Why Has Concho Resources Been Eyeing the Permian Basin?
Concho’s key focus this year
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.”
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Benefits of the Permian Basin
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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