As filed with the Securities and Exchange Commission on June 6, 2007

Registration No. 333-142315

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

Concho Resources Inc.

(Exact name of registrant as specified in charter)

 

 

 

 

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

 

 

 

 

David W. Copeland

Vice President and General Counsel

550 West Texas Avenue, Suite 1300

Midland, Texas 79701

(432) 683-7443

(Name, address, including zip code, and telephone number, including area code,

of agent for service)

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable on or after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to completion, dated June 6, 2007

 

Preliminary prospectus

 

           shares

 

 

Concho Resources Inc.

 

Common Stock

 

Concho Resources Inc. is selling           shares of common stock, and the selling stockholders identified in this prospectus are selling an additional           shares. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. This is the initial public offering of our common stock. The estimated initial public offering price is between $      and $      per share.

 

Prior to this offering, there has been no public market for our common stock. We have been authorized to apply to have our common stock listed on the New York Stock Exchange under the symbol “CXO.”

 

 

Certain selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an aggregate of           additional shares of our common stock on the same terms and conditions set forth above to cover over-allotments, if any.

 

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 16.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to investors on          , 2007.

 

 

 

Lehman Brothers

 

 

 

          , 2007

 

 

 

Table of contents

 

 

 

You should rely only on the information contained in this prospectus and the registration statement of which this prospectus is a part. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

Concho and Concho Resources are registered trademarks of ours. Other products, services and company names mentioned in this prospectus are the service marks/trademarks of their respective owners.

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information.

 

Prospectus summary

																							Three months
		As of																					ended
		December 31, 2006																					March 31,
								Pro forma									As of						2007
		Total						reserve/									March 31, 2007						Average
		proved						production			Identified			Identified			Total			Total			net daily
		reserves			PV-10			index(1)			drilling			recompletion			gross			net			production
Areas		(Bcfe)			($ in millions)			(years)			locations(2)			projects(2)			acreage			acreage			(MMcfe/d)
Permian Basin
Southeast New Mexico			387.5		$	782.6			18.7			1,505			489			170,275			76,583			63.8
West Texas			70.2			154.5			15.5			148			49			91,687			34,765			13.4
Emerging Plays and Other(3)			9.1			16.9			19.2			23			2			234,098			125,245			2.8
Total			466.8		$	954.0			18.1			1,676			540			496,060			236,593			80.0

(1)		The Pro forma reserve/production index is the number of years proved reserves would last assuming current production continued at the same rate. This index is calculated by dividing pro forma production during the year ended December 31, 2006, into the proved reserve quantity as of December 31, 2006. Pro forma production during the year ended December 31, 2006 was 25,735.0 MMcfe, consisting of 20,734.0 MMcfe in the Southeast New Mexico part of the Permian Basin, 4,526.5 MMcfe in the West Texas part of the Permian Basin and 474.5 MMcfe in Emerging Plays and Other. Pro forma production information assumes the combination transaction had taken place on January 1, 2006.

(2)		The identified drilling locations and identified recompletion projects listed in the table above included 817 drilling locations and recompletion projects for which proved reserves had been included in our reserve reports as of December 31, 2006.

(3)		Information with respect to “Other” includes conventional oil and gas operations on properties that are not located in the Permian Basin. As of December 31, 2006, 3.1 Bcfe of the proved reserves and $5.4 million of the PV-10 as well as one of the identified drilling locations and two identified recompletion projects were related to oil and natural gas properties categorized as “Other” and not as “Emerging Plays.” In addition, as of March 31, 2007, 4,948 gross (797 net) acres reflected above were categorized as “Other,” and 1.1 MMcfe/d of the average daily production during the three months ended March 31, 2007 reflected above were categorized as “Other.”

•	the Northwest Shelf area in Southeast New Mexico, where we have tested one re-entry well and drilled seven exploratory wells targeting the Wolfcamp Carbonate;

•	the Central Basin Platform of West Texas, where we plan to target the Woodford Shale;
•	the Delaware Basin of West Texas, where we have drilled four exploratory wells targeting the Bone Spring, Atoka, Barnett and Woodford Shales;
•	the Val Verde Basin of West Texas, where we plan to drill our first test well in 2007, which will target the Ellenburger Dolomite and the Canyon Sands;
•	the North Dakota portion of the Williston Basin, where we have drilled two exploratory wells targeting the Bakken Shale; and
•	the eastern Arkoma Basin in Arkansas, where we plan to drill our first test well prior to March 31, 2008, which will target the Fayetteville Shale.

•	Exploit our multi-year project inventory. We believe our multi-year drilling and exploitation inventory of 2,216 drilling locations and recompletion projects on our existing properties as of December 31, 2006 will allow us to grow our proved reserves and production for the next several years.

•

Enhance production from our existing properties through development of additional producing horizons and enhanced recovery methods. We have begun to evaluate additional productive horizons underlying certain of our existing producing horizons in Southeast New Mexico. During 2006, we drilled 52 wells in the Blinebry interval, all of which have since been completed as producers. In addition, we are evaluating the feasibility of enhanced recovery operations on a significant portion of our Southeast New Mexico properties.

•	Pursue the acquisition, exploration and development of unconventional emerging oil and natural gas resource plays. We have assembled an exploration team to target unconventional emerging resource plays. Members of our technical staff, consisting of six petroleum engineers, seven geoscientists and eight landmen, have, on average, more than 23 years experience in the industry.

•

Make opportunistic acquisitions that meet our strategic and financial objectives. We seek to acquire oil and gas properties that we believe complement our existing properties in our core areas of operation, as well as other properties that provide opportunities for the addition of reserves and production through a combination of exploitation, development, high-potential exploration and control of operations.

•	Experienced and incentivized management team. Our executive officers average over 19 years of experience in the oil and gas industry, having led both public and private oil and natural gas exploration and production companies, all of which have had substantially all of their operations in our core area of the Permian Basin.

•	History of growth and capital efficiency.  Despite increasing costs of oilfield services and equipment in our areas of operation, we added 101 Bcfe of proved reserves in 2006 through new discoveries and extensions, excluding revisions of previous estimates, at a total cost of $193.3 million.

•	Large inventory of drilling and recompletion opportunities. As of December 31, 2006, we had identified multiple undrilled well locations and recompletion opportunities, with proved reserves attributed to a portion of such locations and opportunities. We plan to drill 142 wells and recomplete 95 wells during 2007.

•	Geographically concentrated operations. The geographic concentration of our current operations in the Permian Basin allows us to establish economies of scale with respect to drilling, production, operating and administrative costs, in addition to further leveraging our base of technical expertise in this region.

•	Significant operational control. Our high proportion of operated properties enables us to exercise a significant level of control over the amount and timing of expenses, capital allocation and other aspects of exploration and development.

•	A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.
•	Our development and exploitation projects require substantial capital expenditures. We may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a decline in our oil and natural gas reserves.

•	Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially reduce the estimated quantity and present value of our reserves.

•	Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could cause our expenses to increase or our cash flows and production volumes to decrease.

•	We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations. We may not be insured for, or our insurance may be inadequate to protect us against, these risks.

•	Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows, our ability to raise capital and the value of our common stock.

•	The unavailability or high cost of drilling and workover rigs, equipment, supplies, materials, electricity, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans within our budget or on a timely basis.
•	Substantially all of our producing properties are located in Southeast New Mexico and West Texas, making us vulnerable to risks associated with operating in one major geographic area. Furthermore, approximately 53% of our proved reserves as of December 31, 2006, are from the Yeso formation, which includes both the Paddock and Blinebry intervals, within this geographic area, thus making us vulnerable to risks associated with this concentration of assets.

•	Uncertainties associated with enhanced recovery methods may result in us not realizing an acceptable return on the investments we make to use such methods.

Common stock offered by us:		shares
Common stock offered by the selling stockholders:		shares
Total common stock offered hereby:		shares
Common stock to be outstanding immediately following the offering:		shares
Use of proceeds:		We intend to use the net proceeds from the sale of our shares to repay a portion of our existing indebtedness. See “Use of proceeds.” We will not receive any of the proceeds from the sale of the shares by the selling stockholders. See “Principal and selling stockholders.”
Dividend policy:		We do not anticipate paying any cash dividends on our common stock.

Proposed New York Stock Exchange symbol:		CXO

Risk factors:		See “Risk factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in shares of our common stock.

•	shares of our common stock reserved for issuance upon exercise of stock options granted under our stock option plans, at a weighted average exercise price of $     per share; and
•	shares of our common stock reserved for issuance pursuant to future awards under our 2006 Stock Incentive Plan.

•	reflects a           reverse stock split of our shares of common stock effected immediately prior to the completion of this offering;
•	assumes no exercise of the underwriters’ over-allotment option; and
•	assumes an initial public offering price of $     , which is the mid-point of the range set forth on the front cover page of this prospectus.

•	Prior to December 7, 2004, Concho Equity Holdings Corp. did not own any material assets and did not conduct substantial operations other than organizational activities.
•	On December 7, 2004, Concho Equity Holdings Corp. acquired the Lowe Properties for approximately $117 million and commenced oil and gas operations.
•	On February 27, 2006, the initial closing of the combination transaction occurred. Pursuant to the combination transaction, Concho Resources acquired the Chase Group Properties for approximately 70 million shares of common stock and approximately $409 million in cash.
•	On March 27, 2007, Concho Resources entered into a $200.0 million second lien term loan facility from which it received proceeds of $199.0 million that it used to repay the $39.8 million outstanding under its prior term loan facility and to reduce the outstanding balance under its revolving credit facility by $154.0 million, with the remaining $5.2 million used to pay loan fees, accrued interest and for general corporate purposes.

	•	the issuance by us of           shares of common stock in this offering;

	•	the repayment by our executive officers of certain loans made by our company to our executive officers prior to the filing of the registration statement of which this prospectus is a part; and

	•	the repayment of a portion of our outstanding indebtedness using net proceeds from this offering as described in “Use of proceeds.”

		Chase Group
		Properties						Concho Resources Inc.
								Inception
								(April 21,												Pro forma
		Years ended						2004) through				Years ended								year ended				Three months
		December 31,						December 31,				December 31,								December 31,				ended March 31,
(In thousands, except per share amounts)		2004			2005			2004				2005				2006				2006				2006				2007
																				(unaudited)				(unaudited)				(unaudited)
Statement of operations data:
Operating revenues:
Oil sales		$	66,529		$	73,132		$	1,851			$	31,621			$	131,773			$	145,713			$	16,404			$	39,371
Natural gas sales			41,247			46,546			1,771				23,315				66,517				74,033				9,248				20,975
Total operating revenues			107,776			119,678			3,622				54,936				198,290				219,746				25,652				60,346
Operating costs and expenses:
Oil and gas production			11,762			12,979			512				10,923				22,060				24,456				3,929				7,259
Oil and gas production taxes			9,202			10,298			234				3,712				15,762				17,602				1,981				4,687
Exploration and abandonments			179			—			1,850				2,666				5,612				5,612				906				441
Depreciation, depletion and accretion			20,459			19,092			963				11,574				61,009				66,520				7,260				19,537
Impairments of proved oil and gas properties			3,233			194			—				2,295				9,891				9,892				105				1,113
Contract drilling fees—stacked rigs			—			—			—				—				—				—				—				3,354
General and administrative			1,387			1,702			3,086				8,055				12,577				12,861				2,437				3,467
Stock-based compensation			—			—			1,128				3,252				9,144				9,144				6,622				825
Ineffective portion of cash flow hedges			—			—			—				1,148				(1,193	)			(1,193	)			786				1,255
(Gain) loss on derivatives not designated as hedges			7,936			1,062			(684	)			5,001				—				—				—				—
Total operating costs and expenses			54,158			45,327			7,089				48,626				134,862				144,894				24,026				41,938
Income (loss) from operations			53,618			74,351			(3,467	)			6,310				63,428				74,852				1,626				18,408
Other income (expense):
Interest expense			—			—			(272	)			(3,096	)			(30,567	)			(35,790	)			(3,610	)			(10,675	)
Other, net			—			—			168				779				1,186				1,186				303				265
Total other expense			—			—			(104	)			(2,317	)			(29,381	)			(34,604	)			(3,307	)			(10,410	)
Income (loss) before income taxes			53,618			74,351			(3,571	)			3,993				34,047				40,248				(1,681	)			7,998
Income tax (expense) benefit			—			—			915				(2,039	)			(14,379	)			(16,797	)			253				(3,375	)
Net income (loss)		$	53,618		$	74,351			(2,656	)			1,954				19,668				23,451				(1,428	)			4,623
Preferred stock dividends									(804	)			(4,766	)			(1,244	)			—				(1,146	)			(34	)
Effect of induced conversion of preferred stock									—				—				11,601				—				11,601				—
Net income (loss) applicable to common shareholders								$	(3,460	)		$	(2,812	)		$	30,025			$	23,451			$	9,027			$	4,589
EBITDA(1) (unaudited)		$	74,077		$	93,443		$	(2,336	)		$	18,663			$	125,623			$	142,558			$	9,189			$	38,210
Basic earnings (loss) per share:
Net income (loss) per share								$	(1.74	)		$	(0.35	)		$	0.32			$	0.22			$	0.19			$	0.04
Shares used in basic earnings (loss) per share									1,987				8,117				94,575				108,335				47,951				109,872
Diluted earnings (loss) per share:
Net income (loss) per share								$	(1.74	)		$	(0.35	)		$	0.30			$	0.20			$	0.17			$	0.04
Shares used in diluted earnings (loss) per share									1,987				8,117				101,458				115,412				53,005				117,681

		Chase Group								Concho Resources Inc.
		Properties								Inception (April 21,
		Years ended								2004) through				Years ended								Three months ended
		December 31,								December 31,				December 31,								March 31,
(In thousands)		2004				2005				2004				2005				2006				2006				2007
																						(unaudited)				(unaudited)
Other financial data:
Net cash provided by (used in) operations		$	84,202			$	93,162			$	(2,193	)		$	25,070			$	112,181			$	11,615			$	31,049
Net cash provided by (used in) investing			(30,045	)			(35,611	)			(122,473	)			(61,902	)			(596,852	)			(447,018	)			(36,564	)
Net cash provided by (used in) financing			(54,157	)			(57,551	)			125,322				45,358				476,611				426,221				6,966
Capital expenditures			25,451				32,352				116,880				72,758				1,226,180				1,039,414				27,430

								Concho Resources Inc.
		Chase Group																		As adjusted
		Properties															As of			as of
		As of December 31,						As of December 31,									March 31,			March 31,
(In thousands)		2004			2005			2004			2005			2006			2007			2007(2)
																	(unaudited)			(unaudited)
Balance sheet data:
Cash and cash equivalents		$	—		$	—		$	656		$	9,182		$	1,122		$	2,573
Property and equipment, net			135,568			149,042			115,455			170,583			1,320,655			1,327,095			1,327,095
Total assets			145,100			161,792			130,717			232,385			1,390,072			1,380,339
Long-term debt, including current maturities			—			—			53,000			72,000			495,500			505,000
Stockholders’ equity/net investment			134,014			150,814			71,710			109,670			575,156			574,791

(1)		EBITDA is defined as income before accounting changes, plus (1) interest, the amortization of related debt issuance costs and other financial costs, net of capitalized interest, (2) federal and state income taxes and (3) depreciation, depletion and accretion. See “—Non-GAAP financial measures and reconciliations.”

(2)		A $1.00 increase (decrease) in the assumed initial public offering price per share would decrease (increase) long-term debt, including current maturities by $      and would increase (decrease) stockholders’ equity by $     , assuming the number of shares offered by us set forth on the cover page of this prospectus remains the same and after deducting underwriting discounts and estimated offering expenses payable by us.

		Pro forma as of			As of
		December 31, 2005			December 31, 2006
Proved reserves:
Oil (MBbl)			37,492			44,322
Natural gas (MMcf)			190,938			200,818
Natural gas equivalent (MMcfe)			415,890			466,750
Proved developed reserves percentage			55.0%			54.2%
PV-10 (in millions)(1)		$	1,324.5		$	954.0
Estimated reserve life (in years)(2)			18.9			18.1

(1)	PV-10 is a non-GAAP financial measure and generally differs from standardized measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “—Non-GAAP financial measures and reconciliations.” Prices used in the computation of future net cash flows were adjusted for location and quality by field, and were $61.04 per Bbl and $10.08 per MMBtu for purposes of estimating pro forma net proved reserves as of December 31, 2005 and were $57.75 per Bbl and $5.64 per MMBtu for purposes of estimating net proved reserves as of December 31, 2006.
(2)	Calculated by dividing proved reserves by pro forma production volumes for the years indicated.

		Pro forma			Three months
		year ended			ended
		December 31,			March 31,
		2006			2007
Net production volumes:
Oil (MBbl)			2,539.6			708.9
Natural gas (MMcf)			10,497.6			2,952.2
Natural gas equivalent (MMcfe)			25,735.0			7,205.5
Average prices:
Oil, without hedges ($/Bbl)		$	60.13		$	54.09
Oil, with hedges ($/Bbl)		$	57.38		$	55.54
Natural gas, without hedges ($/Mcf)		$	6.94		$	7.06
Natural gas, with hedges ($/Mcf)		$	7.05		$	7.10
Natural gas equivalent, without hedges ($/Mcfe)		$	8.76		$	8.21
Natural gas equivalent, with hedges ($/Mcfe)		$	8.54		$	8.37
Operating costs and expenses:
Oil and gas production ($/Mcfe)		$	0.95		$	1.01
Oil and gas production taxes ($/Mcfe)		$	0.68		$	0.65
General and administrative ($/Mcfe)		$	0.50		$	0.48
Depreciation and depletion expense ($/Mcfe)		$	2.57		$	2.70

(Dollars in millions)		Pro forma 2005				2006
PV-10		$	1,324.5			$	954.0
Present value of future income tax discounted at 10%			(379.7	)			(243.7	)
Standardized measure of discounted future cash flows		$	944.8			$	710.3

		Chase Group Properties								Concho Resources Inc.
										Inception
										(April 21, 2004)										Pro forma
		Years ended								through				Years ended						year ended			Three months
		December 31,								December 31,				December 31,						December 31,			ended March 31,
(In thousands)		2004				2005				2004				2005			2006			2006			2006				2007
Net income (loss)		$	53,618			$	74,351			$	(2,656	)		$	1,954		$	19,668		$	23,451		$	(1,428	)		$	4,623
Interest expense			—				—				272				3,096			30,567			35,790			3,610				10,675
Income tax expense (benefit)			—				—				(915	)			2,039			14,379			16,797			(253	)			3,375
Depreciation, depletion and accretion			20,459				19,092				963				11,574			61,009			66,520			7,260				19,537
EBITDA		$	74,077			$	93,443			$	(2,336	)		$	18,663		$	125,623		$	142,558		$	9,189			$	38,210

 

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your investment. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially adversely affect our business, financial condition or results of operations.

 

Risks relating to our business

 

Oil and natural gas prices are volatile. A decline in oil and natural gas prices could adversely affect our financial position, financial results, cash flows, access to capital and ability to grow.

 

Our future financial condition, revenues, results of operations, rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prices we receive for our oil and natural gas production and the prices prevailing from time to time for oil and natural gas. Oil and natural gas prices historically have been volatile and are likely to continue to be volatile in the future, especially given current geopolitical conditions. This price volatility also affects the amount of our cash flow we have available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of factors, including:

 

 

Declines in oil and natural gas prices would not only reduce our revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect on our financial condition, results of operations and reserves. If the oil and natural gas industry experiences significant price declines, we may, among other things, be unable to maintain or increase our borrowing capacity, repay current or future indebtedness or

obtain additional capital on attractive terms, all of which can affect the value of our common stock.

 

Furthermore, recent oil prices have been high compared to historical prices and have been particularly volatile. For example, the NYMEX crude oil price per Bbl was $32.52, $43.45, $61.04 and $61.15 as of December 31, 2003, 2004, 2005 and 2006, respectively, and during 2006 the NYMEX crude oil spot price ranged from a high of $77.03 to a low of $55.81. In addition, natural gas prices have been subject to significant fluctuations during the past several years. For example, the NYMEX natural gas price per Mcf was $5.96, $6.18, $10.08 and $5.64 as of December 31, 2003, 2004, 2005 and 2006, respectively, and during 2006 the NYMEX natural gas spot price ranged from a high of $9.87 to a low of $3.63.

 

Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that could cause our expenses to increase or our cash flows and production volumes to decrease.

 

Our future financial condition and results of operations will depend on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see “—Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.” Our cost of drilling, completing, equipping and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling, including the following:

 

 

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially reduce the estimated quantities and present value of our reserves.

 

The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many estimates, including estimates based upon assumptions relating to economic factors. Any significant inaccuracies in these interpretations or estimates could materially reduce the estimated quantities and present value of reserves shown in this prospectus. See “Business and properties—Our oil and natural gas reserves” for information about our oil and natural gas reserves.

 

In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, the amount and timing of capital expenditures, taxes and the availability of funds.

 

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. For example, in connection with the preparation of our total estimated net proved reserves as of December 31, 2006, we revised our estimated natural gas reserves downward by 16,595 MMcf from our previous estimates. This reduction in natural gas reserves was primarily because of the decrease in natural gas prices during 2006. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors.

 

You should not assume that the present value of future net revenues from our proved reserves referred to in this prospectus is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we generally base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate. If oil prices decline by $1.00 per Bbl, then our PV-10 as of December 31, 2006, would decrease from $954.0 million to $934.9 million. If natural gas prices decline by $0.10 per Mcf, then our PV-10 as of December 31, 2006, would decrease from $954.0 million to $945.3 million. Any adjustments to the estimates of proved reserves or decreases in the price of oil or natural gas may decrease the value of our common stock.

 

Almost all of our producing properties are located in the Permian Basin region of Southeast New Mexico and West Texas, making us vulnerable to risks associated with operating in one major geographic area. In addition, a substantial portion of our proved reserves as of December 31, 2006, are from a single producing horizon within this area.

 

Our producing properties are geographically concentrated in the Permian Basin region of Southeast New Mexico and West Texas. At December 31, 2006, approximately 99% of our PV-10 was attributable to properties located in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from these wells caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production

or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas.

 

In addition to the geographic concentration of our producing properties described above, approximately 53% of our proved reserves as of December 31, 2006, were attributable to the Yeso formation, which includes both the Paddock and Blinebry intervals, underlying our oil and gas properties located in Southeast New Mexico. This concentration of assets within one producing horizon exposes us to risks such as changes in field-wide rules and regulations that could cause us to permanently or temporarily shut-in all of our wells within the field. Furthermore, we are in the process of drilling and completing wells in the Blinebry interval (the lower member of the Yeso formation), which lies beneath the Paddock interval on certain of our properties located in Southeast New Mexico. These activities could result in delays in the production of our proved reserves from the Paddock interval in the event that commingling of both formations is imprudent or otherwise not feasible.

 

Part of our strategy involves exploratory drilling, including drilling in new or emerging plays. As a result, our drilling results in these areas are uncertain, and the value of our undeveloped acreage will decline if drilling results are unsuccessful.

 

The results of our exploratory drilling in new or emerging areas are more uncertain than drilling results in areas that are developed and have established production. Since new or emerging plays and new formations have limited or no production history, we are unable to use past drilling results in those areas to help predict our future drilling results. As a result, our cost of drilling, completing and operating wells in these areas may be higher than initially expected, and the value of our undeveloped acreage will decline if drilling results are unsuccessful.

 

Our commodity price risk management program may cause us to forego additional future profits or result in our making cash payments to our counterparties.

 

To reduce our exposure to changes in the prices of oil and natural gas, we have entered into and may in the future enter into additional commodity price risk management arrangements for a portion of our oil and natural gas production. The agreements that we have entered into generally have the effect of providing us with a fixed price for a portion of our expected future oil and natural gas production over a fixed period of time. Commodity price risk management arrangements expose us to the risk of financial loss and may limit our ability to benefit from increases in oil and natural gas prices in some circumstances, including the following:

 

 

Our commodity price risk management activities could have the effect of reducing our revenues and the value of our common stock. As of March 31, 2007, the net unrealized loss on our commodity price risk management contracts was $10.1 million. An average increase in the commodity price of $1 per barrel of crude oil and $0.10 per Mcf for natural gas would have resulted in an increase in the net unrealized loss on our commodity price risk management

contracts as reflected on our balance sheet as of March 31, 2007 of approximately $2.1 million. We may continue to incur significant unrealized gains or losses in the future from our commodity price risk management activities to the extent market prices continue to increase and our derivatives contracts remain in place. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Hedging.”

 

If we enter into derivative instruments that require us to post cash collateral, our cash otherwise available for use in our operations would be reduced, which could limit our ability to make future capital expenditures.

 

The use of derivatives may, in some cases, require the posting of cash collateral with counterparties. If we enter into derivative instruments that require cash collateral and commodity prices change in a manner adverse to us, our cash otherwise available for use in our operations would be reduced, which could limit our ability to make future capital expenditures. Future collateral requirements will depend on arrangements with our counterparties and highly volatile oil and natural gas prices.

 

Our business requires substantial capital expenditures. We may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a decline in our oil and natural gas reserves.

 

The oil and natural gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development, exploitation, production and acquisition of oil and natural gas reserves. For example, during the first three months of 2007, we curtailed our drilling program in order to preserve liquidity until we could complete our second lien term loan facility. As of March 31, 2007, our total debt outstanding was $505.0 million, and $69.0 million was available to be borrowed under our revolving credit facility. Expenditures for exploration and development of oil and natural gas properties are the primary use of our capital resources. We anticipate investing approximately $154 million for exploration and development expenditures in 2007. See “Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources — Future capital expenditures and commitments.” We intend to finance our future capital expenditures primarily through cash flow from operations and through borrowings under our revolving credit facility; however, our financing needs may require us to alter or increase our capitalization substantially through the issuance of debt or equity securities. The issuance of additional equity securities could have a dilutive effect on the value of your common stock. Additional borrowings under our revolving credit facility or the issuance of additional debt will require that a greater portion of our cash flow from operations be used for the payment of interest and principal on our debt, thereby reducing our ability to use cash flow to fund working capital, capital expenditures and acquisitions. In addition, our bank credit facilities impose certain limitations on our ability to incur additional indebtedness other than indebtedness under our revolving credit facility. If we desire to issue additional debt securities other than as expressly permitted under our bank credit facilities, we will be required to seek the consent of the lenders in accordance with the requirements of those facilities, which consent may be withheld by the lenders under our bank credit facilities in their discretion. Additional financing also may not be available on acceptable terms or at all. In the event additional capital resources are unavailable, we may curtail drilling, development and other activities or be forced to sell some of our assets on an untimely or unfavorable basis.

 

Our cash flow from operations and access to capital are subject to a number of variables, including:

 

 

If our revenues or the borrowing base under our revolving credit facility decrease as a result of lower oil or natural gas prices, operating difficulties, declines in reserves, lending requirements or regulations, or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. As a result, we may require additional capital to fund our operations, and we may not be able to obtain debt or equity financing to satisfy our capital requirements. If cash generated from operations or cash available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our prospects, which in turn could lead to a decline in our oil and natural gas reserves, and could adversely affect our business, financial condition and results of operations.

 

Our identified inventory of drilling locations and recompletion opportunities are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

 

Our management has specifically identified and scheduled the drilling and recompletion of our drilling and recompletion opportunities as an estimation of our future multi-year development activities on our existing acreage. As of December 31, 2006, we had identified 1,676 drilling locations with proved undeveloped reserves attributable to 595 of such locations, and 540 recompletion opportunities with proved reserves attributed to 222 of such opportunities. These identified opportunities represent a significant part of our growth strategy. Our ability to drill and develop these opportunities depends on a number of uncertainties, including the availability of capital, equipment, services and personnel, seasonal conditions, regulatory and third party approvals, oil and natural gas prices, costs and drilling and recompletion results. Because of these uncertainties, we may never drill or recomplete the numerous potential opportunities we have identified or produce oil or natural gas from these or any other potential opportunities. As such, our actual development activities may materially differ from those presently identified, which could adversely affect our business.

 

Approximately 46% of our total estimated net proved reserves as of December 31, 2006, were undeveloped, and those reserves may not ultimately be developed.

 

As of December 31, 2006, approximately 46% of our total estimated net proved reserves were undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling. The reserve data assumes that we can and will make these expenditures and conduct these operations successfully. These assumptions, however, may not prove correct. If we choose not to spend the capital to develop these reserves, or if we are not able to successfully develop these reserves, we will be required to write-off these reserves. Any such write-offs of our reserves could reduce our ability to borrow money and could reduce the value of our common stock.

 

Because we do not control the development of the properties we own but do not operate, we may not be able to achieve any production from these properties in a timely manner.

 

As of December 31, 2006, approximately 11% of our PV-10 was attributable to properties for which we were not designated as the operator. As a result, the success and timing of our drilling and development activities on such nonoperated properties depend upon a number of factors, including:

 

 

If drilling and development activities are not conducted on these properties or are not conducted on a timely basis, we may be unable to increase our production or offset normal production declines, which may adversely affect our production, revenues and results of operations.

 

Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows, our ability to raise capital and the value of our common stock.

 

Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and therefore our cash flow and results of operations, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. The value of our common stock and our ability to raise capital will be adversely impacted if we are not able to replace our reserves that are depleted by production. We may not be able to develop, exploit, find or acquire sufficient additional reserves to replace our current and future production.

 

We may be unable to make attractive acquisitions or integrate acquired companies, and any inability to do so may disrupt our business and hinder our ability to grow through the acquisition of businesses.

 

One aspect of our business strategy calls for acquisitions of businesses that complement or expand our current business. We may not be able to identify attractive acquisition opportunities. Even if we do identify attractive candidates, we may not be able to complete the acquisition of them or do so on commercially acceptable terms.

 

In addition, our bank credit facilities impose certain direct limitations on our ability to enter into mergers or combination transactions involving our company. Our bank credit facilities also limit our ability to incur certain indebtedness, which could indirectly limit our ability to engage in acquisitions of businesses. If we desire to engage in an acquisition that is otherwise

prohibited by our bank credit facilities, we will be required to seek the consent of the lenders in accordance with the requirements of those facilities, which consent may be withheld by the lenders under our bank credit facilities in their discretion.

 

If we acquire another business, we could have difficulty integrating its operations, systems, management and other personnel and technology with our own. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. In addition, we may incur additional debt or issue additional equity to pay for any future acquisitions, subject to the limitations described above.

 

Acquisitions may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities.

 

We obtained nearly all of our current reserve base through acquisitions of producing properties and undeveloped acreage. We expect acquisitions will continue to contribute to our future growth. Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, exploration potential, future oil and gas prices, operating costs and potential environmental and other liabilities. Such assessments are inexact and we cannot make these assessments with a high degree of accuracy. In connection with our assessments, we perform a review of the acquired properties. However, such a review will not reveal all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We do not inspect every well. Even when we inspect a well, we do not always discover structural, subsurface and environmental problems that may exist or arise.

 

We are generally not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities. Normally, we acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties.

 

Competition in the oil and natural gas industry is intense, making it more difficult for us to acquire properties, market oil and natural gas and secure trained personnel.

 

We operate in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. In addition, those companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased over the past few years due to competition and may increase substantially in the future. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital. Our failure to acquire properties, market oil and natural gas and secure trained personnel and increased compensation for trained personnel could have a material adverse effect on our business.

 

Shortages of oil field equipment, services and qualified personnel could delay our drilling program and increase the prices we pay to obtain such equipment, services and personnel.

 

The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. Historically, there have been shortages of drilling rigs and other oilfield equipment as demand for rigs and equipment has increased along with the number of wells being drilled. These factors also cause significant increases in costs for equipment, services and personnel. Higher oil and natural gas prices generally stimulate demand and result in increased prices for drilling rigs, crews and associated supplies, equipment and services. It is beyond our control and ability to predict whether these conditions will exist in the future and, if so, what their timing and duration will be. These types of shortages or price increases could significantly decrease our profit margin, cash flow and operating results, or restrict our ability to drill the wells and conduct the operations which we currently have planned and budgeted or which we may plan in the future.

 

Because of the termination of our Transition Services Agreement with Mack Energy upon the completion of this offering, we must hire or relocate personnel to assume the daily operations of certain of our properties in the Permian Basin region of Southeast New Mexico. If we are not able to hire or relocate sufficient personnel to operate these properties, we may be forced to curtail operations in this area, which would result in a decrease in our rate of production and would have an adverse effect on our cash flow and results of operations. In addition, upon termination of the Transition Services Agreement, our production costs per unit of production in the field currently subject to the Transition Services Agreement may increase compared to our historical production costs per unit of production. This is primarily because certain arrangements pursuant to which oil and gas services and equipment are currently provided to us in this field will terminate in connection with the termination of the Transition Services Agreement, and we may be required to procure those services or equipment from alternative sources, which sources may charge more than we are currently paying for those services or equipment.

 

Our exploration and development drilling may not result in commercially productive reserves.

 

Drilling activities are subject to many risks, including the risk that commercially productive reservoirs will not be encountered. New wells that we drill may not be productive, or we may not recover all or any portion of our investment in such wells. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or may be produced economically. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry holes but also from wells that are productive but do not produce sufficient net reserves to return a profit at then realized prices after deducting drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including:

 

 

We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations. In addition, we may not be insured for, or our insurance may be inadequate to protect us against, these risks.

 

We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:

 

 

Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company as a result of:

 

 

We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not covered or not fully covered by insurance could have a material adverse effect on our business, financial condition or results of operations.

 

Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production.

 

Market conditions or the unavailability of satisfactory oil and natural gas processing or transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. Our failure to obtain such services on acceptable terms could have a material adverse effect on our business, financial condition and results of operations. We may be required to shut in wells due to lack of a market or inadequacy or unavailability of crude oil or natural gas pipeline or gathering system capacity. If that were to occur, then we would be unable to realize revenue from those wells until suitable arrangements were made to market our production.

 

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, timing, manner or feasibility of conducting our operations.

 

Our oil and natural gas exploration, development and production, and saltwater disposal operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state, local and governmental authorities. We may incur substantial costs and experience delays in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase or our operations may be otherwise adversely affected if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. For instance, the New Mexico Oil Conservation Division is considering amending or replacing an existing rule regulating the permitting, construction, operation and closure of oilfield pits at well sites in New Mexico. If the agency adopts a new or revised pit rule that imposes stricter requirements on the construction and use of oilfield pits, then it is possible that the cost to operate our wells in New Mexico could increase. These and other future costs could have a material adverse effect on our business, financial condition or results of operations.

 

Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and the production of, oil and natural gas. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on our business, financial condition or results of operations. Please read “Business and properties—Applicable laws and regulations” for a description of the laws and regulations that affect us.

 

Our operations expose us to significant costs and liabilities with respect to environmental and operational safety matters.

 

We may incur significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our oil and natural gas exploration, development and production, and saltwater disposal activities. These delays, costs and liabilities could arise under a wide range of federal, state and local laws and regulations relating to protection of the environment, health and safety, including regulations and enforcement policies that have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in the

assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, and, to a lesser extent, issuance of injunctions to limit or cease operations. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations.

 

Strict as well as joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we were not able to recover the resulting costs through insurance or increased revenues, our business, financial condition or results of operations could be adversely affected. Please read “Business and properties—Applicable laws and regulations—Environmental, health and safety matters” for more information.

 

The loss of our chief executive officer or our chief operating officer or other key personnel could negatively impact our ability to execute our business strategy.

 

We depend, and will continue to depend in the foreseeable future, on the services of Timothy A. Leach, our chairman of the board and chief executive officer, Steven L. Beal, our president and chief operating officer, and other officers and key employees with extensive experience and expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, marketing oil and gas production, and developing and executing acquisition, financing and hedging strategies. These persons include the executive officers listed in “Management—Executive officers and directors.” Our ability to hire and retain our officers is important to our continued success and growth. The unexpected loss of the services of one or more of these individuals could negatively impact our ability to execute our business strategy.

 

Uncertainties associated with enhanced recovery methods may result in us not realizing an acceptable return on the investments we make to use such methods.

 

We inject water into formations on some of our properties to increase the production of oil and natural gas. We may in the future expand these efforts to more of our properties or employ other enhanced recovery methods in our operations. The additional production and reserves attributable to the use of enhanced recovery methods are inherently difficult to predict. If our enhanced recovery methods do not allow for the extraction of oil and natural gas in a manner or to the extent that we anticipate, we may not realize an acceptable return on the investments we make to use such methods.

 

Failure by us to achieve and maintain effective internal control over financial reporting in accordance with the rules of the SEC could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could have a material adverse effect on our business and stock price.

 

As a public company, we will be required to evaluate our internal control systems to allow management to report on, and our independent auditors to audit, our internal control over financial reporting. As part of this process, we will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley

Act. We will first be required to comply with Section 404 for the year ending December 31, 2008.

 

We do not know when we will complete our evaluation, testing and remediation actions, if any, or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. Evaluating our internal control over financial reporting will likely involve substantial costs and take a significant amount of time to complete, which may distract our officers, directors and employees from the operation of our business. These efforts and any remedial actions we implement as a result of this evaluation may not ultimately be effective to maintain adequate internal control over financial reporting.

 

If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements, and our stock price may be adversely affected as a result. If we fail to remedy any material weakness, our consolidated financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

 

Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.

 

We now have, and after this offering will continue to have, a significant amount of indebtedness, and the terms of our revolving credit facility require us to pay higher interest rate margins as we utilize a larger percentage of our available borrowing base. As of March 31, 2007, our total debt was $505 million, and on an as adjusted basis (as if we had closed this offering and used the net proceeds as described in “Use of proceeds” on that date), our total debt would have been $           million. At March 31, 2007, our revolving credit facility bore interest at a rate of 6.87% per annum. Our second lien term loan facility currently bears interest at 9.10% per annum. Assuming our total debt outstanding as of March 31, 2007 was held constant throughout the three months ended March 31, 2007, if interest rates had been higher or lower by 1% per annum, interest expense for the three months ended March 31, 2007 would have increased or decreased by approximately $1.3 million. Our total borrowing capacity under our revolving credit facility is $375.0 million, of which $69.0 million was available as of March 31, 2007.

 

Our current and future indebtedness could have important consequences to you. For example, it could:

 

 

Our ability to meet our debt service and other obligations may depend in significant part on the extent to which we can successfully implement our business strategy. We may not be able to implement or realize the benefits of our business strategy.

 

Our existing bank credit facilities impose restrictions on us that may affect our ability to successfully operate our business.

 

Our bank credit facilities limit our ability to take various actions, such as:

 

 

In addition, our bank credit facilities require us to maintain certain financial ratios and to satisfy certain financial conditions, which may require us to reduce our debt or take some other action in order to comply with each of them.

 

These restrictions could also limit our ability to obtain future financings, make needed capital expenditures, withstand a downturn in our business or the economy in general, or otherwise conduct necessary corporate activities. We also may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under each of our bank credit facilities.

 

A terrorist attack or armed conflict could harm our business by decreasing our revenues and increasing our costs.

 

Terrorist activities, anti-terrorist efforts and other armed conflict involving the United States may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur or escalate, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenue. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if significant infrastructure or facilities we use for the

production, transportation or marketing of our oil and natural gas production are destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

 

Risks relating to the offering and our common stock

 

Certain stockholders’ shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly.

 

After this offering, we will have outstanding        shares of common stock. Of these shares, the        shares we and the selling stockholders are selling in this offering, or        shares if the underwriters exercise their over-allotment option in full, will be freely tradeable without restriction under the Securities Act except for any shares purchased by one of our “affiliates” as defined in Rule 144 under the Securities Act. A total of        shares, or        shares if the underwriters exercise their over-allotment option in full, will be “restricted securities” (within the meaning of Rule 144 under the Securities Act) or subject to lock-up arrangements. In connection with this offering, we, our officers and directors and certain of our existing stockholders (including the selling stockholders) have entered into lock-up agreements under which we and they have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for an initial period of 180 days from the date of this prospectus without the prior written consent of J.P. Morgan Securities Inc. and Banc of America Securities LLC, on behalf of the underwriters. J.P. Morgan Securities Inc. and Banc of America Securities LLC may, at any time and without notice, waive any of the terms of these lock-up agreements. See “Underwriting” for a description of these lock-up agreements. An aggregate of        of these shares will become available for resale in the public market as shown in the chart below.

 

 

As soon as practicable after this offering, we intend to file one or more registration statements with the SEC on Form S-8 providing for the registration of        shares of our common stock issued or reserved for issuance under our stock incentive plan. Subject to the exercise of unexercised options or the expiration or waiver of vesting conditions for restricted stock and the expiration of lock-ups we and certain of our stockholders have entered into, shares registered under these registration statements on Form S-8 will be available for resale immediately in the public market without restriction.

 

Our management and directors and their affiliates will beneficially own, control or have substantial influence over a significant amount of our common stock, giving them a significant influence over our corporate transactions and other matters. Their interests may conflict with yours, and the concentration of ownership of our common stock by such stockholders will limit the influence of public stockholders.

 

Upon the closing of this offering, our management, directors and their respective affiliates, will beneficially own, control or have substantial influence over approximately     % of our outstanding common stock. If these stockholders voted together as a group, they would have the ability to exert significant influence over our board of directors and its policies. These stockholders would, acting together, be able to significantly influence the outcome of stockholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our certificate of incorporation or bylaws and possible mergers, corporate control contests and other significant corporate transactions. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, a merger, consolidation, takeover or other business combination. This concentration of ownership could also discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of us, which could in turn have an adverse effect on the market price of our common stock.

 

Purchasers of common stock will experience immediate and substantial dilution.

 

Based on an assumed initial public offering price of $      per share, purchasers of our common stock in this offering will experience an immediate and substantial dilution of $      per share in the net tangible book value per share of common stock from the initial public offering price, and our pro forma net tangible book value as of March 31, 2007, after giving effect to this offering, would be $      per share. You will incur further dilution if outstanding options to purchase common stock are exercised. In addition, our certificate of incorporation allows us to issue significant numbers of additional shares. Please read “Dilution” for a description of the calculation of net tangible book value.

 

Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.

 

Our certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:

 

 

 

Please read “Description of capital stock—Anti-takeover provisions of our certificate of incorporation and bylaws” for more information about these provisions.

 

Because we have no plans to pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in us.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. The terms of our existing bank credit facilities restrict the payment of dividends without the prior written consent of the lenders. Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

 

There has been no active trading market for our common stock, and an active trading market may not develop.

 

Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock for trading on the New York Stock Exchange. We do not know if an active trading market will develop for our common stock or how the common stock will trade in the future, which may make it more difficult for you to sell your shares. Negotiations among the underwriters, certain of the selling stockholders and us will determine the initial public offering price, which may not be indicative of the price at which our common stock will trade following the closing of this offering. You may not be able to resell your shares at or above the initial public offering price.

 

The availability of shares for sale in the future could reduce the market price of our common stock.

 

In the future, we may issue securities to raise cash for acquisitions. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.

 

In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934 and the requirements of the Sarbanes-Oxley Act, may strain our resources and increase our costs. We may be unable to comply with these requirements in a timely or cost-effective manner.

 

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the requirements of the NYSE with which we are not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will increase our costs and expenses. We will need to:

 

 

In addition, we also expect that being a public company subject to these rules and regulations will require us to modify our director and officer liability insurance, and we may be required to accept reduced coverage or to incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, as well as qualified executive officers.

 

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this prospectus, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

 

Forward-looking statements may include statements about our:

 

 

You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this prospectus. We do not undertake any obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, unless the securities laws require us to do so.

 

Although we believe that our plans, objectives, expectations and intentions reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can give no assurance that they will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

We estimate that our net proceeds from this offering will be approximately $      million, assuming an initial public offering price of $      per share and after deducting underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use all of the net proceeds we receive from this offering to repay a portion of our outstanding indebtedness under our second lien term loan facility, our revolving credit facility or a combination of the foregoing. Under the terms of our second lien term loan facility, we are obligated to use not less than 50% of our net proceeds to repay a portion of our outstanding indebtedness under our second lien term loan facility. Currently, we expect to use half of the net proceeds to repay a portion of our outstanding indebtedness under our second lien term loan facility and the remaining half of the net proceeds to repay a portion of our outstanding indebtedness under our revolving credit facility. We may, however, allocate a greater portion of the net proceeds to repay a portion of our outstanding indebtedness under our second lien term loan facility based on the relative interest rates of our revolving credit facility and our second lien term loan facility and our anticipated capital needs at the time of closing of this offering. We will not receive any of the net proceeds from the sale of shares of common stock by the selling stockholders. See “Principal and selling stockholders.”

 

Our revolving credit facility bore interest at 6.87% per annum as of March 31, 2007 and matures on February 24, 2010. We incurred borrowings of approximately $421.0 million under our revolving credit facility in connection with the combination transaction in February 2006 to pay the cash purchase price of $400.0 million to the Chase Group, $15.9 million to repay the balance on the prior revolving credit facility of Concho Equity Holdings Corp. and approximately $5.1 million for bank fees and legal costs associated with our revolving credit facility. We also incurred borrowings of approximately $8.9 million in May 2006 in connection with the purchase of additional working interests in the Chase Group Properties pursuant to the combination transaction from persons associated with the Chase Group. The remaining borrowings under our revolving credit facility were used for working capital and to fund a portion of our exploration and development drilling program. Our second lien term loan facility currently bears interest at 9.10% per annum and matures on March 27, 2012. We used the borrowings from our second lien term loan facility of $199.0 million to repay the $39.8 million outstanding under our prior term loan facility, to reduce the outstanding balance under our revolving credit facility by $154.0 million and the remaining $5.2 million to pay loan fees, accrued interest and for general corporate purposes.

 

Certain affiliates of the underwriters to this offering are lenders under our second lien term loan facility and our revolving credit facility and will receive a portion of the net proceeds we receive from this offering based on the amount of the loans they have extended under these bank credit facilities. Banc of America Securities LLC is the lead arranger and book manager under our second lien term loan facility. In addition, each of BNP Paribas Securities Corp. and Merrill Lynch, Pierce, Fenner & Smith Incorporated has an affiliate that is a lender and/or agent under our second lien term loan facility. In addition, under our revolving credit facility, JPMorgan Chase Bank, N.A. is the administrative agent, Bank of America, N.A. is the syndication agent and each of Wachovia Bank, National Association and BNP Paribas is a documentation

agent. Each of these is a lender under our revolving credit facility and is an affiliate of one of the underwriters of this offering. Please read “Underwriting.”

 

Following this offering of our common stock, we do not currently anticipate paying any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our results of operations, financial condition, capital requirements and investment opportunities. We are also currently prohibited from paying dividends by our bank credit facilities.

 

The following table shows our cash and cash equivalents and our total capitalization as of March 31, 2007 on an actual basis and on an as adjusted basis to reflect the following events:

 

 

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the historical consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should read this information in conjunction with these consolidated financial statements and “Management’s discussion and analysis of financial condition and results of operations.”

 

 

 

Purchasers of common stock in this offering will experience immediate and substantial dilution in the net tangible book value per share of the common stock for accounting purposes. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock that will be outstanding. At March 31, 2007, we had a net tangible book value of $569.4 million, or $4.82 per share. After giving effect to the sale by us of      shares of common stock in this offering at an assumed initial public offering price of $      per share and after the deduction of underwriting discounts and estimated offering expenses, the as adjusted net tangible book value at  March 31, 2007, would have been $      million, or $      per share. This represents an immediate increase in such net tangible book value of $      per share to existing stockholders and an immediate and substantial dilution of $      per share to new investors purchasing common stock in this offering. The following table illustrates this per share dilution:

 

 

A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) our as adjusted net tangible book value by $      million, would increase (decrease) our net tangible book value per share by $      per share and would increase (decrease) the dilution in as adjusted net tangible book value to new investors in this offering by $      per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

The following table summarizes, on an as adjusted basis set forth above as of March 31, 2007, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at $     , the mid-point of the range of the initial public offering prices set forth on the cover of this prospectus, calculated before deduction of estimated underwriting discounts.

 

 

 

This section presents our selected historical and pro forma consolidated financial data. The selected historical consolidated financial data presented below is not intended to replace our historical consolidated financial statements. You should read the following data along with “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes, each of which is included in this prospectus. You should also read the pro forma information together with the unaudited pro forma combined financial statements and related notes included in this prospectus.

 

Selected historical and pro forma financial information for Concho Resources Inc.

 

The following table shows selected historical financial data related to Concho Resources Inc. (as the accounting successor to Concho Equity Holdings Corp.), combined financial data of the Chase Group Properties and unaudited pro forma financial data of Concho Resources as of and for the year ended December 31, 2006. We have accounted for the combination transaction that occurred on February 27, 2006, as an acquisition by Concho Equity Holdings Corp. of the Chase Group Properties and a simultaneous reorganization of Concho Resources such that Concho Equity Holdings Corp. is now our wholly owned subsidiary.

 

Our historical results of operations for the periods presented below may not be comparable either from period to period or going forward, for the following reasons:

 

 

The historical financial data for the Chase Group Properties for the years ended December 31, 2003, 2004 and 2005 are derived from the audited financial statements of the Chase Group Properties. The historical financial data for the Chase Group Properties for the year ended December 31, 2002 is derived from the unaudited financial statements of the Chase Group Properties. The historical financial data for Concho Resources for the period from inception (April 21, 2004) through December 31, 2004, and for the years ended December 31, 2005 and 2006, are derived from the audited financial statements of Concho Resources. The historical financial data for Concho Resources for the three months ended March 31, 2006 and 2007, are derived from the unaudited financial statements of Concho Resources.

 

The pro forma financial data for the year ended December 31, 2006 set forth in the following table is derived from the unaudited pro forma financial statements of Concho Resources included in this prospectus. The pro forma statement of operations has been prepared as if the closing of the combination transaction had taken place as of January 1, 2006.

 

Our balance sheet data as of March 31, 2007, as adjusted, gives effect to the following transactions:

 

 

 

 

The following table includes the non-GAAP financial measure EBITDA. For a definition of this measure and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles, which we refer to as GAAP, please read “Prospectus summary—Non-GAAP financial measures and reconciliations.”