UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q þ
 
 QUARTERLY REPORT PURSUANT TO SECTION 13
  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended March 31, 2013 or o
 
 TRANSITION REPORT PURSUANT TO SECTION 13
  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto  Commission file number: 1-33615 Concho Resources Inc. (Exact name of registrant as specified in its charter) Delaware
 
 76-0818600(State or other jurisdiction
 
 (I.R.S. Employerof incorporation or organization)
 
 Identification No.)One Concho Center600 West Illinois AvenueMidland, Texas
 
 79701(Address of principal executive offices)
 
 (Zip code)
  (432) 683-7443(Registrant’s telephone number, including area code)
   Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YesþNoo  Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).YesþNoo  Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.  Large
  accelerated filerþ
 Accelerated
  fileroNon-accelerated
  filero(Do not check if a smaller reporting company)
 Smaller
  reporting companyo
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YesoNoþ  Number of shares of the registrant’s common stock outstanding at April
29, 2013: 104,731,689 shares


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TABLE
  OF CONTENTSPART I – FINANCIAL INFORMATION:
 iiiItem 1.Consolidated Financial Statements
  (Unaudited)
 iiiItem 2.Management’s Discussion and Analysis
  of Financial Condition and Results of Operations
 42Item 3.Quantitative and Qualitative
  Disclosures About Market Risk
 59Item 4.Controls and Procedures
 61PART II – OTHER INFORMATION:
 62Item 1.Legal Proceedings
 62Item 1A.Risk Factors
 62Item 2.Unregistered Sales of Equity
  Securities and Use of Proceeds
 62Item 6.Exhibits
 63
  i


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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Various statements contained in or
incorporated by reference into this report that express a belief, expectation,
or intention, or that are not statements of historical fact, are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking
statements include statements, projections and estimates concerning our
operations, performance, business strategy, oil and natural gas reserves,
drilling program, capital expenditures, liquidity and capital resources, the
timing and success of specific projects, outcomes and effects of litigation,
claims and disputes, derivative activities and potential financing.
Forward-looking statements are generally accompanied by words such as
“estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,”
“potential,” “could,” “may,” “foresee,” “plan,” “goal” or other words that
convey the uncertainty of future events or outcomes. Forward-looking statements
are not guarantees of performance. We have based these forward-looking
statements on our current expectations and assumptions about future events.
These statements are based on certain assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments as well as other factors we believe
are appropriate under the circumstances. Actual results may differ materially
from those implied or expressed by the forward-looking statements. These forward-looking
statements speak only as of the date of this report, or if earlier, as of the
date they were made. We disclaim any obligation to update or revise these
statements unless required by law, and we caution you not to rely on them
unduly. While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic,
competitive, regulatory and other risks, contingencies and uncertainties
relating to, among other matters, the risks discussed in our Annual Report on
Form 10-K for the year ended December 31, 2012 and in this report, as well as
those factors summarized below: ·declines in the
prices we receive for our oil and natural gas; ·uncertainties
about the estimated quantities of oil and natural gas reserves; ·drilling and
operating risks, including risks related to properties where we do not serve as
the operator and risks related to hydraulic fracturing activities; ·the adequacy of
our capital resources and liquidity including, but not limited to, access to
additional borrowing capacity under our credit facility; ·the effects of
government regulation, permitting and other legal requirements, including new
legislation or regulation of hydraulic fracturing; ·difficult and
adverse conditions in the domestic and global capital and credit markets; ·risks related to
the concentration of our operations in the Permian Basin of Southeast New
Mexico and West Texas; ·shortages of
oilfield equipment, supplies, services and qualified personnel and increased
costs for such equipment, supplies, services and personnel; ·potential
financial losses or earnings reductions from our commodity price management
program; ·risks and
liabilities associated with acquired properties or businesses; ·uncertainties
about our ability to successfully execute our business and financial plans and
strategies; ·uncertainties
about our ability to replace reserves and economically develop our current
reserves; ·general economic
and business conditions, either internationally or domestically; ·competition in the
oil and natural gas industry; and ·uncertainty
concerning our assumed or possible future results of operations. Reserve
engineering is a process of estimating underground accumulations of oil and
natural gas that cannot be measured in an exact way. The accuracy of any
reserve estimate depends on the quality of available data, the interpretation
of such data and price and cost assumptions made by our reserve engineers. In
addition, the results of drilling, testing and production activities may
justify revisions of estimates that were made previously. If significant, such
revisions would change the schedule of any further production and development
drilling. Accordingly, reserve estimates may differ from the quantities of oil
and natural gas that are ultimately recovered.   ii


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PART I
– FINANCIAL INFORMATION  Item 1. 
Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets at March
  31, 2013 and December 31, 2012
 1Consolidated Statements of Operations
  for the Three Months Ended March 31, 2013 and 2012
 2Consolidated Statement of
  Stockholders' Equity for the Three Months Ended March 31, 2013
 3Consolidated Statements of Cash Flows
  for the Three Months Ended March 31, 2013 and 2012
 4Condensed Notes to Consolidated
  Financial Statements
 5
                   iii


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Concho
  Resources Inc.Consolidated
  Balance SheetsUnauditedMarch
  31,
 
 
 December
  31,(in thousands, except share and per share amounts)
 
 
 2013
 
 
 2012AssetsCurrent assets:Cash and cash equivalents
 
 $
 974
 
 $
 2,880Accounts receivable, net of allowance for doubtful accounts:Oil and natural gas
 
 
 195,524
 
 
 198,053Joint operations and other
 
 
 209,057
 
 
 202,738Derivative instruments
 
 
 7,201
 
 
 35,942Deferred income taxes
 
 
 16,420
 
 
 -Prepaid costs and other
 
 
 17,226
 
 
 19,269Total current assets
 
 
 446,402
 
 
 458,882Property and equipment:Oil and natural gas properties, successful efforts method
 
 
 9,907,856
 
 
 9,455,599Accumulated depletion and depreciation
 
 
 (1,729,399)
 
 
 (1,565,316)Total oil and natural gas properties, net
 
 
 8,178,457
 
 
 7,890,283Other property and equipment, net
 
 
 103,578
 
 
 103,141Total property and equipment, net
 
 
 8,282,035
 
 
 7,993,424Deferred loan costs, net
 
 
 74,355
 
 
 77,609Intangible asset - operating rights, net
 
 
 29,711
 
 
 30,076Inventory
 
 
 20,604
 
 
 20,611Noncurrent derivative instruments
 
 
 2,908
 
 
 2,769Other assets
 
 
 7,383
 
 
 6,066Total assets
 
 $
 8,863,398
 
 $
 8,589,437Liabilities
  and Stockholders’ EquityCurrent liabilities:Accounts payable:Trade
 
 $
 7,333
 
 $
 31,144Related parties
 
 
 629
 
 
 185Bank overdrafts
 
 
 39,000
 
 
 24,275Revenue payable
 
 
 133,389
 
 
 162,073Accrued and prepaid drilling costs
 
 
 371,976
 
 
 351,919Derivative instruments
 
 
 34,029
 
 
 1,584Deferred income taxes
 
 
 -
 
 
 8,566Other current liabilities
 
 
 183,432
 
 
 160,340Total current liabilities
 
 
 769,788
 
 
 740,086Long-term debt
 
 
 3,264,626
 
 
 3,101,103Deferred income taxes
 
 
 1,220,440
 
 
 1,186,621Noncurrent derivative instruments
 
 
 16,035
 
 
 12,049Asset retirement obligations and other long-term liabilities
 
 
 87,026
 
 
 83,382Commitments and contingencies (Note J)Stockholders’ equity:Common stock, $0.001 par value; 300,000,000 authorized;
  104,848,854 and104,668,427 shares issued at March 31, 2013 and December 31,
  2012, respectively
 
 
 105
 
 
 105Additional paid-in capital
 
 
 1,994,817
 
 
 1,982,714Retained earnings
 
 
 1,520,656
 
 
 1,490,563Treasury stock, at cost; 118,591 and 86,861 shares at March 31,
  2013 and December 31,2012, respectively
 
 
 (10,095)
 
 
 (7,186)Total stockholders’ equity
 
 
 3,505,483
 
 
 3,466,196Total liabilities and stockholders’ equity
 
 $
 8,863,398
 
 $
 8,589,437The accompanying notes are an integral part of these
  consolidated financial statements.
 1


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Concho
  Resources Inc.Consolidated
  Statements of OperationsUnauditedThree
  Months EndedMarch
  31,(in thousands, except per share amounts)
 
 
 2013
 
 
 2012Operating revenues:Oil sales
 
 $
 393,208
 
 $
 383,963Natural gas sales
 
 
 78,919
 
 
 89,821Total operating revenues
 
 
 472,127
 
 
 473,784Operating costs and expenses:Oil and natural gas production
 
 
 100,845
 
 
 81,577Exploration and abandonments
 
 
 18,407
 
 
 5,979Depreciation, depletion and amortization
 
 
 168,420
 
 
 127,263Accretion of discount on asset retirement obligations
 
 
 1,394
 
 
 841General and administrative (including non-cash stock-based
  compensation of $6,767 and$6,128 for the three months ended March 31, 2013 and 2012,
  respectively)
 
 
 43,293
 
 
 27,979Loss on derivatives not designated as hedges
 
 
 59,017
 
 
 158,093Total operating costs and expenses
 
 
 391,376
 
 
 401,732Income from operations
 
 
 80,751
 
 
 72,052Other income (expense):Interest expense
 
 
 (52,106)
 
 
 (35,837)Other, net
 
 
 (109)
 
 
 (1,268)Total other expense
 
 
 (52,215)
 
 
 (37,105)Income from continuing operations before income taxes
 
 
 28,536
 
 
 34,947Income tax expense
 
 
 (10,977)
 
 
 (13,615)Income from continuing operations
 
 
 17,559
 
 
 21,332Income from discontinued operations, net of tax
 
 
 12,534
 
 
 9,785Net income
 
 $
 30,093
 
 $
 31,117Basic earnings per share:Income from continuing operations
 
 $
 0.17
 
 $
 0.21Income from discontinued operations, net of tax
 
 
 0.12
 
 
 0.09Net income
 
 $
 0.29
 
 $
 0.30Weighted average shares used in basic earnings per share
 
 
 103,631
 
 
 102,854Diluted earnings per share:Income from continuing operations
 
 $
 0.17
 
 $
 0.21Income from discontinued operations, net of tax
 
 
 0.12
 
 
 0.09Net income
 
 $
 0.29
 
 $
 0.30Weighted average shares used in diluted earnings per share
 
 
 104,345
 
 
 103,770The accompanying notes are an integral part of these
  consolidated financial statements.
 2


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Concho Resources Inc.Consolidated Statement of Stockholders’ EquityUnauditedAdditional
 
 
 
 
 
 
 
 
 
 
 TotalCommon Stock
 
 
 Paid-in
 
 
 Retained
 
 Treasury Stock
 
 Stockholders’(in thousands)
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Earnings
 
 Shares
 
 
 Amount
 
 
 EquityBALANCE AT
  DECEMBER 31, 2012
 
 104,668
 
 $
 105
 
 $
 1,982,714
 
 $
 1,490,563
 
 87
 
 $
 (7,186)
 
 $
 3,466,196Net income
 
 -
 
 
 -
 
 
 -
 
 
 30,093
 
 -
 
 
 -
 
 
 30,093Stock options
  exercised
 
 118
 
 
 -
 
 
 2,059
 
 
 -
 
 -
 
 
 -
 
 
 2,059Grants of restricted
  stock
 
 132
 
 
 -
 
 
 -
 
 
 -
 
 -
 
 
 -
 
 
 -Cancellation of
  restricted stock
 
 (69)
 
 
 -
 
 
 -
 
 
 -
 
 -
 
 
 -
 
 
 -Stock-based
  compensation
 
 -
 
 
 -
 
 
 6,767
 
 
 -
 
 -
 
 
 -
 
 
 6,767Excess tax benefits
  related to stock-basedcompensation
 
 -
 
 
 -
 
 
 3,277
 
 
 -
 
 -
 
 
 -
 
 
 3,277Purchase of treasury
  stock
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 32
 
 
 (2,909)
 
 
 (2,909)BALANCE AT MARCH 31,
  2013
 
 104,849
 
 $
 105
 
 $
 1,994,817
 
 $
 1,520,656
 
 119
 
 $
 (10,095)
 
 $
 3,505,483The accompanying
  notes are an integral part of these consolidated financial statements.
 3


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Concho
  Resources Inc.Consolidated
  Statements of Cash FlowsUnauditedThree
  Months EndedMarch
  31,(in thousands)
 
 2013
 
 2012CASH FLOWS FROM OPERATING ACTIVITIES:Net income
 
 $
 30,093
 
 $
 31,117Adjustments to reconcile net income to net cash provided by
  operating activities:Depreciation, depletion and amortization
 
 
 168,420
 
 
 127,263Accretion of discount on asset retirement obligations
 
 
 1,394
 
 
 841Exploration and abandonments, including dry holes
 
 
 4,478
 
 
 3,102Non-cash stock-based compensation expense
 
 
 6,767
 
 
 6,128Deferred income taxes
 
 
 11,500
 
 
 12,007Loss on sale of assets, net
 
 
 5
 
 
 895Loss on derivatives not designated as hedges
 
 
 59,017
 
 
 158,093Discontinued operations
 
 
 (19,754)
 
 
 9,315Other non-cash items
 
 
 3,376
 
 
 2,818Changes in operating assets and liabilities, net of acquisitions
  and dispositions:Accounts receivable
 
 
 12,608
 
 
 (19,102)Prepaid costs and other
 
 
 726
 
 
 (1,494)Inventory
 
 
 (21)
 
 
 6,328Accounts payable
 
 
 (27,679)
 
 
 (11,727)Revenue payable
 
 
 (15,636)
 
 
 31,722Other current liabilities
 
 
 (15,623)
 
 
 (11,401)Net cash provided by operating activities
 
 
 219,671
 
 
 345,905CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures on oil and natural gas properties
 
 
 (419,766)
 
 
 (541,665)Additions to other property and equipment
 
 
 (4,244)
 
 
 (20,234)Proceeds from the sale of assets
 
 
 15,865
 
 
 669Funds held in escrow
 
 
 -
 
 
 17,394Settlements received from (paid on) derivatives not designated
  as hedges
 
 
 6,016
 
 
 (31,911)Net cash used in investing activities
 
 
 (402,129)
 
 
 (575,747)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of debt
 
 
 626,700
 
 
 1,180,000Payments of debt
 
 
 (463,300)
 
 
 (978,500)Exercise of stock options
 
 
 2,059
 
 
 2,996Excess tax benefit from stock-based compensation
 
 
 3,277
 
 
 6,781Payments for loan costs
 
 
 -
 
 
 (10,050)Purchase of treasury stock
 
 
 (2,909)
 
 
 (2,038)Bank overdrafts
 
 
 14,725
 
 
 30,917Net cash provided by financing activities
 
 
 180,552
 
 
 230,106Net increase (decrease) in cash and cash equivalents
 
 
 (1,906)
 
 
 264Cash and cash equivalents at beginning of period
 
 
 2,880
 
 
 342Cash and cash equivalents at end of period
 
 $
 974
 
 $
 606SUPPLEMENTAL CASH FLOWS:Cash paid for interest and fees
 
 $
 43,988
 
 $
 51,647Cash paid for income taxes
 
 $
 3,145
 
 $
 5,455The accompanying notes are an integral part of these
  consolidated financial statements.
 4


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note A.Organization and nature of operations  Concho
Resources Inc. (the “Company”) is a Delaware corporation formed on
February 22, 2006. The Company’s principal business is the acquisition,
development and exploration of oil and natural gas properties primarily located
in the Permian Basin region of Southeast New Mexico and West Texas.  Note B.Summary
of significant accounting policies  Principles of consolidation.The consolidated financial statements of the Company include
the accounts of the Company and its wholly-owned subsidiaries. The Company
consolidates the financial statements of these entities. All material
intercompany balances and transactions have been eliminated.  Use of estimates in the preparation of financial statements.Preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America (“U.S. GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. Depletion
of oil and natural gas properties is determined using estimates of proved oil
and natural gas reserves. There are numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production and the timing of development expenditures. Similarly,
evaluations for impairment of proved and unproved oil and natural gas
properties are subject to numerous uncertainties including, among others,
estimates of future recoverable reserves and commodity price outlooks. Other
significant estimates include, but are not limited to, the asset retirement
obligations, fair value of derivative financial instruments, fair value
measurements for business combinations and fair value of stock-based
compensation.  Interim financial statements.The accompanying consolidated financial statements of the
Company have not been audited by the Company’s independent registered public
accounting firm, except that the consolidated balance sheet at December 31,
2012 is derived from audited consolidated financial statements.  In the opinion
of management, the accompanying consolidated financial statements reflect all
adjustments necessary to present fairly the Company’s financial position at March
31, 2013 and its results of operations and cash flows for the three months
ended March 31, 2013 and 2012. All such adjustments are of a normal recurring
nature. In preparing the accompanying consolidated financial statements,
management has made certain estimates and assumptions that affect reported
amounts in the consolidated financial statements and disclosures of
contingencies. Actual results may differ from those estimates. The results for
interim periods are not necessarily indicative of annual results.  Certain
disclosures have been condensed in or omitted from these consolidated financial
statements. Accordingly, these consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2012.  Deferred loan costs.Deferred loan costs are stated at cost, net of
amortization, which is computed using the effective interest and straight-line
methods. The Company had deferred loan costs of $74.4 million and $77.6
million, net of accumulated amortization of $42.0 million and $38.8 million, at
March 31, 2013 and December 31, 2012, respectively. 5


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Future amortization expense of deferred loan costs at
March 31, 2013 was as follows:  (in thousands)Remaining 2013
 
 $
 9,8832014
 
 
 13,4762015
 
 
 13,8422016
 
 
 8,5542017
 
 
 5,749Thereafter
 
 
 22,851Total
 
 $
 74,355
  Intangible assets.The Company has capitalized certain operating rights acquired
in an acquisition. The gross operating rights, which have no residual value,
are amortized over the estimated economic life of 25 years. Impairment will be
assessed if indicators of potential impairment exist or when there is a
material change in the remaining useful economic life. The following table
reflects the gross and net intangible assets at March 31, 2013 and December 31,
2012:  March
  31,
 
 
 December
  31,(in thousands)
 
 
 2013
 
 
 2012Gross intangible - operating rights
 
 $
 36,557
 
 $
 36,557Accumulated amortization
 
 
 (6,846)
 
 
 (6,481)Net intangible - operating rights
 
 $
 29,711
 
 $
 30,076
  The
following table reflects amortization expense from continuing and discontinued
operations for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Amortization
  expense
 
 $
 365
 
 $
 387
 6


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The
following table reflects the estimated aggregate amortization expense for each
of the periods presented below at March 31, 2013:  (in thousands)Remaining 2013
 
 $
 1,0962014
 
 
 1,4612015
 
 
 1,4612016
 
 
 1,4612017
 
 
 1,461Thereafter
 
 
 22,771Total
 
 $
 29,711
  Oil and natural gas sales and imbalances.Oil and natural gas revenues are
recorded at the time of delivery to pipelines for the account of the purchaser
or at the time of physical transfer to the purchaser. The Company follows the
sales method of accounting for oil and natural gas sales, recognizing revenues
based on the Company’s share of actual proceeds from the oil and natural gas
sold to purchasers. Oil and natural gas imbalances are generated on properties
for which two or more owners have the right to take production “in-kind” and,
in doing so, take more or less than their respective entitled percentage.
Imbalances are tracked by well, but the Company does not record any receivable
from or payable to the other owners unless the imbalance has reached a level at
which it exceeds the remaining reserves in the respective well. If reserves are
insufficient to offset the imbalance and the Company is in an overtake
position, a liability is recorded for the amount of shortfall in reserves valued
at a contract price or the market price in effect at the time the imbalance is
generated. If the Company is in an undertake position, a receivable is recorded
for an amount that is reasonably expected to be received, not to exceed the
current market value of such imbalance.  Treasury stock.Treasury stock purchases are recorded at cost.  Upon reissuance, the
cost of treasury shares held is reduced by the average purchase price per share
of the aggregate treasury shares held.  General and administrative expense.The Company receives fees for the operation of
jointly-owned oil and natural gas properties and records such reimbursements as
reductions of general and administrative expense. Such fees from continuing and
discontinued operations totaled approximately $4.2 million and $3.8
million for the three months ended March 31, 2013 and 2012, respectively.  Recent accounting pronouncements.In December 2011, the Financial Accounting Standards
Board (the “FASB”) issued amendments to enhance disclosures required by U.S.
GAAP by requiring improved information about financial instruments and
derivative instruments that are either (i) offset in accordance with the
current definition of “right of setoff” or the current balance sheet netting
for derivative instruments allowed under current U.S. GAAP or (ii) subject to
an enforceable master netting arrangement or similar agreement, irrespective of
whether they are offset in accordance with either the definition of “right of
setoff” or the current balance sheet netting for derivative instruments. This
information will enable users of an entity’s financial statements to evaluate
the effect or potential effect of netting arrangements on an entity’s financial
position, including the effect or potential effect of rights of setoff
associated with certain financial instruments and derivative instruments in the
scope of the update.  7


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 An entity is required to apply the amendments for
annual reporting periods beginning on or after January 1, 2013, and interim
periods within those annual periods. An entity should provide the disclosures
required by those amendments retrospectively for all comparative periods
presented. The Company adopted this update on January 1, 2013, and the update
did not have a significant impact on the consolidated financial statements.  Note C.Exploratory well
costs  The
Company capitalizes exploratory well costs until a determination is made that
the well has either found proved reserves or that it is impaired. The
capitalized exploratory well costs are carried in unproved oil and natural gas
properties. See Note R for the proved and unproved components of oil and
natural gas properties.  If the exploratory well is determined to be impaired,
the well costs are charged to expense.  The
following table reflects the Company’s capitalized exploratory well activity
during the three months ended March 31, 2013:  Three Months Ended(in thousands)
 March 31, 2013Beginning
  capitalized exploratory well costs
 
 $
 118,806Additions to
  exploratory well costs pending the determination of proved reserves
 
 
 271,647Reclassifications
  due to determination of proved reserves
 
 
 (207,400)Exploratory well
  costs charged to expense
 
 
 (69)Ending capitalized
  exploratory well costs
 
 $
 182,984
  The
following table provides an aging at March 31, 2013 and December 31, 2012 of
capitalized exploratory well costs based on the date drilling was completed:  March 31,
 
 
 December 31,(in thousands)
 
 
 2013
 
 
 2012Exploratory wells in
  progress
 
 $
 37,605
 
 $
 22,837Capitalized
  exploratory well costs that have been capitalized for a period of one year or
  less
 
 
 145,379
 
 
 95,969Capitalized
  exploratory well costs that have been capitalized for a period greater than
  one year
 
 
 -
 
 
 -Total capitalized
  exploratory well costs
 
 $
 182,984
 
 $
 118,806
  At
March 31, 2013, the Company had 104 gross exploratory wells either drilling or
waiting on results from completion and testing, of which 42 wells were in the
Delaware Basin area, 38 wells were in the New Mexico Shelf area, and 24 wells
were in the Texas Permian area. 8


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note D.Acquisitions  Three
Rivers Acquisition.In July 2012, the Company acquired certain
producing and non-producing assets from Three Rivers Operating Company LLC and
certain affiliated entities (collectively, the “Three Rivers Acquisition”) for
cash consideration of approximately $1.0 billion. The Three Rivers Acquisition
was primarily funded with borrowings under the Company’s credit facility. The
Company’s results of operations prior to July 2012 do not include results from
the Three Rivers Acquisition.  The
following table reflects the fair value of the acquired asset and liabilities with
the Three Rivers Acquisition:  (in thousands)Fair value of net assets:Proved oil and natural gas properties
 
 $
 683,482Unproved oil and natural gas properties
 
 
 359,109Total assets acquired
 
 
 1,042,591Current liabilities, including current portion of asset retirement
  obligations
 
 
 (2,229)Asset retirement obligations assumed
 
 
 (26,002)Fair value of net assets acquired
 
 $
 1,014,360Fair value of consideration paid for net assets:Cash consideration
 
 $
 1,014,360
 9


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
   PDC Acquisition.In February 2012, the Company acquired certain producing and
non-producing assets from Petroleum Development Corporation (the “PDC
Acquisition”) for cash consideration of approximately $189.2 million.  The
PDC Acquisition was primarily funded with borrowings under the Company’s credit
facility. The Company’s results of operations prior to March 2012 do not
include results from the PDC Acquisition.  The
following table reflects the fair value of the acquired assets and liabilities
associated with the PDC Acquisition:  (in thousands)Fair value of net
  assets:Current assets
 
 $
 2,366Proved oil and
  natural gas properties
 
 
 159,314Unproved oil and
  natural gas properties
 
 
 29,687Total assets
  acquired
 
 
 191,367Current liabilities
 
 
 (123)Asset retirement
  obligations assumed
 
 
 (2,050)Fair value of net
  assets acquired
 
 $
 189,194Fair value of
  consideration paid for net assets:Cash consideration
 
 $
 189,194
  Pro forma data.The following unaudited
pro forma combined condensed financial data for the three months ended March
31, 2012, were derived from the historical financial statements of the Company
giving effect to the Three Rivers Acquisition, as if it had occurred on January
1, 2012. The results of operations since the closing of the Three Rivers
Acquisition in July 2012 are included in the Company’s results of operations.
The pro forma financial data does not include the results of operations for the
PDC Acquisition, as the results of operations were deemed not to be material.
The unaudited pro forma combined condensed financial data has been included for
comparative purposes only and is not necessarily indicative of the results that
might have occurred had the Three Rivers Acquisition taken place as of the date
indicated and is not intended to be a projection of future results.  Three
  Months Ended(in thousands, except per share amounts)
 
 March
  31, 2012(unaudited)Operating revenues
 
 $
 510,679Net income
 
 $
 19,333Earnings per common share:Basic
 
 $
 0.19Diluted
 
 $
 0.19
 10


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note E.Asset retirement obligations  The
Company’s asset retirement obligations represent the estimated present value of
the estimated cash flows the Company will incur to plug, abandon and remediate
its producing properties at the end of their productive lives, in accordance
with applicable state laws. The Company does not provide for a market risk
premium associated with asset retirement obligations because a reliable
estimate cannot be determined. The Company has no assets that are legally
restricted for purposes of settling asset retirement obligations.  The
Company’s asset retirement obligation transactions during the three months
ended March 31, 2013 and 2012 are summarized in the table below:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Asset retirement
  obligations, beginning of period
 
 $
 86,261
 
 $
 59,685Liabilities
  incurred from new wells
 
 
 1,592
 
 
 1,777Liabilities assumed
  in acquisitions
 
 
 161
 
 
 2,050Accretion expense
  for continuing operations
 
 
 1,394
 
 
 841Accretion expense
  for discontinued operations
 
 
 -
 
 
 147Disposition of
  wells
 
 
 (303)
 
 
 -Liabilities settled
  upon plugging and abandoning wells
 
 
 (854)
 
 
 (110)Revision of
  estimates
 
 
 672
 
 
 (935)Asset retirement
  obligations, end of period
 
 $
 88,923
 
 $
 63,455
  Note F.Incentive plans  Defined contribution plan.The Company sponsors a 401(k) defined contribution plan for
the benefit of substantially all employees. Currently, the Company matches 100
percent of employee contributions, not to exceed 10 percent of the
employee’s annual salary. The Company’s contributions to the plans for the
three months ended March 31, 2013 and 2012, were approximately
$1.2 million and $0.9 million, respectively. 11


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Stock
incentive plan.The Company’s 2006 Stock Incentive Plan, as amended and
restated (the “Plan”), provides for granting stock options, restricted stock
awards and performance awards to employees and individuals associated with the
Company. The following table shows the number of existing awards and awards
available under the Plan at March 31, 2013:  Number ofCommon SharesApproved and
  authorized awards
 
 7,500,000Restricted stock
  grants, net of forfeitures
 
 (2,044,445)Stock option
  grants, net of forfeitures
 
 (3,463,720)Performance unit
  grants (a)
 
 (332,667)Treasury shares
 
 118,591Awards available
  for future grant
 
 1,777,759(a)
 This
  amount represents the number of units granted (110,889) multiplied by the
  maximum potential payout of 300 percent.  The actual payout of shares may be
  between zero percent and 300 percent of the performance units granted
  depending on the Company's performance at the end of the performance period.
 Restricted
stock awards.All restricted shares are treated as issued and
outstanding in the accompanying consolidated balance sheets. If an employee
terminates employment prior to the restriction lapse date, the awarded shares
are forfeited and cancelled and are no longer considered issued and
outstanding. A summary of the Company’s restricted stock award activity for the
three months ended March 31, 2013 is presented below:  Number of
 
 
 Grant DateRestricted
 
 
 Fair ValueShares
 
 
 Per ShareRestricted stock:Outstanding at
  December 31, 2012
 
 1,072,527Shares granted
 
 131,656
 
 $
 83.50Shares cancelled /
  forfeited
 
 (69,373)Lapse of
  restrictions
 
 (111,638)Outstanding at
  March 31, 2013
 
 1,023,172
 12


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The following
table summarizes information about stock-based compensation for the Company’s
restricted stock awards activity under the Plan for the three months ended
March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Grant
  date fair value for awards during the period: (a)Employee grants
 
 $
 593
 
 $
 1,254Officer and
  director grants
 
 
 11,386
 
 
 17,461Total
 
 $
 11,979
 
 $
 18,715Stock-based
  compensation expense from restricted stock:Employee grants
 
 $
 3,672
 
 $
 2,742Officer and
  director grants
 
 
 2,088
 
 
 3,277Total
 
 $
 5,760
 
 $
 6,019Income
  taxes and other information:Income tax benefit
  related to restricted stock
 
 $
 2,202
 
 $
 2,301Deductions in
  current taxable income related to restricted stock
 
 $
 9,790
 
 $
 9,017(a)
 The three months
  ended March 31, 2013 includes effects of modifications to certain stock-based
  awards.
  Stock
option awards.A summary of the Company’s stock option award
activity under the Plan for the three months ended March 31, 2013 is presented
below:  WeightedAverageNumber of
 
 
 ExerciseOptions
 
 
 PriceStock
  options:Outstanding at
  December 31, 2012
 
 429,879
 
 $
 20.28Options exercised
 
 (118,144)
 
 $
 17.43Outstanding at
  March 31, 2013
 
 311,735
 
 $
 21.35Vested and
  exercisable at end of period
 
 311,110
 
 $
 21.32
 13


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The
following table summarizes information about the Company’s vested and exercisable
stock options outstanding at March 31, 2013:  WeightedAverage
 
 
 WeightedRange of
 
 
 
 
 Remaining
 
 
 AverageExercise
 
 
 Number
 
 Contractual
 
 
 Exercise
 
 
 IntrinsicPrices
 
 
 Vested
 
 Life
 
 
 Price
 
 
 Value(in thousands)Vested and
  exercisable options:$8.00
 
 11,597
 
 1.37  years
 
 
 $
 8.00
 
 
 $
 1,037$12.00
 
 33,288
 
 2.63  years
 
 
 $
 12.00
 
 
 
 2,844$12.50 - $15.50
 
 15,000
 
 4.38  years
 
 
 $
 12.85
 
 
 
 1,269$20.00 - $23.00
 
 192,895
 
 5.29  years
 
 
 $
 21.40
 
 
 
 14,667$28.00 - $37.27
 
 58,330
 
 5.15  years
 
 
 $
 31.22
 
 
 
 3,862311,110
 
 4.79  years
 
 
 $
 21.32
 
 
 $
 23,679
  The
following table summarizes information about stock-based compensation for stock
options for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Stock-based
  compensation expense from stock options:Employee grants
 
 $
 1
 
 $
 9Officer and
  director grants
 
 
 13
 
 
 100Total
 
 $
 14
 
 $
 109Income
  taxes and other information:Income tax benefit
  related to stock options
 
 $
 5
 
 $
 42Deductions in
  current taxable income related to stock options exercised
 
 $
 8,501
 
 $
 15,016
 14


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Performance unit awards.During the three months ended March 31, 2013, the Company
awarded performance units to the Company's officers under the Plan. The number
of shares of common stock that could be issued will be determined by a
combination of (i) comparing the Company's total shareholder return relative to
the total shareholder return of a predetermined group of peer companies at the
end of the performance period and (ii) the Company’s absolute total shareholder
return at the end of the performance period. The performance period is 36
months. The grant date fair value was determined using the Monte Carlo
simulation method and is being expensed ratably over the performance period. The Company used the following assumptions to estimate the
fair value of performance unit awards granted during the three months ended
March 31, 2013:  Risk-free interest rate
 
 0.37%Range of volatilities
 
 31.5
  % - 45.1 %
  The following table
summarizes the performance unit activity for the three months ended March 31,
2013:  Number
  of
 
 
 Grant
  DateUnits
  (a)
 
 
 Fair
  ValuePerformance units:Outstanding at December 31, 2012
 
 -Units granted
 
 110,889
 
 $
 111.40Outstanding at March 31, 2013
 
 110,889(a)
 Reflects the amount of
  performance units granted. The actual payout of shares may be between zero
  and 300 percent of the performance units granted depending on the Company's
  performance at the end of the performance period.
 15


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The following
table summarizes information about the stock-based compensation expense for
performance units for the three months ended March 31, 2013:  Three Months Ended(in thousands)
 
 March 31, 2013Stock-based
  compensation expense from performance units:Officer grants
 
 $
 
 993Income
  taxes:Income tax benefit
  related to performance units
 
 $
 
 380
  Future stock-based compensation expense.The following table reflects the
future stock-based compensation expense to be recorded for all the stock-based
compensation awards that were outstanding at March 31, 2013:  Restricted
 
 
 Stock
 
 
 Performance(in thousands)
 
 
 Stock
 
 
 Options
 
 
 Units
 
 
 TotalRemaining 2013
 
 $
 21,024
 
 $
 1
 
 $
 3,088
 
 $
 24,1132014
 
 
 18,261
 
 
 -
 
 
 4,118
 
 
 22,3792015
 
 
 6,630
 
 
 -
 
 
 4,154
 
 
 10,7842016
 
 
 1,304
 
 
 -
 
 
 -
 
 
 1,3042017
 
 
 10
 
 
 -
 
 
 -
 
 
 10Total
 
 $
 47,229
 
 $
 1
 
 $
 11,360
 
 $
 58,590
 16


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note G.Disclosures about fair value of financial
instruments  The
Company uses a valuation framework based upon inputs that market participants
use in pricing an asset or liability, which are classified into two categories:
observable inputs and unobservable inputs.  Observable inputs represent market
data obtained from independent sources, whereas unobservable inputs reflect a
company’s own market assumptions, which are used if observable inputs are not
reasonably available without undue cost and effort. These two types of inputs
are further prioritized into the following fair value input hierarchy:  Level 1:Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets or
liabilities. The Company considers active markets to be those in which
transactions for the assets or liabilities occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.  Level 2:Quoted prices in markets that are not active, or
inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability. This category includes those
derivative instruments that the Company values using observable market data.
Substantially all of these inputs are observable in the marketplace throughout
the full term of the derivative instrument, can be derived from observable
data, or supported by observable levels at which transactions are executed in
the marketplace. Level 2 instruments primarily include non-exchange traded
derivatives such as over-the-counter commodity price swaps, basis swaps,
investments and interest rate swaps. The Company’s valuation models are
primarily industry-standard models that consider various inputs including:
(i) quoted forward prices for commodities, (ii) time value and
(iii) current market and contractual prices for the underlying
instruments, as well as other relevant economic measures. The Company utilizes
its counterparties’ valuations to assess the reasonableness of its prices and
valuation techniques.  Level 3:Measured based on prices or valuation models that
require inputs that are both significant to the fair value measurement and less
observable from objective sources (i.e., supported by little or no
market activity). Level 3 instruments primarily include derivative instruments,
such as commodity price collars and floors, as well as investments. The
Company’s valuation models are primarily industry-standard models that consider
various inputs including: (i) quoted forward prices for commodities,
(ii) time value, (iii) volatility factors and (iv) current
market and contractual prices for the underlying instruments, as well as other
relevant economic measures.  Although the Company utilizes its counterparties’
valuations to assess the reasonableness of its prices and valuation techniques,
the Company does not have sufficient corroborating market evidence to support
classifying these assets and liabilities as Level 2. 17


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The
fair value input hierarchy level to which an asset or liability measurement in
its entirety falls is determined based on the lowest level input that is
significant to the measurement in its entirety. The following table presents
the Company’s assets and liabilities that are measured at fair value on a
recurring basis at March
31, 2013, for each of
the fair value hierarchy levels:  Fair
  Value Measurements at Reporting Date UsingSignificantQuoted
  Prices in
 
 Other
 
 SignificantActive
  Markets for
 
 Observable
 
 Unobservable
 
 Fair
  Value atIdentical
  Assets
 
 Inputs
 
 Inputs
 
 March
  31,(in thousands)
 
 (Level
  1)
 
 (Level
  2)
 
 (Level
  3)
 
 2013Assets:Commodity derivative price swap contracts
 
 $
 -
 
 $
 28,494
 
 $
 -
 
 $
 28,494-
 
 
 28,494
 
 
 -
 
 
 28,494Liabilities:Commodity derivative price swap contracts
 
 
 -
 
 
 (56,892)
 
 
 -
 
 
 (56,892)Commodity derivative basis swap contracts
 
 
 -
 
 
 (11,557)
 
 
 -
 
 
 (11,557)-
 
 
 (68,449)
 
 
 -
 
 
 (68,449)Net financial liabilities
 
 $
 -
 
 $
 (39,955)
 
 $
 -
 
 $
 (39,955)
 18


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Assets and
Liabilities Measured at Fair Value on a Recurring Basis  The
following table presents the carrying amounts and fair values of the Company’s
financial instruments at March
31, 2013 and December
31, 2012:  March
  31, 2013
 
 December
  31, 2012Carrying
 
 Fair
 
 Carrying
 
 Fair(in thousands)
 
 Value
 
 Value
 
 Value
 
 ValueAssets:Derivative instruments
 
 $
 10,109
 
 $
 10,109
 
 $
 38,711
 
 $
 38,711Liabilities:Derivative instruments
 
 $
 50,064
 
 $
 50,064
 
 $
 13,633
 
 $
 13,633Credit facility
 
 $
 467,400
 
 $
 468,247
 
 $
 304,000
 
 $
 299,6798.625% senior notes due 2017
 
 $
 297,226
 
 $
 318,775
 
 $
 297,103
 
 $
 323,4717.0% senior notes due 2021
 
 $
 600,000
 
 $
 660,000
 
 $
 600,000
 
 $
 669,0006.5% senior notes due 2022
 
 $
 600,000
 
 $
 654,000
 
 $
 600,000
 
 $
 660,0005.5% senior notes due 2022
 
 $
 600,000
 
 $
 624,000
 
 $
 600,000
 
 $
 633,0005.5% senior notes due 2023
 
 $
 700,000
 
 $
 726,250
 
 $
 700,000
 
 $
 733,250
 19


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Cash and cash equivalents, accounts receivable, other current assets,
accountspayable,
interest payable and other current liabilities.The carrying
amounts approximate fair value due to the short maturity of these instruments.  Credit facility.The fair value of the Company’s credit facility is estimated by
discounting the principal and interest payments at the Company’s credit-adjusted
discount rate at the reporting date.  Senior notes.The fair values of the Company’s senior notes are based on quoted
market prices.  Derivative instruments.The fair value of the Company’s derivative instruments
is estimated by management considering various factors, including closing
exchange and over-the-counter quotations and the time value of the underlying
commitments.  Financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the valuation of the fair
value of assets and liabilities and their placement within the fair value
hierarchy levels. The following table summarizes (i) the valuation of each of
the Company’s financial instruments by required fair value hierarchy levels and
(ii) the gross fair value by the appropriate balance sheet classification,even
when the derivative instruments are subject to netting arrangements and qualify
for net presentation in the Company’s consolidated balance sheets at March 31, 2013 and December 31, 2012:  Fair Value Measurements UsingSignificant
 
 
 
 
 
 TotalQuoted Prices in
 
 
 Other
 
 
 Significant
 
 
 Fair ValueActive Markets for
 
 
 Observable
 
 
 Unobservable
 
 
 atIdentical Assets
 
 
 Inputs
 
 
 Inputs
 
 
 March 31,(in thousands)
 (Level 1)
 
 
 (Level 2)
 
 
 (Level 3)
 
 
 2013Assets (a)Current:(b)Commodity derivative
  price swap contracts
 
 $
 -
 
 $
 22,735
 
 $
 -
 
 $
 22,735-
 
 
 22,735
 
 
 -
 
 
 22,735Noncurrent:(c)Commodity derivative
  price swap contracts
 
 
 -
 
 
 5,759
 
 
 -
 
 
 5,759-
 
 
 5,759
 
 
 -
 
 
 5,759Liabilities (a)Current:(b)Commodity derivative
  price swap contracts
 
 
 -
 
 
 (38,006)
 
 
 -
 
 
 (38,006)Commodity derivative
  basis swap contracts
 
 
 -
 
 
 (11,557)
 
 
 -
 
 
 (11,557)-
 
 
 (49,563)
 
 
 -
 
 
 (49,563)Noncurrent:(c)Commodity derivative
  basis swap contracts
 
 
 -
 
 
 (18,886)
 
 
 -
 
 
 (18,886)-
 
 
 (18,886)
 
 
 -
 
 
 (18,886)Net financial
  liabilities
 
 $
 -
 
 $
 (39,955)
 
 $
 -
 
 $
 (39,955)(b) Total current
  financial liabilities, gross basis
 
 $
 (26,828)(c) Total noncurrent
  financial liabilities, gross basis
 
 
 (13,127)Net financial
  liabilities
 
 $
 (39,955)
  20


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Fair Value Measurements UsingSignificant
 
 
 
 
 
 TotalQuoted Prices in
 
 
 Other
 
 
 Significant
 
 
 Fair ValueActive Markets for
 
 
 Observable
 
 
 Unobservable
 
 
 atIdentical Assets
 
 
 Inputs
 
 
 Inputs
 
 
 December 31,(in thousands)
 (Level 1)
 
 
 (Level 2)
 
 
 (Level 3)
 
 
 2012Assets (a)Current:(b)Commodity derivative
  price swap contracts
 
 $
 -
 
 $
 56,471
 
 $
 -
 
 $
 56,471-
 
 
 56,471
 
 
 -
 
 
 56,471Noncurrent:(c)Commodity derivative
  price swap contracts
 
 
 -
 
 
 12,108
 
 
 -
 
 
 12,108-
 
 
 12,108
 
 
 -
 
 
 12,108Liabilities (a)Current:(b)Commodity derivative
  price swap contracts
 
 
 -
 
 
 (22,113)
 
 
 -
 
 
 (22,113)-
 
 
 (22,113)
 
 
 -
 
 
 (22,113)Noncurrent:(c)Commodity derivative
  price swap contracts
 
 
 -
 
 
 (21,388)
 
 
 -
 
 
 (21,388)-
 
 
 (21,388)
 
 
 -
 
 
 (21,388)Net financial assets
 
 $
 -
 
 $
 25,078
 
 $
 -
 
 $
 25,078(b) Total current
  financial assets, gross basis
 
 $
 34,358(c) Total noncurrent
  financial liabilities, gross basis
 
 
 (9,280)Net financial assets
 
 $
 25,078(a)
 The
  fair value of derivative instruments reported in the Company’s consolidated
  balance sheets is subject to netting arrangements and qualifies for net
  presentation. The following table reports the derivative fair values as
  reported in the consolidated balance sheets at March 31, 2013 and December
  31, 2012:March 31,
 
 
 December 31,(in thousands)
 
 
 2013
 
 
 2012Consolidated Balance
  Sheets Classification:Current derivative
  contracts:Assets
 
 $
 7,201
 
 $
 35,942Liabilities
 
 
 (34,029)
 
 
 (1,584)Net current
 
 $
 (26,828)
 
 $
 34,358Noncurrent
  derivative contracts:Assets
 
 $
 2,908
 
 $
 2,769Liabilities
 
 
 (16,035)
 
 
 (12,049)Net noncurrent
 
 $
 (13,127)
 
 $
 (9,280)
 21


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Assets and
Liabilities Measured at Fair Value on a Nonrecurring Basis  Certain
assets and liabilities are reported at fair value on a nonrecurring basis in
the Company’s consolidated balance sheets.  The following methods and
assumptions were used to estimate the fair values:  Impairments
of long-lived assets –The Company reviews its long-lived assets to be held and used, including
proved oil and natural gas properties, whenever events or circumstances
indicate that the carrying value of those assets may not be recoverable. An impairment
loss is indicated if the sum of the expected undiscounted future net cash flows
is less than the carrying amount of the assets. In this circumstance, the
Company recognizes an impairment loss for the amount by which the carrying
amount of the asset exceeds the estimated fair value of the asset. The Company
reviews its oil and natural gas properties by depletion base or by individual
well for those wells not constituting part of a depletion base. For each
property determined to be impaired, an impairment loss equal to the difference
between the carrying value of the properties and the estimated fair value
(discounted future cash flows) of the properties would be recognized at that
time. Estimating future cash flows involves the use of judgments, including
estimation of the proved and unproved oil and natural gas reserve quantities,
timing of development and production, expected future commodity prices, capital
expenditures and production costs.  The
Company periodically reviews its proved oil and natural gas properties for
impairment. Impairment expense is caused primarily due to declines in commodity
prices and well performance. The Company did not recognize any impairment
charges for the three months ended March 31, 2013 or 2012.  Asset
retirement obligations –The Company estimates the fair value of Asset Retirement Obligations
(“AROs”) based on discounted cash flow projections using numerous estimates,
assumptions and judgments regarding such factors as the existence of a legal
obligation for an ARO; amounts and timing of settlements; the credit-adjusted
risk-free rate to be used and inflation rates. See Note E for a summary of
changes in AROs. 22


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The following
table sets forth the measurement information for liabilities measured at fair
value on a nonrecurring basis:  Fair Value Measurements UsingQuoted Prices
 
 
 Significantin Active
 
 
 Other
 
 
 SignificantMarkets for
 
 
 Observable
 
 
 UnobservableIdentical Assets
 
 
 Inputs
 
 
 Inputs(in thousands)
 (Level 1)
 
 
 (Level 2)
 
 
 (Level 3)Three Months Ended
  March 31, 2013Asset retirement
  obligations incurred or assumed
 
 $
 -
 
 $
 -
 
 $
 1,753Three Months Ended
  March 31, 2012Asset retirement
  obligations incurred or assumed
 
 $
 -
 
 $
 -
 
 $
 3,827
  Note H.Derivative
financial instruments  The
Company uses derivative financial instruments to manage its exposure to
commodity price fluctuations. Commodity derivative instruments are used to
(i) reduce the effect of the volatility of price changes on the oil and
natural gas the Company produces and sells, (ii) support the Company’s
capital budget and expenditure plans and (iii) support the economics associated
with acquisitions. The Company does not enter into derivative financial
instruments for speculative or trading purposes. The Company may also enter
into physical delivery contracts to effectively provide commodity price hedges.
Because these contracts are not expected to be net cash settled, they are
considered to be normal sales contracts and not derivatives. Therefore, these
contracts are not recorded in the Company’s consolidated financial statements.  The
Company does not designate its derivative instruments to qualify for hedge
accounting.  Accordingly, the Company reflects changes in the fair value of its
derivative instruments in its statements of operations as they occur. 23


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Commodity derivative contracts at March 31, 2013.The following table sets forth the
Company’s outstanding derivative contracts at March 31, 2013. When aggregating multiple contracts, the weighted average
contract price is disclosed.  First
 
 Second
 
 Third
 
 FourthQuarter
 
 Quarter
 
 Quarter
 
 Quarter
 
 TotalOil Swaps: (a)2013:Volume (Bbl)
 
 
 
 3,801,000
 
 3,446,000
 
 3,188,000
 
 10,435,000Price per Bbl
 
 
 $
 95.84
 $
 95.57
 $
 95.34
 $
 95.602014:Volume (Bbl)
 
 2,985,000
 
 2,824,000
 
 2,618,000
 
 2,501,000
 
 10,928,000Price per Bbl
 $
 93.46
 $
 92.16
 $
 90.19
 $
 90.11
 $
 91.572015:Volume (Bbl)
 
 420,000
 
 420,000
 
 119,000
 
 117,000
 
 1,076,000Price per Bbl
 $
 85.91
 $
 85.91
 $
 89.44
 $
 89.43
 $
 86.692016:Volume (Bbl)
 
 108,000
 
 108,000
 
 108,000
 
 105,000
 
 429,000Price per Bbl
 $
 88.32
 $
 88.32
 $
 88.32
 $
 88.28
 $
 88.312017:Volume (Bbl)
 
 84,000
 
 84,000
 
 -
 
 -
 
 168,000Price per Bbl
 $
 87.00
 $
 87.00
 $
 -
 $
 -
 $
 87.00Oil Basis Swaps:
  (b)2013:Volume (Bbl)
 
 
 
 3,458,000
 
 3,220,000
 
 2,944,000
 
 9,622,000Price per Bbl
 
 
 $
 (1.19)
 $
 (1.21)
 $
 (1.23)
 $
 (1.21)(a) The index prices
  for the oil price swaps are based on the NYMEX – West Texas Intermediate
  monthly average futures price.(b) The basis
  differential price is between Midland – WTI and Cushing – WTI.
 24


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The following
table summarizes the losses reported in earnings related to the commodity
derivative instruments for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Loss
  on derivatives not designated as hedges:Cash (payments on)
  receipts from derivatives not designated as hedges:Commodity
  derivatives:Oil
 
 $
 6,016
 
 $
 (32,196)Natural gas
 
 
 -
 
 
 285Mark-to-market
  loss:Commodity
  derivatives:Oil
 
 
 (65,033)
 
 
 (126,108)Natural gas
 
 
 -
 
 
 (74)Total loss on
  derivatives not designated as hedges
 
 $
 (59,017)
 
 $
 (158,093)
  All of the Company’s derivative contracts at March
31, 2013 are expected to settle by June 30, 2017.  Note I.Debt  The Company’s debt consisted of the following at
March 31, 2013 and December 31, 2012:  March 31,
 
 
 December 31,(in thousands)
 
 
 2013
 
 
 2012Credit facility
 
 $
 467,400
 
 $
 304,0008.625% unsecured
  senior notes due 2017
 
 
 300,000
 
 
 300,0007.0% unsecured
  senior notes due 2021
 
 
 600,000
 
 
 600,0006.5% unsecured
  senior notes due 2022
 
 
 600,000
 
 
 600,0005.5% unsecured
  senior notes due 2022
 
 
 600,000
 
 
 600,0005.5% unsecured
  senior notes due 2023
 
 
 700,000
 
 
 700,000Unamortized
  original issue discount, net
 
 
 (2,774)
 
 
 (2,897)Less: current
  portion
 
 
 -
 
 
 -Total long-term
  debt
 
 $
 3,264,626
 
 $
 3,101,103
 25


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Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Credit facility.The Company’s credit facility, as amended (the “Credit
Facility”), has a maturity date of April 25, 2016. The Company’s borrowing base
is $3.0 billion until the next scheduled borrowing base redetermination in
October 2013, and commitments from the Company’s bank group total $2.5 billion.Between scheduled
borrowing base redeterminations, the Company and the lenders (requiring a 66
2/3 percent vote), may each request one special redetermination.  Advances
on the Credit Facility bear interest, at the Company’s option, based on
(i) the prime rate of JPMorgan Chase Bank (“JPM Prime Rate”) (3.25 percent
at March 31, 2013) or (ii) a Eurodollar rate
(substantially equal to the LIBOR). At March 31, 2013, the interest rates of Eurodollar rate advances and JPM
Prime Rate advances varied, with interest margins ranging from 150 to
250 basis points and 50 to 150 basis points per annum, respectively,
depending on the debt balance outstanding. At March 31, 2013, the Company paid commitment fees on the unused portion of
the available commitments ranging from 37.5 to 50 basis points per annum.  The
Credit Facility also includes a same-day advance facility under which the
Company may borrow funds from the administrative agent. Same-day advances
cannot exceed $25 million, and the maturity dates cannot exceed fourteen
days. The interest rate on this facility is the JPM Prime Rate plus the
applicable interest margin.  The
Company’s obligations under the Credit Facility are secured by a first lien on
substantially all of its oil and natural gas properties. In addition, all of
the Company’s subsidiaries are guarantors and have had their equity pledged to
secure borrowings under the Credit Facility.  The
Credit Facility contains various restrictive covenants and compliance
requirements which include:  ·maintenance of
certain financial ratios, including (i) maintenance of a quarterly ratio
of total debt to last twelve months of consolidated earnings before interest
expense, income taxes, depletion, depreciation, and amortization, exploration
expense and other noncash income and expenses to be no greater than 4.0 to 1.0,
and (ii) maintenance of a ratio of current assets to current liabilities,
excluding noncash assets and liabilities related to financial derivatives and
asset retirement obligations and including the unfunded amounts under the
Credit Facility, to be not less than 1.0 to 1.0;  ·limits on the
incurrence of additional indebtedness and certain types of liens;  ·restrictions as
to mergers, combinations and dispositions of assets; and  ·limitations on
the payment of cash dividends.  Senior notes.Interest on the Company’s senior notes is paid in arrears semi-annually.
The senior notes are fully and unconditionally guaranteed on a senior unsecured
basis by all subsidiaries of the Company, subject to customary release
provisions as described in Note P.  At March 31, 2013, the Company was in compliance with
the covenants under its debt instruments. 26


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Future interest from original issue discount at March 31, 2013 was as
follows:  (in thousands)Remaining 2013
 
 $
 
 3852014
 
 
 
 5582015
 
 
 
 6122016
 
 
 
 6722017
 
 
 
 547Total
 
 $
 
 2,774
  Principal maturities of debt.Principal
maturities of long-term debt outstanding at March 31, 2013 were as follows:  (in thousands)2013
 
 $
 
 -2014
 
 
 
 -2015
 
 
 
 -2016
 
 
 
 467,4002017
 
 
 
 300,000Thereafter
 
 
 
 2,500,000Total
 
 $
 
 3,267,400
 27


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Interest expense.The following amounts have been incurred and charged to interest
expense for the three months ended March 31, 2013 and 2012:   Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Cash payments for
  interest
 
 $
 43,988
 
 $
 51,647Amortization of
  original issue discount
 
 
 123
 
 
 111Amortization of
  deferred loan origination costs
 
 
 3,254
 
 
 2,706Net changes in
  accruals
 
 
 4,741
 
 
 (18,627)Total interest
  expense
 
 $
 52,106
 
 $
 35,837
  Note J.Commitments
and contingencies  Severance agreements.The
Company has entered into severance and change in control agreements with all of
its officers.  The current annual salaries for the Company’s officers covered
under such agreements total approximately $5.0 million.  Indemnifications.The
Company has agreed to indemnify its directors and officers with respect to
claims and damages arising from certain acts or omissions taken in such
capacity.  Legal actions.The Company
is a party to proceedings and claims incidental to its business.  While many of
these matters involve inherent uncertainty, the Company believes that the
amount of the liability, if any, ultimately incurred with respect to any such
proceedings or claims will not have a material adverse effect on the Company’s
consolidated financial position as a whole or on its liquidity, capital
resources or future results of operations. The Company will continue to
evaluate proceedings and claims involving the Company on a regular basis and
will establish and adjust any reserves as appropriate to reflect its assessment
of the then current status of the matters. 28


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Contractual drilling commitments.The Company periodically enters into
contractual arrangements under which the Company is committed to expend funds
to drill wells in the future, including agreements to secure drilling rig
services, which require the Company to make future minimum payments to the rig
operators.  The Company records drilling commitments in the periods in which
well capital is incurred or rig services are provided. The following table
summarizes the Company’s future drilling commitments at March 31, 2013:  Payments Due By PeriodLess than
 
 
 1-3
 
 
 3-5
 
 
 More than(in thousands)
 
 
 Total
 
 
 1 year
 
 
 years
 
 
 years
 
 
 5 yearsContractual
  drilling commitments
 
 $
 8,943
 
 $
 7,495
 
 $
 1,448
 
 $
 -
 
 $
 -
  Operating leases.The Company leases vehicles, equipment and office facilities under
non-cancellable operating leases. Lease payments associated with these
operating leases for the three months ended March 31, 2013 and 2012 were approximately $1.2 million and $1.1
million, respectively.  Future
minimum lease commitments under non-cancellable operating leases at March 31, 2013 were as follows:  (in thousands)Remaining 2013
 
 $
 4,0302014
 
 
 4,4592015
 
 
 3,1402016
 
 
 2,2702017
 
 
 535Thereafter
 
 
 1,689Total
 
 $
 16,123
  Note K.Income taxes  The
Company uses an asset and liability approach for financial accounting and
reporting for income taxes. The Company’s objectives of accounting for income
taxes are to recognize (i) the amount of taxes payable or refundable for the
current year and (ii) deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in its financial statements or
tax returns. The Company and its subsidiaries file a federal income tax return
on a consolidated basis.  The tax returns and the amount of taxable income or
loss are subject to examination by federal and state taxing authorities. At March 31, 2013 and December 31, 2012, the Company
had current income taxes payable of approximately $5.7 million and $2.1
million, respectively.  The
Company continually assesses both positive and negative evidence to determine
whether it is more likely than not that deferred tax assets can be realized
prior to their expiration. Management monitors company-specific, oil and
natural gas industry and worldwide economic factors and assesses the likelihood
that the Company’s net operating loss carryforwards (“NOLs”), if any, and other
deferred tax attributes in the United States, state, and local tax
jurisdictions will be utilized prior 29


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 to their
expiration. At March 31,
2013 and December 31,
2012, the Company had no valuation allowances related to its deferred tax
assets.  At March 31, 2013, the Company did not have any
significant uncertain tax positions requiring recognition in the financial
statements.  The tax years 2009 through 2012 remain subject to examination by
the major tax jurisdictions.  Income tax provision.The Company’s income tax provision and amounts separately
allocated were attributable to the following items for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Income from
  continuing operations
 
 $
 10,977
 
 $
 13,615Income from
  discontinued operations
 
 
 7,829
 
 
 5,502Changes in
  stockholders' equity:Excess tax benefits
  related to stock-based compensation
 
 
 (3,277)
 
 
 (6,781)$
 15,529
 
 $
 12,336
  The Company’s
income tax provision attributable to income from continuing operations
consisted of the following for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Current:U.S. federal
 
 $
 (703)
 
 $
 768U.S. state and
  local
 
 
 180
 
 
 840Total current
  income tax provision (benefit)
 
 
 (523)
 
 
 1,608Deferred:U.S. federal
 
 
 10,253
 
 
 11,077U.S. state and
  local
 
 
 1,247
 
 
 930Total deferred
  income tax provision
 
 
 11,500
 
 
 12,007Total income tax
  provision attributable to income from continuing operations
 
 $
 10,977
 
 $
 13,615
 30


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  The
reconciliation between the income tax expense computed by multiplying pretax
income from continuing operations by the United States federal statutory
rate and the reported amounts of income tax expense from continuing operations
is as follows:  Three Months EndedMarch 31,(in thousands)
 
 
 2013
 
 
 2012Income at U.S.
  federal statutory rate
 
 $
 9,988
 
 $
 12,231State income taxes
  (net of federal tax effect)
 
 
 928
 
 
 1,151Statutory depletion
 
 
 (13)
 
 
 (16)Nondeductible
  expense & other
 
 
 74
 
 
 249Income tax expense
 
 $
 10,977
 
 $
 13,615Effective tax rate
 
 
 38.5%
 
 
 39.0%
  The
Company’s income tax provision attributable to income from discontinued
operations consisted of the following for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 2013
 
 2012Current:U.S. federal
 $
 6,479
 
 $
 4,912U.S. state and
  local
 
 741
 
 
 28Total current
  income tax provision
 
 7,220
 
 
 4,940Deferred:U.S. federal
 
 332
 
 
 (125)U.S. state and
  local
 
 277
 
 
 687Total deferred
  income tax provision
 
 609
 
 
 562Total income tax
  provision attributable to income from discontinued operations
 $
 7,829
 
 $
 5,502
 31


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note L.Related party transactions  The
following tables summarize charges incurred with and payments made to related
parties and reported in the Company’s consolidated statements of operations, as
well as outstanding payables included in the consolidated balance sheets for
the periods presented:  Three
  Months EndedMarch
  31,(in thousands)
 
 
 2013
 
 
 2012Royalty interests paid to a director and certain officers of the
  Company (a)
 
 $
 1,350
 
 $
 439Amounts paid under consulting agreement with Steven L. Beal (b)
 
 $
 60
 
 $
 60
  March 31,
 
 December 31,(in thousands)
 
 
 
 
 
 
 
 2013
 
 2012Amounts
  included in accounts payable - related parties:Royalty interests
  of a director of the Company (a)
 
 $
 629
 
 $
 185
  (a)Royalties
are paid (i) on certain properties to a partnership of which a director is the
general partner and owns a 3.5 percent partnership interest (approximately $1.3
million) and (ii) to a director and certain officers who own overriding royalty
interests in properties owned by the Company.  (b)On
June 30, 2009, Steven L. Beal, the Company’s then-president and chief
operating officer, retired from such positions. On June 9, 2009, the Company entered into a
consulting agreement (the “Consulting Agreement”) with Mr. Beal, under
which Mr. Beal began serving as a consultant to the Company on
July 1, 2009. Either the Company or Mr. Beal may terminate the
consulting relationship at any time by giving ninety days written notice
to the other party; however, the Company may terminate the relationship
immediately for cause. During the term of the consulting relationship,
Mr. Beal will receive a consulting fee of $20,000 per month and a monthly
reimbursement for his medical and dental coverage costs. If Mr. Beal dies
during the term of the Consulting Agreement, his estate will receive a $60,000
lump sum payment.  
 32


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note M.Discontinued operations  In December
2012, the Company closed the sale of certain of its non-core assets for cash
consideration of approximately $503.9 million, which resulted in a final
pre-tax gain of approximately $1.7 million. As a result of post-closing adjustments during the three
months ended March 31, 2013, the Company made an adjustment to its pre-tax gain
of approximately $20.4 million. The Company reflected the results of operations of this divestiture as
discontinued operations, rather than as a component of continuing operations.
The following table represents the components of the Company’s discontinued
operations for the three months ended March 31, 2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Operating revenues:Oil sales
 
 $
 -
 
 $
 29,684Natural gas sales
 
 
 -
 
 
 4,337Total operating
  revenues
 
 
 -
 
 
 34,021Operating costs and
  expenses:Oil and natural gas
  production
 
 
 -
 
 
 10,573Depreciation,
  depletion and amortization (a)
 
 
 -
 
 
 8,606Accretion of
  discount on asset retirement obligations (a)
 
 
 -
 
 
 147General and
  administrative (b)
 
 
 -
 
 
 (592)Total operating
  costs and expenses
 
 
 -
 
 
 18,734Income from
  operations
 
 
 -
 
 
 15,287Other income
  (expense):Gain on disposition
  of assets, net (a)
 
 
 20,363
 
 
 -Income from
  discontinued operations before income taxes
 
 
 20,363
 
 
 15,287Income tax expense:Current
 
 
 (7,220)
 
 
 (4,940)Deferred (a)
 
 
 (609)
 
 
 (562)Income from
  discontinued operations, net of tax
 
 $
 12,534
 
 $
 9,785(a) Represents the
  significant non-cash components of discontinued operations.(b) Represents the
  fees received from third-parties for operating oil and natural gas properties
  that were sold. The Companyreflects these
  fees as a reduction of general and administrative expenses.
 33


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note N.Net income per share  Basic
net income per share is computed by dividing net income applicable to common
shareholders by the weighted average number of common shares treated as
outstanding for the period.  The
computation of diluted net income per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock that
are dilutive to income were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the Company. These amounts include unexercised stock options, restricted
stock and performance units. Potentially dilutive effects are calculated using
the treasury stock method.  The
following table is a reconciliation of the basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the three
months ended March 31,
2013 and 2012:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Weighted
  average common shares outstanding:Basic
 
 103,631
 
 102,854Dilutive common
  stock options
 
 204
 
 481Dilutive restricted
  stock
 
 510
 
 435Dilutive
  performance units
 
 -
 
 -Diluted
 
 104,345
 
 103,770
  The following table is a summary of the
common stock options, restricted stock and performance units which were not
included in the computation of diluted net income per share, as inclusion of certain
items would be antidilutive:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Number
  of antidilutive common shares:Antidilutive common
  stock options
 
 -
 
 -Antidilutive
  restricted stock
 
 13
 
 150Antidilutive
  performance units
 
 111
 
 -
 34


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note O.Other
current liabilities  The following table provides the
components of the Company’s other current liabilities at March 31, 2013
and December 31, 2012:  March 31,
 
 
 December 31,(in thousands)
 
 
 2013
 
 
 2012Other
  current liabilities:Accrued production
  costs
 
 $
 49,471
 
 $
 52,825Payroll related
  matters
 
 
 25,372
 
 
 16,365Accrued interest
 
 
 69,045
 
 
 64,304Acquisition and
  divestiture settlements
 
 
 27,551
 
 
 18,100Asset retirement
  obligations
 
 
 2,326
 
 
 3,308Other
 
 
 9,667
 
 
 5,438Other current
  liabilities
 
 $
 183,432
 
 $
 160,340
 35


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note P.Subsidiary guarantors  Certain of the Company’s wholly-owned subsidiaries have fully and
unconditionally guaranteed the Company’s senior notes.The indentures governing the
Company’s senior notes provide that the guarantees of its subsidiary guarantors
will be releasedin certain
customary circumstances, including (i)in connection with any sale,
exchange or other disposition, whether by merger, consolidation or otherwise,
of the capital stock of that guarantor to a person that is not the Company or a
restricted subsidiary of the Company, such that, after giving effect to such
transaction, such guarantor would no longer constitute a subsidiary of the
Company, (ii) in connection with any sale, exchange or other disposition (other
than a lease) of all or substantially all of the assets of that guarantor to a
person that is not the Company or a restricted subsidiary of the Company, (iii)
upon the merger of a guarantor into the Company or any other guarantor or the
liquidation or dissolution of a guarantor, (iv) if the Company designates any
restricted subsidiary that is a guarantor to be an unrestricted subsidiary in
accordance with the indenture, (v) upon legal defeasance or satisfaction and
discharge of the indenture and (vi) upon written notice of such release or
discharge by the Company to the trustee following the release or discharge of
all guarantees by such guarantor of any indebtedness that resulted in the
creation of such guarantee, except a discharge or release by or as a result of
payment under such guarantee.  See Note I for a summary of the Company’s senior notes. In
accordance with practices accepted by the U.S. Securities and Exchange Commission,
the Company has prepared condensed consolidating financial statements in order
to quantify the assets, results of operations and cash flows of such subsidiaries
as subsidiary guarantors.  The following condensed consolidating balance sheets atMarch 31, 2013 and December 31, 2012, condensed consolidating
statements of operations and condensed consolidating statements of cash flows for
the three months endedMarch
31, 2013 and 2012, present financial information for Concho Resources Inc. as the
Parent on a stand-alone basis (carrying any investments in subsidiaries under
the equity method), financial information for the subsidiary guarantors on a
stand-alone basis and the consolidation and elimination entries necessary to
arrive at the information for the Company on a consolidated basis. All current
and deferred income taxes are recorded on Concho Resources Inc., as the
subsidiaries are flow-through entities for income tax purposes. The subsidiary
guarantors are not restricted from making distributions to the Company. 36


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
  Condensed Consolidating Balance SheetMarch 31, 2013Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalASSETSAccounts receivable
  - related parties
 
 $
 5,974,511
 
 $
 1,271,563
 
 $
 (7,246,074)
 
 $
 -Other current
  assets
 
 
 27,881
 
 
 418,521
 
 
 -
 
 
 446,402Oil and natural gas
  properties, net
 
 
 -
 
 
 8,178,457
 
 
 -
 
 
 8,178,457Property and
  equipment, net
 
 
 -
 
 
 103,578
 
 
 -
 
 
 103,578Investment in
  subsidiaries
 
 
 3,307,119
 
 
 -
 
 
 (3,307,119)
 
 
 -Other long-term
  assets
 
 
 77,263
 
 
 57,698
 
 
 -
 
 
 134,961Total assets
 
 $
 9,386,774
 
 $
 10,029,817
 
 $
 (10,553,193)
 
 $
 8,863,398LIABILITIES AND EQUITYAccounts payable -
  related parties
 
 $
 1,271,563
 
 $
 5,975,140
 
 $
 (7,246,074)
 
 $
 629Other current
  liabilities
 
 
 108,628
 
 
 660,531
 
 
 -
 
 
 769,159Other long-term
  liabilities
 
 
 1,236,474
 
 
 87,027
 
 
 -
 
 
 1,323,501Long-term debt
 
 
 3,264,626
 
 
 -
 
 
 -
 
 
 3,264,626Equity
 
 
 3,505,483
 
 
 3,307,119
 
 
 (3,307,119)
 
 
 3,505,483Total liabilities
  and equity
 
 $
 9,386,774
 
 $
 10,029,817
 
 $
 (10,553,193)
 
 $
 8,863,398
  Condensed Consolidating Balance SheetDecember 31, 2012Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalASSETSAccounts receivable
  - related parties
 
 $
 5,839,995
 
 $
 2,416,697
 
 $
 (8,256,692)
 
 $
 -Other current
  assets
 
 
 46,737
 
 
 412,145
 
 
 -
 
 
 458,882Oil and natural gas
  properties, net
 
 
 -
 
 
 7,890,283
 
 
 -
 
 
 7,890,283Property and
  equipment, net
 
 
 -
 
 
 103,141
 
 
 -
 
 
 103,141Investment in
  subsidiaries
 
 
 3,146,918
 
 
 -
 
 
 (3,146,918)
 
 
 -Other long-term
  assets
 
 
 80,378
 
 
 56,753
 
 
 -
 
 
 137,131Total assets
 
 $
 9,114,028
 
 $
 10,879,019
 
 $
 (11,403,610)
 
 $
 8,589,437LIABILITIES AND EQUITYAccounts payable -
  related parties
 
 $
 1,271,563
 
 $
 6,985,314
 
 $
 (8,256,692)
 
 $
 185Other current
  liabilities
 
 
 76,496
 
 
 663,405
 
 
 -
 
 
 739,901Other long-term
  liabilities
 
 
 1,198,670
 
 
 83,382
 
 
 -
 
 
 1,282,052Long-term debt
 
 
 3,101,103
 
 
 -
 
 
 -
 
 
 3,101,103Equity
 
 
 3,466,196
 
 
 3,146,918
 
 
 (3,146,918)
 
 
 3,466,196Total liabilities
  and equity
 
 $
 9,114,028
 
 $
 10,879,019
 
 $
 (11,403,610)
 
 $
 8,589,437
  37


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Condensed Consolidating Statement of
  OperationsThree Months Ended March 31, 2013Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalTotal operating
  revenues
 
 $
 -
 
 $
 472,127
 
 $
 -
 
 $
 472,127Total operating
  costs and expenses
 
 
 (59,196)
 
 
 (332,180)
 
 
 -
 
 
 (391,376)Income (loss) from
  operations
 
 
 (59,196)
 
 
 139,947
 
 
 -
 
 
 80,751Interest expense
 
 
 (52,106)
 
 
 -
 
 
 -
 
 
 (52,106)Other, net
 
 
 160,201
 
 
 (109)
 
 
 (160,201)
 
 
 (109)Income before income
  taxes
 
 
 48,899
 
 
 139,838
 
 
 (160,201)
 
 
 28,536Income tax expense
 
 
 (10,977)
 
 
 -
 
 
 -
 
 
 (10,977)Income from
  continuing operations
 
 
 37,922
 
 
 139,838
 
 
 (160,201)
 
 
 17,559Income (loss) from
  discontinued operations, net of tax
 
 
 (7,829)
 
 
 20,363
 
 
 -
 
 
 12,534Net income
 
 $
 30,093
 
 $
 160,201
 
 $
 (160,201)
 
 $
 30,093
      Condensed Consolidating Statement of OperationsThree Months Ended March 31, 2012Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalTotal operating
  revenues
 
 $
 -
 
 $
 473,784
 
 $
 -
 
 $
 473,784Total operating
  costs and expenses
 
 
 (158,338)
 
 
 (243,394)
 
 
 -
 
 
 (401,732)Income (loss) from
  operations
 
 
 (158,338)
 
 
 230,390
 
 
 -
 
 
 72,052Interest expense
 
 
 (35,837)
 
 
 -
 
 
 -
 
 
 (35,837)Other, net
 
 
 244,409
 
 
 (1,269)
 
 
 (244,408)
 
 
 (1,268)Income before income
  taxes
 
 
 50,234
 
 
 229,121
 
 
 (244,408)
 
 
 34,947Income tax expense
 
 
 (13,615)
 
 
 -
 
 
 -
 
 
 (13,615)Income from
  continuing operations
 
 
 36,619
 
 
 229,121
 
 
 (244,408)
 
 
 21,332Income (loss) from
  discontinued operations, net of tax
 
 
 (5,502)
 
 
 15,287
 
 
 -
 
 
 9,785Net income
 
 $
 31,117
 
 $
 244,408
 
 $
 (244,408)
 
 $
 31,117
  38


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Condensed Consolidating Statement of
  Cash FlowsThree Months Ended March 31, 2013Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalNet cash flows
  provided by (used in) operating activities
 
 $
 (171,843)
 
 $
 391,514
 
 $
 -
 
 $
 219,671Net cash flows
  provided by (used in) investing activities
 
 
 6,016
 
 
 (408,145)
 
 
 -
 
 
 (402,129)Net cash flows
  provided by financing activities
 
 
 165,827
 
 
 14,725
 
 
 -
 
 
 180,552Net decrease in cash
  and cash equivalents
 
 
 -
 
 
 (1,906)
 
 
 -
 
 
 (1,906)Cash and cash
  equivalents at beginning of period
 
 
 -
 
 
 2,880
 
 
 -
 
 
 2,880Cash and cash
  equivalents at end of period
 
 $
 -
 
 $
 974
 
 $
 -
 
 $
 974
     Condensed Consolidating Statement of Cash FlowsThree Months Ended March 31, 2012Parent
 
 
 Subsidiary
 
 
 Consolidating(in thousands)
 
 
 Issuer
 
 
 Guarantors
 
 
 Entries
 
 
 TotalNet cash flows
  provided by (used in) operating activities
 
 $
 (167,276)
 
 $
 513,181
 
 $
 -
 
 $
 345,905Net cash flows used
  in investing activities
 
 
 (31,913)
 
 
 (543,834)
 
 
 -
 
 
 (575,747)Net cash flows
  provided by financing activities
 
 
 199,189
 
 
 30,917
 
 
 -
 
 
 230,106Net increase in cash
  and cash equivalents
 
 
 -
 
 
 264
 
 
 -
 
 
 264Cash and cash
  equivalents at beginning of period
 
 
 -
 
 
 342
 
 
 -
 
 
 342Cash and cash
  equivalents at end of period
 
 $
 -
 
 $
 606
 
 $
 -
 
 $
 606
 39


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note Q.Subsequent events  New commodity derivative contracts.After
March 31, 2013, the Company entered into the following oil price swaps, oil
basis swaps, natural gas price swaps and natural gas collars to hedge
additional amounts of its estimated future production:  First
 
 Second
 
 Third
 
 FourthQuarter
 
 Quarter
 
 Quarter
 
 Quarter
 
 TotalOil Swaps: (a)2013:Volume (Bbl)
 
 
 
 390,000
 
 517,000
 
 420,000
 
 1,327,000Price per Bbl
 
 
 $
 92.52
 $
 92.50
 $
 92.48
 $
 92.502014:Volume (Bbl)
 
 356,000
 
 312,000
 
 347,000
 
 319,000
 
 1,334,000Price per Bbl
 $
 89.37
 $
 89.37
 $
 89.37
 $
 89.37
 $
 89.372015:Volume (Bbl)
 
 2,240,000
 
 -
 
 -
 
 -
 
 2,240,000Price per Bbl
 $
 87.43
 $
 -
 $
 -
 $
 -
 $
 87.43Oil Basis Swaps: (b)2013:Volume (Bbl)
 
 
 
 150,000
 
 460,000
 
 460,000
 
 1,070,000Price per Bbl
 
 
 $
 (0.45)
 $
 (0.45)
 $
 (0.45)
 $
 (0.45)2014:Volume (Bbl)
 
 900,000
 
 910,000
 
 -
 
 -
 
 1,810,000Price per Bbl
 $
 (0.50)
 $
 (0.50)
 $
 -
 $
 -
 $
 (0.50)Natural Gas Swaps:
  (c)2013:Volume (MMBtu)
 
 
 
 2,280,000
 
 6,992,000
 
 6,992,000
 
 16,264,000Price per MMBtu
 
 
 $
 4.25
 $
 4.25
 $
 4.25
 $
 4.25Natural Gas Collars:
  (d)2014:Volume (MMBtu)
 
 5,400,000
 
 5,460,000
 
 5,520,000
 
 5,520,000
 
 21,900,000Price per MMBtu
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40(a)
 The index prices for
  the oil price swaps are based on the NYMEX – WTI monthly average futures
  price.(b)
 The basis
  differential price is between Midland – WTI and Cushing – WTI.(c)
 The index prices for
  the natural gas price swaps are based on the NYMEX – Henry Hub last trading
  day futures price.(d)
 The index prices for
  the natural gas collars are based on the El Paso Permian delivery point.
 40


---



Concho

Resources Inc. Condensed

Notes to Consolidated Financial Statements March

31, 2013 Unaudited
 Note
R.Supplementary information  Capitalized
costs  March 31,
 
 December 31,(in thousands)
 
 2013
 
 2012Oil
  and natural gas properties:Proved
 
 $
 8,774,914
 
 $
 8,402,154Unproved
 
 
 1,132,942
 
 
 1,053,445Less: accumulated depletion
 
 
 (1,729,399)
 
 
 (1,565,316)Net capitalized
  costs for oil and natural gas properties
 
 $
 8,178,457
 
 $
 7,890,283
  Costs incurred for oil and natural gas producing activities(a)  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Property
  acquisition costs:Proved
 
 $
 1,885
 
 $
 160,047Unproved
 
 
 27,896
 
 
 39,356Exploration
 
 
 266,690
 
 
 184,483Development
 
 
 174,722
 
 
 194,731Total costs
  incurred for oil and natural gas properties
 
 $
 471,193
 
 $
 578,617(a)
 The
  costs incurred for oil and natural gas producing activities includes the
  following amounts of asset retirement obligations:Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Proved property
  acquisition costs
 
 $
 161
 
 $
 2,050Exploration costs
 
 
 734
 
 
 798Development costs
 
 
 1,530
 
 
 44Total asset
  retirement obligations
 
 $
 2,425
 
 $
 2,892
  41


---



Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations  The following discussion is intended to
assist you in understanding our business and results of operations together
with our present financial condition. This section should be read in
conjunction with our historical consolidated financial statements and notes. As
a result of the acquisitions and divesture discussed below, many comparisons
between periods may be difficult or impossible.  In December 2012, we closed the sale of
certain of our non-core assets, a portion of which were acquired in the Three
Rivers Acquisition, for cash consideration of approximately $503.9 million,
which resulted in a final pre-tax gain of approximately $1.7 million (included
in discontinued operations).  For the three months ended March 31, 2012, these
assets produced an average of 4,561 Boe per day.  In July 2012, we acquired certain
producing and non-producing assets from Three Rivers Operating Company (the
“Three Rivers Acquisition”) for cash consideration of approximately $1.0 billion.
The Three Rivers Acquisition was primarily funded with borrowings under our
credit facility.The results of
operations prior to July 2012 do not include results from the Three Rivers Acquisition.  In February 2012, we
acquired certain producing and non-producing assets from Petroleum Development
Corporation (the “PDC Acquisition”) for cash consideration of approximately
$189.2 million. The PDC Acquisition was primarily funded with borrowings
under our credit facility.The
results of operations prior to March 2012 do not include results from the PDC
Acquisition.  Certain statements in our discussion below
are forward-looking statements. These forward-looking statements involve risks
and uncertainties. We caution that a number of factors could cause actual
results to differ materially from those implied or expressed by the
forward-looking statements. Please see “Cautionary Statement Regarding
Forward-Looking Statements.”  Overview  We are an
independent oil and natural gas company engaged in the acquisition, development
and exploration of producing oil and natural gas properties. Our core
operations are primarily focused in the Permian Basin of Southeast
New Mexico and West Texas. We refer to our three core operating areas as
the (i) New Mexico Shelf, where we primarily target the Yeso formation,
(ii) Delaware Basin, where we primarily target the Bone Spring formation
(which includes the Avalon Shale and the Bone Spring sands) and the Wolfcamp
shale, and (iii) Texas Permian, where we primarily target the Wolfberry, a
term applied to the combined Wolfcamp and Spraberry horizons.Oil comprised 61.2 percent of our 447.2
MMBoe of estimated proved reserves at December 31, 2012 and 61.6 percent
of our 7.7 MMBoe of production for the three months endedMarch 31, 2013. We seek to operate the wells in which we own an interest, and we
operated wells that accounted for 91.3 percent of our proved developed
producing PV-10 and 81.6 percent of our approximately 5,800 gross wells at
December 31, 2012. By controlling operations, we are able to more effectively
manage the cost and timing of exploration and development of our properties,
including the drilling and stimulation methods used.  Financial
and Operating Performance  Our financial
and operating performance for the three months ended March 31, 2013, as
compared to the three months ended March 31, 2012, included the following
highlights:  ·Net income was $30.1million
($0.29per diluted share) for the first three
months of 2013, as compared to net income of $31.1million
($0.30per diluted share) during the three
months ended March 31, 2012. The decrease in net income was primarily due to:  §$1.7 million decrease
in oil and natural gas revenues from continuing operations as a result of a
16 percent decrease in commodity price realizations per Boe(excluding the effects of derivative activities)offset
in part by a 19percent increase in
production;  §$41.2 million
increase in depreciation, depletion and amortization (“DD&A”) expense from
continuing operations, primarily due to(i)
capitalized costs associated with new wells that were successfully drilled and
completed in 2012 and 2013 and (ii) our acquisitions in 2012;  42


---



§$19.3 million
increase in oil and natural gas production costs from continuing operations due
in part to increased production, related to our wells successfully drilled and
completed in 2012 and 2013 and our acquisitions in 2012, partially offset by a
decrease in oil and natural gas revenues that directly decreased our oil and
natural gas production taxes; and  §$16.3 million
increase in interest expense due to a 47 percent increase in the weighted
average debt balance outstanding between the periods primarily related to our
acquisitions in 2012 and timing of our capital expenditures, offset in part by
a lower weighted average interest rate due to (i) the weighted average debt
balance of credit facility borrowings bearing a lower interest rate than our
senior notes and (ii) our recent senior note issuances having lower interest
rates than historical issuances;  §$15.3 million increase
in general and administrative expense due to(a)2013
including an adjustment to our bonus accrual for services related to 2012 of
approximately $5.9 million ($0.76 per Boe) and (b)an increase in the number of employees and related personnel expenses to
handle our increased activities, both from (i) increased drilling and
exploration activities and (ii) our acquisitions in 2012.  partially
offset by:  §$20.4 million pre-tax
gain from discontinued operations in 2013 related to the post-closing
adjustments to our sale of certain non-core assets in the fourth quarter of 2012;
and  §$59.0 million loss on derivatives not designated as
hedges for the three months ended March 31, 2013, as compared to a$158.1 million loss on derivatives not designated as
hedges during the three months ended March 31, 2012.  ·Average daily sales volumes from continuing operations increased
by 20 percent from 71,471 Boe per day during the first three months of 2012 to85,926Boe per day during the first three months of
2013. The increase is primarily attributable toour
successful drilling efforts during 2012 and 2013 and our acquisitions in 2012.  ·Net cash provided by operating activities decreased by
approximately $126.2 million to $219.7millionfor
the first three months of 2013, as compared to $345.9million
in the first three months of 2012, primarily due to (i) decreased oil and
natural gas revenues, (ii) increases in related oil and natural gas production
costs, general and administrative expense and interest expense and (iii) a
larger negative variances in working capital changes, which adjust for the
timing of receipts and payments of actual cash.  ·Long-term debt increased by approximately $0.2billion during the first three months of 2013,
primarily as a result of drilling activity in excess of our cash flow.  ·At March 31, 2013, availability under our credit facility was
approximately $2.0billion.  Commodity Prices  Our
results of operations are heavily influenced by commodity prices. Commodity
prices may fluctuate widely in response to (i) relatively minor changes in the
supply of and demand for oil, (ii) natural gas and NGLs market uncertainty and (iii)
a variety of additional factors that are beyond our control. Factors that may
impact future commodity prices, including the price of oil, natural gas and
NGLs include:  ·economic stimulus initiatives in the
United States;  ·worldwide and continuing economic
struggles in Eurozone nations’ economies;  ·political and economic developments in
the Middle East;  ·demand from Asian and European markets;  ·the extent to which members of the
Organization of Petroleum Exporting Countries and other oil exporting nations
are able to continue to manage oil supply through export quotas;  43


---



·technological advances affecting energy
consumption and energy supply;  ·the effect of energy conservation
efforts;  ·the price and availability of
alternative fuels;  ·domestic and foreign governmental
regulations and taxation;  ·the proximity, capacity, cost and
availability of pipelines and other transportation facilities;  ·the overall global demand for oil;  and  ·overall North American natural gas
supply and demand fundamentals, including:  §the United States economy impact,  §weather conditions, and  §liquefied natural gas deliveries to the
United States.  Although
we cannot predict the occurrence of events that may affect future commodity
prices or the degree to which these prices will be affected, the prices for any
commodity that we produce will generally approximate current market prices in
the geographic region of the production. From time to time, we expect that we
may economically hedge a portion of our commodity price risk to mitigate the
impact of price volatility on our business. See Note H of the Condensed Notes
to Consolidated Financial Statements included in “Item 1. Consolidated
Financial Statements (Unaudited)” for additional information regarding our
commodity derivative positions at March 31, 2013.  Oil and natural gas prices have been
subject to significant fluctuations during the past several years. In general,
oil prices were lower during the comparable periods of 2013 measured against
2012, while natural gas prices were significantly higher. The following table sets
forth the average New York Mercantile Exchange (“NYMEX”) oil and natural gas
prices for the three months endedMarch
31, 2013and 2012, as well as
the high and low NYMEX prices for the same periods:  Three Months EndedMarch 31,2013
 
 2012Average NYMEX
  prices:Oil (Bbl)
 
 $
 94.41
 
 $
 102.88Natural gas (MMBtu)
 
 $
 3.49
 
 $
 2.52High and Low NYMEX
  prices:Oil
  (Bbl):High
 
 $
 97.94
 
 $
 109.77Low
 
 $
 90.12
 
 $
 96.36Natural
  gas (MMBtu):High
 
 $
 4.07
 
 $
 3.10Low
 
 $
 3.11
 
 $
 2.13
  Further, the NYMEX oil price and NYMEX
natural gas price reached highs and lows of $97.23 and $86.68 per Bbl and $4.41
and $3.90 per MMBtu, respectively, during the period fromMarch 31, 2013to April 29, 2013. At April 29, 2013, the NYMEX oil price and
NYMEX natural gas price were $94.50 per Bbl and $4.39 per MMBtu, respectively. 44


---



Recent Events  2013 capital budget.In
November 2012, we announced our 2013 capital budget of approximately $1.6
billion, which we expect will be substantially funded within our cash flow,
based on current commodity prices and capital costs. We take a longer-term view
on spending within our cash flow, and our spending during any specific period
may exceed our cash flow for that period. However, our capital budget is
largely discretionary, and if we experience sustained oil and natural gas
prices significantly below the current levels or substantial increases in our
costs, we may reduce our capital spending program to be substantially within
our cash flow.  The
following table summarizes our 2013 capital budget, which does not include
acquisitions other than customary purchase of leasehold acreage:  2013Capital(in millions)
 
 
 BudgetDrilling and
  completion costs:New Mexico Shelf
 
 $
 285Delaware Basin
 
 
 725Texas Permian
 
 
 342Facilities and
  other capital in our core operating areas
 
 
 123Acquisition of
  leasehold acreage
 
 
 75Geological and
  geophysical data
 
 
 35Total
 
 $
 1,585
  Divestiture.In December 2012, we closed the sale of certain of our
non-core assets for cash consideration of approximately $503.9 million,
which resulted in a final pre-tax gain of approximately $1.7 million. We
used the net proceeds from this divestiture to repay a portion of the
borrowings under our credit facility.For the three months ended March 31,
2012, these assets produced an average of 4,561 Boe per day.We estimate that the proved reserves of these assets at
closing were approximately 35.3 MMBoe. 45


---



Derivative Financial Instruments  Derivative financial instrument exposure.At March 31,
2013, the fair value of our financial
derivatives was a net liability of $40.0million.
All of our counterparties to these financial derivatives are parties or
affiliates of parties to our credit facility and have their outstanding debt
commitments and derivative exposures collateralized pursuant to our credit
facility. Under the terms of our financial derivative instruments and their
collateralization under our credit facility, we do not have exposure to
potential “margin calls” on our financial derivative instruments. We currently
have no reason to believe that our counterparties to these commodity derivative
contracts are not financially viable. Our credit facility does not allow us to
offset amounts we may owe a lender against amounts we may be owed related to
our financial instruments with such party or its affiliates.  After March 31, 2013, we entered into the following additional oil
price swaps, oil basis swaps, natural gas price swaps and natural gas collars to
hedge additional amounts of our estimated future production:  First
 
 Second
 
 Third
 
 FourthQuarter
 
 Quarter
 
 Quarter
 
 Quarter
 
 TotalOil Swaps: (a)2013:Volume (Bbl)
 
 
 
 390,000
 
 517,000
 
 420,000
 
 1,327,000Price per Bbl
 
 
 $
 92.52
 $
 92.50
 $
 92.48
 $
 92.502014:Volume (Bbl)
 
 356,000
 
 312,000
 
 347,000
 
 319,000
 
 1,334,000Price per Bbl
 $
 89.37
 $
 89.37
 $
 89.37
 $
 89.37
 $
 89.372015:Volume (Bbl)
 
 2,240,000
 
 -
 
 -
 
 -
 
 2,240,000Price per Bbl
 $
 87.43
 $
 -
 $
 -
 $
 -
 $
 87.43Oil Basis Swaps: (b)2013:Volume (Bbl)
 
 
 
 150,000
 
 460,000
 
 460,000
 
 1,070,000Price per Bbl
 
 
 $
 (0.45)
 $
 (0.45)
 $
 (0.45)
 $
 (0.45)2014:Volume (Bbl)
 
 900,000
 
 910,000
 
 -
 
 -
 
 1,810,000Price per Bbl
 $
 (0.50)
 $
 (0.50)
 $
 -
 $
 -
 $
 (0.50)Natural Gas Swaps: (c)2013:Volume (MMBtu)
 
 
 
 2,280,000
 
 6,992,000
 
 6,992,000
 
 16,264,000Price per MMBtu
 
 
 $
 4.25
 $
 4.25
 $
 4.25
 $
 4.25Natural Gas Collars: (d)2014:Volume (MMBtu)
 
 5,400,000
 
 5,460,000
 
 5,520,000
 
 5,520,000
 
 21,900,000Price per MMBtu
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40
 $
 3.85
  - 4.40(a)
 The index prices for the oil price swaps are based on the NYMEX
  – WTI monthly average futures price.(b)
 The basis differential price is between Midland – WTI and
  Cushing – WTI.(c)
 The index prices for the natural gas price swaps are based on
  the NYMEX – Henry Hub last trading day futures price.(d)
 The index prices for the natural gas collars are based on the El
  Paso Permian delivery point.
 46


---



Results of Operations  The following table sets forth summary
information concerning our production and operating data from continuing
operations for the three months endedMarch
31, 2013and 2012. The table
below excludes production and operating data that we have classified as
discontinued operations, which is more fully described in Note M of the
Condensed Notes to Consolidated Financial Statements included in “Item 1.
Consolidated Financial Statements (Unaudited).” The actual historical data in
this table excludes results from (i) the Three Rivers Acquisition for periods
prior to July 2012 and (ii) the PDC Acquisition for periods prior to March
2012. Because of normal production declines, increased or decreased drilling
activities and the effects of acquisitions or divestitures, the historical
information presented below should not be interpreted as being indicative of
future results. Three
  Months EndedMarch
  31,2013
 
 2012Production and operating data from continuing operations:Net production volumes:Oil (MBbl)
 
 
 4,767
 
 
 3,914Natural gas (MMcf)
 
 
 17,798
 
 
 15,539Total (MBoe)
 
 
 7,733
 
 
 6,504Average daily production volumes:Oil (Bbl)
 
 
 52,967
 
 
 43,011Natural gas (Mcf)
 
 
 197,756
 
 
 170,758Total (Boe)
 
 
 85,926
 
 
 71,471Average prices:Oil, without derivatives (Bbl)
 
 $
 82.49
 
 $
 98.10Oil, with derivatives (Bbl) (a)
 
 $
 83.75
 
 $
 89.87Natural gas, without derivatives (Mcf)
 
 $
 4.43
 
 $
 5.78Natural gas, with derivatives (Mcf) (a)
 
 $
 4.43
 
 $
 5.80Total, without derivatives (Boe)
 
 $
 61.05
 
 $
 72.85Total, with derivatives (Boe) (a)
 
 $
 61.83
 
 $
 67.94Operating costs and expenses per Boe:Lease operating expenses and workover costs
 
 $
 7.74
 
 $
 6.58Oil and natural gas taxes
 
 $
 5.31
 
 $
 5.96Depreciation, depletion and amortization
 
 $
 21.79
 
 $
 19.57General and administrative
 
 $
 5.60
 
 $
 4.30(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 loss on derivatives
  not designated as hedges as reported in the statements of operations:Three
  Months EndedMarch
  31,(in thousands)
 
 2013
 
 2012Loss on derivatives not designated as hedges:Cash receipts from (payments on) oil derivatives
 
 $
 6,016
 
 $
 (32,196)Cash receipts from natural gas derivatives
 
 
 -
 
 
 285Unrealized mark-to-market loss on commodity derivatives
 
 
 (65,033)
 
 
 (126,182)Loss on derivatives not designated as hedges
 
 $
 (59,017)
 
 $
 (158,093)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 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.
 47


---



The following table sets forth summary
information from our discontinued operations concerning our production and
operating data for the three months endedMarch
31, 2012. The discontinued
operations presentation is the result of reclassifying the results of
operations from our December 2012 non-core assets divestiture, which is more
fully described in Note M of the Condensed Notes to Consolidated Financial
Statements included in “Item 1. Consolidated Financial Statements
(Unaudited).”  Three Months EndedMarch 31, 2012Production
  and operating data from discontinued operations:Net production
  volumes:Oil (MBbl)
 
 
 300Natural gas (MMcf)
 
 
 690Total (MBoe)
 
 
 415Average daily
  production volumes:Oil (MBbl)
 
 
 3,297Natural gas (MMcf)
 
 
 7,582Total (MBoe)
 
 
 4,561Average prices:Oil, without
  derivatives (Bbl)
 
 $
 98.95Oil, with
  derivatives (Bbl)
 
 $
 98.95Natural gas,
  without derivatives (Mcf)
 
 $
 6.29Natural gas, with
  derivatives (Mcf)
 
 $
 6.29Total, without
  derivatives (Boe)
 
 $
 81.98Total, with
  derivatives (Boe)
 
 $
 81.98Operating costs and
  expenses per Boe:Lease operating
  expenses and workover costs
 
 $
 18.28Oil and natural gas
  taxes
 
 $
 7.20Depreciation,
  depletion and amortization
 
 $
 20.73General and
  administrative (a)
 
 $
 (1.43)(a)
 Represents
  the fees received from third-parties for operating oil and natural gas
  properties that were sold. We reflect these fees as a reduction of general
  and administrative expense.
 48


---



Three Months Ended March 31, 2013 Compared
to Three Months Ended March 31, 2012   Oil and natural gas revenues.Revenue from oil and natural
gas operations was$472.1 million for the three months endedMarch 31, 2013, a decrease of$1.7 million (less than 1percent) from $473.8 million for the three months endedMarch 31, 2012. This decrease was primarily due to a decrease in the realized
oil and natural gas prices offset in part by increased production due to (i)
successful drilling efforts during 2012 and 2013, (ii) production from the PDC
Acquisition which closed in February 2012 and (iii) production from the Three
Rivers Acquisition which closed in July 2012. Specific factors affecting oil
and natural gas revenues include the following:  ·total oil production
was 4,767MBblfor the three months endedMarch
31, 2013, anincreaseof 853MBbl(22percent) from 3,914MBblfor the three months endedMarch 31, 2012;  ·average realized oil
price (excluding the effects of derivative activities) was$82.49per Bbl during the
three months endedMarch 31, 2013, a decrease of 16percentfrom$98.10per Bbl during the three months endedMarch 31, 2012.For the three months ended
March 31, 2013 and 2012, we realized approximately 87.3 percent and 95.3 percent,
respectively, of the average NYMEX oil prices for the respective periods. The
deterioration of our realization was primarily related to the basis
differential between the Midland WTI and Cushing WTI oil price being over $6
per barrel higher for the three months ended March 31, 2013 than the 2012
comparable period.  The increase in the basis differential, which negatively
impacted our price, was due to unplanned events outside of our control effecting
the operations of takeaway capacity of oil infrastructure.  Subsequent to March
31, 2013, the basis differential has returned to its generally historical
level;  ·total natural gas
production was 17,798MMcffor the three months endedMarch 31, 2013, anincreaseof 2,259MMcf(15percent) from 15,539MMcffor the
three months endedMarch 31, 2012; and  ·average realized
natural gas price (excluding the effects of derivative activities) was$4.43per Mcf during the
three months endedMarch 31, 2013, a decrease of 23percentfrom$5.78per Mcf during the three months endedMarch 31, 2012. For the three months ended March 31,
2013 and 2012, we realized approximately 126.9 percent and 229.4 percent,
respectively, of the average NYMEX natural gas prices for the respective
periods. Historically, approximately 65 to 80 percent of our total natural gas
revenues were derived from the value of the natural gas liquids, with the
remaining portion comingfrom the value of the dry natural gas residue. Because
of our liquids-rich natural gas stream and the related value of the natural gas
liquids being included in our natural gas revenues historically, our realized
natural gas price (excluding the effects of derivatives) has reflected a price
greater than the related NYMEX natural gas price. The deterioration of our
realization percentage was primarily related to a combination of (i) a higher
average NYMEX natural gas price between comparable periods and (ii) a lower
price being received for the value of our natural gas liquids included within
our natural gas revenue stream.  We estimate that between the comparable
periods the value we received per gallon of natural gas liquids decreased
approximately 30 percent, which is primarily the result of an increase in the
supply of natural gas liquids from the significant industry drilling in liquid
prone areas. 49


---



Production expenses.The following table provides
the components of our total oil and natural gas production costs for the three
months endedMarch 31, 2013and 2012:  Three Months Ended March 31,2013
 
 
 2012Per
 
 
 
 
 Per(in thousands,
  except per unit amounts)
 
 Amount
 
 Boe
 
 Amount
 
 BoeLease operating
  expenses
 
 $
 54,173
 
 $
 7.01
 
 $
 41,048
 
 $
 6.31Taxes:Ad valorem
 
 
 5,775
 
 
 0.75
 
 
 2,610
 
 
 0.40Production
 
 
 35,229
 
 
 4.56
 
 
 36,177
 
 
 5.56Workover costs
 
 
 5,668
 
 
 0.73
 
 
 1,742
 
 
 0.27Total oil and
  natural gas production expenses
 
 $
 100,845
 
 $
 13.05
 
 $
 81,577
 
 $
 12.54
  Among
the cost components of production expenses, we have some control over lease
operating expenses and workover costs on properties we operate, but production
and ad valorem taxes are directly related to commodity price changes.  Lease operating expenses were $54.2 million ($7.01 per Boe) for
the three months endedMarch 31, 2013, which was an increase of $13.2 million
(32 percent) from $41.0 million ($6.31 per Boe) for the three months endedMarch 31, 2012. The increase in lease operating expenses was primarily due to(i) our wells successfully drilled and completed in
2012 and 2013, (ii) our acquisitions in 2012 and (iii) an increase in cost of
services, primarily labor related, due to the increased demand for services and
related labor in the Permian Basin. The increase in lease operating expenses per Boe was primarily
due to cost increases in services, primarily labor related, offset in part by additional
production from our wells successfully drilled which were completed in 2012 and
2013 where we are receiving benefits from economies of scale.  Ad valorem taxes have increased primarily as a result of increased
valuations of our Texas properties and the increase in the number of wells
primarily associated with our 2012 and 2013 drilling activity in our Texas
Permian area and the Texas properties acquired in the PDC Acquisition and the
Three Rivers Acquisition.  Production taxes per unit of production were $4.56 per Boe during
the three months endedMarch 31, 2013, a decrease of 18 percent from $5.56 per
Boe during the three months endedMarch
31, 2012. The decrease was
directly related to the decrease in commodity prices. Over the same period, our
per Boe prices (excluding the effects of derivatives) decreased 16 percent.  Workover expenses were approximately $5.7 million and $1.7
million for the three months endedMarch
31, 2013and 2012,
respectively. The 2013 and 2012 expenses related primarily to workovers in the
Texas Permian and New Mexico Shelf areas performed to restore production. 50


---



Exploration and abandonments expense.The following table provides a breakdown
of our exploration and abandonments expense for the three months endedMarch 31, 2013and 2012:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Geological and geophysical
 
 $
 13,929
 
 $
 2,877Exploratory dry
  hole costs
 
 
 91
 
 
 2,982Leasehold
  abandonments and other
 
 
 4,387
 
 
 120Total exploration
  and abandonments
 
 $
 18,407
 
 $
 5,979
  Our geological and geophysical expense primarily consists of the
costs of acquiring and processing seismic data, geophysical data and core
analysis, mostly related to our Delaware Basin and Texas Permian areas.  Our exploratory dry hole costs during the three months endedMarch 31, 2012were primarily related toexpensing
an unsuccessful lateral due to mechanical issues in the Delaware Basin area.  For the three months endedMarch
31, 2013 and 2012, we
recorded approximately $4.4 million and $0.1 million of leasehold
abandonments, respectively,which related
to non-core prospects in our Delaware Basin area and New Mexico Shelf area.  Depreciation, depletion and amortization expense.The following table provides
components of our depreciation, depletion and amortization expense for the
three months endedMarch 31, 2013and 2012:  Three Months Ended March 31,2013
 
 2012Per
 
 
 
 Per(in thousands,
  except per unit amounts)
 
 Amount
 
 Boe
 
 Amount
 
 BoeDepletion of proved
  oil and natural gas properties
 
 $
 164,301
 
 $
 21.25
 
 $
 124,583
 
 $
 19.15Depreciation of
  other property and equipment
 
 
 3,754
 
 
 0.49
 
 
 2,315
 
 
 0.36Amortization of
  intangible assets - operating rights
 
 
 365
 
 
 0.05
 
 
 365
 
 
 0.06Total depletion,
  depreciation and amortization
 
 $
 168,420
 
 $
 21.79
 
 $
 127,263
 
 $
 19.57Oil price used to
  estimate proved oil reserves at period end
 
 $
 89.17
 
 
 
 
 $
 94.65Natural gas price
  used to estimate proved reserved at period end
 
 $
 2.95
 
 
 
 
 $
 3.73
  Depletion of proved oil and natural gas properties was $164.3
million ($21.25 per Boe) for the three months ended March 31, 2013, an increase
of $39.7 million (32 percent) from $124.6 million ($19.15 per Boe) for the
three months ended March 31, 2012. The increase in depletion expense was
primarily due to (i) capitalized costs associated with new wells that were
successfully drilled and completed in 2012 and 2013 and (ii) costs associated
with our acquisitions in 2012. The increase in depletion expense per Boe was primarily
due to (i) the properties
acquired in the Three Rivers Acquisition having a higher rate per Boe than our
legacy wells, (ii) drilling
deeper, higher cost wells and (iii) the decrease in the oil and natural gas
prices between periods utilized to determine proved reserves.  The increase in depreciation expense was primarily associated with
our increase in our other property and equipment related to buildings and other
items as a result of our increasing work force.  The amortization of the intangible asset is a result of the value
assigned to the operating rights that we acquired inan acquisition. The
intangible asset is currently being amortized over an estimated life of 25
years. 51


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General and administrative expenses.The following table provides components of
our general and administrative expenses for the three months endedMarch 31, 2013and 2012:  Three months ended March 31,2013
 
 2012Per
 
 
 
 
 Per(in thousands,
  except per unit amounts)
 
 Amount
 
 Boe
 
 Amount
 
 BoeGeneral and
  administrative expenses
 
 $
 40,688
 
 $
 5.26
 
 $
 25,091
 
 $
 3.86Non-cash
  stock-based compensation
 
 
 6,767
 
 
 0.88
 
 
 6,128
 
 
 0.94Less: Third-party
  operating fee reimbursements
 
 
 (4,162)
 
 
 (0.54)
 
 
 (3,240)
 
 
 (0.50)Total general and
  administrative expenses
 
 $
 43,293
 
 $
 5.60
 
 $
 27,979
 
 $
 4.30
  General and administrative expenses were approximately $43.3
million ($5.60 per Boe) for the three months endedMarch 31, 2013, an increase of $15.3 million (55 percent) from $28.0 million
($4.30 per Boe) for the three months endedMarch
31, 2012. The increase in
general and administrative expenses and non-cash stock-based compensation was
primarily due to (a)2013 including an
adjustment to our bonus accrual for services related to 2012 of approximately
$5.9 million ($0.76 per Boe) and (b)an increase in the number of employees and related personnel
expenses to handle our increased activities, both from (i) increased drilling
and exploration activities and (ii) our acquisitions in 2012, offset in part by
an approximate $2.3 million ($0.30 per Boe) net benefit to stock-based
compensation related to forfeitures and modifications of stock-based awards
associated with two of our former officers. The increase in general and
administrative expenses per Boe was primarily due to (a)2013 including an adjustment to our bonus accrual for
services related to 2012, noted above, and(b) an increase in the number of employees and related personnel
expenses to handle our increased activities, offset in part by (i) increased
production from our wells successfully drilled and completed in 2012 and 2013,
(ii) additional production associated with our acquisitions in 2012 and (iii)
increased third-party operating fee reimbursements.  As
the operator of certain oil and natural gas properties in which we own an
interest, we earn overhead reimbursements during the drilling and production
phases of the property.We earned reimbursements of
$4.2 million and $3.2 million during the three months endedMarch 31, 2013and 2012, respectively. This reimbursement is reflected as a
reduction of general and administrative expenses in the consolidated statements
of operations. The increase in third-party operating fee reimbursements is
primarily due to drilling and completing wellsin which we own a lower working interest resulting in increased
third-party income. 52


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Loss on derivatives not designated as
hedges.The following table sets forth the cash
settlements and the non-cash mark-to-market adjustments for the derivative
contracts not designated as hedges for the three months endedMarch 31, 2013and 2012:  Three Months EndedMarch 31,(in thousands)
 
 2013
 
 2012Cash
  payments (receipts):Commodity
  derivatives - oil
 
 $
 (6,016)
 
 $
 32,196Commodity
  derivatives - natural gas
 
 
 -
 
 
 (285)Mark-to-market
  loss:Commodity
  derivatives - oil
 
 
 65,033
 
 
 126,108Commodity
  derivatives - natural gas
 
 
 -
 
 
 74Loss on derivatives
  not designated as hedges
 
 $
 59,017
 
 $
 158,093
  Our earnings are affected by the changes in value of our
derivatives portfolio between periods and the related cash settlements of those
derivatives, which can be volatile to our earnings. To the extent the future
commodity price outlook declines between measurement periods, we will have
mark-to-market gains, while to the extent future commodity price outlook
increases between measurement periods, we will have mark-to-market losses.  Interest expense.The following table sets forth interest
expense, weighted average interest rates and weighted average debt balances for
the three months endedMarch 31, 2013and 2012:  Three Months EndedMarch 31,(dollars in
  thousands)
 
 2013
 
 2012Interest expense
 
 $
 52,106
 
 $
 35,837Weighted average
  interest rate - credit facility
 
 
 2.1%
 
 
 2.2%Weighted average
  interest rate - senior notes
 
 
 6.4%
 
 
 7.0%Total weighted average
  interest rate
 
 
 5.8%
 
 
 5.8%Weighted average
  credit facility balance
 
 $
 405,476
 
 $
 567,544Weighted average
  senior notes balance
 
 
 2,800,000
 
 
 1,620,000Total weighted
  average debt balance
 
 $
 3,205,476
 
 $
 2,187,544
  The increase in weighted average debt balance for the three months
endedMarch 31, 2013as compared to the corresponding period
in 2012 was due primarily to
(i) borrowings associated with our acquisitions in 2012 and (ii) timing of our
capital expenditures.The increase in
interest expense was due to an overall
increase in the weighted average debt balance, offset in part by a lower
weighted average interest rate due to (i) the weighted average debt balance of
credit facility borrowings bearing a lower interest rate than our senior notes
and (ii) our recent senior note issuances having lower interest rates than
historical issuances.  Income tax provisions.We recorded an income tax
expense of $11.0 million and $13.6 million for the three months endedMarch 31, 2013and 2012, respectively. The effective income tax rates for the
three months endedMarch 31, 2013and 2012 were 38.5 percent and 39.0 percent,
respectively.  53


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Income from discontinued operations, net
of tax.In December 2012, we closed the sale of certain
of our non-core assets for cash consideration of approximately $503.9 million, which resulted in a final pre-tax gain of
approximately $1.7 million. As a result
of post-closing adjustments during the three months ended March 31, 2013, we
made an adjustment to our pre-tax gain of approximately $20.4 million. We recognized income from discontinued operations of $12.5
million and $9.8 million for the three months ended March 31, 2013 and 2012,
respectively.  The
results of operations of these assets are reported as discontinued operations
in the accompanying consolidated statements of operations, described in more
detail in Note M of the Condensed Notes to Consolidated Financial Statements
included in “Item 1. Consolidated Financial Statements (Unaudited).”  54


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Capital Commitments, Capital Resources and Liquidity  Capital commitments.Our primary needs for cash are development,
exploration and acquisition of oil and natural gas assets, payment of
contractual obligations and working capital obligations. Funding for these cash
needs may be provided by any combination of internally-generated cash flow,
financing under our credit facility or proceeds from the disposition of assets
or alternative financing sources, as discussed in“—Capital
resources” below.  Oil and natural gas properties.Our costs incurred on oil and natural gas
properties, excluding acquisitions and asset retirement obligations, during thethreemonths
endedMarch 31, 2013and 2012 totaled $439.1 million and
$378.4 million, respectively. The primary reason for the differences in
the costs incurred and cash flow expenditures is the timing of payments. The
2013 expenditures were funded in part from borrowings under our credit
facility.  In November 2012, we announced our 2013 capital budget
of approximately $1.6 billion, which we
expect can be substantially funded within our cash flow, based on current
commodity prices and capital costs. As our size and financial flexibility have
grown, we take a longer-term view on spending within our cash flow, and our
spending during any specific period may exceed our cash flow for that period.
However, our capital budget is largely discretionary, and if we experience
sustained oil and natural gas prices significantly below the current levels or
substantial increases in our costs, we may reduce our capital spending program
to be substantially within our cash flow.  Although
we cannot provide any assurance, we generally attempt to fund our
non-acquisition expenditures with our available cash and cash flow as adjusted
from time to time; however, we may also use our credit facility, or other
alternative financing sources, to fund such expenditures. The actual amount and
timing of our expenditures may differ materially from our estimates as a result
of, among other things, actual drilling results, the timing of expenditures by
third parties on projects that we do not operate, the availability of drilling
rigs and other services and equipment, regulatory, technological and
competitive developments and market conditions. In addition, under certain
circumstances, we would consider increasing or reallocating our capital
spending plans.  Other
than the customary purchase of leasehold acreage, our capital budgets are
exclusive of acquisitions. We do not have a specific acquisition budget, since
the timing and size of acquisitions are difficult to forecast. We evaluate
opportunities to purchase or sell oil and natural gas properties in the
marketplace and could participate as a buyer or seller of properties at various
times. We seek to acquire oil and natural gas properties that provide
opportunities for the addition of reserves and production through a combination
of development, high-potential exploration and control of operations that will
allow us to apply our operating expertise.  Acquisitions.Our
expenditures for acquisitions of proved and unproved properties during the
three months ended March 31, 2013 and 2012 totaled approximately $29.8million and $199.4million,
respectively. The significant acquisitions of proved properties during the
three months ended March 31, 2012 primarily related to the PDC Acquisition.
Expenditures for leasehold acreage acquisitions (which are expenditures we
generally provide for in our planned capital expenditures) included in the
total above were approximately $27.9million
and $9.7million for the three months ended March 31, 2013
and 2012, respectively.  Divestitures.In December
2012, we closed the sale of certain of our non-core assets for cash
consideration of approximately $503.9 million, which resulted in a final
pre-tax gain (included in discontinued operations) of approximately $1.7
million. As a result of post-closing
adjustments during the three months ended March 31, 2013, we made an adjustment
to our pre-tax gain of approximately $20.4 million.For the three months ended March 31, 2012,
these assets produced an average of 4,561 Boe per day. We estimate that the
proved reserves of these assets at closing were approximately 35.3 MMBoe.
We used the net proceeds from this divestiture to repay a portion of the
outstanding borrowings under our credit facility.  Contractual obligations.Our contractual obligations include
long-term debt, cash interest expense on debt, operating lease obligations,
drilling commitments, employment agreements with officers, derivative
liabilities and other obligations. Since December 31, 2012, the material
changes in our contractual obligations included a$0.2billion increase in
outstanding long-term debt, a $28.4 million decrease in cash interest expense
on debt and a $36.4 million increase in our net commodity derivative liability.
See Note I of the Condensed Notes to Consolidated Financial Statements included
in “Item 1. Consolidated Financial Statements (Unaudited)” for additional information
regarding our long-term debt and “Item 3. Quantitative and Qualitative
Disclosures About Market Risk” for information regarding the interest on our
long-term debt 55


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and information on changes in the fair
value of our open derivative obligations during the three months endedMarch 31, 2013.  Off-balance sheet arrangements.Currently, we do not have any material
off-balance sheet arrangements.  Capital resources.Our primary sources of liquidity have
historically been cash flows generated from operating activities (including thecash settlements received from (paid on)
derivatives not designated as hedgespresented in our
investing activities) and borrowings under our credit facility. We currently
believe that our cash flow will substantially meet both our short-term working
capital requirements and our current 2013 capital expenditure plans. We believe
that we have adequate availability under our credit facility to fund any cash
flow deficits, though we could reduce our capital spending program to remain
substantially within our cash flow.  The following table summarizes our changes
in cash and cash equivalents for the three months endedMarch 31, 2013and 2012:  Three
  Months EndedMarch
  31,(in thousands)
 
 2013
 
 2012Net cash provided by operating activities
 
 $
 219,671
 
 $
 345,905Net cash used in investing activities
 
 
 (402,129)
 
 
 (575,747)Net cash provided by financing activities
 
 
 180,552
 
 
 230,106Net increase (decrease) in cash and cash equivalents
 
 $
 (1,906)
 
 $
 264
  Cash flow from operating activities.The decrease in operating cash flows during thethreemonths ended March 31, 2013 as compared to
2012 was primarily due to (i) decreased
oil and natural gas revenues, (ii) increases in related oil and natural gas
production costs, general and administrative expense and interest expense and
(iii) negative variances in working capital changes.  Our
net cash provided by operating activities includes a reduction of $45.6million and $5.7million
for thethreemonths ended March 31, 2013
and 2012, respectively, associated with changes in working capital items.
Changes in working capital items adjust for the timing of receipts and payments
of actual cash.  Cash flow used in investing activities.During the three months endedMarch 31, 2013and 2012, we invested $0.4 billion and $0.5 billion,
respectively, for capital expenditures on oil and natural gas properties. Cash
flows used in investing activities were lower during the three months endedMarch 31, 2013as compared to 2012, in part due to our PDC Acquisition in 2012.  Cash flow from financing activities.In March
2012, we issued $600 million in aggregate principal amount of 5.5% senior notes
due 2022 at par, for which we received net proceeds of approximately $590.0
million. We used the net proceeds to repay a portion of the borrowings under
our credit facility, which increased our liquidity for future activities.  Our credit facility has a maturity date of
April 25, 2016. Our borrowing base is $3.0 billion until the next
scheduled borrowing base redetermination in October 2013, and commitments from
our bank group total $2.5 billion. Between scheduled borrowing base
redeterminations, the Company and the lenders (requiring a 66 2/3 percent
vote), may each request one special redetermination. AtMarch 31, 2013,our availability to borrow additional funds was approximately$2.0billion based on
bank commitments of $2.5 billion.  Advances on our credit facility bear interest, at our option,
based on (i) the prime rate of JPMorgan Chase Bank (“JPM Prime Rate”)
(3.25 percent atMarch 31, 2013) or (ii) a Eurodollar rate
(substantially equal to the London Interbank Offered Rate).  The credit
facility’s interest rates of Eurodollar rate advances and JPM Prime Rate
advances varied, with interest margins ranging from 150 to 250 basis
points and 50 to 150 basis points, respectively, per annum depending on
the debt balance outstanding. We pay commitment fees on the unused portion of
the available commitment ranging from 37.5 to 50 basis points per annum,
depending on utilization of the commitments. 56


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In conducting our business, we may utilize various
financing sources, including the issuance of (i) fixed and floating rate debt,
(ii) convertible securities, (iii) preferred stock, (iv) common stock and (v)
other securities.Over the last three years, we have
demonstrated our use of the capital markets by issuing common stock in public
offerings and private placements and issuing senior unsecured debt. However,
there are no assurances that we can access the capital markets to obtain
additional funding, if needed, and at what cost and terms.We may also
sell assets and issue securities in exchange for oil and natural gas assets or
interests in oil and natural gas companies.  Additional securities may be of a
class senior to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
from time to time by our board of directors. Utilization of some of these
financing sources may require approval from the lenders under our credit
facility.  Liquidity.Our principal
sources of short-term liquidity are cash on hand and available borrowing
capacity under our credit facility.  At March
31, 2013, we had $1.0million of cash on hand.  AtMarch 31, 2013, the commitments under our credit
facility were $2.5 billion, which provided us with approximately$2.0billionofavailableborrowing
capacity. Upon a redetermination, our $3.0 billion borrowing base could be
substantially reduced. There is no assurance that our borrowing base will not
be reduced, whichcould affect our liquidity.  Debt ratings.We receive debt credit ratings from Standard &
Poor’s Ratings Group, Inc. (“S&P”) and Moody’s Investors Service, Inc.
(“Moody’s”), which are subject to regular reviews. S&P’s corporate rating
for us is “BB+” with a stable outlook. Moody’s corporate rating for us is “Ba3”
with a stable outlook. S&P and Moody’s consider many factors in determining
our ratings including: production growth opportunities, liquidity, debt levels
and asset and reserve mix. A reduction in our debt ratings could negatively
affect our ability to obtain additional financing or the interest rate, fees
and other terms associated with such additional financing.  Book capitalization and current ratio.Our book capitalization at March 31, 2013
was $6.8billion, consisting of debt of $3.3 billion and stockholders’ equity of $3.5billion. Our debt to book capitalization was 48percent and 47percent
at March 31, 2013 and December 31, 2012, respectively. Our ratio of
current assets to current liabilities was 0.58to
1.0 at March 31, 2013 as compared to 0.62 to 1.0 at December 31, 2012.  Inflation and changes in prices.Our revenues, the value of our assets, and our ability to obtain bank
financing or additional capital on attractive terms have been and will continue
to be affected by changes in commodity prices and the costs to produce our
reserves. Commodity prices are subject to significant fluctuations that are
beyond our ability to control or predict. During the three months ended March 31, 2013,
we received an average of $82.49per barrel of
oil and $4.43per Mcf of natural gas before
consideration of commodity derivative contracts compared to $98.10per barrel of oil and $5.78per Mcf of natural gas in the three months ended March 31, 2012.
Although certain of our costs are affected by general inflation, inflation does
not normally have a significant effect on our business. In a trend that began
in 2004, and that has continued until recently, oil prices have increased
significantly. The higher oil price led to increased activity in the industry
and, consequently, rising costs. These cost trends have put pressure not only
on our operating costs, but also on capital costs. Although we have seen a
decrease in commodity prices, the cost trends have not followed proportionally. 57


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Critical Accounting Policies, Practices and Estimates  Our
historical consolidated financial statements and related condensed notes to
consolidated financial statements contain information that is pertinent to our
management’s discussion and analysis of financial condition and results of
operations. Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that our management
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. However, the accounting principles used by us generally
do not change our reported cash flows or liquidity. Interpretation of the
existing rules must be done and judgments made on how the specifics of a given
rule apply to us.  In
management’s opinion, the more significant reporting areas impacted by
management’s judgments and estimates are revenue recognition, the choice of
accounting method for oil and natural gas activities, oil and natural gas
reserve estimation, asset retirement obligations, impairment of long-lived
assets, valuation of stock-based compensation, valuation of business
combinations and valuation of financial derivative instruments. Management’s
judgments and estimates in these areas are based on information available from
both internal and external sources, including engineers, geologists and
historical experience in similar matters. Actual results could differ from the
estimates, as additional information becomes known.  There
have been no material changes in our critical accounting policies and
procedures during thethreemonths ended March 31, 2013. See our disclosure of
critical accounting policies in “Item 8. Financial Statements and Supplementary
Data” of our Annual Report on Form 10-K for the year ended December 31, 2012,
filed with the United States Securities and Exchange Commission (the “SEC”) on
February 22, 2013.  58


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Item 3. Quantitative and Qualitative Disclosures About
Market Risk  The
following market risk disclosures should be read in conjunction with the quantitative
and qualitative disclosures about market risk contained in our Annual Report on
Form 10-K for the year ended December 31, 2012.  We are exposed to a variety of market
risks including credit risk, commodity price risk and interest rate risk. We
address these risks through a program of risk management which includes the use
of derivative instruments. The following quantitative and qualitative
information is provided about financial instruments to which we are a party at
December 31, 2012, and from which we may incur future gains or losses
from changes in market interest rates or commodity prices and losses from
extension of credit.  We do not enter into derivative or other financial
instruments for speculative or trading purposes.  Hypothetical changes in interest rates and commodity prices chosen
for the following estimated sensitivity analysis are considered to be
reasonably possible near-term changes generally based on consideration of past
fluctuations for each risk category. However, since it is not possible to
accurately predict future changes in interest rates and commodity prices, these
hypothetical changes may not necessarily be an indicator of probable future
fluctuations.  Credit risk.We monitor
our risk of loss due to non-performance by counterparties of their contractual
obligations. Our principal exposure to credit risk is through the sale of our
oil and natural gas production, which we market to energy marketing companies
and refineries and to a lesser extent our derivative counterparties. We monitor
our exposure to these counterparties primarily by reviewing credit ratings,
financial statements and payment history. We extend credit terms based on our
evaluation of each counterparty’s creditworthiness. Although we have not
generally required our counterparties to provide collateral to support their
obligation to us, we may, if circumstances dictate, require collateral in the
future. In this manner, we reduce credit risk.  We
have entered into International Swap Dealers Association Master Agreements
(“ISDA Agreements”) with each of our derivative counterparties. The terms of
the ISDA Agreements provide us and the counterparties with rights of set off
upon the occurrence of defined acts of default by either us or a counterparty
to a derivative, whereby the party not in default may set off all derivative
liabilities owed to the defaulting party against all derivative asset
receivables from the defaulting party.See
Note H of the Condensed Notes to Consolidated Financial Statements included in
“Item 1. Consolidated Financial Statements (Unaudited)” for additional
information regarding our derivative activities.  Commodity price risk.We are
exposed to market risk as the prices of our commodities are subject to
fluctuations resulting from changes in supply and demand. To reduce our
exposure to changes in the prices of our commodities we have entered into, and
may in the future enter into, additional commodity price risk management
arrangements for a portion of our oil and natural gas production. The
agreements that we have entered into generally have the effect of providing us
with a fixed price for a portion of our expected future oil and natural gas
production over a fixed period of time. Our commodity price risk management
activities could have the effect of reducing net income and the value of our
securities.An average increase in the commodity
price of $10.00 per barrel of oil from the commodity prices at March 31, 2013,
would have resulted in a net unrealized loss on our commodity price risk management
contracts of approximately $229.5 million.  At
March 31, 2013, we had (i) oil price swaps that settle on a monthly
basis covering future oil production from April 1, 2013 through June 30,
2017 and (ii) oil basis swaps covering our basis differential from April 1, 2013
to December 31, 2013. See Note H of the Condensed Notes to Consolidated
Financial Statements included in “Item 1. Consolidated Financial Statements
(Unaudited)” for additional information on our commodity derivative
instruments. The average NYMEX oil price for thethreemonths ended March 31, 2013,
was $94.41 per Bbl. AtApril
29, 2013, the NYMEX oil price was $94.50 per Bbl.  A
decrease in the average forward NYMEX oil price below those at March 31, 2013,
would decrease the fair value liability of our commodity derivative contracts
from their recorded balance at March 31,
2013. Changes in the recorded fair value
of the undesignated commodity derivative contracts are marked to market through
earnings as unrealized gains or losses. The potential decrease in our fair
value liability would be recorded in earnings as an unrealized
gain. However, an increase in the average forward NYMEX oil price above that
at March 31, 2013, would increase the fair value liability of our
commodity derivative contracts from their recorded balance at March 31, 2013.
The potential increase in our fair value liability would be recorded in
earnings as an unrealized loss. We are currently unable to estimate the effects
on the earnings of future periods resulting from changes in the market value of
our commodity derivative contracts.  59


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The fair value of our derivative instruments is
determined based on our valuation models. We did not change our valuation
method during the three months ended March
31, 2013. During the three months ended March 31, 2013,
we were party to commodity derivative instruments. See Note H of the Condensed Notes to Consolidated Financial
Statements included in “Item 1. Consolidated Financial Statements (Unaudited)”
for additional information regarding our derivative instruments.  The following
table reconciles the changes that occurred in the fair values of our derivative
instruments during the three months ended March
31, 2013:  Commodity DerivativeInstruments(in thousands)
 Net Assets (Liabilities) (a)Fair value of
  contracts outstanding at December 31, 2012
 
 $
 25,078Changes in fair
  values (b)
 
 
 (59,017)Contract maturities
 
 
 (6,016)Fair value of
  contracts outstanding at March 31, 2013
 
 $
 (39,955)(a)
 Represents the fair
  values of open derivative contracts subject to market risk.(b)
 At inception, new
  derivative contracts entered into by us have no intrinsic value.
  Interest rate risk.Our
exposure to changes in interest rates relates primarily to debt obligations. We
manage our interest rate exposure by limiting our variable-rate debt to a
certain percentage of total capitalization and by monitoring the effects of
market changes in interest rates. To reduce our exposure to changes in interest
rates we have entered into, and may in the future enter into additional
interest rate risk management arrangements for a portion of our outstanding
debt. The agreements that we have entered into generally have the effect of
providing us with a fixed interest rate for a portion of our variable rate
debt. We may utilize interest rate derivatives to alter interest rate exposure
in an attempt to reduce interest rate expense related to existing debt issues.
Interest rate derivatives are used solely to modify interest rate exposure and
not to modify the overall leverage of the debt portfolio. We are exposed to
changes in interest rates as a result of our credit facility, and the terms of
our credit facility require us to pay higher interest rate margins as we
utilize a larger percentage of our available commitments.  We
had total indebtedness of $467.4 million outstanding under our credit facility
at March 31, 2013. The impact of a one percent increase in interest
rates on this amount of debt would result in increased annual interest expense
of approximately $4.7 million.  60


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Item 4. Controls and Procedures  Evaluation of Disclosure Controls and Procedures.As
required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Our disclosure controls and
procedures are designed to provide reasonable assurance that the information
required to be disclosed by us in reports that we file under the Exchange Act
is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure and is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC. Based upon the evaluation, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures were effective at March 31,
2013 at the reasonable assurance level.  Changes in Internal Control over Financial Reporting.There
have been no changes in our internal controls over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last
fiscal quarter that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.  61


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PART
II – OTHER INFORMATION  Item 1. 
Legal Proceedings  We
are a party to proceedings and claims incidental to our business. While many of
these other matters involve inherent uncertainty, we believe that the
liability, if any, ultimately incurred with respect to such other proceedings
and claims will not have a material adverse effect on our consolidated
financial position as a whole or on our liquidity, capital resources or future
results of operations. We will continue to evaluate proceedings and claims
involving us on a regular basis and will establish and adjust any reserves as
appropriate to reflect our assessment of the then current status of the
matters.  Item 1A. 
Risk Factors  In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the risks discussed in our Annual Report on
Form 10-K for the year ended December 31, 2012, under the headings “Item 1.
Business – Competition,” “— Marketing Arrangements” and “— Applicable Laws
and Regulations,” “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Item 7A.
Quantitative and Qualitative Disclosure About Market Risk,” which risks could
materially affect our business, financial condition or future results. There
have been no material changes in our risk factors from those described in our
Annual Report on Form 10-K for the year ended December 31, 2012.  The risks
described in this Quarterly Report on Form 10-Q and in our Annual Report on
Form 10-K are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition or future results.  Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds  Period
 
 Total number of shares withheld (a)
 
 Average price per share
 
 Total number of shares purchased as part of publicly announced
  plans
 
 Maximum number of shares that may yet be purchased under the
  planJanuary 1, 2013 -
  January 31, 2013
 
 4,735
 
 $
 83.21
 
 -February 1, 2013 -
  February 28, 2013
 
 26,995
 
 $
 93.18
 
 -March 1, 2013 -
  March 31, 2013
 
 -
 
 $
 -
 
 -(a)
 Represents
  shares that were withheld by us to satisfy tax withholding obligations of
  certain of our officers and key employees that arose upon the lapse of
  restrictions on restricted stock.
  62


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Item 6.  Exhibits  Exhibit
  Number
 
 Exhibit3.1
 
 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
  the Company’s Current Report on Form 8-K on August 8, 2007, and
  incorporated herein by reference).3.2
 
 Second Amended and Restated Bylaws of Concho Resources Inc., as
  amended November 7, 2012 (filed as Exhibit 3.1 to the Company’s Current
  Report on Form 8-K on November 8, 2012, and incorporated herein by reference).4.1
 
 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the
  Company’s Annual Report on Form 10-K on February 22, 2013, and
  incorporated herein by reference).10.1 **
  
  
  10.2
 
 Form of Performance Unit Award Agreement (filed as Exhibit 10.1
  to the Company’s Current Report on Form 8-K on January 4, 2013, and
  incorporated herein by reference).
  
  Eleventh Amendment to Amended and Restated Credit Agreement,
  dated as of April 15, 2013, among Concho Resources Inc., the lenders party
  thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as
  Exhibit 10.1 to the Company’s Current Report on Form 8-K on April 17, 2013,
  and incorporated herein by reference).31.1 (a)
 
 Certification of Chief Executive Officer pursuant to Section 302
  of the Sarbanes-Oxley Act of 2002.31.2 (a)
 
 Certification of Chief Financial Officer pursuant to Section 302
  of the Sarbanes-Oxley Act of 2002.32.1 (b)
 
 Certification of Chief Executive Officer pursuant to Section 906
  of the Sarbanes-Oxley Act of 2002.32.2 (b)
 
 Certification of Chief Financial Officer pursuant to Section 906
  of the Sarbanes-Oxley Act of 2002.101.INS (a)
 
 XBRL Instance Document.101.SCH (a)
 
 XBRL Schema Document.101.CAL (a)
 
 XBRL Calculation Linkbase Document.101.DEF (a)
 
 XBRL
  Definition Linkbase Document.101.LAB (a)
 
 XBRL
  Labels Linkbase Document.101.PRE (a)
 
 XBRL
  Presentation Linkbase Document.
 (a)  Filed herewith. (b) 
Furnished herewith. **
Management contract or compensatory plan or agreement
 63


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SIGNATURES  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.   CONCHO
  RESOURCES INC.Date:
 May 2, 2013
 
 By
 /s/  Timothy A.
  LeachTimothy A. LeachDirector, Chairman of the Board of Directors, Chief ExecutiveOfficer and President (Principal Executive Officer)By
 /s/  Darin G. HoldernessDarin G. HoldernessSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 64


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EXHIBIT INDEX   Exhibit
  Number
 
 Exhibit3.1
 
 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
  the Company’s Current Report on Form 8-K on August 8, 2007, and
  incorporated herein by reference).3.2
 
 Second Amended and Restated Bylaws of Concho Resources Inc., as
  amended November 7, 2012 (filed as Exhibit 3.1 to the Company’s Current
  Report on Form 8-K on November 8, 2012, and incorporated herein by reference).4.1
 
 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the
  Company’s Annual Report on Form 10-K on February 22, 2013, and
  incorporated herein by reference).10.1 **
  
  
  10.2
 
 Form of Performance Unit Award Agreement (filed as Exhibit 10.1
  to the Company’s Current Report on Form 8-K on January 4, 2013, and
  incorporated herein by reference).
  
  Eleventh Amendment to Amended and Restated Credit Agreement,
  dated as of April 15, 2013, among Concho Resources Inc., the lenders party
  thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as
  Exhibit 10.1 to the Company’s Current Report on Form 8-K on April 17, 2013,
  and incorporated herein by reference).31.1 (a)
 
 Certification of Chief Executive Officer pursuant to Section 302
  of the Sarbanes-Oxley Act of 2002.31.2 (a)
 
 Certification of Chief Financial Officer pursuant to Section 302
  of the Sarbanes-Oxley Act of 2002.32.1 (b)
 
 Certification of Chief Executive Officer pursuant to Section 906
  of the Sarbanes-Oxley Act of 2002.32.2 (b)
 
 Certification of Chief Financial Officer pursuant to Section 906
  of the Sarbanes-Oxley Act of 2002.101.INS (a)
 
 XBRL Instance Document.101.SCH (a)
 
 XBRL Schema Document.101.CAL (a)
 
 XBRL Calculation Linkbase Document.101.DEF (a)
 
 XBRL
  Definition Linkbase Document.101.LAB (a)
 
 XBRL
  Labels Linkbase Document.101.PRE (a)
 
 XBRL
  Presentation Linkbase Document.
 (a)  Filed herewith. (b) 
Furnished herewith. **
Management contract or compensatory plan or agreement


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