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Concho Resources Inc. Announces Fourth Quarter and Full Year 2007 Financial and Operating Results

Posted on: Tuesday, 26 February 2008, 18:00 CST

Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") today reported fourth quarter and year-end 2007 financial and operating results. Highlights for the year ended December 31, 2007 include:

Reserve replacement1 of 363% at an all sources finding and development cost2 of $1.72/mcfe

Production of 30.1 Bcfe, a 30% increase over 2006

Year-end proved reserves of 546 Bcfe, a 17% increase over 2006

Net income of $25.4 million, a 29% increase over 2006

Net cash provided by operating activities of $169.7 million, a 51% increase over 2006

EBITDAX3 of $216.3 million, a 46% increase over 2006

1The Company uses the reserve replacement ratio as an indicator of the Company's ability to replenish annual production volumes and grow its reserves, thereby providing some information on the sources of future production. It should be noted that the reserve replacement ratio is a statistical indicator that has limitations. The ratio is limited because it typically varies widely based on the extent and timing of new discoveries and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not imbed the cost or timing of future production of new reserves, it cannot be used as a measure of value creation. The reserve replacement ratio of 363% was calculated by dividing net proved reserve additions of 109.3 Bcfe (the sum of extensions and discoveries, revisions, purchases and sales) by production of 30.1 Bcfe.

2All sources finding and development cost was calculated by dividing total costs incurred for oil and natural gas properties of $187.8 million by net proved reserve additions of 109.3.

3For an explanation of how we calculate and use EBITDAX and a reconciliation of net income to EBITDAX, please see "Supplemental non-GAAP financial measures" below

For the year ended December 31, 2007, Concho reported net income of $25.4 million, or $0.38 per diluted share, on revenues of $294.3 million, as compared to net income of $19.7 million, or $0.59 per diluted share, on revenues of $198.3 million for the year ended December 31, 2006. Included in net income for 2007 was a pre-tax loss on derivatives not designated as hedges of $20.3 million. For the year ended December 31, 2007, production totaled 30.1 Bcfe, representing a 30% increase over the 23.3 Bcfe produced during 2006.

Timothy A. Leach, Concho's Chairman and CEO, commented, "2007 was a year of significant accomplishments for our employees and shareholders. Highlights of the year included completing our initial public offering and a follow-on secondary offering, assuming operational control of our core Southeast New Mexico Shelf assets and accelerating our drilling activity on those assets to a five rig program, establishing our operational field office in Artesia, New Mexico, and successfully completing our capital program while improving efficiencies. Results for 2007 validated our multi-year development inventory and set the stage for increased activity on our Southeast New Mexico Shelf assets. We will continue to focus capital and human resources on our core assets during 2008 while also working to increase our portfolio of opportunities."

Proved Reserves

Concho's total proved oil and natural gas reserves as of December 31, 2007 were 546 billion cubic feet of natural gas equivalents (Bcfe), a 17% increase over year-end 2006 proved reserves, and consisted of 53.4 million barrels of crude oil (MMBbls) and 225.8 billion cubic feet (Bcf) of natural gas. At both year-end 2007 and year-end 2006, the proved developed portion of the total proved reserves was 54%. The independent reservoir engineering firms of Cawley, Gillespie & Associates, Inc. and Netherland, Sewell & Associates, Inc. prepared Concho's year-end 2007 reserve reports.

Summary of Changes in Proved Reserves

BCFE

Reserves at December 31, 2006

466.8

Purchase of minerals-in-place

0.9

New discoveries and extensions

129.9

Revisions of previous estimates

(21.5

)

Sales of minerals-in-place

0.0

Production

(30.1

)

Reserves at December 31, 2007

546.0

The present value of proved reserves, discounted at 10% ("PV-10"), was estimated at $2.14 billion, before the effect of income taxes, based on the year end natural gas price of $6.80 per MMBtu (Henry Hub Spot) and year-end oil price of $92.50 per Barrel (WTI Posted). The standardized measure of discounted future net cash flows from proved reserves at year end 2007 has not yet been calculated but will be included in the Company's annual report on Form 10-K to be filed by March 31, 2008. 2006 year-end proved reserves totaled 467 Bcfe and had an estimated PV-10 of $954.0 million, based on the year-end natural gas price of $5.64 per MMBtu (Henry Hub Spot) and the year-end oil price of $57.75 per Barrel (WTI Posted). The standardized measure of discounted future net cash flows from proved reserves at year end 2006 was $710.3 million.

Total costs incurred for oil and natural gas properties was $187.8 million for the year ended December 31, 2007, including $180.6 million for exploration and development drilling, $7.0 million for property acquisitions, and $0.2 million for capitalized asset retirement obligations.

As of December 31, 2007, proved reserves on the New Mexico Shelf assets totaled 429.4 Bcfe from 1,243 producing wells. As of December 31, 2007, on our New Mexico Shelf assets, we identified 1,368 drilling locations, with proved undeveloped reserves attributed to 432 of such locations, and 783 recompletion opportunities, with proved undeveloped reserves attributed to 297 of such opportunities.

As of December 31, 2007, proved reserves in the Company's other areas of operations totaled 116.6 Bcfe from 824 producing wells. As of December 31, 2007, on these properties, we identified 291 drilling locations, with proved undeveloped reserves attributed to 195 of such locations, and 95 recompletion opportunities, with proved undeveloped reserves attributed to 78 of such opportunities.

Fourth Quarter of 2007 Financial Results

For the three months ended December 31, 2007, Concho reported net income of $6.9 million, or $0.09 per diluted share, on revenues of $98.8 million, as compared to net income of $6.9 million, or $0.12 per diluted share, on revenues of $62.6 million for the three months ended December 31, 2006. Included in net income for the three months ended 2007 was a pre-tax loss on derivatives not designated as hedges of $23.4 million. EBITDAX increased 66% to $75.5 million in the fourth quarter of 2007, when compared to $45.6 million in the same period of 2006.

Production for the fourth quarter of 2007 totaled 8.4 Bcfe (871 MBbls and 3.2 Bcf), an increase of 15% as compared to 7.3 Bcfe (741 MBbls and 2.9 Bcf) produced in the fourth quarter of 2006.

Hedging Activities and Derivatives Not Designated as Hedges

For the quarter ended December 31, 2007, the Company's total operating revenues were reduced by $7.4 million as a result of derivatives accounted for as cash flow hedges. In addition, the Company recorded a pre-tax loss on derivatives not classified as cash flow hedges during the quarter of $23.4 million due to the significant increase in the market price for oil during the quarter. These derivatives were marked-to-market based on market prices as of December 31, 2007. At December 31, 2007, the Company had one remaining derivative instrument accounted for as a cash flow hedge (see Derivatives table at the end of this release for information on all derivative contracts).

For the year ended December 31, 2007, the Company's total operating revenues were reduced by $9.8 million as a result of derivatives accounted for as cash flow hedges. In addition, for the full year 2007, the Company recorded a loss of $20.3 million on derivative instruments not classified as cash flow hedges as a result of the significant increase in the market price for oil during the year.

Exploration and Abandonments

Exploration and abandonment expense totaled $11.0 million for the three months ended December 31, 2007. Included in this total was approximately $5.7 million of dry hole expense. Of this amount, $5.4 million was associated with the Company's activities in the Western Delaware Basin of West Texas, principally the drilling and completion costs related to the Raymond 19-1 well which totaled $4.7 million. In addition to the dry hole expense recorded during the quarter, the Company also recorded geological and geophysical expense of $3.1 million and abandonments of unproved leasehold of $2.2 million.

For the year ended December 31, 2007, exploration and abandonment expense totaled $29.1 million. Included in this total was approximately $21.9 million of dry hole expense, $17.0 million of which was associated with the Company's activities in the Western Delaware Basin of West Texas. In addition to dry hole expense recorded during the year ended December 31, 2007, the Company also recorded geological and geophysical expense of $4.1 million, and abandonments of unproved leasehold of $3.1 million.

General and Administrative

For the three months ended December 31, 2007, general and administrative expense included $3.4 million of cash incentive compensation for the Company's officers and employees related to 2007 performance. In addition, $1.2 million of stock-based compensation was recognized during the quarter ended December 31, 2007.

For the year ended December 31, 2007, general and administrative expense totaled $25.2 million, including the cash incentive compensation described above, $2.6 million of cash incentive compensation related to 2006 performance and the filing of the Company's registration statement on Form S-1 with the Securities and Exchange Commission in April 2007, and $3.8 million for stock-based compensation.

Operations

For the quarter ended December 31, 2007, the Company drilled or participated in a total of 46 wells (36 operated), 24 of which had been completed as producers and 22 of which were in progress at December 31, 2007. In addition, the Company participated in 53 recompletions (all operated), 43 of which had been completed as producers, 9 of which were in progress and 1 of which was a dry hole at December 31, 2007.

For the year ended December 31, 2007, the Company drilled or participated in a total of 125 wells (99 operated), 98 of which had been completed as producers, 23 of which were in progress and 4 of which were dry holes at December 31, 2007. In addition, the Company participated in 143 recompletions (126 operated), 128 of which had been completed as producers, 9 of which were in progress and 6 of which were dry holes at December 31, 2007.

New Mexico Shelf

For the quarter ended December 31, 2007, the Company drilled or participated in 37 wells (33 operated) and 49 recompletions (all operated) on its New Mexico Shelf assets, with a 100% success rate on the 19 wells and 41 recompletions that had been completed by December 31, 2007. All 37 of these wells were drilled to the Yeso formation and 32 of the 37 will be completed in both the Blinebry and Paddock intervals of the Yeso formation.

For the year ended December 31, 2007, the Company drilled or participated in 98 wells (90 operated) on its New Mexico Shelf assets, 78 of which had been completed as producers, 18 of which were in progress and 2 of which were dry holes at December 31, 2007. In addition, the Company participated in 96 recompletions (94 operated) on its New Mexico Shelf assets during 2007. Of the 96 recompletions, 76 added the Paddock interval to wells that had previously been drilled to and completed only in the Blinebry interval, 17 were re-stimulations of existing Paddock wells, 2 were non-operated recompletions, and 1 was a dry hole.

The Company's engineering model for Paddock re-stimulations assumes an initial increase in production of approximately 20 boepd and ultimate recoveries of approximately 21 Mboe at a total capital cost of approximately $200,000 per well. At December 31, 2007, 310 Paddock wells had been identified as candidates for re-stimulation.

Emerging Resource Plays

Southeast New Mexico

In the horizontal Wolfcamp oil play, the Company has two producing wells, the Reindeer Federal #1 and the Moose 23 Federal #1. The target Wolfcamp zone in the third well, the Dasher 16 State # 1, contained higher than expected levels of water and the Company recompleted the well to a shallow zone. The Company's technical team responsible for this area is continuing its regional work on the play, including analyzing recently acquired seismic data over the area. In the natural gas portion of the Wolfcamp play, the Company participated as a non-operated working interest owner in 7 wells during 2007 and anticipates a similar level of activity in 2008.

North Dakota Bakken

In Mountrail County, North Dakota, where the Company owns approximately 22,935 gross (2,818 net) acres, the Company has three wells producing and is currently participating in two additional wells. In 2008, the Company anticipates an increased level of activity in Mountrail County.

In McKenzie County, North Dakota, where the Company owns 19,427 gross (8,250 net) acres, the Company owns an interest in one producing well and is currently participating as a non-operator in two additional wells. The results of the two wells, one of which is currently drilling and the other of which is awaiting completion, will determine the Company's activity level in McKenzie County in 2008.

Central Basin Platform

In this unconventional oil shale play, located primarily in Andrews County, Texas, the Company's first well has reached total depth and is awaiting completion. The results of this initial well will determine the level of the Company's activity for the remainder of 2008 in this play.

Recent Developments

The Company also announced today that William H. Easter III has been named to its Board of Directors. Mr. Easter's career spans over thirty years in the areas of natural gas supply, processing, marketing and transportation, as well as crude oil/petroleum refining, marketing and transportation. Mr. Easter is the past Chairman of the Board of Directors, President and Chief Operating Officer of DCP Midstream, LLC, having retired in January 2008. Mr. Easter earned his Bachelor of Business Administration degree from the University of Houston and his Master of Science in Management from The Graduate School of Business at Stanford University.

2008 Budget and Guidance

The Company's 2008 capital budget of $250 million remains unchanged from previous guidance.

The Company's previous 2008 guidance for depreciation, depletion and accretion ("DD&A") was $2.45 - $2.55 per Mcfe, and the Company now estimates that DD&A will average $2.55 - $2.65 per Mcfe in 2008.

Conference Call Information

The Company will host a conference call on Wednesday, February 27, 2008, at 10:00 a.m. Central Time to discuss fourth quarter and year-end 2007 financial and operating results. Interested parties may listen to the conference call via the Company's website at http://www.conchoresources.com or by dialing 800-659-1966 (passcode: 21802573). A replay of the conference call will be available on the Company's website or by dialing 888-286-8010 (passcode: 22434450).

Forward-Looking Statements and Cautionary Statements

The foregoing contains 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, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release 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, derivatives activities, capital expenditure levels and other guidance included in this 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 control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include risks relating to 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 statement speaks 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, whether as a result of new information, future events or otherwise, except as required by applicable law.

About Concho Resources Inc.

Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development, exploitation and exploration of oil and natural gas properties. The Company's conventional operations are primarily focused in the Permian Basin of Southeast New Mexico and West Texas. In addition, the Company is involved in a number of unconventional emerging resource plays.

Concho Resources Inc. and subsidiaries

Consolidated balance sheets

December 31,

(in thousands, except share and per share data)

2007

2006

Assets

Current assets:

Cash and cash equivalents

$ 30,424

$ 1,122

Accounts receivable:

Oil and gas

36,735

27,304

Joint operations and other

21,183

22,638

Related parties

-

1,449

Assets held for sale

256

-

Derivative instruments

1,866

6,013

Deferred income taxes

13,502

82

Inventory

1,459

1,309

Prepaid insurance and other

4,017

3,848

Total current assets

109,442

63,765

Property and equipment, at cost:

Oil and gas properties, successful efforts method

1,555,018

1,399,218

Accumulated depletion and depreciation

(167,109

)

(84,098

)

Total oil and gas properties, net

1,387,909

1,315,120

Other property and equipment, net

7,085

5,535

Total property and equipment, net

1,394,994

1,320,655

Deferred loan costs, net

3,426

4,417

Other assets

367

1,235

Total assets

$ 1,508,229

$ 1,390,072

Liabilities and stockholders' equity

Current liabilities:

Accounts payable:

Trade

$ 14,222

$ 16,157

Related parties

2,119

3,593

Other current liabilities:

Bank overdrafts

5,651

-

Revenue payable

14,494

9,901

Accrued drilling costs

39,276

17,051

Accrued interest

1,590

8,004

Other accrued liabilities

11,935

6,220

Derivative instruments

36,414

6,224

Dividends payable

-

87

Income taxes payable

29

-

Chase Group unaccredited investors asset purchase obligation

-

906

Current portion of long-term debt

2,000

400

Current asset retirement obligations

912

1,958

Total current liabilities

128,642

70,501

Long-term debt

325,404

495,100

Noncurrent derivative instruments

10,517

-

Deferred income taxes

259,070

241,752

Asset retirement obligations and other long-term liabilities

9,198

7,563

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value; 10,000,000 shares authorized; and zero shares issued and outstanding at December 31, 2007 and 2006

-

-

Common stock, $0.001 par value; 300,000,000 authorized; 75,832,310 and 59,092,830 shares issued and outstanding at December 31, 2007 and 2006, respectively

76

59

Additional paid-in capital

752,380

575,389

Notes receivable from officers and employees

(330

)

(12,858

)

Retained earnings

37,467

12,152

Accumulated other comprehensive income (loss)

(14,195

)

414

Total stockholders' equity

775,398

575,156

Total liabilities and stockholders' equity

$ 1,508,229

$ 1,390,072

Concho Resources Inc. and subsidiaries

Consolidated statements of operations

Three months ended

Year ended

December 31,

December 31,

(in thousands, except per share amounts)

2007

2006

2007

2006

Operating revenues:

Oil sales

$ 67,444

$ 41,036

$ 195,596

$ 131,773

Natural gas sales

31,342

21,609

98,737

66,517

Total operating revenues

98,786

62,645

294,333

198,290

Operating costs and expenses:

Oil and gas production

7,657

7,549

29,966

22,060

Oil and gas production taxes

8,685

4,931

24,301

15,762

Exploration and abandonments

10,988

895

29,098

5,612

Depreciation and depletion

21,743

18,552

76,779

60,722

Accretion of discount on asset retirement obligations

110

91

444

287

Impairments of proved oil and gas properties

2,690

4,129

7,267

9,891

Contract drilling fees - stacked rigs

-

-

4,269

-

General and administrative (including non-cash stock-based compensation of $1,185 and $1,103 for the three months ended and $3,841 and $9,144 for the years ended December 31, 2007 and 2006, respectively)

8,610

5,677

25,177

21,721

Ineffective portion of cash flow hedges

(313

)

(1,129

)

821

(1,193

)

(Gain) loss on derivatives not designated as hedges

23,362

-

20,274

-

Total operating costs and expenses

83,532

40,695

218,396

134,862

Income from operations

15,254

21,950

75,937

63,428

Other income (expense):

Interest expense

(6,239

)

(9,569

)

(36,042

)

(30,567

)

Other, net

527

279

1,484

1,186

Total other expense

(5,712

)

(9,290

)

(34,558

)

(29,381

)

Income before income taxes

9,542

12,660

41,379

34,047

Income tax expense

(2,684

)

(5,715

)

(16,019

)

(14,379

)

Net income

6,858

6,945

25,360

19,668

Preferred stock dividends

-

(34

)

(45

)

(1,244

)

Effect of induced conversion of preferred stock

-

-

-

11,601

Net income applicable to common shareholders

$ 6,858

$ 6,911

$ 25,315

$ 30,025

Basic earnings per share:

Net income per share

$ 0.09

$ 0.13

$ 0.39

$ 0.63

Shares used in basic earnings per share

75,199

54,936

64,316

47,287

Diluted earnings per share:

Net income per share

$ 0.09

$ 0.12

$ 0.38

$ 0.59

Shares used in diluted earnings per share

76,542

58,799

66,309

50,729

Concho Resources Inc. and subsidiaries

Consolidated statements of cash flows

Year ended

December 31,

(in thousands)

2007

2006

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$ 25,360

$ 19,668

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and depletion

76,779

60,722

Impairments of proved oil and gas properties

7,267

9,891

Accretion of discount on asset retirement obligations

444

287

Exploration expense, including dry holes

25,009

3,387

Non-cash compensation expense

3,841

9,144

Amendment of certain outstanding stock options due to 409A modification

(192

)

-

Gas imbalances

14

82

Deferred rent liability

(211

)

262

Deferred income taxes

13,716

12,618

Interest accrued on officer and employee notes

(303

)

(688

)

Amortization of deferred loan costs

3,563

1,494

Amortization of discount on long-term debt

504

-

(Gain) loss on sale of property and equipment

(368

)

(3

)

Ineffective portion of cash flow hedges

821

(1,193

)

(Gain) loss on derivatives not designated as hedges

20,274

-

Dedesignated cash flow hedges reclassed from AOCI

(1,103

)

-

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

(5,809

)

(27,683

)

Prepaid insurance and other

(319

)

(2,465

)

Other assets

-

12

Accounts payable

(3,493

)

13,853

Revenue payable

4,593

2,372

Accrued liabilities

5,716

3,101

Accrued interest

(6,414

)

7,320

Income taxes payable

29

-

Net cash provided by operating activities

169,718

112,181

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures on oil and gas properties

(162,327

)

(182,389

)

Acquisition of oil and gas properties and other assets

(255

)

(413,229

)

Additions to other property and equipment

(2,813

)

(1,234

)

Proceeds from the sale of oil and gas properties

3,255

-

Proceeds from the sale of other assets

23

-

Settlements (paid) received on derivatives not designated as hedges

1,815

-

Net cash used in investing activities

(160,302

)

(596,852

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

300,200

664,993

Payments of long-term debt

(468,800

)

(241,493

)

Proceeds from issuance of subscribed units and common stock

172,709

61,178

Payments of preferred stock dividends

(132

)

(2,567

)

Proceeds from repayment of officer and employee notes

12,830

-

Payments for loan origination costs

(2,572

)

(5,500

)

Bank overdrafts

5,651

-

Net cash provided by financing activities

19,886

476,611

Net increase (decrease) in cash and cash equivalents

29,302

(8,060

)

BEGINNING CASH AND CASH EQUIVALENTS

1,122

9,182

ENDING CASH AND CASH EQUIVALENTS

$ 30,424

$ 1,122

SUPPLEMENTAL CASH FLOWS:

Cash paid for interest and fees, net of $2,647 and $2,129 capitalized interest

$ (34,623

)

$ (23,881

)

Cash paid for income taxes

$ (2,050

)

$ (1,725

)

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Issuance of common stock in acquisition of oil and gas properties and other assets

$ 650

$ 384,336

Deferred tax effect of acquired oil and gas properties

$ (444

)

$ 227,735

Issuance of notes receivable in connection with capital options

$ -

$ 3,158

Concho Resources Inc. and subsidiaries

Summary production and price data

The following table presents selected financial and operating information of Concho Resources Inc. for the three months and years ended December 31, 2007 and 2006:

Three months ended

Year ended

December 31,

December 31,

(in thousands, except price data)

2007

2006

2007

2006

Oil sales

$ 67,444

$ 41,036

$ 195,596

$ 131,773

Natural gas sales

31,342

21,609

98,737

66,517

Total operating revenues

98,786

62,645

294,333

198,290

Operating costs and expenses

83,532

40,695

218,396

134,862

Interest, net and other revenue

5,712

9,290

34,558

29,381

Income before income taxes

9,542

12,660

41,379

34,047

Income tax expense

(2,684

)

(5,715

)

(16,019

)

(14,379

)

Net income

$ 6,858

$ 6,945

$ 25,360

$ 19,668

Production volumes:

Oil (MBbl)

871

741

3,014

2,295

Natural gas (MMcf)

3,176

2,873

12,064

9,507

Natural gas equivalent (MMcfe)

8,401

7,319

30,148

23,275

Average prices:

Oil, without hedges ($/Bbl)

$ 86.35

$ 54.76

$ 68.58

$ 60.47

Oil, with hedges ($/Bbl)

$ 77.46

$ 55.37

$ 64.90

$ 57.42

Natural gas, without hedges ($/Mcf)

$ 9.75

$ 7.13

$ 8.08

$ 6.87

Natural gas, with hedges ($/Mcf)

$ 9.87

$ 7.52

$ 8.18

$ 7.00

Natural gas equivalent, without hedges ($/Mcfe)

$ 12.64

$ 8.34

$ 10.09

$ 8.77

Natural gas equivalent, with hedges ($/Mcfe)

$ 11.76

$ 8.56

$ 9.76

$ 8.52

Bbl -- Barrel

MBbl -- Thousand Barrels

Mcf -- Thousand cubic feet

MMcf -- Million cubic feet

Mcfe -- Thousand cubic feet of natural gas equivalent (computed on an energy equivalent basis of one Bbl equals six Mcf)

MMcfe -- Million cubic feet of natural gas equivalent (computed on an energy equivalent basis of one Bbl equals six Mcf)

Supplemental non-GAAP financial measures

EBITDAX (as defined below) is presented herein, and reconciled to the generally accepted accounting principle ("GAAP") measure of net income because of its wide acceptance by the investment community as a financial indicator of a company's ability to internally fund exploration and development activities.

We define EBITDAX as net income, plus (1) exploration and abandonments expense, (2) depreciation & depletion expense, (3) accretion expense, (4) impairments of proved oil and gas properties, (5) non-cash stock-based compensation expense, (6) ineffective portion of cash flow hedges and unrealized (gain) loss on derivatives not designated as hedges, (7) interest expense, the amortization of related debt issuance costs and other financing costs, net of capitalized interest, and (8) federal and state income taxes, less other ancillary income including interest income, gathering income and rental income. EBITDAX is not a measure of net income or cash flow as determined by GAAP.

Our EBITDAX measure provides additional information which may be used to better understand our operations. EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income, as an indicator of our operating performance. Certain items excluded from EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic cost of depreciable assets, none of which are components of EBITDAX. EBITDAX as used by us may not be comparable to similarly titled measures reported by other companies. We believe that EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure, and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis.

The following table provides a reconciliation of net income to EBITDAX:

Three months ended

Year ended

December 31,

December 31,

2007

2006

2007

2006

Net income

$ 6,858

$ 6,945

$ 25,360

$ 19,668

Exploration and abandonments

10,988

895

29,098

5,612

Depreciation and depletion

21,743

18,552

76,779

60,722

Accretion of discount on asset retirement obligations

110

91

444

287

Impairments of proved oil and gas properties

2,690

4,129

7,267

9,891

Non-cash stock-based compensation

1,185

1,103

3,841

9,144

Ineffective portion of cash flow hedges

(313

)

(1,129

)

821

(1,193

)

Unrealized (gain) loss on derivatives not designated as hedges

23,891

-

22,089

-

Interest expense

6,239

9,569

36,042

30,567

Other, net

(527

)

(279

)

(1,484

)

(1,186

)

Income tax expense

2,684

5,715

16,019

14,379

EBITDAX

$ 75,548

$ 45,591

$ 216,276

$ 147,891

Concho Resources Inc. and subsidiaries

Derivatives information as of December 31, 2007

The table below provides the volumes and related data associated with our oil and natural gas derivatives as of December 31, 2007. The counterparties in our derivative instruments are Bank of America, N.A., BNP Paribas, Citibank, N.A., and JPMorgan Chase Bank, N.A.

Fair Market Value

Aggregate

Asset / (Liability)

remaining

Daily

Index

Contract

(in thousands)

volume

volume

price

period

Cash flow hedges:

Crude oil (volumes in Bbls):

Price swap

(23,942)

951,600

2,600

$67.50 (a)

1/1/08 - 12/31/08

Cash flow hedges dedesignated:

Natural gas (volumes in MMBtus):

Price collar

1,866

4,941,000

13,500

$6.50 - $9.35 (b)

1/1/08 - 12/31/08

Derivatives not designated as cash flow hedges:

Crude oil (volumes in Bbls):

Price swap

(12,472)

732,000

2,000

$75.78 (a) (c)

1/1/08 - 12/31/08

Price swap

(10,517)

730,000

2,000

$72.84 (a) (c)

1/1/09 - 12/31/09

Net liability

$ (45,065)

(a) The index prices for the oil price swaps are based on the NYMEX-West Texas Intermediate monthly average futures price.

(b) The index price for the natural gas price collar is based on the Inside FERC-El Paso Permian Basin first-of-the-month spot price.

(c) Amounts disclosed represent weighted average prices.

Source: Business Wire

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