Concho Resources Inc. (CXO)

CXO 
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Concho Resources Inc. (CXO)

Q1 2008 Earnings Call

May 14, 2008 11:00 am ET

Executives

Tim Leach - chairman and CEO

Steve Beal - President and COO

Analysts

Joe Allman - JPMorgan

Jeff Robertson - Lehman Brothers

Eric Hagen - Merrill Lynch

John Mansfield - SAC Capital

Salil Sharma - Highbridge

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Concho Resources Incorporated Earnings Call. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

Before we begin, the company has asked me to read the following. This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts that address activities, events, or developments that the company's expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the forgoing, forward-looking statements contained in this conference call specifically include the expectations of plans, strategies, objectives and anticipated financial and operating results of the company, including as to the company's drilling program, production, hedging activities, capital expenditure levels and other guidance included in the press release.

These statements are based on certain assumptions made by the company based on management's experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the company's control, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements.

These include risks relating to the financial performance and results, prices and demand for oil and natural gas, availability of drilling equipment and personnel, availability of sufficient capital to execute our business plan, our ability to replace reserves and efficiently develop and exploit our current reserves, and other important factors that could cause actual results to differ materially from those projected as described in the company's reports filed with the Securities and Exchange Commission.

Any forward-looking statements speak only as of the date of which the certain statements is made and the company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Now I will turn the call over to Tim Leach, chairman and CEO. Please proceed.

Tim Leach

Thank you. Good morning. This is Tim Leach. First, let me say thank you for dialing in and that I am pleased with Concho's performance in the first quarter. We're on track to achieve our 2008 plan. The growth continues to be strong, while our drilling costs and operating expenses remain in the ranges that we forecasted.

While operationally we are on plan, the profitability of our company continues to exceed our forecast. I believe that this is due both to the fundamental economics of the projects that we are drilling and the increased commodity price.

As a result of this increasing cash flow, the Concho board recently approved a substantial increase to our 2008 capital budget. A large portion of this increase is going to be invested in our core asset in Southeast New Mexico, allowing us to add a sixth drilling rig in that field to our drilling program. Consequently, we are also increasing our 2008 production guidance. So other than being on plan, the first quarter was relatively uneventful. But we anticipate that the remainder of the year will be quite busy.

So with that brief overview, let me turn it over to Steve to discuss the details of the first quarter with you. Thanks.

Steve Beal

Thanks, Tim. Good morning, everyone. Our production of 8.4 Bcf equivalent in the first quarter, which was a 17% increase over the first quarter of last year, was in line with our expectation for the quarter, despite the fact that we wound up drilling five fewer net wells on the Shelf asset in the quarter than we planned.

This was a result of some drilling delays we experienced on a couple of wells, where we were experimenting with our pipe program and the fact that the timing of receipted drilling permits from the state was such that we drilled more 50% owned wells and fewer 100% owned wells than we planned in the first quarter.

From a revenue perspective, the first quarter realized oil and gas prices were very strong, in part due to continued strength in the NGL market. As you saw in our press release, we expect that our 2008 gas price received before hedge effect will average about 10% to 15% above the average NYMEX Henry Hub price. This as I am sure you are aware, is a direct result of the significant NGL content in our gas stream, particularly on our core Southeast New Mexico Shelf asset.

Our top line oil and gas revenues for the quarter were reduced by approximately $7.5 million as a result of our derivative contracts that are designated as cash flow hedges. Additionally, approximately $4 million of the $17.2 million loss on derivatives not designated as hedges that you see on our income statement is the cash settlement payments for the quarter on those contracts not designated as hedges, with the remaining $13.2 million representing the non-cash market-to-market on the open positions as of March 31.

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