Concho Resources Inc. (CXO)

CXO 
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Concho Resources, Inc. (CXO)

Q3 2008 Earnings Call

November 12, 2008 10:00 am ET

Executives

Jack F. Harper - Vice President - Business Development and Capital Markets

Timothy A. Leach - Chairman of the Board of Directors, Chief Executive Officer

Steven L. Beal - President, Chief Operating Officer, Director

Analysts

Joseph Allman - J.P. Morgan

Michael Jacobs - Tudor Pickering Holt & Company

Mark Lear - Sidoti & Company

Michael Scialla – Thomas Weisel Partners

Houston Netherland – Natixis Bleichroeder

Jeffrey Robertson – Barclays Capital

Presentation

Operator

Welcome to the third quarter 2008 Concho Resources, Inc. conference call. My name is Dan and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today’s call, Mr. Jack Harper.

Jack F. Harper

The following conference call contains forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this conference call that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future are forward-looking statements.

These statements are based on certain assumptions made by the company and are subject to a number of assumptions, risks and uncertainties many of which are beyond the control of the company which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Additional information concerning the factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company’s annual report on Form 10K and quarterly reports on Form 10Q under the heading Cautionary Statement regarding forward-looking statements as filed with the Securities and Exchange Commission.

Any forward-looking statements speak only as of the date on which such statement is made and the company undertakes no obligation to correct or update any forward-looking statement except as required by applicable law.

I’ll now turn the call over to Tim Leach, our Chairman and CEO.

Timothy A. Leach

Thanks for your interest in Concho. I’ve got the Concho management team here with me. You’ll be hearing from me and Steve Beal. We have some comments and review that we’re going to make and then we’ll turn it back over and look forward to answering your questions.

As all of you have experienced, the third quarter of 2008 was one of the most challenging in our industry’s history. Oil prices declined 29% during the quarter and have continued to show weakness. The Concho team has experienced in this type of volatility in the past and will continue to execute the same strategy that’s been successful for us over the last 20 years, specifically staying within cash flow.

During the third quarter Concho produced 1.9 million Boe which was a 58% increase over the third quarter of 2007. If you exclude the Henry acquisition, organic production increased 33% over 2007. We also experienced increases in cash flow due to the increased price in production. EBITDAX of $122 million is up 130% over the same period of 2007.

Operationally we added 48 net drill wells and 49 recompletions during the quarter at a cost of $110 million. Additionally for 2008 we will marginally under-spend our cash flow due to two major factors: The reduced number of net wells drilled in our core New Mexico asset and also the postponement of certain projects outside our core areas.

On November 6 Concho’s Board approved the 2009 capital budget which will fund projects from cash flow up to a total amount of $500 million. This amount is a continuation of our current level of billing activity and includes six rigs in the New Mexico Yeso play, eight rigs in the Wolfberry play of West Texas, one rig in the Lower Abo Blinebry play and participation as a non-operator in a two-rig program in the North Dakota Bakken shale play.

Approximately 90% of this budget can be funded with internally generated after-tax cash flow assuming NYMEX pricing that average $65 oil and $6 gas and production at the upper end of our new guidance. This does not assume any reduction of our drilling and completion costs from their current levels although constructed discussions are underway with several of our largest vendors. We will monitor the direction both of commodity prices and drilling costs and will adjust the capital budget and estimated production as warranted.

The 2009 capital plan is very similar to 2008. 92% of it’s in our core area, 88% is operated and 61% of the cap ex will be drilling wells which will be moving reserves out of the [2P and 3P] category.

Additionally while we’re pleased with the third quarter results, there were a few noncash items that we should mention.

First, we reported a gain of $176 million as a result of the mark-to-market of our commodity hedges. This compares to the mark-to-market loss of $90 million we experienced in the second quarter.

Secondly, we took a $14 million noncash charge, the majority of which was to impair a portion of our acreage in the Delaware Basin Shale play of Culberson County and the Fayetteville Shale play of Central Arkansas. While this acreage still has remaining turn under the current conditions, it no longer fits into our near-term drilling plans.

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