Analysts have a lot of good things to say about Concho Resources Inc. of late. Terms of praise like "best-in-class," and "premium" are being bestowed on the Midland oil and gas company, most recently in acknowledgement of its $1.3-billion acquisition of Marbob Energy Corp., which closed in fourth-quarter 2010. The deal re-dedicated Concho to producing oil from the legendary Permian Basin, where it is applying cutting-edge technology to new horizons, especially in the Delaware Basin.

In recognition of its efforts to usher in a new age throughout the Delaware Basin, Concho has won Oil and Gas Investor's Excellence Award for Best Field Rejuvenation, 2010.

“Ten years ago I wouldn’t have believed the kinds of rates we are getting out of these areas now would have been possible,” says Concho chief executive, president and chairman Timothy A. Leach.

Chief executive officer, president and chairman Timothy A. Leach is excited about the company's growth. His enthusiasm stems from how far the company has come and how far it can go in the Permian. Despite being productive for nearly a century, the basin is adding solid production in new plays like the Bone Spring and the Avalon shale, plays where Concho is a leader. The company kicked this program off in earnest last year.

"Ten years ago I wouldn't have believed the kinds of rates we are getting out of these areas now would have been possible," Leach says. Relying mostly on horizontal drilling and multiple-stage hydraulic fracturing, Concho has built a large position in the Permian and expects to expand via a multi-thousand-site repertoire of drilling locations already in hand. The staging grounds are the Wolfberry formation in the Midland Basin in Texas, and the Yeso formation in New Mexico. On the latter, Concho has a near monopoly.

Given the Marbob acquisition, Concho has nearly 4,000 wells now. These have provided a wealth of data, allowing the company to drill more wells with one thing in common: "Very high profit margins," says Leach.

Profits are reinvested into additional high-rate-of-return projects, Leach says, and Concho has gotten "really good" at large, factory-like operations. It grows those margins by driving costs down, finding new zones and applying new technology to make the wells more productive. This is typical not just in the Bone Spring but throughout the region.

"In the Yeso, we found a second zone, doubled the reserves, and have driven the number of days to drill down by 10, which is a 50% improvement over 10 years ago," Leach says of recent work in the area. A key to the company's success is its tight concentration on specific plays. This focus is not common practice in the area. The Yeso, for instance, is 30 miles long, and Concho has 12 rigs running there.

"Others may drill a few wells and quit, but our rigs will run 365 days a year." For its concentration and diligence, there is a pay-off. Things have gone so well that Leach and his team have upped the drilling budget to spud more wells this year.

"Everything is on track. We increased the 2011 capital budget, which goes essentially to drilling wells, to $1.35 billion." This was an increase of $245 million, primarily for drilling and additional leasehold in the Delaware Basin and the Wolfberry trend. The rest covers incremental service costs, where the company has seen some inflation.

Concho is running 35 rigs and will drill more than 900 wells in the Permian Basin this year. In fact, it has so much opportunity that it recently sold its Bakken production in North Dakota and redeployed the capital to the Permian. Leach believes the geology will prove very favorable across the Delaware Basin in particular, and he anticipates more stacked targets there.

"It keeps getting better. We are getting Third Bone Spring in the northern part of the play as well. I think what you will see, in time, is an overlapping of the targets throughout the entire Delaware Basin, including First, Second and Third Bone Spring, Avalon and Wolfcamp. Most of them will have multiple targets."

The company owes part of its ascendancy to economies of scale, which have resulted from its commitment to running a large drilling program. This helps to keep costs down. Though he notes some banks have talked about $150 per barrel by the end of 2011, recent commodity price trends appear to play to Concho's hand. For a company that is not debating vertical integration into service companies or pipelines, the cost to drill is a main piece of the economics puzzle.

"I think service costs are somewhat tied to the price of oil. It seems like oil prices have come off their highs, and I think that will help moderate costs for the rest of the year."

Leach thinks rising production from the basin is approaching take-away capacity for crude and natural gas liquids, but infrastructure projects are under way. In the next 18 to 24 months, capacity will increase dramatically. Today, there is a shortage of trucks, but that is not materially affecting production.

"When we talk to providers about costs, what we get is good for six to 12 months. The most volatile component is pressure pumping and completions, which are a function of oil price and rig count."

Right now, the Permian Basin rig count is approaching 400, and Concho itself runs 34 or 35 of those on any given day. Leach provides context for today's rig count: it was 500 in the 1970s. But the rig count may not be as accurate a proxy for the number of wells getting drilled as it once was, as Leach is quick to point out, thanks to greater rig efficiency.

"That level of rig count holding steady can get our $1.35 billion invested. The operations group likes to get most of the work done in the first six months of the year, so we are not rushing at the end." For Concho, increasing capex means it is producing more cash flow, and that induces more drilling. "We hate to lay down rigs when we have good crews."

Leach concedes some analysts have a dim view of E&P companies expanding drilling budgets midyear, if the budgets outstrip cash coming into the company.

"Our industry, over long periods of time—even short periods, actually—destroys capital and doesn't build it. Finding a company that makes money is difficult. When analysts have been critical of capital-budget increases, they are targeting companies that are spending money they don't have, that are outspending cash flow, or are in plays or businesses they can't show to be profitable.

"We reinvest cash at very high rates of return, so when we announce a capital spending increase, it's exciting." In 2012, Leach plans on upping the drilling budgets again to between $1.5- and $2 billion.

Leach intimates there could be more value for the company in acquisitions as well, given the right opportunity.

"Marbob was very successful, and there are still those kinds of opportunities out here."

Being a big corporate citizen in the area exposes Concho to those acquisitions, provided it stays at the ready with liquidity on the balance sheet.

Concho’s manufacturing-like operations in the Permian have steadily raised production and the number of wells drilled.

"Investment in the Bone Spring takes up to $5 million dollars or more per well, but these wells produce more than the Yeso or Wolfberry, which cost between $1.5 to $2 million per well." Concho may not require more rigs as the company works its way up the learning curve in these plays, so a higher budget yields higher overall production rates, but not necessarily with more rigs.

"As we continue to become more efficient and we budget wells to capital, we continue to drive drilling time down," Leach says.

Despite the strides made in the Permian and Delaware basins in the past year, Leach sees more growth ahead for Concho.

"I see this growing. A few years ago we had two core areas. The Delaware will probably be larger than those other two core areas. And there are other things going on in the Permian that could be core. I'd like to see four or five core areas. New plays in the Midland Basin are emerging, and the Delaware and Midland are very similar. We are starting to see some shale develop in the Midland Basin.

"If we stay focused on the Permian, I think we have advantages on cost, getting to deals first, and understanding the business."

If there is one area for improvement, it is on the employment front.

"It's a great advantage to be headquartered here with 500 employees. But we have 150 open positions, from field positions to officers of the company."

Concho typically staffs for the future, so at the beginning of last year there were 200 open positions, and most cannot be filled. In some ways this is an enviable problem to have, especially in the Permian, long after many thought production had slowed.

"I don't remember another time where there was so much excitement, and I was as excited about the new plays, the prospects for discovering new oil and gas, and all the things that need to be built. I like to build things."

Leach's enthusiasm indicates that the Permian renaissance may well be long term.