is certainly one of the elements that goes into sizing it. But I would say the bigger driver is – well, let me step back for a minute. I think we've been one of the leaders in moving to these larger-scale development projects. And that's been a steady evolution over the last couple of years as we've tested different spacing between – within a zone and between zones. And so, these bigger and bigger projects I think are just the further evolution of that trend. Where you see some of the smaller projects, that's us continuing to test tighter spacing or different spacing within a zone or between zones again. And so, I think you're right, longer term, you'll see an evolution to the bigger and bigger projects. However, we're still learning as we go and so I think you'll see a blend of different sizes.

John A. Freeman - Raymond James & Associates, Inc.

Thanks. I appreciate it. Nice quarter.

Timothy A. Leach - Concho Resources, Inc.

Thanks, John.

Jack F. Harper - Concho Resources, Inc.

Thanks, John.

Operator

Our next question comes from Bob Morris with Citi. Your line is now open.

Robert Scott Morris - Citigroup Global Markets, Inc.

Good morning. Congratulations, Tim and Jack, in getting the RSP deal completed, in the fold here. Looking at the rig count that you've ramped up to combined for the two companies at 32, you've added about 5 since the deal was announced. And 4 of those 5 are on the Concho properties, which at 24 rigs is a little bit higher pace than what you'd originally planned for the year. Could you just talk a little bit about the acceleration now on legacy Concho assets and why you're seeing more acceleration there at this stage as opposed to RSP deal? So just overall the acceleration activity, if that's driven by oil prices or just the better positioning of the combined companies?

C. William Giraud - Concho Resources, Inc.

Sure. This is Will again, I'd say that what we're doing on the Concho properties is consistent with what our plan had been for the year. We did add those rigs here over the last month or two, but we've also added a rig to the RSP properties. And like I said, at this point, it really just reflects what the two companies were doing on a stand-alone basis and I think you'll see – you're starting to see it now that we've closed and over the course of this year, you'll continue to see us I think put our stamp on those properties. But I wouldn't really characterize that as anything different than what you should have expected earlier in the year.

Robert Scott Morris - Citigroup Global Markets, Inc.

Okay. All right. And then my second question is, on the Northern Delaware Basin, the Columbus four-well pad, the 30-day IPs were sharply above what we've seen in the Delaware Basin historically. Can you just talk a little bit about where you are in the completion optimization process as far as that contributing to the much better results there, Columbus versus what is just location or acreage there being better than what we've seen in other areas in your portfolio?

C. William Giraud - Concho Resources, Inc.

Yeah. I mean, we're drilling really good Wolfcamp wells. And I think that Columbus project is an example of that. I think we're getting better and better at targeting and also continuing to refine our completions. So, I think it just reflects a good area and also good work by the team drilling really good wells.

Robert Scott Morris - Citigroup Global Markets, Inc.

Great. Thank you. Congratulations again.

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Brian Singer with Goldman Sachs. Your line is now open.

Brian Singer - Goldman Sachs & Co. LLC

Thank you. Good morning.

Timothy A. Leach - Concho Resources, Inc.

Good morning, Brian.

Brian Singer - Goldman Sachs & Co. LLC

Shifting to firm sales agreements and the realized pricing side of the equation, can you add a bit more specifics on those firm sales agreements, particularly how they provide a long-term pricing optionality as you describe, and then whether the agreements provide the flow assurance for the 90% of the crude that your gathering systems are moving, the full 100% when the including PCL sale regionally or some other percentage?

Timothy A. Leach - Concho Resources, Inc.

Yeah. Brian, let me first say that when I think about the issue of crude oil leaving the Permian Basin, it seems like there's two issues. One is can you move your crude oil and secondly what price you get paid for it. And I think as we've described, we have firm sales agreements that cover our crude oil in such a way that we have a high confidence level that our crude will move.

And then on the pricing side that we've used hedges the way we've historically used hedges for the differentials as a shock absorber that covers most of our exposure for this year and next year. So, I feel good about our position. I don't think that transportation is going to affect any of our plans. In fact, you can kind of see by the way we're ramping up that we have confidence that we're going to be able to expand going into next year. But I'll turn it to Jack to talk about any specifics he wants to talk...

Jack F. Harper - Concho Resources, Inc.

Yeah. Brian, I would add to that that the flexibility we're talking about in 2020 is just a reflection of how we attempt to style these agreements, which give that opportunity at a later date. And if history repeats itself, when you get through this period of tightness and Midland pricing becomes at parity again you have a lot more options at that point than you do today.

Brian Singer - Goldman Sachs & Co. LLC

Great. Thanks. And I guess to tie that in to the production trajectory, and I think this was covered a little bit earlier. But by virtue of increasing the scale with the longer lead time projects on slide 13, you would seem to have a lot more visibility on the cadence of wells being brought to sale not just in the next two quarters but potentially for the first three plus quarters of 2019. Is it fair to say that the second quarter and the third quarter of 2019 are when a lot of these new projects are going to come online? And to your point just now, for many that's when Permian oversupply may very well be at its worst?

Jack F. Harper - Concho Resources, Inc.

That's a fair assessment, Brian. And that does line up with the timing of a lot of these larger scale projects. So, that is correct and it's also just in line with how we were planning to go about our business anyway. So, it's nice that it lines up that way.

Brian Singer - Goldman Sachs & Co. LLC

Thanks. And are you still taking efforts to expose the company to pricing points beyond Midland and via your hedges, Cushing? And is that something that could have an impact on 2019 or is that longer term?

Jack F. Harper - Concho Resources, Inc.

Oh, it's longer term and I think you could see that optionality and price begin in late 2019, early 2020. And I feel very confident that we will have opportunities to look at it more as a portfolio approach if we choose to do that. However, we do think Midland will be a good place to price a barrel longer term due to the options that we have here.

Brian Singer - Goldman Sachs & Co. LLC

Thank you.

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Doug Leggate with Bank of America. Your line is now open.

Doug Leggate - Bank of America Merrill Lynch

Thanks, everybody. Good morning. Tim, I kind of feel as if I ask you this question every quarter, but for the combined company you're – well, on a standalone basis in Q2, you generated free cash flow. And the combined company in this commodity deck, it looks like that might continue even at a higher activity level.

How should we think about your prior comments about spending cash flow? And I think a couple of quarters ago, you talked about when you do something, it will be significant as it relates to surplus cash, whether it be dividend or buyback or something. But can you just frame your thoughts if post the Permian bottlenecks, oil prices, let's assume, hold up at this new trading range we've seen recently?

Timothy A. Leach - Concho Resources, Inc.

Yeah. Well, I think one of the most important things to start with is that these capital programs we put together are the highest rate of return capital efficient programs we've ever had in the company's history. So, a lot of our cash flow goes back into those programs because they create so much value. I would say over the longer term, though – and going into the next year or two, oil prices have been very volatile and we've been pretty conservative on how we build our capital program and what commodity price we look at for that program to breakeven.

I like the notion of generating free cash flow and growing dramatically. And so I think in the short-term, you're going to see us generating free cash flow and growing dramatically. And then, beyond 2020, I think as we've discussed in the past, we have all the options in front of us on what's the best way to create value for our shareholders, what's the optimal rate to run our machine. And I think we're just going to be really well-positioned.

Doug Leggate - Bank of America Merrill Lynch

I know it's not an easy one to answer, but I guess we'll have to wait a couple of years. My follow-up, if I may, and this really goes to my discussion with Megan last night, I realize that – do not put words in your mouth, but you really couldn't do a whole heck of a lot with RSP prior to the close. So, now that you've got a hold of this thing, you haven't given us updated outlooks for 2019 and 2020, the way you did for Concho. And I'm just wondering if I could press you a little bit to give us some idea as to maybe how you see the pro forma company growth profile over the next couple years, referencing the guidance you used to give us for Concho. I realize it's a little early, but any help would be appreciated. And I'll leave it there. Thanks.

Timothy A. Leach - Concho Resources, Inc.

Yeah. Well, I think as Jack said, our philosophies haven't changed on how we run the business. And RSP, that acquisition brings in very high-quality property. So, one of the ways we create value is by aggressively managing our portfolio of assets. You'll see that continue. And then, as we look at our capital budget and allocate capital, you're going to see capital going to the highest rate of return projects, which as Jack's described in his presentation, are bigger and bigger percentages of multi-well pads and those kind of projects. So lots of those will be on RSP.

And as far as when we give guidance for 2019, historically – we've transitioned to giving guidance after the year has been completed. I think it – we just got our hands on the steering wheel on the RSP assets, but we've already started to reallocate capital, and the earliest, I think, you could see us give you any guidance would be probably at the end of the next quarter.

Doug Leggate - Bank of America Merrill Lynch

Sorry, Tim, just to be clear, are you pointing towards an acceleration in asset sales (00:25:46)

Timothy A. Leach - Concho Resources, Inc.

I wouldn't call it – I think an acceleration would be a mischaracterization. I just think it's an ongoing aggressive portfolio management to high grade our portfolio. We've got great assets across both basins, but we will continue to very aggressively manage those, to block up, high grade and you ought to see our map getting more concentrated over time.

Doug Leggate - Bank of America Merrill Lynch

I'll take aggressive. Thanks a lot, fellows. Appreciate it.

Timothy A. Leach - Concho Resources, Inc.

All right. Thanks, Doug

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Mike Kelly with Seaport Global. Your line is now open.

Michael Dugan Kelly - Seaport Global Securities LLC

Hey, guys. Good morning.

Timothy A. Leach - Concho Resources, Inc.

Morning, Mike.

Michael Dugan Kelly - Seaport Global Securities LLC

Really just wanted to get your take, kind of at a high level, of how you see the dynamics playing out in the Permian over the next six or 12 months. Jack mentioned in his prepared remarks that production has really exceeded expectations. And as we kind of near pipeline capacity, just really curious on how you see the potential for differentials to vary? What dynamics you could see ultimately happen with producers, certain behavior, et cetera? Just really your kind of high level thoughts. Thanks.

Timothy A. Leach - Concho Resources, Inc.

Okay. Well, let me start with the high-level thoughts. And we have not had any problem moving or selling our crude oil. And historically, we've seen situations like this before where it was just two years ago that everyone was asking about access to service and supply and it came along big time for us. So, the Permian is a great place to be. Transportation resources out of the Permian I think will supply all the needs the industry has. And I think that my expectation is, from a very high level, that when there is a need and there is economics involved, that our industry is great at responding to that need.

So, I think that we've seen these blowouts in differentials before, that's why we have the type of hedging program we have. I think it's probably – this problem will be solved more quickly than anybody's estimating. And then we'll be on to the next problem.

Michael Dugan Kelly - Seaport Global Securities LLC

Fair enough. In the – I know you guys do have great basis swaps, you're protected there. How about activity levels for you guys? If differentials really do get to excessive, egregious levels, do you think about slowing activity? Or how do you respond to that?

Jack F. Harper - Concho Resources, Inc.

Mike, I mean, cash flow is the ultimate governor of our business, and we're also prudent in the way we go about our business. So, if you did have some period of dislocation that brought down the cash flow, we would match up our activity over time with that.

Michael Dugan Kelly - Seaport Global Securities LLC

I got it. Appreciate it. Thanks, guys.

Timothy A. Leach - Concho Resources, Inc.

Thanks.

Operator

Our next question comes from Michael Hall with Heikkinen Energy. Your line is now open.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Thanks, good morning.

Timothy A. Leach - Concho Resources, Inc.

Good morning.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Just wanted to talk a little bit I guess about the 2018, the back half guide on a pro forma basis. I guess as we kind of combine the two, we had a bit higher fourth quarter number in particular relative to what you all had. You talked in the deck about kind of project timing on the legacy assets and shifting to manufacturing on the RSP assets. Was wondering how much that impacted, I guess, the fourth quarter number relative to what it maybe would have been on a just kind of go forward RSP in terms of the way they had been managing that business and how quickly do we make that up? Should we expect to see a big uptick in the first quarter 2019 or how does that transition to manufacturing? How long does that have to take to play out I guess? A few questions there. Appreciate it.

Jack F. Harper - Concho Resources, Inc.

Yeah. Let me start by saying that both companies are doing well relative to our plans. And relative to our internal forecast, both look favorable to those. And most certainly, jump-starting the activity on large projects in RSP modestly defers the timing of some production. But really nothing materially different than what they had planned on those assets or what we had planned on ours, so. But it should provide us some nice momentum as we look to build a budget for next year.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Okay. And is it fair to think then we'd see a pretty healthy uptick early in 2019 just as that curves or is it likely that there's a big lump I guess early in 2019?

Jack F. Harper - Concho Resources, Inc.

Yeah, as Tim mentioned we're just now getting our arms around these. You see some actions we're taking here in the near term, which is building out infrastructure, starting on some of these larger projects on the newly acquired assets. And the earliest we would really guide, as Tim mentioned, would be next quarter. But we're excited most importantly about the added efficiency. This allows us to build a program with this new set of assets.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Okay, makes sense. And I guess last, do you have an estimated base decline for the combined company at this point like what a 12-month out decline rate might look like?

Jack F. Harper - Concho Resources, Inc.

Combined, they're similar to what ours was prior.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Is that like a low 30s type percent? Is that a reasonable level?

Jack F. Harper - Concho Resources, Inc.

Yeah, it's a little bit lower than that.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Okay.

Jack F. Harper - Concho Resources, Inc.

It depends on the timing and cadence of these projects. But yeah, somewhere in that plus or minus 30% is a good way to think about it.

Michael Anthony Hall - Heikkinen Energy Advisors LLC

Great. Appreciate that. Congrats, guys.

Operator

Our next question comes from Neal Dingmann with SunTrust. Your line is now open.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Good morning, all. Tim, for you or Jack, I just wanted to – obviously your Oryx investment continues to pay dividends here with that 24% membership interest. Was I think, last quarter you received what, almost $160 million distribution there. I'm just wondering, how should we think about that, either remainder of this year or go-forward, what else that can generate or what else we should think about around that position?

Jack F. Harper - Concho Resources, Inc.

That Oryx asset is a great asset. We were very happy that we were able to participate in that. As we described in the prepared remarks, it's helping us move that Delaware Basin oil via pipeline. And so – and it's a real business, generating real cash flow. So, we're happy with it as is or if there's a monetization opportunity in the future, that'd be fine too. But most importantly, it's serving the purpose that we hoped it would which is helping us move our barrels to better markets and better prices.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Jack, are there more opportunities like this to invest in that you think you'll see?

Jack F. Harper - Concho Resources, Inc.

There are more midstream opportunities. We try to stay true to our E&P business roots. And really, you would most likely see us only investing in those kind of projects that our equity volumes could support some large portion of the investment.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Okay. And then just one last quick one. Maybe, Tim, for you. You mentioned – nice to see the ramp in rigs, just wondered, with the efficiencies you continue to see both on the drilling and completion side, how do you think about sort of what's needed on the frac side if you're running 32 rigs? I mean, it seems like it's nice tug of war to see, you see a little more efficiencies in drilling then you see more efficiencies in the fracs. How should we think about that on a go forward?

Timothy A. Leach - Concho Resources, Inc.

We're running 10 spreads today and that seems to be adequate with the number of rigs we're running. So, that's – we're pretty happy with the balance in the business right now.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Very good. Thank you, all.

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Charles Meade with Johnson Rice. Your line is now open.

Charles A. Meade - Johnson Rice & Co. LLC

Good morning, Tim, Jack and to the rest of the team there.

Timothy A. Leach - Concho Resources, Inc.

Good morning.

Charles A. Meade - Johnson Rice & Co. LLC

I want to go back to the question you've had from a few, I guess, questioners ago on the 4Q guidance. And I appreciate the disclosure you guys put on slide 12 on your presentation, but to put some numbers to it, it looks like the kind of consensus on the Street for 4Q was maybe 3% or so higher than the – than what you guys are guiding to for 4Q. And of course, one possible explanation for that is that people in seats like mine maybe had some difficulty going from three-stream to two-stream. But the other possibility that is out there to me is that perhaps you guys are pulling in your horns a little bit in 4Q in response to the differential situation and your desire to kind of continue spending within cash flow. So, is there any aspect of that in 4Q that you guys are dialing back a bit in anticipation of lower cash flow or is this really are you on the same course that you said earlier?

Jack F. Harper - Concho Resources, Inc.

We really have not had any significant change to our plans. The modest change to RSP's plan is more investment in the back half of the year on starting these large-scale projects, both in infrastructure and in the size of the projects. But really as I mentioned before, both companies are tracking well with the previous plan and the guidance that was laid out there last quarter.

Charles A. Meade - Johnson Rice & Co. LLC

Got it. Thank you for that, Jack. And then, in a totally different direction, there's some news reports – or there are news reports yesterday and again more this morning about a pipeline fire to the southeast town where you guys are. And I'm just curious if you guys could offer any insight into whether you're affected by any of the flows on those lines. And if there's any, kind of bigger industry effect that you guys are aware of right now or might anticipate?

Jack F. Harper - Concho Resources, Inc.

Yeah. We are aware of that situation and don't anticipate any impact to our plans.

Charles A. Meade - Johnson Rice & Co. LLC

Thank you.

Timothy A. Leach - Concho Resources, Inc.

Thanks.

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Michael McAllister with MUFG Securities. Your line is now open.

Michael McAllister - MUFG Securities America, Inc.

Good morning, everyone. I was hoping that you could give me at least the metric that could work with – grow dramatically within cash flow? Is it production, resource, reserves?

Timothy A. Leach - Concho Resources, Inc.

Well, I'm not sure I really understand your question. But when I talk about growing dramatically within cash flow, I'm talking about growing production within our cash flow and generating free cash flow while we're doing that.

Michael McAllister - MUFG Securities America, Inc.

That's the answer. Okay, so it's production, the metric.

Timothy A. Leach - Concho Resources, Inc.

And we've talked about a three-year CAGR that is supported within cash flow at much lower oil prices. We kind of gave a point in time reference to that last quarter. So that's only been enhanced by this transaction.

Michael McAllister - MUFG Securities America, Inc.

Okay. That's what I was looking for. That's the answer. While I have you, can you give me an update on Eddy County? What's been going on there? Will it have a development program at some point, things kind of shift a little with RSP? Any color on that would be helpful.

C. William Giraud - Concho Resources, Inc.

Sure. You're asking about what we're going to plan to do at Eddy County? I mean it's clearly part of our Northern Delaware asset. We and other participants have been doing a lot of good work out there in the different Bone Spring intervals. We talked about a couple of wells there last quarter. But also our people are drilling a bunch of the different Wolfcamp zones and it has been part of the plan and will continue to be.

Michael McAllister - MUFG Securities America, Inc.

Okay. That's helpful. Thanks.

Timothy A. Leach - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Arun Jayaram with JPMorgan. Your line is now open.

Arun Jayaram - JPMorgan Securities LLC

Yeah. Good morning. I was wondering if you could just give us more details on the conversion from three-stream to two-stream and just the impact to RSP volumes in the second half of the year.

Jack F. Harper - Concho Resources, Inc.

Sure, Arun. As I mentioned in the prepared remarks, it's about a 10% impact to their equivalent volumes and that is starting on July 19. That is how we have forecasted those volumes combined with ours.

Arun Jayaram - JPMorgan Securities LLC

Great. Thanks for that. And just secondly, Jack, you've gone to 32 rigs and now 10 frac crews, just your thoughts on maintaining that level of activity as we move into 2019. And just wondering if – also, if you could comment broadly, in 2018, the growth rate is 22% on a pro forma basis, how the RSP assets would look like relative to that growth rate when you put that together with 2019 to 2020?

Jack F. Harper - Concho Resources, Inc.

Okay. If I understand that correctly, let me take a shot at that. We had put out guidance of 18% to 20% stand-alone. So, incrementally moving above that is what you're seeing the benefit of their assets. And previous to this deal, we had talked about our plan, which is reinvested cash flow and grew about 20%. They had talked about reinvesting their cash flow over a longer period of time and growing about 30%. So, that's a good indication of the two asset bases. But now that we have the opportunity to put them together and base the programs on the best rate of return from either set of assets, I think that's very powerful and they bring a lot of cash flow to the table as well.

Arun Jayaram - JPMorgan Securities LLC

Great. Thanks a lot.

Timothy A. Leach - Concho Resources, Inc.

Thank you.

Jack F. Harper - Concho Resources, Inc.

Thank you.

Operator

Our next question comes from Derrick Whitfield with Stifel Financial. Your line is now open.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Good morning, all.

Jack F. Harper - Concho Resources, Inc.

Good morning.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Tim or Jack, so referencing slide 13, what percentage of your aggregate completions are large-scale development projects? And then, how should we think generally about the cadence of completions over the next year assuming relatively static rig activity levels?

Jack F. Harper - Concho Resources, Inc.

So, more than half of the completions that will happen will be on these large-scale projects, and that's only going to continue to increase over time. And I'm sorry, what was the second part of your question?

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Sure. The second part of the question is how should we generally think about the cadence of completions quarter-over-quarter if we assume static rig activity levels from here?

Jack F. Harper - Concho Resources, Inc.

Sure. Yeah. Ramping into the fourth quarter, you will see progressively increasing completions throughout the back half of this year.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Okay. And as my follow-up question, regarding the Dominator pilot in Northern Delaware, how should we think about the sequencing of drilling completion and flow back operations for larger pilots like it? And specifically, when would we see first production and then when would it – how much later would it then peak?

C. William Giraud - Concho Resources, Inc.

Sure. This is Will. The goal there is to bring – to complete those wells simultaneously with multiple frac spreads and then flow them back together. And that's probably a mid to late next year timing.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Got it. Thanks for taking my questions.

C. William Giraud - Concho Resources, Inc.

Thank you.

Jack F. Harper - Concho Resources, Inc.

Thanks, Derrick.

Operator

Our next question comes from Richard Tullis with Capital One. Your line is now open.

Richard Merlin Tullis - Capital One Securities, Inc.

Hey. Thanks. Good morning, everyone. Jack and Tim, two quick questions. So, now that the RSP acquisition is closed, I know it's still early days, but could you talk a little bit about your current outlook for achieving the $2 billion plus in synergies from the deal? Do you expect to see significant synergies once you do publish your 2019 budget?

Jack F. Harper - Concho Resources, Inc.

Sure. There's a lot of value creation opportunities with that deal that we've described. I'd point you towards the corporate and interest savings, which we've already achieved. That gets you approximately a quarter of that larger number. And then, you can see by evidence of our activity in the back half of the year, we've jumpstarted these large-scale projects which we think is the biggest driver. We're also spending money on the infrastructure to support those. And then outside of that, we've identified a large number of trades that we are actively working and we continue to actively manage our portfolio via asset sales and purchases of acreage in and around some of our best areas. So, I would say we're ahead of schedule there and optimistic.

Richard Merlin Tullis - Capital One Securities, Inc.

Okay, Jack. And if you had to roughly estimate the impact on the updated 2018 budget from the synergies, what would you put that number at?

Jack F. Harper - Concho Resources, Inc.

Well, I guess it depends on how and who's calculating that. But as I said the corporate and interest savings have been achieved now. And by virtue of starting these large projects in the back half of the year, we will begin to see the fruits of those investments into next year.

Richard Merlin Tullis - Capital One Securities, Inc.

Okay. All right. Appreciate it. Thank you.

Timothy A. Leach - Concho Resources, Inc.

Thanks.

Jack F. Harper - Concho Resources, Inc.

Sure.

Operator

And at this time I'm showing no further questions. I'd like to turn the call back over to Tim Leach, CEO, for closing remarks.

Timothy A. Leach - Concho Resources, Inc.

Good. Thank you again for dialing into the call. This is an exciting time for us as we described. I want to compliment our team on excellent execution on getting this deal closed. And again, I want to welcome those RSP employees to the Concho team. So, thank you very much. We look forward to talking to you at the end of next quarter. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.