Concho Resources’ (CXO) key focus this year is apparently to strengthen its position in the Permian Basin. Earlier this year, it announced a trio of deals to enhance its position in the South Delaware Basin. On August 15, 2016, it announced its intention to acquire ~40,000 net acres in the core of the Midland Basin from Reliance Energy for $1.6 billion.
Concho Resources’ latest acquisition is another effort to strengthen its position in the Permian Basin. Read Part 1 to find out more about the acquisition.
Tim Leach, CXO’s chief executive officer, said in the November 21, 2016, press release, “With a continued focus on driving capital efficiency gains and actively managing our portfolio, this acquisition further strengthens our industry-leading position in the Permian Basin and reinforces our ability to deliver differentiated long-term growth.”
The Permian Basin boasts of one of the lowest break-even costs, as you can see in the above graph from a presentation by Bill Barrett Corporation (BBG) in October 2016. In a previous analysis on IRRs (internal rates of return) of US onshore plays, we saw that the Permian’s Midland and Delaware Basins have the highest IRRs, even at sub-$40 oil prices.
The SEC (U.S. Securities and Exchange Commission) defines internal rate of return as “with respect to any investment, a return of all capital invested in such investment plus a cumulative, quarterly compounded, return on such invested capital at a rate per annum equal to the applicable percentage specified herein.”
In Concho Resources’ 2Q16 earnings conference call, Jack Harper, the company’s CFO (chief financial officer), said that 30.0%–50.0% of its drilling inventory, located mostly in the Delaware and Midland Basins, offer IRRs of more than 20.0%.
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