Permian Basin pure-play Concho Resources Inc. exceeded the high end of its production guidance during the third quarter and reduced overall controllable cash costs by 3%.
Total production combined from the twin Midland and Delaware sub-basins was 15% higher from a year ago at 330,000 boe/d. Oil volumes increased by 12% to 206,000 b/d, while natural gas production climbed to 744 MMcf/d from 612 MMcf/d.
The results were in part a reaction to a downturn during the second quarter when low oil and gas prices led the Midland, TX-based independent to moderate operations, drop rigs and reduce its outlook.
“Last quarter's results undermined a consistent track record and raised concerns about our execution ability due to the performance of several spacing tests,” CEO Tim Leach said during a conference call to discuss results.
Some operators have reported issues with spacing Permian wells too tightly and have reported better production results using wider spacing.
“We've course corrected, and our priorities are to demonstrate our execution ability, highlight our asset quality and continue to show financial discipline and cost management,” Leach said.
President Jack Harper told analysts that Concho’s most recent spacing tests were being adequately risked for volume guidance to account for additional test wells to come online.
“And importantly, as we plan for 2020 and beyond, we will develop fewer wells per project at wider spacing,” Harper said.
Concho also drew down the number of drilled but uncompleted wells, i.e. DUCs, to roughly 70 total.
“We've seen a pretty meaningful efficiency gain and cost savings over the last quarter,” Leach said, allowing DUCs to be completed. It’s also allowed the company to continue running two fracture crews that were scheduled to be dropped in the fourth quarter to keep the “cadence” of completions steady going into 2020.
Controllable cash costs, including lease operating/workover, general/administrative and cash interest expenses averaged $9.57/boe, were down 3% from 3Q2018. Well costs also declined by 10%, hitting the 2019 year-end target. Drilling, completion and equipment costs fell 20% year/year in the first half of 2019 to average $955/foot, averaging $1,118/foot in the Delaware and $791/foot in the Midland.
Concho also made progress to narrow its focus and reduce debt by selling its New Mexico Shelf assets in the Permian to Spur Energy Partners LLC for $925 million. In addition, it posted a $299 million gain by contributing Delaware produced water assets to an infrastructure joint venture with Solaris Water Midstream LLC.
“An important step in improving our capital efficiency and cost structure is the sale of the New Mexico Shelf,” Leach said. “The cash flow from this asset funded our discovery and development of other plays in the Permian.
“However, within our broader portfolio it no longer competes for capital and the sale is consistent with our ongoing effort to high-grade our assets and accelerate returns to shareholders.”
Concho’s 2020 plans are around a “conservative commodity price,” Leach said.
“The industry has faced a lot of different challenges over time. Today, sentiment toward the sector now, amplified by campaign promises to severely limit or regulate oil and gas operations, comes at a time when Concho and our peers are making significant strides in reducing our environmental footprint, all the while unlocking an energy source in our country...and provides us with more security and change the global balance in our favor.
“Since we don't know how the politics will resolve, I'll clarify that our exposure to federal acreage
is about 20% of our total gross and net acreage position in our capital allocation toward that acreage is roughly the same. We've a great deal of flexibility, if we need to reallocate that capital.”
Leach did not name names, but a few Democratic candidates pursuing the 2020 nomination for president have said that if elected, they could ban oil and gas drilling on federal lands.
Concho’s net income was $558 million ($2.78/share) in 3Q2019, reversing from a year-ago loss of $199 million (minus $1.05).