UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission file number: 1-33615

Concho Resources Inc.

(Exact name of registrant as specified in its charter)

Delaware		76-0818600
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
550 West Texas Avenue, Suite 100
Midland, Texas		79701
(Address of principal executive offices)		(Zip code)

(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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ      No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Number of shares of the registrant’s common stock outstanding at August 4, 2010: 91,842,832 shares.

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)		iii
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			60
Item 4. Controls and Procedures			61
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			62
Item 1A. Risk Factors			62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 5. Other Information			63
Item 6. Exhibits			64
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     Various statements 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 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements include statements, projections and estimates concerning our 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 and disputes, derivative activities and the estimated purchase price of the acquisition of the assets of Marbob Energy Corporation and affiliates (“Marbob”), potential financing, closing timeline and other discussion of the Marbob acquisition. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal” or other words that convey the uncertainty of future events or 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. 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 the 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 securities law, 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 our Annual Report on Form 10-K for the year ended December 31, 2009, as well as those factors summarized below:

	•		sustained or further declines in the prices we receive for our oil and natural gas;
	•		uncertainties about the estimated quantities of oil and natural gas reserves;
	•		uncertainty regarding the exercise of preferential purchase rights on assets to be acquired in the Marbob acquisitions;
	•		risks related to the integration of the Marbob assets and employees with our operations;
	•		drilling and operating risks;
	•		the adequacy of our capital resources and liquidity including, but not limited to, access to additional borrowing capacity under our credit facility;
	•		the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing;
	•		difficult and adverse conditions in the domestic and global capital and credit markets;
	•		risks related to the concentration of our operations in the Permian Basin of Southeast New Mexico and West Texas;
	•		potential financial losses or earnings reductions from our commodity price risk management program;
	•		shortages of oilfield equipment, services and qualified personnel and increased costs for such equipment, services and personnel;
	•		risks and liabilities associated with acquired properties or businesses, including the Marbob assets;
	•		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 or in the jurisdictions in which we operate;
	•		competition in the oil and natural gas industry;
	•		uncertainty concerning our assumed or possible future results of operations; and
	•		our existing indebtedness.

     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 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.

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets at June 30, 2010 and December 31, 2009			1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009			2
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2010			3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			4
Condensed Notes to Consolidated Financial Statements			5

Concho Resources Inc.

Consolidated Balance Sheets
Unaudited

		June 30,				December 31,
(in thousands, except share and per share data)		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	383			$	3,234
Accounts receivable, net of allowance for doubtful accounts:
Oil and natural gas			88,029				69,199
Joint operations and other			88,836				100,120
Related parties			395				216
Derivative instruments			32,409				1,309
Deferred income taxes			—				29,284
Prepaid costs and other			10,600				13,896
Total current assets			220,652				217,258
Property and equipment, at cost:
Oil and natural gas properties, successful efforts method			3,697,653				3,358,004
Accumulated depletion and depreciation			(630,255	)			(517,421	)
Total oil and natural gas properties, net			3,067,398				2,840,583
Other property and equipment, net			16,304				15,706
Total property and equipment, net			3,083,702				2,856,289
Deferred loan costs, net			20,771				20,676
Intangible asset, net — operating rights			35,748				36,522
Inventory			20,258				16,255
Noncurrent derivative instruments			62,164				23,614
Other assets			958				471
Total assets		$	3,444,253			$	3,171,085
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable:
Trade		$	5,982			$	15,443
Related parties			852				291
Other current liabilities:
Bank overdrafts			37,992				3,415
Revenue payable			30,172				31,069
Accrued and prepaid drilling costs			190,719				164,282
Derivative instruments			18,093				62,419
Deferred income taxes			3,530				—
Other current liabilities			60,308				60,095
Total current liabilities			347,648				337,014
Long-term debt			644,023				845,836
Deferred income taxes			664,222				603,286
Noncurrent derivative instruments			5,678				29,337
Asset retirement obligations and other long-term liabilities			20,335				20,184
Commitments and contingencies (Note K)
Stockholders’ equity:
Common stock, $0.001 par value; 300,000,000 authorized; 91,851,690 and 85,815,926 shares issued at June 30, 2010 and December 31, 2009, respectively			92				86
Additional paid-in capital			1,265,179				1,029,392
Retained earnings			498,078				306,367
Treasury stock, at cost; 23,667 and 12,380 shares at June 30, 2010 and December 31, 2009, respectively			(1,002	)			(417	)
Total stockholders’ equity			1,762,347				1,335,428
Total liabilities and stockholders’ equity		$	3,444,253			$	3,171,085

The accompanying notes are an integral part of these consolidated financial statements.

Concho Resources Inc.

Consolidated Statements of Operations
Unaudited

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands, except per share amounts)		2010				2009				2010				2009
Operating revenues:
Oil sales		$	174,427			$	101,511			$	337,152			$	166,485
Natural gas sales			41,283				25,821				90,558				46,849
Total operating revenues			215,710				127,332				427,710				213,334
Operating costs and expenses:
Oil and natural gas production			40,448				25,817				77,148				50,583
Exploration and abandonments			878				1,424				2,173				7,419
Depreciation, depletion and amortization			54,101				52,402				107,944				103,150
Accretion of discount on asset retirement obligations			372				301				772				579
Impairments of long-lived assets			4,692				4,499				7,312				8,555
General and administrative (including non-cash stock-based compensation of $2,871 and $2,188 for the three months ended June 30, 2010 and 2009, respectively, and $5,702 and $4,113 for the six months ended June 30, 2010 and 2009, respectively)			17,538				14,172				31,096				25,918
Bad debt expense			33				—				572				—
(Gain) loss on derivatives not designated as hedges			(112,763	)			81,606				(128,336	)			86,652
Total operating costs and expenses			5,299				180,221				98,681				282,856
Income (loss) from operations			210,411				(52,889	)			329,029				(69,522	)
Other income (expense):
Interest expense			(11,192	)			(6,200	)			(22,257	)			(10,570	)
Other, net			(304	)			180				(377	)			(148	)
Total other expense			(11,496	)			(6,020	)			(22,634	)			(10,718	)
Income (loss) before income taxes			198,915				(58,909	)			306,395				(80,240	)
Income tax benefit (expense)			(74,744	)			25,691				(114,684	)			33,797
Net income (loss)		$	124,171			$	(33,218	)		$	191,711			$	(46,443	)
Basic earnings per share:
Net income (loss) per share		$	1.36			$	(0.39	)		$	2.13			$	(0.55	)
Weighted average shares used in basic earnings per share			91,044				84,799				89,944				84,665
Diluted earnings per share:
Net income (loss) per share		$	1.35			$	(0.39	)		$	2.10			$	(0.55	)
Weighted average shares used in diluted earnings per share			92,297				84,799				91,220				84,665

The accompanying notes are an integral part of these consolidated financial statements.

Concho Resources Inc.

Consolidated Statement of Stockholders’ Equity
Unaudited

										Additional																Total
		Common Stock								Paid-in				Retained				Treasury Stock								Stockholders’
(in thousands)		Shares				Amount				Capital				Earnings				Shares				Amount				Equity
BALANCE AT DECEMBER 31, 2009			85,816			$	86			$	1,029,392			$	306,367				12			$	(417	)		$	1,335,428
Net income			—				—				—				191,711				—				—				191,711
Issuance of common stock			5,348				5				219,303				—				—				—				219,308
Stock options exercised			436				1				4,079				—				—				—				4,080
Stock-based compensation for restricted stock			—				—				4,114				—				—				—				4,114
Grants of restricted stock			254				—				—				—				—				—				—
Cancellation of restricted stock			(2	)			—				—				—				—				—				—
Stock-based compensation for stock options			—				—				1,588				—				—				—				1,588
Excess tax benefits related to stock-based compensation			—				—				6,703				—				—				—				6,703
Purchase of treasury stock			—				—				—				—				12				(585	)			(585	)
BALANCE AT JUNE 30, 2010			91,852			$	92			$	1,265,179			$	498,078				24			$	(1,002	)		$	1,762,347

The accompanying notes are an integral part of these consolidated financial statements.

Concho Resources Inc.

Consolidated Statements of Cash Flows
Unaudited

		Six Months Ended
		June 30,
(in thousands)		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	191,711			$	(46,443	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization			107,944				103,150
Impairments of long-lived assets			7,312				8,555
Accretion of discount on asset retirement obligations			772				579
Exploration and abandonments, including dry holes			945				6,294
Non-cash compensation expense			5,702				4,113
Bad debt expense			572				—
Deferred income taxes			100,453				(39,799	)
(Gain) loss on sale of assets			(169	)			191
(Gain) loss on derivatives not designated as hedges			(128,336	)			86,652
Other non-cash items			2,420				1,686
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(27,831	)			(18,401	)
Prepaid costs and other			105				612
Inventory			(3,834	)			(6,786	)
Accounts payable			(8,900	)			9,415
Revenue payable			(897	)			8,976
Other current liabilities			(8,439	)			(562	)
Net cash provided by operating activities			239,530				118,232
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on oil and natural gas properties			(278,002	)			(223,283	)
Acquisition of oil and natural gas properties			(13,362	)			—
Additions to other property and equipment			(2,292	)			(2,014	)
Proceeds from the sale of oil and natural gas properties and other assets			790				1,004
Settlements received from (paid on) derivatives not designated as hedges			(9,299	)			61,465
Net cash used in investing activities			(302,165	)			(162,828	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt			360,000				211,650
Payments of long-term debt			(562,000	)			(181,650	)
Net proceeds from issuance of common stock			219,308				—
Exercise of stock options			4,080				3,931
Excess tax benefit related to stock-based compensation			6,703				2,992
Payments for loan origination costs			(2,299	)			—
Purchase of treasury stock			(585	)			(192	)
Bank overdrafts			34,577				(6,806	)
Net cash provided by financing activities			59,784				29,925
Net decrease in cash and cash equivalents			(2,851	)			(14,671	)
Cash and cash equivalents at beginning of period			3,234				17,752
Cash and cash equivalents at end of period		$	383			$	3,081
SUPPLEMENTAL CASH FLOWS:
Cash paid for interest and fees, net of $56 and $18 capitalized interest		$	21,707			$	6,911
Cash paid for income taxes		$	16,715			$	4,232

The accompanying notes are an integral part of these consolidated financial statements.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

Note A. Organization and nature of operations

     Concho Resources Inc. (the “Company” or “Concho”) is a Delaware corporation formed on February 22, 2006. The Company’s principal business is the acquisition, development and exploration of oil and natural gas properties in the Permian Basin region of Southeast New Mexico and West Texas.

Note B. Summary of significant accounting policies

     Principles of consolidation. The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

     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 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 and commodity price outlooks. Other significant estimates include, but are not limited to, asset retirement obligations, fair value of derivative financial instruments, purchase price allocations for business and oil and natural gas property acquisitions and fair value of stock-based compensation.

     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, 2009 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 financial position at June 30, 2010, its results of operations for the three and six months ended June 30, 2010 and 2009 and its cash flows for the six months ended June 30, 2010 and 2009. 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 or omitted from these consolidated financial statements. Accordingly, these consolidated financial statements should be read with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     Deferred loan costs. Deferred loan costs are stated at cost, net of amortization, which is computed using the effective interest and straight-line methods. The Company had deferred loan costs of $20.8 million and $20.7 million, net of accumulated amortization of $10.8 million and $8.6 million, at June 30, 2010 and December 31, 2009, respectively.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     Future amortization expense of deferred loan costs at June 30, 2010 is as follows:

(in thousands)
Remaining 2010		$	2,458
2011			4,973
2012			5,057
2013			3,433
2014			1,132
Thereafter			3,718
Total		$	20,771

     Intangible assets. The Company has capitalized certain operating rights acquired in 2008. The gross operating rights, which have no residual value, are amortized over the estimated economic life of approximately 25 years. Impairment will be assessed if indicators of potential impairment exist or when there is a material change in the remaining useful economic life. The following table reflects the gross and net intangible assets at June 30, 2010 and December 31, 2009:

		June 30,				December 31,
(in thousands)		2010				2009
Gross intangible — operating rights		$	38,717			$	38,717
Accumulated amortization			(2,969	)			(2,195	)
Net intangible — operating rights		$	35,748			$	36,522

     The following table reflects amortization expense for the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2010				2009				2010				2009
Amortization expense		$	387			$	388			$	774			$	781

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table reflects the estimated aggregate amortization expense for each of the periods presented below at June 30, 2010:

(in thousands)
Remaining 2010		$	774
2011			1,549
2012			1,549
2013			1,549
2014			1,549
Thereafter			28,778
Total		$	35,748

     Oil and natural gas sales and imbalances. Oil and natural gas revenues are recorded at the time of delivery of such products to pipelines for the account of the purchaser or at the time of physical transfer of such products to the purchaser. The Company follows the sales method of accounting for oil and natural gas sales, recognizing revenues based on the Company’s share of actual proceeds from the oil and natural gas sold to purchasers. Oil and natural gas imbalances are generated on properties for which two or more owners have the right to take production “in-kind” and, in doing so, take more or less than their respective entitled percentage. Imbalances are tracked by well, but the Company does not record any receivable from or payable to the other owners unless the imbalance has reached a level at which it exceeds the remaining reserves in the respective well. If reserves are insufficient to offset the imbalance and the Company is in an overtake position, a liability is recorded for the amount of shortfall in reserves valued at a contract price or the market price in effect at the time the imbalance is generated. If the Company is in an undertake position, a receivable is recorded for an amount that is reasonably expected to be received, not to exceed the current market value of such imbalance.

     The following tables reflect the Company’s natural gas imbalance positions at June 30, 2010 and December 31, 2009 as well as amounts reflected in oil and natural gas production expense for the three and six months ended June 30, 2010 and 2009:

		June 30,				December 31,
(dollars in thousands)		2010				2009
Natural gas imbalance receivable (included in other assets)		$	431			$	444
Undertake position (Mcf)			95,736				98,584
Natural gas imbalance liability (included in asset retirement obligations and other long-term liabilities)		$	525			$	533
Overtake position (Mcf)			99,438				101,278

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(dollars in thousands)		2010				2009				2010				2009
Value of net overtake (undertake) arising during the period increasing (decreasing) oil and natural gas production expense		$	10			$	9			$	5			$	(40	)
Net overtake (undertake) position arising during the period (Mcf)			2,292				1,697				1,008				(10,069	)

     Treasury stock. Treasury stock purchases are recorded at cost. Upon reissuance, the cost of treasury shares held is reduced by the average purchase price per share of the aggregate treasury shares held.

     General and administrative expense. The Company receives fees for the operation of jointly owned oil and natural gas properties and records such reimbursements as reductions of general and administrative expense. Such fees totaled approximately $3.6 million

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

and $2.8 million for the three months ended June 30, 2010 and 2009, respectively, and $6.5 million and $5.4 million for the six months ended June 30, 2010 and 2009, respectively.

     Recent accounting pronouncements.

     Various topics. In February 2010, the Financial Accounting Standards Board (the “FASB”) issued an update to various topics, which eliminated outdated provisions and inconsistencies in the Accounting Standards Codification (the “Codification”), and clarified certain guidance to reflect the FASB’s original intent. The update is effective for the first reporting period, including interim periods, beginning after issuance of the update, except for the amendments affecting embedded derivatives and reorganizations. In addition to amending the Codification, the FASB made corresponding changes to the legacy accounting literature to facilitate historical research. These changes are included in an appendix to the update. The Company adopted the update effective January 1, 2010, and the adoption did not have a significant impact on the Company’s consolidated financial statements.

     Accounting for extractive activities. In April 2010, the FASB issued an amendment to a paragraph in the accounting standard for oil and natural gas extractive activities accounting. The standard adds to the Codification the SEC’s Modernization of Oil and Gas Reporting release. The Company adopted the update effective April 20, 2010, and the adoption did not have a significant impact on the Company’s consolidated financial statements.

Note C. Exploratory well costs

     The Company capitalizes exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. The capitalized exploratory well costs are presented in unproved properties in the consolidated balance sheets. If the exploratory well is determined to be impaired, the well costs are charged to expense.

     The following table reflects the Company’s capitalized exploratory well activity during the three and six months ended June 30, 2010:

		Three Months Ended				Six Months Ended
(in thousands)		June 30, 2010				June 30, 2010
Beginning capitalized exploratory well costs		$	24,317			$	8,668
Additions to exploratory well costs pending the determination of proved reserves			34,161				64,496
Reclassifications due to determination of proved reserves			(25,616	)			(40,302	)
Exploratory well costs charged to expense			—				—
Ending capitalized exploratory well costs		$	32,862			$	32,862

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table provides an aging, at June 30, 2010 and December 31, 2009, of capitalized exploratory well costs based on the date drilling was completed:

		June 30,				December 31,
(in thousands)		2010				2009
Wells in drilling progress		$	7,903			$	1,767
Capitalized exploratory well costs that have been capitalized for a period of one year or less			24,959				6,901
Capitalized exploratory well costs that have been capitalized for a period greater than one year			—				—
Total capitalized exploratory well costs		$	32,862			$	8,668

     At June 30, 2010, the Company had 45 gross exploratory wells waiting on their completion, including 21 wells in the Texas Permian area, 18 wells in the New Mexico Permian area and 6 wells in the emerging plays area.

Note D. Business Combinations

     Wolfberry acquisitions. In December 2009, together with the acquisition of related additional interests that closed in 2010, the Company closed two acquisitions (the “Wolfberry Acquisitions”) of interests in producing and non-producing assets in the Wolfberry play in the Permian Basin for approximately $270.7 million. The Wolfberry Acquisitions were primarily funded with borrowings under the Company’s credit facility. See Note J. The Company’s 2009 results of operations do not include any production, revenues or costs from the Wolfberry Acquisitions.

     The following table represents the allocation of the total purchase price of the Wolfberry Acquisitions to the acquired assets and liabilities. The allocation represents the fair values assigned to each of the assets acquired and liabilities assumed:

(in thousands)
Fair value of the Wolfberry Acquisitions’ net assets:
Proved oil and natural gas properties		$	212,987
Unproved oil and natural gas properties			58,222
Total assets acquired			271,209
Asset retirement obligations			(464	)
Net purchase price		$	270,745

Note E. Asset retirement obligations

     The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. The Company does not provide for a market risk premium associated with asset retirement obligations because a reliable estimate cannot be determined. The Company has no assets that are legally restricted for purposes of settling asset retirement obligations.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table summarizes the Company’s asset retirement obligation transactions recorded during the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2010				2009				2010				2009
Asset retirement obligations, beginning of period		$	20,837			$	18,254			$	22,754			$	16,809
Liabilities incurred from new wells			665				102				1,111				270
Accretion expense			372				301				772				579
Disposition of wells			—				—				—				(142	)
Liabilities settled upon plugging and abandoning wells			(112	)			(343	)			(297	)			(353	)
Revision of estimates			295				(3,928	)			(2,283	)			(2,777	)
Asset retirement obligations, end of period		$	22,057			$	14,386			$	22,057			$	14,386

Note F. Stockholders’ equity

     Equity issuance. On February 1, 2010, the Company issued 5,347,500 shares of its common stock at $42.75 per share. After deducting underwriting discounts of approximately $9.1 million and transaction costs, the Company received net proceeds of approximately $219.3 million. The net proceeds from this offering were used to repay a portion of the borrowings under the Company’s credit facility.

     Treasury stock. The restrictions on certain restricted stock awards issued to certain of the Company’s officers, directors and key employees lapsed during the six months ended June 30, 2010. Immediately upon the lapse of restrictions, these individuals became liable for income taxes on the value of such shares. In accordance with the Company’s 2006 Stock Incentive Plan and the applicable restricted stock award agreements, some of such persons elected to deliver shares of the Company’s common stock to the Company in exchange for cash used to satisfy such tax liability. In total, at June 30, 2010 and December 31, 2009, the Company had acquired 23,667 and 12,380 shares, respectively, that are held as treasury stock in the approximate amounts of $1.0 million and $0.4 million, respectively.

Note G. Incentive plans

     Defined contribution plan. The Company sponsors a 401(k) defined contribution plan for the benefit of substantially all employees and maintains certain other acquired plans. Currently, the Company matches 100 percent of employee contributions, not to exceed 6 percent of the employee’s annual salary. The Company contributions to the plans for the three months ended June 30, 2010 and 2009, were approximately $0.4 million and $0.2 million, respectively, and approximately $0.6 million and $0.5 million for the six months ended June 30, 2010 and 2009, respectively.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     Stock incentive plan. The Company’s 2006 Stock Incentive Plan (together with applicable stock option agreements and restricted stock agreements, the “Plan”) provides for granting stock options and restricted stock awards to employees and individuals associated with the Company. The following table shows the number of existing awards and awards available under the Plan at June 30, 2010:

		Number of
		Common Shares
Approved and authorized awards			5,850,000
Stock option grants, net of forfeitures			(3,463,720	)
Restricted stock grants, net of forfeitures			(1,057,465	)
Awards available for future grant			1,328,815

     Restricted stock awards. All restricted shares are treated as issued and outstanding in the accompanying consolidated balance sheets. Holders of restricted stock are eligible to vote and receive dividends, if any. If an employee terminates employment prior the restriction lapse date, the awarded shares that have not vested as of the date of termination of employment are forfeited and cancelled and are no longer considered issued and outstanding. A summary of the Company’s restricted stock awards activity under the Plan for the six months ended June 30, 2010 is presented below:

		Number of				Grant Date
		Restricted				Fair Value
		Shares				Per Share
Restricted stock:
Outstanding at December 31, 2009			497,257
Shares granted			254,130			$	48.57
Shares cancelled / forteited			(1,719	)
Lapse of restrictions			(65,435	)
Outstanding at June 30, 2010			684,233

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table summarizes information about stock-based compensation for the Company’s restricted stock awards for the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2010				2009				2010				2009
Grant date fair value for awards during the period:
Employee grants		$	5,751			$	4,620			$	7,341	(a)		$	4,620
Officer and director grants			—				—				5,075				1,850
Total		$	5,751			$	4,620			$	12,416			$	6,470
Stock-based compensation expense from restricted stock:
Employee grants		$	1,140			$	830			$	2,118			$	1,393
Officer and director grants			1,152				473				1,996				807
Total		$	2,292			$	1,303			$	4,114			$	2,200
Income taxes and other information:
Income tax benefit related to restricted stock		$	864			$	586			$	1,553			$	927
Deductions in current taxable income related to restricted stock		$	1,252			$	3,989			$	2,959			$	4,367

     Stock option awards. A summary of the Company’s stock option awards activity under the Plan for the six months ended June 30, 2010 is presented below:

						Weighted
						Average
		Number of				Exercise
		Options				Price
Stock options:
Outstanding at December 31, 2009			2,156,503			$	14.11
Options granted			—			$	—
Options exercised			(435,853	)		$	9.36
Outstanding at June 30, 2010			1,720,650			$	15.31
Vested at end of period			1,247,705			$	13.26
Exercisable at end of period			835,489			$	15.77

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table summarizes information about the Company’s vested and exercisable stock options outstanding at June 30, 2010:

								Weighted
								Average				Weighted
				Number				Remaining				Average
				of Stock				Contractual				Exercise				Intrinsic
				Options				Life				Price				Value
																(in thousands)
Vested options:
June 30, 2010:
Exercise price		$8.00			607,782			1.93 years				$	8.00			$	28,766
Exercise price		$12.00			95,887			4.46 years				$	12.00				4,155
Exercise price		$12.50 - $15.50			257,500			6.22 years				$	14.83				10,429
Exercise price		$20.00 - $23.00			236,578			7.80 years				$	21.67				7,962
Exercise price		$28.00 - $37.27			49,958			7.97 years				$	31.78				1,177
					1,247,705			4.37 years				$	13.26			$	52,489
Exercisable options:
June 30, 2010:
Exercise price		$8.00			213,394			2.74 years				$	8.00			$	10,100
Exercise price		$12.00			78,059			5.13 years				$	12.00				3,382
Exercise price		$12.50 - $15.50			257,500			6.22 years				$	14.83				10,429
Exercise price		$20.00 - $23.00			236,578			7.80 years				$	21.67				7,962
Exercise price		$28.00 - $37.27			49,958			7.97 years				$	31.78				1,177
					835,489			5.78 years				$	15.77			$	33,050

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The following table summarizes information about stock-based compensation for stock options for the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2010				2009				2010				2009
Grant date fair value for awards during the period:
Employee grants		$	—			$	—			$	—			$	—
Officer and director grants			—				—				—				1,454
Total		$	—			$	—			$	—			$	1,454
Stock-based compensation expense from stock options:
Employee grants		$	42			$	70			$	86			$	141
Officer and director grants			537				815				1,502				1,772
Total		$	579			$	885			$	1,588			$	1,913
Income taxes and other information:
Income tax benefit related to stock options		$	218			$	415			$	599			$	806
Deductions in current taxable income related to stock options exercised		$	8,473			$	4,117				$18,124			$	7,157

     The Company used the simplified method that is accepted by the SEC to calculate the expected term for stock options granted during the six months ended June 30, 2009, since it did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its shares of common stock have been publicly traded. Expected volatilities are based on a combination of historical and implied volatilities of comparable companies.

     Future stock-based compensation expense. Future stock-based compensation expense based on the awards outstanding at June 30, 2010 is summarized in the table below:

		Restricted				Stock
(in thousands)		Stock				Options				Total
Remaining 2010		$	4,862			$	1,065			$	5,927
2011			6,239				879				7,118
2012			3,524				184				3,708
2013			1,237				15				1,252
2014			56				—				56
Total		$	15,918			$	2,143			$	18,061

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

Note H. Disclosures about fair value of financial instruments

     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, 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 and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. The Company utilizes its counterparties’ valuations to assess the reasonableness of its prices and valuation techniques.
	Level 3:		Measured based on 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). Level 3 instruments primarily include derivative instruments, such as commodity price collars and floors, as well as investments. 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) volatility factors and (iv) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Although the Company utilizes its counterparties’ valuations to assess the reasonableness of its prices and valuation techniques, the Company does not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2010, for each of the fair value hierarchy levels:

		Fair Value Measurements at Reporting Date Using
						Significant
		Quoted Prices in				Other				Significant
		Active Markets for				Observable				Unobservable				Fair Value at
		Identical Assets				Inputs				Inputs				June 30,
(in thousands)		(Level 1)				(Level 2)				(Level 3)				2010
Assets:
Commodity derivative price swap contracts		$	—			$	122,689			$	—			$	122,689
Commodity derivative price collar contracts			—				—				3,808				3,808
			—				122,689				3,808				126,497
Liabilities:
Commodity derivative price swap contracts			—				(44,315	)			—				(44,315	)
Commodity derivative basis swap contracts			—				(5,095	)			—				(5,095	)
Interest rate derivative swap contracts			—				(6,285	)			—				(6,285	)
			—				(55,695	)			—				(55,695	)
Net financial assets (liabilities)		$	—			$	66,994			$	3,808			$	70,802

     The following table sets forth a reconciliation of changes in the fair value of financial assets (liabilities) classified as Level 3 in the fair value hierarchy:

(in thousands)
Balance at December 31, 2009		$	(945	)
Realized and unrealized gains, net			6,584
Settlements (receipts), net			(1,831	)
Balance at June 30, 2010		$	3,808
Total gains for the period included in earnings attributable to the change in unrealized gains relating to assets (liabilities) still held at the reporting date		$	4,753

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     The following table presents the carrying amounts and fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(in thousands)		Value				Value				Value				Value
Assets:
Derivative instruments		$	94,573			$	94,573			$	24,923			$	24,923
Liabilities:
Derivative instruments		$	23,771			$	23,771			$	91,756			$	91,756
Credit facility		$	348,000			$	332,029			$	550,000			$	528,849
8.625% senior notes due 2017		$	296,023			$	309,000			$	295,836			$	315,000

     Cash and cash equivalents, accounts receivable, other current assets, accounts payable, interest payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments.

     Credit facility. The fair value of the Company’s credit facility is estimated by discounting the principal and interest payments at the Company’s credit adjusted discount rate at the reporting date.

     Senior notes. The fair value of the Company’s senior notes is based on quoted market prices.

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

     Derivative instruments. The fair value of the Company’s derivative instruments are 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 (i) summarize the valuation of each of the Company’s financial instruments by required pricing levels and (ii) summarize 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 June 30, 2010 and December 31, 2009:

		Fair Value Measurements Using
						Significant								Total
		Quoted Prices in				Other				Significant				Carrying Value
		Active Markets for				Observable				Unobservable				at
		Identical Assets				Inputs				Inputs				June 30,
(in thousands)		(Level 1)				(Level 2)				(Level 3)				2010
Assets (1)
Current: (a)
Commodity derivative price swap contracts		$	—			$	50,851			$	—			$	50,851
Commodity derivative price collar contracts			—				—				3,808				3,808
			—				50,851				3,808				54,659
Noncurrent: (b)
Commodity derivative price swap contracts			—				71,838				—				71,838
Interest rate derivative swap contracts			—				—				—				—
			—				71,838				—				71,838
Liabilities (1)
Current: (a)
Commodity derivative price swap contracts			—				(32,772	)			—				(32,772	)
Commodity derivative basis swap contracts			—				(3,485	)			—				(3,485	)
Interest rate derivative swap contracts			—				(4,086	)			—				(4,086	)
			—				(40,343	)			—				(40,343	)
Noncurrent: (b)
Commodity derivative price swap contracts			—				(11,543	)			—				(11,543	)
Commodity derivative basis swap contracts			—				(1,610	)			—				(1,610	)
Interest rate derivative swap contracts			—				(2,199	)			—				(2,199	)
			—				(15,352	)			—				(15,352	)
Net financial assets		$	—			$	66,994			$	3,808			$	70,802
(a) Total current financial assets, gross basis														$	14,316
(b) Total noncurrent financial assets, gross basis															56,486
Net financial assets														$	70,802

Concho Resources Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2010
Unaudited

		Fair Value Measurements Using
						Significant								Total
		Quoted Prices in				Other				Significant				Carrying Value
		Active Markets for				Observable				Unobservable				at
		Identical Assets				Inputs				Inputs				December 31,
(in thousands)		(Level 1)				(Level 2)				(Level 3)				2009
Assets (1)
Current: (a)
Commodity derivative price swap contracts		$	—			$	13,850			$	—			$	13,850
Commodity derivative price collar contracts			—				—				134				134
			—				13,850				134				13,984
Noncurrent: (b)
Commodity derivative price swap contracts			—				35,016				—				35,016
Interest rate derivative swap contracts			—				1,369				—				1,369
			—				36,385				—				36,385
Liabilities (1)
Current: (a)
Commodity derivative price swap contracts			—				(65,351	)			—				(65,351	)
Commodity derivative basis swap contracts			—				(5,254	)			—				(5,254	)
Interest rate derivative swap contracts			—				(3,870	)			—				(3,870	)
Commodity derivative price collar contracts			—				—				(619	)			(619	)
			—				(74,475	)			(619	)			(75,094	)
Noncurrent: (b)
Commodity derivative price swap contracts			—				(38,259	)			—				(38,259	)
Commodity derivative basis swap contracts			—				(3,389	)			—				(3,389	)
Commodity derivative price collar contracts			—				—				(460	)			(460	)
			—				(41,648	)			(460	)			(42,108	)
Net financial liabilities		$	—			$	(65,888	)		$	(945	)		$	(66,833	)
(a) Total current financial liabilities, gross basis														$	(61,110	)
(b)Total noncurrent financial liabilities, gross basis															(5,723	)
Net financial liabilities														$	(66,833	)