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Moody's upgrades Concho Resources on internal cash flow use, $9.5B merger

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Moody's upgrades Concho Resources on internal cash flow use, $9.5B merger

Moody's lifted Concho Resources Inc.'s rating to investment-grade on the back of the company's efforts to keep a balanced financial philosophy and spend within cash flow while attaining growth.

The rating agency upgraded the Permian Basin producer's senior unsecured notes to Baa3 from Ba1, with a stable outlook, according to a June 11 news release.

Concho's efforts to grow its reserve base and its use of internal cash flow for debt reduction also played a role, according to the rating agency, and the company's recently announced $9.5 billion all-stock merger deal with RSP Permian Inc. is expected to bring expanded production and capital allocation opportunities. The upgrade does not depend on the result of the merger's closing, which is expected in the third quarter.

"Concho should have an excellent liquidity profile based on the company's expected free cash flow generation through 2019 and high availability under its unsecured revolver due 2022," Moody's said. "This gives primary liquidity for the company's unexpected capital expenditures in excess of cash flows, if any, over 2018-19."

The stable outlook reflects Moody's expectation that Concho will be able to meet production growth objectives and maintain its reliance on internal cash flow.