OREANDA-NEWS. S&P Global Ratings today affirmed its 'BB+' corporate credit ratings and revised the outlook on Midland, Texas-based oil and gas exploration and production company Concho Resources Inc. to positive from stable.

At the same time, we affirmed our 'BBB' issue-level rating on the company's senior secured credit facility. The recovery rating on this debt is '1', indicating our expectation of very high (90%-100%) recovery in the event of default. We also affirmed our 'BB+' issue-level rating on Concho's senior unsecured notes. The recovery rating on this debt is '3', indicating meaningful (50%-70%) recovery in the event of default.

"We are revising the outlook on Concho to positive based on our view that the company's proved developed reserves and production levels are approaching levels more in line with investment-grade peers," said S&P Global Ratings credit analyst Kevin Kwok.

On Aug. 15, 2016, Concho Resources Inc. announced a $1.625 billion acquisition of Midland Basin assets through a privately negotiated deal with Reliance Energy. The acquisition will add 40,000 net acres, 43 million barrels of oil equivalent of proved reserves (69% proved developed), and production of about 10,000 barrels of oil equivalent per day (boe/d). This will expand the company's core Midland Basin position to more than 150,000 net acres, proved reserves to 670 million boe, and 2017 production guidance of 175,000 boe/d. Pro forma for the acquisition, we expect Concho will be able to grow production by 20% next year, while keeping capital spending levels flat with 2016, as it shifts capital toward completing wells it drilled in 2016 and on the newly acquired assets. Management expects the transaction to close by the end of October 2016.

The positive outlook on Concho Resources Inc. reflects our view that the company will increase production around 20% in 2017 while growing its proved reserves. We expect the company to maintain credit measures appropriate for an investment grade rating, including FFO to debt greater than 30% and debt to EBITDA below 3x.

We could raise the rating based on an improvement in the company's business risk profile. We expect production and reserves to reach levels more in line with investment-grade peers, while the company maintains FFO to debt of greater than 30%. We could also raise the rating if we expected FFO to debt to exceed 45% for a sustained period, which would most likely occur if oil prices average meaningfully above our price deck assumptions.

We could revise the outlook to stable if credit measures weakened such that Concho's FFO to debt declined to less than 30% on a sustained basis. We believe this could occur if the company assumed a substantially more aggressive capital spending program than we currently forecast, if its production were weaker than our current projections for several quarters, or if crude oil prices weakened meaningfully and the company did not reduce capital spending.