Current CXO Stock Info

Net Proceeds to Concho of Approximately $800 Million

Concho Resources Inc. (ticker: CXO) and Frontier Midstream Solutions, LLC have entered into separate agreements to sell 100% of their respective ownership interests of Alpha Holding Company, LLC, the owner of the Alpha Crude Connector system to Plains All American Pipeline, L.P. (ticker: PAA) for a combined total of $1.215 billion.

Tim Leach, Concho’s Chairman, Chief Executive Officer and President, commented, “Our investment in ACC was intended to serve two primary objectives within our core upstream business – provide pipeline infrastructure to support our rapid crude oil growth in the northern Delaware Basin and improve wellhead economics through better price realizations. With both of these objectives secured for the long term, plus the ongoing flexibility to access multiple key markets, we have accomplished our goal of developing a premier midstream solution. This sale not only represents an exceptional return on investment for our shareholders, but also reflects the quality of the substantial resource potential across the northern Delaware Basin. As we continue to focus on and deliver differentiated long-term growth across our four core areas, the proceeds from this sale provide further optionality to redeploy capital into our drilling program, fund future acquisitions and reduce long-term debt.

“I want to thank Frontier for their execution and operation of ACC, and I look forward to expanding our strong relationship with Plains. Their extensive crude oil infrastructure and logistics expertise will support our continued development of our high-quality drilling inventory in the northern Delaware Basin.”

Dave Presley, President and Chief Executive Officer of Frontier, commented, “It has been very exciting to work jointly with Concho to develop the ACC crude oil gathering system that provides a strategic midstream solution to support the continued growth of crude oil development in the prolific northern Delaware Basin.”

In 2014, Concho and Frontier formed the ACC joint venture to construct a crude oil transportation system in the northern Delaware Basin. Concho owns 50% of the joint venture with an option to purchase Frontier’s ownership interest at a predetermined multiple of invested capital. After adjusting for debt and working capital, Concho expects to receive net cash proceeds from the sale of approximately $800 million. As of December 31, 2016, Concho’s net investment in ACC was approximately $130 million. Closing is expected to occur in the first half of 2017, subject to customary terms and conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

ACC, which is the first large-scale crude oil gathering system in the northern Delaware Basin, includes a 515-mile gathering system as well as crude oil storage facilities, truck terminals and multiple receipt points. The pipeline system became operational in late 2015, and at that time, Concho commenced a ten-year crude oil acreage dedication and transportation agreement. After the closing of this transaction, the dedication and transportation agreement, which includes the tariff structure, will remain in place.

Plains intends to make investments on new interconnects and other enhancements to provide greater flow assurance and support the ongoing development of the northern Delaware Basin. In addition, Plains’ ownership of ACC will enhance access to multiple markets, including important crude oil export gateways.

Expecting crude oil production to double: PAA

“We expect aggregate crude oil production on the dedicated acreage to double over the next two to three years, and we believe that overall Permian Basin crude oil volumes have the potential to grow as much as 50% or more during this same time period,” said Greg Armstrong, chairman and CEO of Plains All American, in a company press release.

Armstrong said the system and planned enhancements will connect to PAA’s pipelines with access to markets in Cushing, Houston and Corpus Christi. PAA recently announced it was expanding the capacity on its Cactus pipeline from McCamey to Gardendale, Texas to approximately 390,000 barrels per day.

Plains said the expansion is anticipated to be completed in the third quarter of 2017 and will allow PAA to move increasing production volumes from the Permian Basin to Corpus Christi and other delivery points along the system.

BridgeTex Pipeline Company, LLC, in which PAA owns a 50% interest, announced this week it was expanding the capacity on the BridgeTex pipeline from Colorado City to Houston, Texas, to approximately 400,000 barrels per day. This expansion is anticipated to be completed in the second quarter of 2017 and will also move increasing production volumes from the Permian Basin to the Houston Gulf Coast area, the company said.

Simmons & Company International, Energy Specialists of Piper Jaffray, served as exclusive financial advisor, and Vinson & Elkins served as legal advisor to Concho.

Jefferies LLC acted as financial advisor to Plains All American in connection with the ACC acquisition.

Analyst Commentary

From Wells Fargo
CXO: $1.2B Alpha Crude Connector Sale
CXO announced the sale of its interest in the Alpha Crude Connector system (ACC) to Plains for net proceeds of $800MM (total asset proceeds of $1.215B). Since forming the JV with Frontier Midstream in 2014, CXO has invested $130MM in ACC representing 6x+ return on invested capital. The premier Northern Delaware Basin pipeline system represents 515 miles of crude gathering pipe, crude storage, and truck terminals connecting to multiple delivery points which we had conservatively valued around $500MM. We would also expect minimal tax leakage associated with sale. CXO's 10-year acreage dedication and transportation agreement will remain in place securing takeaway capacity as activity ramps in the region.

CXO has already given its 2017 framework which indicates strong crude-driven growth (about 20% corporate level) on a $1.6B budget. The $800MM of cash proceeds (expected in 1H17 pending regulatory approval) would provide dry powder for what we would expect to be faster acceleration of activity or possibly acquisition capital as the company continues to consolidate its 600K+ net acre Permian foothold spanning the Northern and Southern Delaware as well as the Midland. Think shares react well on the news of proceeds given the benefits of the pipeline system continue to accrue to CXO post-transaction.  


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