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| CXO > SEC Filings for CXO > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
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, as well as the selected historical consolidated financial data included elsewhere in this report. As a result of the acquisitions and divestures discussed below, many comparisons between periods will be difficult or impossible.
In December 2012, we sold certain of our non-core assets, a portion of which were acquired in the Three Rivers Acquisition, for cash consideration of approximately $488.1 million, subject to customary post-closing adjustments, and recognized a pre-tax loss on this sale of approximately $18.7 million (included in discontinued operations). For the year ended December 31, 2012, these assets produced an average of 4,937 Boe per day.
In July 2012, we acquired producing and non-producing assets from Three Rivers Operating Company (the "Three Rivers Acquisition") for cash consideration of approximately $1.0 billion. The Three Rivers Acquisition was primarily funded with borrowings under our credit facility. The results of operations prior to July 2012 do not include results from the Three Rivers Acquisition.
In February 2012, we acquired producing and non-producing assets from Petroleum Development Corporation (the "PDC Acquisition") for cash consideration of approximately $189.2 million. The PDC Acquisition was primarily funded with borrowings under our credit facility. The results of operations prior to March 2012 do not include results from the PDC Acquisition.
In November 2011, we acquired three entities affiliated with OGX Holdings II, LLC (collectively the "OGX Acquisition") for cash consideration of approximately $252.0 million. The results of operations prior to December 2011 do not include results from the OGX Acquisition.
In March 2011, we closed our divestiture of our Bakken assets for cash consideration of approximately $195.9 million and recognized a pre-tax gain on this sale of approximately $135.9 million (included in discontinued operations). For the first quarter of 2011, these assets produced an average of 1,369 Boe per day.
In December 2010, we sold certain of our non-core Permian Basin assets for cash consideration of approximately $103.3 million and recognized a pre-tax gain on this sale of approximately $29.1 million (included in discontinued operations). For the year ended December 31, 2010, these assets produced an average of 1,393 Boe per day.
In October 2010, we closed the Marbob and Settlement Acquisitions for consideration of approximately $1.6 billion. The results of these acquisitions are included in our results of operations for periods after their respective closing dates in October 2010.
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 these implied or expressed by the forward-looking statements. Please see "Cautionary Statement Regarding Forward-Looking Statements."
Overview
We are an independent oil and natural gas company engaged in the acquisition,
development and exploration of producing oil and natural gas properties. Our
core operations are primarily focused in the Permian Basin of Southeast
New Mexico and West Texas. We refer to our three core operating areas as the
(i) New Mexico Shelf, where we primarily target the Yeso formation,
(ii) Delaware Basin, where we primarily target the Bone Spring formation (which
includes the Avalon Shale and the Bone Spring sands) and the Wolfcamp shale, and
(iii) Texas Permian, where we primarily target the Wolfberry, a term applied to
the combined Wolfcamp and Spraberry horizons. Oil comprised 61.2 percent of our
447.2 MMBoe of estimated proved reserves at December 31, 2012 and 60.5 percent
of our 29.8 MMBoe of production for 2012. We seek to operate the wells in which
we own an interest, and we operated wells that accounted for 91.3 percent of our
proved developed producing PV-10 and 81.6 percent of our approximately 5,800
gross wells at December 31, 2012. By controlling operations, we are able to more
effectively manage the cost and timing of exploration and development of our
properties, including the drilling and stimulation methods used.
Financial and Operating Performance
Our financial and operating performance for 2012 included the following highlights:
† Net income was $431.7 million ($4.15 per diluted share), as compared to net income of $548.1 million ($5.28 per diluted share) in 2011. The decrease in earnings was primarily due to:
† $105.1 million decrease in income from discontinued operations in 2012, primarily related to the (i) $135.9 million pre-tax gain related to the sale of the Bakken assets in 2011 and (ii) the $18.7 million pre-tax loss related to the sale of non-core assets in 2012;
† $175.1 million increase in depreciation, depletion and amortization ("DD&A") expense from continuing operations, primarily due to (i) capitalized costs associated with new wells that were successfully drilled and completed in 2011 and 2012 and (ii) the acquisitions in 2011 and 2012;
† $65.8 million increase in oil and natural gas production costs from continuing operations due in part to increased (i) production, partially related to acquisitions in 2011 and 2012 and (ii) oil and natural gas revenues that directly increased our oil and natural gas production taxes; and
† $64.3 million increase in interest expense due to (i) a 62 percent increase in the weighted average debt balance outstanding between the periods primarily related to acquisitions and (ii) our senior note issuances in 2011 and 2012 which bear higher interest costs than borrowings under our credit facility;
partially offset by:
† $202.0 million increase in oil and natural gas revenues from continuing operations as a result of a 27 percent increase in production partially offset by a 12 percent decrease in commodity price realizations per Boe (excluding the effects of derivative activities) which were primarily related to a decrease in natural gas price realizations; and
† a $127.4 million gain on derivatives not designated as hedges in 2012, as compared to a $23.4 million loss on derivatives not designated as hedges in 2011.
† Average daily sales volumes from continuing operations increased by 27 percent from 60,180 Boe per day during 2011 to 76,397 Boe per day during 2012. The increase is primarily attributable to our successful drilling efforts during 2011 and 2012 and our acquisitions in 2011 and 2012.
† Net cash provided by operating activities increased by approximately $38.0 million to $1,237.5 million for 2012, as compared to $1,199.5 million in 2011, primarily due to increased oil and natural gas revenues offset by increases in related oil and natural gas production costs, interest expense and other cash related costs.
† Long-term debt was increased by approximately $1.0 billion during 2012, primarily as a result of the PDC Acquisition and Three Rivers Acquisition in February 2012 and July 2012, respectively, partially offset by our non-core asset divestiture in December 2012.
† At December 31, 2012, availability under our credit facility was approximately $2.2 billion.
Commodity Prices
Our results of operations are heavily influenced by commodity prices. Commodity prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, natural gas and NGLs market uncertainty and a variety of additional factors that are beyond our control. Factors that may impact future commodity prices, including the price of oil, natural gas and NGLs include:
† economic stimulus initiatives in the United States;
† worldwide and continuing economic struggles in Eurozone nations' economies;
† political and economic developments in the Middle East;
† demand from Asian and European markets;
† the extent to which members of the Organization of Petroleum Exporting Countries and other oil exporting nations are able to continue to manage oil supply through export quotas;
† technological advances affecting energy consumption and energy supply;
† the effect of energy conservation efforts;
† the price and availability of alternative fuels;
† domestic and foreign governmental regulations and taxation;
† the proximity, capacity, cost and availability of pipelines and other transportation facilities;
† the overall global demand for oil; and
† overall North American natural gas supply and demand fundamentals, including:
† the United States economy impact,
† weather conditions, and
† liquefied natural gas deliveries to the United States.
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 expect that we may economically hedge a portion of our commodity price risk to mitigate the impact of price volatility on our business. See Note H of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding our commodity derivative positions at December 31, 2012.
Oil and natural gas prices have been subject to significant fluctuations during the past several years. In general, oil prices were consistent during 2012 measured against 2011, while natural gas prices decreased. The following table sets forth the average NYMEX oil and natural gas prices for the years ended December 31, 2012, 2011 and 2010, as well as the high and low NYMEX price for the same periods:
Years Ended December 31,
2012 2011 2010
Average NYMEX prices:
Oil (Bbl) ................................................................................................................................................................................................................................................ $ 94.19 $ 95.07 $ 79.50
Natural gas (MMBtu) ........................................................................................................................................................................................................................ $ 2.83 $ 4.03 $ 4.40
High and Low NYMEX prices:
Oil (Bbl):
High ....................................................................................................................................................................................................................................................... $ 109.77 $ 113.93 $ 91.51
Low ....................................................................................................................................................................................................................................................... $ 77.69 $ 75.67 $ 68.01
Natural gas (MMBtu):
High ....................................................................................................................................................................................................................................................... $ 3.90 $ 4.85 $ 6.01
Low ....................................................................................................................................................................................................................................................... $ 1.91 $ 2.99 $ 3.29
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Further, the NYMEX oil price and NYMEX natural gas price reached highs and lows of $97.94 and $91.82 per Bbl and $3.57 and $3.11 per MMBtu, respectively, during the period from January 1, 2013 to February 20, 2013. At February 20, 2013, the NYMEX oil price and NYMEX natural gas price were $94.46 per Bbl and $3.28 per MMBtu, respectively.
Recent Events
Divestiture. In December 2012, we sold certain of our non-core assets for cash consideration of approximately $488.1 million, subject to customary post-closing adjustments, and recognized a pre-tax loss on the disposition of assets (included in discontinued operations) of approximately $18.7 million. We used the net proceeds from this divestiture to repay a portion of the borrowings under our credit facility. For the year ended December 31, 2012, these assets produced an average of 4,937 Boe per day. We estimate that he proved reserves of these assets at closing were approximately 35.3 MMBoe.
2013 capital budget. In November 2012, we announced our 2013 capital budget of approximately $1.6 billion, which we expect will be substantially funded within our cash flow, based on current commodity prices and capital costs. We take a longer-term view on spending within our cash flow, and our spending during any specific period may exceed our cash flow for that period. However, our capital budget is largely discretionary, and if we experience sustained commodity prices significantly below the current levels or substantial increases in our costs, we may reduce our capital spending program to be substantially within our cash flow.
2013
Capital
(in millions) Budget
Drilling and completion costs:
New Mexico Shelf ............................................................................................................................................................................................................................. $ 285
Delaware Basin ................................................................................................................................................................................................................................. 725
Texas Permian ................................................................................................................................................................................................................................... 342
Acquisition of leasehold acreage and geological and geophysical data ................................................................................................................................... 110
Facilities and other capital in our core operating areas ................................................................................................................................................................ 123
Total
.................................................................................................................................................................................................................................................... $ 1,585
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Credit facility amendment. In October 2012, we amended our credit facility, increasing our borrowing base to $3.0 billion, but maintaining the aggregate lender commitments at $2.5 billion. At December 31, 2012, we had borrowings outstanding under our credit facility of approximately $0.3 billion, and our availability under our credit facility was approximately $2.2 billion.
Senior notes issuances. In August 2012, we issued $700 million aggregate principal amount of 5.5% senior notes due 2023 at par, for which we received net proceeds of approximately $688.6 million. In March 2012, we issued $600 million aggregate principal amount of 5.5% senior notes due 2022 at par, for which we received net proceeds of approximately $590.0 million. We used the net proceeds to repay a portion of the borrowings under our credit facility.
Three Rivers Acquisition. In July 2012, we completed the Three Rivers Acquisition for cash consideration of approximately $1.0 billion. The Three Rivers Acquisition was primarily funded with borrowings under our credit facility.
PDC Acquisition. In February 2012, we completed the PDC Acquisition for cash consideration of approximately $189.2 million. The PDC Acquisition was primarily funded with borrowings under our credit facility.
Derivative Financial Instruments
Derivative financial instrument exposure. At December 31, 2012, the fair value of our financial derivatives was a net asset of $25.1 million. All of our counterparties to these financial derivatives are parties to our credit facility and have their outstanding debt commitments and derivative exposures collateralized pursuant to our credit facility. Under the terms of our financial derivative instruments and their collateralization under our credit facility, 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. Our credit facility does not allow us to offset amounts we may owe a lender against amounts we may be owed related to our financial instruments with such party.
After December 31, 2012, we entered into the following additional oil related price swaps to hedge additional amounts of our estimated future production:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Oil Swaps: (a)
2013:
Volume (Bbl) ................................................................................................................................................................................................................................................ 369,000 384,000 268,000 200,000 1,221,000
Price per Bbl .................................................................................................................................................................................................................................................. $ 94.59 $ 94.59 $ 94.55 $ 94.53 $ 94.57
2014:
Volume (Bbl) ................................................................................................................................................................................................................................................ 150,000 120,000 545,000 430,000 1,245,000
Price per Bbl .................................................................................................................................................................................................................................................. $ 91.90 $ 91.90 $ 91.12 $ 90.92 $ 91.22
....................................................................................................................................................................................................................................................................... .......................................................................................................................................................................................................................................................................
Oil Basis Swaps: (b)
2013:
Volume (Bbl) ................................................................................................................................................................................................................................................ - 3,003,000 3,036,000 2,944,000 8,983,000
Price per Bbl .................................................................................................................................................................................................................................................. $ - $ (1.23) $ (1.22) $ (1.23) $ (1.23)
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(a) The index prices for the oil price swaps are based on the NYMEX - WTI monthly average futures price.
(b) The basis differential price is between Midland - WTI and Cushing - WTI.
Results of Operations
The following table sets forth summary information concerning our production and operating data from continuing operations for the years ended December 31, 2012, 2011 and 2010. The table below excludes production and operating data that we have classified as discontinued operations, which is more fully described in Note N of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data." The actual historical data in this table excludes results from (i) the Three Rivers Acquisition for periods prior to July 2012, (ii) the PDC Acquisition for periods prior to March 2012, (iii) the OGX Acquisition for periods prior to December 2011and (iv) the Marbob and Settlement Acquisitions for periods prior to their respective close dates in October 2010. Because of normal production declines, increased or decreased drilling activities and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
Years Ended December 31,
2012 2011 2010
Production and operating data:
Net production volumes:
Oil (MBbl) ..................................................................................................................................................................................................................................... 16,859 13,446 8,661
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