Most see 2 x 3 as a simple math problem, but for Concho Resources Inc (NYSE: CXO ) it's the code name for its accelerated growth program. Over the next three years, Concho Resources plans on doubling its output over 2013 levels of 92,000 boe/d, which is where the "2 x 3" comes from.
Part of how Concho Resources plans on doubling its output is by using the proceeds from its secondary share offering, which will allow it to pay down the $294.7 million it has withdrawn from its $2.5 billion revolving credit facility. The rest of the funds will be used to grow its hydrocarbon output through an expansion of its capex program, and by building out additional midstream infrastructure to support its aggressive growth ambitions.
More cash, more wells
As Concho Resources increases its capex budget by $300 million to $2.6 billion, it plans on completing 40 additional wells with the extra cash. To do so, management plans on boosting Concho Resources' rig count, now at 33, by one each quarter throughout the year; this will allow it to end 2014 with 35 active rigs. Faster drilling times are also playing a major roll in the capex boost, as Concho Resources would have spent all of its budget before the end of the year. So far, this has had a positive impact on its production forecasts, allowing management to boost 2014 output growth guidance to 20%-24% from 18%-22%.
Another factor allowing for the upward revision is that Concho Resources was already outperforming its own guidance. In the first quarter of 2014, Concho Resources produced an average of 101,600 boe/d; this was above internal forecasts calling for 98,000-101,000 boe/d. What makes this even better is that most of Concho Resources' additional capex is going to be weighted toward the second half of the year, meaning that investors have yet to see most of the benefits from a bigger drilling program.
More productive wells, more output
Not only is Concho Resources trying to bring more wells online, but it's also making each new well produce more. The average 30-day IP rate per well in the Northern Delaware Basin increased from 765 boe/d in the first quarter of 2013 to 909 boe/d in the first quarter of 2014, an 18.8% increase in just one year.
To continue this trend, Concho Resources plans on focusing its drilling program on the second and third benches of the Bone Springs play and delineating the Wolfcamp benches. The average 30-day IP rate of each bench are as follows:
- Brushy Canyon-568 boe/d
- Avalon-690 boe/d
- First Bone Spring-499 boe/d
- Second Bone Spring-856 boe/d
- Third Bone Spring-666 boe/d
- Wolfcamp A, C, D-762 boe/d
By targeting the intervals with the highest IP rates, Concho Resources will be able to make each well contribute more toward its 2 x 3 growth plan. With half of its rigs focused on the Northern Delaware Basin, this is definitely an area to watch.
Why shoulder all the burden
In order to make sure there is ample takeaway capacity from its operations, Concho Resources has teamed up with a private company to build a 100,000 bpd crude oil pipeline servicing the northern portion of the Delaware Basin. 400 miles of an oil gathering system is going to be built along with storage facilities. If everything goes smoothly, the joint venture will have the opportunity to boost the pipeline's capacity by 20,000 bpd in the future. Management is excited by this opportunity, as it will allow Concho Resources to sell its crude to multiple markets, potentially boosting its realized oil prices in the future (which currently stands at 93%-95% of WTI.)
Currently, the pipeline is expected to come online in the second half of 2015, the same time Sunoco Logistics Partners LP's (NYSE: SXL ) 200,000 bpd Permian Express II crude pipeline is expected to come online. Sunoco Logistics Partners has been leading the pack when it comes to Permian Basin infrastructure, successfully bringing online its Permian Express I pipeline last year. The Permian Express I connects Permian crude to Nederland, TX on the Gulf Coast through Wichita Falls, TX, which receives crude from the Permian via the Basin Pipeline.
Sunoco Logistics Partners is also seeking to connect Permian Basin producers to additional markets via smaller pipelines as well. The Houston Access pipeline transports 40,000 bpd of Permian crude, and the Longview Access pipeline transports 30,000 bpd. Looking ahead, Nederland is set to receive even more Permian crude when the 40,000 bpd Nederland Access Pipeline is operational.
By building out more takeaway capacity in the Permian Basin and by expanding oil producers' access to additional markets, Sunoco Logistics Partners is allowing E&P players like Concho Resources the chance to fetch better prices for their crude. Higher realized crude prices further justify increasing capex budgets and boosting crude output, which in turn gives Sunoco Logistics Partners a reason to continue building new cash flow generating pipelines in the region. A win-win all around.
So far, Concho Resources is well on its way to doubling its 2013 production levels by 2016. Connecting its production to more markets will boost its realized prices relative to WTI, generating more cash flow for future investments. Targeting the lower benches of the Permian Basin and getting a better picture of what the Wolfcamp intervals hold will create the building blocks for growth beyond 2016. For investors looking for a pure play on the Permian Basin, take a good look at Concho Resources.
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