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." OverviewConcho Resources Inc. ("Concho," the "Company," "we," "us," and "our") is an independent exploration and production company. We are one of the largest operators in thePermian Basin ofWest Texas andSoutheast New Mexico . Concho's legacy in thePermian 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 ; •$1,917 million of impairments of goodwill during the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 , as compared to$194 million in 2019. •Average daily sales volumes of 326 MBoe per day during the three months endedMarch 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 endedMarch 31, 2020 , as compared to$623 million for the three months endedMarch 31, 2019 , primarily due to an increase in net cash settlements received from derivatives, partially offset by the decrease in oil and natural gas revenues. 22 -------------------------------------------------------------------------------- Table of Contents Commodity Prices Our results of operations are heavily influenced by commodity prices. Commodity prices may fluctuate widely in response to (i) relatively minor changes in the supply of and demand for oil and natural gas, (ii) market uncertainty and (iii) a variety of additional factors that are beyond our control. Recently, there has been a substantial decrease in oil and natural gas prices due in part to significantly decreased demand as a result of the novel coronavirus ("COVID-19") pandemic and an oversupply of crude oil driven by a dispute between members of theOrganization of Petroleum Exporting Countries ("OPEC") andRussia over production cuts, each of which are discussed below under "Other events". A combination of these factors resulted in the price of oil to fall below zero to$(37.63) per barrel of oil onApril 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 fromthe 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 thePermian Basin ofWest Texas andSoutheast New Mexico and the level of commodity inventory in thePermian 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, includingAfrica ,South America and theMiddle East ; •the extent to which members ofOPEC and other oil exporting nations are able to influence global oil supply levels; •changes in trade relations and policies, including the imposition of tariffs bythe United States orChina ; •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 theU.S. dollar, on which oil prices are benchmarked globally, against foreign currencies; •domestic and foreign governmental regulations, including limits onthe 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 atMarch 31, 2020 and additional derivative contracts entered into subsequent toMarch 31, 2020 , respectively. 23 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the averageNew York Mercantile Exchange ("NYMEX") oil and natural gas prices for the three months endedMarch 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 fromApril 1, 2020 toApril 27, 2020 . AtApril 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 averageMont Belvieu price for a blended barrel of natural gas liquids was$15.09 per Bbl and$24.13 per Bbl during the three months endedMarch 31, 2020 and 2019, respectively. Recent Events and Outlook 2020 dividends. OnApril 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 onJune 26, 2020 to stockholders of record as ofMay 8, 2020 . Total cash dividends paid to our stockholders during the three months endedMarch 31, 2020 were$39 million . 2020 capital budget. InMarch 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. InSeptember 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. DuringJanuary 2020 , we repurchased and retired 1,125,906 shares under the program at an aggregate cost of$100 million . As ofMarch 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. InDecember 2019 , COVID-19 was reported to have surfaced inChina . The global spread of this virus has caused business disruption around the world beginning inJanuary 2020 , including disruption to the oil and natural gas industry. InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 to be a pandemic, and theU.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 theU.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 betweenOPEC andRussia over production cuts and a resulting decision bySaudi Arabia and other Persian Gulf members ofOPEC to increase production. InApril 2020 ,OPEC andRussia 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 byU.S. producers starting inmid-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 theGulf Coast region. As storage capacity becomes fully subscribed, possibly by the end ofMay 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. AtMarch 31, 2020 , the fair value of our financial derivatives was a net asset of$1.5 billion . Under the terms of our financial derivative instruments, we do not have exposure to potential "margin calls" on our financial derivative instruments. We currently have no reason to believe that our counterparties to these commodity derivative contracts are not financially viable. The terms of our credit facility, as amended and restated ("Credit Facility"), do not allow us to offset amounts we may owe a lender against amounts we may be owed related to our derivative financial instruments with such party. New commodity derivative contracts. AfterMarch 31, 2020 , we entered into derivative contracts to hedge additional amounts of estimated future production. Refer to Note 12 of the Condensed Notes to Consolidated Financial Statements included in "Item 1. Consolidated Financial Statements (Unaudited)" for additional information regarding these commodity derivative contracts. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth summary information concerning our production and operating data for the three months endedMarch 31, 2020 and 2019. Because of normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions and divestitures, the historical information presented below should not be interpreted as being indicative of future results. Three Months Ended March 31, 2020 2019 Production and operating data: Net production volumes: Oil (MBbl) 19,020 18,936 Natural gas (MMcf) 63,652 63,769 Total (MBoe) 29,629 29,564 Average daily production volumes: Oil (MBbl) 209 210 Natural gas (MMcf) 699 709 Total (MBoe) 326 328 Average prices per unit: (a) Oil, without derivatives (Bbl)$ 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 endedMarch 31, 2020 , a decrease of$182 million (16 percent) from$1,104 million for 2019. The decrease was primarily due to the decrease in oil and natural gas prices (excluding the effects of derivative activities). Specific factors affecting oil and natural gas revenues include the following:
Three Months Ended
2020 2019 Net production volumes: Oil (MBbl) 19,020 18,936 Natural gas (MMcf) 63,652 63,769 Average prices per unit: Average NYMEX oil price (Bbl)$ 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 endedMarch 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 endedMarch 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 ofMidland, Texas andCushing, Oklahoma (settlement location for NYMEX pricing) for our oil directly impacts our realized oil price. For the three months endedMarch 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 endedMarch 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 ourNew Mexico Shelf assets in 2019; and •average realized natural gas price (excluding the effects of derivative activities) decreased 70 percent for the three months endedMarch 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 averageMont Belvieu price for a blended barrel of natural gas liquids decreased from$24.13 per Bbl during the three months endedMarch 31, 2019 to$15.09 per Bbl during the three months endedMarch 31, 2020 . In addition, the continued concerns of rising natural gas production relative to the ability to transport natural gas out of thePermian Basin resulted in the widening of the price differential for natural gas residue during the current period. These widening natural gas residue differentials negatively impacted our realized natural gas prices during both the three months endedMarch 31, 2020 and 2019. The combination of these factors resulted in a realized natural gas price of 42 percent and 92 percent of the average NYMEX natural gas price for the three months endedMarch 31, 2020 and 2019, respectively. 27 -------------------------------------------------------------------------------- Table of Contents Oil and natural gas production expenses. The following table provides the components of our oil and natural gas production expenses for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in millions, except per unit amounts) Amount Per Boe Amount Per Boe Lease operating expenses$ 156 $ 5.27 $ 166 $ 5.59 Workover costs 8 0.27
8 0.28
Total oil and natural gas production expenses
Lease operating expenses were$156 million ($5.27 per Boe) for the three months endedMarch 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 inNovember 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 theNew Mexico Shelf divestiture inNovember 2019 . Workover costs of$8 million ($0.27 per Boe) for the three months endedMarch 31, 2020 , were consistent with 2019. Production and ad valorem taxes. The following table provides the components of our production and ad valorem tax expenses for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in millions, except per unit amounts) Amount Per Boe Amount Per Boe Production taxes$ 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
Production taxes per unit of production were$1.89 per Boe during the three months endedMarch 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 inTexas , which has a lower tax rate thanNew 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$2 million during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to additional wells drilled and completed, along with a higher percentage of our wells located inTexas , which has higher ad valorem tax rates thanNew Mexico . Gathering, processing and transportation costs. The following table shows the gathering, processing and transportation costs for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in millions, except per unit amounts) Amount Per Boe Amount Per Boe Gathering, processing and transportation costs$ 50 $ 1.68
Gathering, processing and transportation costs were$50 million ($1.68 per Boe) for the three months endedMarch 31, 2020 , an increase of 92 percent from$26 million ($0.88 per Boe) during same period in 2019. The increase in gathering, processing and transportation costs was primarily due to a marketing contract that began inOctober 2019 and requires us to deliver 50,000 barrels of oil per day. 28
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Table of Contents
Exploration and abandonments expense. The following table provides the
components of our exploration and abandonments expense for the three months
ended
Three Months Ended March 31, (in millions) 2020 2019 Geological and geophysical$ 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$30 million of unproved impairments and leasehold abandonments for the three months endedMarch 31, 2020 and 2019, respectively. Unproved impairments and leasehold abandonments during the three months endedMarch 31, 2020 were primarily related to impairments of certain unproved properties as our future development plans became more uncertain due to significant declines in commodity prices. See Note 4 of the Condensed Notes to Consolidated Financial Statements included in "Item 1. Consolidated Financial Statements (Unaudited)" for additional information. Leasehold abandonments during the three months endedMarch 31, 2019 were primarily related to certain expiring acreage and acreage where we had no future plans to drill located primarily in theDelaware Basin . Other expense for the periods presented above primarily consists of surface and title costs on locations that we no longer intend to drill, certain plugging costs, delay rentals and other exploratory well costs. Other expense for the three months endedMarch 31, 2019 was primarily due to the abandonment of one exploratory well as a result of certain mechanical issues encountered during the completion of the well that made it unable to produce hydrocarbons. Depreciation, depletion and amortization expense. The following table provides components of our depreciation, depletion and amortization expense for the three months endedMarch 31, 2020 and 2019:
Three Months Ended
2020 2019 (in millions, except per unit amounts) Amount Per Boe Amount Per Boe
Depletion of proved oil and natural gas properties
8 0.28 7 0.24 Amortization of intangible assets 1 0.01 1 0.03
Total depletion, depreciation and amortization
Oil price used to estimate proved oil reserves at period end$ 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 endedMarch 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 endedMarch 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 theMidland Basin andDelaware Basin primarily due to the significant decline in commodity prices. We did not recognize an impairment charge during the three months endedMarch 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. AtMarch 31, 2020 , we performed a goodwill impairment test and impaired our entire goodwill balance of$1.9 billion . The impairment was primarily due to a decline in our market capitalization along with declines in observable control premiums. See Note 2 of the Condensed Notes to Consolidated Financial Statements included in "Item 1. Consolidated Financial Statements (Unaudited)" for additional information on the impairment of goodwill. General and administrative expenses. The following table provides components of our general and administrative expenses for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in millions, except per unit amounts) Amount Per Boe Amount Per Boe General and administrative expenses$ 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
Total general and administrative expenses were$69 million ($2.36 per Boe) for the three months endedMarch 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 inJuly 2019 that were granted in conjunction with the acquisition ofRSP 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$4 million during the three months endedMarch 31, 2020 and 2019, respectively.
Gain (loss) on derivatives. The following table sets forth the gain (loss) on
derivatives for the three months ended
Three Months Ended March 31, (in millions) 2020 2019 Gain (loss) on derivatives: Oil derivatives$ 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
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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 and 2019, respectively. During the three months endedMarch 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 atMarch 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 endedMarch 31, 2020 and 2019, respectively. The difference between theU.S federal statutory rate of 21 percent and our effective tax rate for the three months endedMarch 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 theU.S federal statutory rate of 21 percent and our effective tax rate for the three months endedMarch 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. InMarch 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 endedDecember 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 endedMarch 31, 2020 totaled$567 million . Our capital expenditures during the three months endedMarch 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. OnApril 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 onJune 26, 2020 to stockholders of record as ofMay 8, 2020 . Total cash dividends paid to our stockholders during the three months endedMarch 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. InSeptember 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. DuringJanuary 2020 , the Company repurchased and retired 1,125,906 shares under the program at an aggregate cost of$100 million . As ofMarch 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 endedMarch 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. SinceDecember 31, 2019 , there have been no material changes in our contractual obligations, other than the decrease in our derivative liability which was zero atMarch 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. InMarch 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. AtMarch 31, 2020 , we had a cash balance of$165 million and did not have any borrowings under our Credit Facility. As ofMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 were funded with cash flows from operations. For the three months endedMarch 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 endedMarch 31, 2019 were funded with cash flows from operations and borrowings under our Credit Facility. Cash flow from financing activities. For the three months endedMarch 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 endedMarch 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 endedMarch 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 ofJPMorgan Chase Bank (3.25 percent atMarch 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. AtMarch 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 atMarch 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 atDecember 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 atMarch 31, 2020 andDecember 31, 2019 , respectively. Our ratio of current assets to current liabilities was 2.16 to 1.0 atMarch 31, 2020 , as compared to 0.89 to 1.0 atDecember 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 inthe 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 endedMarch 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission ("SEC") onFebruary 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
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