The following discussion is intended to assist you in understanding our business
and results of operations together with our present financial condition. This
section should be read in conjunction with our historical consolidated financial
statements and notes.
Certain statements in our discussion below are forward-looking statements. These
forward-looking statements involve risks and uncertainties. We caution that a
number of factors could cause actual results to differ materially from those
implied or expressed by the forward-looking statements. Please see "Cautionary
Statement Regarding Forward-Looking Statements."
Overview
Concho Resources Inc. ("Concho," the "Company," "we," "us," and "our") is an
independent exploration and production company. We are one of the largest
operators in the Permian Basin of West Texas and Southeast New Mexico. Concho's
legacy in the Permian Basin provides us a deep understanding of operating and
geological trends, and we are actively developing our resource base by utilizing
large-scale development projects, which include long-lateral wells, enhanced
completion techniques and multi-well pad locations, throughout our operating
areas.
Financial and Operating Performance
Our financial and operating performance for the three months ended March 31,
2020 and 2019 included the following highlights:
•Net loss was $9,277 million ($(47.49) per diluted share) as compared to net
loss of $695 million ($(3.49) per diluted share) for the three months ended
March 31, 2020 and 2019, respectively. The increase in net loss was primarily
due to:
•$7,772 million of impairments of our proved oil and natural gas properties
during the three months ended March 31, 2020;
•$2,672 million increase in exploration and abandonments primarily due to
impairments of our unproved oil and natural gas properties during the three
months ended March 31, 2020;
•$1,917 million of impairments of goodwill during the three months ended
March 31, 2020; and
•$199 million change in other income primarily due to an impairment to one of
our equity method investments during the three months ended March 31, 2020.
partially offset by:
•$2,828 million change in (gain) loss on derivatives due to a gain on
derivatives of $1,769 million during the three months ended March 31, 2020 as
compared to a loss on derivatives of $1,059 million in 2019; and
•$1,373 million increase in income tax benefits due to a $1,567 million tax
benefit during the three months ended March 31, 2020, as compared to $194
million in 2019.
•Average daily sales volumes of 326 MBoe per day during the three months ended
March 31, 2020 as compared to 328 MBoe per day during the same period in 2019.
•Net cash provided by operating activities increased by $213 million to $836
million for the three months ended March 31, 2020, as compared to $623 million
for the three months ended March 31, 2019, primarily due to an increase in net
cash settlements received from derivatives, partially offset by the decrease in
oil and natural gas revenues.
                                       22
--------------------------------------------------------------------------------
  Table of Contents
Commodity Prices
Our results of operations are heavily influenced by commodity prices. Commodity
prices may fluctuate widely in response to (i) relatively minor changes in the
supply of and demand for oil and natural gas, (ii) market uncertainty and (iii)
a variety of additional factors that are beyond our control. Recently, there has
been a substantial decrease in oil and natural gas prices due in part to
significantly decreased demand as a result of the novel coronavirus ("COVID-19")
pandemic and an oversupply of crude oil driven by a dispute between members of
the Organization of Petroleum Exporting Countries ("OPEC") and Russia over
production cuts, each of which are discussed below under "Other events". A
combination of these factors resulted in the price of oil to fall below zero to
$(37.63) per barrel of oil on April 20, 2020 recovering the following day to
$10.01 per barrel of oil. Factors that may impact future commodity prices,
including the price of oil and natural gas, include but are not limited to:
•the overall global demand for oil and natural gas;
•the domestic and foreign supply of oil and natural gas;
•the overall North American oil and natural gas supply and demand fundamentals,
including:
•the U.S. economy,
•weather conditions, and
•liquefied natural gas ("LNG") deliveries to and exports from the United States;
•economic conditions worldwide, including adverse conditions driven by
political, weather or health events, including, but not limited to, the COVID-19
pandemic;
•the proximity, capacity, cost and availability of pipelines and other
transportation facilities, as well as the availability of commodity processing,
gathering and refining capacity;
•risks related to the concentration of our operations in the Permian Basin of
West Texas and Southeast New Mexico and the level of commodity inventory in the
Permian Basin;
•the level of global crude oil, crude oil products and LNG inventories;
•volatility and trading patterns in the commodity-futures markets;
•political and economic developments in oil and natural gas producing regions,
including Africa, South America and the Middle East;
•the extent to which members of OPEC and other oil exporting nations are able to
influence global oil supply levels;
•changes in trade relations and policies, including the imposition of tariffs by
the United States or China;
•technological advances or social attitudes and policies affecting energy
consumption and energy supply;
•activism or activities by non-governmental organizations to limit certain
sources of capital for the energy sector or restrict the exploration,
development and production of oil and gas;
•the effect of energy conservation efforts, alternative fuel requirements and
climate change-related initiatives;
•additional restrictions on the exploration, development and production of oil,
natural gas and natural gas liquids so as to materially reduce emissions of
carbon dioxide and methane greenhouse gases;
•political and economic events that directly or indirectly impact the relative
strength or weakness of the U.S. dollar, on which oil prices are benchmarked
globally, against foreign currencies;
•domestic and foreign governmental regulations, including limits on the United
States' ability to export crude oil, and taxation;
•the cost and availability of products and personnel needed for us to produce
oil and natural gas, including rigs, crews, sand, water and water disposal;
•the quality of the oil we produce; and
•the price, availability and acceptance of alternative fuels.
Although we cannot predict the occurrence of events that may affect future
commodity prices or the degree to which these prices will be affected, the
prices for any commodity that we produce will generally approximate current
market prices in the geographic region of the production. From time to time, we
may hedge a portion of our commodity price risk to mitigate the impact of price
volatility on our business. See Notes 5 and 12 of the Condensed Notes to
Consolidated Financial Statements included in "Item 1. Consolidated Financial
Statements (Unaudited)" for additional information regarding our commodity
derivative positions at March 31, 2020 and additional derivative contracts
entered into subsequent to March 31, 2020, respectively.
                                       23
--------------------------------------------------------------------------------
  Table of Contents
The following table sets forth the average New York Mercantile Exchange
("NYMEX") oil and natural gas prices for the three months ended March 31, 2020
and 2019, as well as the high and low NYMEX prices for the same periods:
                                                Three Months Ended March 31,
                                               2020                          2019
Average NYMEX prices:
Oil (Bbl)                                $       46.35                    $ 54.87
Natural gas (MMBtu)                      $        1.87                    $  2.88

High and Low NYMEX prices:
Oil (Bbl):
High                                     $       63.27                    $ 60.14
Low                                      $       20.09                    $ 45.41
Natural gas (MMBtu):
High                                     $        2.20                    $  3.59
Low                                      $        1.60                    $  2.55


Further, the NYMEX oil price and NYMEX natural gas price reached highs and lows
of $28.34 and $(37.63) per Bbl and $1.94 and $1.55 per MMBtu, respectively,
during the period from April 1, 2020 to April 27, 2020. At April 27, 2020, the
NYMEX oil price and NYMEX natural gas price were $12.78 per Bbl and $1.82 per
MMBtu, respectively.
We derive a portion of our total natural gas revenues from the value of the
natural gas liquids contained in our natural gas, with the remaining portion
coming from the value of the dry natural gas residue. The average Mont Belvieu
price for a blended barrel of natural gas liquids was $15.09 per Bbl and $24.13
per Bbl during the three months ended March 31, 2020 and 2019, respectively.
Recent Events and Outlook

2020 dividends. On April 28, 2020, our board of directors approved a cash
dividend of $0.20 per share for the second quarter of 2020 that is expected to
be paid on June 26, 2020 to stockholders of record as of May 8, 2020. Total cash
dividends paid to our stockholders during the three months ended March 31, 2020
were $39 million.
2020 capital budget. In March 2020, in response to the substantial decrease in
oil and natural gas prices, we announced that we reduced our 2020 planned
capital expenditures to approximately $1.6 billion from the $2.6 billion to $2.8
billion range previously announced. Based on our current expectations of
commodity prices and cost, we expect to fund our 2020 capital budget primarily
with operating cash flows. However, if we experience sustained commodity prices
lower than our forecasted pricing without sufficient costs reductions, we may
adjust our capital budget to preserve our financial strength.
Share repurchase program. In September 2019, we announced that our board of
directors authorized the initiation of a share repurchase program for up to $1.5
billion of our common stock. During January 2020, we repurchased and retired
1,125,906 shares under the program at an aggregate cost of $100 million. As of
March 31, 2020, the Company had repurchased and retired a total of 4,426,276
shares since the inception of the program at an aggregate cost of $350 million.
Other events. In December 2019, COVID-19 was reported to have surfaced in China.
The global spread of this virus has caused business disruption around the world
beginning in January 2020, including disruption to the oil and natural gas
industry. In March 2020, the World Health Organization declared the outbreak of
COVID-19 to be a pandemic, and the U.S. economy began to experience pronounced
effects. The COVID-19 pandemic has negatively impacted the global economy,
disrupted global supply chains and created significant volatility and disruption
of financial and commodity markets. In addition, the pandemic has resulted in
travel restrictions, business closures and the institution of quarantining and
other restrictions on movement in many communities. As a result, there has been
a significant reduction in demand for and prices of oil and natural gas. The
extent of the impact of the COVID-19 pandemic on our operational and financial
performance, including our ability to execute our business strategies and
initiatives in the expected time frame, is uncertain and depends on various
factors, including how the pandemic and measures taken in response to it impact
demand for oil and natural gas, the availability of personnel, equipment and
services critical to our ability to operate our properties and the impact of
potential governmental restrictions on travel, transports and operations. There
is uncertainty around the extent and duration of the disruption, including any
potential resurgence. The degree to which the COVID-19 pandemic or any other
public health crisis adversely impacts our results will depend on future
developments, which are highly uncertain and cannot be predicted, including, but
not limited to, the duration and spread of the outbreak, its severity, the
actions to contain the virus or treat its impact, its impact on the U.S. and
world economies and market conditions, and how quickly and to what extent normal
economic and operating conditions can resume.
                                       24
--------------------------------------------------------------------------------
  Table of Contents
Additionally, the industry is experiencing an oversupply of crude oil driven by
a dispute between OPEC and Russia over production cuts and a resulting decision
by Saudi Arabia and other Persian Gulf members of OPEC to increase production.
In April 2020, OPEC and Russia agreed to certain production cuts. If these cuts
are effected, however, they may not offset near-term demand loss attributable to
the COVID-19 pandemic and the related economic slowdown, and so far, the
tentative agreement has not resulted in increased commodity prices. In response
to an oversupply of crude oil and corresponding low prices, there has been a
significant decline in drilling by U.S. producers starting in mid-March 2020,
but domestic supply has continued to exceed demand, which has led to significant
operational stress with respect to capacity limitations associated with storage,
pipeline and refining infrastructure, particularly in the Gulf Coast region. As
storage capacity becomes fully subscribed, possibly by the end of May 2020, we
may be forced to curtail some portion or all of our estimated production. In
response to these matters, the Company has reduced its planned capital
expenditures for 2020, as discussed below, and, as a result, expects production
to decrease in 2020. Therefore, while we expect these matters to negatively
impact our short-term results, including our revenues and operating costs, as
well as operating cash flows, the degree of the adverse impact cannot be
reasonably estimated at this time.
Derivative Financial Instruments
Derivative financial instrument exposure. At March 31, 2020, the fair value of
our financial derivatives was a net asset of $1.5 billion. Under the terms of
our financial derivative instruments, we do not have exposure to potential
"margin calls" on our financial derivative instruments. We currently have no
reason to believe that our counterparties to these commodity derivative
contracts are not financially viable. The terms of our credit facility, as
amended and restated ("Credit Facility"), do not allow us to offset amounts we
may owe a lender against amounts we may be owed related to our derivative
financial instruments with such party.
New commodity derivative contracts. After March 31, 2020, we entered into
derivative contracts to hedge additional amounts of estimated future production.
Refer to Note 12 of the Condensed Notes to Consolidated Financial Statements
included in "Item 1. Consolidated Financial Statements (Unaudited)" for
additional information regarding these commodity derivative contracts.
                                       25
--------------------------------------------------------------------------------
  Table of Contents
Results of Operations
The following table sets forth summary information concerning our production and
operating data for the three months ended March 31, 2020 and 2019. Because of
normal production declines, increased or decreased drilling activities,
fluctuations in commodity prices and the effects of acquisitions and
divestitures, the historical information presented below should not be
interpreted as being indicative of future results.
                                                            Three Months Ended
                                                                March 31,
                                                            2020           2019
Production and operating data:
Net production volumes:
Oil (MBbl)                                                 19,020        18,936
Natural gas (MMcf)                                         63,652        63,769
Total (MBoe)                                               29,629        29,564

Average daily production volumes:
Oil (MBbl)                                                    209           210
Natural gas (MMcf)                                            699           709
Total (MBoe)                                                  326           328

Average prices per unit: (a)
Oil, without derivatives (Bbl)                          $   45.85       $ 

49.39


Oil, with derivatives (Bbl) (b)                         $   54.88       $ 

49.56


Natural gas, without derivatives (Mcf)                  $    0.79       $  

2.64


Natural gas, with derivatives (Mcf) (b)                 $    1.25       $  

2.59


Total, without derivatives (Boe)                        $   31.13       $ 

37.33


Total, with derivatives (Boe) (b)                       $   37.91       $ 

37.34



Operating costs and expenses per Boe: (a)
Oil and natural gas production                          $    5.54       $  

5.87


Production and ad valorem taxes                         $    2.51       $  

2.92


Gathering, processing and transportation                $    1.68       $  

0.88


Depreciation, depletion and amortization                $   17.68       $ 15.74
General and administrative                              $    2.36       $  3.08



      Per unit and per Boe amounts calculated using dollars and
(a)   volumes rounded to thousands.

      Includes the effect of net cash receipts from (payments on)
(b)   derivatives:

                                                                                    Three Months Ended
                                                                                         March 31,
      (in millions)                                                            2020                     2019
      Net cash receipts from (payments on)
      derivatives:
      Oil derivatives                                                   $           172           $            3
      Natural gas derivatives                                                        29                       (3)
      Total                                                             $           201           $            -

      The presentation of average prices with derivatives is a
      result of including the net cash receipts from (payments on)
      commodity derivatives that are presented in our consolidated
      statements of cash flows. This presentation of average prices
      with derivatives is a means by which to reflect the actual
      cash performance of our commodity derivatives for the
      respective periods and presents oil and natural gas prices
      with derivatives in a manner consistent with the presentation
      generally used by the investment community.






                                       26

--------------------------------------------------------------------------------
  Table of Contents
Oil and natural gas revenues. Revenue from oil and natural gas operations was
$922 million for the three months ended March 31, 2020, a decrease of $182
million (16 percent) from $1,104 million for 2019. The decrease was primarily
due to the decrease in oil and natural gas prices (excluding the effects of
derivative activities).
Specific factors affecting oil and natural gas revenues include the following:
                                                                            

Three Months Ended March 31,


                                                                                         2020                 2019
Net production volumes:
Oil (MBbl)                                                                                19,020            18,936
Natural gas (MMcf)                                                                        63,652            63,769

Average prices per unit:
Average NYMEX oil price (Bbl)                                                      $       46.35           $ 54.87
Realized oil price (Bbl)                                                           $       45.85           $ 49.39
Differential to NYMEX                                                              $       (0.50)          $ (5.48)

Average NYMEX natural gas price (MMBtu)                                            $        1.87           $  2.88
Realized natural gas price (Mcf)                                                   $        0.79           $  2.64
Average realized natural gas price as a percentage of NYMEX                                   42   %            92  %


•total oil production for the three months ended March 31, 2020 was consistent
with the same period in 2019 primarily due to additional production from wells
completed during 2019 and 2020, offset by the sale of our New Mexico Shelf
assets in 2019;
•average realized oil price (excluding the effects of derivative activities)
decreased 7 percent for the three months ended March 31, 2020 as compared to the
same period in 2019. The decrease in average realized oil price was primarily
due to a decrease in the average NYMEX price, partially offset by the narrowing
of the basis differential. The basis differential (referred to as the "Mid-Cush
differential") between the location of Midland, Texas and Cushing, Oklahoma
(settlement location for NYMEX pricing) for our oil directly impacts our
realized oil price. For the three months ended March 31, 2020 and 2019, the
average market Mid-Cush differentials was a price benefit of $0.81 per Bbl and a
price reduction of $3.86 per Bbl, respectively.
•total natural gas production for the three months ended March 31, 2020 was
consistent with the same period in 2019 primarily due to additional production
from wells completed during 2019 and 2020, offset by the sale of our New Mexico
Shelf assets in 2019; and
•average realized natural gas price (excluding the effects of derivative
activities) decreased 70 percent for the three months ended March 31, 2020 as
compared to the same period in 2019. We derive a portion of our total natural
gas revenues from the value of the natural gas liquids contained in our natural
gas, with the remaining portion coming from the value of the dry natural gas
residue. The average Mont Belvieu price for a blended barrel of natural gas
liquids decreased from $24.13 per Bbl during the three months ended March 31,
2019 to $15.09 per Bbl during the three months ended March 31, 2020. In
addition, the continued concerns of rising natural gas production relative to
the ability to transport natural gas out of the Permian Basin resulted in the
widening of the price differential for natural gas residue during the current
period. These widening natural gas residue differentials negatively impacted our
realized natural gas prices during both the three months ended March 31, 2020
and 2019. The combination of these factors resulted in a realized natural gas
price of 42 percent and 92 percent of the average NYMEX natural gas price for
the three months ended March 31, 2020 and 2019, respectively.
                                       27
--------------------------------------------------------------------------------
  Table of Contents
Oil and natural gas production expenses. The following table provides the
components of our oil and natural gas production expenses for the three months
ended March 31, 2020 and 2019:



                                                          Three Months Ended March 31,
                                                         2020                               2019
(in millions, except per unit amounts)            Amount       Per Boe      Amount      Per Boe
Lease operating expenses                        $   156       $ 5.27       $ 166       $ 5.59
Workover costs                                        8         0.27       

8 0.28 Total oil and natural gas production expenses $ 164 $ 5.54 $ 174 $ 5.87




Lease operating expenses were $156 million ($5.27 per Boe) for the three months
ended March 31, 2020, which was a decrease of $10 million from $166 million
($5.59 per Boe) during the same period in 2019. The decrease was primarily due
to the New Mexico Shelf divestiture in November 2019, partially offset by
additional wells successfully drilled and completed during 2019 and 2020. The
decrease in lease operating expenses per Boe was primarily due to the New Mexico
Shelf divestiture in November 2019.
Workover costs of $8 million ($0.27 per Boe) for the three months ended
March 31, 2020, were consistent with 2019.
Production and ad valorem taxes. The following table provides the components of
our production and ad valorem tax expenses for the three months ended March 31,
2020 and 2019:



                                                     Three Months Ended March 31,
                                                    2020                                 2019
(in millions, except per unit amounts)     Amount           Per Boe      Amount      Per Boe
Production taxes                         $   56            $ 1.89       $  70       $ 2.38
Ad valorem taxes                             18              0.62          16         0.54
Total production and ad valorem taxes    $   74            $ 2.51       $  

86 $ 2.92




Production taxes per unit of production were $1.89 per Boe during the three
months ended March 31, 2020, a decrease of 21 percent from $2.38 per Boe during
the same period in 2019. Over the same period, our revenue per Boe (excluding
the effects of derivatives) decreased 17 percent. The decrease in production
taxes per unit of production was primarily due to lower realized revenue per Boe
along with a higher percentage of our total production originating in Texas,
which has a lower tax rate than New Mexico.
Production taxes fluctuate with the market value of our production sold, while
ad valorem taxes are generally based on the valuation of our oil and natural gas
properties at the beginning of the year, which vary across the different areas
in which we operate.

Ad valorem taxes increased $2 million during the three months ended March 31,
2020, as compared to the same period in 2019, primarily due to additional wells
drilled and completed, along with a higher percentage of our wells located in
Texas, which has higher ad valorem tax rates than New Mexico.
Gathering, processing and transportation costs. The following table shows the
gathering, processing and transportation costs for the three months ended
March 31, 2020 and 2019:



                                                             Three Months Ended March 31,
                                                            2020                                 2019
(in millions, except per unit amounts)             Amount           Per Boe      Amount      Per Boe
Gathering, processing and transportation costs   $   50            $ 1.68

$ 26 $ 0.88




Gathering, processing and transportation costs were $50 million ($1.68 per Boe)
for the three months ended March 31, 2020, an increase of 92 percent from $26
million ($0.88 per Boe) during same period in 2019. The increase in gathering,
processing and transportation costs was primarily due to a marketing contract
that began in October 2019 and requires us to deliver 50,000 barrels of oil per
day.
                                       28

--------------------------------------------------------------------------------

Table of Contents Exploration and abandonments expense. The following table provides the components of our exploration and abandonments expense for the three months ended March 31, 2020 and 2019:


                                                                                   Three Months Ended March 31,
(in millions)                                                                         2020                2019
Geological and geophysical                                                       $        2            $      6
Unproved impairments and leasehold abandonments                                       2,713                  30
Other                                                                                     4                  11
Total exploration and abandonments                                               $    2,719            $     47


Our geological and geophysical expense for the periods presented above primarily
consists of the costs of acquiring and processing subsurface data to better
characterize and develop our resources.
We recorded $2,713 million and $30 million of unproved impairments and leasehold
abandonments for the three months ended March 31, 2020 and 2019, respectively.
Unproved impairments and leasehold abandonments during the three months ended
March 31, 2020 were primarily related to impairments of certain unproved
properties as our future development plans became more uncertain due to
significant declines in commodity prices. See Note 4 of the Condensed Notes to
Consolidated Financial Statements included in "Item 1. Consolidated Financial
Statements (Unaudited)" for additional information. Leasehold abandonments
during the three months ended March 31, 2019 were primarily related to certain
expiring acreage and acreage where we had no future plans to drill located
primarily in the Delaware Basin.

Other expense for the periods presented above primarily consists of surface and
title costs on locations that we no longer intend to drill, certain plugging
costs, delay rentals and other exploratory well costs. Other expense for the
three months ended March 31, 2019 was primarily due to the abandonment of one
exploratory well as a result of certain mechanical issues encountered during the
completion of the well that made it unable to produce hydrocarbons.

Depreciation, depletion and amortization expense. The following table provides
components of our depreciation, depletion and amortization expense for the three
months ended March 31, 2020 and 2019:



                                                                        

Three Months Ended March 31,


                                                                   2020                                          2019
(in millions, except per unit amounts)                    Amount          Per Boe           Amount          Per Boe

Depletion of proved oil and natural gas properties $ 515 $ 17.39 $ 457 $ 15.47 Depreciation of other property and equipment

                  8             0.28                7             0.24
Amortization of intangible assets                             1             0.01                1             0.03

Total depletion, depreciation and amortization $ 524 $ 17.68 $ 465 $ 15.74



Oil price used to estimate proved oil reserves at
period end                                              $ 52.23                           $ 59.52

Natural gas price used to estimate proved natural gas reserves at period end

$  2.30                           $  3.07


Depletion of proved oil and natural gas properties was $515 million ($17.39 per
Boe) for the three months ended March 31, 2020, an increase of $58 million (13
percent) from $457 million ($15.47 per Boe) for 2019. The increase in depletion
expense was primarily due to the increase in depletion rate per Boe. The
increase in depletion expense per Boe was primarily due to certain downward
adjustments to our economically recoverable proved oil and natural gas reserves
during 2019.
Impairments of long-lived assets. During the three months ended March 31, 2020,
we recognized impairment charges of approximately $7.8 billion attributable to
the significant decrease in value of our proved oil and natural gas reserves in
both the Midland Basin and Delaware Basin primarily due to the significant
decline in commodity prices. We did not recognize an impairment charge during
the three months ended March 31, 2019. See Note 4 of the Condensed Notes to
Consolidated Financial Statements included in "Item 1. Consolidated Financial
Statements (Unaudited)" for additional information on the fair value assumptions
used for long-lived assets.
                                       29
--------------------------------------------------------------------------------
  Table of Contents
Impairments of goodwill. At March 31, 2020, we performed a goodwill impairment
test and impaired our entire goodwill balance of $1.9 billion. The impairment
was primarily due to a decline in our market capitalization along with declines
in observable control premiums. See Note 2 of the Condensed Notes to
Consolidated Financial Statements included in "Item 1. Consolidated Financial
Statements (Unaudited)" for additional information on the impairment of
goodwill.
General and administrative expenses. The following table provides components of
our general and administrative expenses for the three months ended March 31,
2020 and 2019:



                                                        Three Months Ended March 31,
                                                       2020                                 2019
(in millions, except per unit amounts)        Amount           Per Boe      Amount      Per Boe
General and administrative expenses         $   56            $ 1.88       $  71       $ 2.40
Less: Operating fee reimbursements              (5)            (0.15)         (4)       (0.13)
Non-cash stock-based compensation               18              0.63          24         0.81
Total general and administrative expenses   $   69            $ 2.36

$ 91 $ 3.08




Total general and administrative expenses were $69 million ($2.36 per Boe) for
the three months ended March 31, 2020, a decrease of $22 million (24 percent)
from $91 million ($3.08 per Boe) during the same period in 2019. The decrease in
cash general and administrative expenses was primarily due to lower variable
compensation accruals and lower employee headcount. The decrease in non-cash
stock-based compensation expenses was primarily due to lower employee headcount
and higher forfeitures during 2020, and lapse of restrictions of certain equity
awards in July 2019 that were granted in conjunction with the acquisition of RSP
Permian, Inc. The decrease in total general and administrative expenses per Boe
was primarily the result of the decrease in general and administrative expenses
noted above.
We receive fees for the operation of jointly-owned oil and natural gas
properties during the drilling and production phases and record such
reimbursements as reductions to general and administrative expenses on the
consolidated statements of operations. We earned reimbursements of $5 million
and $4 million during the three months ended March 31, 2020 and 2019,
respectively.

Gain (loss) on derivatives. The following table sets forth the gain (loss) on derivatives for the three months ended March 31, 2020 and 2019:


                                                 Three Months Ended March 31,
(in millions)                                   2020                        2019
Gain (loss) on derivatives:
Oil derivatives                           $      1,825                   $ (1,056)
Natural gas derivatives                            (56)                        (3)
Total                                     $      1,769                   $ (1,059)

The following table represents our net cash receipts from (payments on) derivatives for the three months ended March 31, 2020 and 2019:


                                                                                    Three Months Ended March 31,
(in millions)                                                                           2020               2019
Net cash receipts from (payments on) derivatives:
Oil derivatives                                                                    $     172            $     3
Natural gas derivatives                                                                   29                 (3)
Total                                                                              $     201            $     -


Our earnings are affected by the changes in value of our derivatives portfolio
between periods and the related cash settlements of those derivatives, which
could be significant. To the extent the future commodity price outlook declines
between measurement periods, we will have mark-to-market gains; while to the
extent the future commodity price outlook increases between measurement periods,
we will have mark-to-market losses. See Note 4 of the Condensed Notes to
Consolidated Financial Statements included in "Item 1. Consolidated Financial
Statements (Unaudited)" for additional information regarding significant
judgments made in classifying financial instruments in the fair value hierarchy.
                                       30
--------------------------------------------------------------------------------
  Table of Contents
Interest expense. The following table sets forth interest expense, weighted
average interest rates and weighted average debt balances for the three months
ended March 31, 2020 and 2019:
                                                                                     Three Months Ended March 31,
(in millions)                                                                           2020                 2019
Interest expense, as reported                                                     $          42           $    47
Capitalized interest                                                                          5                 4
Interest expense, excluding impact of capitalized interest                        $          47           $    51

Weighted average interest rate - credit facility                                            3.1   %           4.4  %
Weighted average interest rate - senior notes                                               4.4   %           4.4  %
Total weighted average interest rate                                                        4.4   %           4.4  %

Weighted average credit facility balance                                          $          40           $   503
Weighted average senior notes balance                                                     4,000             4,000
Total weighted average debt balance                                               $       4,040           $ 4,503


The decrease in interest expense during the three months ended March 31, 2020 as
compared to 2019 was primarily due to the decrease in the weighted average
Credit Facility balance.
Other, net. During the three months ended March 31, 2020, we recorded other
expense of $195 million, primarily due to a $204 million other than temporary
impairment of an equity method investment.

Income tax provisions. We recorded an income tax benefit of $1.6 billion and
$194 million for the three months ended March 31, 2020 and 2019, respectively.
During the three months ended March 31, 2020, we recorded impairments of proved
and unproved oil and natural gas properties of $7.8 billion and $2.7 billion,
respectively, which caused our deferred tax balance to change from a net
deferred tax liability to the net deferred tax asset, resulting in the
establishment of a valuation allowance against our deferred tax assets at March
31, 2020. We recognized the valuation allowance as an ordinary item in our
estimated annual effective tax rate.
Our effective income tax rates were 14 percent and 22 percent for the three
months ended March 31, 2020 and 2019, respectively. The difference between the
U.S federal statutory rate of 21 percent and our effective tax rate for the
three months ended March 31, 2020 was primarily due to the impact of the
nondeductible goodwill impairment reported discretely, the change in valuation
allowance and the impact of permanent differences, partially offset by state
income taxes. The difference between the U.S federal statutory rate of 21
percent and our effective tax rate for the three months ended March 31, 2019 was
primarily due to state income taxes and the impact of permanent differences,
partially offset by research and development credits, net of unrecognized tax
benefits. At the end of each interim period, we apply an estimated annualized
effective tax rate to the current period income or loss before income taxes,
which can produce interim effective tax rate fluctuations.

                                       31
--------------------------------------------------------------------------------
  Table of Contents
Capital Commitments, Capital Resources and Liquidity
Capital commitments. Our primary needs for cash are for (i) the development,
exploration and acquisition of oil and natural gas assets, (ii) midstream joint
ventures and other capital commitments, (iii) payment of contractual obligations
and (iv) working capital obligations. Funding for these cash needs may be
provided by any combination of internally-generated cash flow, financing under
our Credit Facility, proceeds from the disposition of assets or alternative
financing sources, as discussed in "- Capital resources" below.
2020 capital budget and costs incurred. In March 2020, in response to the
substantial decrease in oil and natural gas prices, we announced that we reduced
our 2020 planned capital expenditures to approximately $1.6 billion from the
$2.6 billion to $2.8 billion range previously announced. Based on our current
expectations of commodity prices and cost, we expect to fund our 2020 capital
budget primarily with operating cash flows. However, if we experience sustained
commodity prices lower than our forecasted pricing without sufficient costs
reductions, we may adjust our capital budget to preserve our financial strength.
Despite the change to our planned capital expenditures for 2020, our proved
undeveloped reserves reported in our Annual Report on Form 10-K for the year
ended December 31, 2019 remain scheduled to be drilled within five years of the
date of their initial recognition.
Our costs incurred on oil and natural gas properties, excluding acquisitions,
during the three months ended March 31, 2020 totaled $567 million. Our capital
expenditures during the three months ended March 31, 2020 were primarily funded
from cash flows from operations.
During the remainder of 2020, we expect to fund our 2020 capital budget with
operating cash flows. The actual amount and timing of our expenditures may
differ materially from our estimates as a result of, among other things, actual
drilling results, the timing of expenditures by third parties on projects that
we do not operate, the costs of drilling rigs and other services and equipment,
regulatory, technological and competitive developments and market conditions. In
addition, under certain circumstances, we may consider increasing, decreasing or
reallocating our capital spending plans.
Other than the customary purchase of leasehold acreage, our capital budgets are
exclusive of acquisitions. We do not have a specific acquisition budget since
the timing and size of acquisitions are difficult to forecast. We evaluate
opportunities to purchase or sell oil and natural gas properties in the
marketplace and could participate as a buyer or seller of properties at various
times. We seek to acquire oil and natural gas properties that provide
opportunities for the addition of reserves and production through a combination
of development, high-potential exploration and control of operations that will
allow us to apply our operating expertise.
2020 dividends. On April 28, 2020, our board of directors approved a cash
dividend of $0.20 per share for the second quarter of 2020 that is expected to
be paid on June 26, 2020 to stockholders of record as of May 8, 2020. Total cash
dividends paid to our stockholders during the three months ended March 31, 2020
were $39 million. We intend to continue to pay a quarterly dividend of $0.20 per
share in the near future; however, any payment of future dividends will be at
the discretion of our board of directors and may be suspended at any time.
Share repurchase program. In September 2019, we announced that our board of
directors authorized the initiation of a share repurchase program for up to $1.5
billion of our common stock. The share repurchase program may be modified,
suspended or terminated at any time by our board of directors and we are not
obligated to acquire any specific number of shares.
During January 2020, the Company repurchased and retired 1,125,906 shares under
the program at an aggregate cost of $100 million. As of March 31, 2020, the
Company had repurchased and retired a total of 4,426,276 shares since the
inception of the program at an aggregate cost of $350 million.
Acquisitions. The following table reflects our expenditures for acquisitions of
proved and unproved properties for the three months ended March 31, 2020 and
2019:
                                                                          Three Months Ended March 31,
(in millions)                                                                 2020                  2019
Property acquisition costs:
Proved                                                                $          7               $     -
Unproved (a)                                                                     5                     4
Total property acquisition costs                                      $         12               $     4

(a) Unproved property acquisition costs relate primarily to budgeted unproved leasehold acreage acquisitions.




                                       32
--------------------------------------------------------------------------------
  Table of Contents
Contractual obligations. Our contractual obligations include long-term debt,
cash interest expense on debt, derivative liabilities, asset retirement
obligations, employment agreements with officers, purchase obligations,
operating and finance lease obligations and other obligations. Since
December 31, 2019, there have been no material changes in our contractual
obligations, other than the decrease in our derivative liability which was zero
at March 31, 2020.
Off-balance sheet arrangements.  Currently, we do not have any material
off-balance sheet arrangements.
Capital resources.  Our primary sources of liquidity have been cash flows
generated from (i) operating activities, (ii) borrowings under our Credit
Facility, (iii) asset dispositions and (iv) proceeds from bond and equity
offerings. In March 2020, in response to the substantial decrease in oil and
natural gas prices, we announced that we reduced our 2020 planned capital
expenditures to approximately $1.6 billion from the $2.6 billion to $2.8 billion
range previously announced. Based on our current expectations of commodity
prices and cost, we expect to fund our 2020 capital budget primarily with
operating cash flows. However, if we experience sustained commodity prices lower
than our forecasted pricing without sufficient costs reductions, we may adjust
our capital budget to preserve our financial strength. At March 31, 2020, we had
a cash balance of $165 million and did not have any borrowings under our Credit
Facility. As of March 31, 2020, we had approximately $2.0 billion of unused
commitments under our Credit Facility.
The following table summarizes our changes in cash and cash equivalents for the
three months ended March 31, 2020 and 2019:
                                                                          Three Months Ended March 31,
(in millions)                                                                 2020                 2019
Net cash provided by operating activities                              $         836            $   623
Net cash used in investing activities                                           (596)              (902)
Net cash provided by (used in) financing activities                             (145)               279
Net increase in cash and cash equivalents                              $          95            $     -


Cash flow from operating activities. The $213 million increase in operating cash
flows during the three months ended March 31, 2020 as compared to the same
period in 2019 was primarily due to an increase of $201 million in net cash
settlements received from derivatives, partially offset by the decrease in oil
and natural gas revenues.
Our net cash provided by operating activities included a benefit of $92 million
and a reduction of $78 million for the three months ended March 31, 2020 and
2019, respectively, associated with changes in working capital items. Changes in
working capital items adjust for the timing of receipts and payments of actual
cash.
Cash flow from investing activities. Our investing activities consist primarily
of drilling and completion activity, acquisitions and divestitures.
For the three months ended March 31, 2020, our net cash used in investing
activities was $596 million, which consisted primarily of our investment of $556
million for additions to oil and natural gas properties. Additionally, we
completed acquisitions of oil and natural gas properties of $20 million. Our
capital expenditures for the three months ended March 31, 2020 were funded with
cash flows from operations.
For the three months ended March 31, 2019, our net cash used in investing
activities was $902 million, which consisted primarily of our investment of $918
million for additions to oil and natural gas properties. Our capital
expenditures for the three months ended March 31, 2019 were funded with cash
flows from operations and borrowings under our Credit Facility.
Cash flow from financing activities. For the three months ended March 31, 2020,
our net cash used in financing activities was $145 million primarily due to $100
million of common stock repurchases under our share repurchase program and $39
million of dividends paid on our common stock.
For the three months ended March 31, 2019, our net cash provided by financing
activities was $279 million primarily due to $373 million of net borrowings
under our Credit Facility partially offset by $25 million of dividends paid on
our common stock. During the three months ended March 31, 2019, we decreased our
book overdrafts by $54 million.
Advances on our Credit Facility bear interest, at our option, based on:
(i) an alternative base rate ("ABR"), which is equal to the highest of
(a) the prime rate of JPMorgan Chase Bank (3.25 percent at March 31, 2020),
(b) the federal funds effective rate plus 0.5 percent, and
(c) the London Interbank Offered Rate ("LIBOR") plus 1.0 percent; or
                                       33
--------------------------------------------------------------------------------
  Table of Contents
(ii) LIBOR.
Our Credit Facility's interest rates and commitment fees on the unused portion
of the available commitment vary depending on our credit ratings from Moody's
Investors Service, Inc. ("Moody's") and S&P Global Ratings ("S&P"). At our
current credit ratings, LIBOR Rate Loans and Alternate Base Rate Loans bear
interest margins of 150 basis points and 50 basis points per annum,
respectively, and commitment fees on the unused portion of the available
commitment are 25 basis points per annum.
In conducting our business, we may utilize various financing sources, including
the issuance of (i) fixed and floating rate debt, (ii) convertible securities,
(iii) preferred stock, (iv) common stock and (v) other securities. Historically,
we have demonstrated our use of the capital markets by issuing common stock and
senior unsecured debt. There are no assurances that we can access the capital
markets to obtain additional funding, if needed, and at cost and terms that are
favorable to us. We may also sell assets and issue securities in exchange for
oil and natural gas assets or interests in energy companies. Additional
securities may be of a class senior to common stock with respect to such matters
as dividends and liquidation rights and may also have other rights and
preferences as determined from time to time. Utilization of some of these
financing sources may require approval from the lenders under our Credit
Facility.
Liquidity. Our principal source of liquidity is the available borrowing capacity
under our Credit Facility. At March 31, 2020, our commitments from our bank
group totaled $2.0 billion, all of which were unused.
Debt ratings. We receive debt credit ratings from S&P, Moody's and Fitch Ratings
and are designated as investment grade with all three agencies. In determining
our ratings, the agencies perform regular reviews and consider a number of
qualitative and quantitative factors including, but not limited to: the industry
in which we operate, production growth opportunities, liquidity, debt levels and
asset and reserve mix.
A downgrade in our credit ratings could (i) negatively impact our cost of
capital and our ability to effectively execute aspects of our strategy, (ii)
affect our ability to raise debt in the public debt markets, and the cost of any
new debt could be much higher than our outstanding debt and (iii) negatively
affect our ability to obtain additional financing or the interest rate, fees and
other terms associated with such additional financing. Further, if we are unable
to maintain credit ratings of "Ba2" or better from Moody's and "BB" or better
from S&P, the investment grade period under our Credit Facility will
automatically terminate and cause our Credit Facility to once again be secured
by a first lien on substantially all of our oil and natural gas properties and
by a pledge of the equity interests in our subsidiaries. These and other impacts
of a downgrade in our credit ratings could have an adverse effect on our
business, financial condition and results of operations.
As of the filing of this Quarterly Report on Form 10-Q, no changes in our credit
ratings have occurred; however, we cannot be certain that our credit ratings
will not be downgraded in the future.
Book capitalization and current ratio.  Our net book capitalization at March 31,
2020 was $12.2 billion, consisting of cash and cash equivalents of $165 million,
debt of $4.0 billion and stockholders' equity of $8.4 billion. Our net book
capitalization at December 31, 2019 was $21.8 billion, consisting of cash and
cash equivalents of $70 million, debt of $4.0 billion and stockholders' equity
of $17.8 billion. Our ratio of net debt to net book capitalization was 31
percent and 18 percent at March 31, 2020 and December 31, 2019, respectively.
Our ratio of current assets to current liabilities was 2.16 to 1.0 at March 31,
2020, as compared to 0.89 to 1.0 at December 31, 2019.
                                       34
--------------------------------------------------------------------------------
  Table of Contents
Critical Accounting Policies, Practices and Estimates
Our historical consolidated financial statements and related notes to
consolidated financial statements contain information that is pertinent to our
management's discussion and analysis of financial condition and results of
operations. Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that our management
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. However, the accounting principles used by us generally
do not change our reported cash flows or liquidity. Interpretation of the
existing rules must be done and judgments made on how the specifics of a given
rule apply to us.
In management's opinion, the more significant reporting areas impacted by
management's judgments and estimates are the choice of accounting method for oil
and natural gas activities, oil and natural gas reserve estimation, asset
retirement obligations, impairment of long-lived assets, valuation of
stock-based compensation, valuation of business combinations, accounting and
valuation of nonmonetary transactions, litigation and environmental
contingencies, valuation of financial derivative instruments, uncertain tax
positions and income taxes.
Management's judgments and estimates in all the areas listed above are based on
information available from both internal and external sources, including
engineers, geologists and historical experience in similar matters. Actual
results could differ from the estimates as additional information becomes known.
There have been no material changes in our critical accounting policies and
procedures during the three months ended March 31, 2020. See our disclosure of
critical accounting policies in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data" of our Annual Report on Form 10-K for the year ended
December 31, 2019, filed with the Securities and Exchange Commission ("SEC") on
February 19, 2020.
New accounting pronouncements issued but not yet adopted. See Note 2 of the
Condensed Notes to Consolidated Financial Statements included in "Item 1.
Consolidated Financial Statements (Unaudited)" for information regarding new
accounting pronouncements issued but not yet adopted.
                                       35

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses