Moody's Updates Concho Resources (CXO) tp 'Ba1'; Outlook Lowered to Stable

Moody's Investors Service (Moody's) upgraded Concho Resources Inc.'s (Concho) Corporate Family Rating (CFR) to Ba1 from Ba2, Probability of Default Rating (PDR) to Ba1-PD from Ba2-PD and the ratings on the senior unsecured notes to Ba2 from Ba3. The company's SGL-2 Speculative Grade Liquidity (SGL) Rating was affirmed and the rating outlook was changed to stable from positive.

"The rating upgrade is driven by Concho's continually improving operating performance, and better scale and credit metrics that are more in line with Ba1 peers," commented Arvinder Saluja, Moody's Vice President.

Upgrades:

..Issuer: Concho Resources Inc.

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

....Senior Unsecured Regular Bond/Debentures, Upgraded to Ba2 (LGD 4) from Ba3 (LGD 4)

Affirmations:

..Issuer: Concho Resources Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

Outlook Actions:

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

The upgrade of the CFR to Ba1 from Ba2 reflects Moody's expectations for Concho's leading cash margins and good cash flow generation, even in a weak commodity price environment, supported by its oil focused production mix, consistent hedging program and competitive cost structure. The rating also reflects Concho's position as one of the largest producers in the Permian Basin with a large drilling inventory. Production growth has remained strong despite the weak commodity price environment. Its production scale and improving or stable credit metrics are largely in line with other Ba1 peers. The rating incorporates Concho's strategy, which has been to grow its reserve base both organically and with acquisitions. Credit metrics typically worsen temporarily but improve as the company uses internal cash flow generation, asset sales and equity offerings to reduce debt balances. Geographic concentration risks associated with all operations being in a single hydrocarbon basin are high but the Permian Basin remains one of the most prolific oil producing regions in North America.

The Ba2 senior notes rating reflects the large amount of the potential senior secured claims relative to the outstanding unsecured notes, which results in the senior notes being rated one notch beneath the Ba1 CFR under Moody's Loss Given Default Methodology. The senior notes ($3.35 billion in total) are unsecured and therefore are subordinate to the $2.5 billion senior secured revolving credit facility's potential priority claim to the company's assets.

The SGL-2 rating is based on our expectation that Concho will have good liquidity through 2016. Pro forma for the October equity offering proceeds, we expect the company to have approximately $350 million cash at September 30, 2015. The company has a $2.5 billion committed senior secured revolving credit facility with a borrowing base of $3.25 billion, leaving meaningful room for potential reductions in the borrowing base caused by lower oil prices. Concho has full availability under its revolver following its equity offering. This gives primary liquidity for the company's capital expenditures in excess of cash flows, if any, over the remainder of 2015 and 2016. The company may use existing cash and draw under the revolver to make bolt-on acquisitions but leave meaningful undrawn capacity under the revolver. The financial covenant is net debt / EBITDAX of no more than 4.25x. We expect Concho to remain well within compliance with this covenant through 2016. There are no debt maturities until 2019 when the revolving credit facility commitments expire. Although substantially all of Concho's oil and gas properties are encumbered by the credit facility, the excess of the borrowing base above the committed facility provides some flexibility to execute asset sales to raise cash for its capital investment or other liquidity needs.

The stable outlook reflects expectations for modest growth in production and reserves at competitive costs even in a challenging commodity price environment as well as a prudent approach to any major acquisition by funding it with an appropriate mix of equity and debt.

Although an upgrade is currently unlikely, if Concho continues to grow in size and scale, sustains RCF / debt above 50%, achieves debt / average daily production of less than $18,000 per boe and prudently manages its capital spending through the challenging crude price environment, an upgrade could be considered. An upgrade would also be contingent on the company maintaining a leveraged full cycle ratio at above 1.5x even during weak commodity price environments.

We could downgrade the ratings if capital productivity stalls, which could be signaled by the worsening of the leveraged full cycle ratio. If RCF / debt falls below 25% or debt / average daily production rises and is sustained above $30,000 due to the outspending of cash flow or a leveraging acquisition a negative action could become likely.

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