Concho Resources Inc.
Consolidated
Balance Sheets
Unaudited
|
|
|
|
|
|
March
31,
|
|
December
31,
|
(in millions, except share and per share amounts)
|
|
2019
|
|
2018
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
$
|
-
|
|
Accounts receivable, net of allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
Oil and natural gas
|
|
|
530
|
|
|
466
|
|
|
Joint operations and other
|
|
|
413
|
|
|
365
|
|
Inventory
|
|
|
34
|
|
|
35
|
|
Derivative instruments
|
|
|
1
|
|
|
484
|
|
Prepaid costs and other
|
|
|
49
|
|
|
59
|
|
|
|
Total current assets
|
|
|
1,027
|
|
|
1,409
|
Property and equipment:
|
|
|
|
|
|
|
|
Oil and natural gas properties, successful efforts method
|
|
|
32,559
|
|
|
31,706
|
|
Accumulated depletion and depreciation
|
|
|
(10,138)
|
|
|
(9,701)
|
|
|
Total oil and natural gas properties, net
|
|
|
22,421
|
|
|
22,005
|
|
Other property and equipment, net
|
|
|
350
|
|
|
308
|
|
|
Total property and equipment, net
|
|
|
22,771
|
|
|
22,313
|
Deferred loan costs, net
|
|
|
9
|
|
|
10
|
Goodwill
|
|
|
2,229
|
|
|
2,224
|
Intangible assets, net
|
|
|
18
|
|
|
19
|
Noncurrent derivative instruments
|
|
|
2
|
|
|
211
|
Other assets
|
|
|
112
|
|
|
108
|
|
Total assets
|
|
$
|
26,168
|
|
$
|
26,294
|
Liabilities
and Stockholders’ Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
61
|
|
$
|
50
|
|
Bank overdrafts
|
|
|
105
|
|
|
159
|
|
Revenue payable
|
|
|
258
|
|
|
253
|
|
Accrued drilling costs
|
|
|
605
|
|
|
574
|
|
Derivative instruments
|
|
|
292
|
|
|
-
|
|
Other current liabilities
|
|
|
339
|
|
|
320
|
|
|
|
Total current liabilities
|
|
|
1,660
|
|
|
1,356
|
Long-term debt
|
|
|
4,567
|
|
|
4,194
|
Deferred income taxes
|
|
|
1,612
|
|
|
1,808
|
Noncurrent derivative instruments
|
|
|
75
|
|
|
-
|
Asset retirement obligations and other long-term liabilities
|
|
|
195
|
|
|
168
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 300,000,000 authorized;
201,755,333 and
|
|
|
|
|
|
|
|
|
201,288,884 shares issued at March 31, 2019 and December 31,
2018,
|
|
|
|
|
|
|
respectively
|
-
|
|
|
-
|
|
Additional paid-in capital
|
|
|
14,797
|
|
|
14,773
|
|
Retained earnings
|
|
|
3,406
|
|
|
4,126
|
|
Treasury stock, at cost; 1,155,813 and 1,031,655 shares at March
31, 2019 and
|
|
|
|
|
|
|
|
|
December 31, 2018, respectively
|
|
|
(144)
|
|
|
(131)
|
|
|
|
Total stockholders’ equity
|
|
|
18,059
|
|
|
18,768
|
|
Total liabilities and stockholders’ equity
|
|
$
|
26,168
|
|
$
|
26,294
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
Concho Resources Inc.
Consolidated
Statements of Operations
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in millions, except per share amounts)
|
|
|
2019
|
|
|
2018
|
Operating revenues:
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
935
|
|
$
|
793
|
|
Natural gas sales
|
|
|
169
|
|
|
154
|
|
|
Total operating revenues
|
|
|
1,104
|
|
|
947
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Oil and natural gas production
|
|
|
174
|
|
|
130
|
|
Production and ad valorem taxes
|
|
|
86
|
|
|
70
|
|
Gathering, processing and transportation
|
|
|
26
|
|
|
11
|
|
Exploration and abandonments
|
|
|
47
|
|
|
18
|
|
Depreciation, depletion and amortization
|
|
|
465
|
|
|
317
|
|
Accretion of discount on asset retirement obligations
|
|
|
3
|
|
|
2
|
|
General and administrative (including non-cash stock-based
compensation of $24 and
|
|
|
|
|
|
|
|
|
$17 for the three months ended March 31, 2019 and 2018,
respectively)
|
|
|
91
|
|
|
65
|
|
Loss on derivatives
|
|
|
1,059
|
|
|
35
|
|
Gain on disposition of assets, net
|
|
|
(1)
|
|
|
(723)
|
|
Transaction costs
|
|
|
-
|
|
|
7
|
|
|
Total operating costs and expenses
|
|
|
1,950
|
|
|
(68)
|
Income (loss) from operations
|
|
|
(846)
|
|
|
1,015
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(47)
|
|
|
(30)
|
|
Other, net
|
|
|
4
|
|
|
104
|
|
|
Total other income (expense)
|
|
|
(43)
|
|
|
74
|
Income (loss) before income taxes
|
|
|
(889)
|
|
|
1,089
|
|
Income tax (expense) benefit
|
|
|
194
|
|
|
(254)
|
Net income (loss)
|
|
$
|
(695)
|
|
$
|
835
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic net income (loss)
|
|
$
|
(3.49)
|
|
$
|
5.60
|
|
Diluted net income (loss)
|
|
$
|
(3.49)
|
|
$
|
5.58
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
Concho Resources Inc.
Consolidated Statements of Stockholders’
Equity
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Issued
|
Paid-in
|
Retained
|
Treasury
Stock
|
Stockholders’
|
(in millions, except share data)
|
|
Shares
|
|
Amount
|
Capital
|
Earnings
|
Shares
|
|
Amount
|
Equity
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2017
|
|
149,325
|
|
$
|
-
|
|
$
|
7,142
|
|
$
|
1,840
|
|
598
|
|
$
|
(67)
|
|
$
|
8,915
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
835
|
|
-
|
|
|
-
|
|
|
835
|
|
Grants of restricted stock
|
|
112
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Performance unit share conversion
|
|
446
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Cancellation of restricted stock
|
|
(13)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
17
|
|
|
-
|
|
-
|
|
|
-
|
|
|
17
|
|
Purchase of treasury stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
202
|
|
|
(29)
|
|
|
(29)
|
BALANCE AT MARCH 31, 2018
|
|
149,870
|
|
$
|
-
|
|
$
|
7,159
|
|
$
|
2,675
|
|
800
|
|
$
|
(96)
|
|
$
|
9,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2018
|
|
201,289
|
|
$
|
-
|
|
$
|
14,773
|
|
$
|
4,126
|
|
1,032
|
|
$
|
(131)
|
|
$
|
18,768
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(695)
|
|
-
|
|
|
-
|
|
|
(695)
|
|
Common stock dividends ($0.125 per share)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25)
|
|
-
|
|
|
-
|
|
|
(25)
|
|
Grants of restricted stock
|
|
235
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Performance unit share conversion
|
|
246
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Cancellation of restricted stock
|
|
(15)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
24
|
|
|
-
|
|
-
|
|
|
-
|
|
|
24
|
|
Purchase of treasury stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
124
|
|
|
(13)
|
|
|
(13)
|
BALANCE AT MARCH 31, 2019
|
|
201,755
|
|
$
|
-
|
|
$
|
14,797
|
|
$
|
3,406
|
|
1,156
|
|
$
|
(144)
|
|
$
|
18,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
Concho Resources Inc.
Consolidated Statements of Cash Flows
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
31,
|
(in millions)
|
|
2019
|
|
2018
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(695)
|
|
$
|
835
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
465
|
|
|
317
|
|
|
Accretion of discount on asset retirement obligations
|
|
|
3
|
|
|
2
|
|
|
Exploration and abandonments
|
|
|
38
|
|
|
10
|
|
|
Non-cash stock-based compensation expense
|
|
|
24
|
|
|
17
|
|
|
Deferred income taxes
|
|
|
(194)
|
|
|
254
|
|
|
Gain on disposition of assets, net
|
|
|
(1)
|
|
|
(723)
|
|
|
Loss on derivatives
|
|
|
1,059
|
|
|
35
|
|
|
Net settlements paid on derivatives
|
|
|
-
|
|
|
(112)
|
|
|
Other
|
|
|
2
|
|
|
(96)
|
|
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(111)
|
|
|
(81)
|
|
|
|
Prepaid costs and other
|
|
|
9
|
|
|
(2)
|
|
|
|
Inventory
|
|
|
-
|
|
|
3
|
|
|
|
Accounts payable
|
|
|
11
|
|
|
(12)
|
|
|
|
Revenue payable
|
|
|
8
|
|
|
2
|
|
|
|
Other current liabilities
|
|
|
5
|
|
|
39
|
|
|
|
|
Net cash provided by operating activities
|
|
|
623
|
|
|
488
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Additions to oil and natural gas properties
|
|
|
(885)
|
|
|
(474)
|
|
Acquisitions of oil and natural gas properties
|
|
|
(5)
|
|
|
(13)
|
|
Additions to property, equipment and other assets
|
|
|
(15)
|
|
|
(6)
|
|
Proceeds from the disposition of assets
|
|
|
5
|
|
|
255
|
|
Direct transaction costs for disposition of assets
|
|
|
(2)
|
|
|
(3)
|
|
Distribution from equity method investment
|
|
|
-
|
|
|
148
|
|
|
|
|
Net cash used in investing activities
|
|
|
(902)
|
|
|
(93)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
1,112
|
|
|
662
|
|
Payments on credit facility
|
|
|
(739)
|
|
|
(984)
|
|
Payment of common stock dividends
|
|
|
(25)
|
|
|
-
|
|
Purchases of treasury stock
|
|
|
(13)
|
|
|
(29)
|
|
Decrease in bank overdrafts
|
|
|
(54)
|
|
|
(44)
|
|
Other
|
|
|
(2)
|
|
|
-
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
279
|
|
|
(395)
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
-
|
|
|
-
|
Cash and cash equivalents at beginning of period
|
|
|
-
|
|
|
-
|
Cash and cash equivalents at end of period
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 1.
Organization
and nature of operations
Concho
Resources Inc. (the “Company”) is a Delaware corporation formed on
February 22, 2006. The Company’s principal business is the acquisition,
development, exploration and production of oil and natural gas properties
primarily located in the Permian Basin of West Texas and Southeast New Mexico.
Note 2.
Basis of presentation
and summary of significant accounting policies
A complete
discussion of the Company’s significant accounting policies is included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2018
(“2018 Form 10-K”).
Principles of consolidation.
The
consolidated financial statements of the Company include the accounts of the
Company and its 100 percent owned subsidiaries. The Company consolidates the
financial statements of these entities. All material intercompany balances and
transactions have been eliminated.
Reclassifications.
Certain
prior period amounts have been reclassified to conform to the 2019
presentation. These reclassifications had no impact on net income (loss), total
assets, liabilities and stockholders’ equity or total cash flows.
Use of estimates in the
preparation of financial statements.
Preparation of financial
statements in conformity with Generally Accepted Accounting Principles in the
United States of America (“U.S. GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. Depletion
of oil and natural gas properties is determined using estimates of proved oil
and natural gas reserves. There are numerous uncertainties inherent in the
estimation of quantities of proved oil and natural gas reserves and in the
projection of future rates of production and the timing of development
expenditures. Similarly, evaluations for impairment of proved and unproved oil
and natural gas properties are subject to numerous uncertainties including,
among others, estimates of future recoverable reserves, commodity price
outlooks and prevailing market rates of other sources of income and costs.
Other significant estimates include, but are not limited to, asset retirement
obligations, goodwill, fair value of stock-based compensation, fair value of
business combinations, fair value of nonmonetary transactions, fair value of
derivative financial instruments and income taxes.
Interim financial statements.
The
accompanying consolidated financial statements of the Company have not been
audited by the Company’s independent registered public accounting firm, except
that the consolidated balance sheet at December 31, 2018 is derived from
audited consolidated financial statements. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
necessary to present fairly the Company’s consolidated financial statements.
All such adjustments are of a normal, recurring nature. In preparing the
accompanying consolidated financial statements, management has made certain
estimates and assumptions that affect reported amounts in the consolidated
financial statements and disclosures of contingencies. Actual results may
differ from those estimates. The results for interim periods are not
necessarily indicative of annual results.
Certain
disclosures have been condensed in or omitted from these consolidated financial
statements. Accordingly, these condensed notes to the consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the Company’s 2018 Form 10-K.
Equity method investments.
The
Company accounts for its equity method investments under the equity method of
accounting and includes the investment balance in other assets on the
consolidated balance sheets. Gains and losses incurred from the Company’s
equity investments are recorded in other income (expense) on the consolidated
statements of operations.
At March
31, 2019, the Company owned a 23.75 percent membership interest in Oryx
Southern Delaware Holdings, LLC (“Oryx”), an entity that operates a crude oil
gathering and transportation system in the Delaware Basin. In February 2018,
Oryx obtained a term loan of $800 million. The proceeds were used in part to fund
a cash distribution to its equity holders, of which the Company received a
distribution of approximately $157 million. Of this amount, approximately $54
million fully offset the Company’s net investment in Oryx. The remaining
distribution of approximately $103 million was recorded in other income
(expense) on the Company’s consolidated statement of operations since the
lenders to the term loan do not have recourse against the Company, and the
Company has no contractual obligation to repay the distribution.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
The
Company’s net investment in Oryx was
zero at March 31, 2019 and December
31, 2018. The Company did not record income or loss on the Oryx investment for
the three months ended March 31, 2019, as cumulative net income had yet to
exceed the distribution in excess of the Company’s investment. In April 2019,
Oryx entered into an agreement to sell 100 percent of its equity interests,
which included the Company’s 23.75 percent membership interest.
Litigation
contingencies.
The Company is a party to proceedings and claims incidental to its
business. In each reporting period, the Company assesses these claims in an
effort to determine the degree of probability and range of possible loss for
potential accrual in its consolidated financial statements. The amount of any
resulting losses may differ from these estimates. An accrual is recorded for a
material loss contingency when its occurrence is probable and damages are
reasonably estimable. See Note 9 for additional information.
Revenue recognition.
The
Company recognizes revenues from the sales of oil and natural gas to its
customers and presents them disaggregated on the Company’s consolidated
statements of operations. All revenues are recognized in the geographical
region of the Permian Basin.
The
Company enters into contracts with customers to sell its oil and natural gas
production. Revenue on these contracts is recognized in accordance with the
five-step revenue recognition model prescribed in Accounting Standards
Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” (“ASC
606”). Specifically, revenue is recognized when the Company’s performance
obligations under these contracts are satisfied, which generally occurs with
the transfer of control of the oil and natural gas to the purchaser. Control is
generally considered transferred when the following criteria are met: (i)
transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of
loss and (iv) relinquishment of any repurchase rights or other similar rights.
Given the nature of the products sold, revenue is recognized at a point in time
based on the amount of consideration the Company expects to receive in
accordance with the price specified in the contract. Consideration under the
oil and natural gas marketing contracts is typically received from the
purchaser one to two months after production. At March 31, 2019 and December
31, 2018, the Company had receivables related to contracts with customers of
approximately $530 million and $466 million, respectively.
Oil Contracts.
The
majority of the Company’s oil marketing contracts transfer physical custody and
title at or near the wellhead, which is generally when control of the oil has
been transferred to the purchaser. The majority of the oil produced is sold
under contracts using market-based pricing which is then adjusted for
differentials based upon delivery location and oil quality. To the extent the
differentials are incurred after the transfer of control of the oil, the
differentials are included in oil sales on the consolidated statements of
operations as they represent part of the transaction price of the contract. If
the differentials, or other related costs, are incurred prior to the transfer
of control of the oil, those costs are included in gathering, processing and
transportation on the Company’s consolidated statements of operations as they
represent payment for services performed outside of the contract with the
customer.
Natural
Gas Contracts.
The majority of the Company’s natural gas is sold at the lease
location, which is generally when control of the natural gas has been
transferred to the purchaser. The natural gas is sold under (i) percentage of
proceeds processing contracts, (ii) fee-based contracts or (iii) a hybrid of
percentage of proceeds and fee-based contracts. Under the majority of the
Company’s contracts, the purchaser gathers the natural gas in the field where
it is produced and transports it via pipeline to natural gas processing plants
where natural gas liquid products are extracted. The natural gas liquid
products and remaining residue gas are then sold by the purchaser. Under the
percentage of proceeds and hybrid percentage of proceeds and fee-based
contracts, the Company receives a percentage of the value for the extracted
liquids and the residue gas. Under the fee-based contracts, the Company
receives natural gas liquids and residue gas value, less the fee component, or is
invoiced the fee component. To the extent control of the natural gas transfers
upstream of the transportation and processing activities, revenue is recognized
as the net amount received from the purchaser. To the extent that control
transfers downstream of those costs, revenue is recognized on a gross basis,
and the related costs are classified in gathering, processing and
transportation on the Company’s consolidated statements of operations.
The
Company does not disclose the value of unsatisfied performance obligations
under its contracts with customers as it applies the practical exemption in
accordance with ASC 606. The exemption, as described in ASC 606-10-50-14(a),
applies to variable consideration that is recognized as control of the product
is transferred to the customer. Since each unit of product represents a
separate performance obligation, future volumes are wholly unsatisfied and
disclosure of the transaction price allocated to remaining performance
obligations is not required.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
General
and administrative expense.
The Company receives fees for
the operation of jointly-owned oil and natural gas properties during the
drilling and production phases and records such reimbursements as reductions to
general and administrative expense. Such fees totaled approximately $4 million
for each of the three months ended March 31, 2019 and 2018.
Recently adopted accounting
pronouncements.
In February 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires all leases
with a term greater than one year to be recognized on the consolidated balance
sheet while maintaining similar classifications for finance and operating leases.
Lease expense recognition on the consolidated statements of operations was
effectively unchanged. The Company adopted this guidance on January 1, 2019.
The Company made policy elections not to capitalize short-term leases for all
asset classes and not to separate non-lease components from lease components
for all asset classes except for vehicles. The Company also did not elect the
package of practical expedients that allowed for certain considerations under
the original “Leases (Topic 840)” accounting standard (“Topic 840”) to be
carried forward upon adoption of ASU 2016-02.
In January
2018, the FASB issued ASU No. 2018-01, “Land Easement Practical Expedient for
Transition to Topic 842,” which provides an optional practical expedient not to
evaluate land easements that existed or expired before the adoption of ASU
2016-02 and that were not previously accounted for as leases under Topic 840.
The Company enters into land easements on a routine basis as part of its
ongoing operations and has many such agreements currently in place; however,
the Company does not currently account for any land easements under Topic 840.
As this guidance serves as an amendment to ASU 2016-02, the Company elected
this practical expedient, which became effective upon the date of adoption of
ASU 2016-02. The Company will assess any new land easements to determine
whether the arrangement should be accounted for as a lease. In July 2018, the
FASB issued ASU No. 2018-11, “Targeted Improvements,” which provides a
transition election not to restate comparative periods for the effects of
applying the new lease standard. This transition election permits entities to
change the date of initial application to the beginning of the year of adoption
and to recognize the effects of applying the new standard as a
cumulative-effect adjustment to the opening balance of retained earnings. The
Company elected this transition approach, however the cumulative impact of
adoption in the opening balance of retained earnings as of January 1, 2019 was
zero.
The
Company enters into lease agreements to support its operations. These
agreements are for leases on assets such as office space, vehicles, field
equipment and drilling rigs. Upon adoption, the Company recognized $35 million
of right-of-use assets, of which approximately $19 million and $16 million
relate to the Company’s operating and finance leases, respectively, and
approximately $37 million of associated lease liabilities. See Note 9 for
additional disclosures of the Company’s leases.
In August
2018, the Securities and Exchange Commission (“SEC”) issued a final rule that
amends certain of its disclosure requirements that have become redundant,
duplicative, overlapping, outdated or superseded, in light of other disclosure
requirements, U.S. GAAP or changes in the information environment. The
amendments are intended to facilitate the disclosure of information to
investors and simplify compliance without significantly altering the total mix
of information provided to investors. The final rule amends numerous SEC rules,
items and forms covering a diverse group of topics, including, but not limited
to, changes in stockholders’ equity. The final rule extends the annual
disclosure requirement in SEC Regulation S-X, Rule 3-04, of presenting changes
in stockholders’ equity to interim periods. The registrants are required to
analyze changes in stockholders’ equity in the form of a reconciliation for the
current quarter and year-to-date interim periods and comparative periods in the
prior year. As a result, the Company updated its presentation of the
consolidated statements of stockholders’ equity to include comparative periods
in the prior year. In addition, the final rule requires the presentation of
dividends per share to be disclosed in the statement of stockholders’ equity.
New
accounting pronouncements issued but not yet adopted.
In June
2016, the FASB issued ASU No. 2016-13, “Financial Instruments–Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments” (“Topic
326”), which replaces the current “incurred loss” methodology for recognizing
credit losses with an “expected loss” methodology. This new methodology
requires that a financial asset measured at amortized cost be presented at the
net amount expected to be collected. This standard is intended to provide more
timely decision-useful information about the expected credit losses on
financial instruments. In November 2018, the FASB issued ASU No. 2018-19,
“Codification Improvements to Topic 326, Financial Instruments–Credit Losses,”
which makes amendments to clarify the scope of the guidance, including the
amendment clarifying that receivables arising from operating leases are not
within the scope of Topic 326. This guidance is effective for fiscal years
beginning after December 15, 2019, and early adoption is allowed as early as
fiscal years beginning after December 15, 2018. The Company does not believe
this new guidance will have a material impact on its consolidated financial
statements.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
In
November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements
(Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (“ASU
2018-18”), which, among other things, clarifies that (i) certain transactions
between collaborative arrangement participants should be accounted for as
revenue under Topic 606 when the collaborative arrangement participant is a
customer in the context of a unit of account, (ii) adds unit-of-account
guidance in Topic 808 to align with the guidance in Topic 606 and (iii)
requires that in a transaction with a collaborative arrangement participant
that is not directly related to sales to third parties, presenting the
transaction together with revenue recognized under Topic 606 is precluded if
the collaborative arrangement participant is not a customer. ASU 2018-18 is
effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years and early adoption is permitted. The
amendments in this update should be applied retrospectively to the date of
initial application of Topic 606. An entity should recognize the cumulative
effect of initially applying the amendments as an adjustment to the opening
balance of retained earnings of the later of the earliest annual period
presented and the annual period that includes the date of the entity’s initial
application of Topic 606. The Company is currently assessing the effect that
ASU 2018-18 will have on its financial position, results of operations and
disclosures.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 3.
RSP
Acquisition
On July
19, 2018, the Company completed the acquisition of
RSP
Permian, Inc. (“RSP”) through an all-stock transaction (the “RSP Acquisition”)
for approximately $7.5 billion.
Purchase
price allocation.
The RSP Acquisition has been accounted for as a business
combination, using the acquisition method. The following table represents the
allocation of the total purchase price of RSP to the identifiable assets
acquired and the liabilities assumed based on the fair values at the
acquisition date, with any excess of the purchase price over the estimated fair
value of the identifiable net assets acquired recorded as goodwill. Any value
assigned to goodwill is not deductible for income tax purposes.
The following table sets forth
the Company’s preliminary purchase price allocation:
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
7,549
|
|
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
|
Accounts payable – trade
|
|
$
|
48
|
|
Accrued drilling costs
|
|
|
79
|
|
Current derivative instruments
|
|
|
10
|
|
Other current liabilities
|
|
|
124
|
|
Long-term debt
|
|
|
1,758
|
|
Deferred income taxes
|
|
|
514
|
|
Asset retirement obligations
|
|
|
20
|
|
Noncurrent derivative instruments
|
|
|
5
|
|
|
Total liabilities assumed
|
|
$
|
2,558
|
|
|
|
|
|
|
|
|
Total purchase price plus liabilities assumed
|
|
$
|
10,107
|
|
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
Accounts receivable
|
|
$
|
194
|
|
Current derivative instruments
|
|
|
36
|
|
Other current assets
|
|
|
21
|
|
Proved oil and natural gas properties
|
|
|
4,055
|
|
Unproved oil and natural gas properties
|
|
|
3,565
|
|
Other property and equipment
|
|
|
5
|
|
Noncurrent derivative instruments
|
|
|
2
|
|
Implied goodwill
|
|
|
2,229
|
|
|
Total assets acquired
|
|
$
|
10,107
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Pro forma data.
The following unaudited pro
forma combined condensed financial data for the three months ended March 31,
2018 was derived from the historical financial statements of the Company giving
effect to the RSP Acquisition as if it had occurred on January 1, 2017. The
below information reflects pro forma adjustments for the issuance of the
Company’s common stock in exchange for RSP’s outstanding shares of common
stock, as well as pro forma adjustments based on available information and
certain assumptions that the Company believes are reasonable, including (i) the
Company’s common stock issued to convert RSP’s outstanding shares of common
stock and equity awards as of the closing date of the RSP Acquisition, (ii) the
depletion of RSP’s fair-valued proved oil and natural gas properties and (iii)
the estimated tax impacts of the pro forma adjustments.
The pro forma results of
operations do not include any cost savings or other synergies that may result
from the RSP Acquisition. The pro forma financial data does not include the pro
forma results of operations for any other acquisitions made during the period.
The pro forma combined condensed financial data has been included for
comparative purposes only and is not necessarily indicative of the results that
might have occurred had the RSP Acquisition taken place on January 1, 2017 and
is not intended to be a projection of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
(in millions, except per share amounts)
|
March
31, 2018
|
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
|
1,226
|
Net income
|
$
|
|
931
|
Earnings per share:
|
|
|
|
|
Basic net income
|
$
|
|
4.66
|
|
Diluted net income
|
$
|
|
4.64
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 4.
Other
acquisitions, divestitures and nonmonetary transactions
During the three
months ended
March 31, 2018, the Company closed the following transactions:
February
2018 acquisition and divestiture.
In February 2018, the Company
closed an acquisition treated as a business combination where it received
producing wells along with approximately 21,000 net acres, primarily located in
the Midland Basin. As consideration for the non-cash acquisition, the Company
divested of certain producing wells and approximately 34,000 net acres located
primarily in the northern portion of the Delaware Basin. The business acquired
was valued at approximately $755 million as compared to the historical book
value of the divested assets of approximately $180 million, which resulted in a
non-cash gain of approximately $575 million, included in gain on disposition of
assets, net on the Company’s consolidated statement of operations for the three
months ended March 31, 2018.
Delaware Basin divestitures.
In January 2018,
the Company closed on two asset divestitures of certain non-core assets in
Reeves and Ward Counties, Texas, with combined proceeds of approximately $280
million. After direct transaction costs, the Company recorded a pre-tax gain of
approximately $134 million, which is included in gain on disposition of assets,
net on its consolidated statement of operations for the three months ended
March 31, 2018. The assets divested included proved and unproved oil and
natural gas properties on approximately 20,000 net acres.
Nonmonetary
transactions.
During the three months ended March 31, 2018, the Company
completed multiple nonmonetary transactions. These transactions included
exchanges of both proved and unproved oil and natural gas properties. Certain
of these transactions were accounted for at fair value and, as a result, the
Company recorded pre-tax gains of approximately $14 million, included in gain
on disposition of assets, net on the Company’s consolidated statement of
operations for the three months ended March 31, 2018.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 5.
Stock
incentive plan
The
Company’s 2015 Stock Incentive Plan (“the Plan”) provides for granting stock options,
restricted stock awards and performance unit awards to directors, officers and
employees of the Company. The restricted stock awards vest over a period
ranging from one to ten years. The holders of unvested restricted stock awards
have voting rights and the right to receive dividends.
In January
2019, the Company granted 212,947 performance unit awards. Included in this
grant were 38,952 performance unit awards granted to certain officers, of which
19,476 have a three-year performance period and 19,476 have a five-year
performance period. At the end of each performance period, each performance
unit award will convert into a restricted stock award with the number of shares
determined based upon performance criteria, which will then vest at a rate of
20 percent per year commencing on the sixth anniversary of the grant date. The
total number of units converted to restricted stock awards will depend on the
Company’s performance at the end of each performance period. All other
performance unit awards have a three-year performance period.
Shares issued
as a result of awards granted under the Plan are generally new common shares.
A summary of the Company’s
restricted stock shares and performance unit activity under the Plan for the
three months ended March 31, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Performance
|
|
|
|
|
|
Stock
Shares
|
|
|
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,364,699
|
|
|
218,391
|
|
|
|
Awards granted (a)
|
|
|
235,082
|
|
|
212,947
|
(b)
|
|
|
Awards cancelled / forfeited
|
|
|
(14,947)
|
|
|
-
|
|
|
|
Lapse of restrictions
|
|
|
(146,048)
|
|
|
-
|
|
|
Outstanding at March 31, 2019
|
|
1,438,786
|
|
431,338
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Weighted average grant date fair value per share/unit
|
|
$
|
105.52
|
|
$
|
144.03
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Includes 38,952 performance award units granted to certain
officers in January 2019 that may convert into shares of restricted stock
awards at the end of each performance period that will be subject to
additional vesting conditions.
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the
future stock-based compensation expense to be recorded for all the stock-based
compensation awards that were outstanding at March 31, 2019:
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Remaining 2019
|
|
$
|
61
|
2020
|
|
|
48
|
2021
|
|
|
22
|
2022
|
|
|
4
|
2023
|
|
|
2
|
2024
|
|
|
1
|
Thereafter
|
|
|
2
|
|
Total
|
|
$
|
140
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 6.
Disclosures
about fair value measurements
The
Company uses a valuation framework based upon inputs that market participants
use in pricing an asset or liability, which are classified into two categories:
observable inputs and unobservable inputs. Observable inputs represent market
data obtained from independent sources, whereas unobservable inputs reflect a
company’s own market assumptions, which are used if observable inputs are not
reasonably available without undue cost and effort. These two types of inputs
are further prioritized into the following fair value input hierarchy:
Level 1
:
Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities. The Company considers active
markets to be those in which transactions for the assets or liabilities occur
in sufficient frequency and volume to provide pricing information on an ongoing
basis.
Level 2
:
Quoted
prices in markets that are not active, or inputs which are observable, either
directly or indirectly, for substantially the full term of the asset or
liability. This category includes those derivative instruments that the Company
values using observable market data. Substantially all of these inputs are
observable in the marketplace throughout the full term of the derivative
instrument, can be derived from observable data, or supported by observable
levels at which transactions are executed in the marketplace. Level 2
instruments primarily include non-exchange traded derivatives such as
over-the-counter commodity price swaps, basis swaps, collars and floors, 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, (iii) current
market and contractual prices for the underlying instruments and (iv)
volatility factors, as well as other relevant economic measures.
Level 3
:
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). 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) current
market and contractual prices for the underlying instruments and (iv)
volatility factors, as well as other relevant economic measures.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Financial Assets and Liabilities
Measured at Fair Value
The following table presents the
carrying amounts and fair values of the Company’s financial instruments at
March 31,
2019
and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2019
|
|
December
31, 2018
|
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(in millions)
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
3
|
|
$
|
3
|
|
$
|
695
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
367
|
|
$
|
367
|
|
$
|
-
|
|
$
|
-
|
|
|
Credit facility
|
|
$
|
615
|
|
$
|
615
|
|
$
|
242
|
|
$
|
242
|
|
|
$600 million 4.375% senior notes due 2025 (a)
|
|
$
|
594
|
|
$
|
617
|
|
$
|
594
|
|
$
|
591
|
|
|
$1,000 million 3.75% senior notes due 2027 (a)
|
|
$
|
989
|
|
$
|
991
|
|
$
|
989
|
|
$
|
939
|
|
|
$1,000 million 4.3% senior notes due 2028 (a)
|
|
$
|
988
|
|
$
|
1,033
|
|
$
|
988
|
|
$
|
980
|
|
|
$800 million 4.875% senior notes due 2047 (a)
|
|
$
|
789
|
|
$
|
849
|
|
$
|
789
|
|
$
|
761
|
|
|
$600 million 4.85% senior notes due 2048 (a)
|
|
$
|
592
|
|
$
|
634
|
|
$
|
592
|
|
$
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The carrying value includes associated deferred loan costs and
any discount.
|
Credit facility.
The
carrying amount of the Company’s credit facility, as amended and restated (the “Credit
Facility”), approximates its fair value, as the applicable interest rates are
variable and reflective of market rates.
Senior
notes.
The fair values of the Company’s senior notes are based on
quoted market prices. The debt securities are not actively traded and,
therefore, are classified as Level 2 in the fair value hierarchy.
Other financial
assets and liabilities
.
The
Company has other financial instruments consisting primarily of receivables,
payables and other current assets and liabilities. The carrying amounts
approximate fair value due to the short maturity of these instruments.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Derivative
instruments.
The fair value of the Company’s derivative instruments is
estimated by management considering various factors, including closing exchange
and over-the-counter quotations and the time value of the underlying
commitments. Financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the valuation of the fair
value of assets and liabilities and their placement within the fair value
hierarchy levels.
The following
tables summarize (i) the valuation of each of the Company’s financial
instruments by required fair value hierarchy levels and (ii) the gross fair
value by the appropriate balance sheet classification,
even when the
derivative instruments are subject to netting arrangements and qualify for net
presentation in the Company’s consolidated balance sheets at
March 31,
2019
and December 31, 2018. The Company nets the fair value of
derivative instruments by counterparty in the Company’s consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2019
|
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Fair
Value
|
|
|
|
|
|
in
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Presented
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
Offset
in the
|
|
|
in the
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
Balance
|
|
|
Balance
|
(in millions)
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Value
|
|
|
Sheet
|
|
|
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
$
|
57
|
|
$
|
-
|
|
$
|
57
|
|
$
|
(56)
|
|
$
|
1
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
29
|
|
|
-
|
|
|
29
|
|
|
(27)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
(348)
|
|
|
-
|
|
|
(348)
|
|
|
56
|
|
|
(292)
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
(102)
|
|
|
-
|
|
|
(102)
|
|
|
27
|
|
|
(75)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative instruments
|
|
$
|
-
|
|
$
|
(364)
|
|
$
|
-
|
|
$
|
(364)
|
|
$
|
-
|
|
$
|
(364)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Fair
Value
|
|
|
|
|
|
in
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Presented
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
Offset
in the
|
|
|
in the
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
Balance
|
|
|
Balance
|
(in millions)
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Value
|
|
|
Sheet
|
|
|
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
-
|
|
$
|
543
|
|
$
|
-
|
|
$
|
543
|
|
$
|
(59)
|
|
$
|
484
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
243
|
|
|
-
|
|
|
243
|
|
|
(32)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
(59)
|
|
|
-
|
|
|
(59)
|
|
|
59
|
|
|
-
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
-
|
|
|
(32)
|
|
|
-
|
|
|
(32)
|
|
|
32
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
derivative instruments
|
|
$
|
-
|
|
$
|
695
|
|
$
|
-
|
|
$
|
695
|
|
$
|
-
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations of credit risk.
At
March 31,
2019
, the Company’s primary concentrations of credit
risk are the risk of collecting accounts receivable and the risk of
counterparties’ failure to perform under derivative obligations.
The
Company has entered into International Swap Dealers Association Master
Agreements (“ISDA Agreements”) with each of its derivative counterparties. The
terms of the ISDA Agreements provide the Company and the counterparties with
rights of set-off upon the occurrence of defined acts of default by either the
Company or a counterparty to a derivative, whereby the party not in default may
set off all derivative liabilities owed to the defaulting party against all
derivative asset receivables from the defaulting party. See Note 7 for
additional information regarding the Company’s derivative activities and
counterparties.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 7.
Derivative
financial instruments
The
Company uses derivative financial instruments to manage its exposure to
commodity price fluctuations. Commodity derivative instruments are used to (i) reduce
the effect of the volatility of price changes on the oil and natural gas the
Company produces and sells, (ii) support the Company’s capital budget and
expenditure plans and (iii) support the economics associated with acquisitions.
The Company does not enter into derivative financial instruments for
speculative or trading purposes. The Company also enters into fixed-price
forward physical power purchase contracts to manage the volatility of the price
of power needed for ongoing operations. The Company may also enter into
physical delivery contracts to effectively provide commodity price hedges. Because
these physical contracts are not expected to be net cash settled, the Company
has elected normal purchase or normal sale treatment and records these
contracts at cost.
The
Company does not designate its derivative instruments to qualify for hedge
accounting. Accordingly, the Company reflects changes in the fair value of its
derivative instruments in its consolidated statements of operations as they
occur.
The following table summarizes
the amounts reported in earnings related to the commodity derivative instruments
for the three months ended
March 31, 2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
March
31,
|
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives:
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
(1,056)
|
|
$
|
(33)
|
|
|
Natural gas derivatives
|
|
|
(3)
|
|
|
(2)
|
|
|
|
Total
|
|
$
|
(1,059)
|
|
$
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
represents the Company’s net cash receipts from (payments on) derivatives for
the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
March
31,
|
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net cash receipts from (payments on) derivatives:
|
|
|
|
|
|
Oil derivatives
|
|
$
|
3
|
|
$
|
(113)
|
|
|
Natural gas derivatives
|
|
|
(3)
|
|
|
1
|
|
|
|
Total
|
|
$
|
-
|
|
$
|
(112)
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Commodity derivative contracts.
The following table sets forth the
Company’s outstanding derivative contracts at
March 31,
2019
. When aggregating multiple contracts, the weighted average
contract price is disclosed. All of the Company’s derivative contracts at
March 31,
2019 are expected to settle by December 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
Oil Price Swaps: (a)
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
-
|
|
15,112,750
|
|
13,378,000
|
|
11,232,000
|
|
39,722,750
|
|
|
Price per Bbl
|
$
|
-
|
$
|
56.59
|
$
|
56.41
|
$
|
55.88
|
$
|
56.33
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
10,502,500
|
|
10,166,500
|
|
9,453,000
|
|
9,218,000
|
|
39,340,000
|
|
|
Price per Bbl
|
$
|
57.28
|
$
|
57.24
|
$
|
57.18
|
$
|
57.14
|
$
|
57.21
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
2,160,000
|
|
2,184,000
|
|
2,024,000
|
|
2,024,000
|
|
8,392,000
|
|
|
Price per Bbl
|
$
|
54.57
|
$
|
54.57
|
$
|
54.50
|
$
|
54.50
|
$
|
54.54
|
Oil Costless Collars: (a)
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
-
|
|
1,213,250
|
|
1,135,000
|
|
1,058,000
|
|
3,406,250
|
|
|
Ceiling price per Bbl
|
$
|
-
|
$
|
64.00
|
$
|
63.47
|
$
|
62.95
|
$
|
63.50
|
|
|
Floor price per Bbl
|
$
|
-
|
$
|
56.06
|
$
|
55.74
|
$
|
55.43
|
$
|
55.76
|
Oil Basis Swaps: (b)
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
-
|
|
11,965,500
|
|
12,650,000
|
|
15,133,000
|
|
39,748,500
|
|
|
Price per Bbl
|
$
|
-
|
$
|
(3.03)
|
$
|
(2.82)
|
$
|
(2.32)
|
$
|
(2.69)
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
13,013,000
|
|
10,192,000
|
|
10,120,000
|
|
10,120,000
|
|
43,445,000
|
|
|
Price per Bbl
|
$
|
(0.53)
|
$
|
(0.70)
|
$
|
(0.71)
|
$
|
(0.71)
|
$
|
(0.65)
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
2,070,000
|
|
2,093,000
|
|
2,116,000
|
|
2,116,000
|
|
8,395,000
|
|
|
Price per Bbl
|
$
|
0.55
|
$
|
0.55
|
$
|
0.55
|
$
|
0.55
|
$
|
0.55
|
Natural Gas Price Swaps: (c)
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
|
-
|
|
17,241,387
|
|
17,298,537
|
|
17,209,535
|
|
51,749,459
|
|
|
Price per MMBtu
|
$
|
-
|
$
|
2.87
|
$
|
2.87
|
$
|
2.87
|
$
|
2.87
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
|
6,233,500
|
|
6,233,500
|
|
6,118,000
|
|
6,118,000
|
|
24,703,000
|
|
|
Price per MMBtu
|
$
|
2.70
|
$
|
2.70
|
$
|
2.70
|
$
|
2.70
|
$
|
2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The oil derivative contracts are settled based on the NYMEX –
West Texas Intermediate (“WTI”) calendar-month average futures price.
|
(b)
|
The basis differential price is between Midland – WTI and
Cushing – WTI. The majority of these contracts are settled on a calendar-
|
|
month basis, while certain contracts assumed in the RSP
Acquisition are settled on a trading-month basis.
|
(c)
|
The natural gas derivative contracts are settled based on the
NYMEX – Henry Hub last trading day futures price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
counterparties.
The Company uses credit
and other financial criteria to evaluate the creditworthiness of counterparties
to its derivative instruments. The Company believes that all of its derivative
counterparties are currently acceptable credit risks. The Company is not
required to provide credit support or collateral to any counterparties under
its derivative contracts, nor are they required to provide credit support to
the Company.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 8.
Debt
The Company’s debt consisted of
the following at March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility due 2022
|
|
$
|
615
|
|
$
|
242
|
|
4.375% unsecured senior notes due 2025 (a)
|
|
|
600
|
|
|
600
|
|
3.75% unsecured senior notes due 2027
|
|
|
1,000
|
|
|
1,000
|
|
4.3% unsecured senior notes due 2028
|
|
|
1,000
|
|
|
1,000
|
|
4.875% unsecured senior notes due 2047
|
|
|
800
|
|
|
800
|
|
4.85% unsecured senior notes due 2048
|
|
|
600
|
|
|
600
|
|
Unamortized original issue discount
|
|
|
(10)
|
|
|
(10)
|
|
Senior notes issuance costs, net
|
|
|
(38)
|
|
|
(38)
|
|
|
Less: current portion
|
|
|
-
|
|
|
-
|
|
|
|
Total long-term debt
|
|
$
|
4,567
|
|
$
|
4,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For each of the twelve-month
periods beginning on January 15, 2020, 2021, 2022, 2023 and thereafter, these
notes are callable at 103.281%, 102.188%, 101.094% and 100%, respectively.
|
|
|
|
|
Credit facility.
The
Company’s Credit Facility has a maturity date of May 9, 2022. At
March 31,
2019, the Company’s commitments from its bank group were $2.0 billion, of which
$
1.4
billion was unused commitments, net of
letters of credit. During the three months ended March 31, 2019, the weighted
average interest rate on the Credit Facility was 4.4 percent.
At March
31, 2019, certain of the Company’s 100 percent owned subsidiaries were
guarantors under the Credit Facility.
Senior
notes.
Interest on the Company’s senior notes is paid in arrears
semi-annually. The senior notes are fully and unconditionally guaranteed on a
senior unsecured basis by certain of the Company’s 100 percent owned
subsidiaries, subject to customary release provisions as described in Note 13,
and rank equally in right of payments with one another.
At
March 31,
2019
, the Company was in compliance with the covenants under all of
its debt instruments.
Interest expense.
The following amounts have been
incurred and charged to interest expense for the three months ended
March 31,
2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
31,
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
63
|
|
$
|
18
|
Non-cash interest
|
|
|
1
|
|
|
1
|
Net changes in accruals
|
|
|
(13)
|
|
|
12
|
|
Interest costs incurred
|
|
|
51
|
|
|
31
|
Less: capitalized interest
|
|
|
(4)
|
|
|
(1)
|
|
Total interest expense
|
|
$
|
47
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 9.
Commitments
and contingencies
Legal
actions
.
The Company is a party to proceedings and claims incidental to its
business. Assessing contingencies is highly subjective and requires judgment
about uncertain future events. When evaluating contingencies related to legal
proceedings, the Company may be unable to estimate losses due to a number of
factors, including potential defenses, the procedural status of the matter in
question, the presence of complex legal and/or factual issues, the ongoing
discovery and/or development of information important to the matter. For
material matters that the Company believes an unfavorable outcome is reasonably
possible, it would disclose the nature of the matter and a range of potential
exposure, unless an estimate cannot be made at this time. The Company does not
believe that the loss for any other litigation matters and claims that are
reasonably possible to occur will have a material adverse effect on its
financial position, results of operations or liquidity. The Company will
continue to evaluate proceedings and claims involving the Company on a regular
basis and will establish and adjust any estimated accruals as appropriate.
Severance tax, royalty and joint interest audits
.
The Company is subject to routine severance, royalty and joint interest
audits from regulatory bodies and non-operators and makes accruals as necessary
for estimated exposure when deemed probable and estimable. Additionally, the Company is subject
to various possible contingencies that arise primarily from interpretations
affecting the oil and natural gas industry. Such contingencies include
differing interpretations as to the prices at which oil and natural gas sales
may be made, the prices at which royalty owners may be paid for production from
their leases, allowable costs under joint interest arrangements and other
matters. Although the Company believes that it has estimated its exposure with
respect to the various laws and regulations, administrative rulings and
interpretations thereof, adjustments could be required as new interpretations
and regulations are issued.
Commitments.
The
Company periodically enters into contractual arrangements under which the
Company is committed to expend funds. These contractual arrangements relate to
purchase agreements the Company has entered into including water commitment
agreements, throughput volume delivery commitments, fixed and variable power
commitments, sand commitment agreements, fixed asset commitments and
maintenance commitments. The Company’s drilling rig commitments are considered
leases under ASU 2016-02 and are included within the tables under the “Leases”
section below.
The following table
summarizes the Company’s commitments at
March 31, 2019
:
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Remaining 2019
|
|
$
|
35
|
2020
|
|
|
75
|
2021
|
|
|
76
|
2022
|
|
|
36
|
2023
|
|
|
33
|
2024
|
|
|
34
|
Thereafter
|
|
|
96
|
|
Total
|
$
|
385
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
At March
31, 2019, the Company’s delivery commitments covered the following gross
volumes of oil and natural gas:
|
|
|
Oil
|
|
Natural
Gas
|
|
|
(MMBbl)
|
|
(MMcf)
|
|
|
|
|
|
|
Remaining 2019
|
|
12
|
|
2,697
|
2020
|
|
36
|
|
10,286
|
2021
|
|
39
|
|
21,627
|
2022
|
|
41
|
|
16,425
|
2023
|
|
33
|
|
16,425
|
2024
|
|
33
|
|
16,470
|
Thereafter
|
|
114
|
|
32,850
|
|
Total
|
|
308
|
|
116,780
|
|
|
|
|
|
|
Other commitments.
In May
2018, the Company entered into a one-year term oil marketing contract with a
third-party purchaser. The contract requires the Company to deliver not less than
seven thousand barrels per day. Should there be a delivery shortfall in any
given month, the Company retains an option to deliver the shortfall volume in
any two subsequent months; however, failure to meet this volume delivery
commitment would result in a penalty equal to the volume shortfall multiplied
by the then market price for oil. If production is not sufficient to meet the
sales commitment, the Company may purchase commodities in the market to satisfy
its commitment.
In January
2019, the Company entered into a firm sales agreement with a third-party purchaser.
The purchaser provides integrated transportation and marketing optionality,
including dock capacity in Corpus Christi, Texas. The agreement has a term that
ends five years after the startup of Cactus II Pipeline system and requires the
Company to deliver 50,000 barrels of oil per day that will receive waterborne
market pricing.
Leases.
The
Company leases office space, office equipment, drilling rigs, field equipment
and vehicles. Leases with an initial term of 12 months or less are not recorded
on the consolidated balance sheet. The Company elected a practical expedient to
not separate non-lease components from lease components for the following asset
types: office space, office equipment, drilling rigs, and field equipment. The
Company did not elect this practical expedient for vehicle leases.
The following table provides
supplemental consolidated balance sheet information related to leases at March
31, 2019:
|
|
|
|
|
|
|
(in millions)
|
Classification
|
|
March
31, 2019
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Operating lease right-of-use assets
|
Other property and equipment, net
|
|
$
|
18
|
|
Finance lease right-of-use assets
|
Other property and equipment, net
|
|
|
15
|
|
Total lease right-of-use assets (a)
|
|
|
$
|
33
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Operating
|
Other current liabilities
|
|
$
|
7
|
|
Finance
|
Other current liabilities
|
|
|
6
|
|
Noncurrent:
|
|
|
|
|
|
Operating
|
Asset retirement obligations and other long-term liabilities
|
|
|
13
|
|
Finance
|
Asset retirement obligations and other long-term liabilities
|
|
|
10
|
|
Total lease liabilities (a)
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Total lease right-of-use assets
and lease liabilities are gross amounts and a portion of these costs will be
reimbursed by other working interest owners.
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
The following table provides the
components of lease cost, excluding lease cost related to short-term leases,
for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
(in millions)
|
Classification
|
|
March
31, 2019
|
|
|
|
|
|
|
Operating lease cost
|
General and administrative
|
|
$
|
2
|
Finance lease cost
|
Depreciation, depletion, and amortization (a)
|
|
|
2
|
Total lease cost
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Interest on lease liabilities related to finance leases was
immaterial during the three months ended March 31, 2019.
|
|
|
|
|
|
|
The Company’s short-term leases
are comprised primarily of drilling rigs and certain field equipment. During
the three months ended March 31, 2019, the Company’s gross lease cost related to
its short-term leases was $94 million, of which $67 million was capitalized as
part of oil and natural gas properties. A portion of these costs was reimbursed
to the Company by other working interest owners.
The following table summarizes
supplemental cash flow information related to leases for the three months ended
March 31, 2019:
|
|
|
|
|
|
|
|
Three
Months Ended
|
(in millions)
|
|
|
March
31, 2019
|
|
|
|
|
|
Cash paid for amounts included in measurement of lease
liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
2
|
Financing cash flows from finance leases
|
|
$
|
2
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
Operating leases
|
|
$
|
-
|
Finance leases
|
|
$
|
3
|
|
|
|
|
|
The following table provides
lease terms and discount rates related to leases at March 31, 2019:
|
|
|
|
|
|
|
March
31, 2019
|
|
|
|
|
|
Weighted average remaining lease term (years):
|
|
|
|
Operating leases
|
|
|
3.5
|
Finance leases
|
|
|
2.9
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
|
|
4.9%
|
Finance leases
|
|
|
4.4%
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
The
following table provides maturities of lease liabilities at March 31, 2019:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
|
|
|
|
|
|
Remaining 2019
|
|
$
|
6
|
|
$
|
5
|
2020
|
|
|
8
|
|
|
6
|
2021
|
|
|
6
|
|
|
4
|
2022
|
|
|
1
|
|
|
2
|
Thereafter
|
|
|
1
|
|
|
-
|
Total lease payments
|
|
|
22
|
|
|
17
|
Less: interest
|
|
|
(2)
|
|
|
(1)
|
Present value of lease liabilities
|
|
$
|
20
|
|
$
|
16
|
|
|
|
|
|
|
|
|
As discussed in Note 2, the
Company elected a transition method to recognize the effects of applying the
new standard as a cumulative-effect adjustment to the opening balance of
retained earnings. Per ASU 2016-02, an entity electing this transition method
should provide the required disclosures under Topic 840 for all periods that
continue to be in accordance with Topic 840. As such, the Company included the
future minimum lease commitments table below as of December 31, 2018. In
addition, lease payments associated with these operating leases were $3 million
for the three months ended March 31, 2018.
Future minimum
lease commitments under non-cancellable leases at December 31, 2018 were as
follows:
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
14
|
2020
|
|
|
12
|
2021
|
|
|
10
|
2022
|
|
|
3
|
2023
|
|
|
-
|
Thereafter
|
|
|
1
|
|
Total
|
$
|
40
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 10.
Income taxes
The Company’s provision for income taxes is based on the estimated annual
effective tax rate plus discrete items. For the three months ended March 31,
2019 and 2018, the Company recorded an income tax benefit of approximately $194
million and an income tax expense of approximately $254 million, respectively.
The change is primarily due to the pre-tax loss for the three months ended
March 31, 2019 as compared to the pre-tax income for the three months ended
March 31, 2018.
The effective income tax rates were 22 percent and 23 percent for
the three months ended
March 31, 2019
and 2018, respectively.
The difference between the Company’s effective tax rates for the three
months ended March 31, 2019 as compared to 2018 is primarily due to the
research and development credit, net of unrecognized tax benefits, partially
offset by the impact of other items. The Company recorded a discrete income tax
benefit related to stock-based awards of approximately $2 million for each of
the three months ended
March 31, 2019
and 2018.
The Company recognizes the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities based upon the technical merits of the
position. At December 31, 2018, the Company had cumulative unrecognized tax benefits
of approximately $63 million, primarily related to research and development
credits. As of
March 31, 2019, the Company estimated an increase in cumulative
unrecognized tax benefits for the 2019 tax year of approximately $16 million.
If all or a portion of the unrecognized tax benefit is
sustained upon examination by the taxing authorities, the tax benefit will be
recognized as a reduction to the Company's deferred tax liability and will
affect the Company's effective tax rate in the period recognized. The timing as
to when the Company will substantially resolve the uncertainties associated
with the unrecognized tax benefit is uncertain
.
Note 11.
Related party transactions
The
Company paid royalties on certain properties to a partnership in which a
director of the Company is the general partner and owns a 3.5 percent
partnership interest.
At March
31, 2019, the Company had an ownership interest in an entity that operates and
manages various water infrastructure assets located in the Permian Basin and
accounts for this investment using the equity method. The Company also has a
water management services agreement with this entity under which the Company
pays a fee for each barrel of produced water.
The
payments to the Company’s related parties totaled approximately $6 million and
$1 million for the three months ended March 31, 2019 and 2018, respectively.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 12.
Earnings per share
The
Company uses the two-class method of calculating earnings per share because
certain of the Company’s unvested share-based awards qualify as participating
securities.
The
Company’s basic earnings (loss) per share attributable to common stockholders
is computed as (i) net income (loss) as reported, (ii) less participating basic
earnings (iii) divided by weighted average basic common shares outstanding. The
Company’s diluted earnings (loss) per share attributable to common stockholders
is computed as (i) basic earnings (loss) attributable to common stockholders,
(ii) plus reallocation of participating earnings (iii) divided by weighted
average diluted common shares outstanding.
The following table reconciles
the Company’s earnings (loss) from operations and earnings (loss) attributable
to common stockholders to the basic and diluted earnings (loss) used to
determine the Company’s earnings (loss) per share amounts for the three months
ended March 31, 2019 and 2018, respectively, under the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
(in millions)
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
$
|
(695)
|
|
$
|
835
|
Participating basic earnings (a)
|
|
-
|
|
|
(6)
|
|
Basic earnings (loss) attributable to common stockholders
|
|
(695)
|
|
|
829
|
Reallocation of participating earnings
|
|
-
|
|
|
-
|
|
Diluted earnings (loss) attributable to common stockholders
|
$
|
(695)
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Unvested restricted stock
awards represent participating securities because they participate in
nonforfeitable dividends or distributions with the common equity holders of
the Company. Participating earnings represent the distributed and
undistributed earnings of the Company attributable to the participating
securities. Unvested restricted stock awards do not participate in
undistributed net losses as they are not contractually obligated to do so.
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
The
following table is a reconciliation of the basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the three
months ended
March 31, 2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
|
199,148
|
|
147,925
|
|
|
Dilutive performance units
|
|
-
|
|
537
|
|
Diluted
|
|
199,148
|
|
148,462
|
|
|
|
|
|
|
|
The following table
is a summary of the performance units that were not included in the computation
of diluted earnings per share, as inclusion of these items would be
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Number of antidilutive units:
|
|
|
|
|
|
Performance units
|
|
324
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance unit awards.
The
number of shares of common stock that will ultimately be issued for performance
units will be determined by a combination of (i) comparing the Company’s total
shareholder return relative to the total shareholder return of a predetermined
group of peer companies at the end of the performance period and (ii) the
Company’s absolute total shareholder return at the end of the performance
period. The performance period on these awards can range from three to five
years. The actual payout of shares will be between zero and 300 percent. See
Note 5 for additional information on performance unit awards.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 13.
Subsidiary guarantors
At
March 31, 2019, certain
of the Company’s
100 percent owned subsidiaries have fully and unconditionally guaranteed the
Company’s senior notes. The indentures governing the Company’s senior notes
provide that the guarantees of its subsidiary guarantors will be released in
certain customary circumstances including (i) in connection with any sale,
exchange or other disposition, whether by merger, consolidation or otherwise,
of the capital stock of that guarantor to a person that is not the Company or a
restricted subsidiary of the Company, such that, after giving effect to such
transaction, such guarantor would no longer constitute a subsidiary of the
Company, (ii) in connection with any sale, exchange or other disposition (other
than a lease) of all or substantially all of the assets of that guarantor to a
person that is not the Company or a restricted subsidiary of the Company, (iii)
upon the merger of a guarantor into the Company or any other guarantor or the
liquidation or dissolution of a guarantor, (iv) if the Company designates any
restricted subsidiary that is a guarantor to be an unrestricted subsidiary in
accordance with the indenture, (v) upon legal defeasance or satisfaction and
discharge of the indenture and (vi) upon written notice of such release or
discharge by the Company to the trustee following the release or discharge of
all guarantees by such guarantor of any indebtedness that resulted in the
creation of such guarantee, except a discharge or release by or as a result of
payment under such guarantee.
See Note 8 for a summary of the Company’s senior notes. In accordance
with practices accepted by the SEC, the Company has prepared condensed
consolidating financial statements in order to quantify the assets, results of
operations and cash flows of such subsidiaries as subsidiary guarantors. In
addition, certain of the Company’s subsidiaries do not guarantee the Company’s
senior notes and are included in the Company’s consolidated financial
statements. These entities are 100 percent owned subsidiaries and are referred
to as a “Subsidiary Non-Guarantor” in the tables below. The Company’s less than
100 percent owned subsidiaries, primarily equity method investments, do not
guarantee the Company’s senior notes.
The following
condensed consolidating balance sheets at
March 31, 2019 and December
31, 2018
, condensed consolidating statements of operations
for the
three
months ended
March 31,
2019 and 2018
and condensed consolidating statements
of cash flows for the
three
months ended
March
31, 2019 and 2018,
present financial information for
Concho Resources Inc. as the parent on a stand-alone basis (carrying any
investments in subsidiaries under the equity method), financial information for
the subsidiary guarantors on a stand-alone basis (carrying any investment in
non-guarantor subsidiaries under the equity method), financial information for
the subsidiary non-guarantors on a stand-alone basis and the consolidation and
elimination entries necessary to arrive at the information for the Company on a
consolidated basis. All current and deferred income taxes are recorded on
Concho Resources Inc., as the subsidiaries are flow-through entities for income
tax purposes. The subsidiary guarantors and subsidiary non-guarantors are not
restricted from making distributions to the Company.
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheet
|
March
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
|
|
Subsidiary
|
|
|
Consolidating
|
|
|
|
(in millions)
|
|
|
Issuer
|
|
Guarantors
|
Non-Guarantor
|
|
Entries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable - related parties
|
|
$
|
18,518
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(18,518)
|
|
$
|
-
|
Other current assets
|
|
|
6
|
|
|
1,021
|
|
|
-
|
|
|
-
|
|
|
1,027
|
Oil and natural gas properties, net
|
|
|
-
|
|
|
22,405
|
|
|
16
|
|
|
-
|
|
|
22,421
|
Property and equipment, net
|
|
|
-
|
|
|
350
|
|
|
-
|
|
|
-
|
|
|
350
|
Investment in subsidiaries
|
|
|
5,629
|
|
|
-
|
|
|
-
|
|
|
(5,629)
|
|
|
-
|
Goodwill
|
|
|
-
|
|
|
2,229
|
|
|
-
|
|
|
-
|
|
|
2,229
|
Other long-term assets
|
|
|
15
|
|
|
126
|
|
|
-
|
|
|
-
|
|
|
141
|
|
Total assets
|
|
$
|
24,168
|
|
$
|
26,131
|
|
$
|
16
|
|
$
|
(24,147)
|
|
$
|
26,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - related parties
|
|
$
|
-
|
|
$
|
18,502
|
|
$
|
16
|
|
$
|
(18,518)
|
|
$
|
-
|
Other current liabilities
|
|
|
368
|
|
|
1,292
|
|
|
-
|
|
|
-
|
|
|
1,660
|
Long-term debt
|
|
|
4,567
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,567
|
Other long-term liabilities
|
|
|
1,174
|
|
|
708
|
|
|
-
|
|
|
-
|
|
|
1,882
|
Equity
|
|
|
18,059
|
|
|
5,629
|
|
|
-
|
|
|
(5,629)
|
|
|
18,059
|
|
Total liabilities and equity
|
|
$
|
24,168
|
|
$
|
26,131
|
|
$
|
16
|
|
$
|
(24,147)
|
|
$
|
26,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheet
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
|
|
Subsidiary
|
|
Consolidating
|
|
|
(in millions)
|
|
|
Issuer
|
|
Guarantors
|
Non-Guarantor
|
|
Entries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable - related parties
|
|
$
|
18,155
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(18,155)
|
|
$
|
-
|
Other current assets
|
|
|
534
|
|
|
875
|
|
|
-
|
|
|
-
|
|
|
1,409
|
Oil and natural gas properties, net
|
|
|
-
|
|
|
21,988
|
|
|
17
|
|
|
-
|
|
|
22,005
|
Property and equipment, net
|
|
|
-
|
|
|
308
|
|
|
-
|
|
|
-
|
|
|
308
|
Investment in subsidiaries
|
|
|
5,411
|
|
|
-
|
|
|
-
|
|
|
(5,411)
|
|
|
-
|
Goodwill
|
|
|
-
|
|
|
2,224
|
|
|
-
|
|
|
-
|
|
|
2,224
|
Other long-term assets
|
|
|
224
|
|
|
124
|
|
|
-
|
|
|
-
|
|
|
348
|
|
Total assets
|
|
$
|
24,324
|
|
$
|
25,519
|
|
$
|
17
|
|
$
|
(23,566)
|
|
$
|
26,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - related parties
|
|
$
|
-
|
|
$
|
18,138
|
|
$
|
17
|
|
$
|
(18,155)
|
|
$
|
-
|
Other current liabilities
|
|
|
70
|
|
|
1,286
|
|
|
-
|
|
|
-
|
|
|
1,356
|
Long-term debt
|
|
|
4,194
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,194
|
Other long-term liabilities
|
|
|
1,292
|
|
|
684
|
|
|
-
|
|
|
-
|
|
|
1,976
|
Equity
|
|
|
18,768
|
|
|
5,411
|
|
|
-
|
|
|
(5,411)
|
|
|
18,768
|
|
Total liabilities and equity
|
|
$
|
24,324
|
|
$
|
25,519
|
|
$
|
17
|
|
$
|
(23,566)
|
|
$
|
26,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Operations
|
Three
Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Consolidating
|
|
|
|
(in millions)
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantor
|
|
|
Entries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
-
|
|
$
|
1,104
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,104
|
Total operating costs and expenses
|
|
|
(1,060)
|
|
|
(890)
|
|
|
-
|
|
|
-
|
|
|
(1,950)
|
|
Income (loss) from operations
|
|
|
(1,060)
|
|
|
214
|
|
|
-
|
|
|
-
|
|
|
(846)
|
Interest expense
|
|
|
(47)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(47)
|
Other, net
|
|
|
218
|
|
|
4
|
|
|
-
|
|
|
(218)
|
|
|
4
|
|
Income (loss) before income taxes
|
|
|
(889)
|
|
|
218
|
|
|
-
|
|
|
(218)
|
|
|
(889)
|
Income tax benefit
|
|
|
194
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
194
|
|
Net income (loss)
|
|
$
|
(695)
|
|
$
|
218
|
|
$
|
-
|
|
$
|
(218)
|
|
$
|
(695)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Operations
|
Three
Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Consolidating
|
|
|
|
(in millions)
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Entries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
-
|
|
$
|
942
|
|
$
|
5
|
|
$
|
-
|
|
$
|
947
|
Total operating costs and expenses
|
|
|
(34)
|
|
|
105
|
|
|
(3)
|
|
|
-
|
|
|
68
|
|
Income (loss) from operations
|
|
|
(34)
|
|
|
1,047
|
|
|
2
|
|
|
-
|
|
|
1,015
|
Interest expense
|
|
|
(30)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30)
|
Other, net
|
|
|
1,153
|
|
|
104
|
|
|
-
|
|
|
(1,153)
|
|
|
104
|
|
Income before income taxes
|
|
|
1,089
|
|
|
1,151
|
|
|
2
|
|
|
(1,153)
|
|
|
1,089
|
Income tax expense
|
|
|
(254)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(254)
|
|
Net income
|
|
$
|
835
|
|
$
|
1,151
|
|
$
|
2
|
|
$
|
(1,153)
|
|
$
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Condensed Consolidating Statement of Cash
Flows
|
Three
Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
|
Subsidiary
|
Consolidating
|
|
|
(in millions)
|
|
Issuer
|
|
Guarantors
|
Non-Guarantor
|
Entries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) operating activities
|
$
|
(335)
|
|
$
|
958
|
|
$
|
-
|
|
$
|
-
|
|
$
|
623
|
Net cash flows used in investing activities
|
|
|
-
|
|
|
(902)
|
|
|
-
|
|
|
-
|
|
|
(902)
|
Net cash flows provided by (used in) financing activities
|
|
335
|
|
|
(56)
|
|
|
-
|
|
|
-
|
|
|
279
|
|
Net increase in cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash and cash equivalents at beginning of period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash and cash equivalents at end of period
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Cash Flows
|
Three
Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
|
Subsidiary
|
Consolidating
|
|
|
(in millions)
|
|
Issuer
|
|
Guarantors
|
Non-Guarantor
|
Entries
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
$
|
351
|
|
$
|
137
|
|
$
|
-
|
|
$
|
-
|
|
$
|
488
|
Net cash flows used in investing activities
|
|
|
-
|
|
|
(93)
|
|
|
-
|
|
|
-
|
|
|
(93)
|
Net cash flows used in financing activities
|
|
(351)
|
|
|
(44)
|
|
|
-
|
|
|
-
|
|
|
(395)
|
|
Net increase in cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash and cash equivalents at beginning of period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash and cash equivalents at end of period
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 14.
Subsequent
events
Oryx
divestiture.
In April 2019, Oryx entered into an agreement to sell 100 percent
of its equity interests. The Company expects to receive approximately $300
million, net of closing costs, for its 23.75 percent membership interest.
Midstream
joint venture.
In April 2019, the Company entered into a midstream joint venture,
Beta Holding Company, LLC (“Beta Holding”), to construct a pipeline to gather
and transport oil production in the Midland Basin. The Company also entered
into a ten-year dedication agreement with an affiliate of Beta Holding to
transport the Company’s oil production in the Midland Basin. The Company owns a
50 percent membership interest in Beta Holding.
2019
dividends.
On April 30, 2019, the Company’s board of directors approved a
cash dividend of $0.125 per share for the second quarter of 2019 that is
expected to be paid on June 28, 2019 to stockholders of record as of May 10,
2019.
New commodity derivative contracts.
After March 31, 2019,
the Company entered into the following derivative contracts to hedge additional
amounts of estimated future production
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil Price Swaps: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
-
|
|
1,707,000
|
|
1,451,000
|
|
1,281,000
|
|
4,439,000
|
|
|
|
Price per Bbl
|
$
|
-
|
$
|
62.64
|
$
|
63.14
|
$
|
63.43
|
$
|
63.03
|
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
1,170,000
|
|
1,183,000
|
|
1,196,000
|
|
1,196,000
|
|
4,745,000
|
|
|
|
Price per Bbl
|
$
|
56.72
|
$
|
56.72
|
$
|
56.72
|
$
|
56.72
|
$
|
56.72
|
|
Oil Basis Swaps: (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
-
|
|
-
|
|
92,000
|
|
920,000
|
|
1,012,000
|
|
|
|
Price per Bbl
|
$
|
-
|
$
|
-
|
$
|
(1.05)
|
$
|
(0.07)
|
$
|
(0.16)
|
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
1,092,000
|
|
-
|
|
-
|
|
-
|
|
1,092,000
|
|
|
|
Price per Bbl
|
$
|
0.10
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
0.10
|
|
|
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
540,000
|
|
546,000
|
|
552,000
|
|
552,000
|
|
2,190,000
|
|
|
|
Price per Bbl
|
$
|
0.50
|
$
|
0.50
|
$
|
0.50
|
$
|
0.50
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The oil derivative contracts
are settled based on the NYMEX – WTI calendar-month average futures price.
|
|
(b)
|
The basis differential price is
between Midland – WTI and Cushing – WTI. These contracts are settled on a
calendar-month basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2019
Unaudited
Note 15.
Supplementary information
Capitalized costs
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties:
|
|
|
|
|
|
|
|
Proved
|
|
$
|
26,000
|
|
$
|
24,992
|
|
Unproved
|
|
|
6,559
|
|
|
6,714
|
|
Less: accumulated depletion
|
|
|
(10,138)
|
|
|
(9,701)
|
|
|
Net capitalized costs for oil and natural gas properties
|
|
$
|
22,421
|
|
$
|
22,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred for oil and
natural gas producing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Property acquisition costs:
|
|
|
|
|
|
|
|
Proved
|
|
$
|
-
|
|
$
|
-
|
|
Unproved
|
|
|
4
|
|
|
13
|
Exploration
|
|
|
462
|
|
|
243
|
Development
|
|
|
464
|
|
|
207
|
|
Total costs incurred for oil and natural gas properties
|
|
$
|
930
|
|
$
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist you in understanding our
business and results of operations together with our present financial
condition. This section should be read in conjunction with our historical
consolidated financial statements and notes.
Certain statements in our discussion below are forward-looking
statements. These forward-looking statements involve risks and uncertainties.
We caution that a number of factors could cause actual results to differ
materially from those implied or expressed by the forward-looking statements.
Please see “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
Concho Resources Inc. (“Concho,” the “Company,” “we,”
“us,” and “our”) is an independent exploration and production company. We are
one of the largest operators in the Permian Basin of West Texas and Southeast
New Mexico. Concho’s legacy in the Permian Basin provides us a deep understanding
of operating and geological trends, and we are actively developing our resource
base by utilizing large-scale development projects, which include long-lateral
wells, enhanced completion techniques and multi-well pad locations, throughout
our operating areas.
Financial and Operating Performance
On July
19, 2018, we completed our acquisition of RSP Permian, Inc. (“RSP”) through an
all-stock transaction (the “RSP Acquisition”), which, among other things,
impacted the comparability of our results of operations. Our financial and
operating performance for the three months ended March 31, 2019 and 2018
included the following highlights:
·
Net loss was $
695 m
illion
($(3.49)
per diluted share) as compared to net
income of $835
m
illion ($5.58
per diluted share) for the first three months of
2019 and 2018, respectively. The decrease in net income was primarily due to:
•
$
1,024
million increase in loss on
derivatives due to a $1,059 million loss on derivatives
during the three
months ended March 31, 2019, as compared to a loss of
$35
million
during 2018;
•
$722 million net decrease in gain on disposition of assets related
to a gain of approximately $723 million, primarily due to certain acquisitions
and divestitures during 2018, as discussed in Note 4 of the Condensed Notes to
Consolidated Financial Statements
;
•
$148 million increase in depreciation, depletion and amortization
expense, primarily due to an increase in production and the depletion rate per
Boe;
•
$100 million decrease in other income, primarily due to a gain of
approximately $103 million during the three months ended March 31, 2018 on the
equity method investment distribution received from Oryx Southern Delaware
Holdings, LLC (“Oryx”); and
•
$44 million increase in production expense, primarily due to increased
production and activities associated with the additional wells successfully
drilled and completed in 2018 and 2019 as well as our acquisitions during 2018;
partially
offset by:
•
$157 million increase in oil and natural gas revenues as a result
of
a
44
percent
increase in production, partially offset by a 19 percent decrease in
commodity price realizations per Boe
(excluding the
effects of derivative activities).
·
Average daily sales volumes of
328 M
Boe
per day during the first three months of 2019 increased 44 percent as compared
to 228 MBoe per day during 2018.
·
Net cash provided by operating activities increased by
approximately $135 million to $623
million
for
the first three months of 2019, as compared to $488
m
illion
in the first three months of 2018, primarily due to an increase in oil and
natural gas revenues and changes related to cash settlements on derivatives,
partially offset by increased operating costs on our oil and natural gas
properties.
Commodity Prices
Our results of operations are heavily influenced by commodity prices.
Commodity prices may fluctuate widely in response to (i) relatively minor
changes in the supply of and demand for oil and natural gas, (ii) market
uncertainty and (iii) a variety of additional factors that are beyond our
control. Factors that may impact future commodity prices, including the price
of oil and natural gas, include but are not limited to:
·
the overall global demand for oil and natural gas;
·
the domestic and foreign supply of oil, natural gas
and natural gas liquids;
·
the overall North American oil and natural gas supply
and demand fundamentals, including:
·
the U.S. economy,
·
weather conditions, and
·
liquefied natural gas (“LNG”) deliveries to and
exports from the United States;
·
economic conditions worldwide;
·
the proximity, capacity, cost and availability of
pipelines and other transportation facilities, as well as the availability of
commodity processing, gathering and refining capacity;
·
risks related to the concentration of our operations
in the Permian Basin of West Texas and Southeast New Mexico and the level of
commodity inventory in the Permian Basin;
·
the quality of the oil we produce;
·
the level of global crude oil, crude oil products and
LNG inventories;
·
volatility and trading patterns in the
commodity-futures markets;
·
political and economic developments in oil and natural
gas producing regions, including Africa, South America and the Middle East;
·
the extent to which members of the Organization of
Petroleum Exporting Countries and other oil exporting nations are able to
influence global oil supply levels;
·
technological advances affecting energy consumption
and energy supply;
·
the effect of energy conservation efforts;
·
additional restrictions on the exploration,
development and production of oil, natural gas and natural gas liquids so as to
materially reduce emissions of carbon dioxide and methane greenhouse gases;
·
political and economic events that directly or
indirectly impact the relative strength or weakness of the U.S. dollar, on
which oil prices are benchmarked globally, against foreign currencies;
·
domestic and foreign governmental regulations,
including limits on the United States’ ability to export crude oil, and
taxation;
·
the cost and availability of products and personnel
needed for us to produce oil and natural gas, including rigs, crews, sand,
water and water disposal; and
·
the price, availability and acceptance of alternative
fuels.
Although we cannot predict the occurrence of events that may affect
future commodity prices or the degree to which these prices will be affected,
the prices for any commodity that we produce will generally approximate current
market prices in the geographic region of the production. From time to time, we
may hedge a portion of our commodity price risk to mitigate the impact of price
volatility on our business. See Notes 7 and 14 of the Condensed Notes to
Consolidated Financial Statements included in “Item 1. Consolidated
Financial Statements (Unaudited)” for additional information regarding our
commodity
derivative positions at March 31, 2019 and
additional derivative contracts entered into subsequent to March 31, 2019,
respectively.
The following table sets forth the average New York Mercantile Exchange
(“NYMEX”) oil and natural gas prices for the three months ended
March 31,
2019
and 2018, as well as the high and low NYMEX
prices for the same periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Average NYMEX prices:
|
|
|
|
|
|
|
|
Oil (Bbl)
|
|
$
|
54.87
|
|
$
|
62.96
|
|
Natural gas (MMBtu)
|
|
$
|
2.88
|
|
$
|
2.84
|
|
|
|
|
|
|
|
|
|
High and Low NYMEX prices:
|
|
|
|
|
|
|
|
Oil (Bbl):
|
|
|
|
|
|
|
|
|
High
|
|
$
|
60.14
|
|
$
|
66.14
|
|
|
Low
|
|
$
|
45.41
|
|
$
|
59.19
|
|
Natural gas (MMBtu):
|
|
|
|
|
|
|
|
|
High
|
|
$
|
3.59
|
|
$
|
3.63
|
|
|
Low
|
|
$
|
2.55
|
|
$
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further, the NYMEX oil price and NYMEX natural gas price reached highs
and lows of $66.30 and $61.59 per Bbl and $2.71 and $2.46 per MMBtu,
respectively, during the period from
April 1, 2019
to April 29, 2019. At April 29, 2019, the NYMEX oil price
and NYMEX natural gas price were $63.50 per Bbl and $2.59 per MMBtu,
respectively.
Historically, and during the three months ended March 31, 2019, we
derived a significant portion of our total natural gas revenues from the value
of the natural gas liquids contained in our natural gas, with the remaining
portion coming from the value of the dry natural gas residue. The average Mont
Belvieu price for a blended barrel of natural gas liquids was $24.13 per
Bbl and $27.64 per Bbl during the three months ended March 31, 2019 and 2018, respectively.
Recent Events
Oryx
divestiture.
In April 2019, Oryx Southern Delaware Holdings, LLC (“Oryx”), an
entity that operates a crude oil gathering and transportation system in the
Delaware Basin, entered into an agreement to sell 100 percent of its equity
interests. We expect to receive approximately $300 million, net of closing
costs, for our 23.75 percent membership interest. We intend to use the proceeds
of this sale to repay borrowings under our credit facility, as amended and
restated (“Credit Facility”).
Midstream joint venture.
In April
2019, we entered into a midstream joint venture, Beta Holding Company, LLC
(“Beta Holding”), to construct a pipeline to gather and transport oil
production in the northern portion of the Midland Basin. We also entered into a
ten-year dedication agreement with an affiliate of Beta Holding to transport
our oil production in the northern portion of the Midland Basin.
2019
dividends.
On February 19, 2019, our board of directors declared a cash
dividend of $0.125 per share. The total cash dividend, including the cash
dividend paid on unvested restricted stock awards, of $25 million was paid on
March 29, 2019 to stockholders of record as of March 1, 2019. On April
30, 2019,
our board of directors approved a cash dividend of $0.125 per share for the
second quarter of 2019 that is expected to be paid on June 28, 2019 to
stockholders of record as of May 10, 2019.
Derivative
Financial Instruments
Derivative
financial instrument exposure.
At March 31, 2019, the fair
value of our financial derivatives was a net liability of $364
million. Under the terms of our financial
derivative instruments, we do not have exposure to potential “margin calls” on
our financial derivative instruments. The terms of our Credit Facility do not
allow us to offset amounts we may owe a lender against amounts we may be owed
related to our derivative financial instruments with such party.
New commodity derivative contracts.
After March 31, 2019,
we
entered into derivative contracts to hedge additional amounts of estimated
future production. Refer to Note 14 of the Condensed Notes to Consolidated
Financial Statements included in “Item 1. Consolidated Financial Statements
(Unaudited)” for additional information regarding these commodity derivative
contracts
.
Results of Operations
The following table sets forth summary information concerning our
production and operating data for the three months ended
March 31,
2019
and 2018. The actual historical data in this
table excludes results from the RSP Acquisition for periods prior to July 19,
2018. Because of normal production declines, increased or decreased drilling
activities, fluctuations in commodity prices and the effects of acquisitions and
divestitures, the historical information presented below should not be
interpreted as being indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Production and operating data:
|
|
|
|
|
|
|
|
Net production volumes:
|
|
|
|
|
|
|
|
|
Oil (MBbl)
|
|
|
18,936
|
|
|
12,939
|
|
|
Natural gas (MMcf)
|
|
|
63,769
|
|
|
45,448
|
|
|
Total (MBoe)
|
|
|
29,564
|
|
|
20,514
|
|
|
|
|
|
|
|
|
Average daily production volumes:
|
|
|
|
|
|
|
|
|
Oil (Bbl)
|
|
|
210,400
|
|
|
143,767
|
|
|
Natural gas (Mcf)
|
|
|
708,544
|
|
|
504,978
|
|
|
Total (Boe)
|
|
|
328,491
|
|
|
227,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices per unit:
|
|
|
|
|
|
|
|
|
Oil, without derivatives (Bbl)
|
|
$
|
49.39
|
|
$
|
61.29
|
|
|
Oil, with derivatives (Bbl) (a)
|
|
$
|
49.56
|
|
$
|
52.59
|
|
|
Natural gas, without derivatives (Mcf)
|
|
$
|
2.64
|
|
$
|
3.39
|
|
|
Natural gas, with derivatives (Mcf) (a)
|
|
$
|
2.59
|
|
$
|
3.41
|
|
|
Total, without derivatives (Boe)
|
|
$
|
37.33
|
|
$
|
46.17
|
|
|
Total, with derivatives (Boe) (a)
|
|
$
|
37.34
|
|
$
|
40.71
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses per Boe: (b)
|
|
|
|
|
|
|
|
|
Oil and natural gas production
|
|
$
|
5.87
|
|
$
|
6.33
|
|
|
Production and ad valorem taxes
|
|
$
|
2.92
|
|
$
|
3.40
|
|
|
Gathering, processing and transportation
|
|
$
|
0.88
|
|
$
|
0.53
|
|
|
Depreciation, depletion and amortization
|
|
$
|
15.74
|
|
$
|
15.43
|
|
|
General and administrative
|
|
$
|
3.08
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes the effect of net cash
receipts from (payments on) derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
31,
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash receipts from (payments on) derivatives:
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
3
|
|
$
|
(113)
|
|
|
|
Natural gas derivatives
|
|
|
(3)
|
|
|
1
|
|
|
|
|
Total
|
|
$
|
-
|
|
$
|
(112)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The presentation of average
prices with derivatives is a result of including the net cash receipts from
(payments on) commodity derivatives that are presented in our consolidated
statements of cash flows. This presentation of average prices with derivatives
is a means by which to reflect the actual cash performance of our commodity
derivatives for the respective periods and presents oil and natural gas
prices with derivatives in a manner consistent with the presentation
generally used by the investment community.
|
|
|
|
|
|
|
|
(b)
|
Per Boe amounts calculated
using dollars and volumes rounded to thousands.
|
|
Three Months Ended March 31, 2019 Compared to Three
Months Ended March 31, 2018
Oil and natural gas revenues.
Revenue
from oil and natural gas operations was
$1,104 million
for the three months ended
March 31, 2019
, an
increase of
$157 million (17
percent
) from $947 million for
2018
.
This increase was primarily due to the increase in oil and natural gas production,
in part due to an increase in non-operated revenues, partially offset by the
decrease in realized oil and natural gas prices (excluding the effects of
derivative activities). Specific factors affecting oil and natural gas revenues
include the following:
·
total oil production was 18,936 M
Bbl
for the three months ended
March 31, 2019
, an
increase
of 5,997 M
Bbl
(46
percent
) from
12,939 M
Bbl
for
2018
;
·
average realized oil price (excluding the effects of
derivative activities) was
$49.39
per Bbl during the three months
ended
March 31, 2019
, a decrease of 19
percent
from
$61.29
per Bbl
during
2018
.
For the three months ended
March 31, 2019, our crude oil price differential relative to NYMEX was $(5.48)
per Bbl, or a realization of approximately 90 percent, as compared to a crude
oil price differential relative to NYMEX of $(1.67) per Bbl, or a realization
of approximately 97 percent, for 2018. The basis differential (referred to as the
“Mid-Cush differential”) between the location of Midland, Texas and Cushing,
Oklahoma (settlement location for NYMEX pricing) for our oil directly impacts
our realized oil price. For the three months ended March 31, 2019 and 2018, the
average market Mid-Cush differential was a price reduction of $
3.86
per Bbl and a price benefit of $
0.38
per Bbl, respectively. The Mid-Cush
differential significantly narrowed in March 2019 and into the second quarter
of 2019, although it is possible that the differential could widen again at
certain times during 2019;
·
total natural gas production was 63,769 M
Mcf
for the three months ended
March 31, 2019
, an
increase
of 18,321
MMcf
(40
percent
) from
45,448 M
Mcf
for
2018
; and
·
average realized natural gas price (excluding the
effects of derivative activities) was
$2.64
per Mcf during the three months ended
March 31, 2019
, a decrease of 22
percent
from
$3.39
per Mcf during
2018. For the
three months ended March 31, 2019 and 2018, we realized approximately 92
percent and 119 percent, respectively, of the average NYMEX natural gas prices
for the respective periods. We derive a significant portion of our total
natural gas revenues from the value of the natural gas liquids contained in our
natural gas, with the remaining portion coming from the value of the dry
natural gas residue. Because of our liquids-rich natural gas stream and the
related value of the natural gas liquids being included in our natural gas
revenues, our realized natural gas price (excluding the effects of derivatives)
historically reflected a price greater than the related NYMEX natural gas
price. However, during the latter part of 2018 and into 2019, amid concerns of
rising natural gas production relative to natural gas takeaway in the Permian
Basin, the price differential for natural gas residue increased significantly,
and could increase again at certain times during 2019. These widening natural
gas residue differentials negatively impacted our realized natural gas prices
during the three months ended March 31, 2019, but were partially offset by the
value of the natural gas liquids. The combination of these factors resulted in
a realized natural gas price of 92 percent of the average NYMEX natural gas
price, which falls below our historical amounts. In addition, the average Mont
Belvieu price for a blended barrel of natural gas liquids decreased from $27.64
per Bbl during the three months ended 2018 to $24.13 per Bbl during the three
months ended March 31, 2019.
Oil and natural gas production expenses.
The following table provides the components of our oil and
natural gas production expenses for the three months ended
March 31,
2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
Per
|
(in millions, except per unit amounts)
|
|
Amount
|
|
Boe
|
|
Amount
|
|
Boe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
166
|
|
$
|
5.59
|
|
$
|
121
|
|
$
|
5.88
|
Workover costs
|
|
|
8
|
|
|
0.28
|
|
|
9
|
|
|
0.45
|
|
|
Total oil and natural gas production expenses
|
|
$
|
174
|
|
$
|
5.87
|
|
$
|
130
|
|
$
|
6.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses were $166 million ($5.59 per Boe) for the three
months ended
March 31, 2019
, which was an increase of
$45 million from $121 million ($5.88 per Boe) during
2018
. The increase in lease operating expenses during the first
quarter of 2019 as compared to 2018 was primarily the result of (i) additional
wells successfully drilled and completed and (ii) our acquisitions during 2018,
primarily the RSP Acquisition. The decrease in lease operating expenses per Boe
was primarily due to increased production.
Workover costs were $8 million ($0.28 per Boe) for the three months ended
March 31, 2019
, which was a decrease of
$1 million from $9 million ($0.45 per Boe) during
2018
. The decrease in workover costs during the first quarter
of 2019 as compared to 2018 was primarily due to decreased workover activity.
The decrease in workover costs per Boe was primarily due to the decrease in workover
costs along with an increase in production.
Production and ad valorem taxes.
The following table provides the components of our production
and ad valorem tax expenses for the three months ended
March 31,
2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
Per
|
(in millions, except per unit amounts)
|
|
Amount
|
|
Boe
|
|
Amount
|
|
Boe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production taxes
|
|
$
|
70
|
|
$
|
2.38
|
|
$
|
64
|
|
$
|
3.13
|
Ad valorem taxes
|
|
|
16
|
|
|
0.54
|
|
|
6
|
|
|
0.27
|
|
|
Total production and ad valorem taxes
|
|
$
|
86
|
|
$
|
2.92
|
|
$
|
70
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production taxes per unit of production were $2.38 per Boe during the
three months ended
March 31, 2019
, a decrease of 24 percent
from $3.13 per Boe during
2018
. Over the same
period, our revenue per Boe (excluding the effects of derivatives) decreased 19
percent. The decrease in production taxes per unit of production was due to lower
realized revenue per Boe along with a higher percentage of our total production
originating in Texas, which has a lower tax rate than New Mexico.
Production
taxes fluctuate with the market value of our production sold, while ad valorem
taxes are generally based on the valuation of our oil and natural gas
properties at the beginning of the year, which vary across the different areas
in which we operate. Ad valorem taxes increased by $10 million primarily due to
additional wells drilled and completed, new wells acquired in the RSP
Acquisition and an increase in property values and tax rates in certain
counties. The increase in ad valorem taxes per Boe was primarily due to an
increase in property values and tax rates.
Gathering, processing and transportation costs.
The following table shows the gathering, processing and
transportation costs for the three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
Per
|
(in millions, except per unit amounts)
|
|
Amount
|
|
Boe
|
|
Amount
|
|
Boe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering, processing and transportation costs
|
|
$
|
26
|
|
$
|
0.88
|
|
$
|
11
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering, processing and transportation costs were $26 million ($0.88
per Boe) for the three months ended
March 31, 2019
, an increase of 136 percent from $11 million ($0.53 per
Boe) during 2018. The increase in gathering, processing and transportation
costs was primarily due to a certain crude oil gathering and transportation
contract that, among other things, was modified to allow repurchase rights. As
such, costs related to this contract that were previously recorded as a
deduction to revenue during the three months ended March 31, 2018, are now
recorded in gathering, processing and transportation costs. In addition,
contributing to the increase in gathering, processing and transportation costs was
the RSP Acquisition and the increase in production. The increase in gathering,
processing and transportation costs per Boe was primarily related to this crude
oil gathering and transportation contract, fixed costs associated with certain
contracts and higher priced trucking services in certain areas.
Exploration and abandonments expense.
The following table provides the components of our exploration and
abandonments expense for the three months ended
March 31, 2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Geological and geophysical
|
|
$
|
6
|
|
$
|
5
|
Leasehold abandonments
|
|
|
30
|
|
|
10
|
Other
|
|
|
11
|
|
|
3
|
|
Total exploration and abandonments
|
|
$
|
47
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our geological and geophysical expense for the periods presented above
primarily consists of the costs of acquiring and processing subsurface data to
better characterize and develop our resources.
For the three months ended
March 31, 2019 and 2018
, we recorded approximately $30 million and $10 million,
respectively, of leasehold abandonments, primarily related to certain expiring
acreage and acreage where we had no future plans to drill located primarily in
the Delaware Basin.
Our other expense for the periods presented above primarily consists of
surface and title costs on locations that we no longer intend to drill, certain
plugging costs, delay rentals and other exploratory well costs. The increase in
other expense was primarily due to the abandonment of one exploratory well
during the three months ended March 31, 2019 as a result of certain mechanical
issues encountered during the completion of the well that made it unable to
produce hydrocarbons.
Depreciation,
depletion and amortization expense.
The following table provides components of our depreciation, depletion
and amortization expense for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Per
|
|
|
|
Per
|
(in millions, except per unit amounts)
|
|
Amount
|
|
Boe
|
|
Amount
|
|
Boe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion of proved oil and natural gas properties
|
|
$
|
457
|
|
$
|
15.47
|
|
$
|
311
|
|
$
|
15.13
|
Depreciation of other property and equipment
|
|
|
7
|
|
|
0.24
|
|
|
5
|
|
|
0.26
|
Amortization of intangible assets
|
|
|
1
|
|
|
0.03
|
|
|
1
|
|
|
0.04
|
|
Total depletion, depreciation and amortization
|
|
$
|
465
|
|
$
|
15.74
|
|
$
|
317
|
|
$
|
15.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil price used to estimate proved oil reserves at period end
|
|
$
|
59.52
|
|
|
|
|
$
|
49.94
|
|
|
|
Natural gas price used to estimate proved natural gas reserves
at period end
|
$
|
3.07
|
|
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion of proved oil and natural gas properties was $457 million
($15.47 per Boe) for the three months ended
March 31, 2019
, an increase of $146 million (47 percent) from $311
million ($15.13 per Boe) for
2018
. The
increase in depletion expense was primarily due to an increase in production
and the depletion rate per Boe. The increase in depletion expense per Boe was
primarily due to the RSP Acquisition.
General and administrative expenses.
The following table provides components of our general
and administrative expenses for the three months ended
March 31,
2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Per
|
|
|
|
|
Per
|
(in millions, except per unit amounts)
|
|
Amount
|
|
Boe
|
|
Amount
|
|
Boe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
71
|
|
$
|
2.40
|
|
$
|
52
|
|
$
|
2.68
|
Less: Operating fee reimbursements
|
|
|
(4)
|
|
|
(0.13)
|
|
|
(4)
|
|
|
(0.21)
|
Non-cash stock-based compensation
|
|
|
24
|
|
|
0.81
|
|
|
17
|
|
|
0.84
|
|
Total general and administrative expenses
|
|
$
|
91
|
|
$
|
3.08
|
|
$
|
65
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses were approximately $91 million
($3.08 per Boe) for the three months ended
March 31, 2019
, an increase of $26 million (40 percent) from $65 million
($3.31 per Boe) for
2018
. The increases in
cash general and administrative and non-cash stock-based compensation expenses
were primarily the result of increased employee headcount. The decrease in
total general and administrative expenses per Boe was primarily the result of increased
production, partially offset by the increase in total general and
administrative expenses noted above.
We receive fees for the operation of jointly-owned oil and natural gas
properties during the drilling and production phases and record such
reimbursements as reductions to general and administrative expenses on the
consolidated statements of operations. We earned reimbursements of
approximately $4 million for each of the three months ended
March 31,
2019 and 2018
.
Loss on derivatives.
The following table sets forth the loss on derivatives for the three
months ended
March 31, 2019
and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Loss on derivatives:
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
(1,056)
|
|
$
|
(33)
|
|
Natural gas derivatives
|
|
|
(3)
|
|
|
(2)
|
|
|
Total
|
|
$
|
(1,059)
|
|
$
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
represents our net cash receipts from (payments on) derivatives for the three
months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in millions)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net cash receipts from (payments on) derivatives:
|
|
|
|
|
Oil derivatives
|
|
$
|
3
|
|
$
|
(113)
|
|
Natural gas derivatives
|
|
|
(3)
|
|
|
1
|
|
|
Total
|
|
$
|
-
|
|
$
|
(112)
|
|
|
|
|
|
|
|
|
|
Our earnings are affected by the changes in value of our derivatives
portfolio between periods and the related cash settlements of those
derivatives, which could be significant. To the extent the future commodity
price outlook declines between measurement periods, we will have mark-to-market
gains; while to the extent the future commodity price outlook increases between
measurement periods, we will have mark-to-market losses. See Note 6 of the Condensed
Notes to Consolidated Financial Statements included in “Item 1. Consolidated
Financial Statements (Unaudited)” for additional information regarding
significant judgments made in classifying financial instruments in the fair
value hierarchy.
Gain on
disposition of assets, net.
During the three months ended
March 31, 2018, we recorded a net gain on disposition of assets of
approximately $723 million due to (i) a non-cash gain of approximately $575
million related to our February 2018 acquisition and divestiture, (ii) a gain
of approximately $134 million related to our January 2018 Delaware Basin
divestitures and (iii) a gain of approximately $14 million related to certain
nonmonetary transactions. See Note 4 of the Condensed Notes to Consolidated
Financial Statements included in “Item 1. Consolidated Financial Statements
(Unaudited)” for additional information.
Interest expense.
The following table sets forth interest expense, weighted average
interest rates and weighted average debt balances for the three months ended
March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Interest expense, as reported
|
|
$
|
47
|
|
$
|
30
|
Capitalized interest
|
|
|
4
|
|
|
1
|
|
Interest expense, excluding impact of capitalized interest
|
|
$
|
51
|
|
$
|
31
|
|
|
|
|
|
|
|
Weighted average interest rate - credit facility
|
|
|
4.4%
|
|
|
4.3%
|
Weighted average interest rate - senior notes
|
|
|
4.4%
|
|
|
4.3%
|
|
Total weighted average interest rate
|
|
|
4.4%
|
|
|
4.3%
|
|
|
|
|
|
|
|
|
Weighted average credit facility balance
|
|
$
|
503
|
|
$
|
211
|
Weighted average senior notes balance
|
|
|
4,000
|
|
|
2,400
|
|
Total weighted average debt balance
|
|
$
|
4,503
|
|
$
|
2,611
|
|
|
|
|
|
|
|
|
The increase in interest expense was primarily due to the increase in the
weighted average debt balance, partially offset by the increase in capitalized
interest. The increase in the weighted average debt balance was primarily due
to the senior notes issued in connection with the RSP Acquisition and a higher
average outstanding balance under the Credit Facility.
Other income, net.
During the three months ended
March 31, 2018, we recorded other income of approximately $104 million,
primarily related to a cash distribution received from Oryx. See Note 2 of the
Condensed Notes to Consolidated Financial Statements included in “Item 1.
Consolidated Financial Statements (Unaudited)” for additional information
regarding this distribution.
Income tax provisions.
For the three
months ended
March 31, 2019, w
e recorded an income
tax benefit of approximately $194 million compared to an income tax expense of
approximately $254 million for the three months ended
March 31,
2018. The change is primarily due to the pre-tax loss for the
three months ended
March 31, 2019 as compared
to the pre-tax income for the
three months ended
March
31, 2018.
The effective income tax rates for the three months ended
March 31,
2019 and 2018
were 22 percent and 23 percent,
respectively. The change in our effective income tax rate was primarily due to the
research and development credit, net of unrecognized tax benefits, partially
offset by the impact of other items. We recorded a discrete income tax benefit
related to stock-based awards of approximately $2 million for each of the three
months ended
March 31, 2019
and 2018.
Capital Commitments, Capital
Resources and Liquidity
Capital
commitments.
Our primary needs for cash are for the development, exploration
and acquisition of oil and natural gas assets, midstream joint ventures and
other capital commitments, payment of contractual obligations and working
capital obligations. Funding for these cash needs may be provided by any
combination of internally-generated cash flow, financing under our Credit
Facility, proceeds from the disposition of assets or alternative financing
sources, as discussed in “— Capital resources” below.
2019 capital budget and costs incurred.
We expect our 2019 capital spending on drilling and completion activity
to range between $2.8 billion and $3.0 billion.
Our costs
incurred on oil and natural gas properties, excluding acquisitions, during the
three
months ended
March 31, 2019
and 2018 totaled $926 million and $450 million, respectively. Our intent is to
manage our capital spending to be within our operating cash flow, excluding
unbudgeted acquisitions. The primary reason for the differences in costs
incurred and cash flow expenditures was the timing of payments. Our capital
expenditures for the three months ended March 31, 2019 were primarily funded from
cash flows from operations and borrowings under our Credit Facility.
Other than the customary purchase of leasehold acreage, our capital
budgets are exclusive of acquisitions. We do not have a specific acquisition
budget since the timing and size of acquisitions are difficult to forecast. We
evaluate opportunities to purchase or sell oil and natural gas properties in
the marketplace and could participate as a buyer or seller of properties at
various times. We seek to acquire oil and natural gas properties that provide
opportunities for the addition of reserves and production through a combination
of development, high-potential exploration and control of operations that will
allow us to apply our operating expertise.
2019 dividends
.
On February 19, 2019, our board of directors declared a cash dividend of
$0.125 per share. The total cash dividend, including the cash dividend paid on
unvested restricted stock awards, of $25 million was paid on March 29, 2019 to
stockholders as of March 1, 2019.
On April
30, 2019,
our board of directors approved a cash dividend of $0.125 per share for the
second quarter of 2019 that is expected to be paid on June 28, 2019 to
stockholders of record as of May 10, 2019.
We intend to continue
to pay a quarterly dividend of $0.125 in the near future; however, any payment
of future dividends will be at the discretion of our board of directors.
Acquisitions.
The following
table reflects o
ur expenditures for acquisitions
of proved and unproved properties for the three months ended March 31, 2019 and
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Property acquisition costs:
|
|
|
|
|
|
|
|
Proved
|
|
$
|
-
|
|
$
|
-
|
|
Unproved
|
|
|
4
|
|
|
13
|
|
|
Total property acquisition costs (a)
|
|
$
|
4
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included in the property
acquisition costs above are budgeted unproved leasehold acreage acquisitions
of approximately $4 million and $13 million for the three months ended March
31, 2019 and 2018, respectively.
|
|
Contractual
obligations.
Our contractual obligations include long-term debt,
cash interest expense on debt, derivative liabilities, asset retirement
obligations, employment agreements with officers, purchase obligations,
operating and finance lease obligations and other obligations. Since December
31, 2018, there have been the following material changes in our contractual
obligations:
·
$373 million increase in long-term debt due to
additional borrowings under our Credit Facility;
·
$367 million increase in our derivative liability
position; and
·
a marketing contract as described below.
Marketing contract.
Consistent with our strategy of
diversifying our oil pricing, in January 2019, we entered into a firm sales agreement
with a third-party purchaser. The purchaser provides integrated transportation
and marketing optionality, including dock capacity in Corpus Christi, Texas.
The agreement has a term that ends five years after the startup of Cactus II
Pipeline system and requires us to deliver 50,000 barrels of oil per day that
will receive waterborne market pricing.
Off-balance sheet arrangements.
Currently, we
do not have any material off-balance sheet arrangements.
Capital resources.
Our primary sources of
liquidity have been cash flows generated from (i) operating activities, (ii)
borrowings under our Credit Facility, (iii) asset dispositions and (iv)
proceeds from bond and equity offerings. In October 2018, our board of
directors approved our
2019
capital budget of up to $3.8
billion. With current commodity prices, we expect to spend between $2.8 billion
and $3.0 billion on drilling and completion activity. We expect to fund our
2019
capital budget with operating cash flows and borrowings
under our Credit Facility.
The following table summarizes our changes in cash and cash equivalents
for the three months ended
March 31, 2019
and
2018:
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Three
Months Ended
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March
31,
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(in millions)
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2019
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2018
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Net cash provided by operating activities
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$
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623
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$
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488
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Net cash used in investing activities
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(902)
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(93)
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Net cash provided by (used in) financing activities
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279
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(395)
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Net increase in cash and cash equivalents
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$
|
-
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$
|
-
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Cash flow
from operating activities.
The increase in operating cash
flows during the
three
months ended March 31,
2019 as compared to the same period in 2018 was primarily due to an increase in
oil and natural gas revenues of $157 million and an increase of $112 million
due to
approximately zero net cash settlements on
derivatives during the three months ended March 31, 2019, as compared to $
112
million in settlements paid on derivatives during the comparable
period in 2018. The increase was partially offset by a
$44 million
increase in production expense, a $19 million increase in cash general and
administrative expense and a $16 million increase in production tax expense.
Our net
cash provided by operating activities included a reduction of $78
million and $51
million
for the
three
months ended March 31, 2019 and
2018, respectively, associated with changes in working capital items. Changes
in working capital items adjust for the timing of receipts and payments of
actual cash.
Cash flow from investing activities.
Our investing activities consist primarily of drilling and completion
activity, acquisitions and divestitures. The primary difference between costs
incurred on oil and natural gas properties, including acquisitions, and cash
flow expenditures is the timing of payments and the issuances of shares of
common stock to fund certain acquisitions.
For
the three months ended
March 31, 2019
, our net cash used in investing activities was $902 million,
which consisted primarily of our investment of $885 million for additions to oil
and natural gas properties. Our capital expenditures for the three months ended
March 31, 2019 were funded with cash flows from operations and borrowings under
our Credit Facility.
During the three months ended March 31, 2018, our net cash used in
investing activities was $93 million, which consisted primarily of our
investment of $474 million for additions to oil and natural gas properties,
partially offset by $255 million of proceeds received from asset dispositions
and a distribution received from our equity method investment. We received a
distribution from Oryx of $157 million during the three
months ended March 31, 2018. Of this amount, $9 million represented cumulative
Oryx earnings and was classified as cash flow from operating activities, while
the remaining amount of $148 million was classified as cash flow from investing
activities.
Cash flow
from financing activities.
For the
three
months ended March 31, 2019, our net cash provided by financing
activities was $279 million primarily due to $373 million of net borrowings
under our Credit Facility partially offset by $25 million of dividends paid on
our common stock. During the three months ended March 31, 2019, we decreased
our bank overdraft by $54 million. For the three months ended March 31, 2018,
our net cash used in financing activities was $395 million, primarily due to $322
million of net payments on our Credit Facility.
Advances on our Credit Facility bear interest, at our option, based on:
(i)
an alternative base rate (“ABR”), which is equal to
the highest of
(a)
the prime rate of JPMorgan Chase Bank (5.5 percent at
March 31, 2019),
(b)
the federal funds effective rate plus 0.5 percent, and
(c)
the London Interbank Offered Rate (“LIBOR”) plus 1.0
percent; or
(ii)
LIBOR plus 1.5 percent.
Our Credit Facility’s interest rates and commitment fees on the unused
portion of the available commitment vary depending on our credit ratings from
Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings
(“S&P”). At our current credit ratings, LIBOR Rate Loans and Alternate Base
Rate Loans bear interest margins of 150 basis points and 50 basis points per
annum, respectively, and commitment fees on the unused portion of the available
commitment are 25 basis points per annum.
In
conducting our business, we may utilize various financing sources, including
the issuance of (i) fixed and floating rate debt, (ii) convertible securities,
(iii) preferred stock, (iv) common stock and (v) other securities.
Historically, we have demonstrated our use of the capital
markets by issuing common stock and senior unsecured debt. There are no
assurances that we can access the capital markets to obtain additional funding,
if needed, and at cost and terms that are favorable to us.
We may also
sell assets and issue securities in exchange for oil and natural gas assets or
interests in energy companies. Additional securities may be of a class senior
to common stock with respect to such matters as dividends and liquidation
rights and may also have other rights and preferences as determined from time
to time. Utilization of some of these financing sources may require approval
from the lenders under our Credit Facility.
Liquidity.
Our
principal source of liquidity is the available borrowing capacity under our
Credit Facility.
At March 31, 2019, our commitments
from our bank group were $2.0 billion, of which $1.4 billion was unused
commitments.
Debt ratings.
We receive debt
credit ratings from S&P, Moody’s and Fitch Ratings and are designated as
investment grade with all three agencies. In determining our ratings, the
agencies perform regular reviews and consider a number of qualitative and
quantitative factors including, but not limited to: the industry in which we
operate, production growth opportunities, liquidity, debt levels and asset and
reserve mix.
A downgrade in our credit ratings could (i) negatively impact our costs
of capital and our ability to effectively execute aspects of our strategy, (ii)
affect our ability to raise debt in the public debt markets, and the cost of
any new debt could be much higher than our outstanding debt and (iii) negatively
affect our ability to obtain additional financing or the interest rate, fees
and other terms associated with such additional financing. Further, if we are
unable to maintain credit ratings of “Ba2” or better from Moody’s and “BB” or
better from S&P, the investment grade period under our Credit Facility will
automatically terminate and cause our Credit Facility to once again be secured
by a first lien on substantially all of our oil and natural gas properties and
by a pledge of the equity interests in our subsidiaries. These and other
impacts of a downgrade in our credit ratings could have an adverse effect on
our business, financial condition and results of operations.
As of the filing of this Quarterly Report on Form 10-Q, no changes in our
credit ratings have occurred; however, we cannot be certain that our credit
ratings will not be downgraded in the future.
Book capitalization and current ratio
.
Our net book
capitalization at March 31, 2019 was $22.7
billion,
consisting of debt of $
4.6 b
illion and stockholders’
equity of $
18.1
billion. Our net book
capitalization at December 31, 2018 was $23.0 billion, consisting of debt of
$4.2 billion and stockholders’ equity of $18.8 billion. Our ratio of net debt
to net book capitalization was 20
percent and
18
percent
at March 31, 2019 and December 31, 2018,
respectively. Our ratio of current assets to current liabilities was 0.62
to 1.0 at March 31, 2019 as compared to 1.04 to 1.0
at December 31, 2018.
Critical Accounting Policies, Practices and Estimates
Our
historical consolidated financial statements and related notes to consolidated
financial statements contain information that is pertinent to our management’s
discussion and analysis of financial condition and results of operations.
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that our management make
estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. However, the accounting principles used by us generally
do not change our reported cash flows or liquidity. Interpretation of the
existing rules must be done and judgments made on how the specifics of a given
rule apply to us.
In
management’s opinion, the more significant reporting areas impacted by management’s
judgments and estimates are the choice of accounting method for oil and natural
gas activities, oil and natural gas reserve estimation, asset retirement
obligations, impairment of long-lived assets, valuation of stock-based
compensation, valuation of business combinations, accounting and valuation of
nonmonetary transactions, goodwill impairment, litigation and environmental
contingencies, valuation of financial derivative instruments, uncertain tax
positions and income taxes.
Impairment
of Long-Lived Assets
All of our long-lived assets are monitored for potential impairment when
circumstances indicate that the carrying value of an asset may be greater than management’s
estimates of its future net cash flows, including cash flows from proved
reserves, risk-adjusted probable and possible reserves, and integrated assets.
If the carrying value of the long-lived assets exceeds the sum of estimated
undiscounted future net cash flows, an impairment loss is recognized for the
difference between the estimated fair value and the carrying value of the
assets. The evaluations involve a significant amount of judgment since the
results are based on estimated future events, such as future sales prices for
oil and natural gas, future costs to produce these products, estimates of
future oil and natural gas reserves to be recovered and the timing thereof, the
economic and regulatory climates, cash flows from integrated assets and other
factors. The need to test an asset for impairment may result from significant
declines in sales prices or downward revisions in estimated quantities of oil
and natural gas reserves. Any assets held for sale are reviewed for impairment
when we approve the plan to sell. Estimates of anticipated sales prices are
highly judgmental and subject to material revision in future periods. At March 31,
2019, our estimates of commodity prices for purposes of determining
undiscounted future cash flows, which are based on the NYMEX strip, ranged from
a 2019 price of $60.36 per barrel of oil decreasing to a 2026 price of $53.52
per barrel of oil. Natural gas prices ranged from a 2019 price of $2.80 per Mcf
of natural gas decreasing to a 2021 price of $2.65 per Mcf then rising to a 2026
price of $3.01 per Mcf of natural gas. Both oil and natural gas commodity
prices for this purpose were held flat after 2026. We did not recognize an
impairment charge during the three months ended March 31, 2019.
It is reasonably possible that the estimates of undiscounted future net
cash flows of our long-lived assets may change in the future resulting in the
need to impair carrying values. We estimate that if the future oil and natural
gas prices used in this analysis, and noted above, would have been
approximately 10 percent lower at March 31, 2019, with no other changes in
capital costs, operating costs, price differentials or reserve performance
curves, the carrying amount of our Yeso field would
have exceeded the expected undiscounted
future net cash flow, and an impairment of approximately $800 million would
have been recorded. Other assumptions such as operating costs, well and
reservoir performance, severance and ad valorem taxes and operating and
development plans would likely change given a change in oil and natural gas
prices. However, we did not estimate the correlation between these assumptions
and any estimated commodity price change, and these and other assumptions may
worsen or partially mitigate some of the effects of a reduction in commodity
prices, including the ultimate impact and amount of any potential impairment
charge. As a result, we are unable to predict with certainty whether or not a
decline in commodity prices alone will or will not cause us to recognize an
impairment charge in a particular field or the magnitude of any such impairment
charge. We additionally note that there may be changes to both drilling and
completion designs that affect the volume curves, capital costs estimates and
the amount of proved undeveloped locations that can be recorded, each of which
will affect management’s estimates of future cash flows.
Management’s
judgments and estimates in all the areas listed above are based on information
available from both internal and external sources, including engineers,
geologists and historical experience in similar matters. Actual results could
differ from the estimates as additional information becomes known.
There have
been no material changes in our critical accounting policies and procedures
during the three months ended March 31, 2019. See our disclosure of critical
accounting policies in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statements and
Supplementary Data” of our Annual Report on Form 10-K for the year ended
December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on
February 20, 2019.
New
accounting pronouncements issued but not yet adopted.
See Note 2 of the Condensed
Notes to Consolidated Financial Statements included in
“Item 1. Consolidated Financial Statements (Unaudited)” for
information regarding new accounting pronouncements issued but not yet adopted.