Concho Resources Inc. (CXO) Misled the Investing Public Regarding Optimum Well Spacing and its Ability to Take On Large-Scale Projects
In 2018, Concho constructed the Dominator Project in the Delaware Basin, which consisted of 23 wells at an average horizontal distance of 230 feet. Throughout 2018 and the first half of 2019, the Company touted to investors that its transition to large-scale development projects such as Dominator generated cost savings, optimized resource recovery, and was designed to mitigate well-spacing risks. Then, on July 31, 2019, Concho released its financial results for the second quarter 2019, revealing that the Dominator’s 23 wells were spaced “too tight” and that Concho had already “incorporated learnings from [Dominator] into its second half or 2019 program and future Delaware Basin projects.” The Company further revealed that it would be scaling back production targets for the rest of the year and would be reducing its active rig count from 33 to 18. During Concho’s August 1, 2019, conference call, Company executives stated that Concho would be taking a more conservative approach to well spacing and that at a maximum, there should be 12 wells per project in the Permian. These statements called into question the Company’s prior statements regarding its ability to engage in large-scale projects. When this information was shared with the investing public, Concho’s stock sank 22%, to close at $75.97 per share on August 1, 2021.
On October 30, 2019, on Concho’s third quarter 2019 earnings call with analysts and investors, Company executives stated that for “2020 and beyond, [Concho] will develop fewer wells per project at wider spacing” and would not see increased capital efficiency until 2020. When Concho released its 2019 annual report on February 19, 2020, it included a new risk factor regarding well spacing that had not been present in the 2017 and 2018 10-Ks. On an earnings call that same day, a Company executive noted that moving forward, “[t]he average project size will be six wells, and … average well spacing will be 700 to 800 feet as compared to approximately 550 feet last year.”
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