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Concho boasts of holdings in Permian, the 'place to be' during oil volatility

Concho Resources Inc.'s position in the Permian Basin has it positioned to handle continued price volatility, officials of the exploration and production company said during their third-quarter earnings call Aug. 3.

During his commentary, CEO Timothy Leach jokingly recalled a young investor asking him a decade ago whether then-infant Concho could survive in the "Premium Basin." "Little did he know how prophetic that statement was," Leach said. Concho now has nearly 1 million acres with 8 billion barrels of resource potential and 19,000 horizontal drilling locations in the Permian, which is again the world's hottest play.

"Our focus on the Permian has paid off, and the Permian is the best place to be. Production out of the Permian has grown to nearly 2.5 million barrels a day and sits at the low end of the cost curve," he said.

With its holdings secure, Concho is able to withstand the frustrations of a still-unstable market, Leach said. "From a macro perspective, the oil markets continued on a volatile path to find balance. When oil goes above $50 a barrel, the rig count climbs, equity gets sold, the past is forgotten, and the market looks oversupplied," he said. "And when it's below $45 a barrel, we hear it's the end of the oil age; there's a lot of the noise. But we're well-positioned for the volatility, and we'll continue to build value in all points of the cycle."

President and CFO Jack Harper said Concho has consolidated about 27,000 acres in its core areas of the Permian while selling off an additional $800 million in noncore assets to ensure steady cash flow. "[The sales are] highlighting our strategy of actively managing our portfolio. This strategy includes pursuing the right acquisitions to build for the future and continuing to sell projects that have a hard time competing for capital," he said. "Clearly, our performance year-to-date shows that we have significant near-term momentum."

Concho reported net income for the second quarter of $152 million, or $1.02 per diluted share, compared to the $266 million loss the company reported in the second quarter of 2016. The S&P Capital IQ consensus estimate for the quarter called for a GAAP profit of 45 cents per share. On an adjusted basis, Concho reported $77 million in earnings, or 52 cents per share, versus a consensus normalized earnings estimate of 43 cents per share.

Harper said this momentum in the Permian led Concho to raise the midpoint of its annual production growth guidance to 25%. "Capital expenditures, including acquisitions, are tracking to the midpoint of our guidance range of $1.6 billion to $1.8 billion," he said. "While we intend to fully fund the 2017 capital program within cash flow, the third quarter will represent peak capital investments for the year, and capital will likely exceed cash flow for this quarter. This is primarily due to the timing of completing large multiwell projects in the Northern Delaware and Midland Basin."