Concho: Permian Land Swap, $280 Million Sale Now, Consolidation Later

Concho Resources Inc. (NYSE: CXO) opened up fourth-quarter 2018 with a demonstration of advanced A&D judo in the Midland and Delaware basins that shifts a total of 55,000 net acres in the Permian between Concho and a trading partner.

Concho also pivoted from noncore acreage through a sale of about 20,000 net acres in and around Ward and Reeves counties, Texas, to private buyers for $280 million. Colgate Energy LLC and Luxe Energy II LLC were reportedly the buyers, according to BMO Capital Markets. Both transactions closed in February, Concho said on Feb. 20.

In its acreage swap, Concho said it traded about of 34,000 net acres in the northern Delaware Basin to an unnamed, large integrated competitor—most analysts presume it was Chevron Corp. (NYSE: CVX). The company said the acreage was scattered throughout Culberson County, Texas.

In exchange, Concho will receive about 21,000 net acres in a strategic part of its Mabee Ranch position—the middle—in Andrews and Martin counties, Texas. As a result, Concho walks away with average production of 5,000 barrels of oil equivalent per day (boe/d) and the integrated company with 3,000 boe/d.

“For us, the trade fills in a very strategic part of our Mabee Ranch position and also adds working interest to our operated positions in Upton County [Texas] and on the New Mexico Shelf,” Tim Leach, the company’s chairman and CEO, said on a Feb. 21 earnings call. “In exchange, we traded out of our checkerboard acreage in Culberson County.”

The Luxe and Colgate sale rings up more Concho’s divestitures. Since 2016, the company has generated $1.4 billion in proceeds by selling, buying and trading away about 95,000 net acres. Concho has concurrently added 110,000 net core acres, the company said.

The divestiture equates to roughly $14,000 per acre. While the acreage price is cheaper than many Permian Basin transactions, Leach noted the acreage was “low working interest and largely nonoperated properties with minimal production and proved reserves.”

The company’s overall Midland Basin position remains at about 170,000 net acres, despite adding about 60,000 net acres in the Mabee Ranch.

Concho executives said the company is focused on the core of its play and that what’s outside is either sold or left to expire.

With values widely spread among Permian Basin E&Ps—and Concho trading higher than many of its peers—Leach was asked on the February earnings call whether consolidation is becoming a more interesting prospect. While other companies are working to toe the capital discipline line, Concho generated excess cash flow on capital investment of $1.7 billion for the second year in a row. The E&P’s crude oil production increased 29% year-over-year.

“We’ve said before that we think consolidation makes a lot of sense in the Permian from an operational efficiency standpoint,” he said. “We also said before that corporate deals are complicated and more difficult to execute, and therefore there’s fewer of them. We’re really focused on the blocking and tackling of our business.”

Mark Lear, an equity analyst at Jefferies, said the Mabee Ranch deal fills in the center of the asset position as well as adding interests in Upton and the New Mexico Shelf.

“While the premium stock valuation would indicate that Concho is one of the chosen consolidators in the Permian, management stated that it will remain focused on smaller bolt-ons and trades that in aggregate have a meaningful impact on the business,” Lear said in a Feb. 27 report.

Concho has taken aim at smaller transactions that add up to a “huge difference to our business,” Leach said. “We’re focused on the Permian, we’ll be a participant in the consolidation, but we have a very high standard and a high bar for how do you improve on this business plan.”

Analysts see strength in optimizing, particularly as Concho adds acreage to extend lateral lengths and increase working interests in core areas.

Water acquisition and handling have taken on an important part of the business, particularly for driving down costs, said Richard Tullis, an analyst at Capital One Securities.

“[Water] is one of the most important things, both the acquisition of water for the drilling program and also the proper handling of water after it comes out of the ground,” Leach said. “That’s going to be a huge business in the future, and I think there will be a huge expertise and business embedded in Concho going forward.”

Darren Barbee can be reached at dbarbee@hartenergy.com.