##### 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, 2008
 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 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 550 West Texas Avenue, Suite 100Midland, Texas
    
    79701(Address of principal executive offices)
    
    (Zip code)
 (432) 683-7443
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    
    iiiItem 2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    29Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    47Item 4.CONTROLS AND PROCEDURES
    
    
    48PART II  OTHER INFORMATIONItem 1.LEGAL PROCEEDINGS
    
    
    49Item 1A.RISK FACTORS
    
    
    49Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    62Item 6.EXHIBITS
    
    
    63SIGNATURES
    
    
    64EX-31.1EX-31.2EX-32.1EX-32.2
  i




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Cautionary statement regarding forward-looking statements
   
    
    our business strategy;
    
    the estimated quantities of crude oil and natural gas reserves;
    
    technology;
    
    our financial strategy;
    
    our crude oil and natural gas realized prices;
    
    the timing and amount of our future production of crude oil and natural gas;
    
    the amount, nature and timing of our capital expenditures;
    
    our drilling of wells;
    
    our competition and government regulations;
    
    the marketing of our crude oil and natural gas;
    
    our exploitation 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; and
    
    our plans, objectives, expectations and intentions contained in this report that are not
historical.
   ii




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PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited)
 Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    1Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    2Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2008
    
    
    3Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
    
    
    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)
    
    2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    54,370
    
    
    $
    30,424Accounts receivable, net of allowance for doubtful accounts:Oil and gas
    
    
    54,851
    
    
    
    36,735Joint operations and other
    
    
    67,507
    
    
    
    21,183Related parties
    
    
    548
    
    
    
    Derivative instruments
    
    
    11,965
    
    
    
    1,866Deferred income taxes
    
    
    6,983
    
    
    
    13,502Prepaid costs and other
    
    
    5,398
    
    
    
    4,273Total current assets
    
    
    201,622
    
    
    
    107,983Property and equipment, at cost:Oil and gas properties, successful efforts method
    
    
    2,580,508
    
    
    
    1,555,018Accumulated depletion and depreciation
    
    
    (244,175
    )
    
    
    (167,109
    )Total oil and gas properties, net
    
    
    2,336,333
    
    
    
    1,387,909Other property and equipment, net
    
    
    13,593
    
    
    
    7,085Total property and equipment, net
    
    
    2,349,926
    
    
    
    1,394,994Deferred loan costs, net
    
    
    16,558
    
    
    
    3,426Inventory
    
    
    22,790
    
    
    
    1,459Intangible asset, net  operating rights
    
    
    48,524
    
    
    
    Noncurrent derivative instruments
    
    
    23,981
    
    
    
    Other assets
    
    
    373
    
    
    
    367Total assets
    
    $
    2,663,774
    
    
    $
    1,508,229Liabilities and Stockholders EquityCurrent liabilities:Accounts payable:Trade
    
    $
    19,419
    
    
    $
    14,222Related parties
    
    
    1,062
    
    
    
    2,119Other current liabilities:Bank overdrafts
    
    
    4,697
    
    
    
    5,651Revenue payable
    
    
    22,194
    
    
    
    14,494Accrued and prepaid drilling costs
    
    
    145,861
    
    
    
    39,276Derivative instruments
    
    
    29,870
    
    
    
    36,414Income taxes payable
    
    
    3,584
    
    
    
    29Current portion of long-term debt
    
    
    
    
    
    
    2,000Other current liabilities
    
    
    27,859
    
    
    
    14,437Total current liabilities
    
    
    254,546
    
    
    
    128,642Long-term debt
    
    
    635,000
    
    
    
    325,404Noncurrent derivative instruments
    
    
    24,857
    
    
    
    10,517Deferred income taxes
    
    
    543,239
    
    
    
    259,070Asset retirement obligations and other long-term liabilities
    
    
    17,387
    
    
    
    9,198Commitments and contingencies (Note L)Stockholders equity:Preferred stock, $0.001 par value; 10,000,000 shares authorized; and none issued and
outstanding at September 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.001 par value; 300,000,000 authorized; 84,620,765 and 75,832,310
shares issued at September 30, 2008 and December 31, 2007, respectively
    
    
    85
    
    
    
    76Additional paid-in capital
    
    
    1,006,496
    
    
    
    752,380Notes receivable from employees
    
    
    
    
    
    
    (330
    )Retained earnings
    
    
    187,340
    
    
    
    37,467Accumulated other comprehensive loss
    
    
    (5,051
    )
    
    
    (14,195
    )Treasury stock, at cost; 3,142 and zero shares of treasury stock at September 30, 2008 and
December 31, 2007, respectively
    
    
    (125
    )
    
    
    Total stockholders equity
    
    
    1,188,745
    
    
    
    775,398Total liabilities and stockholders equity
    
    $
    2,663,774
    
    
    $
    1,508,229
 The accompanying notes are an integral part of these consolidated financial statements.
 1




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Concho Resources Inc.
 
 Consolidated Statements of Operations
 Unaudited
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenues:Oil sales
    
    $
    130,600
    
    
    $
    45,685
    
    
    $
    301,826
    
    
    $
    128,152Natural gas sales
    
    
    39,857
    
    
    
    23,413
    
    
    
    112,725
    
    
    
    67,395Total operating revenues
    
    
    170,457
    
    
    
    69,098
    
    
    
    414,551
    
    
    
    195,547Operating costs and expenses:Oil and gas production
    
    
    27,041
    
    
    
    13,773
    
    
    
    65,915
    
    
    
    37,925Exploration and abandonments
    
    
    16,824
    
    
    
    11,805
    
    
    
    20,288
    
    
    
    18,110Depreciation, depletion and amortization
    
    
    32,528
    
    
    
    18,003
    
    
    
    75,822
    
    
    
    55,036Accretion of discount on asset retirement obligations
    
    
    270
    
    
    
    106
    
    
    
    571
    
    
    
    334Impairments of long-lived assets
    
    
    2,758
    
    
    
    1,379
    
    
    
    2,827
    
    
    
    4,577General and administrative (including non-cash stock-based
compensation of $1,925 and $702 for the three months ended
September 30, 2008 and 2007, respectively, and $4,954 and $2,656 for the
nine months ended September 30, 2008 and 2007, respectively)
    
    
    10,778
    
    
    
    4,646
    
    
    
    27,044
    
    
    
    16,567Bad debt expense
    
    
    1,106
    
    
    
    
    
    
    
    2,905
    
    
    
    Contract drilling fees  stacked rigs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,269Ineffective portion of cash flow hedges
    
    
    (416
    )
    
    
    (22
    )
    
    
    (1,336
    )
    
    
    1,134Gain on derivatives not designated as hedges
    
    
    (163,312
    )
    
    
    (3,088
    )
    
    
    (43,678
    )
    
    
    (3,088
    )Total operating costs and expenses
    
    
    (72,423
    )
    
    
    46,602
    
    
    
    150,358
    
    
    
    134,864Income from operations
    
    
    242,880
    
    
    
    22,496
    
    
    
    264,193
    
    
    
    60,683Other income (expense):Interest expense
    
    
    (10,255
    )
    
    
    (9,054
    )
    
    
    (19,755
    )
    
    
    (29,803
    )Other, net
    
    
    334
    
    
    
    484
    
    
    
    1,665
    
    
    
    957Total other expense
    
    
    (9,921
    )
    
    
    (8,570
    )
    
    
    (18,090
    )
    
    
    (28,846
    )Income before income taxes
    
    
    232,959
    
    
    
    13,926
    
    
    
    246,103
    
    
    
    31,837Income tax expense
    
    
    (91,031
    )
    
    
    (5,972
    )
    
    
    (96,230
    )
    
    
    (13,335
    )Net income
    
    
    141,928
    
    
    
    7,954
    
    
    
    149,873
    
    
    
    18,502Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )Net income applicable to common shareholders
    
    $
    141,928
    
    
    $
    7,954
    
    
    $
    149,873
    
    
    $
    18,457Basic earnings per share:Net income per share
    
    $
    1.75
    
    
    $
    0.12
    
    
    $
    1.93
    
    
    $
    0.30Weighted average shares used in basic earnings per share
    
    
    81,288
    
    
    
    69,067
    
    
    
    77,489
    
    
    
    60,648Diluted earnings per share:Net income per share
    
    $
    1.72
    
    
    $
    0.11
    
    
    $
    1.90
    
    
    $
    0.29Weighted average shares used in diluted earnings per share
    
    
    82,724
    
    
    
    69,913
    
    
    
    78,945
    
    
    
    62,858
 The accompanying notes are an integral part of these consolidated financial statements.
 2




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Concho Resources Inc.
 
 Consolidated Statement of Stockholders Equity
 Unaudited
 AccumulatedAdditional
    
    
    Notes
    
    
    
    
    
    
    other
    
    
    
    
    
    
    
    
    
    
    TotalCommon stock
    
    
    paid-in
    
    
    receivable from
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury stock
    
    
    stockholders(in thousands)
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    employees
    
    
    earnings
    
    
    loss
    
    
    Shares
    
    
    Amount
    
    
    equityBALANCE AT DECEMBER 31, 2007
    
    
    75,832
    
    
    $
    76
    
    
    $
    752,380
    
    
    $
    (330
    )
    
    $
    37,467
    
    
    $
    (14,195
    )
    
    
    
    
    
    $
    
    
    
    $
    775,398Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,873Deferred hedge losses, net of taxes of $7,013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,909
    )
    
    
    
    
    
    
    
    
    
    
    (10,909
    )Net settlement losses included in earnings, net of taxes of $12,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,053
    
    
    
    
    
    
    
    
    
    
    
    20,053Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,017Issuance of common stock
    
    
    8,304
    
    
    
    8
    
    
    
    242,418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,426Stock options exercised
    
    
    430
    
    
    
    1
    
    
    
    3,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,861Restricted stock issued as stock-based compensation
    
    
    98
    
    
    
    
    
    
    
    1,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,578Cancellation of restricted stock
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation for stock options
    
    
    
    
    
    
    
    
    
    
    3,376
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,376Excess tax benefits related to stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,884Proceeds from notes receivable  employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333Accrued interest  employee notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (125
    )
    
    
    (125
    )BALANCE AT SEPTEMBER 30, 2008
    
    
    84,621
    
    
    $
    85
    
    
    $
    1,006,496
    
    
    $
    
    
    
    $
    187,340
    
    
    $
    (5,051
    )
    
    
    3
    
    
    $
    (125
    )
    
    $
    1,188,745
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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##### Table of Contents



Concho Resources Inc.
 
 Consolidated Statements of Cash Flows
 Unaudited
 Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    149,873
    
    
    $
    18,502Adjustments to reconcile net income to net cash provided by operating activities:Depreciation, depletion and amortization
    
    
    75,822
    
    
    
    55,036Impairments of long-lived assets
    
    
    2,827
    
    
    
    4,577Accretion of discount on asset retirement obligations
    
    
    571
    
    
    
    334Exploration expense, including dry holes
    
    
    17,860
    
    
    
    17,117Non-cash compensation expense
    
    
    4,954
    
    
    
    2,656Bad debt expense
    
    
    2,905
    
    
    
    Deferred income taxes
    
    
    86,908
    
    
    
    11,460Gain on sale of assets
    
    
    (777
    )
    
    
    Ineffective portion of cash flow hedges
    
    
    (1,336
    )
    
    
    1,134Gain on derivatives not designated as hedges
    
    
    (43,678
    )
    
    
    (3,088
    )Dedesignated cash flow hedges reclassified from accumulated other comprehensive income (loss)
    
    
    260
    
    
    
    (722
    )Other non-cash items
    
    
    2,749
    
    
    
    3,523Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    26,209
    
    
    
    11,355Prepaid costs and other
    
    
    (1,035
    )
    
    
    230Inventory
    
    
    (14,985
    )
    
    
    (95
    )Accounts payable
    
    
    (12,472
    )
    
    
    (9,230
    )Revenue payable
    
    
    6,982
    
    
    
    (5,325
    )Other current liabilities
    
    
    16,992
    
    
    
    (4,757
    )Income taxes payable
    
    
    (1,229
    )
    
    
    225Net cash provided by operating activities
    
    
    319,400
    
    
    
    102,932CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures on oil and gas properties
    
    
    (213,666
    )
    
    
    (113,936
    )Acquisition of oil and gas properties, businesses and other assets
    
    
    (586,925
    )
    
    
    (256
    )Additions to other property and equipment
    
    
    (6,711
    )
    
    
    (2,218
    )Proceeds from the sale of oil and gas properties
    
    
    1,034
    
    
    
    96Settlements received (paid) on derivatives not designated as hedges
    
    
    (29,170
    )
    
    
    1,286Net cash used in investing activities
    
    
    (835,438
    )
    
    
    (115,028
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    767,800
    
    
    
    283,600Payments of long-term debt
    
    
    (460,700
    )
    
    
    (433,700
    )Exercise of stock options
    
    
    3,861
    
    
    
    Excess tax benefit from stock-based compensation
    
    
    2,884
    
    
    
    Net proceeds from issuance of common stock
    
    
    242,426
    
    
    
    173,002Payments of preferred stock dividends
    
    
    
    
    
    
    (132
    )Proceeds from repayment of employee notes
    
    
    333
    
    
    
    10,644Payments for loan origination costs
    
    
    (15,541
    )
    
    
    (2,572
    )Purchase of treasury stock
    
    
    (125
    )
    
    
    Bank overdrafts
    
    
    (954
    )
    
    
    Net cash provided by financing activities
    
    
    539,984
    
    
    
    30,842Net increase in cash and cash equivalents
    
    
    23,946
    
    
    
    18,746Cash and cash equivalents at beginning of period
    
    
    30,424
    
    
    
    1,122Cash and cash equivalents at end of period
    
    $
    54,370
    
    
    $
    19,868SUPPLEMENTAL CASH FLOWS:Cash paid for interest and fees, net of $1,090 and $2,160 capitalized interest
    
    $
    16,164
    
    
    $
    32,322Cash paid for income taxes
    
    $
    5,964
    
    
    $
    2,050
 The accompanying notes are an integral part of these consolidated financial statements.
 4




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Concho Resources Inc.
 
 Condensed Notes to Consolidated Financial Statements
 Unaudited
 Note A. Organization and nature of operations
    Initial public offering.
 Secondary public offering.
 Note B. Summary of significant accounting policies
 Principles of consolidation.
 Interim financial statements.
 5




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
   Intangible assets.
 Oil and gas sales and imbalances.
   Treasury stock.
 General and administrative expense
 Note C. Exploratory well costs
 Financial Accounting and Reporting by
Oil and Gas Producing Companies Accounting for
Suspended Well Costs
 6




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Wells in progress
    
    $
    3,446
    
    
    $
    4,199Capitalized exploratory well costs that have been capitalized for a period of one year or less
    
    
    13,061
    
    
    
    16,857Capitalized exploratory well costs that have been capitalized for a period greater than one year
    
    
    
    
    
    
    Total capitalized exploratory well costs
    
    $
    16,507
    
    
    $
    21,056
  Note D. Acquisitions
    7




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  (in thousands)Fair value of Henry Properties net assets:Current assets, excluding cash acquired of $18,960
    
    $
    95,085Proved oil and gas properties
    
    
    590,850Unproved oil and gas properties
    
    
    220,350Other long-term assets
    
    
    7,820Intangible assets  operating rights
    
    
    48,849Total assets acquired
    
    
    962,954Current liabilities
    
    
    (129,369
    )Asset retirement obligations and other long-term liabilities
    
    
    (6,837
    )Noncurrent derivative liabilities
    
    
    (39,037
    )Deferred tax liability
    
    
    (200,786
    )Total liabilities assumed
    
    
    (376,029
    )Total purchase price
    
    $
    586,925Consideration paid for Henry Properties net assets:Cash consideration paid, excluding cash acquired of $18,960
    
    $
    581,275Acquisition costs
    
    
    5,650Total purchase price
    
    $
    586,925
  8




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Nine Months EndedSeptember 30,(in thousands, except per share data)
    
    2008
    
    2007Operating revenues
    
    $
    509,976
    
    
    $
    290,972Net income (loss) applicable to common shareholders
    
    $
    134,959
    
    
    $
    (6,124
    )Earnings (loss) per common share:Basic
    
    $
    1.57
    
    
    $
    (0.09
    )Diluted
    
    $
    1.55
    
    
    $
    (0.09
    )
 Note E. Fair value measurements
 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, investments and interest rate swaps. The
Companys valuation models are primarily industry-standard models that consider various
inputs including: (a) quoted forward prices for commodities, (b) time value and (c)
current market and contractual prices for the underlying instruments, as well as other
relevant economic measures. The Company utilizes our counterparties valuations to
assess the reasonableness of our 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 basis swaps, commodity price collars and floors, as well
as investments. The Companys valuation models are primarily industry-standard models
that consider various inputs including: (a) quoted forward prices for commodities, (b)
time value, (c) volatility factors and (d) current market and contractual prices for the
underlying instruments, as well as other relevant economic measures. Although the
Company utilizes our 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.
 9




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
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)
    
    
    2008Commodity derivative swap contracts
    
    $
    
    
    
    $
    (34,200
    )
    
    $
    
    
    
    $
    (34,200
    )Commodity derivative collar
contracts
    
    
    
    
    
    
    
    
    
    
    15,419
    
    
    
    15,419Total financial assets (liabilities)
    
    $
    
    
    
    $
    (34,200
    )
    
    $
    15,419
    
    
    $
    (18,781
    )
  (in thousands)Balance as of January 1, 2008
    
    $
    1,866Gains (losses), realized or unrealized
    
    
    12,185Purchases, issuances, and settlements
    
    
    1,368Balance as of September 30, 2008
    
    $
    15,419Total gains (losses) for the period included in earnings attributable to the change in
unrealized gains (losses) relating to assets (liabilities) still held at the reporting date
    
    $
    13,553
 Note F. New accounting pronouncements
 The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment of FASB Statement No. 115
 Amendment of FASB Interpretation
No. 39
 Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards
 10




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an Amendment of ARB No. 51
 Share-Based Payment Share-Based Payment Share-Based Payment (revised 2004)
 Disclosures about Derivative Instruments and
Hedging Activities Accounting for Derivative Instruments and Hedging Activities
 Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
 The Hierarchy of Generally Accepted Accounting
Principles
 11




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
 Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active
 Note G. Asset retirement obligations
   Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007Asset retirement obligations, beginning of period
    
    $
    9,418
    
    
    $
    8,700Liabilities incurred from new wells
    
    
    660
    
    
    
    309Liabilities assumed in acquisitions
    
    
    7,062
    
    
    
    Accretion expense
    
    
    571
    
    
    
    334Liabilities settled upon plugging and abandoning wells
    
    
    
    
    
    
    (34
    )Revision of estimates
    
    
    350
    
    
    
    (2,032
    )Asset retirement obligations, end of period
    
    $
    18,061
    
    
    $
    7,277
 Note H. Stockholders equity
 Common stock private placement.
  Treasury stock.
 12




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Equity commitments.
  Capital calls.
 6% Series A preferred stock.
  Purchase notes.
  13




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Number of
    
    
    Weightedcapital
    
    
    averageoptions
    
    
    exercise priceNine months ended September 30, 2008Outstanding at beginning of period
    
    
    38,385
    
    
    $
    8.34$10 Capital Options exercised
    
    
    (38,385
    )
    
    $
    8.34Outstanding at end of period
    
    
    
    
    
    $
    Vested outstanding at end of period
    
    
    
    
    
    $
    
 Conversion of CEHC 6% Series A Preferred Stock and CEHC common stock.
   Note I. Stock incentive plan
  Restricted stock awards.
 Number of
    
    
    Grant daterestricted
    
    
    fair valueshares
    
    
    per shareRestricted stock:Outstanding at December 31, 2007
    
    
    371,549Shares granted
    
    
    98,001
    
    
    $
    34.78Shares cancelled / forfeited
    
    
    (42,791
    )Lapse of restrictions
    
    
    (42,001
    )Outstanding at September 30, 2008
    
    
    384,758
 14




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Stock-based compensation expense related to restricted stock
    
    $
    716
    
    
    $
    226
    
    
    $
    1,578
    
    
    $
    1,007Income tax benefit related to restricted stock
    
    $
    276
    
    
    $
    95
    
    
    $
    617
    
    
    $
    422Deductions in current taxable income related to restricted stock
    
    $
    68
    
    
    $
    140
    
    
    $
    1,088
    
    
    $
    565
 Stock option awards.
 Risk-free interest rate
    
    
    3.19
    %Expected term (years)
    
    
    6.21Expected volatility
    
    
    38.25
    %Expected dividend yield
    
    
    
  15




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  WeightedaverageNumber of
    
    exerciseoptions
    
    priceStock options:Outstanding at December 31, 2007
    
    
    3,011,722
    
    
    $
    9.71Options granted
    
    
    594,055
    
    
    $
    23.57Options forfeited
    
    
    (275,593
    )
    
    $
    14.96Options exercised
    
    
    (430,351
    )
    
    $
    8.98Outstanding at September 30, 2008
    
    
    2,899,833
    
    
    $
    12.16Vested at September 30, 2008
    
    
    1,749,398
    
    
    $
    9.10Exercisable at September 30, 2008
    
    
    668,957
    
    
    $
    10.55
  Weightedaverage
    
    
    Weighted
    
    
    IntrinsicNumber
    
    
    remaining
    
    
    average
    
    
    value atvested and
    
    
    contractual
    
    
    exercise
    
    
    September 30,exercisable
    
    
    life
    
    
    price
    
    
    2008(in thousands)Vested options:Exercise price
    
    $
    8.00
    
    
    
    1,397,198
    
    
    2.53 years
    
    $
    8.00
    
    
    $
    27,399Exercise price
    
    $
    12.00
    
    
    
    160,950
    
    
    4.68 years
    
    $
    12.00
    
    
    
    2,512Exercise price
    
    $
    14.68
    
    
    
    191,250
    
    
    8.03 years
    
    $
    14.68
    
    
    
    2,4721,749,398
    
    
    
    
    
    
    $
    9.10
    
    
    $
    32,383Exercisable options:Exercise price
    
    $
    8.00
    
    
    
    370,778
    
    
    3.83 years
    
    $
    8.00
    
    
    $
    7,271Exercise price
    
    $
    12.00
    
    
    
    106,929
    
    
    5.90 years
    
    $
    12.00
    
    
    
    1,669Exercise price
    
    $
    14.68
    
    
    
    191,250
    
    
    8.03 years
    
    $
    14.68
    
    
    
    2,472668,957
    
    
    
    
    
    
    $
    10.55
    
    
    $
    11,412
 16




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Grant date fair value for awards during the period:Time vesting options (a)
    
    $
    206
    
    
    $
    87
    
    
    $
    389
    
    
    $
    87Officer stock options (c)
    
    
    585
    
    
    
    1,156
    
    
    
    5,675
    
    
    
    1,156Total
    
    $
    791
    
    
    $
    1,243
    
    
    $
    6,064
    
    
    $
    1,243Stock-based compensation expense from stock options:Time vesting options (a)
    
    $
    48
    
    
    $
    6
    
    
    $
    113
    
    
    $
    6Performance vesting options:Officers (b)
    
    
    138
    
    
    
    141
    
    
    
    402
    
    
    
    420Certain employee (b)
    
    
    11
    
    
    
    10
    
    
    
    31
    
    
    
    30Officer stock options (c)
    
    
    1,012
    
    
    
    319
    
    
    
    2,830
    
    
    
    1,193Total
    
    $
    1,209
    
    
    $
    476
    
    
    $
    3,376
    
    
    $
    1,649Income taxes and other information:Income tax benefit related to stock options
    
    $
    461
    
    
    $
    200
    
    
    $
    1,319
    
    
    $
    691Deductions in current taxable income related to stock options
exercised
    
    $
    2,880
    
    
    $
    
    
    
    $
    8,218
    
    
    $
    Number of stock options exercised
    
    
    167
    
    
    
    
    
    
    
    430
    
    
    
    
 
 (a)
    
    Options vest using a four year graded vesting schedule.(b)
    
    Options granted prior to February 27, 2006, vest using a three year graded vesting schedule.(c)
    
    Vest using a three and four year graded vesting schedule as approved by the Board of Directors. Future stock-based compensation expense.
 Restricted
    
    
    Stock(in thousands)
    
    stock
    
    
    options
    
    
    TotalRemaining 2008
    
    $
    768
    
    
    $
    1,236
    
    
    $
    2,0042009
    
    
    2,228
    
    
    
    2,936
    
    
    
    5,1642010
    
    
    1,272
    
    
    
    1,328
    
    
    
    2,6002011
    
    
    391
    
    
    
    486
    
    
    
    8772012
    
    
    
    
    
    
    51
    
    
    
    51Total
    
    $
    4,659
    
    
    $
    6,037
    
    
    $
    10,696
 Note J. Derivative financial instruments
   17




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
    18




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Commodity derivative contracts not designated as hedges.
 Aggregate
    
    
    
    
    
    
    
    
    
    Remainingremaining
    
    Daily
    
    Index
    
    contractvolume
    
    volume
    
    price
    
    periodCrude oil (volumes in Bbls):Price collar
    
    
    768,000
    
    
    
    2,104
    
    
    $
    120.00-$134.60
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    128,800
    
    
    
    1,400
    
    
    
    $  99.25
    (a)
    
    
    10/1/08  12/31/08Price swap
    
    
    147,000
    
    
    
    1,598
    
    
    
    $124.35
    (a)
    
    
    10/1/08  12/31/08Price swap
    
    
    292,000
    
    
    
    800
    
    
    
    $  98.35
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    348,000
    
    
    
    953
    
    
    
    $125.10
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    240,000
    
    
    
    658
    
    
    
    $128.80
    (a)
    
    
    1/1/10  12/31/10Price swap
    
    
    336,000
    
    
    
    921
    
    
    
    $128.66
    (a)
    
    
    1/1/11  12/31/11Price swap
    
    
    504,000
    
    
    
    1,377
    
    
    
    $127.80
    (a)
    
    
    1/1/12  12/31/12Natural gas (volumes in MMBtus):Price swap
    
    
    1,825,000
    
    
    
    5,000
    
    
    
    $    8.44
    (b)
    
    
    1/1/09  12/31/09
 
 (a)
    
    The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price collar is based on the Inside FERC-El Paso Permian Basin first-of-the-month spot price. Commodity derivative contracts assumed in the Acquisition.
 Aggregate
    
    
    
    
    
    
    
    
    
    Remainingremaining
    
    Daily
    
    Index
    
    contractvolume
    
    volume
    
    price
    
    periodCrude oil (volumes in Bbls):Price swap
    
    
    125,873
    
    
    
    1,368
    
    
    $
    74.85
    (a)
    
    
    10/1/08 - 12/31/08Price swap
    
    
    443,491
    
    
    
    1,215
    
    
    $
    73.59
    (a)
    
    
    1/1/09 - 12/31/09Price swap
    
    
    401,746
    
    
    
    1,101
    
    
    $
    72.03
    (a)
    
    
    1/1/10 - 12/31/10Price swap
    
    
    221,746
    
    
    
    608
    
    
    $
    68.92
    (a)
    
    
    1/1/11 - 12/31/11
 
 (a)
    
    The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price and the prices
represent weighted average prices. 19




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Fair value and activity of commodity derivative contracts.
 Aggregate
    
    
    
    
    
    
    
    
    
    
    RemainingFair value
    
    
    remaining
    
    
    Daily
    
    
    Index
    
    
    contractasset (liability)
    
    
    volume
    
    
    volume
    
    
    price
    
    
    period(in thousands)Cash flow hedges:Crude oil (volumes in Bbls):Price swap
    
    $
    (7,844
    )
    
    
    239,200
    
    
    
    2,600
    
    
    
    $ 67.50
    (a)
    
    
    10/1/08    12/31/08Cash flow hedges dedesignated:Natural gas (volumes in MMBtus):Price collar
    
    
    1,065
    
    
    
    1,242,000
    
    
    
    13,500
    
    
    
    $6.50  $9.35
    (b)
    
    
    10/1/08  12/31/08Derivatives not designated as hedges:Crude oil (volumes in Bbls):Price collar
    
    
    14,354
    
    
    
    768,000
    
    
    
    2,104
    
    
    $
    120.00  $134.60
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    (3,753
    )
    
    
    585,673
    
    
    
    6,366
    
    
    
    $  92.93
    (a) (c)
    
    
    10/1/08  12/31/08Price swap
    
    
    (27,465
    )
    
    
    1,813,491
    
    
    
    4,968
    
    
    
    $  87.16
    (a) (c)
    
    
    1/1/09  12/31/09Price swap
    
    
    (6,654
    )
    
    
    641,746
    
    
    
    1,758
    
    
    
    $  93.26
    (a) (c)
    
    
    1/1/10  12/31/10Price swap
    
    
    (102
    )
    
    
    557,746
    
    
    
    1,528
    
    
    
    $104.91
    (a) (c)
    
    
    1/1/11  12/31/11Price swap
    
    
    9,217
    
    
    
    504,000
    
    
    
    1,377
    
    
    
    $127.80
    (a)
    
    
    1/1/12  12/31/12Natural gas (volumes in MMBtus):Price swap
    
    
    2,401
    
    
    
    1,825,000
    
    
    
    5,000
    
    
    
    $    8.44
    (b)
    
    
    1/1/09  12/31/09Net liability
    
    $
    (18,781
    )
 
 (a)
    
    The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price collar is based on the Inside FERC-El Paso Permian Basin first-of-the-month spot price.(c)
    
    Prices represent weighted average prices. 20




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 :
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Increase (decrease) in oil and gas revenue from derivative activity:Cash (payments) receipts on cash flow hedges in oil sales
    
    $
    (12,111
    )
    
    $
    (3,591
    )
    
    $
    (32,684
    )
    
    $
    (3,347
    )Cash receipts from cash flow hedges in gas sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187Dedesignated cash flow hedges reclassified from AOCI in gas sales
    
    
    (38
    )
    
    
    722
    
    
    
    (260
    )
    
    
    722Total increase (decrease) in oil and gas revenue
from derivative activity
    
    $
    (12,149
    )
    
    $
    (2,869
    )
    
    $
    (32,944
    )
    
    $
    (2,438
    )Gain on derivatives not designated as hedges:Mark-to-market gain
    
    $
    176,095
    
    
    $
    1,802
    
    
    $
    72,848
    
    
    $
    1,802Cash (payments) receipts on derivatives not designated as hedges
    
    
    (12,783
    )
    
    
    1,286
    
    
    
    (29,170
    )
    
    
    1,286Total gain on derivatives not designated as hedges
    
    $
    163,312
    
    
    $
    3,088
    
    
    $
    43,678
    
    
    $
    3,088Gain (loss) from ineffective portion of cash flow hedges:
    
    $
    416
    
    
    $
    22
    
    
    $
    1,336
    
    
    $
    (1,134
    )Accumulated other comprehensive income (loss):Cash flow hedges:Mark-to-market gain (loss) of cash flow hedges
    
    $
    14,588
    
    
    $
    (6,843
    )
    
    $
    (17,922
    )
    
    $
    (14,300
    )Reclassification adjustment of losses to earnings
    
    
    12,111
    
    
    
    3,591
    
    
    
    32,684
    
    
    
    3,160Net AOCI upon dedesignation at June 30, 2007
    
    
    
    
    
    
    (407
    )
    
    
    
    
    
    
    (407
    )Net change, before income taxes
    
    
    26,699
    
    
    
    (3,659
    )
    
    
    14,762
    
    
    
    (11,547
    )Income tax effect
    
    
    (10,441
    )
    
    
    1,534
    
    
    
    (5,776
    )
    
    
    4,822Net change, net of income taxes
    
    $
    16,258
    
    
    $
    (2,125
    )
    
    $
    8,986
    
    
    $
    (6,725
    )Dedesignated cash flow hedges:Net AOCI upon dedesignation at June 30, 2007
    
    $
    
    
    
    $
    407
    
    
    $
    
    
    
    $
    407Reclassification adjustment of (gains) losses to earnings
    
    
    38
    
    
    
    (722
    )
    
    
    260
    
    
    
    (722
    )Income tax effect
    
    
    (15
    )
    
    
    133
    
    
    
    (102
    )
    
    
    133Net change, net of income taxes
    
    $
    23
    
    
    $
    (182
    )
    
    $
    158
    
    
    $
    (182
    )
  21




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Note K. Debt
  September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Senior Credit Facility
    
    $
    635,000
    
    
    $
    216,0002nd Lien Credit Facility
    
    
    
    
    
    
    109,900Unamortized original issue discount on 2nd Lien Credit Facility
    
    
    
    
    
    
    (496
    )Total long-term debt
    
    
    635,000
    
    
    
    325,404Current portion of 2nd Lien Credit Facility
    
    
    
    
    
    
    2,000Total debt
    
    $
    635,000
    
    
    $
    327,404
 Senior credit facility.
    2nd lien credit facility.
 22




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Principal maturities of debt.
 (in thousands)2008
    
    $
    2009
    
    
    2010
    
    
    2011
    
    
    2012 and thereafter
    
    
    635,000Total
    
    $
    635,000
 Interest expense.
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash payments for interest
    
    $
    6,496
    
    
    $
    15,485
    
    
    $
    17,254
    
    
    $
    34,482Amortization of original issue discount
    
    
    8
    
    
    
    34
    
    
    
    58
    
    
    
    74Amortization of deferred loan origination costs
    
    
    674
    
    
    
    338
    
    
    
    1,300
    
    
    
    1,026Write-off of deferred loan origination costs
and original issue discount
    
    
    1,547
    
    
    
    1,430
    
    
    
    1,547
    
    
    
    2,631Net changes in accruals
    
    
    1,780
    
    
    
    (7,079
    )
    
    
    686
    
    
    
    (6,250
    )Interest costs incurred
    
    
    10,505
    
    
    
    10,208
    
    
    
    20,845
    
    
    
    31,963Less: capitalized interest
    
    
    (250
    )
    
    
    (1,154
    )
    
    
    (1,090
    )
    
    
    (2,160
    )Total interest expense
    
    $
    10,255
    
    
    $
    9,054
    
    
    $
    19,755
    
    
    $
    29,803
 Note L. Commitments and contingencies
 Severance agreements.
 Indemnifications .
 Legal actions .
 Acquisition commitments .
 23




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Drilling commitments .
 Payments due by periodLess than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than(in thousands)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsDaywork drilling contracts
    
    $
    8,104
    
    
    $
    8,104
    
    
    $
    
    
    
    $
    
    
    
    $
    Daywork drilling contracts with related parties (a)
    
    
    17,632
    
    
    
    17,632
    
    
    
    
    
    
    
    
    
    
    
    Daywork drilling contracts assumed in the Acquisition (b)
    
    
    8,143
    
    
    
    5,361
    
    
    
    2,782
    
    
    
    
    
    
    
    Total contractual drilling commitments
    
    $
    33,879
    
    
    $
    31,097
    
    
    $
    2,782
    
    
    $
    
    
    
    $
    
 
 (a)
    
    Consists of daywork drilling contracts with Silver Oak Drilling, LLC, an affiliate of the Chase Group.(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. Note M. Income taxes
 Accounting for Income Taxes
 Accounting for Uncertainty
in Income Taxes Accounting for Income
Taxes
 Definition of Settlement in FASB Interpretation No. 48
 24




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Income tax provision.
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Current:U.S. federal
    
    $
    7,620
    
    
    $
    1,578
    
    
    $
    8,234
    
    
    $
    1,549U.S. state and local
    
    
    1,007
    
    
    
    333
    
    
    
    1,088
    
    
    
    3268,627
    
    
    
    1,911
    
    
    
    9,322
    
    
    
    1,875Deferred:U.S. federal
    
    
    73,865
    
    
    
    3,282
    
    
    
    77,902
    
    
    
    9,262U.S. state and local
    
    
    8,539
    
    
    
    779
    
    
    
    9,006
    
    
    
    2,19882,404
    
    
    
    4,061
    
    
    
    86,908
    
    
    
    11,460$
    91,031
    
    
    $
    5,972
    
    
    $
    96,230
    
    
    $
    13,335
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Income at U.S. federal statutory rate
    
    $
    81,536
    
    
    $
    4,874
    
    
    $
    86,136
    
    
    $
    11,143State income taxes (net of federal tax effect)
    
    
    9,546
    
    
    
    1,112
    
    
    
    10,094
    
    
    
    2,525Nondeductible expense & other
    
    
    (51
    )
    
    
    (14
    )
    
    
    
    
    
    
    (333
    )Expense for income taxes
    
    $
    91,031
    
    
    $
    5,972
    
    
    $
    96,230
    
    
    $
    13,335
 Note N. Related parties
 Contract Operator Agreement and Transition Services Agreement.
   25




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
  Other related party transactions.
   Overriding royalty and royalty interests.
   Prospect participation.
   Note O. Net income per share
   26




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average common shares outstanding:Basic
    
    
    81,288
    
    
    
    69,067
    
    
    
    77,489
    
    
    
    60,648Dilutive Bundled Capital Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130Dilutive Capital Options
    
    
    
    
    
    
    83
    
    
    
    8
    
    
    
    163Dilutive common stock options
    
    
    1,195
    
    
    
    710
    
    
    
    1,203
    
    
    
    852Dilutive restrictive stock
    
    
    241
    
    
    
    53
    
    
    
    245
    
    
    
    65Diluted
    
    
    82,724
    
    
    
    69,913
    
    
    
    78,945
    
    
    
    62,858
   27




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
Unaudited
 Note P. Supplementary information
 Capitalized costs
 September 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Oil and gas properties:Proved
    
    $
    2,135,089
    
    
    $
    1,303,665Unproved
    
    
    445,419
    
    
    
    251,353Less: accumulated depletion
    
    
    (244,175
    )
    
    
    (167,109
    )Net capitalized costs for oil and gas properties
    
    $
    2,336,333
    
    
    $
    1,387,909
 Costs incurred for oil and gas producing activities
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Property acquisition costs:Proved
    
    $
    589,986
    (a)
    
    $
    3,801
    
    
    $
    589,987
    (a)
    
    $
    11,801Unproved
    
    
    223,892
    
    
    
    1,857
    
    
    
    225,241
    
    
    
    (2,239
    )Exploration
    
    
    30,131
    
    
    
    29,239
    
    
    
    80,638
    
    
    
    70,973Development
    
    
    78,104
    
    
    
    26,880
    
    
    
    148,903
    
    
    
    44,253Capitalized asset retirement obligations
    
    
    373
    
    
    
    (662
    )
    
    
    1,010
    
    
    
    (1,951
    )Total costs incurred for oil and gas properties
    
    $
    922,486
    
    
    $
    61,115
    
    
    $
    1,045,779
    
    
    $
    122,837
 
 (a)
    
    Includes approximately $7.1 million of asset retirement obligations assumed in the Acquisition. 28




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Overview
  Commodity prices
   Recent events
 Henry Petroleum acquisition .
 Amended and restated credit facility.
 29




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##### Table of Contents



Common stock private placement.
 2009 capital budget .
 2009(in millions)
    
    BudgetDrilling and recompletion opportunities in our core operating area
    
    $
    398Projects operated by third parties
    
    
    8Emerging plays, acquisition of leasehold acreage and other property interests, and geological and geophysical
    
    
    72Maintenance capital in our core operating areas
    
    
    22Total 2009 capital budget
    
    $
    500
 Short-term interruptions in production
 
    
    None of our properties and facilities were directly impacted by Hurricane Ike;
however, facilities which ultimately received our production, primarily natural gas
liquids, sustained power interruptions and physical damage. As a result, our
production was either curtailed or shut-in for periods of time. As a result, we
estimate that our September 2008 production was reduced by approximately 700 MMcfe and
our October 2008 production was reduced by approximately 200 MMcfe.
    
    On May 16, 2008, a refinery located in New Mexico shut down for ten days due to
repairs. As a result, we shut-in approximately 221 MMcfe of production during the ten
day period.
    
    On April 7, 2008, a natural gas processing plant through which we process and sell a
portion of the production from our New Mexico shelf properties was curtailed for its
annual routine maintenance. The plant resumed full operation on April 19, 2008, and we
thereafter began restoring production from all of our properties that had been
affected. Approximately 450 MMcfe of our production was shut-in as a result of this
plant shut-down.
    
    During the first quarter of 2008, we experienced short-term interruptions in our
production on the New Mexico shelf properties due to operational problems with a
natural gas processing plant. There were a total of 10 days of curtailment during the
first quarter, and approximately 100 MMcfe of our production was curtailed during this
period.
 Derivative financial exposure.
  30




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##### Table of Contents



New commodity derivative contracts.
 Aggregate
    
    
    
    
    
    
    
    
    
    Remainingremaining
    
    Daily
    
    Index
    
    contractvolume
    
    volume
    
    price
    
    periodCrude oil (volumes in Bbls):Price collar
    
    
    768,000
    
    
    
    2,104
    
    
    $
    120.00-$134.60
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    128,800
    
    
    
    1,400
    
    
    
    $  99.25
    (a)
    
    
    10/1/08  12/31/08Price swap
    
    
    147,000
    
    
    
    1,598
    
    
    
    $124.35
    (a)
    
    
    10/1/08  12/31/08Price swap
    
    
    292,000
    
    
    
    800
    
    
    
    $  98.35
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    348,000
    
    
    
    953
    
    
    
    $125.10
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    240,000
    
    
    
    658
    
    
    
    $128.80
    (a)
    
    
    1/1/10  12/31/10Price swap
    
    
    336,000
    
    
    
    921
    
    
    
    $128.66
    (a)
    
    
    1/1/11  12/31/11Price swap
    
    
    504,000
    
    
    
    1,377
    
    
    
    $127.80
    (a)
    
    
    1/1/12  12/31/12Natural gas (volumes in MMBtus):Price swap
    
    
    1,825,000
    
    
    
    5,000
    
    
    
    $    8.44
    (b)
    
    
    1/1/09  12/31/09
 
 (a)
    
    The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price collar is based on the Inside FERC-El Paso Permian Basin first-of-the-month spot price. Commodity derivative contracts assumed in the Acquisition.
 Aggregate
    
    
    
    
    
    
    
    
    
    Remainingremaining
    
    Daily
    
    Index
    
    contractvolume
    
    volume
    
    price
    
    periodCrude oil (volumes in Bbls):Price swap
    
    
    125,873
    
    
    
    1,368
    
    
    $
    74.85
    (a)
    
    
    10/1/08  12/31/08Price swap
    
    
    443,491
    
    
    
    1,215
    
    
    $
    73.59
    (a)
    
    
    1/1/09  12/31/09Price swap
    
    
    401,746
    
    
    
    1,101
    
    
    $
    72.03
    (a)
    
    
    1/1/10  12/31/10Price swap
    
    
    221,746
    
    
    
    608
    
    
    $
    68.92
    (a)
    
    
    1/1/11  12/31/11
 
 (a)
    
    The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price and the prices
represent weighted average prices. 31




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##### Table of Contents



Results of operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except price and daily volume data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Oil sales
    
    $
    130,600
    
    
    $
    45,685
    
    
    $
    301,826
    
    
    $
    128,152Natural gas sales
    
    
    39,857
    
    
    
    23,413
    
    
    
    112,725
    
    
    
    67,395Total operating revenues
    
    
    170,457
    
    
    
    69,098
    
    
    
    414,551
    
    
    
    195,547Operating costs and expenses
    
    
    90,889
    
    
    
    49,690
    
    
    
    194,036
    
    
    
    137,952Gain on derivatives not designated as hedges
    
    
    (163,312
    )
    
    
    (3,088
    )
    
    
    (43,678
    )
    
    
    (3,088
    )Interest, net and other revenue
    
    
    9,921
    
    
    
    8,570
    
    
    
    18,090
    
    
    
    28,846Income before income taxes
    
    
    232,959
    
    
    
    13,926
    
    
    
    246,103
    
    
    
    31,837Income tax expense
    
    
    (91,031
    )
    
    
    (5,972
    )
    
    
    (96,230
    )
    
    
    (13,335
    )Net income
    
    $
    141,928
    
    
    $
    7,954
    
    
    $
    149,873
    
    
    $
    18,502Production volumes:Oil (MBbl)
    
    
    1,247
    
    
    
    705
    
    
    
    3,033
    
    
    
    2,143Natural gas (MMcf)
    
    
    3,944
    
    
    
    2,982
    
    
    
    10,395
    
    
    
    8,887Natural gas equivalent (MMcfe)
    
    
    11,426
    
    
    
    7,211
    
    
    
    28,593
    
    
    
    21,747Average daily production volumes:Oil (Bbl)
    
    
    13,554
    
    
    
    7,663
    
    
    
    11,069
    
    
    
    7,850Natural gas (Mcf)
    
    
    42,870
    
    
    
    32,413
    
    
    
    37,938
    
    
    
    32,553Natural gas equivalent (Mcfe)
    
    
    124,196
    
    
    
    78,380
    
    
    
    104,354
    
    
    
    79,659Average prices:Oil, without hedges (Bbl)
    
    $
    114.44
    
    
    $
    69.91
    
    
    $
    110.29
    
    
    $
    61.36Oil, with hedges (Bbl)
    
    $
    104.73
    
    
    $
    64.82
    
    
    $
    99.51
    
    
    $
    59.79Natural gas, without hedges (Mcf)
    
    $
    10.12
    
    
    $
    7.61
    
    
    $
    10.87
    
    
    $
    7.48Natural gas, with hedges (Mcf)
    
    $
    10.11
    
    
    $
    7.85
    
    
    $
    10.84
    
    
    $
    7.58Natural gas equivalent, without hedges (Mcfe)
    
    $
    15.98
    
    
    $
    9.98
    
    
    $
    15.65
    
    
    $
    9.10Natural gas equivalent, with hedges (Mcfe)
    
    $
    14.92
    
    
    $
    9.58
    
    
    $
    14.50
    
    
    $
    8.99
 
 Bbl  Barrel.MBbl  Thousand Barrels.Mcf  Thousand cubic feet.MMcf  Million cubic feet.Mcfe  Thousand cubic feet of natural gas equivalent (computed on an energy equivalent basis of one Bbl equals six Mcf).MMcfe  Million cubic feet of natural gas equivalent (computed on an energy equivalent basis of one Bbl equals six Mcf). 32




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##### Table of Contents



Three months ended September 30, 2008, compared to three months ended September 30, 2007
 Oil and gas revenues.
 
    
    average realized oil prices (after giving effect to hedging activities) were $104.73
per Bbl during the three months ended September 30, 2008, an increase of 62% from $64.82
per Bbl during the three months ended September 30, 2007;
    
    total oil production was 1,247 MBbl for the three months ended September 30, 2008, an
increase of 542 MBbl (77%) from 705 MBbl for the three months ended September 30, 2007;
    
    average realized natural gas prices (after giving effect to hedging activities) were
$10.11 per Mcf during the three months ended September 30, 2008, an increase of 29% from
$7.85 per Mcf during the three months ended September 30, 2007;
    
    total natural gas production was 3,944 MMcf for the three months ended September 30,
2008, an increase of 962 MMcf (32%) from 2,982 MMcf for the three months ended September
30, 2007;
    
    average realized natural gas equivalent prices (after giving effect to hedging
activities) were $14.92 per Mcfe during the three months ended September 30, 2008, an
increase of 56% from $9.58 per Mcfe during the three months ended September 30, 2007;
and
    
    total production was 11,426 MMcfe for the three months ended September 30, 2008, an
increase of 4,215 MMcfe (58%) from 7,211 MMcfe for the three months ended September 30,
2007.
  Hedging activities.
 Crude Oil Hedges
    
    Natural Gas HedgesThree Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Hedging revenue increase (decrease) (in thousands)
    
    $
    (12,111
    )
    
    $
    (3,591
    )
    
    $
    (38
    )
    
    $
    722Hedged volumes (Bbls and MMBtus, respectively)
    
    
    239,000
    
    
    
    271,400
    
    
    
    1,242,000
    
    
    
    1,665,200Hedged revenue increase (decrease) per hedged volume
    
    $
    (50.67
    )
    
    $
    (13.23
    )
    
    $
    (0.03
    )
    
    $
    0.43
   33




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##### Table of Contents



Production expenses.
 Three Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeLease operating expenses
    
    $
    12,338
    
    
    $
    1.08
    
    
    $
    6,839
    
    
    $
    0.95Taxes:Ad valorem
    
    
    792
    
    
    
    0.07
    
    
    
    398
    
    
    
    0.06Production
    
    
    13,734
    
    
    
    1.20
    
    
    
    5,673
    
    
    
    0.79Workover costs
    
    
    177
    
    
    
    0.02
    
    
    
    863
    
    
    
    0.12Total oil and gas production expenses
    
    $
    27,041
    
    
    $
    2.37
    
    
    $
    13,773
    
    
    $
    1.92
      Exploration and abandonments expense.
 Three Months EndedSeptember 30,(in thousands)
    
    2008
    
    
    2007Geological and geophysical
    
    $
    111
    
    
    $
    368Exploratory dry holes
    
    
    2,779
    
    
    
    10,557Leasehold abandonments and other
    
    
    13,934
    
    
    
    880Total exploration and abandonments
    
    $
    16,824
    
    
    $
    11,805
   34




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##### Table of Contents



Depreciation, depletion and amortization expense.
 Three Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeDepletion of proved oil and gas properties
    
    $
    31,729
    
    
    $
    2.78
    
    
    $
    17,748
    
    
    $
    2.46Depreciation of other property and equipment
    
    
    473
    
    
    
    0.04
    
    
    
    255
    
    
    
    0.04Amortization of intangible asset  operating rights
    
    
    326
    
    
    
    0.03
    
    
    
    
    
    
    
    Total depletion, depreciation and amortization
    
    $
    32,528
    
    
    $
    2.85
    
    
    $
    18,003
    
    
    $
    2.50Crude oil price used to estimate proved oil reserves at period end
    
    $
    97.00
    
    
    
    
    
    
    $
    78.25Natural gas price used to estimate proved gas reserves at period end
    
    $
    7.12
    
    
    
    
    
    
    $
    6.38
   Impairment of long-lived assets.
 35




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##### Table of Contents



General and administrative expenses.
 Three Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeGeneral and administrative expenses  recurring
    
    $
    8,611
    
    
    $
    0.75
    
    
    $
    4,166
    
    
    $
    0.58Non-recurring bonus paid to Henry Entities employees, see Note L
    
    
    2,367
    
    
    
    0.21
    
    
    
    
    
    
    
    Non-cash stock-based compensation  stock options
    
    
    1,209
    
    
    
    0.11
    
    
    
    476
    
    
    
    0.07Non-cash stock-based compensation  restricted stock
    
    
    716
    
    
    
    0.06
    
    
    
    226
    
    
    
    0.03Less: Third-party operating fee reimbursements
    
    
    (2,125
    )
    
    
    (0.19
    )
    
    
    (222
    )
    
    
    (0.03
    )Total general and administrative expenses
    
    $
    10,778
    
    
    $
    0.94
    
    
    $
    4,646
    
    
    $
    0.65
    Bad debt expense.
 Gain on derivatives not designated as hedges.
  Interest expense.
 36




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Income tax provisions.
 Nine months ended September 30, 2008, compared to nine months ended September 30, 2007
 Oil and gas revenues.
 
    
    average realized oil prices (after giving effect to hedging activities) were $99.51
per Bbl during the nine months ended September 30, 2008, an increase of 66% from $59.79
per Bbl during the nine months ended September 30, 2007;
    
    total oil production was 3,033 MBbl for the nine months ended September 30, 2008, an
increase of 890 MBbl (42%) from 2,143 MBbl for the nine months ended September 30, 2007;
    
    average realized natural gas prices (after giving effect to hedging activities) were
$10.84 per Mcf during the nine months ended September 30, 2008, an increase of 43% from
$7.58 per Mcf during the nine months ended September 30, 2007;
    
    total natural gas production was 10,395 MMcf for the nine months ended September 30,
2008, an increase of 1,508 MMcf (17%) from 8,887 MMcf for the nine months ended
September 30, 2007;
    
    average realized natural gas equivalent prices (after giving effect to hedging
activities) were $14.50 per Mcfe during the nine months ended September 30, 2008, an
increase of 61% from $8.99 per Mcfe during the nine months ended September 30, 2007; and
    
    total production was 28,593 MMcfe for the nine months ended September 30, 2008, an
increase of 6,846 MMcfe (31%) from 21,747 MMcfe for the nine months ended September 30,
2007.
  37




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Hedging activities.
 Crude Oil Hedges
    
    Natural Gas HedgesNine Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Hedging revenue increase (decrease) (in thousands)
    
    $
    (32,684
    )
    
    $
    (3,347
    )
    
    $
    (260
    )
    
    $
    909Hedged volumes (Bbls and MMBtus, respectively)
    
    
    712,000
    
    
    
    805,350
    
    
    
    3,699,000
    
    
    
    4,817,000Hedged revenue increase (decrease) per hedged volume
    
    $
    (45.90
    )
    
    $
    (4.16
    )
    
    $
    (0.07
    )
    
    $
    0.19
   Production expenses.
 Nine Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeLease operating expenses
    
    $
    28,576
    
    
    $
    1.00
    
    
    $
    19,966
    
    
    $
    0.92Taxes:Ad valorem
    
    
    1,798
    
    
    
    0.06
    
    
    
    1,437
    
    
    
    0.07Production
    
    
    34,842
    
    
    
    1.22
    
    
    
    15,616
    
    
    
    0.72Workover costs
    
    
    699
    
    
    
    0.02
    
    
    
    906
    
    
    
    0.04Total oil and gas production expenses
    
    $
    65,915
    
    
    $
    2.31
    
    
    $
    37,925
    
    
    $
    1.75
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Exploration and abandonments expense.
 Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    2007Geological and geophysical
    
    $
    2,428
    
    
    $
    993Exploratory dry holes
    
    
    2,778
    
    
    
    16,222Leasehold abandonments and other
    
    
    15,082
    
    
    
    895Total exploration and abandonments
    
    $
    20,288
    
    
    $
    18,110
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Depreciation, depletion and amortization expense.
 Nine Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeDepletion of proved oil and gas properties
    
    $
    74,238
    
    
    $
    2.60
    
    
    $
    54,306
    
    
    $
    2.50Depreciation of other property and equipment
    
    
    1,258
    
    
    
    0.04
    
    
    
    730
    
    
    
    0.03Amortization of intangible asset  operating rights
    
    
    326
    
    
    
    0.01
    
    
    
    
    
    
    
    Total depletion, depreciation and amortization
    
    $
    75,822
    
    
    $
    2.65
    
    
    $
    55,036
    
    
    $
    2.53Crude oil price used to estimate proved oil reserves at quarter end
    
    $
    97.00
    
    
    
    
    
    
    $
    78.25Natural gas price used to estimate proved gas reserves at quarter period end
    
    $
    7.12
    
    
    
    
    
    
    $
    6.38
   Impairment of long-lived assets.
 General and administrative expenses.
 Nine Months Ended September 30,2008
    
    
    2007Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Mcfe
    
    
    Amount
    
    
    McfeGeneral and administrative expenses  recurring
    
    $
    22,352
    
    
    $
    0.78
    
    
    $
    14,763
    
    
    $
    0.68Non-recurring bonus paid to Henry Entities employees, see Note L
    
    
    2,367
    
    
    
    0.08
    
    
    
    
    
    
    
    Non-cash stock-based compensation  stock options
    
    
    3,376
    
    
    
    0.12
    
    
    
    1,649
    
    
    
    0.08Non-cash stock-based compensation  restricted stock
    
    
    1,578
    
    
    
    0.06
    
    
    
    1,007
    
    
    
    0.05Less: Third-party operating fee reimbursements
    
    
    (2,629
    )
    
    
    (0.09
    )
    
    
    (852
    )
    
    
    (0.04
    )Total general and administrative expenses
    
    $
    27,044
    
    
    $
    0.95
    
    
    $
    16,567
    
    
    $
    0.77
  40




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Bad debt expense.
 Contract drilling fees  stacked rigs.
 Gain on derivatives not designated as hedges.
  Interest expense.
  Income tax provisions.
 41




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Capital commitments, capital resources and liquidity
 Capital commitments.
 Oil and gas properties.
    Acquisitions.
 Contractual obligations, including off-balance sheet obligations .
  42




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Capital resources.
 Cash flow from operating activities.
 Cash flow used in investing activities.
 Cash flow from financing activities.
     43




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Financial markets.
     Liquidity.
 Book capitalization and current ratio.
 Inflation and changes in prices.
 Critical accounting policies and practices
  44




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Recent accounting pronouncements
 The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment of FASB Statement No. 115
 Amendment of FASB Interpretation
No. 39
 Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
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Share-Based
Payment Share-Based Payment Share-Based Payment (revised
2004)
 Disclosures about Derivative Instruments and
Hedging Activities Accounting for Derivative Instruments and Hedging Activities
 Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
 Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Credit risk.
 Commodity price risk.
  Interest rate risk.
 47




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Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in Internal Control Over Financial Reporting.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 You should consider carefully the following risk factors together with all of the other
information included in this report and other reports filed with the SEC, including, but not limited to, our most recent Annual Report on
Form 10-K, before investing in our shares. Any information presented in this report on a pro forma
basis has been prepared as if (a) the closing of the acquisition of Henry Petroleum LP, certain
affiliated entities and the related along-side interests, (b) entering into our
new credit facility and (c) issuance of our common stock in the private placement occurred on
January 1, 2007.
 If any of the following risks were actually to occur, our business, financial condition or
results of operations could be materially adversely affected. In that case, the trading price of
our shares could decline and you could lose all or part of your investment.
 Risks Related to Our Business
 Crude oil and natural gas prices are volatile. A decline in crude oil and natural gas prices could
adversely affect our financial position, financial results, cash flow, access to capital and
ability to grow.
  
    
    the level of consumer demand for crude oil and natural gas;
    
    the domestic and foreign supply of crude oil and natural gas;
    
    commodity processing, gathering and transportation availability, and the
availability of refining capacity;
    
    the price and level of imports of foreign crude oil and natural gas;
    
    the ability of the members of the Organization of Petroleum Exporting Countries
to agree to and maintain crude oil price and production controls;
    
    domestic and foreign governmental regulations and taxes;
    
    the price and availability of alternative fuel sources;
    
    weather conditions;
    
    political conditions or hostilities in oil and gas producing regions, including
the Middle East, Africa and South America;
    
    technological advances affecting energy consumption; and
    
    worldwide economic conditions.
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Drilling for and producing crude oil and natural gas are high-risk activities with many
uncertainties that could cause our expenses to increase or our cash flows and production volumes to
decrease.
  
    
    delays imposed by or resulting from compliance with regulatory and contractual
requirements;
    
    pressure or irregularities in geological formations;
    
    shortages of or delays in obtaining equipment and qualified personnel;
    
    equipment failures or accidents;
    
    adverse weather conditions;
    
    reductions in crude oil and natural gas prices;
    
    surface access restrictions;
    
    loss of title or other title related issues;
    
    crude oil, natural gas liquids or natural gas gathering, transportation and
processing availability restrictions or limitations; and
    
    limitations in the market for crude oil and natural gas.
 Estimates of proved reserves and future net cash flows are not precise. The actual quantities of
our proved reserves and our future net cash flows may prove to be lower than estimated.
   
    
    historical production from the area compared with production from other producing
areas;
    
    the quality, quantity and interpretation of available relevant data;
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
    
    the assumed effects of regulations by governmental agencies;
    
    the quality, quantity and interpretation of available relevant data;
    
    the assumed effects of regulations by governmental agencies;
    
    assumptions concerning future commodity prices; and
    
    assumptions concerning future operating costs; severance, ad valorem and excise
taxes; development costs; and workover and remedial costs.
  
    
    the quantities of crude oil and natural gas that are ultimately recovered;
    
    the production and operating costs incurred;
    
    the amount and timing of future development expenditures; and
    
    future commodity prices.
   
    
    the amount and timing of actual production;
    
    levels of future capital spending;
    
    increases or decreases in the supply of or demand for oil and gas; and
    
    changes in governmental regulations or taxation.
  Our business requires substantial capital expenditures. We may be unable to obtain needed capital
or financing on satisfactory terms or at all, which could lead to a decline in our crude oil and
natural gas reserves.
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
    
    our proved reserves;
    
    the level of crude oil and natural gas we are able to produce from existing
wells;
    
    the prices at which our crude oil and natural gas are sold; and
    
    our ability to acquire, locate and produce new reserves.
  We may not be able to obtain funding at all, or obtain funding on acceptable terms, to meet our
future capital needs because of the deterioration of the credit and capital markets.
     
    
    our lending counterparties may be unwilling or unable to meet their funding
obligations;
    
    the borrowing base under our credit facility is redetermined at least twice a
year and may decrease due to a decrease in crude oil or natural gas prices,
operating difficulties, declines in reserves, lending requirements or regulations,
or for other reasons; or
 52




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
    
    if any lender is unable or unwilling to fund their respective portion of any
advance under our credit facility, then the other lenders thereunder are not
required to provide additional funding to make up the portion of the advance that
the defaulting lender refused to fund.
  Almost all of our producing properties are located in the Permian Basin region of Southeast New
Mexico and West Texas, making us vulnerable to risks associated with operating in one major
geographic area. In addition, we have a large amount of proved reserves attributable to a small
number of producing horizons within this area.
   Future price declines could result in a reduction in the carrying value of our proved oil and gas
properties, which could adversely affect our results of operations.
  Part of our strategy involves exploratory drilling, including drilling in new or emerging plays. As
a result, our drilling results in these areas are uncertain, and the value of our undeveloped
acreage will decline if drilling results are unsuccessful.
  Our commodity price risk management program may cause us to forego additional future profits or
result in our making cash payments to our counterparties.
  53




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
    
    the counterparty to a commodity price risk management contract may default on its
contractual obligations to us;
    
    there may be a change in the expected differential between the underlying price
in a commodity price risk management agreement and actual prices received; or
    
    market prices may exceed the prices which we are contracted to receive, resulting
in our need to make significant cash payments to our counterparties.
  We may enter into interest rate derivative instruments that would subject us to potential loss of
income.
   
    
    the counterparty may default on its contractual obligations to us;
    
    there may be issues with regard to the legal enforceability of such instruments;
    
    the early repayment of one of our interest rate derivative instruments could lead
to prepayment penalties; or
    
    unanticipated and significant changes in interest rates may cause a significant
loss of basis in the instrument and a change in current period expense.
 If we enter into derivative instruments that require us to post cash collateral, our cash otherwise
available for use in our operations would be reduced, which could limit our ability to make future
capital expenditures.
  Our identified inventory of drilling locations and recompletion opportunities are scheduled out
over several years, making them susceptible to uncertainties that could materially alter the
occurrence or timing of their drilling.
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On a pro forma basis, approximately 44% of our total estimated net proved reserves at December 31,
2007, were undeveloped, and those reserves may not ultimately be developed.
  Because we do not control the development of the properties in which we own interests, but do not
operate, we may not be able to achieve any production from these properties in a timely manner.
  
    
    the nature and timing of drilling and operational activities;
    
    the timing and amount of capital expenditures;
    
    the operators expertise and financial resources;
    
    the approval of other participants in such properties; and
    
    the selection of suitable technology.
  Unless we replace our crude oil and natural gas reserves, our reserves and production will decline,
which would adversely affect our cash flow, our ability to raise capital and the value of our
common stock.
  We may be unable to make attractive acquisitions or integrate acquired companies, and any inability
to do so may disrupt our business and hinder our ability to grow through the acquisition of
businesses.
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If we are unable to integrate Henry Petroleum LP, the affiliated entities and the related
along-side interests as expected, our future financial performance may be negatively impacted.
  
    
    operating a larger combined organization and adding operations;
    
    difficulties in the assimilation of the assets and operations of the acquired
business;
    
    vendor or key employee losses from the acquired business;
    
    changes in key supply relationships related to the acquired business;
    
    integrating personnel from diverse business backgrounds and organizational
cultures;
    
    developing and maintaining an effective system of internal controls related to
the acquired business;
    
    integrating internal controls, compliance under the Sarbanes-Oxley Act of 2002
and other regulatory compliance and corporate governance matters;
    
    an inability to complete other internal growth projects and/or acquisitions due
to constraints on time and resources;
    
    difficulties integrating new technology systems that we have not historically
used in our operations or financial reporting;
    
    an increase in our indebtedness;
    
    potential environmental or regulatory compliance matters or liabilities
including, but not limited to potential matters associated with the Environmental
Protection Agency and the Texas Commission on Environmental Quality, and title
issues, including liabilities arising from the operation of the acquired business
before the acquisition; and
    
    coordinating and consolidating corporate and administrative functions.
  The acquisition of Henry Petroleum LP, certain affiliated entities and the related acquisition of
the along-side interests could expose us to potentially significant liabilities.
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Properties acquired may prove to be worth less than we paid because of uncertainties in evaluating
recoverable reserves and potential liabilities.
   Competition in the oil and gas industry is intense, making it more difficult for us to acquire
properties, market crude oil and natural gas and secure trained personnel.
  Shortages of oilfield equipment, services and qualified personnel could delay our drilling program
and increase the prices we pay to obtain such equipment, services and personnel.
  Our exploration and development drilling may not result in commercially productive reserves.
  57




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
    
    unexpected drilling conditions;
    
    title problems;
    
    pressure or lost circulation in formations;
    
    equipment failures or accidents;
    
    adverse weather conditions;
    
    compliance with environmental and other governmental or contractual requirements;
and
    
    increases in the cost of, or shortages or delays in the availability of,
electricity, supplies, materials, drilling or workover rigs, equipment and services.
 We periodically evaluate our unproved oil and gas properties, and could be required to recognize
noncash charges in the earnings of future periods.
  We may incur substantial losses and be subject to substantial liability claims as a result of our
crude oil and natural gas operations. In addition, we may not be insured for, or our insurance may
be inadequate to protect us against, these risks.
  
    
    environmental hazards, such as uncontrollable flows of crude oil, natural gas,
brine, well fluids, toxic gas or other pollution into the environment, including
groundwater contamination;
    
    abnormally pressured or structured formations;
    
    mechanical difficulties, such as stuck oilfield drilling and service tools and
casing collapse;
    
    fires, explosions and ruptures of pipelines;
    
    personal injuries and death; and
    
    natural disasters.
  
    
    injury or loss of life;
    
    damage to and destruction of property, natural resources and equipment;
    
    pollution and other environmental damage;
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
    
    regulatory investigations and penalties;
    
    suspension of our operations; and
    
    repair and remediation costs.
  Market conditions or operational impediments may hinder our access to crude oil and natural gas
markets or delay our production.
  We are subject to complex federal, state, local and other laws and regulations that could adversely
affect the cost, timing, manner or feasibility of conducting our operations.
   Our operations expose us to significant costs and liabilities with respect to environmental and
operational safety matters.
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The loss of our chief executive officer or our chief operating officer or other key personnel could
negatively impact our ability to execute our business strategy.
  Uncertainties associated with enhanced recovery methods may result in us not realizing an
acceptable return on our investments in such projects.
  Our indebtedness could restrict our operations and make us more vulnerable to adverse economic
conditions.
   
    
    impair our ability to make investments and obtain additional financing for
working capital, capital expenditures, acquisitions or other general corporate
purposes;
    
    limit our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to make principal and
interest payments on our indebtedness;
    
    limit our ability to borrow funds that may be necessary to operate or expand our
business;
    
    put us at a competitive disadvantage to competitors that have less debt;
    
    increase our vulnerability to interest rate increases; and
    
    hinder our ability to adjust to rapidly changing economic and industry
conditions.
  Our credit facility imposes restrictions on us that may affect our ability to successfully operate
our business.
  
    
    incurring additional indebtedness;
    
    paying dividends;
    
    creating certain additional liens on our assets;
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
    
    entering into sale and leaseback transactions;
    
    making investments;
    
    entering into transactions with affiliates;
    
    making material changes to the type of business we conduct or our business
structure;
    
    making guarantees;
    
    disposing of assets in excess of certain permitted amounts;
    
    merging or consolidating with other entities; and
    
    selling all or substantially all of our assets.
   A terrorist attack or armed conflict could harm our business by decreasing our revenues and
increasing our costs.
  Risks Relating to Our Common Stock
 Our restated certificate of incorporation, amended and restated bylaws and Delaware law contain
provisions that could discourage acquisition bids or merger proposals, which may adversely affect
the market price of our common stock.
  
    
    the organization of our board of directors as a classified board, which allows no
more than approximately one-third of our directors to be elected each year;
    
    stockholders cannot remove directors from our board of directors except for cause
and then only by the holders of not less than 
66 2/3 % of the voting power of all
outstanding voting stock;
    
    the prohibition of stockholder action by written consent; and
    
    limitations on the ability of our stockholders to call special meetings and
establish advance notice provisions for stockholder proposals and nominations for
elections to the board of directors to be acted upon at meetings of stockholders.
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Because we have no plans to pay dividends on our common stock, stockholders must look solely to
stock appreciation for a return on their investment in us.
  The availability of shares for sale in the future could reduce the market price of our common
stock.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6. Exhibits
 Exhibit Number
    
    Exhibit10.1
    
    Indemnification Agreement, dated August 25, 2008, by and
between Concho Resources Inc. and Darin G. Holderness
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K on August 29, 2008, and incorporated herein by
reference).10.2
    
    Employment Agreement, dated August 25, 2008, by and between
Concho Resources Inc. and Darin G. Holderness (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K on
August 29, 2008, and incorporated herein by reference).10.3
    
    Purchase Agreement, dated June 5, 2008, by and among Concho
Resources Inc., James C. Henry and Paula Henry, Henry
Securities Ltd., Henchild LLC, Henry Family Investment
Group, Henry Holding Lap, Henry Energy LP, Aguasal Holding,
HELP Investment LLC, Henry Capital LLC, Henry Operating
LLC, Henry Petroleum LP, Quail Ranch LLC, Aguasal
Management LLC and Aguasal LP (filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K on June 9, 2008, and
incorporated herein by reference).10.4
    
    Common Stock Purchase Agreement, dated June 5, 2008, by and
among Concho Resources Inc. and the Purchasers named
therein (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K on June 9, 2008, and incorporated herein
by reference).10.5
    
    Registration Rights Agreement, dated July 31, 2008, by and
between Concho Ressources Inc. and the Purchasers named
therein (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K on August 6, 2008, and incorporated
herein by reference).10.6
    
    Amended and Restated Credit Agreement, dated July 31, 2008,
by and between Concho Resources Inc., JPMorgan Chase Bank,
N.A., Bank of America, N.A., Calyon New York Branch, ING
Capital LLC and BNP Paribas and certain other lenders party
thereto (filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K on August 6, 2008, 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. 63




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SIGNATURES
  CONCHO RESOURCES INC.Date: November 13, 2008
    
    By
    
    /s/ Timothy A. Leach

Timothy A. LeachDirector, Chairman of the Board of Directors and 

Chief Executive Officer (Principal Executive Officer)By
    
    /s/ Darin G. Holderness

Darin G. HoldernessVice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
 Exhibit Number
    
    Exhibit10.1
    
    Indemnification Agreement, dated August 25, 2008, by and
between Concho Resources Inc. and Darin G. Holderness
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K on August 29, 2008, and incorporated herein by
reference).10.2
    
    Employment Agreement, dated August 25, 2008, by and between
Concho Resources Inc. and Darin G. Holderness (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K on
August 29, 2008, and incorporated herein by reference).10.3
    
    Purchase Agreement, dated June 5, 2008, by and among Concho
Resources Inc., James C. Henry and Paula Henry, Henry
Securities Ltd., Henchild LLC, Henry Family Investment
Group, Henry Holding Lap, Henry Energy LP, Aguasal Holding,
HELP Investment LLC, Henry Capital LLC, Henry Operating
LLC, Henry Petroleum LP, Quail Ranch LLC, Aguasal
Management LLC and Aguasal LP (filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K on June 9, 2008, and
incorporated herein by reference).10.4
    
    Common Stock Purchase Agreement, dated June 5, 2008, by and
among Concho Resources Inc. and the Purchasers named
therein (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K on June 9, 2008, and incorporated herein
by reference).10.5
    
    Registration Rights Agreement, dated July 31, 2008, by and
between Concho Ressources Inc. and the Purchasers named
therein (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K on August 6, 2008, and incorporated
herein by reference).10.6
    
    Amended and Restated Credit Agreement, dated July 31, 2008,
by and between Concho Resources Inc., JPMorgan Chase Bank,
N.A., Bank of America, N.A., Calyon New York Branch, ING
Capital LLC and BNP Paribas and certain other lenders party
thereto (filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K on August 6, 2008, 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.