Concho Resources' (CXO) bread-and-butter business is drilling wells into the prolific Permian Basin. However, in addition to spending money to boost its oil and gas output, the company has also invested in building out the necessary midstream infrastructure to move its production from wells toward market hubs.

These investments have turned out to be very lucrative. The company has already cashed in on two midstream developments. That success is leading Concho to invest in another infrastructure start-up, in hopes of cashing in once again.

A barrel on a gray floor with money bursting out of it, with a happy businessman celebrating next to it

Image source: Getty Images.

Building out Beta to connect crude to market centers

Concho Resources is forming a 50-50 joint venture with Frontier Midstream Solutions to build a crude-oil gathering, transportation, and storage services business. The partnership will support Concho's operations in the Northern Midland Basin, which is on the eastern side of the Permian. The Beta Crude Connector (BCC) will consist of a 100-mile gathering system and 250,000 barrels of crude storage facilities as well as truck terminals. The pipeline system will transport 150,000 barrels per day (BPD) to downstream pipelines, where it can flow to local refineries as well as market centers.

Concho signed a long-term contract to supply the system with crude oil from wells drilled in the area. However, the partners are also soliciting interest from other producers for capacity. They expect to start construction after seeking additional commitments to the project, and aim to begin transporting oil by midyear.

An uncovered pipeline construction site with sand around it

Image source: Getty Images.

Following a successful model

BCC is the second midstream partnership between Concho and Frontier; the two companies also formed a joint venture to develop the Alpha Crude Connector (ACC) system in 2014. They built ACC to support Concho's growing oil production in the northern Delaware Basin, on the western side of the Permian. Through the end of 2016, Concho invested $130 million in building the 515-mile system.

The partners went on to sell ACC to Plains All American Pipeline (PAA 0.59%) in early 2017, for $1.215 billion. Concho received roughly $800 million in cash for its 50% stake. That sale not only provided Concho with a huge cash windfall, but also transferred future investment spending on the system to Plains All American.

Concho also made an investment in the Oryx I oil gathering and transportation system in 2015. It held a 23.75% stake in that entity, which focused on gathering oil from wells in the southern part of the Delaware Basin. The company invested about $45 million into Oryx to support its growth. Concho received a $157 million cash disbursement from Oryx last year as a result of a recapitalization of that entity. It's set to collect another $300 million after the company and its partners agreed to sell the entire system to a private equity fund earlier this month. That brings the total proceeds up to $457 million, which is more than 10 times its original capital investment in Oryx.

These midstream investments have provided Concho with significant cash windfalls. It has used those funds to firm up its already strong balance sheet, putting it in position to start returning some of its free cash flow to shareholders. It did that by initiating a dividend late last year; it could send back additional cash by following its peers and authorizing a stock repurchase program.

Going back for a third helping

Concho Resources has successfully cashed in on two midstream infrastructure developments in the Permian Basin. It's now potentially setting itself up for another big payday by developing BCC. These high-return investments have given the company the money to fortify its balance sheet. That's boosted its financial flexibility, so it can continue expanding production while returning some of its growing stream of excess cash to shareholders. Those factors help position the company to continue generating market-crushing returns, as it's done since its formation more than a decade ago.