Concho expands Midland basin acreage in $1.6-billion deal

Concho Resources Inc. has agreed to acquire 40,000 net acres with an average 99% working interest in the core of the Midland basin of West Texas from Reliance Energy Inc. for $1.625 billion.

Expected to close in October, the deal between the Midland, Tex.-based firms encompasses production of 10,000 boe/d from 326 vertical wells and 44 horizontal wells, only one of which was completed in 2016. Estimated proved reserves on the acreage totals 43 million boe. Proved developed reserves represent 69% of the total proved reserves, based on Concho’s internal estimates as of June 30.

The acquired acreage is in Andrews, Martin, and Ector counties with minimal leasehold obligations. The deal covers more than 530 long-lateral drilling locations. Due to the contiguous nature of the acquired assets, two thirds of the locations are 2-mile laterals, and the remaining locations are 1.5-mile laterals.

The engineered locations are based on eight locations per zone in the Middle Spraberry, Lower Spraberry, or Wolfcamp B, with two to three of the zones targeted per drilling spacing unit. Concho believes there is development upside from applying optimal drilling and completion methods, testing closer well spacing, and delineating other zones.

Concho sharpens Permian focus

The deal expands Concho’s core Midland basin position to more than 150,000 net acres with production of 30,000 boe/d. Tim Leach, Concho chairman, chief executive officer, and president, noted the move “demonstrates Concho’s commitment to the Midland basin as a core operating area and highlights our continued efforts to consolidate complementary leasehold.”

Leach said, “In line with the objectives of our southern Delaware basin acquisition in the first quarter of 2016, these assets not only build scale, but more importantly high-grade our inventory with additional long-lateral locations that compete with the best projects in the Permian basin.”

Concho in January made three separate deals—an agreed upon acquisition, a completed acreage exchange, and an agreed upon sale—in an effort to improve its position in the southern Delaware basin (OGJ Online, Jan. 19, 2016).

In its second-quarter earnings report published earlier this month, Concho said its active horizontal units in the Delaware have reached a tally of eight, split evenly between the northern and southern portions of the play (OGJ Online, Aug. 5, 2016). In the Midland, the firm has six horizontal rigs working.

The firm has updated its full-year 2016 production outlook to a range of 1-3% annual growth to reflect fourth-quarter production from the acquired Midland basin assets. The company maintains its capital expenditure guidance of $1.1 billion-1.3 billion, excluding acquisitions.

Based on the current commodity price outlook, Concho expects to implement a 2017 capital program within cash flow while recording 20% annual production growth, with oil volume growth of more than 20%.

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