Midland, Texas-based Concho Resources Inc. (NYSE: CXO) has put another strong year of production growth behind it, completing nearly 500 new oil wells in the last year. Most significant in its growth story are its traditional roots in a venerable basin in western Texas and eastern New Mexico now bustling with unconventional activity. There, the oily E&P continues to add leverage based on the idea that mature basins still have a lot left to give.

Concho primarily operates in the Permian Basin, which comprises more than 40 counties in both of its hosting states. Geologically, the basin is the largest inland oil and gas reservoir in the Lower 48 states and has been a "secure" source of domestic energy for more than 80 years, according to the Permian Basin Petroleum Association (PBPA).

PBPA, the largest regional oil and gas association in the U.S., also notes that the Permian Basin is the leading crude oil-producing region in the leading oil-producing state in the nation. As of December 2010, the region had more than 150,000 active producing wells generating 72% of the oil production in Texas and 13% of U.S. domestic oil production, in addition to 67% of casing head gas, 13% of well gas, and 8% of the condensate produced in Texas annually, based on Railroad Commission of Texas data.

It's no small wonder that such legacy assets are now experiencing what Mitchell Wurschmidt, vice president at KeyBanc Capital Markets Inc., calls a "rebirth." In the decades-old basin--which contains some of the latest "it" plays, including the Wolfberry, Avalon and Bone Spring--domestic players are ramping up the search for untapped resources using improved drilling techniques.

Permian Portfolio

During 2010, Concho drilled and participated in a total of 662 gross wells, of which 565 were operated and 492 were tapped as new producers. The company had an additional 169 wells "in progress" by year-end 2010. Moreover, Concho's production of 15.6 million barrels of oil equivalent (MMBOE) was 42% higher than 2009 levels, and year-end proved reserves increased 53% for a year ago to 323.5 MMBOE, according to its latest quarterly report.

On the New Mexico shelf, proved reserves totaled approximately 193 MMBOE, compared with a total of 126 MMBOE at year-end 2009. Here, the company has identified some 2,897 drilling locations, of which 2,156 are targeting the Yeso formation.

In the Delaware Basin, part of the larger Permian Basin, Concho's assets totaled approximately 22 MMBOE, compared with a total of 5.5 MMBOE at year-end 2009. Here, the company has identified 1,101 drilling locations, of which 968 are targeting the Avalon shale/Bone Spring formation.

On its Texas Permian assets, Concho has identified 1,800 drilling locations, of which 1,742 are targeting the Wolfberry play. Here, the company had proved reserves of 100.5 MMBOE at year-end 2010, compared with approximately 77 MMBOE at year-end 2009.

A Permian Head Honcho?

Considering Concho's 4Q10 production, KeyBanc has increased its 4Q10 earnings per share (EPS) estimate from $0.81 to $0.86 per share (consensus at $0.77) and DCFPS from $2.03 to $2.15 (consensus at $2.08). The firm has also factored 2010 year-end proved reserves into its proved net asset value (NAV) and net revenue asset value (RNAV) estimates, and is increasing them from $46.68 to $53.96 per share and $105 to $112 per share, respectively.

Additionally, KeyBanc has reaffirmed its Buy rating, while raising its price target from $105 to $110 per Concho share.

"We continue to believe there is upside to our NAV/RNAV estimates through continued acceleration of drilling activities, as well as further proving up of the company's deep inventory of Yeso and Wolfberry locations, especially as relates to downspacing in both plays," Wurschmidt explains in a Feb. 9 research report.

Mitchell adds that the next chapter in Concho's Permian growth story will likely be the execution and ramp up of drilling in the Bone Spring and Avalon shale, where it has identified more than 960 locations and has only booked approximately 22 MMBOE of proved reserves.

Meanwhile, Wells Fargo Securities LLC recently downgraded Concho shares. "We believe the risk reward is neutral at current levels," senior analyst David Tameron notes in a Feb. 7 research report.

And although Concho remains "a quality company with upside potential in the horizontal Permian," the firm's model indicates that its shares are discounting at $87 per barrel long-term oil, Tameron adds.

Still, with more than 100,000 acres under its belt in the promising Bone Spring trend alone following the recent Marbob acquisition, the oily U.S. independent may continue to stand out as "best in class" among its Permian-focused peers.

Contact the author, Nancy Miller, at nmiller@hartenergy.com.