EUR 850.00 For Business Accounts Only

Morningstar | Concho is the largest shale producer in the Permian Basin.

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. Prior to the RSP acquisition the company was aiming for 20% annual production growth through 2020, while spending within cash flows. We think the combined company can do better than that in the short run. It is currently the most active driller in the basin, with 32 horizontal rigs, and on a year-on-year basis 2019 volumes should be at least 27% higher, after normalizing for the RSP acquisition. In the longer term we expect surging shale growth to pressure global oil inventories and prices, and if that forecast is accurate Concho, like other shale producers, may need to dial back its activity. Nevertheless, the firm's ability to tolerate periods of weaker commodity prices is far beter than most peers, due to its very strong balance sheet as well as its highly competitive position on the cost curve.