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Execution excellence key to Concho realizing full value from RSP Permian acquisition

16 April 2018 Morgen McGuire

Shares of Concho Resources sold off more than $2 billion in market cap after the company announced its US$9.5 billion acquisition of Permian Basin neighbor RSP Permian. The deal, which is expected to close in the third quarter, values RSP's acreage at US$104,330/acre without accounting for current operated production.

We reviewed recent drilling results of the two companies in the IHS Markit Performance Evaluator application, and we would make three observations.

1. Concho and RSP acreage is close and will enable operational efficiency for rigs and crews, which should lead to per-well cost reductions. However, the majority of the two companies' acreage is non-contiguous and limits Concho's ability to apply extended lateral drilling to the combined position and improve per-well recoveries.Figure 1:Concho and RSP Permian: Pre-Merger Acreage

2. The two companies target similar benches in the Permian Basin, and use similar proppant intensity to generate similar performance in peak-month production and estimated reserves. We expect Concho to easily continue leveraging best-practice operations to the combined position, though it will be difficult to derive incremental productivity gains without technological advancement.

Figure 2:Concho and RSP Permian: Pre-Merger Well Design;On a number of key well metrics, Concho and RSPP's average results lie within a few percent of each other: Peak productivity (2%), Proppant intensity (6%), EUR (2%) and lateral footage (3%)

3. We expect the merged entities' share of near-term liquids production to rise by less than 5%, and likely only 1-2%, as the RSP production represents only 20% of the combined entities' liquids total of 250,000 b/d. The RSP production is today more liquids rich (80%) than that of Concho (55%). We do believe that oil-focused drilling on RSP acreage can increase Concho's liquids exposure over the longer term.

Figure 3:Concho and RSP Permian: Pre-Merger Historical Production

Overall, we see these as two very similar operators, and Concho will likely need to rely on execution excellence to justify the 30% premium paid for RSP acreage.

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Morgen McGuire is a senior analyst on the performance evaluator team at IHS Markit.

Posted 16 April 2018

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