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Concho Resources Inc. Reports Second Quarter 2012 Financial And Operating Results

At June 30, 2012, on its Delaware Basin assets, the Company had identified 2,375 drilling locations, including the locations associated with the Three Rivers acquisition, with proved undeveloped reserves attributable to 195 of such locations. Substantially all of the 2,375 drilling locations target horizontal objectives in the northern Delaware Basin. The Company has excluded all 364 vertical Wolfbone play drilling locations in the southern Delaware Basin, which were previously identified as of December 31, 2011. The Company recently began testing a horizontal Wolfcamp shale exploration concept in the southern Delaware Basin and as of June 30, 2012, had not included any potential drilling locations across its approximately 140,000 gross (125,000 net) acres in the southern Delaware Basin. Currently, the Company has completed 3 horizontal Wolfcamp shale wells on its acreage in Reeves County and expects to drill another 7 horizontal wells on its acreage in both Reeves and Pecos Counties during 2012.

Liquidity

At June 30, 2012, the Company had $427 million of indebtedness outstanding under its $2.5 billion credit facility. Pro forma for the closing of the Three Rivers acquisition on July 2, 2012, the Company’s outstanding borrowings under the credit facility would have been $1.4 billion on June 30, 2012, leaving approximately $1.1 billion available to be borrowed.

Derivative Update

The Company maintains an active hedging program and added to its derivative positions in July 2012. Please see the “Derivatives Information” tables at the end of this press release for more detailed information about the Company’s current derivative positions.

Conference Call Information

The Company will host a conference call on Tuesday, August 7, 2012 at 9:00 a.m. Central Time to discuss the second quarter 2012 financial and operating results. Interested parties may listen to the conference call via the Company’s website at www.concho.com or by dialing (800) 638-5439 (passcode: 79957631). A replay of the conference call will be available on the Company’s website or by dialing (888) 286-8010 (passcode: 75490323).

About Concho Resources Inc.

Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company's operations are focused in the Permian Basin of Southeast New Mexico and West Texas. For more information, visit Concho’s website at www.concho.com.

Forward-Looking Statements and Cautionary Statements

The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include statements, estimates and projections regarding the Company's future financial position, operations, performance, production growth, returns, capital expenditure budget, oil and natural gas reserves, number of identified drilling locations, drilling program, derivative activities, costs and other guidance. These statements are based on certain assumptions made by the Company based on management's experience, expectations and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include the factors discussed or referenced in the "Risk Factors" section of the Company's most recent Form 10-K and 10-Q filings and risks relating to declines in the prices we receive for our oil and natural gas; uncertainties about the estimated quantities of reserves; risks related to the integration of acquired assets; the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing; drilling and operating risks; the adequacy of our capital resources and liquidity; risks related to the concentration of our operations in the Permian Basin; the results of our hedging program; weather; litigation; shortages of oilfield equipment, services and qualified personnel and increases in costs for such equipment, services and personnel; uncertainties about our ability to replace reserves and economically develop our current reserves; competition in the oil and natural gas industry; and other important factors that could cause actual results to differ materially from those projected.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

 

Concho Resources Inc.

Consolidated Balance Sheets

Unaudited

 
         
June 30, December 31,
(in thousands, except share and per share amounts)   2012   2011
Assets
Current assets:
Cash and cash equivalents $ 710 $ 342
Accounts receivable, net of allowance for doubtful accounts:
Oil and natural gas 167,138 213,921
Joint operations and other 208,353 153,746
Derivative instruments 126,723 1,698
Deferred income taxes - 28,793
Prepaid costs and other   12,144     12,523  
Total current assets   515,068     411,023  
Property and equipment:
Oil and natural gas properties, successful efforts method 8,279,969 7,347,460
Accumulated depletion and depreciation   (1,388,180 )   (1,116,545 )
Total oil and natural gas properties, net 6,891,789 6,230,915
Other property and equipment, net   99,590     59,203  
Total property and equipment, net   6,991,379     6,290,118  
Funds held in escrow 50,000 17,394
Deferred loan costs, net 72,281 65,641
Intangible asset - operating rights, net 32,651 33,425
Inventory 25,749 19,419
Noncurrent derivative instruments 63,029 7,944
Other assets   8,152     4,612  
Total assets $ 7,758,309   $ 6,849,576  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable:
Trade $ 29,361 $ 23,341
Related parties 540 11
Bank overdrafts 33,528 39,241
Revenue payable 133,808 146,061
Accrued and prepaid drilling costs 319,601 293,919
Derivative instruments - 56,218
Deferred income taxes 45,076 -
Other current liabilities   137,171     142,686  
Total current liabilities   699,085     701,477  
Long-term debt 2,523,366 2,080,141
Deferred income taxes 1,120,593 1,002,295
Noncurrent derivative instruments - 32,254
Asset retirement obligations and other long-term liabilities 59,700 52,670
Commitments and contingencies
Stockholders’ equity:

Common stock, $0.001 par value; 300,000,000 authorized; 104,386,021 and 103,756,222 shares issued at June 30, 2012 and December 31, 2011, respectively

104 104
Additional paid-in capital 1,952,735 1,925,757
Retained earnings 1,409,288 1,058,874

Treasury stock, at cost; 79,643 and 55,990 shares at June 30, 2012 and December 31, 2011, respectively

  (6,562 )   (3,996 )
Total stockholders’ equity   3,355,565     2,980,739  
Total liabilities and stockholders’ equity $ 7,758,309   $ 6,849,576  
                 
       

Concho Resources Inc.

Consolidated Statements of Operations

Unaudited

                 
 
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts)   2012   2011   2012   2011
 
Operating revenues:
Oil sales $ 361,313 $ 342,747 $ 774,960 $ 625,174
Natural gas sales   71,483     103,485     165,641     181,898  
Total operating revenues   432,796     446,232     940,601     807,072  
Operating costs and expenses:
Oil and natural gas production 87,689 69,577 179,839 133,235
Exploration and abandonments 14,398 400 20,377 1,126
Depreciation, depletion and amortization 141,450 98,881 277,319 189,169
Accretion of discount on asset retirement obligations 1,047 715 2,035 1,419
Impairments of long-lived assets - 76 - 76

General and administrative (including non-cash stock-based compensation of $7,347 and $4,725 for the three months ended June 30, 2012 and 2011, respectively, and $13,475 and $9,193 for the six months ended June 30, 2012 and 2011, respectively)

31,968 22,618 59,355 44,010
(Gain) loss on derivatives not designated as hedges   (403,050 )   (144,882 )   (244,957 )   88,260  
Total operating costs and expenses   (126,498 )   47,385     293,968     457,295  
Income from operations   559,294     398,847     646,633     349,777  
Other income (expense):
Interest expense (41,899 ) (21,660 ) (77,736 ) (51,320 )
Other, net   (535 )   (1,735 )   (1,803 )   (2,087 )
Total other expense   (42,434 )   (23,395 )   (79,539 )   (53,407 )
Income from continuing operations before income taxes 516,860 375,452 567,094 296,370
Income tax expense   (197,563 )   (143,270 )   (216,680 )   (112,801 )
Income from continuing operations 319,297 232,182 350,414 183,569
Income from discontinued operations, net of tax   -     -     -     91,188  
Net income $ 319,297   $ 232,182   $ 350,414   $ 274,757  
Basic earnings per share:
Income from continuing operations $ 3.10 $ 2.26 $ 3.40 $ 1.79
Income from discontinued operations, net of tax   -     -     -     0.89  
Net income per share $ 3.10   $ 2.26   $ 3.40   $ 2.68  
Weighted average shares used in basic earnings per share   103,114     102,569     102,984     102,407  
Diluted earnings per share:
Income from continuing operations $ 3.07 $ 2.24 $ 3.38 $ 1.77
Income from discontinued operations, net of tax   -     -     -     0.88  
Net income per share $ 3.07   $ 2.24   $ 3.38   $ 2.65  
Weighted average shares used in diluted earnings per share   103,880     103,638     103,825     103,570  
                                 
 

Concho Resources Inc.

Consolidated Statements of Cash Flows

Unaudited

         
 
Six Months Ended
June 30,
(in thousands)   2012   2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 350,414 $ 274,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization 277,319 189,169
Impairments of long-lived assets - 76
Accretion of discount on asset retirement obligations 2,035 1,419
Exploration and abandonments, including dry holes 11,539 168
Non-cash compensation expense 13,475 9,193
Deferred income taxes 202,559 101,967
Loss on sale of assets, net 68 1,455
(Gain) loss on derivatives not designated as hedges (244,957 ) 88,260
Discontinued operations - (82,118 )
Other non-cash items 5,837 (2,321 )
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 7,425 (105,761 )
Prepaid costs and other (3,160 ) (3,734 )
Inventory (6,385 ) (10,868 )
Accounts payable 6,549 (29,488 )
Revenue payable (12,253 ) 66,164
Other current liabilities   500     (12,491 )
Net cash provided by operating activities   610,965     485,847  
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on oil and natural gas properties (949,059 ) (677,172 )
Additions to other property and equipment (45,701 ) (24,981 )
Proceeds from the sale of assets 4,419 196,252
Funds held in escrow (32,606 ) -
Settlements paid on derivatives not designated as hedges   (23,624 )   (76,047 )
Net cash used in investing activities   (1,046,571 )   (581,948 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 1,776,500 1,645,000
Payments of debt (1,333,500 ) (1,569,000 )
Exercise of stock options 3,110 7,140
Excess tax benefit from stock-based compensation 10,393 21,117
Payments for loan costs (12,250 ) (24,466 )
Purchase of treasury stock (2,566 ) (1,720 )
Bank overdrafts   (5,713 )   18,043  
Net cash provided by financing activities   435,974     96,114  
Net increase in cash and cash equivalents 368 13
Cash and cash equivalents at beginning of period   342     384  
Cash and cash equivalents at end of period $ 710   $ 397  
SUPPLEMENTAL CASH FLOWS:
Cash paid for interest and fees, net of $73 capitalized interest in 2011 $ 67,528 $ 32,069
Cash paid for income taxes $ 12,982 $ 14,322
         
         

Concho Resources Inc.

Summary Production and Price Data

Unaudited

 

The following table sets forth summary information from our continuing and discontinued operations concerning our production and operating data for the periods indicated:

                     
 
Three Months Ended Six Months Ended
June 30, June 30,
        2012   2011   2012   2011
 
Production and operating data:
Net production volumes:
Oil (MBbl) 4,220 3,522 8,434 6,749
Natural gas (MMcf) 15,619 12,307 31,848 24,314
Total (MBoe) 6,823 5,573 13,742 10,801
 
Average daily production volumes:
Oil (Bbl) 46,374 38,703 46,341 37,287
Natural gas (Mcf) 171,637 135,242 174,989 134,331
Total (Boe) 74,980 61,244 75,506 59,675
 
Average prices:
Oil, without derivatives (Bbl) $ 85.62 $ 97.32 $ 91.89 $ 94.03
Oil, with derivatives (Bbl) (a) $ 87.51 $ 83.57 $ 89.01 $ 82.09
Natural gas, without derivatives (Mcf) $ 4.58 $ 8.41 $ 5.20 $ 7.48
Natural gas, with derivatives (Mcf) (a) $ 4.60 $ 8.90 $ 5.22 $ 7.94
Total, without derivatives (Boe) $ 63.43 $ 80.07 $ 68.45 $ 75.60
Total, with derivatives (Boe) (a) $ 64.65 $ 72.48 $ 66.73 $ 69.18
 
Operating costs and expenses per Boe:
Lease operating expenses and workover costs $ 7.52 $ 5.97 $ 7.40 $ 6.28
Oil and natural gas taxes $ 5.33 $ 6.51 $ 5.69 $ 6.21
Depreciation, depletion and amortization $ 20.73 $ 17.74 $ 20.18 $ 17.71
General and administrative $ 4.69 $ 4.06 $ 4.32 $ 4.07
                     

(a)

Includes the effect of cash settlements received from (paid on) commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash settlements received from (paid on) commodity derivatives not designated as hedges that were included in computing average prices with derivatives and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the statements of operations:

 

 

Three Months Ended Six Months Ended
June 30, June 30,
(in thousands)   2012   2011   2012   2011
 
Gain (loss) on derivatives not designated as hedges:
Cash receipts from (payments on) oil derivatives $ 7,963 $ (48,398 ) $ (24,233 ) $ (80,628 )
Cash receipts from natural gas derivatives 324 6,076 609 11,205
Cash payments on interest rate derivatives - (5,429 ) - (6,624 )

Unrealized mark-to-market gain (loss) on commodity and interest rate derivatives

  394,763   192,633     268,581     (12,213 )
Gain (loss) on derivatives not designated as hedges $ 403,050 $ 144,882   $ 244,957   $ (88,260 )
                 
 
The presentation of average prices with derivatives is a non-GAAP measure as a result of including the cash receipts from (payments on) commodity derivatives that are presented in gain (loss) on derivatives not designated as hedges in the statements of operations. This presentation of average prices with derivatives is a means by which to reflect the actual cash performance of our commodity derivatives for the respective periods and presents oil and natural gas prices with derivatives in a manner consistent with the presentation generally used by the investment community.
         

The following table sets forth summary information from our continuing operations concerning production and operating data for the periods indicated:

                     
 
Three Months Ended Six Months Ended
June 30, June 30,
        2012   2011   2012   2011
 
Production and operating data:
Net production volumes:
Oil (MBbl) 4,220 3,522 8,434 6,632
Natural gas (MMcf) 15,619 12,307 31,848 24,277
Total (MBoe) 6,823 5,573 13,742 10,678
 
Average daily production volumes:
Oil (Bbl) 46,374 38,703 46,341 36,641
Natural gas (Mcf) 171,637 135,242 174,989 134,127
Total (Boe) 74,980 61,244 75,506 58,995
 
Average prices:
Oil, without derivatives (Bbl) $ 85.62 $ 97.32 $ 91.89 $ 94.27
Oil, with derivatives (Bbl) (a) $ 87.51 $ 83.57 $ 89.01 $ 82.11
Natural gas, without derivatives (Mcf) $ 4.58 $ 8.41 $ 5.20 $ 7.49
Natural gas, with derivatives (Mcf) (a) $ 4.60 $ 8.90 $ 5.22 $ 7.95
Total, without derivatives (Boe) $ 63.43 $ 80.07 $ 68.45 $ 75.58
Total, with derivatives (Boe) (a) $ 64.65 $ 72.48 $ 66.73 $ 69.08
 
Operating costs and expenses per Boe:
Lease operating expenses and workover costs $ 7.52 $ 5.97 $ 7.40 $ 6.31
Oil and natural gas taxes $ 5.33 $ 6.51 $ 5.69 $ 6.17
Depreciation, depletion and amortization $ 20.73 $ 17.74 $ 20.18 $ 17.72
General and administrative $ 4.69 $ 4.06 $ 4.32 $ 4.12
                     

(a)

Includes the effect of cash settlements received from (paid on) commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash settlements received from (paid on) commodity derivatives not designated as hedges that were included in computing average prices with derivatives and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the statements of operations:

 

 

 
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands)   2012   2011   2012   2011
 
Gain (loss) on derivatives not designated as hedges:
Cash receipts from (payments on) oil derivatives $ 7,963 $ (48,398 ) $ (24,233 ) $ (80,628 )
Cash receipts from natural gas derivatives 324 6,076 609 11,205
Cash payments on interest rate derivatives - (5,429 ) - (6,624 )

Unrealized mark-to-market gain (loss) on commodity and interest rate derivatives

  394,763   192,633     268,581     (12,213 )
Gain (loss) on derivatives not designated as hedges $ 403,050 $ 144,882   $ 244,957   $ (88,260 )
                 
 
The presentation of average prices with derivatives is a non-GAAP measure as a result of including the cash receipts from (payments on) commodity derivatives that are presented in gain (loss) on derivatives not designated as hedges in the statements of operations. This presentation of average prices with derivatives is a means by which to reflect the actual cash performance of our commodity derivatives for the respective periods and presents oil and natural gas prices with derivatives in a manner consistent with the presentation generally used by the investment community.
       

Concho Resources Inc. Supplemental Non-GAAP Financial Measures Unaudited

 

The following tables provide information that the Company believes may be useful to investors who follow the practice of some industry analysts who adjust reported company net income and cash flows from operating activities to exclude certain non-cash items.

 

Adjusted Net Income

 

The following table provides a reconciliation of net income (GAAP) to adjusted net income (non-GAAP) for the three and six months ended June 30, 2012 and 2011.

                 
 
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts)   2012   2011   2012   2011
 
Net income - as reported $ 319,297 $ 232,182 $ 350,414 $ 274,757
 
Adjustments for certain non-cash items:
Unrealized (gain) loss on commodity and interest rate derivatives (394,763 ) (192,633 ) (268,581 ) 12,213
Impairments of long-lived assets - 76 - 76
Leasehold abandonments 8,437 30 8,557 156
Discontinued operations:
Gain on sale of assets - - - (141,950 )
Tax impact (a)   147,577     73,545     99,329     49,341  
Adjusted net income $ 80,548   $ 113,200   $ 189,719   $ 194,593  
 
Adjusted basic earnings per share:
Adjusted net income per share $ 0.78 $ 1.10 $ 1.84 $ 1.90
Weighted average shares used in adjusted basic earnings per share 103,114 102,569 102,984 102,407
 
Adjusted diluted earnings per share:
Adjusted net income per share $ 0.78 $ 1.09 $ 1.83 $ 1.88
Weighted average shares used in adjusted diluted earnings per share 103,880 103,638 103,825 103,570
                 
 

(a)

The tax impact is computed utilizing the Company's statutory effective federal and state income tax rates. The income tax rates for the three months ended June 30, 2012 and 2011 were both approximately 38.2%, and 38.2% and 38.1% for the six months ended June 30, 2012 and 2011, respectively.

Adjusted Cash Flows

The following table provides a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP) for the six months ended June 30, 2012 and 2011.

         
   
Six Months Ended
June 30,
(in thousands)   2012   2011
 
Cash flows from operating activities $ 610,965 $ 485,847
Settlements paid on derivatives not designated as hedges (a)   (23,624 )   (76,047 )
Adjusted cash flows $ 587,341   $ 409,800  
         
 

(a) Amounts are presented in cash flows from investing activities for GAAP purposes.

 

EBITDAX

EBITDAX (as defined below) is presented herein, and reconciled from the generally accepted accounting principles ("GAAP") measure of net income because of its wide acceptance by the investment community as a financial indicator of a company's ability to internally fund exploration and development activities.

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