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Concho Resources Second Quarter 2020 Results

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   |    Thursday,July 30,2020

Concho Resources Inc.  reported financial and operating results for second-quarter 2020.

Q2 Highlights

• Generated cash flow from operating activities of $689 million. Operating cash flow before working capital changes (non-GAAP) totaled $550 million, exceeding capital expenditures of $312 million and resulting in $238 million of free cash flow (non-GAAP).
• Delivered oil production volumes of 200 MBopd.
• Demonstrated excellent cost control, driving an increase in the Company’s full-year 2020 operating and G&A cost reduction target to more than $135 million.
• Continued to capture efficiency gains, resulting in a further reduction in the Company’s outlook for well costs.
• Quickly aligned drilling and completion activity with prevailing market conditions, with capital spending down 44% as compared to first-quarter 2020.
• Reported net loss of $435 million, or $2.23 per share. Adjusted net income (non-GAAP) was $223 million, or $1.13 per share.
• Generated $632 million of adjusted EBITDAX (non-GAAP).

Tim Leach, Chairman and Chief Executive Officer, commented, “Our organization continues to deliver solid results despite an extremely challenging environment. Across our key initiatives, including reducing costs and improving productivity, the business performed very well and demonstrated our resilience. We remain focused on these initiatives as we position the company to deliver value over the long term.”

Second-Quarter 2020 Summary

Second-quarter 2020 oil production volumes totaled 200 thousand barrels per day (MBopd), compared with 206 MBopd produced in the same period a year ago. Natural gas production for second-quarter 2020 totaled 719 million cubic feet per day (MMcfpd). The Company’s total production for second-quarter 2020 was 319 thousand barrels of oil equivalent per day (MBoepd), compared with 329 MBoepd produced in the same period a year ago.

Concho’s average realized price for oil and natural gas for second-quarter 2020, excluding the effect of commodity derivatives, was $23.66 per Bbl and $0.68 per Mcf, respectively.

Net loss for second-quarter 2020 was $435 million, or $2.23 per share. Special items impacting earnings for the quarter included a $107 million gain on the disposition of assets as a result of the Company’s transaction with Solaris Midstream Holdings, LLC (“Solaris”), and $27 million of charges associated with the Company’s voluntary separation program. Excluding these and other special items, adjusted net income (non-GAAP) for second-quarter 2020 was $223 million, or $1.13 per share.

Increasing Cost Reduction Target

For second-quarter 2020, controllable costs totaled $7.49 per Boe, representing a 25% decrease year over year. Controllable costs include production expenses (consisting of lease operating and workover expenses), cash general and administrative (G&A) expenses (which excludes non-cash stock-based compensation) and interest expense.

The Company increased its full-year 2020 operating and G&A cost reduction target to more than $135 million, representing an incremental $35 million in annual savings as compared to the Company's prior target. With these additional savings, the Company expects to hold full-year 2020 controllable costs below $8.50 per Boe.

Reduced Development Activity

Concho is prudently and dynamically managing its capital program in response to challenging macroeconomic conditions, the severe decline in commodity prices and reduced demand for oil and natural gas. During second-quarter 2020, the Company averaged 11 rigs and four completion crews, as compared to 18 rigs and seven completion crews in first-quarter 2020. Capital expenditures for second-quarter 2020 totaled $312 million, representing a 44% decline as compared to first-quarter 2020. Capital expenditures refers to the Company’s additions to oil and natural gas properties on the Company’s condensed consolidated statements of cash flows.

Although Concho has reduced activity across its portfolio, the Company continues to focus on enhancing capital efficiency with sustainable drilling and completion cost savings and improved well productivity. As a result of these operational efficiencies and service cost deflation, the Company currently expects full-year 2020 well costs (drilling, completion and equipment) to average less than $800 per foot, which represents a $50 per foot decrease from the Company’s prior guidance and a 30% decrease in well costs year over year.

Cash Flow

The Company’s hedging strategy combined with excellent cost control resulted in strong cash flow generation during the quarter. For second-quarter 2020, cash flow from operating activities was $689 million, including $139 million in working capital changes. Operating cash flow before working capital changes (non-GAAP), which includes $30 million of cash charges associated with the Company’s voluntary separation program, was $550 million, exceeding second-quarter capital expenditures of $312 million.

Debt

Concho maintains a strong financial position with investment-grade credit ratings and substantial liquidity. At June 30, 2020, Concho had long-term debt of $4 billion, with no outstanding debt maturities until January 2025, no debt outstanding under its credit facility and $320 million in cash and cash equivalents.

Following four consecutive quarters of free cash flow generation, the Company has reduced net debt (non-GAAP) by approximately $710 million since June 30, 2019 to $3.6 billion. The Company is targeting an additional $600 million reduction in net debt.

Hedge Position

The Company’s commodity derivatives strategy mitigates Concho’s exposure to commodity price fluctuations. For the remainder of 2020, Concho has crude oil swap contracts covering approximately 143 MBopd and 28 MBopd at weighted average prices of $53 per Bbl WTI and $49 per Bbl Brent, respectively. Additionally, the Company has approximately 132 MBopd of Midland-Cushing oil basis swaps at a weighted average price of $(0.62) per Bbl, which mitigates exposure to field-level pricing weakness.

Outlook

The Company’s full-year 2020 production and capital expenditure expectations are unchanged at 197 MBopd and $1.6 billion, respectively. Controllable costs are forecasted to be approximately $250 million in the third and fourth quarters of 2020, and oil and gas production taxes are forecasted to be 8% to 10% of oil and gas revenues.