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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-33615
 Concho Resources Inc.
  Delaware
    
    76-0818600(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)550 West Texas Avenue, Suite 100Midland, Texas
    
    79701(Address of principal executive offices)
    
    (Zip code)
 (432) 683-7443  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    iiiItem 1.Consolidated Financial Statements (Unaudited)
    
    
    1Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 4.Controls and Procedures
    
    
    50PART II  OTHER INFORMATION
    
    
    51Item 1.Legal Proceedings
    
    
    51Item 1A.Risk Factors
    
    
    51Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 6.Exhibits
    
    
    51EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2




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




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




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Concho Resources Inc.
 
 Consolidated Balance Sheets
 Unaudited
 March 31,
    
    
    December 31,(in thousands, except share and per share data)
    
    2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,407
    
    
    $
    17,752Accounts receivable, net of allowance for doubtful accounts:Oil and natural gas
    
    
    50,799
    
    
    
    48,793Joint operations and other
    
    
    108,670
    
    
    
    92,833Related parties
    
    
    260
    
    
    
    314Derivative instruments
    
    
    86,082
    
    
    
    113,149Prepaid costs and other
    
    
    4,361
    
    
    
    5,942Total current assets
    
    
    252,579
    
    
    
    278,783Property and equipment, at cost:Oil and natural gas properties, successful efforts method
    
    
    2,791,035
    
    
    
    2,693,574Accumulated depletion and depreciation
    
    
    (357,585
    )
    
    
    (306,990
    )Total oil and natural gas properties, net
    
    
    2,433,450
    
    
    
    2,386,584Other property and equipment, net
    
    
    15,155
    
    
    
    14,820Total property and equipment, net
    
    
    2,448,605
    
    
    
    2,401,404Deferred loan costs, net
    
    
    14,845
    
    
    
    15,701Inventory
    
    
    26,277
    
    
    
    19,956Intangible asset, net  operating rights
    
    
    37,724
    
    
    
    37,768Noncurrent derivative instruments
    
    
    48,649
    
    
    
    61,157Other assets
    
    
    467
    
    
    
    434Total assets
    
    $
    2,829,146
    
    
    $
    2,815,203Liabilities and Stockholders EquityCurrent liabilities:Accounts payable:Trade
    
    $
    22,082
    
    
    $
    7,462Related parties
    
    
    895
    
    
    
    312Other current liabilities:Bank overdrafts
    
    
    4,431
    
    
    
    9,434Revenue payable
    
    
    24,559
    
    
    
    22,286Accrued and prepaid drilling costs
    
    
    133,006
    
    
    
    154,196Derivative instruments
    
    
    2,685
    
    
    
    1,866Deferred income taxes
    
    
    26,504
    
    
    
    37,205Other current liabilities
    
    
    36,343
    
    
    
    38,057Total current liabilities
    
    
    250,505
    
    
    
    270,818Long-term debt
    
    
    670,750
    
    
    
    630,000Noncurrent derivative instruments
    
    
    1,777
    
    
    
    Deferred income taxes
    
    
    572,789
    
    
    
    573,763Asset retirement obligations and other long-term liabilities
    
    
    16,662
    
    
    
    15,468Commitments and contingencies (Note K)Stockholders equity:Common stock, $0.001 par value; 300,000,000 authorized; 85,166,705 and 84,828,824
shares issued at March 31, 2009 and December 31, 2008, respectively
    
    
    85
    
    
    
    85Additional paid-in capital
    
    
    1,013,759
    
    
    
    1,009,025Retained earnings
    
    
    302,944
    
    
    
    316,169Treasury stock, at cost; 3,142 shares at March 31, 2009 and December 31, 2008
    
    
    (125
    )
    
    
    (125
    )Total stockholders equity
    
    
    1,316,663
    
    
    
    1,325,154Total liabilities and stockholders equity
    
    $
    2,829,146
    
    
    $
    2,815,203
 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 March 31,(in thousands, except per share amounts)
    
    2009
    
    
    2008Operating revenues:Oil sales
    
    $
    64,974
    
    
    $
    75,818Natural gas sales
    
    
    21,028
    
    
    
    30,893Total operating revenues
    
    
    86,002
    
    
    
    106,711Operating costs and expenses:Oil and natural gas production
    
    
    24,766
    
    
    
    16,895Exploration and abandonments
    
    
    5,995
    
    
    
    2,741Depreciation, depletion and amortization
    
    
    50,748
    
    
    
    21,284Accretion of discount on asset retirement obligations
    
    
    278
    
    
    
    153Impairments of long-lived assets
    
    
    4,056
    
    
    
    16General and administrative (including non-cash stock-based
compensation of $1,925 and $1,299 for the three months ended
March 31, 2009 and 2008, respectively)
    
    
    11,746
    
    
    
    7,680Ineffective portion of cash flow hedges
    
    
    
    
    
    
    (564
    )Loss on derivatives not designated as hedges
    
    
    5,046
    
    
    
    17,178Total operating costs and expenses
    
    
    102,635
    
    
    
    65,383Income (loss) from operations
    
    
    (16,633
    )
    
    
    41,328Other income (expense):Interest expense
    
    
    (4,370
    )
    
    
    (5,615
    )Other, net
    
    
    (328
    )
    
    
    1,020Total other expense
    
    
    (4,698
    )
    
    
    (4,595
    )Income (loss) before income taxes
    
    
    (21,331
    )
    
    
    36,733Income tax (expense) benefit
    
    
    8,106
    
    
    
    (14,368
    )Net income (loss)
    
    $
    (13,225
    )
    
    $
    22,365Basic earnings per share:Net income (loss) per share
    
    $
    (0.16
    )
    
    $
    0.30Weighted average shares used in basic earnings per share
    
    
    84,529
    
    
    
    75,473Diluted earnings per share:Net income (loss) per share
    
    $
    (0.16
    )
    
    $
    0.29Weighted average shares used in diluted earnings per share
    
    
    84,529
    
    
    
    76,886
 The accompanying notes are an integral part of these consolidated financial statements.
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Concho Resources Inc.
 
 Consolidated Statement of Stockholders Equity
 Unaudited
 Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury Stock
    
    
    Stockholders(in thousands)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    EquityBALANCE
ATDECEMBER 31, 2008
    
    
    84,829
    
    
    $
    85
    
    
    $
    1,009,025
    
    
    $
    316,169
    
    
    
    3
    
    
    $
    (125
    )
    
    $
    1,325,154Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,225
    )
    
    
    
    
    
    
    
    
    
    
    (13,225
    )Stock options exercised
    
    
    248
    
    
    
    
    
    
    
    2,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,005Stock-based compensation for restricted stock
    
    
    91
    
    
    
    
    
    
    
    897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897Cancellation of restricted stock
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation for stock options
    
    
    
    
    
    
    
    
    
    
    1,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,028Excess tax benefits related to stock-based compensation
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    804BALANCE AT MARCH 31, 2009
    
    
    85,167
    
    
    $
    85
    
    
    $
    1,013,759
    
    
    $
    302,944
    
    
    
    3
    
    
    $
    (125
    )
    
    $
    1,316,663
 The accompanying notes are an integral part of these consolidated financial
statements.
 3




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Concho Resources Inc.
 
 Consolidated Statements of Cash Flows
Unaudited
 Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (13,225
    )
    
    $
    22,365Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation, depletion and amortization
    
    
    50,748
    
    
    
    21,284Impairments of long-lived assets
    
    
    4,056
    
    
    
    16Accretion of discount on asset retirement obligations
    
    
    278
    
    
    
    153Exploration expense, including dry holes
    
    
    5,318
    
    
    
    848Non-cash compensation expense
    
    
    1,925
    
    
    
    1,299Deferred income taxes
    
    
    (10,871
    )
    
    
    14,368(Gain) loss on sale of assets
    
    
    243
    
    
    
    (777
    )Ineffective portion of cash flow hedges
    
    
    
    
    
    
    (564
    )Loss on derivatives not designated as hedges
    
    
    5,046
    
    
    
    17,178Dedesignated cash flow hedges reclassified from accumulated other comprehensive
income
    
    
    
    
    
    
    296Other non-cash items
    
    
    813
    
    
    
    334Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (31,744
    )
    
    
    (281
    )Prepaid costs and other
    
    
    1,581
    
    
    
    1,849Inventory
    
    
    (2,371
    )
    
    
    (152
    )Accounts payable
    
    
    15,203
    
    
    
    (11,619
    )Revenue payable
    
    
    2,273
    
    
    
    3,362Other current liabilities
    
    
    11,339
    
    
    
    (154
    )Net cash provided by operating activities
    
    
    40,612
    
    
    
    69,805CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures on oil and natural gas properties
    
    
    (131,559
    )
    
    
    (51,537
    )Additions to other property and equipment
    
    
    (1,078
    )
    
    
    (2,803
    )Proceeds from the sale of oil and natural gas properties and other assets
    
    
    1,000
    
    
    
    1,034Settlements received (paid) on derivatives not designated as hedges
    
    
    37,124
    
    
    
    (3,987
    )Net cash used in investing activities
    
    
    (94,513
    )
    
    
    (57,293
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    100,650
    
    
    
    Payments of long-term debt
    
    
    (59,900
    )
    
    
    (26,500
    )Exercise of stock options
    
    
    2,005
    
    
    
    1,238Excess tax benefit from stock-based compensation
    
    
    804
    
    
    
    593Proceeds from repayment of officer and employee notes
    
    
    
    
    
    
    333Bank overdrafts
    
    
    (5,003
    )
    
    
    (2,908
    )Net cash provided by (used in) financing activities
    
    
    38,556
    
    
    
    (27,244
    )Net decrease in cash and cash equivalents
    
    
    (15,345
    )
    
    
    (14,732
    )Cash and cash equivalents at beginning of period
    
    
    17,752
    
    
    
    30,424Cash and cash equivalents at end of period
    
    $
    2,407
    
    
    $
    15,692SUPPLEMENTAL CASH FLOWS:Cash paid for interest and fees, net of $15 and $475 capitalized interest
    
    $
    3,457
    
    
    $
    6,301Cash paid for income taxes
    
    $
    1,065
    
    
    $
    
 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
 March 31, 2009
 Unaudited
 Note A. Organization and nature of operations
  Note B. Summary of significant accounting policies
 Principles of consolidation.
 Use of estimates in the preparation of financial statements.
 Interim financial statements.
  Deferred loan costs.
 5




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  (in thousands)
    
    TotalRemaining 2009
    
    $
    2,5702010
    
    
    3,4262011
    
    
    3,4262012
    
    
    3,4262013
    
    
    1,997Total
    
    $
    14,845
 Intangible assets.
 (in thousands)Remaining 2009
    
    $
    1,1632010
    
    
    1,5502011
    
    
    1,5502012
    
    
    1,5502013
    
    
    1,550Thereafter
    
    
    30,361Total
    
    $
    37,724
 Oil and natural gas sales and imbalances.
 6




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  March 31,
    
    December 31,(dollars in thousands)
    
    2009
    
    2008Natural gas imbalance liability (included in asset
retirement obligations and other long-term liabilities)
    
    $
    455
    
    
    $
    472Overtake position (Mcf)
    
    
    81,189
    
    
    
    85,698Natural gas imbalance receivable (included in other assets)
    
    $
    439
    
    
    $
    406Undertake position (Mcf)
    
    
    97,578
    
    
    
    90,321
 Three Months Ended March 31,2009
    
    2008Value of net undertake arising during the period
(reducing oil and natural gas production expense)
    
    $
    49
    
    
    $
    4Net undertake position arising during the period (Mcf)
    
    
    11,766
    
    
    
    1,014
 Treasury stock.
 General and administrative expense .
 Reclassifications.
 Recent accounting pronouncements. Business
Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities,
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Determination of
the Useful Life of Intangible Assets Goodwill and Other Intangible
Assets
 The Hierarchy of Generally Accepted Accounting
Principles
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
 Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.
 Interim
Disclosures about Fair Value of Financial Instrument Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, Recognition and Presentation of Other-Than-Temporary Impairments
  
    
    Affirms that the objective of fair value when the market for an asset is not active
is the price that would be received to sell the asset in an orderly transaction.
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 
    
    Clarifies and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that asset is
not active.
    
    Eliminates the proposed presumption that all transactions are distressed (not
orderly) unless proven otherwise. The FSP instead requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the evidence.
    
    Includes an example that provides additional explanation on estimating fair value
when the market activity for an asset has declined significantly.
    
    Requires an entity to disclose a change in valuation technique (and the related
inputs) resulting from the application of the FSP and to quantify its effects, if
practicable.
    
    Applies to all fair value measurements when appropriate.
  Recent developments in reserves reporting. Modernization of Oil and Gas Reporting,
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Note C. Exploratory well costs
   Three Months Ended(in thousands)

    March 31, 2009Beginning capitalized exploratory well costs
    
    $
    25,553Additions to exploratory well costs pending the determination of proved reserves
    
    
    2,537Reclassifications due to determination of proved reserves
    
    
    (25,103
    )Exploratory well costs charged to expense
    
    
    (451
    )Ending capitalized exploratory well costs
    
    $
    2,536
  March 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Wells in drilling progress
    
    $
    
    
    
    $
    7,765Capitalized exploratory well costs that have been capitalized for a period of one year or less
    
    
    2,536
    
    
    
    17,788Capitalized exploratory well costs that have been capitalized for a period greater than one year
    
    
    
    
    
    
    Total capitalized exploratory well costs
    
    $
    2,536
    
    
    $
    25,553
  Note D. Acquisitions
 Henry Entities acquisition.
   10




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
   (in thousands)Fair value of Henry Properties net assets:Current assets, net of cash acquired of $19,049 (a)
    
    $
    86,321Proved oil and natural gas properties
    
    
    594,065Unproved oil and natural gas properties
    
    
    233,790Other long-term assets
    
    
    6,977Intangible assets  operating rights
    
    
    38,758Total assets acquired
    
    
    959,911Current liabilities
    
    
    (113,729
    )Asset retirement obligations and other long-term liabilities
    
    
    (7,529
    )Noncurrent derivative liabilities
    
    
    (39,037
    )Deferred tax liability
    
    
    (215,475
    )Total liabilities assumed
    
    
    (375,770
    )Net purchase price
    
    $
    584,141Consideration paid for Henry Properties net assets:Cash consideration paid, net of cash acquired of $19,049
    
    $
    578,491Acquisition costs (b)
    
    
    5,650Total purchase price
    
    $
    584,141
 
 (a)
    
    Includes a deferred tax asset of approximately $9.0 million.(b)
    
    Estimated acquisition costs include legal and accounting fees, advisory fees and other
acquisition-related costs. 11




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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Three Months Ended(in thousands, except per share data)
    
    March 31, 2008Operating revenues
    
    $
    154,424Net income
    
    $
    14,542Earnings per common share:Basic
    
    $
    0.17Diluted
    
    $
    0.17
 Note E. Asset retirement obligations
   Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Asset retirement obligations, beginning of period
    
    $
    16,809
    
    
    $
    9,418Liabilities incurred from new wells
    
    
    168
    
    
    
    34Accretion expense
    
    
    278
    
    
    
    153Disposition of wells sold
    
    
    (142
    )
    
    
    Liabilities settled upon plugging and abandoning wells
    
    
    (10
    )
    
    
    Revision of estimates
    
    
    1,151
    
    
    
    (810
    )Asset retirement obligations, end of period
    
    $
    18,254
    
    
    $
    8,795
 Note F. Stockholders equity
 Common stock private placement.
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Treasury stock.
 Note G. Incentive plans
 Defined contribution plan.
 Stock incentive plan.
 Number ofCommon SharesApproved and authorized awards
    
    
    5,850,000Stock option grants, net of forfeitures
    
    
    (3,461,485
    )Restricted stock grants, net of forfeitures
    
    
    (602,334
    )Awards available for future grant
    
    
    1,786,181
 Restricted stock awards.
 Number of
    
    Grant DateRestricted
    
    Fair ValueShares
    
    Per ShareOutstanding at December 31, 2008
    
    
    407,351Shares granted
    
    
    90,688
    
    
    $
    20.40Shares cancelled / forfeited
    
    
    (1,163
    )Lapse of restrictions
    
    
    (12,500
    )Outstanding at March 31, 2009
    
    
    484,376
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Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Three Months Ended March 31,(in thousands)
    
    2009
    
    2008Stock-based compensation expense related to restricted stock
    
    $
    897
    
    
    $
    394Income tax benefit related to restricted stock
    
    $
    341
    
    
    $
    154Deductions in current taxable income related to restricted stock
    
    $
    378
    
    
    $
    
 Stock option awards.
 WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at December 31, 2008
    
    
    2,731,324
    
    
    $
    12.46Options granted
    
    
    117,801
    
    
    $
    20.40Options exercised
    
    
    (248,356
    )
    
    $
    8.08Outstanding at March 31, 2009
    
    
    2,600,769
    
    
    $
    13.24Vested at end of period
    
    
    1,747,913
    
    
    $
    9.89Vested and exercisable at end of period
    
    
    922,921
    
    
    $
    11.42
 14




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  WeightedAverage
    
    
    WeightedNumber of
    
    
    Remaining
    
    
    AverageStock
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicOptions
    
    
    Life
    
    
    Price
    
    
    Value(in thousands)Vested options:March 31, 2009:Exercise price
    
    $
    8.00
    
    
    
    1,311,633
    
    
    2.68 years
    
    $
    8.00
    
    
    $
    23,072Exercise price
    
    $
    12.00
    
    
    
    138,780
    
    
    4.86 years
    
    $
    12.00
    
    
    
    1,886Exercise price
    
    $
    14.68
    
    
    
    191,250
    
    
    7.54 years
    
    $
    14.68
    
    
    
    2,086Exercise price
    
    $
    21.84
    
    
    
    106,250
    
    
    8.91 years
    
    $
    21.84
    
    
    
    3991,747,913
    
    
    
    
    
    
    $
    9.89
    
    
    $
    27,443Vested and exercisable options:March 31, 2009:Exercise price
    
    $
    8.00
    
    
    
    522,602
    
    
    3.34 years
    
    $
    8.00
    
    
    $
    9,193Exercise price
    
    $
    12.00
    
    
    
    102,819
    
    
    5.77 years
    
    $
    12.00
    
    
    
    1,397Exercise price
    
    $
    14.68
    
    
    
    191,250
    
    
    7.54 years
    
    $
    14.68
    
    
    
    2,086Exercise price
    
    $
    21.84
    
    
    
    106,250
    
    
    8.91 years
    
    $
    21.84
    
    
    
    399922,921
    
    
    
    
    
    
    $
    11.42
    
    
    $
    13,075
 15




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Grant date fair value for awards during the period:Time vesting options
    
    $
    
    
    
    $
    183Stock option grants under the Plan
    
    1,454
    
    
    4,296Total
    
    $
    1,454
    
    
    $
    4,479Stock-based compensation expense from stock options:Time vesting options
    
    $
    71
    
    
    $
    30Performance vesting options:Officers
    
    
    71
    
    
    
    150Stock option grants under the Plan
    
    
    886
    
    
    
    725Total
    
    $
    1,028
    
    
    $
    905Income taxes and other information:Income tax benefit related to stock options
    
    $
    391
    
    
    $
    354Deductions in current taxable income related to stock options exercised
    
    $
    3,040
    
    
    $
    
  Risk-free interest rate
    
    
    2.46
    %Expected term (years)
    
    
    6.25Expected volatility
    
    
    63.40
    %Expected dividend yield
    
    
    
 Share-Based Payment
 16




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Future stock-based compensation expense.
 Restricted
    
    
    Stock(in thousands)
    
    Stock
    
    
    Options
    
    
    TotalRemaining 2009
    
    $
    2,568
    
    
    $
    2,309
    
    
    $
    4,8772010
    
    
    1,895
    
    
    
    1,694
    
    
    
    3,5892011
    
    
    699
    
    
    
    706
    
    
    
    1,4052012
    
    
    143
    
    
    
    166
    
    
    
    3092013
    
    
    14
    
    
    
    14
    
    
    
    28Total
    
    $
    5,319
    
    
    $
    4,889
    
    
    $
    10,208
 Note H. Disclosures about fair value of financial instruments
 Fair Value Measurements Effective Date of FASB Statement No. 157,
 Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. The Company considers
active markets to be those in which transactions for the assets or liabilities occur in
sufficient frequency and volume to provide pricing information on an ongoing basis.Level 2:
    
    Quoted prices in markets that are not active, or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or liability.
This category includes those derivative instruments that the Company values using
observable market data. Substantially all of these inputs are observable in the
marketplace throughout the full term of the derivative instrument, can be derived from
observable data, or supported by observable levels at which transactions are executed in
the marketplace. Level 2 instruments primarily include non-exchange traded derivatives
such as over-the-counter commodity price swaps, basis swaps, investments and interest
rate swaps. The Companys valuation models are primarily industry-standard models that
consider various inputs including: (i) quoted forward prices for commodities, (ii) time
value and (iii) current market and contractual prices for the underlying instruments, as
well as other relevant economic measures. The Company utilizes 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 commodity price collars and floors, as well as
investments. The Companys valuation models are primarily industry-standard models that
consider various inputs including: (i) quoted forward prices for commodities, (ii) time
value, (iii) volatility factors and (iv) current market and contractual prices for the
underlying instruments, as well as other relevant economic measures. Although the
Company utilizes 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.
 17




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Cash and cash equivalents, accounts receivable, other current assets, accounts payable,
interest payable and other current liabilities.
 Line of credit and term note.
 18




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 Derivative instruments.
 Fair value measurements usingQuoted
    
    
    Significant
    
    
    
    
    
    
    Totalprices
    
    
    other
    
    
    Significant
    
    
    carrying valuein active
    
    
    observable
    
    
    unobservable
    
    
    atmarkets
    
    
    inputs
    
    
    inputs
    
    
    March 31,(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2009Assets(1)Current:(a)Commodity derivative price swap
contracts
    
    $
    
    
    
    $
    56,316
    
    
    $
    
    
    
    $
    56,316Commodity derivative basis swap
contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate derivative swap contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commodity derivative price collar
contracts
    
    
    
    
    
    
    
    
    
    
    36,870
    
    
    
    36,870
    
    
    
    56,316
    
    
    
    36,870
    
    
    
    93,186Noncurrent:(b)Commodity derivative price swap
contracts
    
    
    
    
    
    
    58,773
    
    
    
    
    
    
    
    58,773Commodity derivative basis swap
contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate derivative swap contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commodity derivative price collar
contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,773
    
    
    
    
    
    
    
    58,773Liabilities(1)Current:(a)Commodity derivative price swap
contracts
    
    
    
    
    
    
    (4,281
    )
    
    
    
    
    
    
    (4,281
    )Commodity derivative basis swap
contracts
    
    
    
    
    
    
    (1,007
    )
    
    
    
    
    
    
    (1,007
    )Interest rate derivative swap contracts
    
    
    
    
    
    
    (3,072
    )
    
    
    
    
    
    
    (3,072
    )Commodity derivative price collar
contracts
    
    
    
    
    
    
    
    
    
    
    (1,429
    )
    
    
    (1,429
    )
    
    
    
    (8,360
    )
    
    
    (1,429
    )
    
    
    (9,789
    )Noncurrent:(b)Commodity derivative price swap
contracts
    
    
    
    
    
    
    (9,198
    )
    
    
    
    
    
    
    (9,198
    )Commodity derivative basis swap
contracts
    
    
    
    
    
    
    (569
    )
    
    
    
    
    
    
    (569
    )Interest rate derivative swap contracts
    
    
    
    
    
    
    (437
    )
    
    
    
    
    
    
    (437
    )Commodity derivative price collar
contracts
    
    
    
    
    
    
    
    
    
    
    (1,697
    )
    
    
    (1,697
    )
    
    
    
    (10,204
    )
    
    
    (1,697
    )
    
    
    (11,901
    )Total financial assets (liabilities)
    
    $
    
    
    
    $
    96,525
    
    
    $
    33,744
    
    
    $
    130,269
 
 (a)Total current financial assets
(liabilities), gross basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    83,397(b)Total noncurrent financial
assets (liabilities), gross basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,872Total financial assets
(liabilities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    130,269
 19




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##### Table of Contents



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




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 
 (1)
    
    The fair value of derivative instruments reported in the consolidated balance sheets
are subject to master netting arrangements and qualify for net presentation. The
following table reports the net basis derivative fair values as reported in the
consolidated balance sheets at March 31, 2009 and December 31, 2008: March 31,
    
    
    December 31,2009
    
    
    2008Consolidated Balance Sheet Classification:Current derivative contracts:Assets
    
    $
    86,082
    
    
    $
    113,149Liabilities
    
    
    (2,685
    )
    
    
    (1,866
    )Net current
    
    $
    83,397
    
    
    $
    111,283Noncurrent derivative contracts:Assets
    
    $
    48,649
    
    
    $
    61,157Liabilities
    
    
    (1,777
    )
    
    
    Net noncurrent
    
    $
    46,872
    
    
    $
    61,157
  (in thousands)|Balance at January 1, 2009
    
    $
    49,562Realized and unrealized gains
    
    
    (1,056
    )Purchases, issuances, and settlements
    
    
    (14,762
    )Balance at March 31, 2009
    
    $
    33,744Total losses for the period included in earnings attributable to the change in unrealized losses relating to assets
still held at the reporting date
    
    $
    (15,818
    )
  Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
  Impairments of long-lived assets  Accounting for the
Impairment or Disposal of Long-Lived Assets
 21




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Asset Retirement Obligations 
  Fair value measurements usingQuoted
    
    Significantprices
    
    other
    
    Significantin active
    
    observable
    
    unobservable
    
    Totalmarkets
    
    inputs
    
    inputs
    
    Impairment(in thousands)
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    LossThree months ended March 31, 2009:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    2,887
    
    
    $
    (4,056
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    168Three months ended March 31, 2008:Impairment of long-lived assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (16
    )Asset retirement obligations incurred in current period
    
    
    
    
    
    
    
    
    
    
    34
 Note I. Derivative financial instruments
   22




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 New commodity derivatives contracts in 2009.
 Aggregate
    
    Daily
    
    Index
    
    ContractVolume
    
    Volume
    
    Price
    
    PeriodOil (volumes in Bbls):Price swap
    
    
    540,000
    
    
    
    2,935
    
    
    $51.62 (a)
    
    7/1/09 - 12/31/09Price swap
    
    
    1,608,000
    
    
    
    4,405
    
    
    $55.83 (a)
    
    1/1/10 - 12/31/10Price collar
    
    
    600,000
    
    
    
    6,522
    
    

$45.00 - $49.00(a) (e)
    
    3/1/09 - 5/31/09Natural gas (volumes in MMBtus):Price swap
    
    
    3,000,000
    
    
    
    16,393
    
    
    $4.31 (b)
    
    4/1/09 - 9/30/09Price collar
    
    
    9,000,000
    
    
    
    16,453
    
    
    $5.42 -
$6.12(c) (e)
    
    10/1/09 - 3/31/11Basis swap
    
    
    7,500,000
    
    
    
    16,484
    
    
    $0.90 (d)
    
    1/1/10 - 3/31/11
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas
Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price swap is based on the NYMEX-Henry Hub last trading
day futures price.(c)
    
    The index price for the natural gas price collar is based on the NYMEX-Henry Hub last trading
day futures price.(d)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub delivery
point.(e)
    
    Prices represent weighted average prices.  23




---



##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Commodity derivative contracts at March 31, 2009.
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalOil Swaps:2009:Volume (Bbl)
    
    
    
    
    
    
    452,673
    
    
    
    725,473
    
    
    
    725,473
    
    
    
    1,903,619Price per Bbl (a) (f)
    
    
    
    
    
    $
    87.17
    
    
    $
    73.91
    
    
    $
    73.91
    
    
    $
    77.062010:Volume (Bbl)
    
    
    562,436
    
    
    
    562,436
    
    
    
    562,436
    
    
    
    562,436
    
    
    
    2,249,744Price per Bbl (a)
    
    $
    66.50
    
    
    $
    66.50
    
    
    $
    66.50
    
    
    $
    66.50
    
    
    $
    66.502011:Volume (Bbl)
    
    
    139,436
    
    
    
    139,436
    
    
    
    139,436
    
    
    
    139,436
    
    
    
    557,744Price per Bbl (a) (f)
    
    $
    104.91
    
    
    $
    104.91
    
    
    $
    104.91
    
    
    $
    104.91
    
    
    $
    104.912012:Volume (Bbl)
    
    
    126,000
    
    
    
    126,000
    
    
    
    126,000
    
    
    
    126,000
    
    
    
    504,000Price per Bbl (a)
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80
    
    
    $
    127.80Oil Collars:2009:Volume (Bbl)
    
    
    
    
    
    
    592,000
    
    
    
    192,000
    
    
    
    192,000
    
    
    
    976,000Price per Bbl (a)
    
    
    
    
    
    $
    69.32 - $76.76
    (f)
    
    $
    120.00 - $134.60
    
    
    $
    120.00 - $134.60
    
    
    $
    89.26 - $99.52
    (f)Natural Gas Swaps:2009:Volume (MMBtu)
    
    
    
    
    
    
    455,000
    
    
    
    460,000
    
    
    
    460,000
    
    
    
    1,375,000Price per MMBtu (b)
    
    
    
    
    
    $
    8.44
    
    
    $
    8.44
    
    
    $
    8.44
    
    
    $
    8.442009:Volume (MMBtu)
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    
    
    
    
    3,000,000Price per MMBtu (c)
    
    
    
    
    
    $
    4.31
    
    
    $
    4.31
    
    
    
    
    
    
    $
    4.31Natural Gas Collars:2009:Volume (MMBtu)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000Price per MMBtu (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.00 - $5.81
    
    
    $
    5.00 - $5.812010:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    6,000,000Price per MMBtu (d)
    
    $
    5.00 - $5.81
    
    
    $
    5.25 - $5.75
    
    
    $
    5.25 - $5.75
    
    
    $
    6.00 - $6.80
    
    
    $
    5.38 - $6.03
    (f)2011:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000Price per MMBtu (d)
    
    $
    6.00 - $6.80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6.00 - $6.80
 24




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalNatural Gas Basis Swaps:2009:Volume (MMBtu)
    
    
    
    
    
    
    1,501,500
    
    
    
    1,518,000
    
    
    
    1,518,000
    
    
    
    4,537,500Price per MMBtu (e) (f)
    
    
    
    
    
    $
    1.08
    
    
    $
    1.08
    
    
    $
    1.08
    
    
    $
    1.082010:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    1,500,000
    
    
    
    6,000,000Price per MMBtu (e)
    
    $
    0.90
    
    
    $
    0.90
    
    
    $
    0.90
    
    
    $
    0.90
    
    
    $
    0.902011:Volume (MMBtu)
    
    
    1,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000Price per MMBtu (e)
    
    $
    0.90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.90
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas
Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price swap is based on the Inside FERC-El Paso Permian
Basin first-of-the-month spot price.(c)
    
    The index price for the natural gas price swap is based on the NYMEX-Henry Hub last trading
day futures price.(d)
    
    The index price for the natural gas price collar is based on the NYMEX-Henry Hub last trading
day futures price.(e)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub delivery
point.(f)
    
    Prices represent weighted average prices. Interest rate derivative contracts at March 31, 2009.
 25




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 :
 Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Decrease in oil and natural gas revenue from derivative activity:Cash payments on cash flow hedges in oil sales
    
    $
    
    
    
    $
    (7,206
    )Cash receipts from cash flow hedges in natural gas sales
    
    
    
    
    
    
    1Dedesignated cash flow hedges reclassified from AOCI in natural gas sales
    
    
    
    
    
    
    (296
    )Total decrease in oil and natural gas revenue from derivative activity
    
    $
    
    
    
    $
    (7,501
    )Loss on derivatives not designated as hedges:Mark-to-market loss:Commodity derivatives
    
    $
    (39,743
    )
    
    $
    (13,191
    )Interest rate derivatives
    
    
    (2,427
    )
    
    
    Cash (payments) receipts on derivatives not designated as hedges:Commodity derivatives
    
    
    37,124
    
    
    
    (3,987
    )Interest rate derivatives
    
    
    
    
    
    
    Total loss on derivatives not designated as hedges
    
    $
    (5,046
    )
    
    $
    (17,178
    )Gain from ineffective portion of cash flow hedges
    
    $
    
    
    
    $
    564Accumulated other comprehensive income (loss):Cash flow hedges:Mark-to-market loss of cash flow hedges
    
    $
    
    
    
    $
    (6,606
    )Reclassification adjustment of losses to earnings
    
    
    
    
    
    
    7,205Net AOCI upon dedesignation at June 30, 2007
    
    
    
    
    
    
    Net change, before income taxes
    
    
    
    
    
    
    599Income tax effect
    
    
    
    
    
    
    (233
    )Net change, net of income taxes
    
    $
    
    
    
    $
    366Dedesignated cash flow hedges:Net AOCI upon dedesignation at June 30, 2007
    
    $
    
    
    
    $
    Reclassification adjustment of losses to earnings
    
    
    
    
    
    
    296Income tax effect
    
    
    
    
    
    
    (116
    )Net change, net of income taxes
    
    $
    
    
    
    $
    180
 26




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Note J. Debt
  March 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Credit facility
    
    $
    670,750
    
    
    $
    630,000Less: current portion
    
    
    
    
    
    
    Total long-term debt
    
    $
    670,750
    
    
    $
    630,000
 Credit facility.
     27




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Principal maturities of debt.
 (in thousands)Remaining 2009
    
    $
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    670,750Total
    
    $
    670,750
 Interest expense.
 Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Cash payments for interest
    
    $
    3,472
    
    
    $
    6,776Amortization of original issue discount
    
    
    
    
    
    
    25Amortization of deferred loan origination costs
    
    
    856
    
    
    
    312Write-off of deferred loan origination costs and original issue discount
    
    
    
    
    
    
    Net changes in accruals
    
    
    57
    
    
    
    (1,023
    )Interest costs incurred
    
    
    4,385
    
    
    
    6,090Less: capitalized interest
    
    
    (15
    )
    
    
    (475
    )Total interest expense
    
    $
    4,370
    
    
    $
    5,615
 Note K. Commitments and contingencies
 Severance agreements.
 Indemnifications .
 Legal actions .
 Acquisition commitments .
 28




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Daywork commitments.
 Payments Due By PeriodLess than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than(in thousands)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsDaywork drilling contracts
    
    $
    1,482
    
    
    $
    1,482
    
    
    $
    
    
    
    $
    
    
    
    $
    Daywork drilling contracts with related parties (a)
    
    
    6,100
    
    
    
    6,100
    
    
    
    
    
    
    
    
    
    
    
    Daywork drilling contracts assumed in the Henry Properties
acquisition (b)
    
    
    2,179
    
    
    
    1,817
    
    
    
    362
    
    
    
    
    
    
    
    Total contractual drilling commitments
    
    $
    9,761
    
    
    $
    9,399
    
    
    $
    362
    
    
    $
    
    
    
    $
    
 
 (a)
    
    Consists of daywork drilling contracts with Silver Oak Drilling, LLC, an affiliate
of Chase Oil Corporation.(b)
    
    A major oil and gas company which owns an interest in the wells being drilled and
the Company are parties to these contracts. Only the Companys 25% share of the contract
obligation has been reflected above. Operating leases.
 (in thousands)Remaining 2009
    
    $
    9752010
    
    
    9782011
    
    
    9942012
    
    
    9812013
    
    
    572Total
    
    $
    4,500
 Note L. Income taxes
 Accounting for Income Taxes
 Accounting for Uncertainty
in Income Taxes, Accounting for Income
Taxes,
 29




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Definition of Settlement in FASB Interpretation No. 48,
 Income tax provision.
 Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Income (loss) from operations
    
    $
    (8,106
    )
    
    $
    14,368Changes in stockholders equity:Net deferred hedge losses
    
    
    
    
    
    
    (2,582
    )Net settlement losses included in earnings
    
    
    
    
    
    
    2,932Tax benefits related to stock-based compensation
    
    
    (804
    )
    
    
    (593
    )$
    (8,910
    )
    
    $
    14,125
  Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Current:U.S. federal
    
    $
    2,438
    
    
    $
    U.S. state and local
    
    
    327
    
    
    
    2,765
    
    
    
    Deferred:U.S. federal
    
    
    (9,585
    )
    
    
    12,054U.S. state and local
    
    
    (1,286
    )
    
    
    2,314(10,871
    )
    
    
    14,368$
    (8,106
    )
    
    $
    14,368
 30




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Income (loss) at U.S. federal statutory rate
    
    $
    (7,466
    )
    
    $
    12,857State income taxes (net of federal tax effect)
    
    
    (623
    )
    
    
    1,504Nondeductible expense & other
    
    
    (17
    )
    
    
    7Expense (benefit) for income taxes
    
    $
    (8,106
    )
    
    $
    14,368
 Note M. Related parties
 Chase Group transactions.
  Saltwater disposal services agreement.
 Other related party transactions.
   Overriding royalty and royalty interests.
  31




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
  Working interests owned by employees.
 Note N. Net income (loss) per share
    Three Months Ended March 31,(in thousands)
    
    2009
    
    2008Weighted average common shares outstanding:Basic
    
    
    84,529
    
    
    
    75,473Dilutive capital options
    
    
    
    
    
    
    23Dilutive common stock options
    
    
    
    
    
    
    1,156Dilutive restricted stock
    
    
    
    
    
    
    234Diluted
    
    
    84,529
    
    
    
    76,886
   32




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Note O. Other current liabilities
  March 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Other current liabilities:Accrued production costs
    
    $
    20,455
    
    
    $
    15,489Payroll related matters
    
    
    12,625
    
    
    
    11,290Accrued interest
    
    
    410
    
    
    
    353Asset retirement obligations
    
    
    2,853
    
    
    
    2,611Other
    
    
    
    
    
    
    8,314Other current liabilities
    
    $
    36,343
    
    
    $
    38,057
 33




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##### Table of Contents



Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2009
Unaudited
 Note P. Supplementary information
 Capitalized costs
 March 31,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Oil and natural gas properties:Proved
    
    $
    2,453,517
    
    
    $
    2,316,330Unproved
    
    
    337,518
    
    
    
    377,244Less: accumulated depletion
    
    
    (357,585
    )
    
    
    (306,990
    )Net capitalized costs for oil and natural gas properties
    
    $
    2,433,450
    
    
    $
    2,386,584Costs incurred for oil and natural gas producing activities(a)Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Property acquisition costs:(b)Proved
    
    $
    (940
    )
    
    $
    105Unproved
    
    
    1,221
    
    
    
    762Exploration
    
    
    23,809
    
    
    
    29,565Development
    
    
    83,779
    
    
    
    24,877Total costs incurred for oil and natural gas properties
    
    $
    107,869
    
    
    $
    55,309(a)  The costs incurred for oil and natural gas producing activities includes the following
amounts of asset retirement obligations:Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Proved property acquisition costs
    
    $
    
    
    
    $
    Exploration costs
    
    
    168
    
    
    
    26Development costs
    
    
    999
    
    
    
    (802
    )Total
    
    $
    1,167
    
    
    $
    (776
    )
 
 (b)
    
    During the three months ended March 31, 2009, the Company adjusted the purchase price
allocation related to the acquisition of the Henry Properties. This adjustment reduced the
proved acquisition costs by $940,000 and increased the unproved acquisition costs by $591,000. 34




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Overview
  Commodity prices
  
    
    developments generally impacting the Middle East, specifically Iraq and Iran;
    
    the extent to which members of the Organization of Petroleum Exporting Countries
(OPEC) and other oil exporting nations are able to continue to manage oil supply through
export quotas;
    
    the overall global demand for oil; and
    
    overall North American natural gas supply and demand fundamentals, including:
 §
    
    the impact of the decline of the United States economy,§
    
    weather conditions and§
    
    liquefied natural gas deliveries to the United States.
   35




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##### Table of Contents



Henry Entities acquisition
  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
  
    
    reduced our operated drilling rig
 count in the Wolfberry play from eight to five;
    
    deferred our deepening program on our Southeastern New Mexico shelf properties;
and
    
    deferred certain drilling activity in the Lower Abo horizontal play.
   Recent events
 Reaffirmed borrowing base.
 36




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##### Table of Contents



Short-term interruptions in production
 Derivative financial instrument exposure.
  New commodity derivative contracts.
 Aggregate
    
    Daily
    
    Index
    
    ContractVolume
    
    Volume
    
    Price
    
    PeriodOil (volumes in Bbls):Price swap
    
    
    540,000
    
    
    
    2,935
    
    
    $51.62 (a)
    
    7/1/09 - 12/31/09Price swap
    
    
    1,608,000
    
    
    
    4,405
    
    
    $55.83 (a)
    
    1/1/10 - 12/31/10Price collar
    
    
    600,000
    
    
    
    6,522
    
    

$45.00 - $49.00(a) (e)
    
    3/1/09 - 5/31/09Natural gas (volumes in MMBtus):Price swap
    
    
    3,000,000
    
    
    
    16,393
    
    
    $4.31 (b)
    
    4/1/09 - 9/30/09Price collar
    
    
    9,000,000
    
    
    
    16,453
    
    
    $5.42 -
$6.12(c) (e)
    
    10/1/09 - 3/31/11Basis swap
    
    
    7,500,000
    
    
    
    16,484
    
    
    $0.90 (d)
    
    1/1/10 - 3/31/11
 
 (a)
    
    The index prices for the oil price swaps and collars are based on the NYMEX-West Texas
Intermediate monthly average futures price.(b)
    
    The index price for the natural gas price swap is based on the NYMEX-Henry Hub last trading
day futures price.(c)
    
    The index price for the natural gas price collar is based on the NYMEX-Henry Hub last
trading day futures price.(d)
    
    The basis differential between the El Paso Permian delivery point and NYMEX Henry Hub
delivery point.(e)
    
    Prices represent weighted average prices. 37




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##### Table of Contents



Results of Operations
  Three Months Ended March 31,2009
    
    2008Net production volumes:Oil (MBbl)
    
    
    1,687
    
    
    
    887Natural gas (MMcf)
    
    
    4,955
    
    
    
    3,105Total (MBoe)
    
    
    2,513
    
    
    
    1,405Average daily production volumes:Oil (Bbl)
    
    
    18,744
    
    
    
    9,747Natural gas (Mcf)
    
    
    55,056
    
    
    
    34,121Total (Boe)
    
    
    27,922
    
    
    
    15,440Average prices:Oil, without hedges (Bbl)
    
    $
    38.51
    
    
    $
    93.60Oil, with hedges (Bbl)
    
    $
    38.51
    
    
    $
    85.48Natural gas, without hedges (Mcf)
    
    $
    4.24
    
    
    $
    10.04Natural gas, with hedges (Mcf)
    
    $
    4.24
    
    
    $
    9.95Total, without hedges (Boe)
    
    $
    34.22
    
    
    $
    81.29Total, with hedges (Boe)
    
    $
    34.22
    
    
    $
    75.95
 38




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##### Table of Contents



Three months ended March 31, 2009, compared to three months ended March 31, 2008
 Oil and natural gas revenues.
 
    
    average realized oil price (after giving effect to hedging activities) was $38.51 per
Bbl during the three months ended March 31, 2009, a decrease of 55 percent from $85.48
per Bbl during the three months ended March 31, 2008;
    
    total oil production was 1,687 MBbl for the three months ended March 31, 2009, an
increase of 800 MBbl (90 percent) from 887 MBbl for the three months ended March 31,
2008;
    
    average realized natural gas price (after giving effect to hedging activities) was
$4.24 per Mcf during the three months ended March 31, 2009, a decrease of 57 percent
from $9.95 per Mcf during the three months ended March 31, 2008;
    
    total natural gas production was 4,955 MMcf for the three months ended March 31,
2009, an increase of 1,850 MMcf (60 percent) from 3,105 MMcf for the three months ended
March 31, 2008;
    
    average realized barrel of oil equivalent price (after giving effect to hedging
activities) was $34.22 per Boe during the three months ended March 31, 2009, a decrease
of 55 percent from $75.95 per Boe during the three months ended March 31, 2008; and
    
    total production was 2,513 MBoe for the three months ended March 31, 2009, an
increase of 1,108 MBoe (79 percent) from 1,405 MBoe for the three months ended March 31,
2008.
  Hedging activities.
   Oil Hedges
    
    Natural Gas HedgesThree Months Ended
    
    Three Months EndedMarch 31, 2008
    
    March 31, 2008Hedging revenue increase (decrease) (in thousands)
    
    $
    (7,206
    )
    
    $
    (296
    )Hedged volumes (Bbls and MMBtus, respectively)
    
    
    236,600
    
    
    
    1,228,500Hedged revenue increase (decrease) per hedged volume
    
    $
    (30.46
    )
    
    $
    (0.24
    )
 39




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##### Table of Contents



Production expenses.
 Three Months Ended March 31,2009
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeLease operating expenses
    
    $
    16,568
    
    
    $
    6.59
    
    
    $
    6,942
    
    
    $
    4.94Taxes:Ad valorem
    
    
    1,502
    
    
    
    0.60
    
    
    
    488
    
    
    
    0.35Production
    
    
    6,275
    
    
    
    2.50
    
    
    
    9,078
    
    
    
    6.46Workover costs
    
    
    421
    
    
    
    0.17
    
    
    
    387
    
    
    
    0.28Total oil and gas production expenses
    
    $
    24,766
    
    
    $
    9.86
    
    
    $
    16,895
    
    
    $
    12.03
      Exploration and abandonments expense.
 Three Months Ended March 31,(in thousands)
    
    2009
    
    
    2008Geological and geophysical
    
    $
    677
    
    
    $
    1,893Exploratory dry holes
    
    
    1,421
    
    
    
    18Leasehold abandonments and other
    
    
    3,897
    
    
    
    830Total exploration and abandonments
    
    $
    5,995
    
    
    $
    2,741
  40




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##### Table of Contents



.
 Depreciation, depletion and amortization expense.
 Three Months Ended March 31,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeDepletion of proved oil and natural gas properties
    
    $
    49,777
    
    
    $
    19.81
    
    
    
    $20,926
    
    
    $
    14.89Depreciation of other property and equipment
    
    
    578
    
    
    
    0.23
    
    
    
    358
    
    
    
    0.25Amortization of intangible asset  operating rights
    
    
    393
    
    
    
    0.16
    
    
    
    
    
    
    
    Total depletion, depreciation and amortization
    
    $
    50,748
    
    
    $
    20.20
    
    
    
    $21,284
    
    
    $
    15.14Crude oil price used to estimate proved oil reserves at period end
    
    $
    44.63
    
    
    
    
    
    
    $
    98.00Natural gas price used to estimate proved gas reserves at period end
    
    $
    3.63
    
    
    
    
    
    
    $
    9.37
   Impairment of long-lived assets.
 41




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##### Table of Contents



General and administrative expenses.
 Three Months Ended March 31,2009
    
    
    2008Per
    
    
    
    
    
    
    Per(in thousands, except per unit amounts)
    
    Amount
    
    
    Boe
    
    
    Amount
    
    
    BoeGeneral and administrative expenses  recurring
    
    $
    9,914
    
    
    $
    3.95
    
    
    $
    6,620
    
    
    $
    4.71Non-recurring bonus paid to former Henry Entities employees
    
    
    2,561
    
    
    
    1.02
    
    
    
    
    
    
    
    Non-cash stock-based compensation  stock options
    
    
    1,028
    
    
    
    0.41
    
    
    
    905
    
    
    
    0.64Non-cash stock-based compensation  restricted stock
    
    
    897
    
    
    
    0.36
    
    
    
    394
    
    
    
    0.28Less: Third-party operating fee reimbursements
    
    
    (2,654
    )
    
    
    (1.06
    )
    
    
    (239
    )
    
    
    (0.16
    )Total general and administrative expenses
    
    $
    11,746
    
    
    $
    4.68
    
    
    $
    7,680
    
    
    $
    5.47
    Loss on derivatives not designated as hedges.
  Interest expense.
  42




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##### Table of Contents



Income tax provisions.
 Capital Commitments, Capital Resources and Liquidity
 Capital commitments.
 Oil and natural gas properties.
  
    
    reduced our operated drilling rig count in the Wolfberry play from eight to five;
    
    deferred our deepening program on our Southeastern New Mexico shelf properties; and
    
    deferred certain drilling activity in the Lower Abo horizontal play.
    Acquisitions.
 Contractual obligations.
 43




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##### Table of Contents



Off-balance sheet arrangements.
 Capital resources.
 Cash flow from operating activities.
 Cash flow used in investing activities.
 Cash flow from financing activities.
     Financial markets.
  44




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##### Table of Contents



Liquidity.
  Book capitalization and current ratio.
 Inflation and changes in prices.
 Critical Accounting Policies, Practices and Estimates
    45




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##### Table of Contents



Recent Accounting Pronouncements and Developments
 Recent accounting pronouncements. Business
Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities,
 Determination of
the Useful Life of Intangible Assets Goodwill and Other
Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
 Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.
 46




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##### Table of Contents



Interim
Disclosures about Fair Value of Financial Instrument Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, Recognition and Presentation of Other-Than-Temporary Impairments
  
    
    Affirms that the objective of fair value when the market for an asset is not active
is the price that would be received to sell the asset in an orderly transaction.
    
    Clarifies and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that asset is
not active.
    
    Eliminates the proposed presumption that all transactions are distressed (not
orderly) unless proven otherwise. The FSP instead requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the evidence.
    
    Includes an example that provides additional explanation on estimating fair value
when the market activity for an asset has declined significantly.
    
    Requires an entity to disclose a change in valuation technique (and the related
inputs) resulting from the application of the FSP and to quantify its effects, if
practicable.
    
    Applies to all fair value measurements when appropriate.
  Recent developments in reserves reporting. Modernization of Oil and Gas Reporting,
 47




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Credit risk.
 Commodity price risk.
  Interest rate risk.
 48




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##### Table of Contents



Derivative Instruments Net Assets (Liabilities)(a)(in thousands)
    
    Commodities
    
    
    Interest Rate
    
    
    TotalFair value of contracts outstanding at December 31, 2008
    
    $
    173,523
    
    
    $
    (1,083
    )
    
    $
    172,440Changes in fair values (b)
    
    
    (2,620
    )
    
    
    (2,426
    )
    
    
    (5,046
    )Contract maturities
    
    
    (37,125
    )
    
    
    
    
    
    
    (37,125
    )Fair value of contracts outstanding at March 31, 2009
    
    $
    133,778
    
    
    $
    (3,509
    )
    
    $
    130,269
 
 (a)
    
    Represents the fair values of open derivative contracts subject to market risk.(b)
    
    At inception, new derivative contracts entered into by us have no intrinsic value. 49




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 50




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Certain federal income tax deductions currently available with respect to oil and gas drilling and
development may be eliminated as a result of future legislation.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
 ExhibitNumber
    
    Exhibit10.1
    
    First Amendment to Amended and Restated Credit Agreement dated as of April 7, 2009, with the
lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 4.1
to the Companys Current Report on Form 8-K on April 9, 2009, and incorporated herein by
reference.)10.2 (a)
    
    Form of Restricted Stock Agreement (for executive officers).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. 51




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##### Table of Contents



SIGNATURES
  CONCHO RESOURCES INC.Date:      May 8, 2009
    By               /s/ Timothy A. LeachTimothy A. LeachDirector, Chairman of the Board of Directors and
Chief Executive Officer (Principal Executive Officer) By               /s/ Darin G. HoldernessDarin G. HoldernessVice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 52




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit10.1
    
    First Amendment to Amended and Restated Credit Agreement dated as of April 7, 2009, with the
lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 4.1
to the Companys Current Report on Form 8-K on April 9, 2009, and incorporated herein by
reference.)10.2 (a)
    
    Form of Restricted Stock Agreement (for executive officers).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.