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Morningstar | CXO Updated Forecasts and Estimates from 07 Jun 2019

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 over 600 thousand net acres in the play, and the vast majority is located in areas characterized by particularly impressive flow rates and recoveries. Accordingly, we believe the majority of Concho's 26,000 potential drilling opportunities have West Texas Intermediate break-evens under $40.The Northern Delaware Basin is the cornerstone of Concho's Permian portfolio, as initial production rates often exceed 150 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 now centers on cash flow neutral production growth, which Concho is well-positioned to deliver under a wide range of commodity price scenarios. Management was originally planning to run 34-38 horizontal rigs in 2019, but it changed tack after crude prices slumped at the end of 2018 (the final budget for 2019 was 17% lower than preliminary guidance, and was calibrated around a $50 assumption for WTI). The big question is how Concho will respond if prices recover, and early indications are that it will continue to prioritize returns, rather than growth. Management has not ruled out opportunistic deployment of additional capital, but going forward we think it is more likely that commodity-related windfalls will fund stock repurchases or deleveraging.