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Morningstar | Concho Is a Permian Pure Play With Assets in the Midland and Delaware Basins

Concho Resources is a shale producer based in Midland, Texas. Since inception in 2004, the company has focused exclusively on the Permian Basin and has grown into one of the dominant players in the region. The drillbit has always been the company's primary expansion tool, but it has made several large-scale acquisitions in its history as well (including RSP Permian, which it acquired in July 2018). In total, the firm holds 640,000 net acres in the play, and the vast majority is located in areas characterized by particularly impressive flow rates and recoveries. That translates to a sustainable cost advantage for the company--the majority of Concho's 26,000 potential drilling opportunities have West Texas Intermediate break-evens in the low $30s.The Northern Delaware Basin is the cornerstone of Concho's Permian portfolio, as initial production rates often exceed 200 boe/d per 1,000 of lateral. That makes this area the cheapest source of unconventional oil in the U.S., and that's where most of Concho's undeveloped acreage is located. Nevertheless, returns are not shabby in the Southern Delaware and Midland Basin areas either, and both will make a significant contribution to production growth in the next few years.The strategy centers on cash flow neutral production growth, which Concho is well-positioned to deliver under a wide range of commodity price scenarios. The company is aiming for at least 25% annual production growth through 2020, assuming $55-$60/barrel West Texas Intermediate. To achieve that it will utilize 34-38 horizontal rigs, making it the most active driller in the Permian basin. But that level of breakneck growth is not sustainable, in our view. If left unchecked, surging shale growth will eventually put pressure on global oil inventories, and at that point Concho, like other shale producers, will need to dial back its activity. Nevertheless, the firm's ability to tolerate periods of weaker commodity prices is far better than most peers, due to its very strong balance sheet as well as its highly competitive position on the cost curve.