Concho Resources Inc. (CXO)

CXO 
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Concho Resources Inc. (CXO)

Q4 2011 Earnings Call

February 23, 2012 10:00 AM ET

Executives

Price Moncrief – Director, Corporate Development

Tim Leach – Chairman and CEO

Joe Wright – Chief Operating Officer

Jack Harper – Senior Vice President and Chief, Staff

Matt Hyde – Explorations, VP

Analysts

John Freeman – Raymond James

Neal Dingman – SunTrust

Scott Hanold – RBC Capital Markets

Jessica Chipman – TPH

Pearce Hammond – Simmons & Company

Bob Morris – Citigroup

Rhys Williams – Global Hunter Securities

Irene Haas – Wunderlich Securities, Inc.

Richard Tullis – Capital One Southcoast

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Fourth Quarter 2011 Concho Resources Incorporated Earnings Conference Call. My name is, Chris, and I’ll be your conference moderator for today. Presently, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions)

At this time, I would now like to turn the conference over to your presenter for today, Mr. Price Moncrief, Director of Corporate Development. Sir, you may proceed.

Price Moncrief

Good morning, everyone. We’re glad you could join us today for Concho’s fourth quarter and year end 2011 conference call. Before we get started, I’d like to direct your attention to the forward-looking statement disclaimer contained in the press release.

In summary, it says that statements in the press release and on this conference call that states the company’s or management’s expectations, or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under the federal securities laws. There are many factors that could cause actual results to differ materially from our expectations, including those we’ve described in the press release, our 10-K and other filings with the SEC.

In addition, we will reference certain non-GAAP measures, so be sure to see the reconciliations in our earnings release.

On today’s call, I’m joined by Tim Leach, our Chairman and CEO; and Joe Wright, our COO. He will discuss our 2011 results. We are also joined by other members of our management team, who will be able to answer questions later on the call.

With that, I’d like to turn the call over to Tim.

Tim Leach

Thanks, Price, and thanks everyone for joining the call. The management team is with me here in Houston, where we just concluded our quarterly board meeting and we’re looking forward to spending some time at the [late] conference.

I was pleased at this meeting to welcome Gary Merriman to the Concho Board. Gary’s careers included 26 years at Conoco, where he ultimately retired as President of Conoco ENP in 2002, and he recently served as a Board member of Petrohawk. So we’re very pleased to add his talent to our team.

Before I turn the call over to Joe to discuss the operational highlights, let me comment on what I think are some of the important achievements for the year. 2011 will be remembered as the year that natural gas prices collapsed and everyone tried to get oily.

As a result, more attention was directed toward the Permian, where a combination of new technology, courage and luck unlocked new sources of oil from overlook formations. The industry discovered vast new resources. Concho finds itself right in the middle of the action. People and equipment are moving to the Permian, we are reaching record levels of activity.

Profit margins remain high even with the lower natural gas prices. Our cash margins are as strong as they’ve ever been. To that point, it’s worth highlighting that less than 10% of our revenue came from the sale of residual gas in ‘11.

The main challenge at Concho in the short-term is to capture as much of this opportunity as possible without over extending. We’ll have to be very selective in the opportunities that we choose to pursue and there are now many, many opportunities.

Now for the more mundane achievements. We ended the year with record levels of production, reserves and cash flow. Production grew 51%, 27% organic organically. Reserves were up nearly 20% and we drilled over 800 wells.

To put things into perspective, Concho is now the second largest producer on a gross operated basis in the Permian. While it seems like an uneventful year for Concho, we signed up over $600 million in acquisitions. We added 185,000 new acres to our inventory through leasing and acquisitions. We sold our Bakken assets for $200 million. We completed a $600 million bond offering and we hired 219 new employees. That’s a lot of activity for such quiet year.

Let me talk a moment about our assets. We continue to be encouraged by our result in the Delaware Basin. This core asset now is contributing 16% of the company’s total production. That’s up from just 7% in the first quarter.

Our team has now drilled about 180 horizontal wells here since 2009 and continued to expand our knowledge and confidence in this play. This opportunity is quite large, both geographically and from the standpoint of multi-stack pays. We’re continuing to identify highly productive pay zones up and down the strake column.

There’s been a lot of excitement lately on the Wolfcamp play primarily in the Midland Basin. But we are enthusiastic about our recent success with the Wolfcamp in the Delaware Basin where we just drilled and completed two horizontal wells that have an average 30 day IP of 1,241 BOEs a day.

We currently have four other wells targeting the Wolfcamp that are either completing or drilling and another 14 horizontal Wolfcamp wells ending in ‘12. This is all additive to the Bone Spring and Avalon success that we’ve also had.

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