##### Table of Contents



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 September 30, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-33615
 Concho Resources Inc.
  Delaware
    
    76-0818600(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)550 West Texas Avenue, Suite 100Midland, Texas
    
    79701(Address of principal executive offices)
    
    (Zip code)
 (432) 683-7443  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PART 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
    
    
    63Item 4.Controls and Procedures
    
    
    65PART II  OTHER INFORMATION
    
    
    66Item 1.Legal Proceedings
    
    
    66Item 1A.Risk Factors
    
    
    66Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    66Item 6.Exhibits
    
    
    67EX-31.1EX-31.2EX-32.1EX-32.2
  i




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   
    
    our business and financial strategy;
 
    
    the estimated quantities of oil and natural gas reserves;
 
    
    our use of industry technology;
 
    
    our realized oil and natural gas prices;
 
    
    the timing and amount of the future production of our oil and natural
gas;
 
    
    the amount, nature and timing of our capital expenditures;
 
    
    the drilling of our wells;
 
    
    our competition and government regulations;
 
    
    the marketing of our oil and natural gas;
 
    
    our exploitation activities or property acquisitions;
 
    
    the costs of exploiting and developing our properties and conducting
other operations;
 
    
    general economic and business conditions;
 
    
    our cash flow and anticipated liquidity;
 
    
    uncertainty regarding our future operating results;
 
    
    our plans, objectives, expectations and intentions contained in this
report that are not historical; and
 
    
    our ability to integrate acquisitions.
   ii




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PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited)
 Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    1Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    2Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2009
    
    
    3Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
    
    
    4Condensed Notes to Consolidated Financial Statements
    
    
    5
 iii




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Concho Resources Inc.
 
 Consolidated Balance Sheets
Unaudited
 September 30,
    
    
    December 31,(in thousands, except share and per share data)
    
    2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,695
    
    
    $
    17,752Accounts receivable, net of allowance for doubtful accounts:Oil and natural gas
    
    
    67,021
    
    
    
    48,793Joint operations and other
    
    
    72,402
    
    
    
    92,833Related parties
    
    
    138
    
    
    
    314Derivative instruments
    
    
    9,405
    
    
    
    113,149Deferred income taxes
    
    
    5,800
    
    
    
    Prepaid costs and other
    
    
    8,462
    
    
    
    5,942Total current assets
    
    
    178,923
    
    
    
    278,783Property and equipment, at cost:Oil and natural gas properties, successful efforts method
    
    
    2,980,268
    
    
    
    2,693,574Accumulated depletion
    
    
    (468,247
    )
    
    
    (306,990
    )Total oil and natural gas properties, net
    
    
    2,512,021
    
    
    
    2,386,584Other property and equipment, net
    
    
    16,151
    
    
    
    14,820Total property and equipment, net
    
    
    2,528,172
    
    
    
    2,401,404Deferred loan costs, net
    
    
    21,982
    
    
    
    15,701Inventory
    
    
    24,351
    
    
    
    19,956Intangible asset, net  operating rights
    
    
    36,909
    
    
    
    37,768Noncurrent derivative instruments
    
    
    30,727
    
    
    
    61,157Other assets
    
    
    462
    
    
    
    434Total assets
    
    $
    2,821,526
    
    
    $
    2,815,203Liabilities and Stockholders EquityCurrent liabilities:Accounts payable:Trade
    
    $
    12,010
    
    
    $
    7,462Related parties
    
    
    793
    
    
    
    312Other current liabilities:Bank overdrafts
    
    
    2,810
    
    
    
    9,434Revenue payable
    
    
    40,532
    
    
    
    22,286Accrued and prepaid drilling costs
    
    
    120,726
    
    
    
    154,196Derivative instruments
    
    
    23,158
    
    
    
    1,866Deferred income taxes
    
    
    
    
    
    
    37,205Other current liabilities
    
    
    42,204
    
    
    
    38,057Total current liabilities
    
    
    242,233
    
    
    
    270,818Long-term debt
    
    
    645,747
    
    
    
    630,000Noncurrent derivative instruments
    
    
    16,559
    
    
    
    Deferred income taxes
    
    
    591,029
    
    
    
    573,763Asset retirement obligations and other long-term liabilities
    
    
    13,258
    
    
    
    15,468Commitments and contingencies (Note K)Stockholders equity:Common stock, $0.001 par value; 300,000,000 authorized; 85,605,502 and 84,828,824 shares
issued at September 30, 2009 and December 31, 2008, respectively
    
    
    86
    
    
    
    85Additional paid-in capital
    
    
    1,023,543
    
    
    
    1,009,025Retained earnings
    
    
    289,488
    
    
    
    316,169Treasury stock, at cost; 12,380 and 3,142 shares at September 30, 2009 and December 31, 2008,
respectively
    
    
    (417
    )
    
    
    (125
    )Total stockholders equity
    
    
    1,312,700
    
    
    
    1,325,154Total liabilities and stockholders equity
    
    $
    2,821,526
    
    
    $
    2,815,203
 The accompanying notes are an integral part of these consolidated financial statements.
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Concho Resources Inc.
 
 Consolidated Statements of Operations
Unaudited
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Operating revenues:Oil sales
    
    $
    121,301
    
    
    $
    130,600
    
    
    $
    287,786
    
    
    $
    301,826Natural gas sales
    
    
    32,193
    
    
    
    39,857
    
    
    
    79,042
    
    
    
    112,725Total operating revenues
    
    
    153,494
    
    
    
    170,457
    
    
    
    366,828
    
    
    
    414,551Operating costs and expenses:Oil and natural gas production
    
    
    25,439
    
    
    
    27,041
    
    
    
    76,022
    
    
    
    65,915Exploration and abandonments
    
    
    2,776
    
    
    
    16,824
    
    
    
    10,195
    
    
    
    20,288Depreciation, depletion and amortization
    
    
    54,835
    
    
    
    32,528
    
    
    
    157,985
    
    
    
    75,822Accretion of discount on asset retirement obligations
    
    
    220
    
    
    
    270
    
    
    
    799
    
    
    
    571Impairments of long-lived assets
    
    
    1,131
    
    
    
    2,758
    
    
    
    9,686
    
    
    
    2,827General and administrative (including non-cash stock-based
compensation of $2,548 and $1,925 for the three months ended
September 30, 2009 and 2008, respectively, and $6,661 and $4,954 for
the nine months ended September 30, 2009 and 2008, respectively)
    
    
    12,715
    
    
    
    10,778
    
    
    
    38,633
    
    
    
    27,044Bad debt expense
    
    
    
    
    
    
    1,106
    
    
    
    
    
    
    
    2,905Ineffective portion of cash flow hedges
    
    
    
    
    
    
    (416
    )
    
    
    
    
    
    
    (1,336
    )(Gain) loss on derivatives not designated as hedges
    
    
    7,783
    
    
    
    (163,312
    )
    
    
    94,435
    
    
    
    (43,678
    )Total operating costs and expenses
    
    
    104,899
    
    
    
    (72,423
    )
    
    
    387,755
    
    
    
    150,358Income (loss) from operations
    
    
    48,595
    
    
    
    242,880
    
    
    
    (20,927
    )
    
    
    264,193Other income (expense):Interest expense
    
    
    (6,809
    )
    
    
    (10,255
    )
    
    
    (17,379
    )
    
    
    (19,755
    )Other, net
    
    
    (200
    )
    
    
    334
    
    
    
    (348
    )
    
    
    1,665Total other expense
    
    
    (7,009
    )
    
    
    (9,921
    )
    
    
    (17,727
    )
    
    
    (18,090
    )Income (loss) before income taxes
    
    
    41,586
    
    
    
    232,959
    
    
    
    (38,654
    )
    
    
    246,103Income tax (expense) benefit
    
    
    (21,824
    )
    
    
    (91,031
    )
    
    
    11,973
    
    
    
    (96,230
    )Net income (loss)
    
    $
    19,762
    
    
    $
    141,928
    
    
    $
    (26,681
    )
    
    $
    149,873Basic earnings per share:Net income (loss) per share
    
    $
    0.23
    
    
    $
    1.75
    
    
    $
    (0.31
    )
    
    $
    1.93Weighted average shares used in basic earnings per share
    
    
    85,061
    
    
    
    81,288
    
    
    
    84,798
    
    
    
    77,489Diluted earnings per share:Net income (loss) per share
    
    $
    0.23
    
    
    $
    1.72
    
    
    $
    (0.31
    )
    
    $
    1.90Weighted average shares used in diluted earnings per share
    
    
    86,088
    
    
    
    82,724
    
    
    
    84,798
    
    
    
    78,945
 The accompanying notes are an integral part of these consolidated financial statements.
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Concho Resources Inc.
 
 Consolidated Statement of Stockholders Equity
Unaudited
 Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury Stock
    
    
    Stockholders(in thousands)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    EquityBALANCE AT DECEMBER 31, 2008
    
    
    84,829
    
    
    $
    85
    
    
    $
    1,009,025
    
    
    $
    316,169
    
    
    
    3
    
    
    $
    (125
    )
    
    $
    1,325,154Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,681
    )
    
    
    
    
    
    
    
    
    
    
    (26,681
    )Stock options exercised
    
    
    513
    
    
    
    1
    
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,501Stock-based compensation for restricted stock
    
    
    269
    
    
    
    
    
    
    
    3,433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,433Cancellation of restricted stock
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation for stock options
    
    
    
    
    
    
    
    
    
    
    3,228
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,228Excess tax benefits related to stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,357Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (292
    )
    
    
    (292
    )BALANCE AT SEPTEMBER 30, 2009
    
    
    85,606
    
    
    $
    86
    
    
    $
    1,023,543
    
    
    $
    289,488
    
    
    
    12
    
    
    $
    (417
    )
    
    $
    1,312,700
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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Concho Resources Inc.
 
 Consolidated Statements of Cash Flows
Unaudited
 Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (26,681
    )
    
    $
    149,873Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation, depletion and amortization
    
    
    157,985
    
    
    
    75,822Impairments of long-lived assets
    
    
    9,686
    
    
    
    2,827Accretion of discount on asset retirement obligations
    
    
    799
    
    
    
    571Exploration expense, including dry holes
    
    
    6,950
    
    
    
    17,860Non-cash compensation expense
    
    
    6,661
    
    
    
    4,954Bad debt expense
    
    
    
    
    
    
    2,905Deferred income taxes
    
    
    (21,840
    )
    
    
    86,908(Gain) loss on sale of assets
    
    
    147
    
    
    
    (777
    )Ineffective portion of cash flow hedges
    
    
    
    
    
    
    (1,336
    )(Gain) loss on derivatives not designated as hedges
    
    
    94,435
    
    
    
    (43,678
    )Dedesignated cash flow hedges reclassified from accumulated other comprehensive income
    
    
    
    
    
    
    260Other non-cash items
    
    
    2,656
    
    
    
    2,749Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (10,367
    )
    
    
    26,209Prepaid costs and other
    
    
    (2,519
    )
    
    
    (1,035
    )Inventory
    
    
    (3,979
    )
    
    
    (14,985
    )Accounts payable
    
    
    5,029
    
    
    
    (12,472
    )Revenue payable
    
    
    17,581
    
    
    
    6,982Other current liabilities
    
    
    (4,465
    )
    
    
    15,763Net cash provided by operating activities
    
    
    232,078
    
    
    
    319,400CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures on oil and natural gas properties
    
    
    (316,756
    )
    
    
    (213,666
    )Acquisition of oil and gas properties, businesses and other assets
    
    
    
    
    
    
    (586,925
    )Additions to other property and equipment
    
    
    (3,716
    )
    
    
    (6,711
    )Proceeds from the sale of oil and natural gas properties and other assets
    
    
    1,004
    
    
    
    1,034Settlements received (paid) on derivatives not designated as hedges
    
    
    77,590
    
    
    
    (29,170
    )Net cash used in investing activities
    
    
    (241,878
    )
    
    
    (835,438
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    672,650
    
    
    
    767,800Payments of long-term debt
    
    
    (656,916
    )
    
    
    (460,700
    )Exercise of stock options
    
    
    4,501
    
    
    
    3,861Excess tax benefit from stock-based compensation
    
    
    3,357
    
    
    
    2,884Net proceeds from issuance of common stock
    
    
    
    
    
    
    242,426Proceeds from repayment of employee notes
    
    
    
    
    
    
    333Payments for loan costs
    
    
    (8,933
    )
    
    
    (15,541
    )Purchase of treasury stock
    
    
    (292
    )
    
    
    (125
    )Bank overdrafts
    
    
    (6,624
    )
    
    
    (954
    )Net cash provided by financing activities
    
    
    7,743
    
    
    
    539,984Net increase (decrease) in cash and cash equivalents
    
    
    (2,057
    )
    
    
    23,946Cash and cash equivalents at beginning of period
    
    
    17,752
    
    
    
    30,424Cash and cash equivalents at end of period
    
    $
    15,695
    
    
    $
    54,370SUPPLEMENTAL CASH FLOWS:Cash paid for interest and fees, net of $33 and $1,090 capitalized interest
    
    $
    13,291
    
    
    $
    16,164Cash paid for income taxes
    
    $
    5,598
    
    
    $
    5,964NON-CASH INVESTING ACTIVITIES:Deferred tax effect of acquired oil and gas properties
    
    $
    (835
    )
    
    $
    200,786
 The accompanying notes are an integral part of these consolidated financial statements.
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Concho Resources Inc.
 
 Condensed Notes to Consolidated Financial Statements
 September 30, 2009
 Unaudited
 Note A. Organization and nature of operations
  Note B. Summary of significant accounting policies
 Principles of consolidation.
 Use of estimates in the preparation of financial statements.
 Interim financial statements.
  Deferred loan costs.
 5




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  TotalCredit
    
    
    8.625%
    
    
    Deferred(in thousands)
    
    Facility
    
    
    Notes
    
    
    Loan CostsRemaining 2009
    
    $
    853
    
    
    $
    189
    
    
    $
    1,0422010
    
    
    3,411
    
    
    
    802
    
    
    
    4,2132011
    
    
    3,411
    
    
    
    881
    
    
    
    4,2922012
    
    
    3,411
    
    
    
    968
    
    
    
    4,3792013 & thereafter
    
    
    1,990
    
    
    
    6,066
    
    
    
    8,056Total
    
    $
    13,076
    
    
    $
    8,906
    
    
    $
    21,982
 Intangible assets.
 (in thousands)Remaining 2009
    
    $
    3872010
    
    
    1,5492011
    
    
    1,5492012
    
    
    1,5492013
    
    
    1,549Thereafter
    
    
    30,326Total
    
    $
    36,909
 Oil and natural gas sales and imbalances.
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  September 30, 2009
    
    December 31, 2008Overtake
    
    
    
    
    
    Overtake(Undertake)
    
    
    
    
    
    (Undertake)(dollars in thousands)
    
    Amount
    
    Volume (Mcf)
    
    Amount
    
    Volume (Mcf)Natural gas imbalance receivable (included in other assets)
    
    $
    434
    
    
    
    (96,549
    )
    
    $
    406
    
    
    
    (90,321
    )Natural gas imbalance liability (included in asset retirement
obligations and other long-term liabilities)
    
    $
    (451
    )
    
    
    79,973
    
    
    $
    (472
    )
    
    
    85,698
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(dollars in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Value of net overtake (undertake) arising during the period
(increasing (reducing) oil and natural gas production
expense)
    
    $
    (9
    )
    
    $
    (45
    )
    
    $
    (49
    )
    
    $
    (182
    )Net overtake (undertake) position arising during the
period (Mcf)
    
    
    (1,882
    )
    
    
    (8,440
    )
    
    
    (11,951
    )
    
    
    (16,543
    )
 Treasury stock.
 General and administrative expense .
 Reclassifications.
 Recent accounting pronouncements:
 Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 ASU 2009-05. Fair
Value Measurements and Disclosures (Topic 820)Measuring Liabilities at Fair Value .
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  ASU 2009-11. Extractive Activities  Oil and
Gas: Amendment to Section 932-10-S99
   Recent developments in reserves reporting. Modernization of Oil and Gas Reporting
 8




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Note C. Exploratory well costs
   Three Months Ended
    
    
    Nine Months Ended(in thousands)
    
    September 30, 2009
    
    
    September 30, 2009Beginning capitalized exploratory well costs
    
    $
    7,304
    
    
    $
    25,553Additions to exploratory well costs pending the determination of proved reserves
    
    
    35,822
    
    
    
    129,664Reclassifications due to determination of proved reserves
    
    
    (30,474
    )
    
    
    (142,114
    )Exploratory well costs charged to expense
    
    
    
    
    
    
    (451
    )Ending capitalized exploratory well costs
    
    $
    12,652
    
    
    $
    12,652
  September 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Wells in drilling progress
    
    $
    2,958
    
    
    $
    7,765Capitalized exploratory well costs that have been
capitalized for a period of one year or less
    
    
    9,694
    
    
    
    17,788Capitalized exploratory well costs that have been
capitalized for a period greater than one year
    
    
    
    
    
    
    Total capitalized exploratory well costs
    
    $
    12,652
    
    
    $
    25,553
  Note D. Acquisitions
 Henry Entities acquisition.
  9




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
   (in thousands)Fair value of Henry Properties net assets:Current assets, net of cash acquired of $19,049 (a)
    
    $
    86,005Proved oil and natural gas properties
    
    
    593,634Unproved oil and natural gas properties
    
    
    233,527Other long-term assets
    
    
    7,392Intangible assets  operating rights
    
    
    38,717Total assets acquired
    
    
    959,275Current liabilities
    
    
    (114,394
    )Asset retirement obligations and other long-term liabilities
    
    
    (7,529
    )Noncurrent derivative liabilities
    
    
    (39,037
    )Deferred tax liability
    
    
    (214,640
    )Total liabilities assumed
    
    
    (375,600
    )Net purchase price
    
    $
    583,675Consideration paid for Henry Properties net assets:Cash consideration paid, net of cash acquired of $19,049
    
    $
    578,025Acquisition costs (b)
    
    
    5,650Total purchase price
    
    $
    583,675
 
 (a)
    
    Includes a deferred tax asset of approximately $9.0 million.(b)
    
    Acquisition costs include legal and accounting fees, advisory fees and other
acquisition-related costs. 10




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Nine Months Ended(in thousands, except per share data)
    
    September 30, 2008Operating revenues
    
    $
    509,976Net income
    
    $
    134,959Earnings per common share:Basic
    
    $
    1.57Diluted
    
    $
    1.55
 Note E. Asset retirement obligations
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Asset retirement obligations, beginning of period
    
    $
    14,386
    
    
    $
    10,356
    
    
    $
    16,809
    
    
    $
    9,418Liabilities incurred from new wells
    
    
    132
    
    
    
    351
    
    
    
    402
    
    
    
    660Liabilities incurred in acquisitions
    
    
    
    
    
    
    7,062
    
    
    
    
    
    
    
    7,062Accretion expense
    
    
    220
    
    
    
    270
    
    
    
    799
    
    
    
    571Disposition of wells sold
    
    
    (81
    )
    
    
    
    
    
    
    (223
    )
    
    
    Liabilities settled upon plugging and
abandoning wells
    
    
    (630
    )
    
    
    
    
    
    
    (983
    )
    
    
    Revision of estimates
    
    
    107
    
    
    
    22
    
    
    
    (2,670
    )
    
    
    350Asset retirement obligations, end of period
    
    $
    14,134
    
    
    $
    18,061
    
    
    $
    14,134
    
    
    $
    18,061
 Note F. Stockholders equity
 Common stock private placement.
 11




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Treasury stock.
 Note G. Incentive plans
 Defined contribution plan.
 Stock incentive plan.
 Number ofCommon SharesApproved and authorized awards
    
    
    5,850,000Restricted stock grants, net of forfeitures
    
    
    (776,611
    )Stock option grants, net of forfeitures
    
    
    (3,463,985
    )Awards available for future grant
    
    
    1,609,404
 Restricted stock awards.
 Number of
    
    Grant DateRestricted
    
    Fair ValueShares
    
    Per ShareOutstanding at December 31, 2008
    
    
    407,351Shares granted
    
    
    268,398
    
    
    $
    25.53Shares cancelled / forfeited
    
    
    (4,596
    )Lapse of restrictions
    
    
    (193,358
    )Outstanding at September 30, 2009
    
    
    477,795
 12




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Grant date fair value for awards during the period:Employee grants
    
    $
    382
    
    
    $
    
    
    
    $
    5,002
    
    
    $
    1,989Officer and director grants (a)
    
    
    84
    
    
    
    577
    
    
    
    1,934
    
    
    
    1,419Total
    
    $
    466
    
    
    $
    577
    
    
    $
    6,936
    
    
    $
    3,408Stock-based compensation expense from restricted stock:Employee grants
    
    $
    793
    
    
    $
    514
    
    
    $
    2,185
    
    
    $
    1,212Officer and director grants (a)
    
    
    440
    
    
    
    202
    
    
    
    1,248
    
    
    
    366Total
    
    $
    1,233
    
    
    $
    716
    
    
    $
    3,433
    
    
    $
    1,578Income taxes and other information:Income tax benefit related to restricted stock
    
    $
    137
    
    
    $
    276
    
    
    $
    1,064
    
    
    $
    617Deductions in current taxable income related to restricted stock
    
    $
    699
    
    
    $
    68
    
    
    $
    5,066
    
    
    $
    1,268
 
 (a)
    
    The three and nine months ended September 30, 2009 includes effects of modifications to
certain stock-based awards, see further discussion below. Stock option awards.
 WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at December 31, 2008
    
    
    2,731,324
    
    
    $
    12.46Options granted
    
    
    120,301
    
    
    $
    20.75Options exercised
    
    
    (512,876
    )
    
    $
    8.77Outstanding at September 30, 2009
    
    
    2,338,749
    
    
    $
    13.70Vested at end of period
    
    
    1,639,459
    
    
    $
    10.74Vested and exercisable at end of period
    
    
    814,467
    
    
    $
    13.34
 13




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  WeightedAverage
    
    
    WeightedNumber of
    
    
    Remaining
    
    
    AverageStock
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicOptions
    
    
    Life
    
    
    Price
    
    
    Value(in thousands)Vested options:September 30, 2009:Exercise price
    
    $
    8.00
    
    
    
    1,121,212
    
    
    2.38 years
    
    $
    8.00
    
    
    $
    31,753Exercise price
    
    $
    12.00
    
    
    
    118,681
    
    
    4.63 years
    
    $
    12.00
    
    
    
    2,886Exercise price
    
    $
    14.84
    
    
    
    263,750
    
    
    6.96 years
    
    $
    14.84
    
    
    
    5,664Exercise price
    
    $
    21.84
    
    
    
    102,250
    
    
    8.42 years
    
    $
    21.84
    
    
    
    1,481Exercise price
    
    $
    31.81
    
    
    
    33,566
    
    
    8.76 years
    
    $
    31.81
    
    
    
    1521,639,459
    
    
    
    
    
    
    $
    10.74
    
    
    $
    41,936Vested and exercisable options:September 30, 2009:Exercise price
    
    $
    8.00
    
    
    
    332,181
    
    
    3.89 years
    
    $
    8.00
    
    
    $
    9,407Exercise price
    
    $
    12.00
    
    
    
    82,720
    
    
    5.88 years
    
    $
    12.00
    
    
    
    2,012Exercise price
    
    $
    14.84
    
    
    
    263,750
    
    
    6.96 years
    
    $
    14.84
    
    
    
    5,664Exercise price
    
    $
    21.84
    
    
    
    102,250
    
    
    8.42 years
    
    $
    21.84
    
    
    
    1,481Exercise price
    
    $
    31.81
    
    
    
    33,566
    
    
    8.76 years
    
    $
    31.81
    
    
    
    152814,467
    
    
    
    
    
    
    $
    13.34
    
    
    $
    18,716
 14




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Three Months Ended September 30,
    
    

Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Grant date fair value for awards during the period:Employee grants
    
    $
    50
    
    
    $
    206
    
    
    $
    50
    
    
    $
    389Officer and director grants (a)
    
    
    2,907
    
    
    
    585
    
    
    
    4,361
    
    
    
    5,675Total
    
    $
    2,957
    
    
    $
    791
    
    
    $
    4,411
    
    
    $
    6,064Stock-based compensation expense from stock options:Employee grants
    
    $
    132
    
    
    $
    48
    
    
    $
    273
    
    
    $
    113Performance vesting options- officers
    
    
    22
    
    
    
    149
    
    
    
    93
    
    
    
    433Officer and director grants (a)
    
    
    1,161
    
    
    
    1,012
    
    
    
    2,862
    
    
    
    2,830Total
    
    $
    1,315
    
    
    $
    1,209
    
    
    $
    3,228
    
    
    $
    3,376Income taxes and other information:Income tax benefit related to stock options
    
    $
    194
    
    
    $
    461
    
    
    $
    1,000
    
    
    $
    1,319Deductions in current taxable income related to stock options exercised
    
    $
    1,729
    
    
    $
    2,880
    
    
    $
    8,886
    
    
    $
    8,218
 
 (a)
    
    The three and nine months ended September 30, 2009 includes effects of modifications to
certain stock-based awards, see further discussion below.  Risk-free interest rate
    
    
    2.47
    %Expected term (years)
    
    
    6.25Expected volatility
    
    
    63.19
    %Expected dividend yield
    
    
    
  Modification of stock-based awards.
 15




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Future stock-based compensation expense.
 Restricted
    
    
    Stock(in thousands)
    
    Stock
    
    
    Options
    
    
    TotalRemaining 2009
    
    $
    1,200
    
    
    $
    1,059
    
    
    $
    2,2592010
    
    
    3,612
    
    
    
    2,279
    
    
    
    5,8912011
    
    
    2,231
    
    
    
    927
    
    
    
    3,1582012
    
    
    682
    
    
    
    199
    
    
    
    8812013
    
    
    41
    
    
    
    18
    
    
    
    59Total
    
    $
    7,766
    
    
    $
    4,482
    
    
    $
    12,248
 Note H. Disclosures about fair value measurements
  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 our
prices and valuation techniques, the Company does not have sufficient corroborating
market evidence to support classifying these assets and liabilities as Level 2.
 16




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Fair value measurements at reporting date usingSignificantQuoted prices in
    
    
    other
    
    
    Significantactive markets for
    
    
    observable
    
    
    unobservable
    
    
    Fair value atidentical assets
    
    
    inputs
    
    
    inputs
    
    
    September 30,(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2009Assets:Commodity derivative price swap contracts
    
    $
    
    
    
    $
    62,723
    
    
    $
    
    
    
    $
    62,723Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    10,078
    
    
    
    10,078Interest rate derivative swap contracts
    
    
    
    
    
    
    1,292
    
    
    
    
    
    
    
    1,292
    
    
    
    64,015
    
    
    
    10,078
    
    
    
    74,093Liabilities:Commodity derivative price swap contracts
    
    
    
    
    
    
    (58,186
    )
    
    
    
    
    
    
    (58,186
    )Commodity derivative basis swap contracts
    
    
    
    
    
    
    (7,483
    )
    
    
    
    
    
    
    (7,483
    )Interest rate derivative swap contracts
    
    
    
    
    
    
    (4,020
    )
    
    
    
    
    
    
    (4,020
    )Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    (3,989
    )
    
    
    (3,989
    )
    
    
    
    (69,689
    )
    
    
    (3,989
    )
    
    
    (73,678
    )Total financial assets (liabilities)
    
    $
    
    
    
    $
    (5,674
    )
    
    $
    6,089
    
    
    $
    415
  (in thousands)Balance at December 31, 2008
    
    $
    49,562Realized and unrealized losses
    
    
    (9,429
    )Purchases, issuances, and settlements
    
    
    (34,044
    )Balance at September 30, 2009
    
    $
    6,089Total losses for the period included in earnings attributable to the change in unrealized
losses relating to assets
still held at the reporting date
    
    $
    (43,473
    )
 17




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
  September 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    Fair(in thousands)
    
    value
    
    value
    
    value
    
    valueAssets:Derivative instruments
    
    $
    40,132
    
    
    $
    40,132
    
    
    $
    174,306
    
    
    $
    174,306Liabilities:Derivative instruments
    
    $
    39,717
    
    
    $
    39,717
    
    
    $
    1,866
    
    
    $
    1,866Credit facility
    
    $
    350,000
    
    
    $
    324,342
    
    
    $
    630,000
    
    
    $
    553,6458.625% senior notes due 2017
    
    $
    295,747
    
    
    $
    307,500
    
    
    $
    
    
    
    $
    
 Cash and cash equivalents, accounts receivable, other current assets, accounts payable,
interest payable and other current liabilities.
 Credit facility.
 Senior notes.
 Derivative instruments.
 18




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Fair value measurements usingQuoted
    
    
    Significant
    
    
    
    
    
    
    Totalprices
    
    
    other
    
    
    Significant
    
    
    carrying valuein active
    
    
    observable
    
    
    unobservable
    
    
    atmarkets
    
    
    inputs
    
    
    inputs
    
    
    September 30,(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2009Assets(1)Current:(a)Commodity derivative price swap contracts
    
    $
    
    
    
    $
    19,580
    
    
    $
    
    
    
    $
    19,580Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    10,078
    
    
    
    10,078
    
    
    
    19,580
    
    
    
    10,078
    
    
    
    29,658Noncurrent:(b)Commodity derivative price swap contracts
    
    
    
    
    
    
    43,143
    
    
    
    
    
    
    
    43,143Interest rate derivative swap contracts
    
    
    
    
    
    
    1,292
    
    
    
    
    
    
    
    1,292
    
    
    
    44,435
    
    
    
    
    
    
    
    44,435Liabilities(1)Current:(a)Commodity derivative price swap contracts
    
    
    
    
    
    
    (32,432
    )
    
    
    
    
    
    
    (32,432
    )Commodity derivative basis swap contracts
    
    
    
    
    
    
    (4,630
    )
    
    
    
    
    
    
    (4,630
    )Interest rate derivative swap contracts
    
    
    
    
    
    
    (4,020
    )
    
    
    
    
    
    
    (4,020
    )Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    (2,329
    )
    
    
    (2,329
    )
    
    
    
    (41,082
    )
    
    
    (2,329
    )
    
    
    (43,411
    )Noncurrent:(b)Commodity derivative price swap contracts
    
    
    
    
    
    
    (25,754
    )
    
    
    
    
    
    
    (25,754
    )Commodity derivative basis swap contracts
    
    
    
    
    
    
    (2,853
    )
    
    
    
    
    
    
    (2,853
    )Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    (1,660
    )
    
    
    (1,660
    )
    
    
    
    (28,607
    )
    
    
    (1,660
    )
    
    
    (30,267
    )Total financial assets (liabilities)
    
    $
    
    
    
    $
    (5,674
    )
    
    $
    6,089
    
    
    $
    415(a)Total current financial assets (liabilities),
gross basis
    
    
    
    
    
    
    
    
    $
    (13,753
    )(b)Total noncurrent financial assets
(liabilities), gross basis
    
    
    
    
    
    
    
    
    
    14,168Total financial assets (liabilities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    415
 19




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Fair value measurements usingQuoted
    
    
    Significant
    
    
    
    
    
    
    Totalprices
    
    
    other
    
    
    Significant
    
    
    carrying valuein active
    
    
    observable
    
    
    unobservable
    
    
    atmarkets
    
    
    inputs
    
    
    inputs
    
    
    December 31,(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2008Assets(1)Current:(a)Commodity derivative price swap contracts
    
    $
    
    
    
    $
    64,162
    
    
    $
    
    
    
    $
    64,162Commodity derivative price collar contracts
    
    
    
    
    
    
    
    
    
    
    49,562
    
    
    
    49,562
    
    
    
    64,162
    
    
    
    49,562
    
    
    
    113,724Noncurrent:(b)Commodity derivative price swap contracts
    
    
    
    
    
    
    60,995
    
    
    
    
    
    
    
    60,995Interest rate derivative swap contracts
    
    
    
    
    
    
    678
    
    
    
    
    
    
    
    678
    
    
    
    61,673
    
    
    
    
    
    
    
    61,673Liabilities(1)Current:(a)Commodity derivative price swap contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commodity derivative basis swap contracts
    
    
    
    
    
    
    (680
    )
    
    
    
    
    
    
    (680
    )Interest rate derivative swap contracts
    
    
    
    
    
    
    (1,761
    )
    
    
    
    
    
    
    (1,761
    )
    
    
    
    (2,441
    )
    
    
    
    
    
    
    (2,441
    )Noncurrent:(b)Commodity derivative price swap contracts
    
    
    
    
    
    
    (516
    )
    
    
    
    
    
    
    (516
    )
    
    
    
    (516
    )
    
    
    
    
    
    
    (516
    )Total financial assets (liabilities)
    
    $
    
    
    
    $
    122,878
    
    
    $
    49,562
    
    
    $
    172,440(a)Total current financial assets
(liabilities), gross basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    111,283(b)Total noncurrent financial assets
(liabilities), gross basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,157Total financial assets (liabilities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    172,440
 20




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 
 (1)
    
    The fair value of derivative instruments reported in the Companys consolidated balance
sheets are subject to netting arrangements and qualify for net presentation. The following
table reports the net basis derivative fair values as reported in the consolidated balance
sheets at September 30, 2009 and December 31, 2008: September 30,
    
    
    December 31,2009
    
    
    2008Consolidated Balance Sheet Classification:Current derivative contracts:Assets
    
    $
    9,405
    
    
    $
    113,149Liabilities
    
    
    (23,158
    )
    
    
    (1,866
    )Net current
    
    $
    (13,753
    )
    
    $
    111,283Noncurrent derivative contracts:Assets
    
    $
    30,727
    
    
    $
    61,157Liabilities
    
    
    (16,559
    )
    
    
    Net noncurrent
    
    $
    14,168
    
    
    $
    61,157
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
  Impairments of long-lived assets 
  Asset Retirement Obligations 
 21




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Fair value measurements usingQuoted
    
    Significantprices
    
    other
    
    Significantin active
    
    observable
    
    unobservable
    
    Totalmarkets
    
    inputs
    
    inputs
    
    Impairment(in thousands)
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    LossThree months ended September 30, 2009:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    629
    
    
    $
    (1,131
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    132Three months ended September 30, 2008:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    2,068
    
    
    $
    (2,758
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    7,413Nine months ended September 30, 2009:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    6,249
    
    
    $
    (9,686
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    402Nine months ended September 30, 2008:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    2,075
    
    
    $
    (2,827
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    7,722
 22




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Note I. Derivative financial instruments
   23




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 New commodity derivatives contracts in 2009.
 Aggregate
    
    Index
    
    ContractVolume
    
    Price
    
    PeriodOil (volumes in Bbls):Price collar
    
    
    600,000
    
    
    $
    45.00 - $49.00
    (a)
    
    
    3/1/09 - 5/31/09Price swap
    
    
    960,000
    
    
    $
    59.44
    (a)
    
    
    7/1/09 - 12/31/09Price swap
    
    
    273,000
    
    
    $
    67.50
    (a)
    
    
    8/1/09 - 12/31/09Price swap
    
    
    3,307,000
    
    
    $
    63.44
    (a)
    
    
    1/1/10 - 12/31/10Price swap
    
    
    2,601,000
    
    
    $
    71.66
    (a)
    
    
    1/1/11 - 12/31/11Natural gas (volumes in MMBtus):Price collar
    
    
    1,500,000
    
    
    $
    5.00 - $5.81
    (b)
    
    
    10/1/09 - 12/31/09Price collar
    
    
    1,500,000
    
    
    $
    5.00 - $5.81
    (b)
    
    
    1/1/10 - 3/31/10Price collar
    
    
    3,000,000
    
    
    $
    5.25 - $5.75
    (b)
    
    
    4/1/10 - 9/30/10Price collar
    
    
    1,500,000
    
    
    $
    6.00 - $6.80
    (b)
    
    
    10/1/10 - 12/31/10Price collar
    
    
    1,500,000
    
    
    $
    6.00 - $6.80
    (b)
    
    
    1/1/11 - 3/31/11Price swap
    
    
    3,000,000
    
    
    $
    4.31
    (b)
    
    
    4/1/09 - 9/30/09Price swap
    
    
    1,050,000
    
    
    $
    4.66
    (b)
    
    
    7/1/09 - 12/31/09Price swap
    
    
    6,810,000
    
    
    $
    6.13
    (b)
    
    
    1/1/10 - 12/31/10Price swap
    
    
    300,000
    
    
    $
    7.29
    (b)
    
    
    1/1/11 - 3/31/11Price swap
    
    
    5,400,000
    
    
    $
    6.96
    (b)
    
    
    4/1/11 - 12/31/11Basis swap
    
    
    600,000
    
    
    $
    0.79
    (c)
    
    
    7/1/09 - 9/30/09Basis swap
    
    
    450,000
    
    
    $
    0.89
    (c)
    
    
    10/1/09 - 12/31/09Basis swap
    
    
    8,400,000
    
    
    $
    0.85
    (c)
    
    
    1/1/10 - 12/31/10Basis swap
    
    
    1,800,000
    
    
    $
    0.87
    (c)
    
    
    1/1/11 - 3/31/11Basis swap
    
    
    5,400,000
    
    
    $
    0.76
    (c)
    
    
    4/1/11 - 12/31/11
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index prices for the natural gas price swaps and collars are based on the NYMEX-Henry Hub last trading day futures price.(c)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub delivery point. 24




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
  Aggregate
    
    Index
    
    ContractVolume
    
    Price
    
    PeriodOil (volumes in Bbls):Price swap
    
    
    540,000
    
    
    $
    80.33
    (a)
    
    
    1/1/10 - 12/31/10Natural gas (volumes in MMBtus):Price swap
    
    
    1,504,000
    
    
    $
    6.11
    (b)
    
    
    1/1/10 - 12/31/10
 
 (a)
    
    The index price for the oil price swap is based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index prices for the natural gas price swaps and collars are based on the NYMEX-Henry Hub last trading day futures price. 25




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Commodity derivative contracts at September 30, 2009.
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalOil Swaps:(a)2009:Volume (Bbl)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,028,473
    
    
    
    1,028,473Price per Bbl
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72.31
    
    
    $
    72.312010:Volume (Bbl)
    
    
    1,099,436
    
    
    
    1,013,436
    
    
    
    944,436
    
    
    
    891,436
    
    
    
    3,948,744Price per Bbl
    
    $
    68.21
    
    
    $
    68.27
    
    
    $
    68.32
    
    
    $
    68.37
    
    
    $
    68.292011:Volume (Bbl)
    
    
    844,436
    
    
    
    805,436
    
    
    
    770,436
    
    
    
    738,436
    
    
    
    3,158,744Price per Bbl
    
    $
    77.24
    
    
    $
    77.44
    
    
    $
    77.65
    
    
    $
    77.85
    
    
    $
    77.532012:Volume (Bbl)
    
    
    126,000
    
    
    
    126,000
    
    
    
    126,000
    
    
    
    126,000
    
    
    
    504,000Price per Bbl
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80Oil Collars:(a)2009:Volume (Bbl)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,000
    
    
    
    192,000Price per Bbl
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    120.00 - $134.60
    
    
    $
    120.00 - $134.60Natural Gas Swaps:(b)2009:Volume (MMBtu)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460,000
    
    
    
    460,000Price per MMBtu
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8.44
    
    
    $
    8.44Natural Gas Swaps:(c)2009:Volume (MMBtu)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000Price per MMBtu
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4.66
    
    
    $
    4.662010:Volume (MMBtu)
    
    
    1,950,000
    
    
    
    1,770,000
    
    
    
    1,620,000
    
    
    
    1,470,000
    
    
    
    6,810,000Price per MMBtu
    
    $
    6.11
    
    
    $
    6.12
    
    
    $
    6.13
    
    
    $
    6.15
    
    
    $
    6.132011:Volume (MMBtu)
    
    
    300,000
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    5,700,000Price per MMBtu
    
    $
    7.29
    
    
    $
    6.96
    
    
    $
    6.96
    
    
    $
    6.96
    
    
    $
    6.98Natural Gas Collars:(c)2009:Volume (MMBtu)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000Price per MMBtu
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.00 - $5.81
    
    
    $
    5.00 - $5.812010:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    6,000,000Price per MMBtu
    
    $
    5.00 - $5.81
    
    
    $
    5.25 - $5.75
    
    
    $
    5.25 - $5.75
    
    
    $
    6.00 - $6.80
    
    
    $
    5.38 - $6.032011:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000Price per MMBtu
    
    $
    6.00 - $6.80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6.00 - $6.80
 26




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalNatural Gas Basis Swaps:(d)2009:Volume (MMBtu)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,968,000
    
    
    
    1,968,000Price per MMBtu
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    $
    1.032010:Volume (MMBtu)
    
    
    2,100,000
    
    
    
    2,100,000
    
    
    
    2,100,000
    
    
    
    2,100,000
    
    
    
    8,400,000Price per MMBtu
    
    $
    0.85
    
    
    $
    0.85
    
    
    $
    0.85
    
    
    $
    0.85
    
    
    $
    0.852011:Volume (MMBtu)
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    7,200,000Price per MMBtu
    
    $
    0.87
    
    
    $
    0.76
    
    
    $
    0.76
    
    
    $
    0.76
    
    
    $
    0.79
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price swap is based on the Inside FERC-El Paso Permian Basin first-of-the-month spot price.(c)
    
    The index prices for the natural gas price swaps and collars are based on the NYMEX-Henry Hub last trading day futures price.(d)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub delivery point. Interest rate derivative contracts at September 30, 2009.
 27




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 :
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Decrease in oil and natural gas revenue from derivative activity:Cash payments on cash flow hedges in oil sales
    
    $
    
    
    
    $
    (12,111
    )
    
    $
    
    
    
    $
    (32,684
    )Dedesignated cash flow hedges reclassified from AOCI in natural gas sales
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (260
    )Total decrease in oil and natural gas revenue from derivative activity
    
    $
    
    
    
    $
    (12,149
    )
    
    $
    
    
    
    $
    (32,944
    )Gain (loss) on derivatives not designated as hedges:Mark-to-market gain (loss):Commodity derivatives:Oil
    
    $
    (12,821
    )
    
    $
    160,148
    
    
    $
    (156,920
    )
    
    $
    71,248Natural gas
    
    
    (8,442
    )
    
    
    15,947
    
    
    
    (13,460
    )
    
    
    1,600Interest rate derivatives
    
    
    (2,645
    )
    
    
    
    
    
    
    (1,645
    )
    
    
    Cash (payments) receipts on derivatives not designated as hedges:Commodity derivatives:Oil
    
    
    13,971
    
    
    
    (11,837
    )
    
    
    70,383
    
    
    
    (27,802
    )Natural gas
    
    
    3,395
    
    
    
    (946
    )
    
    
    9,227
    
    
    
    (1,368
    )Interest rate derivatives
    
    
    (1,241
    )
    
    
    
    
    
    
    (2,020
    )
    
    
    Total gain (loss) on derivatives not designated as hedges
    
    $
    (7,783
    )
    
    $
    163,312
    
    
    $
    (94,435
    )
    
    $
    43,678Gain from ineffective portion of cash flow hedges
    
    $
    
    
    
    $
    416
    
    
    $
    
    
    
    $
    1,336Accumulated other comprehensive income (loss):Cash flow hedges:Mark-to-market gain (loss) of cash flow hedges
    
    $
    
    
    
    $
    14,588
    
    
    $
    
    
    
    $
    (17,922
    )Reclassification adjustment of losses to earnings
    
    
    
    
    
    
    12,111
    
    
    
    
    
    
    
    32,684Net change, before income taxes
    
    
    
    
    
    
    26,699
    
    
    
    
    
    
    
    14,762Income tax effect
    
    
    
    
    
    
    (10,441
    )
    
    
    
    
    
    
    (5,776
    )Net change, net of income taxes
    
    $
    
    
    
    $
    16,258
    
    
    $
    
    
    
    $
    8,986Dedesignated cash flow hedges:Reclassification adjustment of losses to earnings
    
    $
    
    
    
    $
    38
    
    
    $
    
    
    
    $
    260Income tax effect
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (102
    )Net change, net of income taxes
    
    $
    
    
    
    $
    23
    
    
    $
    
    
    
    $
    158
 28




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Note J. Debt
  September 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Credit facility
    
    $
    350,000
    
    
    $
    630,0008.625% unsecured senior notes due 2017
    
    
    300,000
    
    
    
    Less: unamortized original issue discount
    
    
    (4,253
    )
    
    
    Less: current portion
    
    
    
    
    
    
    Total long-term debt
    
    $
    645,747
    
    
    $
    630,000
 Credit facility.
    8.625% unsecured senior notes.
 29




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
    Principal maturities of debt.
 (in thousands)Remaining 2009
    
    $
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    350,000Thereafter
    
    
    300,000Total
    
    $
    650,000
 Interest expense.
 Three Months Ended September 30,
    
    

Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Cash payments for interest
    
    $
    6,395
    
    
    $
    6,496
    
    
    $
    13,324
    
    
    $
    17,254Amortization of original issue discount
    
    
    13
    
    
    
    8
    
    
    
    13
    
    
    
    58Amortization of deferred loan origination costs
    
    
    883
    
    
    
    674
    
    
    
    2,596
    
    
    
    1,300Write-off of deferred loan origination costs and original issue discount
    
    
    57
    
    
    
    1,547
    
    
    
    57
    
    
    
    1,547Net changes in accruals
    
    
    (524
    )
    
    
    1,780
    
    
    
    1,422
    
    
    
    686Interest costs incurred
    
    
    6,824
    
    
    
    10,505
    
    
    
    17,412
    
    
    
    20,845Less: capitalized interest
    
    
    (15
    )
    
    
    (250
    )
    
    
    (33
    )
    
    
    (1,090
    )Total interest expense
    
    $
    6,809
    
    
    $
    10,255
    
    
    $
    17,379
    
    
    $
    19,755
 Note K. Commitments and contingencies
 Severance agreements.
 30




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Indemnifications .
 Legal actions .
 Acquisition commitments .
 Daywork commitments.
 Payments Due By PeriodLess than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than(in thousands)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsDaywork drilling contracts with related parties (a)
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Daywork drilling contracts assumed in the Henry Properties acquisition (b)
    
    
    1,085
    
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    Total contractual drilling commitments
    
    $
    2,085
    
    
    $
    2,085
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    Consists of daywork drilling contracts with Silver Oak Drilling, LLC, an affiliate of Chase Oil Corporation.(b)
    
    A major oil and gas company which owns an interest in the wells being drilled and the Company are parties to these contracts. Only the
Companys 25% share of the contract obligation has been reflected above. 31




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Operating leases.
 (in thousands)Remaining 2009
    
    $
    2682010
    
    
    1,0772011
    
    
    1,0832012
    
    
    1,0772013
    
    
    1,084Thereafter
    
    
    3,261Total
    
    $
    7,850
 Note L. Income taxes
   32




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Income tax provision.
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Income (loss) from operations
    
    $
    21,824
    
    
    $
    91,031
    
    
    $
    (11,973
    )
    
    $
    96,230Changes in stockholders equity:Net deferred hedge gains (losses)
    
    
    
    
    
    
    5,692
    
    
    
    
    
    
    
    (7,013
    )Net settlement losses included in earnings
    
    
    
    
    
    
    4,764
    
    
    
    
    
    
    
    12,891Tax benefits related to stock-based compensation
    
    
    (365
    )
    
    
    (738
    )
    
    
    (3,357
    )
    
    
    (2,884
    )$
    21,459
    
    
    $
    100,749
    
    
    $
    (15,330
    )
    
    $
    99,224
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Current:U.S. federal
    
    $
    2,766
    
    
    $
    7,620
    
    
    $
    8,060
    
    
    $
    8,234U.S. state and local
    
    
    1,099
    
    
    
    1,007
    
    
    
    1,807
    
    
    
    1,0883,865
    
    
    
    8,627
    
    
    
    9,867
    
    
    
    9,322Deferred:U.S. federal
    
    
    15,941
    
    
    
    73,865
    
    
    
    (19,162
    )
    
    
    77,902U.S. state and local
    
    
    2,018
    
    
    
    8,539
    
    
    
    (2,678
    )
    
    
    9,00617,959
    
    
    
    82,404
    
    
    
    (21,840
    )
    
    
    86,908$
    21,824
    
    
    $
    91,031
    
    
    $
    (11,973
    )
    
    $
    96,230
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Income (loss) at U.S. federal statutory rate
    
    $
    14,555
    
    
    $
    81,536
    
    
    $
    (13,529
    )
    
    $
    86,136State income taxes (net of federal tax effect)
    
    
    1,762
    
    
    
    9,546
    
    
    
    (830
    )
    
    
    10,094Nondeductible expense & other
    
    
    5,507
    
    
    
    (51
    )
    
    
    2,386
    
    
    
    Income tax expense (benefit)
    
    $
    21,824
    
    
    $
    91,031
    
    
    $
    (11,973
    )
    
    $
    96,230
 33




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Note M. Related party transactions
 Consulting Agreement.
 Chase Group transactions.
  Saltwater disposal services agreement.
 Other related party transactions.
   Overriding royalty and royalty interests.
  34




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
   Working interests owned by employees.
  Note N. Net income (loss) per share
    Three Months Ended September 30,
    
    Nine Months Ended September 30,(in thousands)
    
    2009

    
    2008

    
    2009

    
    2008Weighted average common shares outstanding:Basic
    
    
    85,061
    
    
    
    81,288
    
    
    
    84,798
    
    
    
    77,489Dilutive capital options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Dilutive common stock options
    
    
    789
    
    
    
    1,195
    
    
    
    
    
    
    
    1,203Dilutive restricted stock
    
    
    238
    
    
    
    241
    
    
    
    
    
    
    
    245Diluted
    
    
    86,088
    
    
    
    82,724
    
    
    
    84,798
    
    
    
    78,945
  35




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
   Note O. Other current liabilities
  September 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Other current liabilities:Accrued oil and natural gas related costs
    
    $
    24,585
    
    
    $
    15,489Payroll related matters
    
    
    8,364
    
    
    
    11,290Accrued interest
    
    
    1,775
    
    
    
    353Income taxes payable
    
    
    1,475
    
    
    
    Asset retirement obligations
    
    
    1,473
    
    
    
    2,611Other
    
    
    4,532
    
    
    
    8,314Other current liabilities
    
    $
    42,204
    
    
    $
    38,057
 Note P. Subsidiary Guarantors
  36




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Consolidating Condensed Balance Sheet
September 30, 2009
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalASSETSAccounts receivable  related parties
    
    $
    1,718,424
    
    
    $
    2,683
    
    
    $
    (1,720,969
    )
    
    $
    138Other current assets
    
    
    20,010
    
    
    
    158,775
    
    
    
    
    
    
    
    178,785Total oil and natural gas properties, net
    
    
    
    
    
    
    2,512,021
    
    
    
    
    
    
    
    2,512,021Total property and equipment, net
    
    
    
    
    
    
    16,151
    
    
    
    
    
    
    
    16,151Investment in subsidiaries
    
    
    800,070
    
    
    
    
    
    
    
    (800,070
    )
    
    
    Total other long-term assets
    
    
    52,708
    
    
    
    61,723
    
    
    
    
    
    
    
    114,431Total assets
    
    $
    2,591,212
    
    
    $
    2,751,353
    
    
    $
    (2,521,039
    )
    
    $
    2,821,526LIABILITIES AND EQUITYAccounts payable  related parties
    
    $
    
    
    
    $
    1,721,762
    
    
    $
    (1,720,969
    )
    
    $
    793Other current liabilities
    
    
    27,245
    
    
    
    214,195
    
    
    
    
    
    
    
    241,440Other long-term liabilities
    
    
    605,520
    
    
    
    15,326
    
    
    
    
    
    
    
    620,846Long-term debt
    
    
    645,747
    
    
    
    
    
    
    
    
    
    
    
    645,747Equity
    
    
    1,312,700
    
    
    
    800,070
    
    
    
    (800,070
    )
    
    
    1,312,700Total liabilities and equity
    
    $
    2,591,212
    
    
    $
    2,751,353
    
    
    $
    (2,521,039
    )
    
    $
    2,821,526
 Consolidating Condensed Balance Sheet
December 31, 2008
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalASSETSAccounts receivable  related parties
    
    $
    2,500,186
    
    
    $
    1,432,829
    
    
    $
    (3,932,701
    )
    
    $
    314Other current assets
    
    
    120,406
    
    
    
    158,063
    
    
    
    
    
    
    
    278,469Total oil and natural gas properties, net
    
    
    
    
    
    
    2,386,584
    
    
    
    
    
    
    
    2,386,584Total property and equipment, net
    
    
    
    
    
    
    14,820
    
    
    
    
    
    
    
    14,820Investment in subsidiaries
    
    
    734,969
    
    
    
    
    
    
    
    (734,969
    )
    
    
    Total other long-term assets
    
    
    73,538
    
    
    
    61,478
    
    
    
    
    
    
    
    135,016Total assets
    
    $
    3,429,099
    
    
    $
    4,053,774
    
    
    $
    (4,667,670
    )
    
    $
    2,815,203LIABILITIES AND EQUITYAccounts payable  related parties
    
    $
    860,758
    
    
    $
    3,072,255
    
    
    $
    (3,932,701
    )
    
    $
    312Other current liabilities
    
    
    39,424
    
    
    
    231,082
    
    
    
    
    
    
    
    270,506Other long-term liabilities
    
    
    573,763
    
    
    
    15,468
    
    
    
    
    
    
    
    589,231Long-term debt
    
    
    630,000
    
    
    
    
    
    
    
    
    
    
    
    630,000Equity
    
    
    1,325,154
    
    
    
    734,969
    
    
    
    (734,969
    )
    
    
    1,325,154Total liabilities and equity
    
    $
    3,429,099
    
    
    $
    4,053,774
    
    
    $
    (4,667,670
    )
    
    $
    2,815,203
 37




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Consolidating Condensed Statement of Operations
For the Three Months Ended September 30, 2009
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalTotal operating revenues
    
    $
    
    
    
    $
    153,494
    
    
    $
    
    
    
    $
    153,494Total operating costs and expenses
    
    
    (9,083
    )
    
    
    (95,816
    )
    
    
    
    
    
    
    (104,899
    )Income (loss) from operations
    
    
    (9,083
    )
    
    
    57,678
    
    
    
    
    
    
    
    48,595Interest expense
    
    
    (6,809
    )
    
    
    
    
    
    
    
    
    
    
    (6,809
    )Other, net
    
    
    57,478
    
    
    
    (200
    )
    
    
    (57,478
    )
    
    
    (200
    )Income before income taxes
    
    
    41,586
    
    
    
    57,478
    
    
    
    (57,478
    )
    
    
    41,586Income tax expense
    
    
    (21,824
    )
    
    
    
    
    
    
    
    
    
    
    (21,824
    )Net income
    
    $
    19,762
    
    
    $
    57,478
    
    
    $
    (57,478
    )
    
    $
    19,762
 Consolidating Condensed Statement of Operations
For the Three Months Ended September 30, 2008
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalTotal operating revenues
    
    $
    (12,150
    )
    
    $
    182,607
    
    
    $
    
    
    
    $
    170,457Total operating costs and expenses
    
    
    19,782
    
    
    
    52,641
    
    
    
    
    
    
    
    72,423Income (loss) from operations
    
    
    7,632
    
    
    
    235,248
    
    
    
    
    
    
    
    242,880Interest expense
    
    
    (10,255
    )
    
    
    
    
    
    
    
    
    
    
    (10,255
    )Other, net
    
    
    235,582
    
    
    
    329
    
    
    
    (235,577
    )
    
    
    334Income before income taxes
    
    
    232,959
    
    
    
    235,577
    
    
    
    (235,577
    )
    
    
    232,959Income tax expense
    
    
    (91,031
    )
    
    
    
    
    
    
    
    
    
    
    (91,031
    )Net income
    
    $
    141,928
    
    
    $
    235,577
    
    
    $
    (235,577
    )
    
    $
    141,928
 38




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Consolidating Condensed Statement of Operations
For the Nine Months Ended September 30, 2009
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalTotal operating revenues
    
    $
    
    
    
    $
    366,828
    
    
    $
    
    
    
    $
    366,828Total operating costs and expenses
    
    
    (86,376
    )
    
    
    (301,379
    )
    
    
    
    
    
    
    (387,755
    )Income (loss) from operations
    
    
    (86,376
    )
    
    
    65,449
    
    
    
    
    
    
    
    (20,927
    )Interest expense
    
    
    (17,379
    )
    
    
    
    
    
    
    
    
    
    
    (17,379
    )Other, net
    
    
    65,101
    
    
    
    (348
    )
    
    
    (65,101
    )
    
    
    (348
    )Income (loss) before income taxes
    
    
    (38,654
    )
    
    
    65,101
    
    
    
    (65,101
    )
    
    
    (38,654
    )Income tax benefit
    
    
    11,973
    
    
    
    
    
    
    
    
    
    
    
    11,973Net income (loss)
    
    $
    (26,681
    )
    
    $
    65,101
    
    
    $
    (65,101
    )
    
    $
    (26,681
    )
 Consolidating Condensed Statement of Operations
For the Nine Months Ended September 30, 2008
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalTotal operating revenues
    
    $
    (32,945
    )
    
    $
    447,496
    
    
    $
    
    
    
    $
    414,551Total operating costs and expenses
    
    
    19,638
    
    
    
    (169,996
    )
    
    
    
    
    
    
    (150,358
    )Income (loss) from operations
    
    
    (13,307
    )
    
    
    277,500
    
    
    
    
    
    
    
    264,193Interest expense
    
    
    (19,755
    )
    
    
    
    
    
    
    
    
    
    
    (19,755
    )Other, net
    
    
    279,165
    
    
    
    1,660
    
    
    
    (279,160
    )
    
    
    1,665Income before income taxes
    
    
    246,103
    
    
    
    279,160
    
    
    
    (279,160
    )
    
    
    246,103Income tax expense
    
    
    (96,230
    )
    
    
    
    
    
    
    
    
    
    
    (96,230
    )Net income
    
    $
    149,873
    
    
    $
    279,160
    
    
    $
    (279,160
    )
    
    $
    149,873
 39




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalNet cash flows provided by (used in) operating activities
    
    $
    (91,954
    )
    
    $
    324,032
    
    
    $
    
    
    
    $
    232,078Net cash flows provided by (used in) investing activities
    
    
    77,590
    
    
    
    (319,468
    )
    
    
    
    
    
    
    (241,878
    )Net cash flows provided by (used in) financing activities
    
    
    14,367
    
    
    
    (6,624
    )
    
    
    
    
    
    
    7,743Net decrease in cash and cash equivalents
    
    
    3
    
    
    
    (2,060
    )
    
    
    
    
    
    
    (2,057
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    17,752
    
    
    
    
    
    
    
    17,752Cash and cash equivalents at end of period
    
    $
    3
    
    
    $
    15,692
    
    
    $
    
    
    
    $
    15,695
 Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(in thousands)
 Parent
    
    
    Subsidiary
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Entries
    
    
    TotalNet cash flows provided by (used in) operating activities
    
    $
    (514,355
    )
    
    $
    833,755
    
    
    $
    
    
    
    $
    319,400Net cash flows used in investing activities
    
    
    (26,175
    )
    
    
    (809,263
    )
    
    
    
    
    
    
    (835,438
    )Net cash flows provided by (used in) financing activities
    
    
    540,938
    
    
    
    (954
    )
    
    
    
    
    
    
    539,984Net increase in cash and cash equivalents
    
    
    408
    
    
    
    23,538
    
    
    
    
    
    
    
    23,946Cash and cash equivalents at beginning of period
    
    
    107
    
    
    
    30,317
    
    
    
    
    
    
    
    30,424Cash and cash equivalents at end of period
    
    $
    515
    
    
    $
    53,855
    
    
    $
    
    
    
    $
    54,370
 Note Q. Subsequent events
  40




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2009
Unaudited
 Note R. Supplementary information
 Capitalized costs
 September 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Oil and natural gas properties:Proved
    
    $
    2,706,933
    
    
    $
    2,316,330Unproved
    
    
    273,335
    
    
    
    377,244Less: accumulated depletion
    
    
    (468,247
    )
    
    
    (306,990
    )Net capitalized costs for oil and natural gas properties
    
    $
    2,512,021
    
    
    $
    2,386,584
 Costs incurred for oil and natural gas producing activities (a)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Property acquisition costs:(b)Proved
    
    $
    (467
    )
    
    $
    589,986
    
    
    $
    (1,475
    )
    
    $
    589,987Unproved
    
    
    7,618
    
    
    
    223,892
    
    
    
    12,200
    
    
    
    225,241Exploration
    
    
    26,065
    
    
    
    30,131
    
    
    
    111,005
    
    
    
    80,638Development
    
    
    64,554
    
    
    
    78,477
    
    
    
    179,783
    
    
    
    149,913Total costs incurred for oil and natural gas properties
    
    $
    97,770
    
    
    $
    922,486
    
    
    $
    301,513
    
    
    $
    1,045,779
 
 (a)
    
    The costs incurred for oil and natural gas producing activities includes the following
amounts of asset retirement obligations: Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Proved property acquisition costs
    
    $
    
    
    
    $
    7,062
    
    
    $
    
    
    
    $
    7,062Exploration costs
    
    
    (70
    )
    
    
    115
    
    
    
    150
    
    
    
    309Development costs
    
    
    (321
    )
    
    
    258
    
    
    
    (3,048
    )
    
    
    701Total
    
    $
    (391
    )
    
    $
    7,435
    
    
    $
    (2,898
    )
    
    $
    8,072
 (b)
    
    During the three and nine months ended September 30, 2009, the Company adjusted the purchase
price allocation related to the acquisition of the Henry Properties. This adjustment reduced
the proved acquisition costs by $350,000 and $1,371,000 during the three and nine months ended
September 30, 2009, respectively, while the unproved acquisition costs were increased by
$35,000 and $328,000 during the three and nine months ended September 30, 2009, respectively. 41




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Overview
  Commodity prices
  
    
    developments generally impacting the Middle East, including Iraq and Iran;
    
    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;
    
    the overall global demand for oil; and
    
    overall North American natural gas supply and demand fundamentals, including:
 §
    
    the impact of the decline of the United States economy,§
    
    weather conditions, and§
    
    liquefied natural gas deliveries to the United States.
  42




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##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Average NYMEX prices:Oil (Bbl)
    
    $
    68.24
    
    
    $
    118.67
    
    
    $
    57.22
    
    
    $
    113.59Natural gas (MMBtu)
    
    $
    3.42
    
    
    $
    9.02
    
    
    $
    3.90
    
    
    $
    9.74High / Low NYMEX prices:Oil (Bbl):High
    
    $
    74.37
    
    
    $
    145.29
    
    
    $
    74.37
    
    
    $
    145.29Low
    
    $
    59.52
    
    
    $
    91.15
    
    
    $
    33.98
    
    
    $
    86.99Natural gas (MMBtu):High
    
    $
    4.88
    
    
    $
    13.58
    
    
    $
    6.07
    
    
    $
    13.58Low
    
    $
    2.51
    
    
    $
    7.22
    
    
    $
    2.51
    
    
    $
    7.22
  2010 capital budget
  (in millions)
    
    2010 BudgetDrilling and recompletion opportunities in our core operating area
    
    $
    383Projects operated by third parties
    
    
    8Emerging plays, acquisition of leasehold acreage and other
property interests, and geological and geophysical
    
    
    82Maintenance capital in our core operating areas
    
    
    33Total 2010 capital budget
    
    $
    506
 Senior Notes Issuance
   43




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##### Table of Contents



Borrowing base
   2009 capital budget
  Current 2009Original 2009
    
    
    Planned Capital(in millions)
    
    Budget
    
    
    ExpendituresDrilling and recompletion opportunities in our core operating area
    
    $
    398
    
    
    $
    316Projects operated by third parties
    
    
    8
    
    
    
    5Emerging plays, acquisition of leasehold acreage and other
property interests, and geological and geophysical
    
    
    72
    
    
    
    60Maintenance capital in our core operating areas
    
    
    22
    
    
    
    19Total 2009 capital budget
    
    $
    500
    
    
    $
    400
   Henry Entities acquisition
  Derivative financial instrument exposure
  44




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##### Table of Contents



New commodity derivative contracts.
 Aggregate
    
    Index
    
    ContractVolume
    
    Price
    
    PeriodOil (volumes in Bbls):Price collar
    
    
    600,000
    
    
    $
    45.00 - $49.00
    (a)
    
    3/1/09 - 5/31/09Price swap
    
    
    960,000
    
    
    $
    59.44
    (a)
    
    7/1/09 - 12/31/09Price swap
    
    
    273,000
    
    
    $
    67.50
    (a)
    
    8/1/09 - 12/31/09Price swap
    
    
    3,307,000
    
    
    $
    63.44
    (a)
    
    1/1/10 - 12/31/10Price swap
    
    
    2,601,000
    
    
    $
    71.66
    (a)
    
    1/1/11 - 12/31/11Natural gas (volumes in MMBtus):Price collar
    
    
    1,500,000
    
    
    $
    5.00 - $5.81
    (b)
    
    10/1/09 - 12/31/09Price collar
    
    
    1,500,000
    
    
    $
    5.00 - $5.81
    (b)
    
    1/1/10 - 3/31/10Price collar
    
    
    3,000,000
    
    
    $
    5.25 - $5.75
    (b)
    
    4/1/10 - 9/30/10Price collar
    
    
    1,500,000
    
    
    $
    6.00 - $6.80
    (b)
    
    10/1/10 - 12/31/10Price collar
    
    
    1,500,000
    
    
    $
    6.00 - $6.80
    (b)
    
    1/1/11 - 3/31/11Price swap
    
    
    3,000,000
    
    
    $
    4.31
    (b)
    
    4/1/09 - 9/30/09Price swap
    
    
    1,050,000
    
    
    $
    4.66
    (b)
    
    7/1/09 - 12/31/09Price swap
    
    
    6,810,000
    
    
    $
    6.13
    (b)
    
    1/1/10 - 12/31/10Price swap
    
    
    300,000
    
    
    $
    7.29
    (b)
    
    1/1/11 - 3/31/11Price swap
    
    
    5,400,000
    
    
    $
    6.96
    (b)
    
    4/1/11 - 12/31/11Basis swap
    
    
    600,000
    
    
    $
    0.79
    (c)
    
    7/1/09 - 9/30/09Basis swap
    
    
    450,000
    
    
    $
    0.89
    (c)
    
    10/1/09 - 12/31/09Basis swap
    
    
    8,400,000
    
    
    $
    0.85
    (c)
    
    1/1/10 - 12/31/10Basis swap
    
    
    1,800,000
    
    
    $
    0.87
    (c)
    
    1/1/11 - 3/31/11Basis swap
    
    
    5,400,000
    
    
    $
    0.76
    (c)
    
    4/1/11 - 12/31/11
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index prices for the natural gas price swaps and collars are based on the NYMEX-Henry Hub last trading day futures price.(c)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub delivery point. 45




---



##### Table of Contents



Aggregate
    
    Index
    
    ContractVolume
    
    Price
    
    PeriodOil (volumes in Bbls):Price swap
    
    
    540,000
    
    
    $
    80.33
    (a)
    
    1/1/10 - 12/31/10Natural gas (volumes in MMBtus):Price swap
    
    
    1,504,000
    
    
    $
    6.11
    (b)
    
    1/1/10 - 12/31/10
 
 (a)
    
    The index price for the oil price swap is based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index prices for the natural gas price swaps and collars are based on the NYMEX-Henry Hub last trading day futures price. 46




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Net production volumes:Oil (MBbl)
    
    
    1,912
    
    
    
    1,247
    
    
    
    5,430
    
    
    
    3,033Natural gas (MMcf)
    
    
    5,753
    
    
    
    3,944
    
    
    
    16,122
    
    
    
    10,395Total (MBoe)
    
    
    2,871
    
    
    
    1,904
    
    
    
    8,117
    
    
    
    4,766Average daily production volumes:Oil (Bbl)
    
    
    20,783
    
    
    
    13,554
    
    
    
    19,890
    
    
    
    11,069Natural gas (Mcf)
    
    
    62,533
    
    
    
    42,870
    
    
    
    59,055
    
    
    
    37,938Total (Boe)
    
    
    31,205
    
    
    
    20,699
    
    
    
    29,733
    
    
    
    17,392Average prices:Oil, without hedges (Bbl)
    
    $
    63.44
    
    
    $
    114.44
    
    
    $
    53.00
    
    
    $
    110.29Oil, with hedges(a) (Bbl)
    
    $
    63.44
    
    
    $
    104.73
    
    
    $
    53.00
    
    
    $
    99.51Natural gas, without hedges (Mcf)
    
    $
    5.60
    
    
    $
    10.12
    
    
    $
    4.90
    
    
    $
    10.87Natural gas, with hedges(a) (Mcf)
    
    $
    5.60
    
    
    $
    10.11
    
    
    $
    4.90
    
    
    $
    10.84Total, without hedges (Boe)
    
    $
    53.46
    
    
    $
    95.91
    
    
    $
    45.19
    
    
    $
    93.89Total, with hedges(a) (Boe)
    
    $
    53.46
    
    
    $
    89.53
    
    
    $
    45.19
    
    
    $
    86.98
 
 (a)
    
    These prices do not reflect the cash receipts/payments related to the oil and natural
gas derivatives that were not designated as hedges and are reflected in (gain) loss on
derivatives not designated as hedges in our statements of operations. If the cash
receipts/payments related to the oil and natural gas derivatives that were not designated
as hedges were included in our oil and natural gas sales our oil and natural gas prices
would be as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Oil (Bbl)
    
    $
    70.75
    
    
    $
    95.24
    
    
    $
    65.96
    
    
    $
    90.35Natural gas (Mcf)
    
    $
    6.19
    
    
    $
    9.87
    
    
    $
    5.48
    
    
    $
    10.71Total (Boe)
    
    $
    59.51
    
    
    $
    82.81
    
    
    $
    55.00
    
    
    $
    80.86
  47




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##### Table of Contents



Three months ended September 30, 2009, compared to three months ended September 30, 2008
 Oil and natural gas revenues.
 
 
 
 
 Hedging activities.
   Oil Hedges
    
    Natural Gas HedgesThree Months Ended
    
    Three Months Ended(dollars in thousands)
    
    September 30, 2008
    
    September 30, 2008Hedging revenue decrease
    
    $
    (12,111
    )
    
    $
    (38
    )Hedged volumes (Bbls and MMBtus, respectively)
    
    
    239,000
    
    
    
    1,242,000
 48




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##### Table of Contents



Production expenses.
 Three Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeLease operating expenses
    
    $
    13,573
    
    
    $
    4.73
    
    
    $
    12,338
    
    
    $
    6.48Taxes:Ad valorem
    
    
    954
    
    
    
    0.33
    
    
    
    792
    
    
    
    0.42Production
    
    
    10,682
    
    
    
    3.72
    
    
    
    13,734
    
    
    
    7.21Workover costs
    
    
    230
    
    
    
    0.08
    
    
    
    177
    
    
    
    0.09Total oil and gas production expenses
    
    $
    25,439
    
    
    $
    8.86
    
    
    $
    27,041
    
    
    $
    14.20
       Exploration and abandonments expense.
 Three Months Ended September 30,(in thousands)
    
    2009
    
    
    2008Geological and geophysical
    
    $
    2,120
    
    
    $
    111Exploratory dry holes
    
    
    474
    
    
    
    2,779Leasehold abandonments and other
    
    
    182
    
    
    
    13,934Total exploration and abandonments
    
    $
    2,776
    
    
    $
    16,824
 49




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##### Table of Contents



.
 Depreciation, depletion and amortization expense.
 Three Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeDepletion of proved oil and natural gas properties
    
    $
    53,824
    
    
    $
    18.75
    
    
    $
    31,729
    
    
    $
    16.66Depreciation of other property and equipment
    
    
    624
    
    
    
    0.22
    
    
    
    473
    
    
    
    0.25Amortization of intangible asset  operating rights
    
    
    387
    
    
    
    0.13
    
    
    
    326
    
    
    
    0.17Total depletion, depreciation and amortization
    
    $
    54,835
    
    
    $
    19.10
    
    
    $
    32,528
    
    
    $
    17.08Crude oil price used to estimate proved oil reserves at period end
    
    $
    67.00
    
    
    
    
    
    
    $
    97.00Natural gas price used to estimate proved gas reserves at period end
    
    $
    3.30
    
    
    
    
    
    
    $
    7.12
   Impairment of long-lived assets.
 50




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##### Table of Contents



General and administrative expenses.
 Three Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeGeneral and administrative expenses  recurring
    
    $
    10,986
    
    
    $
    3.83
    
    
    $
    8,611
    
    
    $
    4.52Non-recurring bonus paid to former Henry Entities employees
    
    
    2,369
    
    
    
    0.83
    
    
    
    2,367
    
    
    
    1.24Non-cash stock-based compensation  stock options
    
    
    1,315
    
    
    
    0.46
    
    
    
    1,209
    
    
    
    0.63Non-cash stock-based compensation  restricted stock
    
    
    1,233
    
    
    
    0.43
    
    
    
    716
    
    
    
    0.38Less: Third-party operating fee reimbursements
    
    
    (3,188
    )
    
    
    (1.11
    )
    
    
    (2,125
    )
    
    
    (1.12
    )Total general and administrative expenses
    
    $
    12,715
    
    
    $
    4.44
    
    
    $
    10,778
    
    
    $
    5.65
    Bad debt expense.
 (Gain) loss on derivatives not designated as hedges.
 51




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##### Table of Contents



Three Months Ended September 30,(in thousands)
    
    2009
    
    
    2008Cash payments (receipts):Commodity derivatives  oil
    
    $
    (13,971
    )
    
    $
    11,837Commodity derivatives  natural gas
    
    
    (3,395
    )
    
    
    946Financial derivatives  interest
    
    
    1,241
    
    
    
    Mark-to-market (gain) loss:Commodity derivatives  oil
    
    
    12,821
    
    
    
    (160,148
    )Commodity derivatives  natural gas
    
    
    8,442
    
    
    
    (15,947
    )Financial derivatives  interest
    
    
    2,645
    
    
    
    (Gain) loss on derivatives not designated as hedges
    
    $
    7,783
    
    
    $
    (163,312
    )
 Interest expense.
   Income tax provisions.
 52




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##### Table of Contents



Nine months ended September 30, 2009, compared to nine months ended September 30, 2008
 Oil and natural gas revenues.
 
 
 
 
 Hedging activities.
   Oil Hedges
    
    Natural Gas HedgesNine Months Ended
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2008
    
    September 30, 2008Hedging revenue decrease
    
    $
    (32,684
    )
    
    $
    (260
    )Hedged volumes (Bbls and MMBtus, respectively)
    
    
    712,000
    
    
    
    3,699,000
 53




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##### Table of Contents



Production expenses.
 Nine Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeLease operating expenses
    
    $
    45,867
    
    
    $
    5.65
    
    
    $
    28,576
    
    
    $
    6.00Taxes:Ad valorem
    
    
    3,445
    
    
    
    0.42
    
    
    
    1,798
    
    
    
    0.38Production
    
    
    26,047
    
    
    
    3.21
    
    
    
    34,842
    
    
    
    7.31Workover costs
    
    
    663
    
    
    
    0.08
    
    
    
    699
    
    
    
    0.15Total oil and gas production expenses
    
    $
    76,022
    
    
    $
    9.36
    
    
    $
    65,915
    
    
    $
    13.84
      Exploration and abandonments expense.
 Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008Geological and geophysical
    
    $
    3,245
    
    
    $
    2,428Exploratory dry holes
    
    
    2,340
    
    
    
    2,778Leasehold abandonments and other
    
    
    4,610
    
    
    
    15,082Total exploration and abandonments
    
    $
    10,195
    
    
    $
    20,288
  54




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##### Table of Contents



.
 Depreciation, depletion and amortization expense.
 Nine Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeDepletion of proved oil and natural gas properties
    
    $
    154,819
    
    
    $
    19.07
    
    
    $
    74,239
    
    
    $
    15.58Depreciation of other property and equipment
    
    
    1,998
    
    
    
    0.25
    
    
    
    1,257
    
    
    
    0.26Amortization of intangible asset  operating rights
    
    
    1,168
    
    
    
    0.14
    
    
    
    326
    
    
    
    0.07Total depletion, depreciation and amortization
    
    $
    157,985
    
    
    $
    19.46
    
    
    $
    75,822
    
    
    $
    15.91Crude oil price used to estimate proved oil reserves at period end
    
    $
    67.00
    
    
    
    
    
    
    $
    97.00Natural gas price used to estimate proved gas reserves at period end
    
    $
    3.30
    
    
    
    
    
    
    $
    7.12
   Impairment of long-lived assets.
 55




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##### Table of Contents



General and administrative expenses.
 Nine Months Ended September 30,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeGeneral and administrative expenses  recurring
    
    $
    32,925
    
    
    $
    4.06
    
    
    $
    22,352
    
    
    $
    4.69Non-recurring bonus paid to former Henry Entities employees
    
    
    7,680
    
    
    
    0.95
    
    
    
    2,367
    
    
    
    0.50Non-cash stock-based compensation  stock options
    
    
    3,228
    
    
    
    0.40
    
    
    
    3,376
    
    
    
    0.71Non-cash stock-based compensation  restricted stock
    
    
    3,433
    
    
    
    0.42
    
    
    
    1,578
    
    
    
    0.33Less: Third-party operating fee reimbursements
    
    
    (8,633
    )
    
    
    (1.06
    )
    
    
    (2,629
    )
    
    
    (0.54
    )Total general and administrative expenses
    
    $
    38,633
    
    
    $
    4.77
    
    
    $
    27,044
    
    
    $
    5.69
    Bad debt expense.
 (Gain) loss on derivatives not designated as hedges.
 56




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##### Table of Contents



Nine Months Ended September 30,(in thousands)
    
    2009
    
    
    2008Cash payments (receipts):Commodity derivatives  oil
    
    $
    (70,383
    )
    
    $
    27,802Commodity derivatives  natural gas
    
    
    (9,227
    )
    
    
    1,368Financial derivatives  interest
    
    
    2,020
    
    
    
    Mark-to-market (gain) loss:Commodity derivatives  oil
    
    
    156,920
    
    
    
    (71,248
    )Commodity derivatives  natural gas
    
    
    13,460
    
    
    
    (1,600
    )Financial derivatives  interest
    
    
    1,645
    
    
    
    (Gain) loss on derivatives not designated as hedges
    
    $
    94,435
    
    
    $
    (43,678
    )
 Interest expense.
   Income tax provisions.
 Capital Commitments, Capital Resources and Liquidity
 Capital commitments.
 Oil and natural gas properties.
  57




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##### Table of Contents



Acquisitions.
 Contractual obligations.
  Payments due by periodLess than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than(in thousands)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt (a)
    
    $
    650,000
    
    
    $
    
    
    
    $
    
    
    
    $
    350,000
    
    
    $
    300,000Operating lease obligations (b)
    
    
    7,850
    
    
    
    1,073
    
    
    
    2,163
    
    
    
    4,614
    
    
    
    Drilling commitments (c)
    
    
    2,805
    
    
    
    2,805
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements with executive officers(d)
    
    
    4,421
    
    
    
    1,965
    
    
    
    2,456
    
    
    
    
    
    
    
    Henry Entities bonus obligation(e)
    
    
    8,233
    
    
    
    8,233
    
    
    
    
    
    
    
    
    
    
    
    Derivative liabilities (f)
    
    
    39,717
    
    
    
    23,158
    
    
    
    16,559
    
    
    
    
    
    
    
    Asset retirement obligations(g)
    
    
    14,134
    
    
    
    1,473
    
    
    
    360
    
    
    
    443
    
    
    
    11,858Total contractual cash obligations
    
    $
    727,160
    
    
    $
    38,707
    
    
    $
    21,538
    
    
    $
    355,057
    
    
    $
    311,858
 
 (a)
    
    See Note J of the Condensed Notes to Consolidated Financial Statements included in
Item 1. Consolidated Financial Statements (Unaudited) for information regarding future
interest payment obligations on the 8.625% unsecured senior notes. The amounts included in
the table above represent principal maturities only. 58




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##### Table of Contents



(b)
    
    See Note K of the Condensed Notes to Consolidated Financial Statements included in
Item 1. Consolidated Financial Statements (Unaudited).(c)
    
    Consists of daywork drilling contracts related to drilling rigs contracted through June
30, 2010. See Note K of the Condensed Notes to Consolidated Financial Statements included
in Item 1. Consolidated Financial Statements (Unaudited).(d)
    
    Represents amounts of cash compensation we are obligated to pay to our executive
officers under employment agreements assuming such employees continue to serve the entire
term of their employment agreement and their cash compensation is not adjusted.(e)
    
    Represents bonuses we agreed to pay certain employees of the Henry Entities at each of
the first and second anniversaries of the closing of the Henry Properties acquisition. The
first such anniversary bonus payment was made on July 31, 2009. See Note K of the
Condensed Notes to Consolidated Financial Statements included in Item 1. Consolidated
Financial Statements (Unaudited).(f)
    
    Derivative obligations represent only the liability positions for our commodity and
interest rate derivatives that were valued at September 30, 2009. The ultimate settlement
amounts of our derivative obligations are unknown because they are subject to continuing
market risk. See Note I of the Condensed Notes to Consolidated Financial Statements
included in Item 1. Consolidated Financial Statements (Unaudited) regarding our
derivative obligations.(g)
    
    Amounts represent costs related to expected oil and gas property abandonments related
to proved reserves by period, net of any future accretion. See Note E of the Condensed
Notes to Consolidated Financial Statements included in Item 1. Consolidated Financial
Statements (Unaudited). Off-balance sheet arrangements.
 Capital resources.
 Cash flow from operating activities.
 Cash flow used in investing activities.
 Cash flow from financing activities.
   59




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##### Table of Contents



Financial markets.
     Liquidity.
  60




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##### Table of Contents



Book capitalization and current ratio.
 Inflation and changes in prices.
 Critical Accounting Policies, Practices and Estimates
    Recent Accounting Pronouncements and Developments
 Recent accounting pronouncements:
 Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 ASU 2009-05. Fair Value Measurements and Disclosures (Topic
820)Measuring Liabilities at Fair Value .
 61




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##### Table of Contents



ASU 2009-11. Extractive Activities  Oil and
Gas: Amendment to Section 932-10-S99
   Recent developments in reserves reporting. Modernization of Oil and Gas Reporting
 62




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Credit risk.
 Commodity price risk.
  Interest rate risk.
 63




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##### Table of Contents



Derivative Instruments Net Assets (Liabilities) (a)(in thousands)
    
    Commodities
    
    
    Interest Rate
    
    
    TotalFair value of contracts outstanding at December 31, 2008
    
    $
    173,523
    
    
    $
    (1,083
    )
    
    $
    172,440Changes in fair values (b)
    
    
    (90,770
    )
    
    
    (3,665
    )
    
    
    (94,435
    )Contract maturities
    
    
    (79,610
    )
    
    
    2,020
    
    
    
    (77,590
    )Fair value of contracts outstanding at September 30, 2009
    
    $
    3,143
    
    
    $
    (2,728
    )
    
    $
    415
 
 (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. 64




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 65




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 Total number
    
    Maximumof shares
    
    number ofpurchased as
    
    shares thatTotal number
    
    
    
    
    
    part of publicly
    
    may yet beof shares
    
    Average price
    
    announced
    
    purchasedPeriod
    
    withheld (1)
    
    per share
    
    plans
    
    under the planJuly 1, 2009 - July 31, 2009
    
    
    
    
    
    $
    
    
    
    
    August 1, 2009 - August 31, 2009
    
    
    3,039
    
    
    $
    32.88
    
    
    
    September 1, 2009 - September 30, 2009
    
    
    
    
    
    $
    
    
    
    
    
 
 (1)
    
    Represents shares that were withheld by us to satisfy tax withholding obligations of certain executive officers that arose upon
the lapse of restrictions on restricted stock. 66




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    
    
    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
    
    
    
    Amended and Restated Bylaws of Concho Resources Inc., as amended March 25, 2008 (filed as
Exhibit 3.1 to the Companys Current Report on Form 8-K on March 26, 2008, and incorporated herein
by reference).4.1
    
    
    
    Indenture, dated September 18, 2009, between Concho Resources Inc., the subsidiary guarantors
named therein, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K on September 22, 2009, and incorporated herein by reference).4.2
    
    
    
    First Supplemental Indenture, dated September 18, 2009, between Concho Resources Inc., the
subsidiary guarantors named therein, and Wells Fargo Bank, National Association, as trustee (filed
as Exhibit 4.2 to the Companys Current Report on Form 8-K on September 22, 2009, and incorporated
herein by reference).4.3
    
    
    
    Form of 8.625% Senior Notes due 2017 (included in Exhibit 4.2).10.1
    
    
    
    Waiver agreement, effective as of September 18, 2009, among Concho Resources Inc. and the lenders
party thereto (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K on September 22,
2009, 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.
 
 (a)
    
    Filed herewith.(b)
    
    Furnished herewith. 67




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##### Table of Contents



SIGNATURES
  CONCHO RESOURCES INC.Date:  November 5, 2009
    By
    /s/ Timothy A. LeachTimothy A. LeachDirector, Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)By
    /s/ Darin G. HoldernessDarin G. HoldernessVice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 68




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    
    
    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
    
    
    
    Amended and Restated Bylaws of Concho Resources Inc., as amended March 25, 2008 (filed as
Exhibit 3.1 to the Companys Current Report on Form 8-K on March 26, 2008, and incorporated herein
by reference).4.1
    
    
    
    Indenture, dated September 18, 2009, between Concho Resources Inc., the subsidiary guarantors
named therein, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K on September 22, 2009, and incorporated herein by reference).4.2
    
    
    
    First Supplemental Indenture, dated September 18, 2009, between Concho Resources Inc., the
subsidiary guarantors named therein, and Wells Fargo Bank, National Association, as trustee (filed
as Exhibit 4.2 to the Companys Current Report on Form 8-K on September 22, 2009, and incorporated
herein by reference).4.3
    
    
    
    Form of 8.625% Senior Notes due 2017 (included in Exhibit 4.2).10.1
    
    
    
    Waiver agreement, effective as of September 18, 2009, among Concho Resources Inc. and the lenders
party thereto (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K on September 22,
2009, 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.
 
 (a)
    
    Filed herewith.(b)
    
    Furnished herewith.