Concho Resources doubles long-lateral inventory with Red Hills bolt-on
Concho Resources Inc. (ticker: CXO) announced Monday that the company has added approximately 24,000 gross (16,400 net) acres to its norther Delaware Basin assets through a $430 million deal with an undisclosed seller. The acquired acreage is producing approximately 2.5 MMBOEPD (69% oil) and doubles the company’s long-lateral drilling inventory in the Red Hills area of the Northern Delaware Basin from which the company has posted strong drilling results in the past.
“The Red Hills area is an oil-prone fairway generating exceptional returns at current commodity prices,” Concho said in its press release Monday. “With more than 5,000 feet of resource-rich hydrocarbon column, this area is highly prospective for multi-zone development. The acquisition more than doubles the company’s long-lateral drilling inventory in Red Hills and enhances its ability to drill long laterals on existing Concho leasehold.”
Prior to Monday’s bolt-on acquisition, CXO held approximately 250,000 net acres in the Northern Delaware Basin, 125,000 net acres in the southern Delaware Basin, 110,000 net acres in the Midland Basin, and 100,000 acres in the New Mexico Shelf.
Assuming Concho paid approximately $40,000 per flowing BOE, the deal works out to about $20,000 per acre, which is materially lower than recent Northern Delaware transaction at approximately $30,000+ per acre, notes a report from SunTrust this morning.
Source: Concho. Red Hills acquisition map.
Concho Chairman, CEO and President, Tim Leach commented, “This transaction is an opportunistic bolt-on in the Red Hills area where we are consistently delivering strong well performance. Our evaluation provides for multiple opportunities to enhance value through increased density development on multi-well pads as well as additional zones beyond the Avalon Shale, Wolfcamp Shale and the emerging Wolfcamp Sands. With a continued focus on driving capital efficiency gains and actively managing our portfolio, this acquisition further strengthens our position in the Permian Basin and reinforces our ability to deliver differentiated long-term growth.”
Consideration for Monday’s Delaware Basin deal includes $150 million in cash and 2.18 million shares of Concho’s common stock (1.5% dilution). The company said it expects to fund the cash portion of the transaction with cash on hand, borrowings under its $2.1 billion credit facility and potentially non-core asset sales.
Concho upgrades full-year 2017 outlook while maintaining previous capex budget
Along with news of the company’s acquisition today, which is expected to close in January, Concho also updated the company’s full-year outlook following the deal. As a result of the bolt-on, CXO expects to grow oil production volumes by more than 20% year-over-year in 2017 and total production by 18% to 21%, up from a previously disclosed guidance range of 17% to 20%. Concho plans to operate an average of eight rigs in the Northern Delaware Basin during 2017, up one from its previous guidance.
The company does not plan to change its previously announced capital budget to achieve this increased production, however. Concho will maintain its capital expenditure plan of $1.4 billion to $1.6 billion for next year, it said in its press release. CXO expects to fund its 2017 capital program within cash flow. The capex plan excludes acquisitions and is subject to change depending “on a number of factors, including prices and industry conditions,” the company said in its release.
Following the announcement today, Stephens said it is still modeling leverage “remaining conservative with YE17 net debt-to-EBITDAX of ~2.2x” for the company.
Permian assets offering 20% IRRs at $40 oil
Low oil prices have force E&P companies to improve efficiencies wherever possible, and Permian operators like Concho have seen a great deal of success, explaining the flight of capital to the play. Concho believes that, even at $40 oil, it has multiple decade’s worth of inventory with greater than 20% internal rates of returns (IRRs) in the Permian.
Speaking during a conference call in August, Leach said between 30% and 50% of the company’s Permian assets offer IRRs above 20%. These high returns were thanks in large part to improved operating efficiency and not lower service costs, Concho’s management said.
“The Permian Basin’s kind of where everybody wants to be. So, there’s been equipment and people moving in here from other basins,” Leach said during the call. “So, I think we’ve got plenty of spare capacity in all respects. And so, I don’t think we feel any cost pressure on the upside, and there may still be some room to move lower.”
Analyst Commentary
Tudor Pickering Holt
CXO bolt-on acquisition of 16.4k net acres in N. Delaware Basin ($130.05 – B) – We estimate CXO is paying ~$21k/acre for 24k gross (16.4k net acres) in the N. Delaware Basin (~10k net in the Red Hills area in Lea County, NM) for $430mm, net of 2.5mboepd (69% oil) of PDP production from an undisclosed seller. Deal is expected to increase efficiencies by expanding long lateral inventory and taking advantage of the multi-stack pay (TPHe multiple Avalon, Bone Spring, Wolfcamp formations) in the area. Financing for the transaction with $150mm cash and 2.18mm shares of CXO common stock and is expected to close in January 2017. Planned rig count for 2017 in the N. Delaware increases by +1 to 8 rigs in 2017, with overall production guidance increased to 18-21% y/y overall (+17-20% previously) for the same $1.4-1.6B capex program within cash flow at strip.
Capital One
• Concho, an advocate of long-term consolidation in the Permian, is acquiring ~16.4K net acres in the northern Delaware Basin for $430MM (($150MM cash + 2.18MM CXO common shares representing ~1.5% of current share count) with the transaction expected to close in January 2017. The acreage being acquired is located in Lea & Eddy Counties (~10K in the Red Hills area in southern Lea) and includes ~2.5 Mboe/d (69% oil) of current production.
• Deal metrics work out to ~$19K/acre after assigning $122MM of production value based on $60K per flowing bbl/d. Although not a large deal on a relative basis (equates to ~2% of CXO's current EV), the transaction boosts our NAV by $3 to $153 while increasing our 2017 production estimate to 184.3 Mboe/d (+22% y/y) from 181.3 Mboe/d. The new acreage should allow for CXO to drill substantially more long laterals in Red Hills (an area where the company recently drilled 2 Upper Wolfcamp wells with avg peak 30-day rate of 2,385 boe/d on 6,826 avg laterals).
Stephens
CXO announced it is adding to its northern Delaware position with the acquisition of ~16.4K net acres for $430 million, which will be funded by $150 million in cash and 2.18 million shares to the sellers (1.5% dilution). The acquisition doubles CXO's long-lateral drilling inventory in Red Hills, and assuming $40K per flowing Boe on 2.5 Mboepd (69% oil) in current production, the Company paid ~$20K per acre, which we believe is a fair price. CXO also increased FY17 production guidance from 17%-20% to 18%-21% while leaving FY17 Capex guidance at a range of $1.4 billion-1.6 billion and reiterating plans to fund that capital program within cash flow. We remain OW.
Wells Fargo
CXO announced an acquisition of 16,400 net acres in the Northern Delaware for $430MM or about $20,000 per net acre (undeveloped). Transaction includes 10,000 net acres in the Red Hills development area in Lea County, NM where the company released strong well performance during 3Q earnings, successfully testing the Wolfcamp Sands and confirmed multibench potential within the Avalon Shale. Acquisition increases Red Hills footprint by 25% to 47,000 net acres and effectively doubles long lateral drilling locations in the area. Remaining 6,400 net acres consists of blocks spanning into Eddy County adjacent to CXO’s existing position. Importantly, CXO plans to leverage existing Northern Delaware infrastructure given the acquired acreage is nearby its Alpha Crude Connector gathering system.
SunTrust Robinson Humphrey
Concho announced a $430 million acquisition of 16,400 Lea/Eddy Counties
NM acres (~$20k/acre backing out production) that not only expands the
company’s footprint in the highly attractive Red Hills area, but doubles longlateral
drilling opportunities in the area. As a result of the announced deal and
plans to add an 8th rig in the Northern Delaware, Concho increased its 2017
total production guidance to 18%-21% up from previously guidance range of
17%-20%. Stock should outperform today on the positive news including the
higher guidance.
Stifel
CXO continues to aggressively expand one of the largest acreage positions in the
Permian Basin. The company has now spent $2.1B to acquire 54M net acres in the
basin this year via several large transactions. While roughly neutral to
our NAV estimate, the new assets should add value over time with improved
completions, tighter spacing, and emerging zones.
