Though Permian Basin-focused oil and gas producer Concho Resources (CXO) recently reported a 42% decline in full-year 2013 earnings, the company's results highlight continued success in delivering strong, oil-weight production and reserve growth from its core Permian Basin operations. And with a plan to sharply accelerate activity over the next few years, Concho's production is set to double by 2016.

Photo credit: Paul Lowry on Flickr.

Solid production and reserve growth
Concho reported net income of $251.0 million, or $2.39 per diluted share, for the full year 2013, down from $431.7 million, or $4.15 per diluted share, in 2012. However, the year-over-year decline in profits was due mainly to non-cash and unusual items such as derivatives losses, impairments, and leasehold abandonments.

On the plus side, however, Concho's production for the full year 2013 totaled 33.6 MMBoe, up 20% from the previous year, while crude oil production grew by an even more impressive 25%. Concho has now delivered quarter-over-quarter growth in oil production for 16 straight quarters, which is quite commendable.

Further, its production mix continues to become oilier, with crude oil's share of its total production increasing to 63% last year, up from 60% in 2012. As the company moves forward with its acceleration plan over the next three years, this shift toward a more oil-weighted production mix should continue, driving stronger returns as long as crude prices stay high.

Concho also delivered impressive reserve growth, with year-end 2013 proved reserves totaling 503 MMBoe, up from 447 MMBoe at the end of 2012. This helped the company replace 266% of its production through the drill bit at a relatively low finding and development (F&D) cost of less than $17 per Boe. This is important because it shows Concho is replacing a lot more than it produces with new reserves at competitive costs.

In fact, the company nearly doubled its number of remaining drilling locations to more than 22,000 from the previous year. Crucially, much of these additional locations are located in the Delaware and Midland Basins, where the company is generating exceptionally strong returns. Overall, Concho reckons its resource potential is about six times its proved reserves.

Strong results in the Delaware Basin
Concho is performing especially well in the northern and southern Delaware Basin, where the company's shift toward longer laterals in some parts of the basin is yielding stellar initial results. In the southern Delaware basin's Wolfcamp shale, for instance, the company's recently drilled wells posted an average 30-day initial production (IP) rate of 984 Boe/d, of which a whopping 80% was oil.

Several other operators are also seeing solid results from the Wolfcamp. For instance, Devon Energy (DVN 0.44%) reported that one of its Wolfcamp wells drilled during the fourth quarter yielded an average initial 30-day production of 950 Boe per day. This year, the company plans to continue derisking the play, where it commands more than 100,000 net prospective acres.

Occidental Petroleum (OXY 0.60%), the largest producer in the Permian Basin, is also optimistic about the Wolfcamp. Encouraged by strong test results from the Wolfcamp A and B benches, the company plans to boost its capital spending in the Permian by $450 million this year to drill more horizontal wells and test its remaining Wolfcamp benches.

Linn Energy (LINEQ) is also a big believer in the Wolfcamp, where it now holds approximately 60,000 net acres with horizontal potential following the merger with Berry Petroleum. The company believes it can drill about 675 horizontal wells across its Wolfcamp acreage and is currently evaluating multiple strategies to develop its inventory, including joint ventures and asset trades.

The bottom line
Concho has proven itself as one of the more capable drillers in the liquids-rich Permian basin. With drilling activity set to accelerate over the next three years, and with an expanded inventory of low-risk locations across the vast play, the company should have no problem delivering continued double-digit production and reserve growth. It is targeting 25% annual production growth over the next three years, which implies a doubling of production by the end of 2016.