Concho Dives Deeper Into Permian

Concho Resources (NYSE:CXO) dove deeper into the Permian Basin with its latest purchase of a private oil company, and picked up additional acreage exposed to the Bone Spring, and Yeso plays in New Mexico. Concho Resources was almost entirely a Permian Basin company even before the purchase, with 95% of its 2010 capital budget allocated to various areas in this basin.

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The Deal
Concho Resources is purchasing Marbob Energy Corporation, a privately held oil and gas company with substantial operations in the Permian Basin, for $1.65 billion in a combination of cash, notes and stock.

Concho Resources will pay $1.45 billion in cash to Marbob, and 1.1 million shares of Concho Resources common stock. The company will also issue an eight year $150 million note to Marbob due in 2018.

Concho Resources received proved reserves of 76 million barrels of oil equivalent (BOE) along with average daily production of 14,000 BOE per day. Marbob Energy Corporation operates mostly on the New Mexico side of the Permian, and has 2,300 drilling locations on its acreage, including 350 that are proved undeveloped.

Bone Spring
One of the reasons for the Marbob purchase was the company's exposure to the Bone Spring formation in New Mexico. After closing, Concho Resources will have 100,000 net acres prospective for the Bone Spring.

The Bone Spring is an oily play that the exploration and production industry has been pursuing to help diversify away from natural gas. The Bone Spring consists of several separate sections of sandstones that are productive.

Cimarex Energy (NYSE:XEC) is partnering with FieldPoint Petroleum (NYSE:FPP) to develop the Bone Spring and will drill two horizontal wells in the play with an option for a third.

Anadarko Petroleum (NYSE:APC) is also testing out the Bone Spring, and recently completed the Blacktip Johnson 1-39 #1H well, which produced at a maximum rate of 1,175 barrels of oil per day.

Yeso Play
Concho Resources also increased its exposure to the Yeso play in the deal. Concho Resources already had seven rigs drilling 200 wells in 2010, and will pick up another rig from Marbob. Wells here cost approximately $1.4 million and according to the company will have an internal rate of return of 88%, assuming realized prices of $80 a barrel and $6.00 per Mcf.

The Bottom Line
Concho Resources is sticking to its knitting and doubling down on the Permian Basin, through its purchase of a privately held oil and gas operator. The company gains further acreage in the Yeso, one of its core areas in the basin. (Read Peak Oil: What To Do When The Wells Run Dry to learn about theories on the future of oil.)

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