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Press release from Business Wire

Concho Resources Inc. Reports Third Quarter 2011 Financial and Operating Results and Provides 2012 Capital Budget Detail and Guidance

Wednesday, November 02, 2011

Concho Resources Inc. Reports Third Quarter 2011 Financial and Operating Results and Provides 2012 Capital Budget Detail and Guidance16:54 EDT Wednesday, November 02, 2011 MIDLAND, Texas (Business Wire) -- Concho Resources Inc. (NYSE: CXO) (“Concho” or the “Company”) today reported financial and operating results for the three and nine months ended September 30, 2011. Highlights for the three months ended September 30, 2011 include: Production of 6.3 million barrels of oil equivalent (“MMBoe”) for the third quarter of 2011, an increase of 73% over the third quarter of 2010 and a 13% increase over the second quarter of 2011 Net income of $356.2 million, or $3.44 per diluted share, for the third quarter of 2011, as compared to net income of $20.8 million, or $0.22 per diluted share, in the third quarter of 2010 Adjusted net income1 (non-GAAP) of $117.8 million, or $1.14 per diluted share, for the third quarter of 2011, as compared to $71.4 million, or $0.77 per diluted share, for the third quarter of 2010 EBITDAX2 (non-GAAP) of $349.6 million for the third quarter of 2011, an increase of 90% over the third quarter of 2010 1 Adjusted net income (non-GAAP) is comparable to securities analyst estimates. For an explanation of how we calculate adjusted net income (non-GAAP) and a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. 2 For an explanation of how we calculate and use EBITDAX (non-GAAP) and a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. Third Quarter 2011 Financial Results Production for the third quarter of 2011 totaled 6.3 MMBoe (3.9 million barrels of oil (“MMBbls”) and 14.7 billion cubic feet of natural gas (“Bcf”)), an increase of 73% as compared to 3.6 MMBoe (2.5 MMBbls and 7.1 Bcf) produced in the third quarter of 2010 from continuing operations. The increase in production is due in part to the Marbob acquisition in the fourth quarter of 2010 and the Company's successful 2010 and 2011 drilling program. Timothy A. Leach, Concho's Chairman, CEO and President, commented, “Our third quarter results reflect outstanding execution by the entire Concho organization. Our team achieved record levels of production and cash flows while finishing the quarter in excellent financial position with a healthy balance sheet and significant liquidity. Looking forward to 2012, we expect to continue our trend of delivering substantial organic production growth while spending within cash flow and focusing on rate-of-return. We will allocate a greater proportion of our 2012 drilling budget to our Delaware Basin Bone Spring play, where we are expanding and testing the multiple horizons across our acreage. With our recent expansion efforts in the Delaware Basin Bone Spring play, I believe that we have assembled a premier acreage position that will enhance our future growth. Looking to the fourth quarter, we remain on track to meet our goals for 2011 and expect the momentum from our operational success to carry into 2012.” For the third quarter of 2011, the Company reported net income of $356.2 million, or $3.44 per diluted share, as compared to net income of $20.8 million, or $0.22 per diluted share, for the third quarter of 2010. The Company's third quarter 2011 results were impacted by several non-cash items, including a $387.0 million unrealized mark-to-market gain on commodity derivatives and $0.6 million of leasehold abandonments. Excluding these items and their tax effects, the third quarter 2011 adjusted net income (non-GAAP) was $117.8 million, or $1.14 per diluted share. Excluding these similar items and an impairment of long-lived assets recorded in the third quarter of 2010, our adjusted net income (non-GAAP) for the third quarter of 2010 was $71.4 million, or $0.77 per diluted share. For a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see “Supplemental Non-GAAP Financial Measures” below. EBITDAX (defined as net income, plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) bad debt expense, (7) unrealized (gain) loss on derivatives not designated as hedges, (8) (gain) loss on sale of assets, net, (9) interest expense, (10) federal and state income taxes, and (11) similar items listed above that are presented in discontinued operations) increased to $349.6 million in the third quarter of 2011, as compared to $184.3 million in the third quarter of 2010. For a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please see “Supplemental Non-GAAP Financial Measures” below. Operating revenues for the third quarter of 2011 increased 101% when compared to the third quarter of 2010. This increase is attributable to the 73% increase in production, the 19% increase in the Company's unhedged realized oil price and the 22% increase in the Company's unhedged realized natural gas price in the third quarter of 2011 compared to the same period in 2010. Oil and natural gas production expense for the third quarter of 2011, including taxes, totaled $84.1 million, or $13.32 per Boe, a 16% increase per Boe over the third quarter of 2010. This increase was primarily due to higher lease operating expenses and workover costs, in part due to higher third-party labor costs and a prior period underestimate of costs. Depreciation, depletion and amortization for the third quarter of 2011 totaled $115.7 million, or $18.34 per Boe, a 16% increase per Boe from $57.6 million, or $15.82 per Boe, in the third quarter of 2010. The increase in depletion expense was primarily due to capitalized costs associated with new wells that were successfully drilled and completed in 2010 and 2011 and the Marbob acquisition. General and administrative expense (“G&A”) for the third quarter of 2011 totaled $22.9 million, or $3.62 per Boe, compared to $15.3 million, or $4.20 per Boe, in the third quarter of 2010. The decrease in per Boe expense in the third quarter of 2011 over the third quarter of 2010 was primarily due to increased production, offset by a 50% increase in absolute G&A costs due in part to increased staffing across the Company and the addition of employees from the Marbob acquisition. The Company's cash flows from operating activities (GAAP) for the nine months ended September 30, 2011 was $779.0 million, as compared to $402.8 million for the nine months ended September 30, 2010, an increase of 93%. Adjusted cash flows (non-GAAP), which are cash flows from operating activities adjusted for settlements paid on derivatives not designated as hedges, was $701.2 million for the nine months ended September 30, 2011, as compared to $397.5 million for the nine months ended September 30, 2010, an increase of 76%. For a description of the use of adjusted cash flows (non-GAAP) and for a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP), please see “Supplemental Non-GAAP Financial Measures” below. In the third quarter of 2011, the Company made net cash payments for settlements on derivatives contracts not designated as hedges of $1.8 million and the non-cash unrealized mark-to-market gain for the derivatives contracts not designated as hedges was $387.0 million. This is compared to net cash receipts of $4.1 million on derivatives contracts not designated as hedges and a $70.2 million non-cash unrealized mark-to-market loss on contracts not designated as hedges in the third quarter of 2010. To better understand the impact of the Company's derivatives positions and their impact on the statement of operations, please see the “Summary Production and Operating Data” and “Derivatives Information” tables at the end of this press release.Operations For the quarter ended September 30, 2011, the Company commenced the drilling of or participated in a total of 223 gross wells (194 operated), 69 of which had been completed as producers and 154 of which were in progress at September 30, 2011. In addition, during the third quarter of 2011, the Company completed 170 wells that were drilled prior to the third quarter of 2011. Currently, the Company is operating 30 drilling rigs in the Permian Basin; 10 of these rigs are drilling Yeso wells in the New Mexico Shelf, 13 are drilling Wolfberry wells in the Texas Permian, 6 are drilling in the Delaware Basin Bone Spring play and 1 rig is drilling Lower Abo wells in the New Mexico Shelf. New Mexico Shelf During the third quarter of 2011, the Company drilled 122 wells (105 operated) on its New Mexico Shelf assets, which included both Yeso and Lower Abo wells, with a 100% success rate on the 55 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 71 wells that were drilled prior to the third quarter of 2011. Texas Permian During the third quarter of 2011, the Company drilled 77 wells (74 operated) on its Texas Permian assets with a 100% success rate on the 12 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 77 wells that were drilled prior to the third quarter of 2011. Delaware Basin During the third quarter of 2011, the Company drilled 24 wells (15 operated) on its Delaware Basin assets with a 100% success rate on the 2 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 22 wells that were drilled prior to the third quarter of 2011. The Company's net production in the third quarter of 2011 from the Bone Spring play, which includes the Avalon shale, the Bone Spring sands and the Wolfcamp shale, averaged approximately 8,900 Boepd, an increase of 59% over the second quarter of 2011. 2012 Capital Budget Concho's capital budget for 2012 is approximately $1.3 billion, which the Company believes will yield production in the range of 27.0 – 28.0 MMBoe. This budget contemplates operating an average of 35 drilling rigs for 2012. The Company estimates that its 2012 capital budget can be funded entirely out of its after-tax cash flow assuming (i) a NYMEX crude oil price of $85 per barrel and a NYMEX natural gas price of $4 per thousand cubic feet of natural gas (“Mcf”) for the Company's unhedged production and (ii) that the Company achieves the mid-point of its 2012 production guidance. The Company intends to monitor both the direction of commodity prices and the costs of goods and services and may adjust its capital budget, and resultant estimated production and cash flows, as conditions warrant. Of the approximately $1.1 billion dedicated to the Company's core areas, approximately $500 million will be dedicated to drilling and recompletion projects on its New Mexico Shelf assets (primarily in the Yeso and Lower Abo plays), approximately $375 million will be dedicated to drilling projects on its Delaware Basin assets (primarily in the Bone Spring play) and approximately $260 million will be dedicated to drilling and recompletion projects on its Texas Permian assets (primarily in the Wolfberry play). The Company expects to drill or participate in a total of 850 gross wells (700 operated), which includes 359 Yeso wells, 13 Lower Abo wells, 113 Bone Spring play wells and 309 Wolfberry wells. The remaining $160 million of capital will be allocated between leasehold acquisition, geological and geophysical (“G&G”), exploratory costs and other ($110 million) and facilities ($50 million). 2012 Guidance   Production: Oil equivalent (MMBoe) 27.0 - 28.0 Oil (MMBbls) 17.3 - 17.9 Natural gas (Bcf) 58.3 - 60.5   Price differentials to NYMEX: (excluding the effects of hedging) Oil (Bbl) 93% - 95% Natural gas (Mcf) 140% - 160%   Operating costs and expenses: Lease operating expense: Direct lease operating expense ($/Boe) $6.40 - $6.80 Oil & natural gas taxes (% of oil and natural gas revenue) 8.25%   G&A expense: Cash G&A expense ($/Boe) $3.25 - $3.50 Non-cash stock based compensation ($/Boe) $0.80 - $0.90   DD&A expense ($/Boe) $18.00 - $19.00   Exploration, abandonments and G&G ($/Boe) $0.50 - $1.50   Cash interest rates: $300 million senior notes due 2017 8.625% $600 million senior notes due 2021 7.000% $600 million senior notes due 2022 6.500% Remainder of debt LIBOR + (150 - 250 bps)   Income taxes: 38% Percent deferred of total taxes 80% - 90%   Capital expenditures ($ in billions) $1.3   Liquidity Update Lenders under Concho's revolving credit facility recently completed their semi-annual redetermination of the borrowing base, voting unanimously to reaffirm the $2.5 billion borrowing base and aggregate commitment of $2.0 billion. At September 30, 2011, Concho had $293.0 million outstanding on the credit facility. Derivative Update The Company maintains an active hedging program and continued to add to its derivative positions through October 2011. 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 Thursday, November 3, 2011 at 9:00 a.m. Central Time to discuss the third quarter 2011 financial and operating results and the 2012 capital budget and guidance. Interested parties may listen to the conference call via the Company's website at http://www.concho.com or by dialing (800) 659-2032 (passcode: 39505486). A replay of the conference call will be available on the Company's website or by dialing (888) 286-8010 (passcode: 60178210). 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 StatementsThe 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, liquidity and capital resources, operations, performance, production growth, acquisitions, returns, capital expenditure budgets, oil and natural gas reserves, number of identified drilling locations, drilling program, derivative activities, costs and other guidance included in this press release. 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; our existing indebtedness; 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 SheetsUnaudited             September 30,   December 31,(in thousands, except share and per share data)     2011       2010   Assets Current assets: Cash and cash equivalents $ 174 $ 384 Accounts receivable, net of allowance for doubtful accounts: Oil and natural gas 216,832 136,471 Joint operations and other 168,935 131,912 Related parties 103 169 Derivative instruments 145,671 6,855 Deferred income taxes - 42,716 Prepaid costs and other   15,381     12,126   Total current assets   547,096     330,633   Property and equipment: Oil and natural gas properties, successful efforts method 6,687,087 5,616,249 Accumulated depletion and depreciation   (995,261 )   (730,509 ) Total oil and natural gas properties, net 5,691,826 4,885,740 Other property and equipment, net   53,791     28,047   Total property and equipment, net   5,745,617     4,913,787   Deferred loan costs, net 68,297 52,828 Intangible asset - operating rights, net 33,811 34,973 Inventory 26,349 28,342 Noncurrent derivative instruments 90,752 2,233 Other assets   10,864     5,698   Total assets $ 6,522,786   $ 5,368,494   Liabilities and Stockholders' Equity Current liabilities: Accounts payable: Trade $ 6,781 $ 39,943 Related parties 25 1,197 Other current liabilities: Bank overdrafts 56,892 12,314 Revenue payable 143,605 57,406 Accrued and prepaid drilling costs 291,151 215,079 Derivative instruments 1,960 97,775 Deferred income taxes 52,521 - Other current liabilities   108,751     83,275   Total current liabilities   661,686     506,989   Long-term debt 1,789,532 1,668,521 Deferred income taxes 972,346 720,889 Noncurrent derivative instruments - 51,647 Asset retirement obligations and other long-term liabilities 41,583 36,574 Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value; 300,000,000 authorized; 103,724,471 and 102,842,082 shares issued at September 30, 2011 and December 31, 2010, respectively 104 103 Additional paid-in capital 1,919,397 1,874,649 Retained earnings 1,141,699 510,737 Treasury stock, at cost; 51,499 and 31,963 shares at September 30, 2011 and December 31, 2010, respectively   (3,561 )   (1,615 ) Total stockholders' equity   3,057,639     2,383,874   Total liabilities and stockholders' equity $ 6,522,786   $ 5,368,494                         Concho Resources Inc.Consolidated Statements of OperationsUnaudited                                   Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands, except per share data)       2011       2010(a)         2011       2010(a)   Operating revenues: Oil sales $ 332,659 $ 177,601 $ 957,833 $ 489,681 Natural gas sales   121,809     48,190     303,707     134,598   Total operating revenues   454,468     225,791     1,261,540     624,279   Operating costs and expenses: Oil and natural gas production 84,050 41,762 217,285 111,534 Exploration and abandonments 3,498 3,617 4,624 5,648 Depreciation, depletion and amortization 115,730 57,624 304,899 157,394 Accretion of discount on asset retirement obligations 751 349 2,170 1,006 Impairments of long-lived assets - 1,922 76 5,667 General and administrative (including non-cash stock-based compensation of $4,673 and $3,152 for the three months ended September 30, 2011 and 2010, respectively, and $13,866 and $8,854 for the nine months ended September 30, 2011 and 2010, respectively) 22,873 15,285 66,883 46,824 Bad debt expense - 6 - 578 (Gain) loss on derivatives not designated as hedges   (385,222 )   66,107     (296,962 )   (62,229 ) Total operating costs and expenses   (158,320 )   186,672     298,975     266,422   Income from operations   612,788     39,119     962,565     357,857   Other income (expense): Interest expense (32,881 ) (12,036 ) (84,201 ) (34,293 ) Other, net   (2,503 )   (3,521 )   (4,590 )   (3,898 ) Total other expense   (35,384 )   (15,557 )   (88,791 )   (38,191 ) Income from continuing operations before income taxes 577,404 23,562 873,774 319,666 Income tax expense   (221,199 )   (7,392 )   (334,000 )   (118,375 ) Income from continuing operations 356,205 16,170 539,774 201,291 Income from discontinued operations, net of tax   -     4,605     91,188     11,195   Net income $ 356,205   $ 20,775   $ 630,962   $ 212,486   Basic earnings per share: Income from continuing operations $ 3.47 $ 0.18 $ 5.27 $ 2.23 Income from discontinued operations, net of tax   -     0.05     0.88     0.12   Net income per share $ 3.47   $ 0.23   $ 6.15   $ 2.35   Weighted average shares used in basic earnings per share   102,733     91,182     102,517     90,361   Diluted earnings per share: Income from continuing operations $ 3.44 $ 0.18 $ 5.21 $ 2.20 Income from discontinued operations, net of tax   -     0.04     0.88     0.12   Net income per share $ 3.44   $ 0.22   $ 6.09   $ 2.32   Weighted average shares used in diluted earnings per share   103,696     92,440     103,613     91,631                         (a) Retrospectively adjusted for presentation of discontinued operations.     Concho Resources Inc.Consolidated Statements of Cash FlowsUnaudited               Nine Months EndedSeptember 30,(in thousands)     2011       2010(a)   CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 630,962 $ 212,486 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 304,899 157,394 Impairments of long-lived assets 76 5,667 Accretion of discount on asset retirement obligations 2,170 1,006 Exploration and abandonments, including dry holes 807 3,995 Non-cash compensation expense 13,866 8,854 Bad debt expense - 578 Deferred income taxes 312,199 107,261 Loss on sale of assets 3,129 24 Gain on derivatives not designated as hedges (296,962 ) (62,229 ) Discontinued operations (82,118 ) 19,041 Other non-cash items 309 3,760 Changes in operating assets and liabilities: Accounts receivable (125,091 ) (35,505 ) Prepaid costs and other (8,420 ) (700 ) Inventory 1,204 (4,673 ) Accounts payable (34,334 ) (8,127 ) Revenue payable 86,199 9,716 Other current liabilities   (29,909 )   (15,792 ) Net cash provided by operating activities   778,986     402,756   CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures on oil and natural gas properties (932,770 ) (486,903 ) Acquisition of oil and natural gas properties (113,438 ) (17,730 ) Additions to other property and equipment (29,954 ) (3,750 ) Proceeds from the sale of assets 196,252 790 Settlements paid on derivatives not designated as hedges   (77,835 )   (5,231 ) Net cash used in investing activities   (957,745 )   (512,824 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 2,079,000 840,500 Payments of long-term debt (1,949,500 ) (998,000 ) Net proceeds from issuance of common stock - 219,308 Exercise of stock options 7,661 4,371 Excess tax benefit related to stock-based compensation 23,222 8,968 Payments for loan origination costs (24,466 ) (2,299 ) Purchase of treasury stock (1,946 ) (793 ) Bank overdrafts   44,578     35,136   Net cash provided by financing activities   178,549     107,191   Net decrease in cash and cash equivalents (210 ) (2,877 ) Cash and cash equivalents at beginning of period   384     3,234   Cash and cash equivalents at end of period $ 174   $ 357   SUPPLEMENTAL CASH FLOWS: Cash paid for interest and fees, net of $73 and $119 capitalized interest $ 60,752 $ 27,627 Cash paid for income taxes $ 15,610 $ 17,771           (a) Retrospectively adjusted for presentation of discontinued operations.     Concho Resources Inc.Summary Production and Operating DataUnaudited   The following table sets forth summary information from our continuing operations concerning production and operating data for the periods indicated:               Three Months EndedNine Months EndedSeptember 30,September 30,           2011       2010         2011       2010     Production and operating data:Net production volumes: Oil (MBbl) 3,869 2,460 10,501 6,613 Natural gas (MMcf) 14,652 7,098 38,929 19,081 Total (MBoe) 6,311 3,643 16,989 9,793   Average daily production volumes: Oil (Bbl) 42,054 26,739 38,465 24,223 Natural gas (Mcf) 159,258 77,152 142,596 69,894 Total (Boe) 68,597 39,598 62,231 35,872   Average prices: Oil, without derivatives (Bbl) $ 85.98 $ 72.20 $ 91.21 $ 74.05 Oil, with derivatives (Bbl) (a) $ 83.90 $ 72.62 $ 82.77 $ 72.24 Natural gas, without derivatives (Mcf) $ 8.31 $ 6.79 $ 7.80 $ 7.05 Natural gas, with derivatives (Mcf) (a) $ 8.74 $ 7.39 $ 8.25 $ 7.60 Total, without derivatives (Boe) $ 72.01 $ 61.98 $ 74.26 $ 63.75 Total, with derivatives (Boe) (a) $ 71.73 $ 63.43 $ 70.06 $ 63.59   Operating costs and expenses per Boe: Lease operating expenses and workover costs $ 7.42 $ 5.57 $ 6.72 $ 5.88 Oil and natural gas taxes $ 5.90 $ 5.89 $ 6.07 $ 5.51 Depreciation, depletion and amortization $ 18.34 $ 15.82 $ 17.95 $ 16.07 General and administrative $ 3.62 $ 4.20 $ 3.94 $ 4.78                           (a) Includes the effect of the 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 consolidated statements of operations:                           Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands)     2011       2010         2011       2010     Gain (loss) on derivatives not designated as hedges: Cash receipts from (payments on) oil derivatives $ (8,051 ) $ 1,034 $ (88,679 ) $ (11,951 ) Cash receipts from natural gas derivatives 6,263 4,258 17,468 10,378 Cash payments on interest rate derivatives - (1,224 ) (6,624 ) (3,658 ) Unrealized mark-to-market gain (loss) on commodity and interest rate derivatives   387,010     (70,175 )   374,797     67,460   Gain (loss) on derivatives not designated as hedges $ 385,222   $ (66,107 ) $ 296,962   $ 62,229                         The presentation of average prices with derivatives is a non-GAAP measure as a result of including the cash payments on/receipts from 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 MeasuresUnauditedEBITDAX 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. We define EBITDAX as net income, plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) bad debt expense, (7) unrealized (gain) loss on derivatives not designated as hedges, (8) (gain) loss on sale of assets, net, (9) interest expense, (10) federal and state income taxes, and (11) similar items listed above that are presented in discontinued operations. EBITDAX is not a measure of net income or cash flows as determined by GAAP. Our EBITDAX measure (which includes continuing and discontinued operations) provides additional information which may be used to better understand our operations. EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income, as an indicator of our operating performance. Certain items excluded from EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic cost of depreciable assets, none of which are components of EBITDAX. EBITDAX, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team, and by other users, of our consolidated financial statements. For example, EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure, and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis. The following table provides a reconciliation of net income to EBITDAX:                                   Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands)       2011       2010       2011       2010     Net income $ 356,205 $ 20,775 $ 630,962 $ 212,486 Exploration and abandonments 3,498 3,617 4,624 5,648 Depreciation, depletion and amortization 115,730 57,624 304,899 157,394 Accretion of discount on asset retirement obligations 751 349 2,170 1,006 Impairments of long-lived assets - 1,922 76 5,667 Non-cash stock-based compensation 4,673 3,152 13,866 8,854 Bad debt expense - 6 - 578 Unrealized (gain) loss on derivatives not designated as hedges (387,010 ) 70,175 (374,797 ) (67,460 ) Loss on sale of assets, net 1,674 193 3,129 24 Interest expense 32,881 12,036 84,201 34,293 Income tax expense 221,199 7,392 334,000 118,375 Discontinued operations   -     7,030   (83,306 )   22,729   EBITDAX $ 349,601   $ 184,271 $ 919,824   $ 499,594                                           Adjusted Net Income 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 earnings and cash flows from operating activities to match realizations to production settlement months and make other adjustments to exclude certain non-cash items. The following table provides a reconciliation of net income (GAAP) to adjusted net income (non-GAAP).                                   Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands, except per share data)       2011       2010         2011       2010     Net income - as reported $ 356,205 $ 20,775 $ 630,962 $ 212,486   Adjustments for certain non-cash items: Unrealized mark-to-market (gain) loss on commodity and interest rate derivatives (387,010 ) 70,175 (374,797 ) (67,460 ) Impairments of long-lived assets - 1,922 76 5,667 Leasehold abandonments 639 3,176 795 3,903 Discontinued operations: Impairments of long-lived assets - - - 3,567 Gain on sale of assets - - (141,950 ) - Tax impact (a)   147,980     (24,614 )   197,065     20,100   Adjusted net income $ 117,814   $ 71,434   $ 312,151   $ 178,263     Adjusted basic earnings per share: Adjusted net income per share $ 1.15 $ 0.78 $ 3.04 $ 1.97 Weighted average shares used in adjusted basic earnings per share 102,733 91,182 102,517 90,361   Adjusted diluted earnings per share: Adjusted net income per share $ 1.14 $ 0.77 $ 3.01 $ 1.95 Weighted average shares used in adjusted diluted earnings per share 103,696 92,440 103,613 91,631                         (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 September 30, 2011 and 2010, were 38.3% and 32.7%, respectively, and 38.2% and 37.0% for the nine months ended September 30, 2011 and 2010, respectively.     Adjusted Cash Flows The following table provides a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP).               Nine Months EndedSeptember 30,(in thousands)     2011       2010     Cash flows from operating activities (a) $ 778,986 $ 402,756 Settlements paid on derivatives not designated as hedges (b)   (77,835 )   (5,231 ) Adjusted cash flows $ 701,151   $ 397,525                   (a) Cash flows from operating activities includes net reductions of $110.4 million and $55.1 million for the nine months ended September 30, 2011 and 2010, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payments of actual cash.     (b) Amounts are presented in cash flows from investing activities for GAAP purposes.         Concho Resources Inc.Costs IncurredUnaudited   The table below provides the costs incurred for the three and nine months ended September 30, 2011 and 2010.   Costs incurred for oil and natural gas producing activities (a)               Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands)       2011     2010       2011     2010     Property acquisition costs: Proved $ - $ 3,762 $ 69,148 $ 17,501 Unproved 42,432 10,874 117,772 31,903 Exploration 138,170 74,740 410,089 136,673 Development   233,062   88,310   567,547   334,222   Total costs incurred for oil and natural gas properties $ 413,664 $ 177,686 $ 1,164,556 $ 520,299                                 (a) The costs incurred for oil and natural gas producing activities includes the following amounts of asset retirement obligations:                         Three Months EndedNine Months EndedSeptember 30,September 30,(in thousands)       2011     2010       2011     2010     Proved property acquisition costs $ - $ - $ 148 $ - Exploration costs 198 321 838 573 Development costs   1,342   197   2,094   (1,227 ) Total $ 1,540 $ 518 $ 3,080 $ (654 )                                     Concho Resources Inc.Derivatives Information at November 2, 2011Unaudited   The table below provides data associated with our derivatives at November 2, 2011.               Fourth Quarter20112012201320142015     Oil Swaps: Volume (Bbl) 3,133,436 11,308,000 7,434,000 1,248,000 600,000 NYMEX price (Bbl) (a) $ 89.00 $ 93.85 $ 94.29 $ 83.94 $ 84.50   Natural Gas Swaps: Volume (MMBtu) 3,069,000 300,000 - - - NYMEX price (MMBtu) (b) $ 6.62 $ 6.54 - - -   Natural Gas Basis Swaps: Volume (MMBtu) 1,800,000 - - - - Price differential ($/MMBtu) (c) $ 0.76 - - - -                         (a) The index prices for the oil contracts are based on the NYMEX-West Texas Intermediate monthly average futures price. (b) The index prices for the natural gas contracts are based on the NYMEX-Henry Hub last trading day of the month futures price. (c) The basis differential between the El Paso Permian delivery point and NYMEX-Henry Hub delivery point. Concho Resources Inc.Toffee McAlister, 432-683-7443Director, Investor Relations & Corporate Communications