Concho Resources Inc. Reports First-Quarter 2020 Results; Updates 2020 Outlook

Concho Resources Inc. (NYSE: CXO) today reported financial and operating results for first-quarter 2020.

First-Quarter 2020 Highlights

• Delivered oil production volumes of 209 MBopd, exceeding the high end of the Company’s guidance range.
• Generated cash flow from operating activities of $836 million. Operating cash flow before working capital changes (non-GAAP) was $744 million, exceeding capital expenditures of $556 million and resulting in $188 million of free cash flow (non-GAAP).
• Included in the Company’s first-quarter 2020 results are $12.6 billion in impairment charges related to the substantial weakness in commodity prices. As such, the Company reported a net loss of $9.3 billion, or $47.49 per share.
• Adjusted net income (non-GAAP) totaled $142 million, or $0.72 per share.
• Generated $784 million of adjusted EBITDAX (non-GAAP).
• Returned capital to shareholders through the Company’s common dividend of $0.20 per share, up 60% year over year, and $100 million of share repurchases.

2020 Outlook Update

• Further reducing planned capital expenditures to $1.6 billion, representing a 40% decrease from the Company’s initial capital spending expectations for the year.
• Targeting $100 million in operating and G&A cost reductions.
• The Company expects production to remain relatively consistent with 2019 divestiture-adjusted production volumes. The Company’s production outlook includes current voluntary curtailments, but does not include any potential future curtailments.

See “Supplemental Non-GAAP Financial Measures” below for descriptions of the above non-GAAP measures as well as a reconciliation of these measures to the associated GAAP (as defined herein) measures.

Tim Leach, Chairman and Chief Executive Officer, commented, “This is an extremely challenging environment, but our first priority is the safety and well-being of our employees, business partners and communities. Due to the hard work and dedication of our team, we delivered strong operational and financial results for the first quarter. The operating environment has changed considerably since our last update, and we expect a sustained period of low commodity prices. We are managing through the volatility and uncertainty from a position of strength, which we are focused on maintaining by aligning our operations with current market realities. We are further reducing capital spending in 2020 and targeting $100 million in operating cost reductions. We expect these actions will improve our capital efficiency and better position Concho to deliver value over the long term.”

First-Quarter 2020 Summary

First-quarter 2020 oil production volumes totaled 209 thousand barrels per day (MBopd), compared with 210 MBopd produced in the same period a year ago. Natural gas production for first-quarter 2020 totaled 699 million cubic feet per day (MMcfpd). The Company’s total production for first-quarter 2020 was 326 thousand barrels of oil equivalent per day (MBoepd), compared with 328 MBoepd produced in the same period a year ago.

Concho’s average realized price for oil and natural gas for first-quarter 2020, excluding the effect of commodity derivatives, was $45.85 per Bbl and $0.79 per Mcf, respectively.

Net loss for first-quarter 2020 was $9.3 billion, or $47.49 per share. Special items impacting earnings for the quarter included non-cash impairment charges primarily related to the Company’s proved and unproved oil and natural gas assets and goodwill. These impairment charges are due to the substantial weakness in equity markets due to the COVID-19 pandemic and the substantial decline in commodity prices. Excluding these and other special items, adjusted net income (non-GAAP) for first-quarter 2020 was $142 million, or $0.72 per share.

Continued Cost Performance; Further Improving Cost Structure in 2020

For first-quarter 2020, controllable costs totaled $8.68 per Boe, representing an 11% decrease year over year and below the Company’s full-year 2020 controllable cost target of $9.00 per Boe. Controllable costs include production expenses (consisting of lease operating and workover expenses), cash general and administrative (G&A) expenses (which excludes non-cash stock-based compensation) and interest expense.

Concho will continue focusing on improving its operating cost structure and is targeting $100 million in reductions across production expenses and cash G&A in 2020. These reductions would enable the Company to hold controllable costs below $9.00 per Boe despite current expectations for production volumes that are lower than previously contemplated under the Company’s initial 2020 outlook.

Generated Strong Cash Flow

For first-quarter 2020, cash flow from operating activities was $836 million, including $92 million in working capital changes. Operating cash flow before working capital changes (non-GAAP) was $744 million, exceeding first-quarter capital expenditures of $556 million. Capital expenditures refers to the Company’s additions to oil and natural gas properties on the Company’s consolidated statements of cash flows.

During January 2020, the Company repurchased approximately 1.1 million shares for $100 million. Since initiating the repurchase program in fourth-quarter 2019, the Company has repurchased approximately 4.4 million shares for $350 million, which represents approximately 40% of the proceeds from the Company’s New Mexico Shelf sale.

Significant Financial Flexibility

Concho maintains a strong financial position with investment-grade credit ratings and substantial liquidity. At March 31, 2020, Concho had long-term debt of $4 billion, with no outstanding debt maturities until January 2025 and no debt outstanding under its credit facility. Additionally, at March 31, 2020, the Company had cash of $165 million and approximately $2.2 billion of liquidity.

Hedge Position Mitigates Cash Flow Volatility

The Company’s commodity derivatives strategy mitigates Concho’s exposure to commodity price fluctuations. For the remainder of 2020, Concho has crude oil swap contracts covering approximately 138 MBopd and 25 MBopd at weighted average prices of $54 per Bbl WTI and $54 per Bbl Brent, respectively. Additionally, the Company has approximately 140 MBopd of Midland-Cushing oil basis swaps at a weighted average price of $(0.64) per Bbl, which mitigates exposure to field-level pricing weakness. At March 31, 2020, Concho had a net derivative asset of approximately $1.5 billion.

Please see the table under “Derivatives Information” below for detailed information about Concho’s current derivatives positions.

Further Reducing 2020 Capital Program

Concho continues to prudently and dynamically manage its capital program in response to challenging macroeconomic conditions, the severe decline in commodity prices and reduced demand for oil and natural gas. The Company is further reducing 2020 capital expenditures to approximately $1.6 billion, which represents a 40% decrease from the Company’s initial 2020 capital guidance. For the remainder of 2020, Concho expects to average approximately 8 rigs and complete approximately 110 to 130 gross operated wells. This level of investment under current market conditions:

• Reinforces one of the sector’s strongest balance sheets;
• Generates substantial free cash flow in 2020;
• Maintains the Company’s commitment to returning capital to shareholders; and
• Preserves the Company’s operational capacity and development opportunities, which the Company can execute in a more conducive investment environment.

The Company expects full-year 2020 oil production to be approximately flat with 2019 divestiture-adjusted oil production volumes of 197 MBopd. The Company’s production guidance reflects voluntarily curtailed volumes, which are primarily associated with low-margin vertical wells. However, Concho’s production guidance does not reflect incremental curtailments that may arise as a result of further deteriorating crude oil supply and demand fundamentals or economic conditions, including field-level commodity prices. Additionally, given the unique and challenging operating environment, the Company is withholding detailed quarterly and annual guidance.

First-Quarter 2020 Conference Call

Concho will host a conference call tomorrow, May 1, 2020, at 8:00 AM CT (9:00 AM ET) to discuss first-quarter 2020 results. The telephone number and passcode to access the conference call are provided below:

Dial-in: (844) 263-8298

Intl. dial-in: (478) 219-0007

Participant Passcode: 7526676

To access the live webcast and view the related earnings presentation, visit Concho’s website at www.concho.com. The replay will also be available on the Company’s website under the “Investors” section.

About Concho Resources

Concho Resources (NYSE: CXO) is one of the largest unconventional shale producers in the Permian Basin, with operations focused on safely and efficiently developing and producing oil and natural gas resources. We are working today to deliver a better tomorrow for our shareholders, people and communities. For more information about Concho, visit www.concho.com.

Forward-Looking Statements and Cautionary Statements

The foregoing contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, 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. The words “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “enable,” “strategy,” “intend," “positioned,” “foresee,” “plan,” “will,” “guidance,” “outlook,” “goal,” "target" or other similar expressions that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements, which generally are not historical in nature. However, the absence of these words does not mean that the statements are not forward-looking. These statements are based on certain assumptions and analyses made by the Company based on management’s experience, expectations and perception of historical trends, current conditions, current plans, anticipated future developments, expected financings, the impact of the COVID-19 pandemic and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, 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 the risk factors and other information discussed or referenced in the Company’s most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. In particular, the unprecedented nature of the current economic downturn, pandemic and industry decline may make it particularly difficult to identify risks or predict the degree to which identified risks will impact the Company’s business and financial condition. 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. Information on Concho’s website is not part of this press release.

Use of Non-GAAP Financial Measures

To supplement the presentation of the Company’s financial results prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), this press release contains certain financial measures that are not prepared in accordance with GAAP, including adjusted net income, adjusted earnings per share, adjusted EBITDAX, operating cash flow before working capital changes and free cash flow.

See “Supplemental Non-GAAP Financial Measures” below for a description and reconciliation of each non-GAAP measure presented in this press release to the most directly comparable financial measure calculated in accordance with GAAP.

Concho Resources Inc.

Earnings per Share

Unaudited

The Company uses the two-class method of calculating earnings per share because certain of the Company’s unvested share-based awards qualify as participating securities.

The Company’s basic earnings (loss) per share attributable to common stockholders is computed as (i) net income (loss) as reported, (ii) less participating basic earnings (iii) divided by weighted average basic common shares outstanding. The Company’s diluted earnings (loss) per share attributable to common stockholders is computed as (i) basic earnings (loss) attributable to common stockholders, (ii) plus reallocation of participating earnings (iii) divided by weighted average diluted common shares outstanding.

The following table reconciles the Company’s loss from operations and loss attributable to common stockholders to the basic and diluted loss used to determine the Company’s loss per share amounts for the periods indicated under the two-class method:

The following table is a reconciliation of the basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the periods indicated:

Concho Resources Inc.

Supplemental Non-GAAP Financial Measures

Unaudited

The Company reports its financial results in accordance with the United States generally accepted accounting principles (GAAP). However, the Company believes certain non-GAAP performance measures may provide financial statement users with additional meaningful comparisons between current results, the results of its peers and the results of prior periods. In addition, the Company believes these measures are used by analysts and others in the valuation, rating and investment recommendations of companies within the oil and natural gas exploration and production industry. See the reconciliations throughout this release of GAAP financial measures to non-GAAP financial measures for the periods indicated.

Reconciliation of Net Loss to Adjusted Net Income and Adjusted Earnings per Share

The Company’s presentation of adjusted net income and adjusted earnings per share that exclude the effect of certain items are non-GAAP financial measures. Adjusted net income and adjusted earnings per share represent earnings (loss) and diluted earnings (loss) per share determined under GAAP without regard to certain non-cash and special items. The Company believes these measures provide useful information to analysts and investors for analysis of its operating results on a recurring, comparable basis from period to period. Adjusted net income and adjusted earnings per share should not be considered in isolation or as a substitute for earnings (loss) or diluted earnings (loss) per share as determined in accordance with GAAP and may not be comparable to other similarly titled measures of other companies.

The following table provides a reconciliation from the GAAP measure of net loss to adjusted net income, both in total and on a per diluted share basis, for the periods indicated:

Reconciliation of Net Loss to Adjusted EBITDAX

Adjusted EBITDAX (as defined below) is presented herein and reconciled from the GAAP measure of net income (loss) because of its wide acceptance by the investment community as a financial indicator.

The Company defines adjusted EBITDAX as net loss, plus (1) exploration and abandonments, (2) depreciation, depletion and amortization, (3) accretion of discount on asset retirement obligations, (4) impairments of long-lived assets, (5) impairments of goodwill, (6) non-cash stock-based compensation, (7) (gain) loss on derivatives, (8) net cash received from derivatives, (9) (gain) loss on disposition of assets and other, (10) interest expense, (11) loss on equity method investments and (12) income tax benefit. Adjusted EBITDAX is not a measure of net income (loss) or cash flows as determined by GAAP.

The Company’s adjusted EBITDAX measure provides additional information that may be used to better understand the Company’s operations. Adjusted EBITDAX is one of several metrics that the Company uses as a supplemental financial measurement in the evaluation of its business and should not be considered as an alternative to, or more meaningful than, net income (loss) as an indicator of operating performance. Certain items excluded from adjusted 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 and depletable assets. Adjusted EBITDAX, as used by the Company, may not be comparable to similarly titled measures reported by other companies. The Company believes that adjusted EBITDAX is a widely followed measure of operating performance and is one of many metrics used by the Company’s management team and by other users of the Company’s consolidated financial statements. For example, adjusted EBITDAX can be used to assess the Company’s 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 the Company’s assets and the Company without regard to capital structure or historical cost basis.

The following table provides a reconciliation of the GAAP measure of net loss to adjusted EBITDAX for the periods indicated:

Reconciliation of Net Cash Provided by Operating Activities to Operating Cash Flow ("OCF") Before Working Capital Changes and to Free Cash Flow

The Company provides OCF before working capital changes, which is a non-GAAP financial measure. OCF before working capital changes represents net cash provided by operating activities as determined under GAAP without regard to changes in operating assets and liabilities, net of acquisitions and dispositions as determined in accordance with GAAP. The Company believes OCF before working capital changes is an accepted measure of an oil and natural gas company’s ability to generate cash used to fund development and acquisition activities and service debt or pay dividends. Additionally, the Company provides free cash flow, which is a non-GAAP financial measure. Free cash flow is cash flow from operating activities before changes in working capital in excess of additions to oil and natural gas properties. The Company believes that free cash flow is useful to investors as it provides a measure to compare both cash flow from operating activities and additions to oil and natural gas properties across periods on a consistent basis.

The Company previously defined free cash flow as cash flow from operating activities before changes in working capital in excess of exploration and development costs incurred. Exploration and development costs incurred include those costs that are capitalized or charged to expense such as geological and geophysical costs and capitalized asset retirement costs. The Company’s new calculation better aligns with the way its industry peers compute free cash flow and can be derived directly from line items appearing on the Company’s statement of cash flows.

These non-GAAP measures should not be considered as alternatives to, or more meaningful than, net cash provided by operating activities as an indicator of operating performance.

The following tables provide a reconciliation from the GAAP measure of net cash provided by operating activities to OCF before working capital changes and to free cash flow:

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