Concho Resources Inc. (CXO) (the “Company” or “Concho”) today reported results for the third quarter of 2014 and provided an outlook for 2015.
Highlights
- Concho delivered record quarterly production, exceeding 10 million BOE, and achieved 23% crude oil production growth over the same quarter a year ago.
- Production for the third quarter of 2014 averaged 113.5 MBoepd and was negatively impacted by approximately 2 MBoepd due to weather-related downtime.
- The Company continued to deliver industry-leading well performance in the northern Delaware Basin.
- Earnings for the third quarter of 2014 totaled $2.69 per diluted share, or $1.09 per diluted share on an adjusted basis1 (non-GAAP). This compares with earnings of $0.29 per diluted share, or $1.06 per diluted share on an adjusted basis, in the third quarter of 2013.
- EBITDAX2 (non-GAAP) increased for the sixth consecutive quarter to $536.4 million.
- Cash flows generated from operating activities in the first nine months of 2014 totaled $1.3 billion. Adjusted cash flows3 (non-GAAP) generated from operating activities in the first nine months of 2014 also totaled $1.3 billion, up 39% over the same period last year.
- Concho is targeting 28% to 32% year-over-year production growth in 2015 with a $3.0 billion capital program. The Company is on track to accomplish its Two-by-Three Growth Plan to double production in 2016 over 2013.
Tim Leach, Chairman, Chief Executive Officer and President, commented, “Concho delivered strong results this quarter, even as we faced challenges from flooding in the northern Delaware Basin. Our team did a great job minimizing the production downtime that resulted from the flooding. In addition, through our implementation of enhanced drilling and completion techniques, we’re making better wells and driving efficiencies throughout our assets in the Permian Basin. Posting another quarter of successively higher production, cash flow and well results underscores our strategy to invest in high-margin, high rate-of-return projects.”
Third Quarter Operations Summary
Production for the third quarter of 2014 totaled 10.4 million barrels of oil equivalent (MMBoe), or an average of 113.5 thousand Boe per day (MBoepd), up 20% from the third quarter of 2013 and 6% from the second quarter of 2014. Production for the third quarter of 2014 consisted of 6.7 million barrels (MMBbls) of crude oil and 22.5 billion cubic feet of natural gas. Crude oil production of 6.7 MMBbls represents a 23% and a 7% increase over the third quarter of 2013 and the second quarter of 2014, respectively. The third quarter of 2014 marks the 19th consecutive quarter of crude oil production growth from continuing operations.
Heavy rainfall and flooding late in the third quarter disrupted the Company’s operations, primarily in the northern Delaware Basin, causing production downtime, road closures and drilling and completion delays. The Company estimates weather-related downtime negatively impacted third quarter production by approximately 2 MBoepd. Had such impacted production been included in third quarter’s production, the Company would have delivered production at the high end of the Company’s third quarter guidance range.
During the quarter, the Company started drilling or participated in a total of 153 gross wells, of which 123 were operated by the Company, and completed 120 gross wells. The table below summarizes the Company’s drilling activity by core area for the third quarter of 2014.
|
Number of Wells |
Number of |
Number of Wells |
||||||||||
| Delaware Basin | 79 | 59 |
67 |
|||||||||
| New Mexico Shelf | 29 | 21 |
19 |
|||||||||
| Texas Permian | 45 | 43 |
34 |
|||||||||
| Total | 153 | 123 |
120 |
|||||||||
| Percent Horizontal | 71 | % | 67 | % |
78 |
% | ||||||
Delaware Basin
The Company’s production in the third quarter of 2014 from horizontal wells in the Delaware Basin totaled 55.2 MBoepd, up 64% over the third quarter of 2013 and 12% over the second quarter of 2014. During the third quarter, Concho drilled 79 wells in the Delaware Basin, including 57 wells targeting the Bone Spring sands, 16 wells targeting the Wolfcamp shale, five wells targeting the Brushy Canyon and one well targeting the Avalon shale.
In addition, Concho continues to deliver industry-leading well results in the Delaware Basin. In the northern Delaware Basin, the Company has 40 new wells with at least 30 days of production as of September 30, 2014. The average peak 30-day and 24-hour rates for these 40 wells were 1,015 Boepd (73% oil) and 1,576 Boepd, respectively, from an average lateral length of 4,749 feet.
In the southern Delaware Basin, the Company has nine new wells with at least 30 days of production as of September 30, 2014, five of which are extended laterals. The average peak 30-day and 24-hour rates for these nine wells were 991 Boepd (79% oil) and 1,427 Boepd, respectively, from an average lateral length of 5,607 feet.
New Mexico Shelf
The Company’s operations on the New Mexico Shelf were previously impacted by high line pressure and insufficient gas processing capacity. With these midstream issues substantially resolved, the Company accelerated vertical development during the third quarter with the addition of two rigs. The Company added 12 new horizontal wells with at least 30 days of production as of September 30, 2014, targeting the Yeso. The average peak 30-day and 24-hour rates for these wells were 336 Boepd (85% oil) and 469 Boepd, respectively. The Yeso is a shallow oil target where we have a sizeable inventory of low cost, high return vertical and horizontal projects.
Texas Permian
Concho completed nine horizontal wells in the Midland Basin targeting the Upper Wolfcamp during the third quarter with average peak 30-day and 24-hour rates of 805 Boepd (80% oil) and 1,019 Boepd, respectively, from an average lateral length of 5,853 feet. In the Midland Basin, the Company is testing multi-zone potential targeting the Wolfcamp shale and Spraberry zones while optimizing lateral placement and completion design.
Concho is currently running 37 drilling rigs, including 24 horizontal rigs in the Delaware Basin, four (two horizontal) rigs in the New Mexico Shelf and nine (five horizontal) rigs in the Texas Permian. Concho is currently running the largest horizontal drilling program in the Permian Basin with a total of 31 horizontal rigs.
Third Quarter Financial Summary
Revenues for the third quarter of 2014 were $700.3 million, up 7% compared with the same period a year ago.
Net income for the quarter totaled $305.2 million, or $2.69 per diluted share, compared with net income of $30.4 million, or $0.29 per diluted share, in the third quarter of 2013. Net income for the third quarter of 2014 included several non-cash or non-recurring items, including a $326.2 million gain on derivatives, $14.7 million in cash receipts from commodity derivatives, a $15.5 million impairment of long-lived assets primarily relating to non-core Delaware Basin properties, $4.6 million of leasehold abandonments and a $0.8 million gain on the disposition of assets.
Excluding these items, adjusted net income4 (non-GAAP) for the third quarter of 2014 was $123.2 million, or $1.09 per diluted share, compared with adjusted net income (non-GAAP) of $111.1 million, or $1.06 per diluted share, for the third quarter of 2013.
EBITDAX5 (non-GAAP) for the third quarter of 2014 totaled $536.4 million, an increase of 18% over the third quarter of 2013.
The Company’s total realized price during the third quarter of 2014, excluding the effect of commodity derivatives, was $67.07 per Boe, compared with $75.20 per Boe during the third quarter of 2013. The lower total realized price in the 2014 period reflects lower crude oil prices and an increase in the discount of WTI-Midland to WTI-Cushing, partially offset by slightly higher natural gas prices.
Cash flows generated from operating activities in the first nine months of 2014 totaled $1.3 billion, compared with $944.6 million in the same period last year. Adjusted cash flows6 (non-GAAP), which are cash flows from operating activities adjusted for settlements on derivatives not designated as hedges, were $1.3 billion for the first nine months of 2014, as compared to $907.0 million for the same period last year, reflecting an increase of 39%.
Financial Position and Liquidity
As of September 30, 2014, Concho’s balance sheet included $98.9 million of cash and cash equivalents and total long-term debt of $3.4 billion. The Company’s net debt-to-EBITDAX7 (non-GAAP) was 1.7 times at September 30, 2014. Concho had $2.5 billion available for future borrowings under its revolving credit facility and no borrowings outstanding as of September 30, 2014.
Outlook
Due to the lingering effects of the flooding in the northern Delaware Basin at the end of the third quarter, the Company currently estimates that fourth quarter production will be negatively impacted by approximately 1.3 MBoepd. As a result, the Company expects fourth quarter production to be within the range of 122 MBoepd to 127 MBoepd. In addition, the Company expects fourth quarter lease operating expense (LOE) per Boe to be consistent with third quarter LOE per Boe due to repairs to roads and production facilities damaged by the floods.
2015 Capital Program
Concho is targeting year-over-year production growth of 28% to 32% in 2015 and expects to spend approximately $3.0 billion. The Company’s capital program includes $2.7 billion for drilling and completions and $300 million for facilities, leasehold acquisitions, midstream, geological and geophysical (“G&G”) and other capital. As the Company optimizes drilling and completion techniques, the development program requires fewer rigs than originally planned to achieve the Company’s Two-by-Three Growth Plan and further extends Concho’s inventory. As a result, the Company plans to operate an average of 39 drilling rigs in 2015, with 34 rigs drilling horizontal wells.
Commenting on the Company’s 2015 capital program, Mr. Leach said:
“The 2015 capital program reflects our continued execution on the Two-by-Three Growth Plan – a plan that balances high growth through the doubling of our production from 2013 to 2016 and improvement of the Company’s leverage metric. We are mindful of the significant decline in crude oil prices as we stress-test our capital program against various commodity price scenarios.
“Concho is well positioned to navigate the commodity price cycles as a result of our inventory of high rate-of-return projects, ongoing capital efficiency improvements, strong balance sheet and hedges. During times of volatility, preserving our financial strength is a high priority. Therefore, we will recalibrate our capital program and activity level if conditions warrant.”
Approximately 90% of the Company’s 2015 capital for drilling and completions will be directed to horizontal development in the Permian Basin. The Company plans to allocate approximately $1.7 billion of capital for drilling and completions in the Delaware Basin, approximately $600 million in the Texas Permian and approximately $380 million in the New Mexico Shelf.
The following table summarizes the Company’s operational and financial guidance for 2014 and 2015. The Company’s capital expenditures guidance for 2014 excludes contributions to the Company’s midstream joint venture and other capital.
| 2014 | 2015 | |||||
| Production | ||||||
| Year-over-year production growth | 20% – 24% | 28% – 32% | ||||
| Oil mix | 62% – 64% | 63% – 65% | ||||
| Price realizations, excluding commodity derivatives (percent of NYMEX) | ||||||
| Crude oil (per Bbl) | 90% – 92% | 90% – 93% | ||||
| Natural gas (per Mcf) | 120% – 140% | 120% – 140% | ||||
| Operating costs and expenses | ||||||
| Lease operating expense: | ||||||
| Direct lease operating expense ($/Boe) | $8.00 – $8.50 | $8.00 – $8.50 | ||||
| Oil & natural gas taxes (% of oil and natural gas revenues) | 8.25% | 8.25% | ||||
| General and administrative (“G&A”) expense ($/Boe): | ||||||
| Cash G&A expense | $3.50 – $4.00 | $3.40 – $3.90 | ||||
| Non-cash stock-based compensation | $1.15 – $1.25 | $1.10 – $1.20 | ||||
| Depletion, depreciation and amortization expense ($/Boe) | $23.00 – $25.00 | $24.00 – $26.00 | ||||
| Exploration, abandonments and G&G ($/Boe) | $1.50 – $2.50 | $1.50 – $2.50 | ||||
| Interest expense ($ in millions): | ||||||
| Cash | $210 – $215 | $215 – $225 | ||||
| Non-cash | $10 | $10 | ||||
| Income tax rate | 39% | 38% | ||||
| Percent deferred of total taxes | 75% – 85% | 75% – 85% | ||||
| Capital expenditures ($ in billions) | $2.6 | $3.0 | ||||
The Company’s guidance is forward-looking information that is subject to a number of risks and uncertainties, many of which are beyond the Company’s control. See “Forward-Looking Statements and Cautionary Statements” below. In addition, our 2015 capital program is subject to change depending upon a number of factors, including economic and industry conditions at the time of drilling and prevailing and anticipated prices for crude oil and natural gas.
Commodity Derivatives Update
The Company enters into commodity derivatives to manage its exposure to commodity price fluctuations. For calendar year 2015, Concho currently has swap contracts covering approximately 41.8 thousand barrels (MBbls) per day of expected crude oil production at a weighted average price of $87.73 per Bbl. Concho also currently has basis swap contracts covering approximately 30.5 MBbls per day of expected crude oil production at a weighted average price of $3.73 per Bbl for calendar year 2015. Please see the table under “Derivatives Information” below for more detailed information about the Company’s current derivatives positions.
Conference Call
Concho will discuss third quarter results on a conference call tomorrow, November 6, 2014, at 8:30 AM CT. To participate in the call, dial (800) 706-7745 (passcode:68939783). The simultaneous webcast of the conference call will be available at www.concho.com. A related presentation is now posted on the Company’s website. To access the presentation, visit www.concho.com and select “Investor Relations,” then “Presentations.”
A replay of the conference call will be available on the Company’s website or by dialing (888) 286-8010 (passcode:10103075).
About Concho Resources Inc.
Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company’s operations are primarily focused in the Permian Basin of Southeast New Mexico and West Texas. For more information, visit the Company’s website at www.concho.com.
