If any one company represents a Permian Basin pure-play E&P, it's Concho Resources Inc. The Midland, Texas-based operator holds 600,000 net acres across four focal operating areas in West Texas and New Mexico, considered to be some of the best real estate in the basin. Through the past couple of years, rather than hibernating through a lower price environment, Concho has actively added to its positions while pushing the technological envelope in each.

The prize: some 8 billion barrels of oil equivalent total net resource potential across 19,000 gross identified horizontal drilling locations awaiting the bit. And with 21 rigs deployed throughout the Permian, Concho is the most active operator.

The company is led by chairman, president and CEO Tim Leach, who has been at the helm since formation in 2004 but is perhaps more enthusiastic about Concho’s prospects than ever before in its history.

“When you look at 2017’s drilling program, it’s the highest overall rate of return program we’ve ever put together. When you put all those great projects together, it gives you a capital efficiency that I would compare to any other company in our industry.”

Leach’s history goes back to his days as a petroleum engineer in the Permian with Parker & Parsley, which later became Pioneer Natural Resources Co. He formed the first of three iterations with a Concho moniker in 1997, but the current one stuck, going public in 2007. Before horizontal drilling came to the Permian, Concho built its reputation on its New Mexico Yeso and Midland Basin Wolfberry portfolio.

But since the horizontal shale revolution swept across the Permian’s plains, Concho high-graded its activity in four primary plays: The Midland Basin, the northern and southern Delaware basins, and New Mexico’s Northwest Shelf. It spent more than $2 billion last year adding to these positions.

In the northern Delaware, Concho has fully delineated nine distinct zones in Lea and Eddy counties, New Mexico, and Culberson County, Texas. Two wells in the newly tested Wolfcamp sands flowed 1,900 barrels a day (bbl/d) on average over 90 days. A 1.5-mile lateral Wolfcamp A well showed a 24-hour initial rate of 2,800 bbl/d.

“With results like these coming in from multiple zones, it’s easy to see why we continue to increase our acreage footprint in this region,” said Leach.

Concho is testing limits in its southern Delaware region, pushing lateral lengths up to 2.5 miles and batch-completing multiple zones from a single pad. In the Midland, it is developing multiwell projects with 10,000 feet or greater laterals. And on the shelf, the company is experimenting with tighter well spacing, stacked laterals and enhanced completions.

Undoubtedly, Concho is inundated with a bounty of riches. Leach recently visited with Investor to discuss how the company plans to execute on its cornucopia of opportunity.

Investor You’ve worked the Permian much of your career—did you ever imagine the resource potential that horizontal drilling and enhanced completions would unlock?

Leach I’ve been doing this for 35 years now, and my team always knew that the Permian was a great place to be. We’ve always found things that worked at almost any price scenario.

But I don’t think anybody ever dreamed of the effect that technology would have on the productivity of these zones. Certainly, producing oil out of the shale was a breakthrough idea that came to our industry later, not sooner. I don’t know that anyone envisioned these rocks would produce the way they’re producing today. And now having 4,000 feet of pay in the Permian Basin and all the multiple zones, even leading companies are just getting their brains around what it means to have this much potential.

Investor How do you think about accessing 19,000 drilling locations in your portfolio?

Leach The amazing thing is those 19,000 locations have stayed relatively the same over the last couple of years, but the resource that comes out of those opportunities went up 60%, up to 8 billion barrels just this last year. The productivity, the recovery of the wells, is increasing due to longer laterals and denser spacing. The quality of our assets has allowed us to be able to continue to find new resource on what we own.

Investor What challenges did you face through the downturn and how did you weather them?

Leach We are the most active driller in the Permian because of the core competencies of our company. The strategy and the philosophy behind Concho are built for a volatile environment. We’ve been through several cycles and we try to run our business where we can make adjustments as we go through the cycle but not shock the system.

We don’t shut down all the rigs. We have opportunities that we can access even at much lower prices, so we spend within cash flow; we have a strong balance sheet. A disciplined approach to investing in our properties has paid off for us.

And we have a disciplined hedging program where we execute the same kind of hedges every quarter. It’s like forward selling your oil for a couple of years and just keep it rolling.

Investor Whatever the price is?

Leach Back when the futures market was backwardated and the current price of oil was $100, we were putting hedges on at $80. It wasn’t a very happy day to hedge, but when we actually settled those hedges and oil was $40 and we were getting $80, we felt pretty good about it. We start with the premise that we’re price takers, so what we want to do is just de-risk our cash flow because we’re building a capital budget around our cash flow.

One of the challenges is to stay disciplined around your strategy. The business is more efficient if you don’t radically change it every year, so we didn’t have big layoffs like other companies. We slowed our spending; we slowed our hiring. We went from 38 rigs down to eight or 10 rigs to stay within cash flow as oil bottomed out, but we’re back at 21 rigs today. Our hedge program and our balance sheet gave us the time to make those adjustments so we could run steady as she goes.

Investor Concho entered the horizontal Permian era with a much larger acreage footprint than newer entrants. Why were you compelled to add to your Midland and Delaware positions with large acquisitions?

Leach With the strong balance sheet, last year was our most active year on the A&D front. We purchased $2.3 billion worth of assets last year. During the down cycle is a good time to continue to high-grade your assets. And we like both sides of the Permian Basin.

But I don’t think we were compelled to do acquisitions. However, in 2016 we saw opportunities to buy big, blocky assets in the sweet spots of the best parts of the Permian. All of those drilling opportunities went to the front of our drilling inventory. That puts us in a very strong position coming out of the bottom of the cycle to have accumulated really high-quality assets.

Investor You seem to have some diversity even within the Permian itself. How do you rank your four operating areas, and how do you high-grade those?

Leach Ranking them is the wrong way to think about it. Within those four sweet spots, there are projects that give a rate of return and a recovery that compete with each other at any price deck. Those four areas are just as good as each other; they just have different characteristics. For Concho, that’s a valuable position to have. It makes us distinctive in that we can quickly allocate capital to different places.

Investor Right now you’re placing a majority of your capex into the northern Delaware Basin, with the Midland Basin close behind. Does this give an indication as to where you’re leaning now?

Leach On a rate-of-return basis, all four of our areas compete and have projects that are right at the front of the inventory. Going forward, you’re going to see a balance between the Delaware and Midland basins. We’re focusing our drilling on areas where we have big, blocky acreage positions, and a significant amount of capital is going into areas where we’re testing new zones and new ideas, both to expand the geographic area of the sweet spot but also testing new landing targets within what we already know to be good.

One way that the southern Delaware and Midland basins are advantaged is from our ability to drill long laterals there. To the extent that we can push those lateral lengths up in all areas we have, that does move things to the front of the line.

Investor What is Concho doing to expand resource capture?

Leach Technology is really enhancing our recoveries. We’re testing longer laterals—our longest well to date is in excess of 12,000 feet—and we’ve tested sand up to and in excess of 3,000 pounds a foot. We’re trying to find the optimal balance of how to design these wells to get the highest rate of return but also achieve the highest recovery.

Investor Are you of the belief that longer and bigger is better?

Leach Generally, yes. If you didn’t have lease constraints, you’d want to make laterals at 10,000 feet or greater. Our average is probably around 8,000 feet now. Our average sand loading is around 2,000 pounds per foot. It will continue to get more intense, I would guess.

Investor How far can you push it?

Leach We are learning so much so fast that to draw a line in the sand and say, here’s the answer, that’s probably a foolish thing to do. I would guess that most wells will be between 2,000 and 3,000 pounds a foot of sand loading, and somewhere around a 10,000-foot lateral length is probably a well design that would optimize your recovery and your economics.

Investor How do you foresee harvesting all the recoverable reserves from all the zones across your acreage?

Leach We’re testing bringing on many of these zones at the same time. This is a big concept going forward. If you drill one well and drop the pressure, you will lessen the productivity of all the offsets. As we enter development mode, I think we’re going to discover that the way to optimize recovery is to drill them all at the same time and complete them all at the same time.

We have a project in the Midland Basin, the Mabee Ranch project, with 13 wells being drilled and completed with 2-mile laterals at the same time on half a section testing five different landing targets. That’s a lot of capital in a half section of land. It’s foreshadowing the capital intensity you’re going to see in the industry going forward.

Investor Does this create challenges around infrastructure or logistics?

Leach The infrastructure required is going to be another factor that differentiates companies—getting water there, getting sand there, and then a system to sell your oil and gas. There are only a handful of companies that can do that. We’re one of the few companies that have the infrastructure that allows us to do that kind of operation.

Investor Do you feel like you’re in full development mode yet in the Midland? What might that look like?

Leach No, I think we’re still a year or two away from where a higher percentage of what you do is developing out a single section at one time with large-scale projects. I mentioned the highest well project that we drilled so far is 13 wells. I think in the future when you get into full development mode it may be more like 20 or 30 wells going at one time.

Investor You said 13 were in a half section.

Leach That’s right. It’s not inconceivable that a few years from now a typical operation for a full section is going to be 30 wells or more in the section and it may run a couple hundred million dollars of capital for one project.

We think that kind of capital intensity, that kind of completion technique, is going to be what maximizes efficiencies and recoveries, but it’s going to require companies that have the size and scale to do that kind of operation.

Investor What have your recent tests on the New Mexico Shelf revealed about the potential of that area? Is it expanding?

Leach That area is awesome. It was an old oil field that had been drilled vertically on 10-acre spacing for a long time. The fairway was probably 3 miles wide and 50 miles long and captured five targeted completion zones in the Paddock and Blinebry.

But with horizontals you only need one zone, so it’s expanded the fairway geographically. That’s added a lot of potential. We also found that we can drill horizontal wells in these areas where it’s been developed vertically and find original pressure that wasn’t being tapped by these vertical wells. It’s exciting; some of the highest rate of return projects we do are on the New Mexico Shelf because it’s so shallow. It’s not very expensive—a couple of million bucks—but very high rate of return. It produces a lot of excess cash flow that we’re reinvesting in these other assets.

Investor Should we expect to see Concho active in the A&D market over the coming year or so?

Leach Sure. You will continue to see us consolidate our positions inside these core areas. When you see us buy something, it’s because we think it’s in the sweet spot and we’re trying to block up our acreage position in those sweet spots.

Going forward, blocky assets with high ownership are going to be much, much more valuable than small pieces of acreage scattered around the Permian. It’s going to get easier to trade acreage between companies because everybody needs to block up their acreage so they can drill longer laterals and have higher ownership. These projects I’ve described are so capital intensive that they don’t lend themselves very well to having lots of partners.

We sold our ACC pipeline project in the northern Delaware Basin and still have $800 million of those proceeds sitting on our balance sheet, so we’re in a good position to take advantage of any opportunity that comes along. You’ll continue to see a high level of activity of Concho both buying and selling assets.

Investor With all the stacked pay and potential locations, what is a Permian acre worth today?

Leach An acre in the Permian is worth more in Concho’s hands than it is in anybody else’s hands! If you don’t have the machine to go execute on it, an acre’s not worth much. Acreage is a lot more valuable now the way we understand full development.

Investor What oil price are you modeling for your plans?

Leach We look at the strip, but it’s basically mid-$40s oil. As I mentioned, we’re aggressively hedged, so short-term moves in the oil price don’t move our cash flow all that much. We’ll drill 250 to 300 wells this year, and participate in another 50 or so.

Investor What excites you about this upcoming year?

Leach When 2017 is over with, Concho is going to demonstrate that we can invest our cash flow and grow in excess of 20% inside of cash flow for numerous years. That’s going to be a performance that other companies will have a hard time matching. Spending within cash flow is a discipline that’s time-tested and is going to demonstrate how efficient our machine is.

As the shale revolution plays out, everyone’s business model is turned on its head all the way from the major oil companies down to the smallest independents. I think Concho is in the lead at establishing the business model that creates the most value with the technology that we find ourselves with today.

Investor What does that business model look like?

Leach It’s going to be a very large, very well-capitalized, highly efficient investment machine that grows every single year at oil prices that no one thought you could profit at in the past. Execution is the next theme. We’re building a company that’s going to be unlike anything that’s been built before. That’s exciting to me.

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