Company Quick10K Filing
Quick10K
Concho Resources
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$110.92 201 $22,250
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-16 Officers, Shareholder Vote, Exhibits
8-K 2019-04-30 Earnings, Earnings, Exhibits
8-K 2019-02-19 Earnings, Earnings, Exhibits
8-K 2019-01-01 Enter Agreement, Officers, Exhibits
8-K 2018-10-30 Earnings, Earnings, Exhibits
8-K 2018-08-14 Enter Agreement, Exhibits
8-K 2018-08-01 Earnings, Earnings, Exhibits
8-K 2018-07-19 M&A, Officers, Other Events, Exhibits
8-K 2018-07-17 Shareholder Vote, Other Events
8-K 2018-07-02 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-14 Other Events, Exhibits
8-K 2018-06-14 Enter Agreement, Exhibits
8-K 2018-05-17 Officers, Shareholder Vote, Other Events
8-K 2018-05-01 Earnings, Earnings, Exhibits
8-K 2018-04-27 Other Events
8-K 2018-03-27 Enter Agreement, Exhibits
8-K 2018-02-20 Earnings, Earnings, Exhibits
8-K 2018-01-02 Officers, Amend Bylaw, Exhibits
DVA Davita 8,720
AMH American Homes 4 Rent 7,070
AYX Alteryx 5,560
OAS Oasis Petroleum 1,710
PEBO Peoples Bancorp 678
PSTI Pluristem Therapeutics 99
ENT Global Eagle Entertainment 73
PPIH Perma-Pipe 71
ACXM Acxiom 0
APTI Apptio 0
CXO 2019-03-31
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Note 1. Organization and Nature of Operations
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Note 3. Rsp Acquisition
Note 4. Other Acquisitions, Divestitures and Nonmonetary Transactions
Note 5. Stock Incentive Plan
Note 6. Disclosures About Fair Value Measurements
Note 7. Derivative Financial Instruments
Note 8. Debt
Note 9. Commitments and Contingencies
Note 10. Income Taxes
Note 11. Related Party Transactions
Note 12. Earnings per Share
Note 13. Subsidiary Guarantors
Note 14. Subsequent Events
Note 15. Supplementary Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31 cxo1q19exhibit311.htm
EX-31 cxo1q19exhibit312.htm
EX-32 cxo1q19exhibit321.htm
EX-32 cxo1q19exhibit322.htm

Concho Resources Earnings 2019-03-31

CXO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cxo_1Q19_10Q.htm FORM 10-Q  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

or

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                           to                                          

 

Commission file number: 1-33615

Concho Resources Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

76-0818600

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

 

 

 One Concho Center

 

 

600 West Illinois Avenue

 

 

Midland, Texas

 

79701

(Address of principal executive offices)

 

(Zip Code)

 

 

        (432) 683-7443

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer  

Smaller reporting company

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  

 

Number of shares of the registrant’s common stock outstanding at April 29, 2019: 200,594,025 shares

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION:  

                iii

 

 

 

 

Item 1. Consolidated Financial Statements (Unaudited)

                iii

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

              33

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

              49

 

 

 

 

Item 4. Controls and Procedures

              51

 

 

PART II – OTHER INFORMATION:  

              52

 

 

 

 

Item 1. Legal Proceedings

              52

 

 

 

 

Item 1A. Risk Factors

              52

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

              53

 

 

 

 

Item 6. Exhibits 

              54

 

 

 

 

 

 

 

 

 

  

 

i 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements and information contained in or incorporated by reference into this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements, projections and estimates concerning our future financial position, operations, performance, business strategy, oil and natural gas reserves, drilling program, capital expenditures, liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims, disputes and derivative activities. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “will,” “goal” or other words that convey future events, expectations or possible outcomes. Forward-looking statements are not guarantees of performance. We have based these forward-looking statements on our current expectations and assumptions about future events and their potential effect on us. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Actual results may differ materially from those implied or expressed by any forward-looking statements. These forward-looking statements speak only as of the date of this report, or if earlier, as of the date they were made. We disclaim any obligation to update or revise these statements unless required by law, whether as a result of new information, future events or otherwise, and we caution you not to rely on them unduly. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks discussed in “Part II, Item 1A. Risk Factors” in this Quarterly Report and in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as those factors summarized below:

·           declines in, the sustained depression of, or increased volatility in the prices we receive for our oil and natural gas, or increases in the differential between index oil or natural gas prices and prices received;

·           drilling, completion and operating risks, including our ability to efficiently execute large-scale project development as we could experience delays, curtailments and other adverse impacts associated with a high concentration of activity;

·           the effects of government regulation, permitting and other legal requirements, including new legislation or regulation related to hydraulic fracturing, climate change or derivatives reform;

·           disruptions to, capacity constraints in or other limitations on the pipeline systems that deliver our oil and natural gas and other processing and transportation considerations;

·           risks related to ongoing expansion of our business, including the recruitment and retention of qualified personnel in the Permian Basin;

·           competition in the oil and natural gas industry;

·           risks related to the concentration of our operations in the Permian Basin of West Texas and Southeast New Mexico;

·           the costs and availability of equipment, resources, services and qualified personnel required to perform our drilling, completion and operating activities;

·           environmental hazards, such as uncontrollable flows of oil, natural gas, saltwater, well fluids, toxic gas or other pollution into the environment, including groundwater contamination;

·           uncertainties about the estimated quantities of oil and natural gas reserves;

·           risks associated with acquisitions such as increased expenses and integration efforts, failure to realize the expected benefits of the transaction and liabilities associated with acquired properties or businesses;

·           evolving cybersecurity risks, such as those involving unauthorized access, denial-of-service attacks, malicious software, data privacy breaches by employees, insiders or others with authorized access, cyber or phishing-attacks, ransomware, malware, social engineering, physical breaches or other actions;

·           the impact of current and potential changes to federal or state tax rules and regulations;

·           potential financial losses or earnings reductions from our commodity price risk-management program;

·           difficult and adverse conditions in the domestic and global capital and credit markets;

·           the adequacy of our capital resources and liquidity including, but not limited to, access to additional borrowing capacity under our Credit Facility, as defined herein;

·           the impact of potential changes in our credit ratings;

·           uncertainties about our ability to successfully execute our business and financial plans and strategies;

·           uncertainties about our ability to replace reserves and economically develop our current reserves;

·           general economic and business conditions, either internationally or domestically; and

·           uncertainty concerning our assumed or possible future results of operations.

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and the price and cost assumptions made by our reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ from the quantities of oil and natural gas that are ultimately recovered.

 

ii 



 

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.

1 


 

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.

2 


 

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.

3 


 

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.

 

 

4 


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.

5 


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.

 

6 


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.

7 


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.    

8 


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

 

 

 

 

 

 

9 


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

 

 

 

 

 

 

 

 

10 


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.

11 


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

 

 

 

 

 

12 


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.

13 


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.

  

14 


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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15 


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.

16 


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) s