Concho Expands Midland Footprint with $1.6B Acquisition

Concho Resources Inc. will expand its Midland Basin footprint with its $1.625 billion acquisition of assets from Reliance Energy.

The acquisition is consistent with Concho’s “opportunistic and disciplined” portfolio management strategy as it expands its core Midland Basin position to over 150,000 net acres and 30,000 barrels of oil equivalent per day (boepd), the company said in an Aug. 15 press statement.

Concho will add 40,000 net acres – located in the core of the Midland Basin in Andrews, Martin and Ector counties – to its holdings. The acreage being acquired includes approximately 10 thousand barrels of oil equivalent per day of production, 67 percent of which is oil.

The acquisition will also enhance Concho’s drilling inventory with over 530 long-lateral drilling locations targeting the Middle Spraberry, Lower Spraberry and Wolfcamp B, and provides expansive development upside across multiple zones.

Estimated proved reserves attributable to the acquisition total approximately 43 million barrels of oil equivalent.

Concho Chairman, Chief Executive Officer and President Tim Leach said the acquisition is in line with the objectives of Concho’s southern Delaware Basin acquisition in the first quarter of 2016 – to actively manage and improve its portfolio of high-quality Permian Basin assets. In a Jan. 18 press statement, Concho said it acquired approximately 12,000 net acres that complimented Concho’s core North Harpoon prospect in Ward and Reeves counties, Texas from a private operator for approximately $360 million. The company also completed an acreage exchange with Clayton Williams Energy Inc. to consolidate 21,000 net non-operated acres in Concho’s Big Chief prospect in Reeves County, Texas, and sold 14,000 net acres in Loving County, Texas for $290 million.

“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,” Leach said in the Aug. 15 press statement. “As we continue to enhance our ability to efficiently allocate capital across our four key assets in the Permian Basin, we are uniquely positioned to deliver attractive returns today and build shareholder value over the long term.”

Concho reported that the acquired assets current production holds a present value of $.5 billion at current NYMEX pricing, implying an acquisition price of $28,000/acre for the undeveloped acreage. This price is comparable to recent Midland Basin transactions completed by SM Energy, which last week acquired 25,000 net acres for around $32,000/acre in Howard County, Texas, according to an Aug. 15 research note from Stifel Research.

Other comparable Midland Basin transactions include Diamondback Energy’s acquisition of 12,000 acres for $28,000/acre in Howard County, and Parsley Energy’s acquisition of 10,000 acres for approximately $42,000/acre in Glasscock County, Texas.

“Like most 2016 Midland Basin transactions, this acquisition was not cheap,” Stifel analysts noted. “However, the properties appear to be underdeveloped and located in the heart of one of the best shale plays in the U.S. We suspect that projected returns from 530 acquired locations rank near the top of Concho’s drilling inventory.”

The Midland Basin is part of the Permian Basin, where oil and gas operators are continuing to acquire and develop acreage in spite of the oil price downturn. The Wolfcamp and Spraberry are two of the various producing formations in the Permian Basin, which remains a significant oil-producing area, according to the Texas Railroad Commission’s website. The Permian, which has produced over 29 billion barrels of oil and 75 trillion cubic feet of gas, is estimated by industry experts to contain recoverable oil and gas resources exceeding what has been produced over the past 90 years.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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