As the Permian Basin gains attention, investors need to become more acquainted with Concho Resources (NYSE:CXO). The company is a leading pure-play operator in the basin, producing over 20% production growth and generating solid profits.

While the company's stock has surged recently, it is cheap compared to fellow Permian operator Pioneer Natural Resources (NYSE:PXD). It also offers an important lesson to investors focused on the attention-grabbing companies such as SandRidge Energy (NYSE:SD). While SandRidge Energy was busy making deals for assets, Concho Resources quietly built up a solid acreage position and is now reaping the rewards of strong production growth.

Oil focused
Concho is focused on the Permian Basin, where it has 605,000 net acres. The Permian has recently become a hot area with multiple zones of oil in the basin.

Last quarter, the company produced 97 MBoepd. Concho has estimated proved reserves of 503 MMBoe at year-end with a resource potential up to six times those proved reserves. The oil portion of production saw a 25% increase over fiscal year 2012. In total, crude oil accounted for 64% of fourth-quarter production and a substantial 83% of revenue.

As the slide below highlights, the shift toward oil production continues to gain momentum with the company starting 2012 with a mix of 60% oil.

Screen Shot

Source: Investor presentation

Oddly, SandRidge Energy made a push toward oil but sold Permian assets to Sheridan Production Partners II back in 2012 for $2.6 billion. The Permian assets were producing 24,500 Boed with a mix of 67% oil. The company chose to focus on the Mississippian where it had 1.85 million net acres at that point. While the market favors companies that are focused, SandRidge Energy made the decision to exit a very attractive basin right when horizontal drilling took it to the next level.

Horizontal drilling shift
Interestingly, Concho Resources drilled or participated in 633 gross wells during 2013 with only 44% of wells horizontal. Concho continues to transition to full-scale horizontal drilling in the Permian Basin, leading to the 20% production growth forecasts. The company forecasts doubling production by 2016 due to a substantial ramp in rigs used for horizontal drilling. The company went from an average of only 12 rigs during 2012 to 30 currently.

Screen Shot

Source: Company presentation

Pioneer Resources is making a similar move, with plans to double production by 2018. For 2013, the company grew oil production from continuing operations by 22% and targets growth of up 20% each year. Similar to Concho Resources, the growth is being obtained by shifting focus to horizontal drilling. In the Spraberry/Wolfcamp area, the company increased the horizontal rig count from five rigs at the end of 2013 to 16 rigs by the end of the first quarter.  

For the long-term prospects, Pioneer Resources estimates that the net recoverable resource potential rose from more than 8Bboe to more than 10Bboe. This compares very favorably to the 3Bboe estimated by Concho Resources.

Bottom line
The interesting part of the story for Concho Resources is that the company is already solidly profitable and generates a substantial amount of EBITDAX. The company trades at a very attractive 22 times forward earnings compared to a much higher 29 times for Pioneer Resources. With the growth potential in the Permian, Concho Resources is the cheaper alternative in the group.

Mark Holder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.