CALCULATION OF REGISTRATION FEE

 

 

 

Filed Pursuant to Rule 424(b)(5)
Registration Number 333-161809

 

Prospectus supplement
(To prospectus dated September 9, 2009)

 

 

Concho Resources Inc.

 

$300,000,000

 

8.625% Senior Notes due 2017

 

We are offering $300,000,000 of our 8.625% Senior Notes due 2017, which we refer to as the notes. The notes will mature on October 1, 2017. We will pay interest on the notes on each April 1 and October 1, beginning on April 1, 2010.

 

We may redeem some or all of the notes at any time on or after October 1, 2013 at the redemption prices set forth under “Description of notes—Optional redemption” and prior to such date at a “make-whole” redemption price. We may also redeem up to 35% of the notes prior to October 1, 2012 with cash proceeds we receive from certain equity offerings. If we sell certain assets and do not reinvest the proceeds or repay senior indebtedness or if we experience specific kinds of changes of control, we must offer to repurchase the notes.

 

The notes will be our unsecured obligations and will rank equally in right of payment with all of our existing and future senior indebtedness and senior in right of payment to all of our future subordinated indebtedness. The notes will be structurally subordinated to any of our existing and future secured debt to the extent of the value of the collateral securing such indebtedness, including all borrowings under our credit facility. The notes will be structurally subordinated to all liabilities of any of our subsidiaries that do not issue guarantees of the notes.

 

The obligations under the notes will be fully and unconditionally guaranteed by all of our current subsidiaries and by certain of our future restricted subsidiaries. The guarantee of any subsidiary will be released when such subsidiary no longer guarantees certain specified indebtedness, when such subsidiary is no longer a subsidiary of ours or when such subsidiary is designated an unrestricted subsidiary under the terms of the indenture. The guarantees will rank equally in right of payment with the existing and future senior indebtedness of the guarantors, including their guarantees of our borrowings under our credit facility, and will rank senior to any future subordinated indebtedness of the guarantors. The guarantees will be structurally subordinated to all existing and future secured indebtedness of the guarantors, including guarantees of our borrowings under our credit facility, to the extent of the value of the collateral securing such indebtedness.

 

Investing in the notes involves risk. See “Risk factors” beginning on page S-17 of this prospectus supplement.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

The notes will not be listed on a securities exchange. Currently, there is no public market for the notes.

 

The underwriters expect to deliver the notes on or about September 18, 2009 in book-entry form through The Depository Trust Company for the account of its participants, including Clearstream Banking société anonyme and Euroclear Bank S.A./N.V.

 

 

Joint book-running managers

 

 

 

Co-managers

 

 

September 15, 2009

Table of contents

 

This document is in two parts. The first part is the prospectus supplement and the documents incorporated herein, which describes the specific terms of this offering of the notes. The second part is the accompanying prospectus, which gives more general information, some of which may not apply to the notes or this offering. If the information relating to the offering varies between the prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.

 

You should rely only on the information contained in or incorporated by reference into this prospectus supplement, the accompanying prospectus and any related free writing prospectus. We have not authorized any dealer, salesman or other person to provide you with additional or different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus are not an offer to sell or the solicitation of an offer to buy any securities other than the securities to which they relate and are not an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. You should not assume that the information contained in this prospectus supplement is accurate as of any date other than the date on the front cover of this prospectus supplement, or that the information contained in any document incorporated by reference is accurate as of any date other than the date of the document incorporated by reference, regardless of the time of delivery of this prospectus supplement or any sale of a security.

 

Unless otherwise indicated or the context otherwise requires, all references in this prospectus supplement to “we,” “our,” “us,” “the Company” or “Concho” are to Concho Resources Inc., a Delaware corporation, and its subsidiaries. See “Glossary of oil and natural gas terms” beginning on page G-1 for abbreviations and definitions commonly used in the oil and natural gas industry that are used in this prospectus supplement.

 

We file annual, quarterly and current reports and other information with the SEC (File No. 001-33615) pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”). You may read and copy any documents that are filed at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates from the public reference section of the SEC at its Washington address. Please call the SEC at 1-800-SEC-0330 for further information.

 

Our filings are also available to the public through the SEC’s website at http://www.sec.gov.

 

The SEC allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you to documents previously filed with the SEC. The information incorporated by reference is an important part of this prospectus supplement, and the information that we later file with the SEC will automatically update and supersede this information. The following documents we filed with the SEC pursuant to the Exchange Act are incorporated herein by reference:

 

 

 

These reports contain important information about us, our financial condition and our results of operations.

 

All future documents filed pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act (excluding any information furnished pursuant to Item 2.02 or Item 7.01 on any Current Report on Form 8-K) before the termination of the offering of securities under this prospectus supplement shall be deemed to be incorporated in this prospectus supplement by reference and to be a part hereof from the date of filing of such documents. Any statement contained herein, or in a document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this prospectus supplement to the extent that a statement contained herein or in any subsequently filed document that also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus supplement.

 

You may request a copy of these filings at no cost by writing or telephoning us at the following address and telephone number:

 

Concho Resources Inc.
550 West Texas Avenue, Suite 100
Midland, Texas 79701
Attention: General Counsel
(432) 683-7443

 

We also maintain a website at http://www.conchoresources.com. However, the information on our website is not part of this prospectus supplement.

 

Various statements contained in or incorporated by reference into this prospectus supplement our filings with the SEC and our public releases, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Exchange Act. These forward-looking statements may include projections and estimates concerning capital expenditures, our liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of our business strategy and other statements concerning our operations, economic performance and financial condition. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. These statements are based on

certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. These forward-looking statements speak only as of the date of this prospectus supplement; we disclaim any obligation to update or revise these statements unless required by securities law, and we caution you not to rely on them unduly. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks discussed in “Risk factors,” our Annual Report on Form 10-K for the year ended December 31, 2008, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009 and our subsequent SEC filings, as well as those factors summarized below:

 

 

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by our reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ from the quantities of oil and natural gas that are ultimately recovered.

 

Summary

														Quarter
														ended June 30,
		December 31, 2008												2009								June 30, 2009
																		Average net
		Total																daily
		proved																production				Identified				Total				Total
		reserves				PV-10								% Proved				(Boe per				drilling				gross				net
Areas		(MBoe)				($ in millions)				% Oil				developed				day)				locations				acreage				acreage
Core Operating Areas:
New Mexico Permian			95,055			$	1,242.8				59.3%				52.9%				18,847				1,654				151,766				70,868
Texas Permian			39,392				378.0				71.9%				62.9%				8,709				1,558				283,043				77,784
Emerging Plays:
Lower Abo			2,127				34.4				67.8%				39.3%				1,939				152				31,978				27,805
Bakken/Three Forks			206				3.8				83.2%				100.0%				376				150				44,221				11,661
Other			495				4.2				6.2%				87.1%				166				8				147,715				68,645
Total			137,275			$	1,663.2				62.9%				55.7%				30,037				3,522				658,723				256,763

•	Exploit our multi-year project inventory. We believe our multi-year drilling and exploitation inventory of 3,522 drilling locations on our existing properties at June 30, 2009 should allow us to grow our proved reserves and production for the next several years.
•	Continue to focus on the Permian Basin. The Permian Basin is one of the largest and most prolific oil and gas basins in the United States. Members of our management have spent significant portions of their careers in the Permian Basin. We believe our presence and relationships in the Permian Basin are an advantage for the acquisition and development of new opportunities.
•	Make opportunistic acquisitions that meet our strategic and financial objectives. We seek to acquire oil and natural 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.
•	Pursue the exploration and development of opportunities in emerging plays. Our team has the necessary experience and expertise to allow us to take advantage of the growth

	opportunities in emerging plays. We apply current geologic, drilling and completion practices to increase the predictability and reproducibility of finding and recovering resources in emerging plays.

•	High operational success rate. As a result of our experience and knowledge, we have been successful in our drilling operations. For the three and one-half years ended June 30, 2009, we drilled and completed 625 (414.5 net) wells, including 266 (186.6 net) exploratory wells, with over a 98% rate of success.
•	Large inventory of drilling locations and recompletion opportunities. We have identified multiple undrilled well locations and recompletion opportunities in our core operating areas, with proved reserves attributed to a portion of such locations and opportunities. This large inventory provides us with a solid operational and financial foundation from which to pursue additional growth opportunities.
•	Favorable operating cash margins and low cost structure. During the first half of 2009, we had favorable operating cash margins relative to our peer group of companies, with the sale of oil and natural gas liquids contributing over 80 percent of our revenue. We maintain a favorable cost structure through our concentration of assets in our core operating areas.
•	Significant economies of scale and highly focused asset base. 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. Our high percentage 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.
•	Experienced management team. Our executive officers average over 20 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 substantial operations in our core operating areas in the Permian Basin.
•	Financial flexibility. We are committed to maintaining a conservative financial position, ample liquidity and a strong balance sheet. Our ratio of total debt to EBITDAX has been less than 2.0x since December 31, 2007. At June 30, 2009, we had $660 million borrowed under our credit facility, which has a current borrowing base of $960 million, and expect to have $582.8 million of liquidity available following the application of the proceeds of this offering and giving effect to the reduction to our borrowing base as a result of the issuance of the notes. For further discussion, see “Description of other indebtedness—Senior secured credit facility.” Furthermore, we have prudently raised equity throughout industry cycles to keep our balance sheet strong, as demonstrated most recently with our acquisition of the Henry Petroleum entities. We believe that our cash flow, expected proceeds from this offering and our borrowing capacity under our credit facility will provide us with the financial flexibility to pursue our longer-term capital expenditure plans.

•	Manage risk exposure through an active hedging program. We have hedged approximately 62 percent and 43 percent of our anticipated oil and natural gas production for the second half of 2009 and 2010, respectively.

Issuer		Concho Resources Inc.
The notes		$300,000,000 aggregate principal amount of 8.625% Senior Notes due 2017.
Maturity		October 1, 2017.
Interest payment dates		Interest is payable on the notes on April 1 and October 1 of each year, beginning on April 1, 2010.
Optional redemption		We may, at our option, redeem all or part of the notes at any time prior to October 1, 2013 at a make-whole price, and at any time on or after October 1, 2013 at fixed redemption prices, plus accrued and unpaid interest, if any, to the date of redemption, as described under “Description of notes—Optional redemption.” In addition, prior to October 1, 2012, we may, at our option, redeem up to 35% of the notes with the proceeds of certain equity offerings.
Guarantees		The payment of the principal, premium and interest on the notes will be fully and unconditionally guaranteed on a senior unsecured basis by all of our existing subsidiaries and by certain of our future restricted subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. See “Description of notes—Subsidiary guarantees.”
Ranking		The notes and the guarantees will be our and the guarantors’ senior unsecured obligations and will:
		• rank equally in right of payment with all our and the guarantors’ existing and future senior indebtedness;
		• rank senior in right of payment to all our and the guarantors’ future subordinated indebtedness;
		• be structurally subordinated in right of payment to all our and the guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness (including all of our borrowings and the guarantors’ guarantees under our credit facility); and
		• be structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of any of our subsidiaries that is not also a guarantor of the notes.
		As of June 30, 2009, after giving effect to the issuance and sale of the notes and the application of the net proceeds therefrom as set forth

		under “Use of proceeds” to repay a portion of the borrowings outstanding under our credit facility, we would have had total consolidated indebtedness of $668.7 million (net of discount), consisting of $373.0 million of secured indebtedness outstanding under our credit facility and $295.7 million (net of discount) of the notes offered hereby, the subsidiary guarantors would have had total indebtedness of $668.7 million (net of discount) consisting of $373.0 million of secured guarantees under our credit facility and $295.7 million (net of discount) of guarantees of the notes offered hereby, excluding intercompany indebtedness, and we would have been able to incur an additional $582.8 million of secured indebtedness under our credit facility (after giving effect to the reduction in our borrowing base as a result of the issuance of the notes). For further discussion, see “Description of other indebtedness—Senior secured credit facility.”
Covenants		The indenture governing the notes will contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
		• incur additional debt;
		• make certain investments or pay dividends or distributions on our capital stock or purchase, redeem or retire capital stock;
		• sell assets, including capital stock of our restricted subsidiaries;
		• restrict dividends or other payments by restricted subsidiaries;
		• create liens that secure debt;
		• enter into transactions with affiliates; and
		• merge or consolidate with another company.
		These covenants are subject to a number of important limitations and exceptions. See “Description of notes—Certain covenants.” However, most of the covenants will terminate if both Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. assign the notes an investing grade rating and no default exists with respect to the notes.
Change of control offer		If we experience certain kinds of changes of control, we must give the holders of the notes the opportunity to sell us their notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
No public market		The notes are a series of securities for which there is currently no established trading market. The underwriters have advised us that they presently intend to make a market in the notes. However, you should be aware that they are not obligated to make a market in the notes and may discontinue their market-making activities at any time without notice. As a result, a liquid market for the notes may not be available if you try to sell your notes. We do not intend to apply for

		a listing of the notes on any securities exchange or any automated dealer quotation system.
Use of proceeds		We will use the net proceeds from this offering of approximately $287.0 million to repay a portion of the outstanding borrowings under our credit facility. See “Use of proceeds.”
Form		The notes will be represented by one or more registered global securities registered in the name of Cede & Co., the nominee of the depositary, The Depository Trust Company. Beneficial interests in the notes will be shown on, and transfers of beneficial interests will be effected through, records maintained by The Depository Trust Company and its participants.
Conflicts of interest		Affiliates of certain of the underwriters are lenders under our credit facility and will receive a portion of the net proceeds from this offering. For more information, see “Conflicts of interest.”

		Six months
		ended June 30,								Year ended December 31,
		2009				2008				2008				2007				2006
(in thousands)						(unaudited)
Statement of operations data:
Operating revenues:
Oil sales		$	166,485			$	171,226			$	390,945			$	195,596			$	131,773
Natural gas sales			46,849				72,868				142,844				98,737				66,517
Total operating revenues			213,334				244,094				533,789				294,333				198,290
Operating costs and expenses:
Oil and gas production			50,583				38,874				91,234				54,267				37,822
Exploration and abandonments			7,419				3,464				38,468				29,098				5,612
Depreciation, depletion and amortization			103,150				43,294				123,912				76,779				60,722
Accretion of discount on asset retirement obligations			579				301				889				444				287
Impairments of long-lived assets			8,555				69				18,417				7,267				9,891
General and administrative (including non-cash stock-based compensation of $4,113 and $3,029 for the six months ended June 30, 2009 and 2008, respectively, and $5,223, $3,841 and $9,144 for the years ended December 31, 2008, 2007 and 2006, respectively)			25,918				16,266				40,776				25,177				21,721
Bad debt expense			–				1,799				2,905				–				–
Contract drilling fees—stacked rigs			–				–				–				4,269				–
Ineffective portion of cash flow hedges			–				(920	)			(1,336	)			821				(1,193	)
(Gain) loss on derivatives not designated as hedges			86,652				119,634				(249,870	)			20,274				–
Total operating costs and expenses			282,856				222,781				65,395				218,396				134,862
Income (loss) from operations			(69,522	)			21,313				468,394				75,937				63,428

		Six months
		ended June 30,								Year ended December 31,
		2009				2008				2008				2007				2006
(in thousands)						(unaudited)
Other income (expense):
Interest expense			(10,570	)			(9,500	)			(29,039	)			(36,042	)			(30,567	)
Other, net			(148	)			1,331				1,432				1,484				1,186
Total other expense			(10,718	)			(8,169	)			(27,607	)			(34,558	)			(29,381	)
Income (loss) before income taxes			(80,240	)			13,144				440,787				41,379				34,047
Income tax (expense) benefit			33,797				(5,199	)			(162,085	)			(16,019	)			(14,379	)
Net income (loss)			(46,443	)			7,945				278,702				25,360				19,668
Preferred stock dividends			–				–				–				(45	)			(1,244	)
Effect of induced conversion of preferred stock			–				–				–				–				11,601
Net income (loss) applicable to common shareholders		$	(46,443	)		$	7,945			$	278,702			$	25,315			$	30,025
Other financial data:
Net cash provided by operating activities		$	118,232			$	162,948			$	391,397			$	169,769			$	112,181
Net cash used in investing activities			(162,828	)			(142,127	)			(946,050	)			(160,353	)			(596,852	)
Net cash provided by (used in) financing activities			29,925				(19,529	)			541,981				19,886				476,611
Capital expenditures on oil and natural gas properties			223,283				122,757				347,702				162,378				182,389

		June 30,								December 31,
		2009				2008				2008				2007				2006
(in thousands)						(unaudited)
Balance sheet data:
Cash and cash equivalents		$	3,081			$	31,716			$	17,752			$	30,424			$	1,122
Property and equipment, net			2,487,166				1,475,521				2,401,404				1,394,994				1,320,655
Total assets			2,764,799				1,634,233				2,815,203				1,508,229				1,390,072
Long-term debt, including current maturities			660,000				300,953				630,000				327,404				495,500
Stockholders’ equity			1,289,555				783,959				1,325,154				775,398				575,156

		Twelve
		months				Six months ended								Year ended
		ended				June 30,								December 31,
(dollars in thousands)		June 30, 2009				2009				2008				2008				2007				2006
Key statistics (unaudited):
EBITDAXa		$	427,416			$	202,263			$	176,927			$	402,080			$	217,760			$	149,077
Total interest			30,109				10,570				9,500				29,039				36,042				30,567
Ratio of total debt to EBITDAXa			1.5x												1.6x				1.5x				3.3x
Ratio of EBITDAXa to total interest			14.2x												13.8x				6.0x				4.9x

(a)		EBITDAX is defined as net income (loss), plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) ineffective portion of cash flow hedges and unrealized (gain) loss on derivatives not designated as hedges, (7) interest expense, (8) bad debt expense and (9) federal and state income taxes. See “—Non-GAAP financial measures and reconciliations.”

		December 31,
		2008				2007				2006
Proved reserves:
Oil (MBbl)			86,285				53,361				44,322
Natural gas (MMcf)			305,948				225,837				200,818
Oil equivalent (MBoe)			137,275				91,000				77,791
Proved developed reserves percentage			55.7%				54.0%				54.2%
Standardized measure of discounted future cash flows (in millions)		$	1,199.0			$	1,431.8			$	710.3
PV-10 (in millions)a		$	1,663.2			$	2,138.5			$	954.0
Estimated reserve life (in years)b			19.4				18.1				20.0

(a)		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 $41.00 per Bbl and $5.71 per MMBtu for 2008, $92.50 per Bbl and $6.80 per MMBtu for 2007 and $57.75 per Bbl and $5.64 per MMBtu for 2006.

(b)		Calculated by dividing historical proved reserves by historical production volumes for the years indicated. The historical production does not include the production from assets that we acquired in 2008 and 2006 before the time we acquired them. Pro forma for a full year of production from the acquired assets, the estimated reserve life in 2008 and 2006 would have been 16.8 years and 18.2 years, respectively.

		Six months
		ended June 30,								Years ended December 31,
		2009				2008				2008				2007				2006
Production and operating data:
Net production volumes:
Oil (MBbl)			3,518				1,786				4,586				3,014				2,295
Natural gas (MMcf)			10,369				6,451				14,968				12,064				9,507
Total (MBoe)			5,246				2,861				7,081				5,025				3,880
Average daily production volumes:
Oil (Bbl)			19,436				9,813				12,530				8,258				6,288
Natural gas (Mcf)			57,287				35,445				40,896				33,052				26,047
Total (Boe)			28,984				15,721				19,347				13,767				10,630
Average prices:
Oil, without hedges (Bbl)		$	47.32			$	107.39			$	91.92			$	68.58			$	60.47
Oil, with hedges (Bbl)a		$	63.36			$	86.93			$	83.55			$	64.90			$	57.42
Natural gas, without hedges (Mcf)		$	4.52			$	11.33			$	9.59			$	8.08			$	6.87
Natural gas, with hedges (Mcf)a		$	5.08			$	11.23			$	9.64			$	8.33			$	7.00
Total, without hedges (Boe)		$	40.67			$	92.59			$	79.80			$	60.54			$	52.62
Total, with hedges (Boe)a		$	52.53			$	79.59			$	74.49			$	58.93			$	51.12
Operating costs and expenses per Boe:
Lease operating expenses and workover costs		$	6.24			$	5.86			$	6.31			$	5.56			$	5.40
Oil and natural gas taxes		$	3.40			$	7.73			$	6.57			$	5.24			$	4.35
General and administrative		$	4.93			$	5.69			$	5.76			$	5.01			$	5.60
Depreciation, depletion and amortization		$	19.66			$	15.13			$	17.50			$	15.28			$	15.65

(a)		Includes the effect of (i) commodity derivatives designated as hedges and reported in oil and natural gas sales and (ii) includes the cash payments/receipts from commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash payments/receipts from commodity derivatives not designated as hedges that were included in computing average prices with hedges and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the statement of operations:

		Six months ended June 30,								Years ended December 31,
(in thousands)		2009				2008				2008				2007				2006
Oil and natural gas sales:
Cash payments from oil derivatives		$	–			$	(20,573	)		$	(30,591	)		$	(11,091	)		$	(7,000	)
Cash receipts from natural gas derivatives			–				–				–				188				1,232
Designated natural gas cash flow hedges reclassified from accumulated other comprehensive income			–				(222	)			(696	)			1,103				–
Total effect on oil and natural gas sales		$	–			$	(20,795	)		$	(31,287	)		$	(9,800	)		$	(5,768	)
Gain (loss) on derivatives not designated as hedges:
Cash (payments) receipts from oil derivatives		$	56,412			$	(15,965	)		$	(7,780	)		$	–			$	–
Cash (payments) receipts from natural gas derivatives			5,832				(422	)			1,426				1,815				–
Cash payments from interest rate derivatives			(779	)			–				–				–				–
Unrealized mark-to-market gain (loss) on commodity and interest rate derivatives			(148,117	)			(103,247	)			256,224				(22,089	)			–
Gain (loss) on derivatives not designated as hedges		$	(86,652	)		$	(119,634	)		$	249,870			$	(20,274	)		$	–

		The presentation of average prices with hedges is a non-GAAP measure as a result of including the cash payments/receipts from commodity derivatives that are presented in gain (loss) on derivatives not designated as hedges in the statements of operations. This presentation of average prices with hedges is a means by which to reflect the actual cash performance of our commodity derivatives for the respective periods and presents oil and natural gas prices with hedges in a manner consistent with the presentation generally used by the investment community.

		December 31,
(in millions)		2008				2007				2006
PV-10		$	1,663.2			$	2,138.5			$	954.0
Present value of future income tax discounted at 10%			(464.2	)			(706.7	)			(243.7	)
Standardized measure of discounted future cash flows		$	1,199.0			$	1,431.8			$	710.3

		Six months
		ended June 30,								Years ended December 31,
(in thousands)		2009				2008				2008				2007				2006
Net income (loss)		$	(46,443	)		$	7,945			$	278,702			$	25,360			$	19,668
Exploration and abandonments			7,419				3,464				38,468				29,098				5,612
Depreciation, depletion and amortization			103,150				43,294				123,912				76,779				60,722
Accretion of discount on asset retirement obligations			579				301				889				444				287
Impairment of long-lived assets			8,555				69				18,417				7,267				9,891
Non-cash stock-based compensation			4,113				3,029				5,223				3,841				9,144
Bad debt expense			–				1,799				2,905				–				–
Ineffective portion of cash flow hedges			–				(920	)			(1,336	)			821				(1,193	)
Unrealized (gain) loss on derivatives not designated as hedges			148,117				103,247				(256,224	)			22,089				–
Interest expense			10,570				9,500				29,039				36,042				30,567
Income tax expense (benefit)			(33,797	)			5,199				162,085				16,019				14,379
EBITDAX		$	202,263			$	176,927			$	402,080			$	217,760			$	149,077

 

An investment in the notes involves risk. In addition to the risks described below, you should also carefully read all of the other information included in this prospectus supplement, the accompanying prospectus and the documents we have incorporated by reference into this prospectus supplement in evaluating an investment in the notes. If any of the described risks actually were to occur, our business, financial condition or results of operations could be affected materially and adversely. In that case, our ability to fulfill our obligations under the notes could be materially affected and you could lose all or part of your investment.

 

The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial individually or in the aggregate may also impair our business operations.

 

This prospectus supplement and documents incorporated by reference also contain forward-looking statements that involve risks and uncertainties, some of which are described in the documents incorporated by reference in this prospectus supplement and the accompanying prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks and uncertainties faced by us described below or incorporated by reference in this prospectus supplement and the accompanying prospectus.

 

Risks related 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 flow, 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 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 beyond our control, including:

 

 

 

Furthermore, oil and natural gas prices were particularly volatile in the first six months of 2009. For example, the NYMEX oil prices during the six months ended June 30, 2009 ranged from a high of $72.68 to a low of $33.98 per Bbl, and the NYMEX natural gas prices during that time ranged from a high of $6.07 to a low of $3.25 per MMBtu. During the period from July 1, 2009 to September 8, 2009, oil prices ranged from a high of $74.37 to a low of $59.52 per Bbl, and natural gas prices ranged from a high of $4.04 to a low of $2.51 per MMBtu.

 

Further declines in oil and natural gas prices would not only reduce our revenue, but could further 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 gas industry continues to experience significant price declines, we may, among other things, be unable to maintain or increase our borrowing capacity, repay current or future indebtedness (including payments of interest and principal on the notes) or obtain additional capital on attractive terms, all of which can adversely affect the value of our securities, including the notes.

 

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. 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 or less economic than forecasted. Further, many factors may curtail, delay or cancel drilling, including the following:

 

 

 

Estimates of proved reserves and future net cash flows are not precise. The actual quantities of our proved reserves and our future net cash flows may prove to be lower than estimated.

 

Numerous uncertainties exist in estimating quantities of proved reserves and future net cash flows therefrom. Our estimates of proved reserves and related future net cash flows are based on various assumptions, which may ultimately prove to be inaccurate.

 

Petroleum engineering is a subjective process of estimating accumulations of oil and/or natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including the following:

 

 

Because all reserve estimates are to some degree subjective, each of the following items, or other items not identified below, may differ materially from those assumed in estimating reserves:

 

 

Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same data. Our actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material.

 

As required by the rules and regulations of the SEC, the estimated discounted future net cash flows from proved reserves are based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. For example, the estimated discounted future net cash flows from our proved reserves at December 31, 2008 were calculated using the West Texas Intermediate posted oil price of $41.00 per Bbl and the NYMEX

natural gas price of $5.71 per MMBtu, adjusted for location and quality by field, while the actual future net cash flows also will be affected by other factors, including:

 

 

Standardized Measure is a reporting convention that provides a common basis for comparing oil and gas companies subject to the rules and regulations of the SEC. It requires the use of commodity prices, as well as operating and development costs, prevailing as of the date of computation. Consequently, it may not reflect the prices ordinarily received or that will be received for oil and natural gas production because of seasonal price fluctuations or other varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and gas properties. Accordingly, estimates included herein of future net cash flows may be materially different from the future net cash flows that are ultimately received. In addition, the ten percent discount factor, which is required by the rules and regulations of the SEC to be used in calculating discounted future net cash flows for reporting purposes, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our company or the oil and gas industry in general. Therefore, the estimates of discounted future net cash flows or Standardized Measure included or incorporated by reference in this prospectus supplement should not be construed as accurate estimates of the current market value of our proved reserves. If oil prices were $1.00 per Bbl lower than the price we used, our PV-10 at December 31, 2008 would have decreased from $1,663 million to $1,622 million. If natural gas prices were $0.10 per Mcf lower than the price we used, our PV-10 at December 31, 2008 would have decreased from $1,663 million to $1,646 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 and the notes.

 

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 gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures for the acquisition, exploration and development of oil and natural gas reserves. At June 30, 2009, total debt outstanding under our credit facility was $660 million, and $300 million was available to be borrowed. Following the application of the proceeds of this offering in the manner described in “Use of proceeds” and giving effect to the reduction to our borrowing base as a result of the issuance of the notes, we expect to have approximately $582.8 million of availability under our credit facility and a revised borrowing base of $955.9 million. For further discussion, see “Description of other indebtedness—Senior secured credit facility.” Expenditures for exploration and development of oil and gas properties are the primary use of our capital resources. We invested approximately $202.7 million in exploration and development activities, excluding asset retirement obligations, during the six months ended June 30, 2009 on our properties under our capital budget and anticipate we could invest up to an additional approximately $193 million in 2009 for exploration and development activities, dependent on our cash flow.

We intend to finance our future capital expenditures primarily through cash flow from operations and through borrowings under our 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 our common stock. Additional borrowings under our 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 credit facility imposes, and the indenture governing the notes will impose, certain limitations on our ability to incur additional indebtedness, subject to certain exceptions. If we desire to issue additional debt securities other than as expressly permitted under our credit facility, we will be required to seek the consent of the lenders in accordance with the requirements of the facility, which consent may be withheld by the lenders under our credit facility in their discretion. If we incur certain additional indebtedness, including the notes, our borrowing base under our credit facility will be reduced. For further discussion, see “Description of other indebtedness—Senior secured credit facility.” 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 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 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 the development of our prospects, which in turn could lead to a decline in our oil and natural gas reserves, and could adversely affect our production, revenues and results of operations.

 

We may not be able to obtain funding at all, or obtain funding on acceptable terms, to meet our future capital needs because of the deterioration of the credit and capital markets.

 

Global financial markets and economic conditions have been, and will likely continue to be, disrupted and volatile. The debt and equity capital markets have become uncertain. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding.

 

In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets has diminished significantly. Also, as a result of concern about the stability of financial markets generally and the solvency of

counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced and, in some cases, ceased to provide funding to borrowers.

 

In addition, our ability to obtain capital under our credit facility may be impaired because of the recent downturn in the financial market, including the issues surrounding the solvency of certain institutional lenders and the recent failure of several banks. Specifically, we may be unable to obtain adequate funding under our credit facility because:

 

 

Due to these factors, we cannot be certain that funding will be available if needed and to the extent required, on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to implement our development plan, enhance our existing business, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations.

 

Our lenders can limit our borrowing capabilities, which may materially impact our operations.

 

At June 30, 2009, we had approximately $660 million of outstanding debt under our credit facility, and our borrowing base was $960 million. Following the application of the proceeds of this offering in the manner described in “Use of proceeds” and giving effect to the reduction to our borrowing base as a result of the issuance of the notes, we expect to have approximately $582.8 million of availability under our credit facility and a revised borrowing base of $955.9 million. The borrowing base limitation under our credit facility is semi-annually redetermined based upon a number of factors, including commodity prices and reserve levels. In addition to such semi-annual redeterminations, our lenders may request one additional redetermination during any twelve-month period. Upon a redetermination, our borrowing base could be substantially reduced, and in the event the amount outstanding under our credit facility at any time exceeds the borrowing base at such time, we may be required to repay a portion of our outstanding borrowings. If we incur certain additional indebtedness, including the notes, our borrowing base under our credit facility will be reduced. For further discussion, see “Description of other indebtedness — Senior secured credit facility.” We utilize cash flow from operations, bank borrowings and equity financings to fund our acquisition, exploration and development activities. A reduction in our borrowing base could limit our activities.

 

In addition, we may significantly alter our capitalization in order to make future acquisitions or develop our properties. These changes in capitalization may significantly increase our level of debt. If we incur additional debt for these or other purposes, the related risks that we now face could intensify. A higher level of debt also increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations (including our ability to pay interest and principal on the notes) and to reduce our level of debt depends on our future performance

which is affected by general economic conditions and financial, business and other factors, many of which are beyond our control.

 

Our producing properties are located in the Permian Basin of Southeast New Mexico and West Texas, making us vulnerable to risks associated with operating in one major geographic area. In addition, we have a large amount of proved reserves attributable to a small number of producing horizons within this area.

 

Our producing properties in our core operating areas are geographically concentrated in the Permian Basin of Southeast New Mexico and West Texas. At December 31, 2008, 97.4 percent of our PV-10 was attributable to properties located in our core operating areas. 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 wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, or interruption of the processing or transportation of oil, natural gas or natural gas liquids.

 

In addition to the geographic concentration of our producing properties described above, at December 31, 2008, approximately (i) 52.0 percent of our proved reserves 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; and (ii) 15.1 percent of our proved reserves were attributable to the Wolfberry play in West Texas. This concentration of assets within a small number of producing horizons exposes us to additional 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 a field.

 

Future price declines could result in a reduction in the carrying value of our proved oil and gas properties, which could adversely affect our results of operations.

 

Declines in commodity prices may result in having to make substantial downward adjustments to our estimated proved reserves. If this occurs, or if our estimates of production or economic factors change, accounting rules may require us to write-down, as a noncash charge to earnings, the carrying value of our oil and gas properties for impairments. We are required to perform impairment tests on proved assets whenever events or changes in circumstances warrant a review of our proved oil and gas properties. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of our oil and gas properties, the carrying value may not be recoverable and therefore require a write-down. We may incur impairment charges in the future, which could materially adversely affect our results of operations in the period incurred.

 

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, net income and the value of our common stock. At June 30, 2009, the net unrealized asset on our commodity price risk management contracts was $24.4 million. An average increase in the commodity price of $10.00 per barrel of oil and $1.00 per Mcf for natural gas from the commodity prices at June 30, 2009 would have resulted in a net unrealized liability on our commodity price risk management contracts, as reflected on our consolidated balance sheet at June 30, 2009, of approximately $81.0 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 increase or decrease and our derivatives contracts remain in place.

 

We have entered into interest rate derivative instruments that may subject us to loss of income.

 

We have entered into derivative instruments designed to limit the interest rate risk under our current credit facility or any credit facilities we may enter into in the future. These derivative instruments can involve the exchange of a portion of our floating rate interest obligations for fixed rate interest obligations or a cap on our exposure to floating interest rates to reduce our exposure to the volatility of interest rates. While we may enter into instruments limiting our exposure to higher market interest rates, we cannot assure you that any interest rate derivative instruments we implement will be effective. Furthermore, even if effective these instruments may not offer complete protection from the risk of higher interest rates.

 

All interest rate derivative instruments involve certain additional risks, such as:

 

 

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 or interest rates 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 and make payments on our indebtedness, including the notes. Future collateral requirements will depend on arrangements with our counterparties and highly volatile oil and natural gas prices and interest rates.

 

Nonperformance by the counterparties to our derivative instruments and commodity purchase agreements could adversely affect our financial condition and results of operations.

 

We routinely enter into derivative instruments with a number of counterparties to reduce our exposure to changes in oil and natural gas prices and interest rates. Recently, a number of financial institutions similar to those that serve as counterparties to our derivative instruments have been adversely affected by the global credit crisis. If a counterparty to one of these derivative instruments cannot or will not perform under the contract, we will not realize the benefit of the derivative, which could adversely affect our financial condition and results of operations.

 

Additionally, substantially all of our accounts receivable result from oil and natural gas sales to third parties in the energy industry. Recent market conditions have resulted in downgrades to credit ratings of energy industry merchants and financial institutions, affecting the liquidity of several of our purchasers and counterparties. We extend credit to our purchasers based on each party’s creditworthiness, but we generally have not required our purchasers to provide collateral support for their obligations to us and therefore have no assurances that our counterparties will have the ability to pay us. If a purchaser of our oil and natural gas production fails to meet its obligations under our commodity purchase agreement, our financial condition and results of operations could be adversely affected.

 

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

 

We have identified and scheduled the drilling of certain of our drilling locations as an estimation of our future multi-year development activities on our existing acreage. At June 30, 2009, we had identified 3,522 drilling locations with proved undeveloped reserves attributable to 1,005 of such locations. These identified locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including (i) our ability to timely drill wells on lands subject to complex development terms and circumstances; (ii) the availability of capital, equipment, services and personnel; (iii) seasonal conditions; (iv) regulatory and third party approvals; (v) oil and natural gas prices, and (vi) drilling and recompletion costs and results. Because of these uncertainties, we may never drill the numerous potential locations we have identified or produce oil or natural gas from these or any other potential locations. As such, our actual development activities may materially differ from those presently identified, which could adversely affect our production, revenues and results of operations.

Approximately 44.3 percent of our total estimated net proved reserves at December 31, 2008, were undeveloped, and those reserves may not ultimately be developed.

 

At December 31, 2008, approximately 44.3 percent of our total estimated net proved reserves were undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling. Our 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 otherwise 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 securities, including the notes.

 

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

 

At December 31, 2008, approximately 6.7 percent of our PV-10 was attributable to properties for which we were not the operator. As a result, the success and timing of 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 or we will be required to write-off the reserves attributable thereto, which may adversely affect our production, revenues and results of operations. Any such write-offs of our reserves could reduce our ability to borrow money and could reduce the value of our securities, including the notes.

 

Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flow and ability to pay interest and principal on our indebtedness, including the notes, our ability to raise capital and the value of our securities.

 

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 securities, including the notes, and our ability to raise capital and ability to pay interest and principal on our indebtedness, including the notes, will be adversely impacted if we are not able to replace our reserves that are depleted by production or otherwise lost. 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 successfully integrate acquired companies, and any inability to do so may disrupt our business and hinder our ability to grow.

 

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 credit facility imposes, and the indenture governing the notes will impose, certain direct limitations on our ability to enter into mergers or combination transactions involving our company. Our credit facility also limits, and the indenture governing the notes will 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 credit facility, we will be required to seek the consent of our lenders in accordance with the requirements of the facility, which consent may be withheld by the lenders under our credit facility in their discretion. Furthermore, given the current situation in the credit markets, many lenders are reluctant to provide consents in any circumstances, including to allow accretive transactions.

 

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.

 

The acquisition of the Henry Entities could expose us to potentially significant liabilities.

 

In connection with the acquisition of the Henry Entities, we purchased all of the sellers’ interests in the Henry Entities, rather than individual assets; therefore, the Henry Entities retained their liabilities, subject to certain exclusions and limitations contained in the purchase agreement, including certain unknown and contingent liabilities. We performed limited due diligence in connection with the acquisition of the Henry Entities and attempted to verify the representations of the sellers and of the former management of the Henry Entities, but there may be threatened, contemplated, asserted or other claims against the Henry Entities related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially adversely affect our production, revenues and results of operations. In addition, although the sellers agreed to indemnify us on a limited basis against certain liabilities, these indemnification obligations will expire over time and expose us to potential unindemnified liabilities, which could materially adversely affect our production, revenues and results of operations.

 

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

 

We obtained the majority of our current reserve base through acquisitions of producing properties and undeveloped acreage, including those owned by the Henry Entities. We expect that acquisitions will continue to contribute to our future growth. Successful acquisitions of oil and gas properties require an assessment of a number of factors, including estimates of recoverable reserves, the timing of recovering reserves, exploration potential, future oil and

natural 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 sometimes able to obtain contractual indemnification for preclosing liabilities, including environmental liabilities, but we generally acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties.

 

Competition in the oil and 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 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 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 adequately compensate personnel could have a material adverse effect on our production, revenues and results of operations.

 

Shortages of oilfield 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 gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. Historically, there have been shortages of drilling and workover rigs, pipe 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 and workover 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.

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 results, 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 periodically evaluate our unproved oil and gas properties for impairment, and could be required to recognize noncash charges to earnings of future periods.

 

At June 30, 2009, we carried unproved property costs of $277.1 million. GAAP requires periodic evaluation of these costs on a project-by-project basis in comparison to their estimated fair value. These evaluations will be affected by the results of exploration activities, commodity price circumstances, planned future sales or expiration of all or a portion of the leases, contracts and permits appurtenant to such projects. If the quantity of potential reserves determined by such evaluations is not sufficient to fully recover the cost invested in each project, we will recognize noncash charges to earnings in future periods.

 

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 us 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 production, revenues and 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, the proximity of reserves to pipelines and terminal facilities, competition for such facilities and the inability of such facilities to gather, transport or process our production due to shutdowns or curtailments arising from mechanical, operational or weather related matters, including hurricanes and other severe weather conditions. Our ability to market our production depends in substantial part on the availability and capacity of gathering and transportation 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 or otherwise curtail production from wells due to lack of a market or inadequacy or unavailability of oil, natural gas liquids or natural gas pipeline or gathering, transportation or processing 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 related 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. These and other costs could have a material adverse effect on our production, revenues and 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 production, revenues and results of operations.

 

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 related 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, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain 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 production, revenues and results of operations could be adversely affected.

 

The adoption of climate change legislation by Congress could result in increased operating costs and reduced demand for the oil and natural gas we produce.

 

On June 26, 2009, the U.S. House of Representatives approved adoption of the “American Clean Energy and Security Act of 2009,” also known as the “Waxman-Markey cap-and-trade legislation” or ACESA. The purpose of ACESA is to control and reduce emissions of “greenhouse gases,” or “GHGs,” in the United States. GHGs are certain gases, including carbon dioxide and methane, that may be contributing to warming of the Earth’s atmosphere and other climatic changes. ACESA would establish an economy-wide cap on emissions of GHGs in the United States and would require an overall reduction in GHG emissions of 17% (from 2005 levels) by 2020, and by over 80% by 2050. Under ACESA, most sources of GHG emissions would be required to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. The number of emission allowances issued each year would decline as necessary to meet ACESA’s

overall emission reduction goals. As the number of GHG emission allowances declines each year, the cost or value of allowances is expected to escalate significantly. The net effect of ACESA would be to impose increasing costs on the combustion of carbon-based fuels such as oil, refined petroleum products, and natural gas.

 

The U.S. Senate has begun work on its own legislation for controlling and reducing emissions of GHGs in the United States. If the Senate adopts GHG legislation that is different from ACESA, the Senate legislation would need to be reconciled with ACESA and both chambers would be required to approve identical legislation before it could become law. President Obama has indicated that he is in support of the adoption of legislation to control and reduce emissions of GHGs through an emission allowance permitting system that results in fewer allowances being issued each year but that allows parties to buy, sell and trade allowances as needed to fulfill their GHG emission obligations. Although it is not possible at this time to predict whether or when the Senate may act on climate change legislation or how any bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may be adopted to restrict or reduce emissions of GHGs could require us to incur increased operating costs, and could have an adverse effect on demand for the oil and natural gas we produce.

 

The adoption of derivatives legislation by Congress could have an adverse impact on our ability to hedge risks associated with our business.

 

Congress is currently considering legislation to impose restrictions on certain transactions involving derivatives, which could affect the use of derivatives in hedging transactions. ACESA contains provisions that would prohibit private energy commodity derivative and hedging transactions. ACESA would expand the power of the Commodity Futures Trading Commission, or CFTC, to regulate derivative transactions related to energy commodities, including oil and natural gas, and to mandate clearance of such derivative contracts through registered derivative clearing organizations. Under ACESA, the CFTC’s expanded authority over energy derivatives would terminate upon the adoption of general legislation covering derivative regulatory reform. The CFTC is conducting hearings to determine whether to set limits on trading and positions in commodities with finite supply, particularly energy commodities, such as oil, natural gas and other energy products. The CFTC also is evaluating whether position limits should be applied consistently across all markets and participants. In addition, the Treasury Department recently has indicated that it intends to propose legislation to subject all over-the-counter, or OTC, derivative dealers and all other major OTC derivatives market participants to substantial supervision and regulation, including by imposing conservative capital and margin requirements and strong business conduct standards. Derivatives contracts that are not cleared through central clearinghouses and exchanges may be subject to substantially higher capital and margin requirements. Although it is not possible at this time to predict whether or when the Senate may act on derivatives legislation or how any bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may be adopted that subject us to additional capital or margin requirements relating to, or additional restrictions on, our trading and commodity positions could have an adverse impact on our ability to hedge risks associated with our business.

 

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

 

Legislation has been proposed in Congress to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process.

Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and natural gas production. Sponsors of bills currently pending before the Senate and House of Representatives have asserted that chemicals used in the fracturing process may be impacting drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process are impairing groundwater or causing other damage. In addition, these bills, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.

 

The loss of our chief executive 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 our chief executive officer, Timothy A. Leach, and other officers and key employees who have extensive experience and expertise in evaluating and analyzing producing oil and gas properties and drilling prospects, maximizing production from oil and gas properties, marketing oil and gas production, and developing and executing acquisition, financing and hedging strategies. Our ability to hire and retain our officers and key employees 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 our investments in such projects.

 

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, if any, 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 our investments in such projects. In addition, if proposed legislation and regulatory initiatives relating to hydraulic fracturing become law, the cost of some of these enhanced recovery methods could increase substantially.

 

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

 

We now have, and will continue to have, a significant amount of indebtedness, and the terms of our credit facility require us to pay higher interest rate margins as we utilize a larger percentage of our available borrowing base. At June 30, 2009, after giving effect to the issuance and sale of the notes and the application of the net proceeds therefrom as set forth under “Use of proceeds” to repay a portion of the borrowings under our credit facility, we would have had total consolidated indebtedness of $668.7 million (net of discount). Assuming our total debt outstanding at June 30, 2009 was held constant, if interest rates had been higher or lower by one percent per annum, on our variable interest rate indebtedness, our interest expense for the six months ended June 30, 2009 would have increased or decreased by approximately $1.9 million. Following the application of the proceeds of this offering in the manner described in “Use of proceeds” and

giving effect to the reduction to our borrowing base as a result of the issuance of the notes, we expect to have approximately $582.8 million of availability under our credit facility and a revised borrowing base of $955.9 million. For further discussion, see “Description of other indebtedness—Senior secured credit facility.”

 

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, including our obligations with respect to the notes, 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.

 

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 used for the production, transportation, processing or marketing of 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 related to the notes

 

We and the guarantors may incur substantial additional indebtedness, including indebtedness ranking equal to the notes and the guarantees.

 

At June 30, 2009, after giving effect to the issuance and sale of the notes and the application of the net proceeds therefrom as set forth under “Use of proceeds” to repay a portion of the borrowings outstanding under our credit facility, we and the guarantors would have had total consolidated indebtedness of $668.7 million (net of discount), (including $373.0 million of secured indebtedness and guarantees under our credit facility) and we would have been able to incur an additional $582.8 million of secured indebtedness under our credit facility (after giving effect to the

automatic reduction in the borrowing base under our credit facility resulting from the issuance of the notes). For further discussion, see “Description of other indebtedness—Senior secured credit facility.”

 

Subject to the restrictions in the indenture governing the notes and in other instruments governing our other outstanding indebtedness (including our credit facility), we and our subsidiaries may incur substantial additional indebtedness (including secured indebtedness) in the future. Although the indenture governing the notes and the instruments governing certain of our other outstanding indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to waiver and a number of significant qualifications and exceptions, and indebtedness incurred in compliance with these restrictions could be substantial.

 

If we or any subsidiary guarantor incurs any additional indebtedness that ranks equally with the notes (or with the guarantee thereof), including trade payables, the holders of that indebtedness will be entitled to share ratably with noteholders in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or such subsidiary guarantor. This may have the effect of reducing the amount of proceeds paid to noteholders in connection with such a distribution.

 

Any increase in our level of indebtedness will have several important effects on our future operations, including, without limitation:

 

 

Our credit facility and the indenture governing the notes have restrictive covenants that could limit our financial flexibility.

 

The indenture related to the notes and our credit facility contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our credit facility is subject to compliance with certain financial covenants, including (i) maintenance of a quarterly ratio of total debt to consolidated earnings before interest expense, income taxes, depletion, depreciation, and amortization, exploration expense and other noncash income and expenses to be no greater than 4.0 to 1.0, and (ii) maintenance of a ratio of current assets to current liabilities, excluding noncash assets and liabilities related to financial derivatives and asset retirement obligations and including the unfunded amounts under the credit facility, to be no less than 1.0 to 1.0. Our credit facility also includes other restrictions that, among other things, limit our ability to incur certain additional indebtedness and certain types of liens, to effect mergers and sales or transfer of assets and to pay cash dividends.

 

The indenture governing the notes will contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:

 

 

 

See “Description of other indebtedness” and “Description of notes.” Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay planned investments and capital expenditures, or to sell assets, seek additional financing in the debt or equity markets or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facility and the indenture governing the notes offered hereby restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could have realized from them and any proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our debt service obligations.

 

Your right to receive payments on the notes is structurally subordinated to the right of lenders who have a security interest in our assets to the extent of the value of those assets.

 

Our obligations under the notes and the guarantors’ obligations under their guarantees of the notes will be unsecured, but our obligations under our credit facility and certain other financing

arrangements with lenders under our credit facility and each guarantor’s obligations under its guarantee of our credit facility are secured by a security interest in substantially all of our oil and natural gas properties and the ownership interests of all of our subsidiaries. If we are declared bankrupt or insolvent, or if we default under our credit facility, the funds borrowed thereunder, together with accrued interest, could become immediately due and payable. If we were unable to repay such indebtedness, the lenders under our credit facility could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the indenture governing the notes at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any guarantor in a transaction permitted under the terms of the indenture governing the notes, then such guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of such assets or by the equity interests in any such guarantor, it is possible that there would be no assets from which your claims could be satisfied or, if any assets existed, they might be insufficient to satisfy your claims in full. Please see “Management’s discussion and analysis of financial condition and results of operations—Capital commitments, capital resources and liquidity.”

 

As of June 30, 2009, after giving effect to the issuance and sale of the notes and the application of the net proceeds therefrom as set forth under “Use of proceeds” to pay down a portion of the borrowings outstanding under our credit facility, we would have had total consolidated indebtedness of $668.7 million (net of discount), consisting of $373.0 million of secured indebtedness outstanding under our credit facility and $295.7 million (net of discount) of the notes offered hereby, the subsidiary guarantors would have had total indebtedness of $668.7 million (net of discount) consisting of $373.0 million of secured guarantees under our credit facility and $295.7 million (net of discount) of guarantees of the notes offered hereby, excluding intercompany indebtedness, and we would have been able to incur an additional $582.8 million of secured indebtedness under our credit facility (after giving effect to the reduction in our borrowing base as a result of the issuance of the notes). See “Description of other indebtedness—Senior secured credit facility.”

 

Our ability to repay our debt, including the notes, is affected by the cash flow generated by our subsidiaries.

 

Our subsidiaries own substantially all of our assets and conduct all of our operations. Accordingly, repayment of our indebtedness, including the notes, will be dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. All of our existing subsidiaries on the date of completion of this offering will guarantee our obligations under the notes. Unless they guarantee the notes, any of our future subsidiaries will not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual encumbrances or restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to waiver and certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal, premium, if any, and interest payments on our indebtedness, including the notes.

Claims of noteholders will be structurally subordinated to claims of creditors of any of our future subsidiaries that do not guarantee the notes.

 

We conduct all of our operations through our subsidiaries. Subject to certain limitations, the indenture governing the notes permits us to form or acquire certain subsidiaries that are not guarantors of the notes and to permit such non-guarantor subsidiaries to acquire assets and incur indebtedness, and noteholders would not have any claim as a creditor against any of our non-guarantor subsidiaries to the assets and earnings of those subsidiaries. The claims of the creditors of those subsidiaries, including their trade creditors, banks and other lenders, would have priority over any of our claims or those of our other subsidiaries as equity holders of the non-guarantor subsidiaries. Consequently, in any insolvency, liquidation, reorganization, dissolution or other winding-up of any of the non-guarantor subsidiaries, creditors of those subsidiaries would be paid before any amounts would be distributed to us or to any of the guarantors as equity, and thus be available to satisfy our obligations under the notes and other claims against us or the guarantors.

 

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.

 

Any default under the agreements governing our indebtedness, including a default under our credit facility, that is not waived, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including covenants in the instruments governing our indebtedness (including covenants in our credit facility and the indenture governing the notes), we could be in default under the terms of the agreements governing such indebtedness, including our credit facility and the indenture governing the notes. In the event of such default:

 

 

If our operating performance declines, we may in the future need to obtain waivers under our credit facility to avoid being in default. If we breach our covenants under our credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our credit facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

We may not be able to repurchase the notes upon a change of control.

 

Upon the occurrence of specific kinds of change of control events, we may be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest, if any. The source of funds for any such purchase of the notes will be our available cash or cash generated from the operations of our subsidiaries or other sources, including borrowings, sales of assets or sales of equity or debt securities. We may not be able to repurchase the

notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Our failure to repurchase the notes upon a change of control would cause a default under the indenture governing the notes and could lead to a cross default under our credit facility.

 

The change of control put right might not be enforceable.

 

In a recent decision, the Chancery Court of Delaware raised the possibility that a change of control put right occurring as a result of a failure to have “continuing directors” comprising a majority of a board of directors might be unenforceable on public policy grounds.

 

Federal bankruptcy and state fraudulent transfer laws and other limitations may preclude the recovery of payments under the guarantees.

 

Initially, all of our subsidiaries will guarantee the notes. Federal bankruptcy and state fraudulent transfer laws permit a court, if it makes certain findings, to avoid all or a portion of the obligations of the guarantors pursuant to their guarantees of the notes, or to subordinate any such guarantor’s obligations under such guarantee to claims of its other creditors, reducing or eliminating the noteholders’ ability to recover under such guarantees. Although laws differ among these jurisdictions, in general, under applicable fraudulent transfer or conveyance laws, a guarantee could be voided as a fraudulent transfer or conveyance if (1) the guarantee was incurred with the intent of hindering, delaying or defrauding creditors; or (2) the guarantor received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of (2) only, one of the following is also true:

 

 

A court would likely find that a guarantor did not receive reasonably equivalent value or fair consideration for its guarantee if the guarantor did not substantially benefit directly or indirectly from the issuance of the notes. If a court were to void a guarantee, you would no longer have a claim against the guarantor. Sufficient funds to repay the notes may not be available from other sources, including the remaining guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from the guarantor.

 

The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the governing law. Generally, a guarantor would be considered insolvent if:

 

 

Each guarantee will contain a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. This provision may not be effective to protect the guarantees from being voided under fraudulent transfer law.

 

An active trading market for the notes may not develop.

 

There is no existing market for the notes. The notes will not be listed on any securities exchange. There can be no assurance that a trading market for the notes will ever develop or will be maintained. Further, there can be no assurance as to the liquidity of any market that may develop for the notes, your ability to sell your notes or the price at which you will be able to sell your notes. Future trading prices of the notes will depend on many factors, including prevailing interest rates, our financial condition and results of operations, the then-current ratings assigned to the notes and the market for similar securities. Any trading market that develops would be affected by many factors independent of and in addition to the foregoing, including the:

 

 

If an active market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected.

 

Many of the covenants contained in the indenture will terminate if the notes are rated investment grade by both of Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc.

 

Many of the covenants in the indenture governing the notes will terminate if the notes are rated investment grade by both of Standard & Poor’s Ratings Service and Moody’s Investors Service, Inc., provided at such time no default under the indenture has occurred and is continuing. These covenants will restrict, among other things, our ability to pay dividends, to incur debt and to enter into certain other transactions. There can be no assurance that the notes will ever be rated investment grade, or that if they are rated investment grade, that the notes will maintain such ratings. However, termination of these covenants would allow us to engage in certain transactions that would not be permitted while these covenants were in force. Please see “Description of notes—Covenant termination.”

 

The following table contains our consolidated ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends for the periods indicated.

 

 

 

 

 

 

 

The net proceeds from this offering will be approximately $287.0 million, after deducting fees and estimated expenses (including underwriting discounts and commissions). We intend to use the net proceeds from this offering to repay a portion of the outstanding borrowings under our credit facility.

 

Our credit facility matures on July 31, 2013. At June 30, 2009, we had outstanding borrowings thereunder of approximately $660 million, which bore interest at a rate of approximately 2.82%. Borrowings under the credit facility are incurred for general corporate purposes, including the funding of our capital budget. Any amounts repaid with the proceeds from this offering may be reborrowed in the future. As of June 30, 2009, after giving effect to the issuance and sale of the notes and the application of the net proceeds therefrom and the automatic reduction in the borrowing base under our credit facility resulting from the issuance of the notes, we would have been able to incur an additional $582.8 million of indebtedness under our credit facility. For further discussion, see ‘’Description of other indebtedness—Senior secured credit facility.”

 

The following table sets forth our capitalization at June 30, 2009:

 

 

 

 

The following tables show our selected historical financial data as of and for the periods indicated. 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 our consolidated financial statements and related the notes, each of which is included or incorporated by reference in this prospectus supplement.

 

Selected historical financial information

 

The following table shows selected historical financial data related to us (as the accounting successor to Concho Equity Holdings Corp., which is now known as Concho Equity Holdings LLC) and combined financial data of the properties we acquired from Chase Oil Corporation, Caza Energy LLC and other related working interest owners (which we refer to collectively as the “Chase Group Properties”). 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 such that Concho Equity Holdings Corp. became 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 below for the Chase Group Properties for the years ended December 31, 2005 and 2004 are derived from the audited financial statements of the Chase Group Properties. Our historical financial data below for the years ended December 31, 2008, 2007, 2006 and 2005, and for the period from inception (April 21, 2004) through December 31, 2004, are derived from our audited financial statements. Our historical financial data below for the six months ended June 30, 2009 and 2008 are derived from our unaudited consolidated financial statements and the notes thereto and, in our opinion, have been prepared on a basis consistent with the audited financial statements and the notes thereto and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this information.