UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.Washington, D.C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003March 31, 2004
or
/ / Transition Report Pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No.Number: 1-13245
PIONEER NATURAL RESOURCES COMPANY
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number,Code)
(972) 444-9001
----------------------------------------------------
(Registrant's telephone number, including area code : (972) 444-9001code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Indicate by checkmarkcheck mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / x / No / /
Number of shares of Common Stock outstanding as of October 30, 2003................................................ 118,027,311May 6, 2004... 120,104,666
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and ConventionsConversions Used Herein............Herein........ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003March 31, 2004 and
December 31, 2002...........................................2003 ..................................... 4
Consolidated Statements of Operations for the three
and
nine months ended September 30, 2003March 31, 2004 and 2002...............2003................... 5
Consolidated Statement of Stockholders' Equity for the
ninethree months ended September 30, 2003........................March 31, 2004...................... 6
Consolidated Statements of Cash Flows for the three
and
nine months ended September 30, 2003March 31, 2004 and 2002...............2003................... 7
Consolidated Statements of Comprehensive Income (Loss)
for the
three and nine months ended September 30,
2003March 31, 2004 and 2002...............................................2003............. 8
Notes to Consolidated Financial Statements....................Statements................ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24Operations....................... 26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....Risk............................................... 36
Item 4. Controls and Procedures....................................... 38Procedures................................... 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................Proceedings......................................... 39
Item 6. Exhibits and Reports on Form 8-K..............................8-K.......................... 39
Signatures.................................................... 40Signatures ......................................................... 41
Exhibit Index................................................. 41Index....................................................... 42
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions
have specific meanings: "Bbl" means a standard barrel containing 42 United
States gallons; "BOE" means a barrel of oil equivalent and is a standard
convention used to express oil and gas volumes on a comparable oil equivalent
basis; "Btu" means British thermal unit and is a measure of the amount of energy
required to raise the temperature of one pound of water one degree Fahrenheit;
"LIBOR" means London Interbank Offered Rate, which is a market rate of
interest; "MMBtu" means
one million Btus; "MBbl""MBbl" means one thousand Bbls; "MBOE" means one thousand BOE;BOEs; "Mcf"
means one thousand cubic feet and is a measure of natural gas volume; "MMBtu"
means one million Btus; "MMcf" means one million cubic feet; "NGL" means natural
gas liquid; "NYMEX" means Thethe New York Mercantile Exchange; "proved reserves"
mean the estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made. Prices include consideration of changes in existing prices provided only
by contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Gas equivalents are determined under the relative energy content
method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.
With espectrespect to information on the working interest in wells,
drilling locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by Pioneer
Natural Resources Company's ("Pioneer" or the "Company") working interest in
such wells, drilling locations or acres. Unless otherwise specified, wells,
drilling locations and acreage statistics quoted herein represent gross wells,
drilling locations or acres; and, all currency amounts are expressed in U.S.
dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,March 31, December 31,
2004 2003 2002
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................equivalents............................................ $ 12,6519,022 $ 8,49019,299
Accounts receivable:
Trade, net of reservesallowance for doubtful accounts of $4,641$2,466
and $4,744$4,727 as of September 30, 2003March 31, 2004 and December 31, 2002, respectively........................................... 97,388 97,7742003,
respectively.................................................... 145,733 111,033
Due from affiliates............................................ 239 448
Inventories....................................................... 19,054 10,648affiliates............................................... 406 447
Inventories.......................................................... 17,210 17,509
Prepaid expenses.................................................. 13,889 5,485expenses..................................................... 10,166 11,083
Deferred income taxes............................................. 39,500 13,900taxes................................................ 35,780 40,514
Other current assets:
Derivatives.................................................... 1,856 2,508Derivatives....................................................... 179 423
Other, net of reservesallowance for doubtful accounts of $4,207
and $3,351$4,486 as of
September 30, 2003March 31, 2004 and December 31, 2002, respectively........................................... 11,161 7,8402003............................ 4,217 4,807
---------- ----------
Total current assets......................................... 195,738 147,093assets............................................ 222,713 205,115
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties.............................................. 4,767,281 4,252,897properties................................................. 5,069,733 4,983,558
Unproved properties............................................ 182,429 219,073properties............................................... 176,580 179,825
Accumulated depletion, depreciation and amortization.............. (1,555,709) (1,303,541)amortization................. (1,808,468) (1,676,136)
---------- ----------
3,394,001 3,168,429Total property, plant and equipment............................. 3,437,845 3,487,247
---------- ----------
Noncurrent deferredDeferred income taxes.................................... 188,712 76,840taxes.................................................. 198,587 192,344
Other property and equipment, net................................... 25,733 22,784net...................................... 28,470 28,080
Other assets:
Derivatives....................................................... 349 643Derivatives.......................................................... 157 209
Other, net of reservesallowance for doubtful accounts of $371 and $1,227$92 as of
September 30, 2003March 31, 2004 and December 31, 2002, respectively... 37,077 39,3272003.............................. 40,512 38,577
---------- ----------
$ 3,841,6103,928,284 $ 3,455,1163,951,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade..........................................................Trade............................................................. $ 135,411173,378 $ 117,582177,614
Due to affiliates.............................................. 6,263 7,192affiliates................................................. 2,523 8,804
Interest payable.................................................. 38,039 37,458payable..................................................... 37,728 37,034
Income taxes payable.............................................. 3,916 -payable................................................. 8,986 5,928
Other current liabilities:
Derivatives.................................................... 109,200 83,638
Other.......................................................... 30,002 28,722Derivatives....................................................... 195,295 161,574
Other............................................................. 45,668 38,798
---------- ----------
Total current liabilities.................................... 322,831 274,592liabilities....................................... 463,578 429,752
---------- ----------
Long-term debt...................................................... 1,621,364 1,668,536
Noncurrent derivatives.............................................. 44,999 42,490
Noncurrent deferreddebt......................................................... 1,456,695 1,555,461
Derivatives............................................................ 89,524 48,825
Deferred income taxes.................................... 12,713 8,760taxes.................................................. 12,832 12,121
Other noncurrent liabilities........................................ 123,798 85,841liabilities...................................................... 147,828 145,641
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
119,672,784120,118,811 and 119,592,344119,665,784 shares issued as of
September 30, 2003March 31, 2004 and December 31, 2002, respectively.........2003, respectively................ 1,202 1,197 1,196
Additional paid-in capital........................................ 2,726,969 2,714,567capital........................................... 2,751,454 2,734,403
Treasury stock, at cost; 1,674,81967,408 and 2,339,806378,012 shares as of
September 30, 2003March 31, 2004 and December 31, 2002, respectively......... (23,857) (32,219)2003, respectively................ (1,367) (5,385)
Deferred compensation............................................. (11,477) (14,292)compensation................................................ (24,164) (9,933)
Accumulated deficit............................................... (945,222) (1,298,440)deficit.................................................. (839,646) (887,848)
Accumulated other comprehensive income (loss):
Net deferred hedge gains (losses),losses, net of tax.................. (55,043) 9,555tax............................. (158,879) (104,130)
Cumulative translation adjustment.............................. 23,338 (5,470)adjustment................................. 29,227 31,468
---------- ----------
Total stockholders' equity................................... 1,715,905 1,374,897equity...................................... 1,757,827 1,759,772
Commitments and contingencies.......................................contingencies
---------- ----------
$ 3,841,6103,928,284 $ 3,455,1163,951,572
========== ==========
The financial information included as of September 30, 2003March 31, 2004 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,
--------------------- -----------------------March 31,
------------------------
2004 2003
2002 2003 2002
--------- --------- --------- --------------------- ----------
Revenues and other income:
Oil and gas......................................gas............................................................ $ 332,515446,526 $ 168,317 $ 953,625 $ 506,286284,999
Interest and other............................... 348 7,083 4,321 9,089other..................................................... 1,735 2,713
Gain (loss) on disposition of assets, net............... 46 3,353 1,576 4,374
-------- -------- --------net.............................. (13) 1,426
--------- 332,909 178,753 959,522 519,749
-------- -------- -----------------
448,248 289,138
--------- ---------
Costs and expenses:
Oil and gas production........................... 71,806 49,970 205,387 150,705production................................................. 89,211 67,867
Depletion, depreciation and amortization......... 103,534 54,748 274,142 156,081amortization............................... 136,499 70,049
Exploration and abandonments..................... 24,516 18,324 107,430 57,304abandonments........................................... 80,506 35,867
General and administrative....................... 15,207 12,466 44,332 35,142administrative............................................. 18,329 15,481
Accretion of discount on asset retirement obligations.................................... 1,327 - 3,656 -
Interest......................................... 23,212 20,347 69,526 71,405
Other............................................ 1,389 21,599 12,205 37,603
-------- -------- --------obligations.................. 1,966 1,094
Interest............................................................... 21,576 22,491
Other.................................................................. 196 5,178
--------- 240,991 177,454 716,678 508,240
-------- -------- -----------------
348,283 218,027
--------- ---------
Income before income taxes and cumulative effect of change in
accounting principle................ 91,918 1,299 242,844 11,509principle.................................................... 99,965 71,111
Income tax benefit (provision)..................... 99,895 (2,189) 94,961 (3,216)
-------- -------- --------provision....................................................... (39,777) (2,304)
--------- ---------
Income (loss) before cumulative effect of change in accounting principle.......................... 191,813 (890) 337,805 8,293principle.......... 60,188 68,807
Cumulative effect of change in accounting principle, net of tax............................ -tax............ - 15,413
-
-------- -------- ----------------- ---------
Net income (loss)..................................income................................................................. $ 191,81360,188 $ (890) $ 353,218 $ 8,293
======== ======== ======== ==========84,220
========= =========
Net income (loss) per share:
Basic:
Income (loss) before cumulative effect of change in accounting principle..............principle.... $ 1.64.51 $ (.01) $ 2.89 $ .07.59
Cumulative effect of change in accounting principle, net of tax....................... -tax...... - .13
-
-------- -------- ----------------- ---------
Net income (loss)...........................income........................................................ $ 1.64.51 $ (.01) $ 3.02 $ .07
======== ======== ======== ==========.72
========= =========
Diluted:
Income (loss) before cumulative effect of change in accounting principle..............principle.... $ 1.62.50 $ (.01) $ 2.86 $ .07.58
Cumulative effect of change in accounting principle, net of tax....................... -tax...... - .13
-
-------- -------- ----------------- ---------
Net income (loss)...........................income........................................................ $ 1.62.50 $ (.01) $ 2.99 $ .07
======== ======== ======== ==========.71
========= =========
Weighted average shares outstanding:
Basic......................................... 117,216 116,193 116,990 111,227
======== ======== ========Basic.................................................................. 118,719 116,743
========= Diluted....................................... 118,457 116,193 118,283 112,889
======== ======== =================
Diluted................................................................ 120,264 118,675
========= =========
Dividends declared per share............................................... $ .10 $ -
========= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
------------------------------------------------
Net
Deferred
Hedge
Common Gains
Stock Additional (Losses),Hedge Cumulative Total
Shares
Common Paid-in Treasury Deferred Accumulated NetLosses, Translation Stockholders'
Outstanding
Stock Capital Stock Compensation Deficit Net of Tax Adjustment Equity
-----------
------ ---------- -------- ------------ ----------- -------------------- ----------- ------------
Balance as of January 1, 2003................... 117,253 $1,196 $2,714,567 $(32,219) $(14,292) $(1,298,440)2004...... $1,197 $2,734,403 $(5,385) $ 9,555(9,933) $(887,848) $(104,130) $ (5,470) $1,374,897
Stock options exercised
and employee stock
purchased.............. 797 1 1,630 10,71131,468 $1,759,772
Dividends declared............... - - - - 12,342
Purchase of treasury
stock.................. (100)(11,986) - - (2,349)(11,986)
Exercise of long-term
incentive plan stock options.... - (1,089) 9,584 - - - - (2,349)
Deferred income tax
valuation reserve
adjustment8,495
Purchase of treasury stock....... - - (5,566) - - - - (5,566)
Tax benefits related to
stock-based compensation...........compensation........ - - 9,2661,935 - - - - - 9,2661,935
Deferred compensation:
Compensation deferred.. 48deferred.......... 5 16,205 - 1,242 - (1,242)(16,210) - - - -
Deferred compensation
included in net income................ - - 264 - 4,057income........ - - - 4,3211,979 - - - 1,979
Net income..............income....................... - - - - - 353,21860,188 - - 353,21860,188
Other comprehensive income
(loss):
Net deferred hedge gains (losses),losses,
net of tax:
Net deferred hedge losses.............losses.... - - - - - (117,392) - (117,392)
Tax benefits related to net
deferred hedge losses..... - - - - - 31,871 - 31,871
Net hedge losses included
in net income............. - - - - - 30,772 - 30,772
Translation adjustment......... - - - - - - (188,758) - (188,758)
Deferred income tax
valuation reserve
adjustment related
to hedging......... - - - - - - 23,288 - 23,288
Net hedge losses
included in
net income......... - - - - - - 100,872 - 100,872
Translation
adjustment........... - - - - - - - 28,808 28,808
-------(2,241) (2,241)
----- --------- ------ ------- ------- ------------------ -------- ------- ---------
Balance as of September 30, 2003..... 117,998 $1,197 $2,726,969 $(23,857) $(11,477)March 31, 2004....... $1,202 $2,751,454 $(1,367) $(24,164) $(839,646) $(158,879) $ (945,222) $ (55,043) $ 23,338 $1,715,905
=======29,227 $1,757,827
===== ========= ====== ======= ======= ================== ======== ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,March 31,
---------------------
---------------------2004 2003 2002 2003 2002
--------- ---------
--------- ---------
Cash flows from operating activities:
Net income (loss)...............................income.......................................................... $ 191,81360,188 $ (890) $ 353,218 $ 8,29384,220
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization..... 103,534 54,748 274,142 156,081amortization......................... 136,499 70,049
Exploration expenses, including dry holes.... 15,677 12,589 83,204 43,437holes........................ 78,820 30,263
Deferred income taxes........................ (103,691) 1,512 (103,938) 1,617
Gaintaxes............................................ 32,720 254
(Gain) loss on disposition of assets, net........... (46) (3,353) (1,576) (4,374)net........................ 13 (1,426)
Accretion of discount on asset retirement obligations................................ 1,327 - 3,656 -obligations............ 1,966 1,094
Interest related amortization................ (4,781) (19) (13,960) (1,660)amortization.................................... (6,370) (4,565)
Commodity hedge related amortization......... (18,132) 6,184 (54,119) 20,307amortization............................. (11,291) (17,782)
Cumulative effect of change in accounting principle, net of tax...................... -tax.. - (15,413)
-
Other noncash items.......................... 1,598 16,093 8,580 28,337items.............................................. 1,220 4,733
Changes in operating assets and liabilities:
Accounts receivable, net..................... 17,932 6,153 3,287 (4,715)
Inventories.................................. (4,678) 69 (8,895) 4,052net......................................... (33,737) (25,967)
Inventories...................................................... (19) (360)
Prepaid expenses............................. 1,102 951 (8,404) 1,011expenses................................................. 917 (8,222)
Other current assets, net.................... (2,712) (1,802) (3,276) (1,939)net........................................ 757 398
Accounts payable............................. 23,281 (3,907) 28,951 (18,056)payable................................................. (6,002) 8,381
Interest payable............................. 850 (384) 581 183payable................................................. 693 522
Income taxes payable......................... 1,740 - 3,916 -payable............................................. 3,058 1,452
Other current liabilities.................... (2,349) (290) (3,278) (4,320)
-------- --------liabilities........................................ (5,802) 9,158
-------- --------
Net cash provided by operating activities.. 222,465 87,654 546,676 228,254
-------- --------activities...................... 253,630 136,789
-------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............. 9,294 59,895 35,006 118,831assets................................. 285 15,553
Additions to oil and gas properties............. (134,889) (226,440) (521,985) (489,733)properties................................. (167,226) (252,753)
Other property additions, net................... (1,814) (2,675) (8,170) (8,535)
-------- --------net....................................... (5,360) (2,281)
-------- --------
Net cash used in investing activities...... (127,409) (169,220) (495,149) (379,437)
-------- --------activities.......................... (172,301) (239,481)
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt................. 50,913 210,792 222,725 466,668debt..................................... 56,083 116,628
Principal payments on long-term debt............ (142,913) (56,257) (270,262) (442,583)
Common stock issuance proceeds, net of
issuance costs............................... - (4) - 236,000debt................................ (146,083) (15,000)
Payment of other noncurrent liabilities......... (4,869) (67,142) (11,097) (103,704)
Exercise of stock options and employee
stock purchases.............................. 2,481 3,149 12,342 10,756liabilities........................................ (4,355) (6,380)
Purchase of treasury stock......................stock.......................................... (5,566) -
- (2,349) -
Deferred debt issuance costs.................... - (135) - (3,293)
-------- --------Exercise of long-term incentive plan stock options.................. 8,495 5,346
-------- --------
Net cash provided by (used in) financing activities..................... (94,388) 90,403 (48,641) 163,844
-------- --------activities............ (91,426) 100,594
-------- --------
Net increasedecrease in cash and cash equivalents......... 668 8,837 2,886 12,661equivalents............................... (10,097) (2,098)
Effect of exchange rate changes on cash and cash equivalents................................ (173) (63) 1,275 (1,493)equivalents............ (180) 466
Cash and cash equivalents, beginning of period.... 12,156 16,728period.......................... 19,299 8,490 14,334
-------- --------
-------- --------
Cash and cash equivalents, end of period..........period................................ $ 12,6519,022 $ 25,502 $ 12,651 $ 25,502
======== ========6,858
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(in thousands)
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,
--------------------- ---------------------March 31,
----------------------
2004 2003 2002 2003 2002
--------- ---------
--------- ---------
Net income (loss).................................income................................................... $ 191,81360,188 $ (890) $ 353,218 $ 8,293
-------- --------84,220
-------- --------
Other comprehensive income (loss):
Net deferred hedge gains (losses),losses, net of tax:
Net deferred hedge gains (losses)............ 46,568 (24,269) (188,758) (113,360)
Deferred income tax valuation reserve
adjustmentlosses.............................. (117,392) (116,164)
Tax benefits related to hedging............. 23,288 - 23,288 -net deferred hedge losses...... 31,871 (268)
Net hedge (gains) losses included in net income (loss).............................. 27,911 1,651 100,872 (34,147)income................ 30,772 50,363
Translation adjustment.......................... (1,017) (6,915) 28,808 1,827
-------- --------adjustment................................... (2,241) 12,192
-------- --------
Other comprehensive income (loss).......... 96,750 (29,533) (35,790) (145,680)
-------- --------loss............................ (56,990) (53,877)
-------- --------
Comprehensive income (loss).......................income......................................... $ 288,5633,198 $ (30,423) $ 317,428 $(137,387)
======== ========30,343
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company" or "Pioneer") is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is an independent oil and gas
exploration and production company with ownership interests in oil and gas
properties located in the United States, Argentina, Canada, Gabon, South Africa
and Tunisia.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of September 30, 2003March 31, 2004 and for the three
and nine monththree-month
periods ended September 30,March 31, 2004 and 2003 and 2002 include all adjustments and accruals,
consisting only of normal, recurring accrual adjustments, which are necessary
for a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the United States Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2002.2003.
Adoption of SFAS 143. On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
the provisions of SFAS 143, asset retirement obligations are capitalized as part
of the carrying value of the long-lived asset.
Under the provisions of SFAS 19,
asset retirement obligations were recognized using a cost-accumulation approach.
Prior to the adoption of SFAS 143, the Company recorded significant asset
retirement obligations through the unit-of-production method, except for asset
retirement obligations that were assumed in business combinations, which were
recorded at their estimated fair values on their dates of acquisition.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $13.8 million increase in the carrying values of
proved properties, (ii) a $26.3 million decrease in accumulated depreciation,
depletion and amortization of property, plant and equipment, (iii) a $1.0
million increase in current abandonment liabilities, (iv) a $22.4 million
increase in noncurrent abandonment liabilities and (v) a $1.3 million increase
in Argentine deferred income tax liabilities. The net impact of items (i)
through (v) was to record a gain of $15.4 million, net of $1.3 million of deferred
tax, as a cumulative effect adjustment of a change in accounting principle in
the Company's Consolidated Statements of Operations upon adoption on January 1,for the three months ended
March 31, 2003. See Notes C and FE for additional information regarding the
Company's income taxes and asset retirement obligations.obligations, respectively.
Inventories. Inventories are comprised of $15.6 million and $15.3 million
of lease and well equipment and $1.6 million and $2.2 million of commodities as
of March 31, 2004 and December 31, 2003, respectively. Lease and well equipment
is net of lower of cost or market allowances of $.6 million as of March 31, 2004
and December 31, 2003.
Stock-based compensation. The following pro forma data summarizes the Company's net income (loss)
and net income (loss) per share for the three and nine month periods ended
September 30, 2003 and 2002 as ifCompany has a long-term incentive plan (the
"Long-Term Incentive Plan") under which the Company had adopted the provisions of SFAS
143 on January 1, 2002, including aggregate pro forma asset retirement
obligations on that date of $60.2 million:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income (loss), as reported................. $ 191,813 $ (890) $ 353,218 $ 8,293
Pro forma adjustments to reflect retroactive
adoption of SFAS 143........................ - 1,270 (15,413) 2,594
-------- -------- -------- --------
Pro forma net income........................... $ 191,813 $ 380 $ 337,805 $ 10,887
======== ======== ======== ========
Net income (loss) per share:
Basic - as reported......................... $ 1.64 $ (.01) $ 3.02 $ .07
======== ======== ======== ========
Basic - pro forma........................... $ 1.64 $ - $ 2.89 $ .10
======== ======== ======== ========
Diluted - as reported....................... $ 1.62 $ (.01) $ 2.99 $ .07
======== ======== ======== ========
Diluted - pro forma......................... $ 1.62 $ - $ 2.86 $ .10
======== ======== ======== ========
Adoption of SFAS 145. On January 1, 2003, the Company a dopted the
provisions of Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections" ("SFAS 145"). Prior to SFAS 145, gains or losses on the
early extinguishment of debt were required to be classified in a company's
periodic consolidated statements of operations as extraordinary gains or losses,
net of associated income taxes, after the determination of income or loss from
continuing operations. SFAS 145 requires, except in the case of events or
transactions of a highly unusual and infrequent nature, that gains or losses
from the early extinguishment of debt be classified, on both a prospective and
retrospective basis, as components of a company's income or loss from continuing
operations. The adoption of SFAS 145 did not affect the Company's financial
position or liquidity. Under the provisions of SFAS 145, gains or losses from
the early extinguishment of debt are recognized in the Company's Consolidated
Statements of Operations, except in the case of events or transactions of a
highly unusual and infrequent nature, as components of other income or other
expense and are included in the determination of income (loss) from continuing
operations. Accordingly, extraordinary losses from the early extinguishment of
debt of $2.8 million and $19.5 million recorded during the three month periods
ended June 30 and September 30, 2002, respectively, have been reclassified to
other expense.
Stock-basedgrants stock-based
compensation. The Company accounts for stock-based compensation granted under
its long-term incentive planthe Long-Term Incentive Plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Stock-based compensation expensesexpense
associated with option grants werewas not recognized in the Company's net income
(loss) forduring the three and nine monththree-month periods ended September 30,March 31, 2004 and 2003, and 2002, as all options
granted under the Long-Term Incentive Plan had exercise prices equal to the
market value of the underlying common stock on the dates of grant. Stock-based
compensation expense associated with restricted stock awards is deferred and
amortized to earnings ratably over the vesting periods of the awards. The
following table illustrates the pro forma effect on net income (loss) and net income (loss)earnings per
share as if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to stock-based compensation during the three and nine monththree-month periods ended
September 30, 2003March 31, 2004 and 2002:
102003:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,
--------------------- ---------------------March 31,
------------------------
2004 2003 2002 2003 2002
--------- ---------
--------- ---------
(in thousands, except
per share amounts)
Net income, (loss), as reported...................reported................................. $ 191,81360,188 $ (890) $ 353,218 $ 8,29384,220
Plus: Total stock-based employeeStock-based compensation expense included
in net income (loss)
for all awards, net of tax (1)................. 1,022 483 2,744 517(a)......... 1,257 1,369
Deduct: Total stock-based employeeStock-based compensation expense determined
under fair value based method for all awards,
net of tax (1).......... (3,027) (3,462) (8,700) (8,819)
-------- --------(a)....................................... (3,115) (4,401)
-------- --------
Pro forma net income (loss)......................income.................................... $ 189,80858,330 $ (3,869) $ 347,262 $ (9)
======== ========81,188
======== ========
Net income (loss) per share:
Basic - as reported............................reported.................................. $ 1.64.51 $ (.01) $ 3.02 $ .07
======== ========.72
======== ========
Basic - pro forma..............................forma.................................... $ 1.62.49 $ (.03) $ 2.97 $ -
======== ========.70
======== ========
Diluted - as reported..........................reported................................ $ 1.62.50 $ (.01) $ 2.99 $ .07
======== ========.71
======== ========
Diluted - pro forma............................forma.................................. $ 1.60.49 $ (.03) $ 2.94 $ -
======== ========.68
======== ========
- -----------
(1) Total(a) For the three months ended March 31, 2004, stock-based employee compensation expense
included in net income (loss) is net of a tax benefitsbenefit of $587 thousand and $1.6 million during the
three and nine month periods ended September 30, 2003, respectively. Total$722 thousand. Similarly,
stock-based employee compensation expense determined under the fair value based
method for the three and nine month periodsmonths ended September 30, 2003
areMarch 31, 2004 is net of $1.7a $1.8 million
and $5.0 million of tax benefits, respectively.benefit. No tax benefits were recognized for the 2002stock-based
compensation expense.expense amounts during the three months ended March 31, 2003.
See Note C for additional information regarding the Company's income taxes in the
United States.taxes.
NOTE C. Income Tax Assets
Since 1998,The Company accounts for income taxes in accordance with the Company has maintained a valuation allowance against a
portionprovisions of its deferred tax asset position in the United States. As of December
31, 2002, the Company's deferred tax valuation allowances totaled $247.0
million, comprised of $204.3 million of United States deferred tax valuation
allowances and $42.7 million of international deferred tax valuation allowances.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that the Company continually assess both
positive and negative evidence to determine whether it is more likely than not
that the deferred tax assets can be realized prior to their expiration. InFrom 1998
until 2003, the Company maintained a valuation allowance against a portion of
its deferred tax asset position in the United States. During the third quarter
of 2003, the Company concluded that it is
nowwas more likely than not that it willwould be
able to realize its gross deferred tax asset position in the United States after giving consideration to the following
specific facts:
o Over the past several years, the Company has been steadily improving its
portfolio of assets, including significant proved reserve discoveries and
follow-up development projects that have recently started to produce.
Specifically, Pioneer completed development activities and began production
operations on its Canyon Express gas project in September 2002 and on its
Company-operated Falcon field gas project in March 2003. The production
performance to-date and the reservoir data that has been accumulated
through September 30, 2003 on these projects provide assurance that these
projects will recover the reserves as predicted.
o During the three months ended September 30, 2003, the Company announced
additional Falcon area discoveries in the Tomahawk and Raptor fields and
expects first production from these fields in the second half of 2004. The
Company also expects to complete its other significant United States Gulf
of Mexico development projects, Harrier and Devils Tower, in early and
mid-2004, respectively.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
o Commodity market supply and demand fundamentals have continued to stabilize
during the quarter as evidenced by quoted futures prices that suggest that
North American gas prices will remain relatively flat over the next five
years and that worldwide oil prices may decline modestly over that time
span compared to relatively high current levels for each commodity.
o The Company's future revenues are further protected against price declines
through its significant hedging program. The Company has hedged portions of
its oil price risk through 2005 and portions of its gas price risk through
2007. See Note E for information regarding the Company's hedge positions.
o The Company has generated record pretax income for the third quarter of
2003, significant net income for the nine months ended September 30, 2003
and net income in each of the years ended December 31, 2002, 2001 and 2000.
The Company has also generated significant taxable income for the third
consecutive quarter, including the deduction of 100 percent of its
intangible drilling costs for those periods. The Company believes that
these trends will continue for the foreseeable future.
o The Company performed various economic evaluations in the third quarter to
determine if the Company would be able to realize all of its deferred tax
assets, including its net operating loss carryforwards, prior to any
expiration. These evaluations were based on the Company's reserve
projections of existing producing properties and recent discoveries being
developed. These evaluations employed varying price assumptions, some of
which included a significant reduction in commodity prices, and factored in
limitations on the use of the Company's net operating loss carryforwards.
The evaluations did not include assumptions of increases in proved reserves
through future exploration or acquisitions. The evaluations indicated that
the deferred tax assets are realizable in the future.States.
Accordingly, during the third quarter of 2003, the Company reversed its valuation allowanceallowances in the United States.
As a result of the reversal of the valuation allowances against the Company's
United States deferred tax assets, the Company's effective tax rate on future
earnings in the United States resulting in the recognition of a
deferred tax benefit of $104.7 million ($.88 per diluted share). Further, the
reversal of the allowance increased stockholders' equity by $32.6 million as the
Company recognized the tax effects of previous stock option exercises and
deferred hedging gains and losses in other comprehensive income.will approximate statutory rates.
Pioneer will continue to monitor Company-specific, oil and gas industry and
worldwide economic factors and will reassessassess the likelihood that the Company's net
operating loss carryforwards and other deferred tax attributes in the United
States and foreign tax jurisdictions will be utilized prior to their expiration.
There can be no assurances that
facts and circumstances will not materially change and require the Company to
reestablish a United States deferred tax asset valuation allowance in a future
period. As of September 30, 2003,March 31, 2004, the Company does not believe there is
sufficient positive evidence to reverse its valuation allowances related to
certain foreign tax jurisdictions. The Company's valuation allowances related to foreign tax
jurisdictions are $53.4 million as of September 30, 2003.$102.1 million.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Income tax (provision) benefitprovision (benefit) attributable to income (loss) before cumulative
effect of change in accounting principle consists of the following for the
three and nine monththree-month periods ended September 30, 2003March 31, 2004 and 2002:2003:
Three months ended
Nine months ended
September 30, September 30,
--------------------- ---------------------March 31,
----------------------
2004 2003 2002 2003 2002
--------- ---------
--------- ---------
(in thousands)
Current:
U.S. state and local...........local......................... $ (201)1,003 $ (52) $ (839) $ (321)
Foreign........................ (3,595) (626) (8,138) (1,278)(22)
Foreign...................................... 6,054 2,072
-------- --------
-------- --------
(3,796) (678) (8,977) (1,599)
-------- --------7,057 2,050
-------- --------
Deferred:
U.S. state and local........... 104,670local......................... 35,509 -
104,670 -
Foreign........................ (979) (1,511) (732) (1,617)Foreign...................................... (2,789) 254
-------- --------
32,720 254
-------- --------
103,691 (1,511) 103,938 (1,617)
-------- -------- -------- --------
Total $ 99,89539,777 $ (2,189) $ 94,961 $ (3,216)
======== ========2,304
======== ========
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE D. Asset Acquisition
On March 28, 2003, the Company purchased the remaining 25 percent working
interest that it did not already own in the Falcon field, the Harrier field and
surrounding satellite prospects in the deepwater Gulf of Mexico for $119.4
million, including $113.1 million of cash paid upon closing, $1.7 million of
asset retirement obligations assumed and $4.6 million of closing adjustments.
NOTE E. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of minimizing costs of capital.
During August and February 2003,March 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge a portion of the fair value of its 9-5/87-1/2
percent senior notes. Under the terms of the interest rate swap contracts entered into during
August 2003 (the "August Contracts"), the Company contracted to receive a fixed
annual rate of 9-5/8 percent on $300.0 million notional amount and agreed to pay
the counterparties a variable rate on the notional amount equal to the six-month
LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of
521.0 basis points. The terms of the interest rate swap contracts entered into
during February 2003 (the "February Contracts") differed from thosematch the
scheduled maturity of the August Contracts only in notional amounthedged senior notes, require the counterparties to pay
the Company a 7-1/2 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six-month LIBOR Margin, which terms were
$250.0 million and 566.4 basis points, respectively.plus a weighted average annual margin of 3.71 percent. During
SeptemberFebruary 2003, the Company entered into similar interest rate swap contracts
which were terminated the August Contracts for $10.1 million of cash proceeds. The
cash proceeds were comprised of $1.2 million of settlement gains attributable to
the period from August 2003 through the date of termination and $8.9 million
attributable to the fair value, on the date of termination, of the remaining
term of the August Contracts. Duringduring May 2003 the Company terminated the
February Contracts for $11.4 million of cash proceeds. The cash proceeds were
comprisedAs of
$2.0 million of settlement gains attributable toMarch 31, 2004, the period from
February 2003 through the date of termination and $9.4 million attributable to
the fair value, on the date of termination, of the remaining term of the
February Contracts. The $8.9 million and $9.4 million of proceeds attributable
to the faircarrying value of the remaining termCompany's fair value hedges was a
liability of the August Contracts and February
Contracts are included in "Proceeds from disposition of assets" in the
accompanying Consolidated Statements of Cash Flows during the periods that the
hedges were terminated.$1.5 million.
As of September 30, 2003,March 31, 2004, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included $34.7$20.1 million of
incremental carrying value attributable to unamortized net deferred hedge gains realized fromon
terminated fair value hedge interest rate swap contracts.swaps that are being amortized as net reductions to
interest expense over the original terms of the terminated agreements. The
amortization of net deferred hedge gains on terminated interest rate swaps
reduced the Company's reported interest expense by $6.3$7.3 million and $2.3$5.9 million
during the three monththree-month periods ended September 30,March 31, 2004 and 2003, respectively.
Settlements of open fair value hedges reduced the Company's interest expense by
$167 thousand and 2002, respectively, and by $18.1 million and $7.9 million$867 thousand during the nine monththree-month periods ended September 30,March 31,
2004 and 2003, and 2002, respectively.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The following table sets forth, as of March 31, 2004, the scheduled
amortization of net deferred hedge gains and losses on terminated fair value hedges as of September 30, 2003agreements
that will be recognized as increases in the case of losses, or decreases in the
case of gains, to the Company's future interest expense:
First Second Third Fourth
Outstanding
Quarter Quarter Quarter Quarter Total
------- -------- ------- ------- ------- --------------------
(in thousands)
2003 net hedge gain amortization....... $ 7,948 $ 7,948
2004 net hedge gain amortization.......amortization...... $ 7,2666,116 $ 6,0745,489 $ 5,4474,555 $ 4,512 23,29916,160
2005 net hedge gain amortization.......amortization...... $ 4,2224,264 $ 2,7732,816 $ 2,2712,313 $ 1,533 10,799
Remaining1,575 10,968
2006 net losses to be amortized
through 2010......................... (7,329)
------
$34,717
======hedge gain amortization...... $ 1,441 $ 824 $ 676 $ 253 3,194
2007 net hedge gain (loss) amortization $ 123 $ (417) $ (684) $(1,003) (1,981)
2008 net hedge loss amortization...... $ (599) $ (747) $ (755) $ (899) (3,000)
2009 net hedge loss amortization...... $ (879) $(1,070) $(1,082) $(1,135) (4,166)
2010 net hedge loss amortization...... $(1,109) $ - $ - $ - (1,109)
--------
$ 20,066
========
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The terms of the fair value hedgeshedge agreements described above perfectly
matched the terms of the underlyinghedged senior notes. The Company did not exclude any
component of the derivatives' gains or losses from the measurement of hedge
effectiveness.
Cash flow hedges. The Company utilizes commodity swap and collar contracts
to (i) reduce the effect of price volatility on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) reduce commodity price risk associated with certain
capital projects. The Company has also utilizedutilizes interest rate swap agreementscontracts to
reduce the effect of interest rate volatility on the Company's variable rate
line of credit indebtedness and, from time to time, forward currency exchange
agreements to reduce the effect of U.S. dollar to Canadian dollar exchange rate
volatility.
Oil.Oil prices. All material sales contracts governing the Company's oil
production have been tied directly or indirectly to NYMEX prices. The following
table sets forth the Company's outstanding oil hedge contracts and the weighted
average NYMEX prices for those contracts as of September 30, 2003:March 31, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- --------------- -------- -------- -------- -----------
Daily oil production:
2003 - Swap Contracts
Volume (Bbl)................ 14,000 14,000
Price per Bbl............... $ 24.35 $ 24.35production hedged:
2004 - Swap Contracts
Volume (Bbl)................................. 24,000 14,000 14,000 14,000 14,000 14,00017,309
Price per Bbl...............Bbl................ $ 26.51 $ 24.65 $ 24.65 $ 24.65 $ 24.65 $ 24.6525.50
2005 - Swap Contracts
Volume (Bbl)................ 12,000 12,000 12,000 12,000 12,000................. 17,000 17,000 17,000 17,000 17,000
Price per Bbl...............Bbl................ $ 24.4424.93 $ 24.4424.93 $ 24.4424.93 $ 24.4424.93 $ 24.4424.93
2006 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.19 $ 26.19 $ 26.19 $ 26.19 $ 26.19
2007 - Swap Contracts
Volume (Bbl)................. 1,000 1,000 1,000 1,000 1,000
Price per Bbl................ $ 26.00 $ 26.00 $ 26.00 $ 26.00 $ 26.00
2008 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.09 $ 26.09 $ 26.09 $ 26.09 $ 26.09
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The Company reports average oil prices per Bbl including the effects of oil
quality adjustments and the net effect of oil hedges. The following table sets
forth the Company's oil prices, both reported (including hedge results) and
realized (excluding hedge results), and the net effect of settlements of oil
price hedges on oil revenue for the three and nine monththree-month periods ended September
30, 2003March 31, 2004 and
2002:2003:
Three months ended
Nine months ended
September 30, September 30,
----------------- -----------------March 31,
-------------------
2004 2003 2002 2003 2002
------- -------
------- -------
Average price reported per Bbl..................... $ 25.3528.31 $ 21.77 $ 25.14 $ 22.8625.82
Average price realized per Bbl..................... $ 28.2732.12 $ 24.43 $ 28.84 $ 21.91
Addition (reduction)30.92
Reduction to oil revenue (in millions)............... $ (9.1)(16.5) $ (7.2) $ (32.9) $ 8.2(14.7)
Natural gas liquids prices. During the three and nine monththree-month periods ended September 30,March 31,
2004 and 2003, and 2002, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at March 31, 2004.
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
prices, in order to mitigate the basis risk between NYMEX prices and actual
index prices.price. The following table sets forth the Company's outstanding gas hedge
contracts and the weighted average index prices for those contracts as of September 30, 2003:
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)March
31, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- -------------------- --------- --------- --------- -----------
Daily gas production:
2003 - Swap Contracts
Volume (Mcf)................... 310,000 310,000
Index price per MMBtu.......... $ 4.39 $ 4.39production hedged:
2004 - Swap Contracts
Volume (Mcf)................... 260,000 260,000 260,000 260,000 260,000280,000 280,000 280,000 280,000
Index price per MMBtu.......... $ 4.054.11 $ 4.054.11 $ 4.054.11 $ 4.05 $ 4.05
2004 - Collar Contracts
Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu.......... $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.604.11
2005 - Swap Contracts
Volume (Mcf)................... 60,000 60,000 60,000 60,000 60,000
Index price per MMBtu.......... $ 4.284.24 $ 4.284.24 $ 4.284.24 $ 4.284.24 $ 4.284.24
2006 - Swap Contracts
Volume (Mcf)................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu.......... $ 4.234.16 $ 4.234.16 $ 4.234.16 $ 4.234.16 $ 4.234.16
2007 - Swap Contracts
Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu.......... $ 3.753.51 $ 3.753.51 $ 3.753.51 $ 3.753.51 $ 3.753.51
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, and shrinkage adjustments and the net effect of gas hedges.
The following table sets forth the Company's gas prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of gas price hedges on gas revenue for the three and nine monththree-month
periods ended September 30, 2003March 31, 2004 and 2002:2003:
Three months ended
Nine months ended
September 30, September 30,
----------------- -----------------March 31,
--------------------
2004 2003 2002 2003 2002
------- -------
------- -------
Average price reported per Mcf...........Mcf........................ $ 3.644.41 $ 2.25 $ 3.91 $ 2.394.16
Average price realized per Mcf...........Mcf........................ $ 3.964.64 $ 2.09 $ 4.35 $ 2.12
Addition (reduction)5.05
Reduction to gas revenue (in millions)........................................... $ (18.9)(14.2) $ 5.8 $ (68.0) $ 26.3(35.7)
Hedge ineffectiveness and excluded items.ineffectiveness. During the three monththee-month periods ended September 30,March 31, 2004
and 2003, and 2002, the Company recognized other expense of $.3
million$44 thousand and $1.4$1.8 million,
respectively, related to the ineffective portions of
its cash flow hedging instruments. During the nine month periods ended September
30, 2003 and 2002, the Company recognized other expense of $2.6 million and $1.7
million, respectively, related to the ineffective portion of its cash flow hedging
instruments.
Accumulated other comprehensive income (loss) ("AOCI") - net deferred hedge
gains (losses),losses, net of tax. As of September 30, 2003March 31, 2004 and December 31, 2002, "AOCI2003, AOCI - net
deferred hedge gains (losses),losses, net of tax"tax represented net deferred losses of $55.0$158.9
million and net deferred gains of $9.6$104.1 million, respectively. The "AOCIAOCI - net deferred hedge gains (losses),losses,
net of tax"tax balance as of September 30, 2003March 31, 2004 was comprised of $118.3$276.3 million of unrealizednet
deferred hedge losses on the effective portions of open commodity cash flow
hedges, $40.0$34.1 million of net deferred gains on terminated cash flow hedges and
$23.3$83.2 million of associated net deferred tax benefits. The decreaseincrease in "AOCIAOCI -
net deferred hedge gains (losses),losses, net of tax"tax during the ninethree months ended September 30,
2003March 31,
2004 was primarily attributable to increases in future commodity prices relative
to the commodity prices stipulated in the hedge agreements,contracts, partially offset by
the reclassification of net deferred hedge losses to net income as derivatives
matured by their terms and the reversal of associated United States deferred tax
valuation allowances.terms. The unrealized net deferred hedge losses associated with
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited) open cash
flow hedges remain subject to market price fluctuations until the positions are
either settled under the terms of the hedge agreementscontracts or terminated prior to
settlement. The net deferred hedge gains on terminated cash flow hedges are
fixed.
During the twelve months ending September 30, 2004,March 31, 2005, based on current estimates
of future commodity prices, the Company expects to reclassify $75.1$188.5 million of
net deferred losses associated with open cash flow hedges $27.8and $33.2 million of
net deferred gains on terminated cash flow hedges from AOCI - net deferred hedge
losses, net of tax to oil and gas revenues. The Company also expects to
reclassify approximately $16.6$56.7 million of net deferred income tax benefits
during the twelve months ending March 31, 2005 from "AOCIAOCI - net deferred hedge
gains (losses),losses, net of tax"tax to oil and gas revenue and income tax (provision) benefit.provision.
The following table sets forth, as of March 31, 2004, the scheduled
reclassifications of pretax
net deferred hedge gains and losses on terminated cash flow hedges as of
September 30, 2003
that will be recognized in the Company's future oil and gas revenue:revenues:
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ----------------
(in thousands)
2003 net deferred hedge losses.... $(5,141) $(5,141)
2004 net deferred hedge gains..... $10,978 $10,932 $11,001 $10,954 43,865$32,887
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
------
$39,973$34,136
======
The net deferred commodity hedge gains and losses shown in the table above
include the following gains and losses for which cash settlements have been
deferred until the indicated future periods: (i) $22.8 million of net deferred
losses due during the fourth quarter of 2003, (ii) $1.2 million of net deferred
losses due during 2004 and (iii) $209 thousand of net deferred gains to be
received during 2005.
NOTE F.E. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provisionsprovision of SFAS 143 on
January 1, 2003. The Company's asset retirement obligations primarily relate to
the future plugging and abandonment of proved properties and related facilities.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS 143 during the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and in accordance with the provisions of SFAS 19 during the
three and nine month periods ended September 30, 2002:2003:
Three months ended
NineMarch 31,
----------------------
2004 2003
--------- --------
(in thousands)
Beginning asset retirement obligations....................... $ 105,036 $ 34,692
Cumulative effect adjustment................................. - 23,393
New wells placed on production and changes in estimates...... 2,732 6,965
Liabilities settled.......................................... (2,597) (2,442)
Accretion expense............................................ 1,966 1,094
Currency translation......................................... (103) 472
-------- -------
Ending asset retirement obligations ......................... $ 107,034 $ 64,174
======== =======
NOTE F. Postretirement Benefit Obligations
As of March 31, 2004 and December 31, 2003, the Company had recorded $15.5
million and $15.6 million, respectively, of unfunded accumulated postretirement
benefit obligations in the accompanying Consolidated Balance Sheets. The
following table reconciles changes in the Company's unfunded accumulated
postretirement benefit obligations during the three-month periods ended March
31, 2004 and 2003:
Three months ended
September 30, September 30,
------------------- -------------------March 31,
----------------------
2004 2003 2002 2003 2002
-------- --------
-------- --------
(in thousands)
Beginning asset retirement obligations.....accumulated postretirement benefit obligations........ $ 65,22315,556 $ 37,294 $ 34,692 $ 39,461
Cumulative effect adjustment............... - - 23,393 -
Liabilities incurred during period......... 7,740 - 14,755 -
Liabilities settled during period.......... (907) (3,028) (4,283) (5,836)19,743
Benefit payments................................................ (339) (240)
Service costs................................................... 58 51
Accretion expense.......................... 1,327 622 3,656 1,905
Currency translation....................... (36) 104 1,134 (538)
------- -------of discounts.......................................... 226 372
------- -------
Ending asset retirement obligations .......accumulated postretirement benefit obligations........... $ 73,34715,501 $ 34,992 $ 73,347 $ 34,992
======= =======19,926
======= =======
NOTE G. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental to
its business, including, but not limited to, the proceedings described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. The Company believes that
the ultimate disposition of these legal actions will not have a material adverse
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
effect on the Company's consolidated financial position, liquidity, capital
resources or future results of operations. The Company will continue to evaluate
its litigation matters on a quarter-by-quarterquarter-by- quarter basis and will adjust its
litigation reserves as appropriate to reflect the then current status of
litigation.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings to add claims regarding
the field compression installed by the Company in the 1990's. The lawsuitand it now hascontains two
material claims. First, the plaintiffs assert that thethey were improperly charged
expenses related
to the(primarily field compressioncompression), which are a "cost of production", and
for which plaintiffs, cannot
be charged their proportionate share underas royalty owners, are not responsible. Second, the
applicable oil and gas leases.
Second, the15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
plaintiffs claim they are entitled to 100 percent of the value of the helium
extracted at the Company's Satanta gas plant. If the plaintiffs were to prevail
on the above two claims in their entirety, it is possible that the Company's
liability (both for periods covered by the lawsuit and from the last date
covered by the lawsuit to the present - because the deductions continue to be
taken and the plaintiffs continue to be paid for a royalty share of the helium)
could reach $33.8$65 million, plus prejudgment interest. However, the Company
believes it has valid defenses to the plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases and other
agreements, and intends to vigorously defend itself.
The Company believesdoes not believe the cost of the field compression is notcosts it has deducted are a "cost of
production", but is rather an expense of transporting. The costs being deducted are post production costs incurred to
transport the gas to the Company's Satanta gas plant for processing, where the
valuable hydrocarbon liquids and helium are extracted from the gas. The
plaintiffs benefit from such extractions and the Company believes that charging
the plaintiffs with their proportionate share of such transportation and
processing expenses is consistent with Kansas law.law and with the parties'
agreements.
The Company has also vigorously defended against the plaintiffs' claims to
100 percent of the value of the helium extracted, and believes that in
accordance with applicable law, it has properly accounted to the plaintiffs for
their fractional royalty share of the helium under the specified royalty clauses
of the respective oil and gas leases.
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to the plaintiffs and believes it presented strong
evidence at trial to support its positions. The Company has not yet determined
the amount of damages, if any, that would be payable if the Court were to render
an adverse judgement against the Company. Although the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the quarterly reporting period in which such liability is
recorded, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity, capital resources or future annual results of operations.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows a
"severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, one of the
Company's predecessor entities collected the Kansas ad valorem tax in addition
to the otherwise maximum lawful price. The FERC's ruling was appealed to the
United States Court of Appeals for the District of Columbia ("D.C. Circuit"),
which held in June 1988 that the FERC failed to provide a reasonable basis for
its findings and remanded the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limited the effect of its decision to Kansas ad valorem taxes for sales made
on or after June 28, 1988. The FERC clarified the effective date of its decision
by an order dated May 18, 1994. The order clarified that the effective date
applies to tax bills rendered after June 28, 1988, not sales made on or after
that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various gas producers subsequently
filed a petition for writ of certiori with the United States Supreme Court
seeking to limit the scope of the potential refunds to tax bills rendered on or
after June 28, 1988 (the effective date originally selected by the FERC).
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking a waiver or set-off from the FERC
with respect to that portion of the refund associated with (i) non-recoupablenonrecoupable
royalties, (ii) non-recoupablenonrecoupable Kansas property taxes based, in part, upon the
higher prices collected and (iii) interest for all periods. On September 10,
1997, the FERC denied this request, and on October 10, 1997, the Company and
other producers filed a request for rehearing. Pipelines were given until
November 10, 1997 to file claims on refunds sought from producers and refund
claims totaling approximately $30.2 million were made against the Company.
Through September 30,
2003,March 31, 2004, the Company has settled $21.7$21.6 million of the original
claim amounts. As of September 30, 2003March 31, 2004 and December 31, 2002,2003, the Company had on
deposit $10.5$10.7 million, and $10.6 million, respectively, including accrued interest, in an escrow account and had
a corresponding obligationsobligation for the remaining claim recorded in other current
liabilities in the accompanying Consolidated Balance Sheets.Sheets as of March 31,
2004.
On December 1, 2003, an administrative law judge issued a Partial Initial
Decision denying the Company's request to allow any waiver or set-off from the
refunds and stating that the Company must pay the FERC interest rate on the
refund claims instead of the escrow interest rate. As of December 31, 2003, the
Company had accrued an additional $1.5 million obligation for the difference
between the escrow interest rate and the FERC interest rate. During the first
quarter of 2004, the FERC overruled this administrative law judge's decision as
it relates to the payment of interest and stated that the escrow interest rate
is sufficient. As of March 31, 2004, the Company reversed the additional $1.5
million obligation that had been recorded for the difference between the escrow
interest rate and the FERC interest rate. The Company intends to vigorously
appeal the administrative law judge's decision denying waiver or set-off from
the refunds and believes that the escrowed amounts, plus accrued interest,obligations will be sufficient to
settleresolve the remaining claims.
NOTE H. Income (Loss) Per Share Before Cumulative Effect of Change in Accounting
Principle
Basic income (loss) per share before cumulative effect of change in accounting
principle is computed by dividing income (loss) before cumulative effect of change in
accounting principle by the weighted average number of common shares outstanding
for the period. The computation of diluted income per share before cumulative
effect of change in accounting principle reflects the potential dilution that
could occur if securities or other contracts to issue common stock that are
dilutive to income before cumulative effect of change in accounting principle
were exercised or converted into common stock or resulted in the issuance of
common stock that would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average common shares outstanding duringfor the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and
2002:2003:
Three months ended
Nine months ended
September 30, September 30,
----------------- -----------------March 31,
---------------------
2004 2003
2002 2003 2002
------- ------- ------- --------------- --------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 117,216 116,193 116,990 111,227Basic............................................. 118,719 116,743
Dilutive common stock options (a)........... 1,006 - 1,106 1,662................. 1,177 1,793
Restricted stock awards..................... 235 - 187 -
------- ------- ------- -------
Diluted..................................... 118,457 116,193 118,283 112,889awards........................... 368 139
-------- --------
Diluted........................................... 120,264 118,675
======= ======= ======= ===============
- ------------------------
(a) Common stock options to purchase 1,179,76630,712 shares and 1,868,5881,377,519 shares of
common stock were outstanding but not included in the computations of
diluted income (loss)per share before cumulative effect of change in accounting
principle per share for the three monththree-month periods ended September 30,March 31, 2004 and 2003,
and 2002, respectively, and common stock options to purchase 1,308,582
shares and 2,024,455 shares of common stock were outstanding but not
included in the computations of diluted income before cumulative effect of
change in accounting principle per share for the nine month periods ended
September 30, 2003 and 2002,
respectively, because the exercise prices of the options were greater than
the average market price of the common shares and would have beenbe anti-dilutive to
the computations.
In-the-money options
representing 1,932,385 weighted average equivalent shares of common stock
and 395 weighted average equivalent shares of unvested restricted stock
were not included in the computation of diluted net loss before cumulative
effect of change in accounting principle for the three month period ended
September 30, 2002, since they have a dilutive effect to that period's
loss.
1817
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
NOTE I. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the oil
and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina, Canada and
Canada.Africa. Africa is primarily comprised of operations in Gabon, South Africa and
Tunisia.
The following tables provide the Company's interim geographic operating
segment data for the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and 2002.2003.
Geographic operating segment income tax benefits (provisions) have been
determined based on statutory rates existing in the various tax jurisdictions
where the Company has oil and gas producing activities. The "Headquarters and
Other" table column includes revenues and expenses that are not routinely
included in the earnings measures internally reported to management on a
geographic operating segment basis.
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- -------- ------- ------------ ------------
(in thousands)
Three month period ended September 30, 2003:
Revenues and other income:
Oil and gas............................ $285,623 $ 30,777 $ 15,592 $ 523 $ - $ 332,515
Interest and other..................... - - - - 348 348
Gain on disposition of assets, net..... (2) - - - 48 46
------- ------- ------- ------ ------- --------
285,621 30,777 15,592 523 396 332,909
------- ------- ------- ------ ------- --------
Costs and expenses:
Oil and gas production................. 61,456 6,616 3,689 45 - 71,806
Depletion, depreciation and
amortization......................... 80,160 13,651 7,156 161 2,406 103,534
Exploration and abandonments........... 17,275 1,275 1,789 4,177 - 24,516
General and administrative............. - - - - 15,207 15,207
Accretion of discount on asset
retirement obligations............... - - - - 1,327 1,327
Interest............................... - - - - 23,212 23,212
Other.................................. - - - - 1,389 1,389
------- ------- ------- ------ ------- --------
158,891 21,542 12,634 4,383 43,541 240,991
------- ------- ------- ------ ------- --------
Income (loss) before income taxes........ 126,730 9,235 2,958 (3,860) (43,145) 91,918
Income tax benefit (provision)........... (46,256) (3,232) (1,168) 1,351 149,200 99,895
------- ------- ------- ------ ------- --------
Net income (loss) ....................... $ 80,474 $ 6,003 $ 1,790 $(2,509) $106,055 $ 191,813
======= ======= ======= ====== ======= ========
Three month period ended September 30, 2002:
Revenues and other income:
Oil and gas............................ $137,155 $ 19,149 $ 12,013 $ - $ - $ 168,317
Interest and other..................... - - - - 7,083 7,083
Gain on disposition of assets, net..... 3,087 - - - 266 3,353
------- ------- ------- ------ ------- --------
140,242 19,149 12,013 - 7,349 178,753
------- ------- ------- ------ ------- --------
Costs and expenses:
Oil and gas production................. 43,713 3,622 2,635 - - 49,970
Depletion, depreciation and
amortization......................... 33,607 12,227 6,713 - 2,201 54,748
Exploration and abandonments........... 12,557 2,843 1,429 1,495 - 18,324
General and administrative............. - - - - 12,466 12,466
Interest............................... - - - - 20,347 20,347
Other.................................. - - - - 21,599 21,599
------- ------- ------- ------ ------- --------
89,877 18,692 10,777 1,495 56,613 177,454
------- ------- ------- ------ ------- --------
Income (loss) before income taxes........ 50,365 457 1,236 (1,495) (49,264) 1,299
Income tax benefit (provision)........... (17,628) (160) (521) 523 15,597 (2,189)
------- ------- ------- ------ ------- --------
Net income (loss) ....................... $ 32,737 $ 297 $ 715 $ (972) $(33,667) $ (890)
======= ======= ======= ====== ======= =========
1918
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada ForeignAfrica and Otherother Total
----------------- --------- -------- -------- ------------ ------------
(in thousands)
Nine month periodThree months ended September 30,March 31, 2004:
Revenues and other income:
Oil and gas revenues.............. $357,308 $ 30,883 $ 18,219 $ 40,116 $ - $ 446,526
Interest and other................ - - - - 1,735 1,735
Gain (loss) on disposition
of assets, net.................. 51 - - - (64) (13)
------- ------- ------- ------- ------- --------
357,359 30,883 18,219 40,116 1,671 448,248
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production............ 66,019 6,759 7,949 8,484 - 89,211
Depletion, depreciation and
amortization.................... 97,371 12,542 7,475 16,396 2,715 136,499
Exploration and abandonments...... 53,556 3,550 12,976 10,424 - 80,506
General and administrative........ - - - - 18,329 18,329
Accretion of discount on asset
retirement obligations.......... - - - - 1,966 1,966
Interest.......................... - - - - 21,576 21,576
Other............................. - - - - 196 196
------- ------- ------- ------- ------- --------
216,946 22,851 28,400 35,304 44,782 348,283
------- ------- ------- ------- ------- --------
Income (loss) before income taxes.. 140,413 8,032 (10,181) 4,812 (43,111) 99,965
Income tax benefit (provision)..... (51,251) (2,811) 3,843 (1,162) 11,604 (39,777)
------- ------- ------- ------- ------- --------
Net income (loss).................. $ 89,162 $ 5,221 $ (6,338) $ 3,650 $(31,507) $ 60,188
======= ======= ======= ======= ======= ========
United Headquarters Consolidated
States Argentina Canada Africa and other Total
-------- --------- -------- -------- ------------ ------------
(in thousands)
Three months ended March 31, 2003:
Revenues and other income:
Oil and gas............................gas revenues.............. $239,251 $ 819,75823,381 $ 79,632 $ 53,712 $ 52322,367 $ - $ 953,625- $ 284,999
Interest and other.....................other................ - - - - 4,321 4,3212,713 2,713
Gain on disposition of assets,
net..... 1,319net............................. 1,246 - 1 - 256 1,576
--------179 1,426
------- ------- ------- ---------------- ------- --------
821,077 79,632 53,713 523 4,577 959,522
--------240,497 23,381 22,368 - 2,892 289,138
------- ------- ------- ---------------- ------- --------
Costs and expenses:
Oil and gas production................. 177,377 18,204 9,761 45production............ 55,537 5,409 6,921 - 205,387- 67,867
Depletion, depreciation and
amortization......................... 211,457 33,970 21,458 161 7,096 274,142amortization.................... 52,858 8,326 6,551 - 2,314 70,049
Exploration and abandonments........... 57,665 10,847 14,949 23,969abandonments...... 17,787 3,044 11,327 3,709 - 107,43035,867
General and administrative.............administrative........ - - - - 44,332 44,33215,481 15,481
Accretion of discount on asset
retirement obligations...............obligations.......... - - - - 3,656 3,656
Interest...............................1,094 1,094
Interest.......................... - - - - 69,526 69,526
Other..................................22,491 22,491
Other............................. - - - - 12,205 12,205
--------5,178 5,178
------- ------- ------- ---------------- ------- --------
446,499 63,021 46,168 24,175 136,815 716,678
--------126,182 16,779 24,799 3,709 46,558 218,027
------- ------- ------- ---------------- ------- --------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle ................. 374,578 16,611 7,545 (23,652) (132,238) 242,844principle........... 114,315 6,602 (2,431) (3,709) (43,666) 71,111
Income tax benefit (provision).......... (136,721) (5,814) (2,979) 8,278 232,197 94,961
--------..... (40,010) (2,311) 960 1,298 37,759 (2,304)
------- ------- ------- --------------- ------- --------
Income (loss) before cumulative
effect of change in accounting
principle.....principle......................... $ 237,85774,305 $ 10,7974,291 $ 4,566 $(15,374)(1,471) $ 99,959(2,411) $ 337,805
========(5,907) $ 68,807
======= ======= ======= ======== ========
Nine month period ended September 30, 2002:
Revenues and other income:
Oil and gas........................... $ 411,139 $ 57,459 $ 37,688 $ - $ - $ 506,286
Interest and other.................... - - - - 9,089 9,089
Gain (loss) on disposition of
assets, net......................... 3,249 (3) 1,010 - 118 4,374
-------- ------- ------- ------- -------- --------
414,388 57,456 38,698 - 9,207 519,749
-------- ------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production................ 132,725 10,023 7,957 - - 150,705
Depletion, depreciation and
amortization........................ 97,594 31,263 20,758 - 6,466 156,081
Exploration and abandonments.......... 39,841 6,631 5,272 5,560 - 57,304
General and administrative............ - - - - 35,142 35,142
Interest.............................. - - - - 71,405 71,405
Other................................. - - - - 37,603 37,603
-------- ------- ------- ------- -------- --------
270,160 47,917 33,987 5,560 150,616 508,240
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes...... 144,228 9,539 4,711 (5,560) (141,409) 11,509
Income tax benefit (provision)......... (50,480) (3,339) (1,986) 1,946 50,643 (3,216)
-------- ------- ------- ------- -------- --------
Net income (loss)...................... $ 93,748 $ 6,200 $ 2,725 $ (3,614) $ (90,766) $ 8,293
======== ======= ======= ======= ======== ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE J. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed the
long-termcertain
debt securities of the Company. In accordance with practices accepted by the
SEC, the Company has prepared Consolidating Condensed Financial Statements in
order to quantify the assets and results of operations of Pioneer USA as a
subsidiary guarantor. The following Consolidating Condensed Balance Sheets as of
March 31, 2004 and December 31, 2003, and Consolidating Condensed Statements of
Operations and Comprehensive Income (Loss) and Consolidating Condensed Statements of
Cash Flows for the three-month periods ended March 31, 2004 and 2003 present
financial information for Pioneer Natural Resources Company as the Parent on a
stand-alonestand- alone basis (carrying any investments in subsidiaries under the equity
method), financial information for Pioneer USA on a stand-alone basis (carrying
any investment in non-guarantor subsidiaries under the equity method), financial
information for the non- guarantornon-guarantor subsidiaries of the Company on a consolidated
basis, the consolidation and elimination entries necessary to arrive at the
information for the Company on a consolidated basis, and the financial
information for the Company on a consolidated basis. Pioneer USA is not
restricted from making distributions to the Company.
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2003March 31, 2004
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.............equivalents................. $ 2,18219 $ 1,7621,063 $ 8,7077,940 $ - $ 12,6519,022
Other current assets, net............. 1,706,269 (1,389,079) (134,103)net................. 1,550,774 (1,248,898) (88,185) - 183,087213,691
--------- ---------- ---------- ---------- ----------
Total current assets................. 1,550,793 (1,247,835) (80,245) - 222,713
--------- ---------- ---------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties...................... - 3,549,681 1,520,052 - 5,069,733
Unproved properties.................... - 24,492 152,088 - 176,580
Accumulated depletion, depreciation and
amortization............................ - (1,302,712) (505,756) - (1,808,468)
--------- ---------- ---------- ---------- ----------
Total property, plant and equipment.. - 2,271,461 1,166,384 - 3,437,845
--------- ---------- ---------- ---------- ----------
Deferred income taxes....................... 193,555 - 5,032 - 198,587
Other property and equipment, net........... - 24,349 4,121 - 28,470
Other assets, net........................... 14,325 18,147 8,197 - 40,669
Investment in subsidiaries.................. 1,708,426 227,547 - (1,935,973) -
--------- ---------- --------- ---------- ----------
$3,467,099 $ 1,293,669 $1,103,489 $(1,935,973) $ 3,928,284
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................... $ 42,740 $ 349,439 $ 71,399 $ - $ 463,578
Long-term debt.............................. 1,456,695 - - - 1,456,695
Other liabilities........................... 1,546 269,822 (34,016) - 237,352
Deferred income taxes....................... - - 12,832 - 12,832
Stockholders' equity........................ 1,966,118 674,408 1,053,274 (1,935,973) 1,757,827
Commitments and contingencies
--------- ---------- --------- ---------- ----------
$3,467,099 $ 1,293,669 $1,103,489 $(1,935,973) $ 3,928,284
========= ========== ========= ========== ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2003
(in thousands)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $ 369 $ 4,225 $ 14,705 $ - $ 19,299
Other current assets, net................. 1,654,575 (1,354,256) (114,503) - 185,816
--------- ---------- --------- ---------- ----------
Total current assets............. 1,708,451 (1,387,317) (125,396)assets................. 1,654,944 (1,350,031) (99,798) - 195,738205,115
--------- ---------- --------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties..................properties...................... - 3,340,061 1,427,2203,508,365 1,475,193 - 4,767,2814,983,558
Unproved properties................properties.................... - 25,844 156,58525,460 154,365 - 182,429179,825
Accumulated depletion, depreciation and
amortization........................amortization............................ - (1,124,926) (430,783)(1,208,700) (467,436) - (1,555,709)(1,676,136)
--------- ---------- --------- ---------- ----------
Total property, plant and equipment.. - 2,240,979 1,153,0222,325,125 1,162,122 - 3,394,0013,487,247
--------- ---------- --------- ---------- ----------
Noncurrent deferredDeferred income taxes........ 186,935taxes....................... 190,492 - 1,7771,852 - 188,712192,344
Other property and equipment, net.......net........... - 21,607 4,12623,890 4,190 - 25,73328,080
Other assets, net....................... 14,094 16,863 6,469net........................... 14,836 17,076 6,874 - 37,42638,786
Investment in subsidiaries.............. 1,511,495 158,123subsidiaries.................. 1,604,534 167,515 - (1,669,618)(1,772,049) -
--------- ---------- --------- ---------- ----------
$3,420,975$3,464,806 $ 1,050,255 $1,039,998 $(1,669,618)1,183,575 $1,075,240 $(1,772,049) $ 3,841,6103,951,572
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.....................liabilities......................... $ 32,59329,978 $ 257,300347,720 $ 32,93852,054 $ - $ 322,831429,752
Long-term debt.......................... 1,621,364debt.............................. 1,555,461 - - - 1,621,364
Noncurrent deferred1,555,461
Other liabilities........................... - 226,055 (31,589) - 194,466
Deferred income taxes........taxes....................... - - 12,71312,121 - 12,713
Other noncurrent liabilities............ - 194,712 (25,915) - 168,79712,121
Stockholders' equity.................... 1,767,018 598,243 1,020,262 (1,669,618) 1,715,905equity........................ 1,879,367 609,800 1,042,654 (1,772,049) 1,759,772
Commitments and contingencies...........contingencies
--------- ---------- --------- ---------- ----------
$3,420,975$3,464,806 $ 1,050,255 $1,039,998 $(1,669,618)1,183,575 $1,075,240 $(1,772,049) $ 3,841,610
========= ========== ========= ========== ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2002
(in thousands)
ASSETS
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents............. $ 6 $ 1,783 $ 6,701 $ - $ 8,490
Other current assets, net............. 1,727,828 (1,480,657) (108,568) - 138,603
--------- ---------- --------- ---------- ----------
Total current assets............. 1,727,834 (1,478,874) (101,867) - 147,093
--------- ---------- --------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties.................. - 3,024,845 1,228,052 - 4,252,897
Unproved properties................ - 43,969 175,104 - 219,073
Accumulated depletion, depreciation and
amortization........................ - (947,091) (356,450) - (1,303,541)
--------- ---------- --------- ----------- ----------
- 2,121,723 1,046,706 - 3,168,429
--------- ---------- --------- ----------- ----------
Noncurrent deferred income taxes........ 75,311 - 1,529 - 76,840
Other property and equipment, net....... - 19,000 3,784 - 22,784
Other assets, net....................... 16,067 14,231 9,672 - 39,970
Investment in subsidiaries.............. 1,247,042 136,159 - (1,383,201) -
--------- ---------- --------- ---------- ----------
$3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,116
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,785 $ 216,065 $ 27,742 $ - $ 274,592
Long-term debt, net of current maturities 1,668,536 - - - 1,668,536
Noncurrent deferred income taxes........ - - 8,760 - 8,760
Other noncurrent liabilities............ - 147,970 (19,639) - 128,331
Stockholders' equity.................... 1,366,933 448,204 942,961 (1,383,201) 1,374,897
Commitments and contingencies...........
--------- ---------- --------- ---------- ----------
$3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,1163,951,572
========= ========== ========= ========== ==========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003March 31, 2004
(Unaudited)
CONSOLIDATINGCONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(LOSS)
For the NineThree Months Ended September 30, 2003March 31, 2004
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax Consolidated
Parent USA Subsidiaries Provision Eliminations Total
--------- ------------------ -------- ------------ ------------ ------------ -------------------------
Revenues and other income:
Oil and gas.........................gas................................ $ - $330,303 $ 753,928 $ 199,697116,223 $ - $ - $ 953,625446,526
Interest and other.................. - 1,796 2,525other......................... 69 811 855 - - 4,3211,735
Gain (loss) on disposition of assets, net.. - 1,469 10789 (102) - - 1,576(13)
------- ------- -------- --------- -------- ---------------- -------- --------
- 757,193 202,32969 331,203 116,976 - - 959,522448,248
------- ------- -------- --------- -------- ---------------- -------- --------
Costs and expenses:
Oil and gas production..............production..................... - 162,911 42,47660,360 28,851 - - 205,38789,211
Depletion, depreciation and amortization......................amortization... - 208,144 65,99896,309 40,190 - - 274,142136,499
Exploration and abandonments........abandonments............... - 59,123 48,30747,789 32,717 - - 107,43080,506
General and administrative.......... 998 34,828 8,506administrative................. 411 14,807 3,111 - - 44,33218,329
Accretion of discount on asset
retirement obligations............obligations................... - 2,824 8321,512 454 - - 3,656
Interest............................ 17,690 50,803 1,0331,966
Interest................................... 6,823 14,426 327 - - 69,52621,576
Equity (income) lossincome from subsidiaries...................... (268,108) 26,166subsidiaries............ (103,862) (4,160) - - 241,942108,022 -
Other............................... 72 2,191 9,942Other...................................... - (1,181) 1,377 - - 12,205196
------- ------- -------- --------- -------- ---------------- -------- --------
(249,348) 546,990 177,094(96,628) 229,862 107,027 - 241,942 716,678108,022 348,283
------- ------- -------- --------- -------- ---------------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle............... 249,348 210,203 25,235taxes.................... 96,697 101,341 9,949 - (241,942) 242,844(108,022) 99,965
Income tax benefit (provision).......provision.......................... - - (8,909) 103,870(3,268) (36,509) - 94,961(39,777)
------- ------- -------- --------- -------- --------- -------- --------
Income before cumulative effect of
change in accounting principle..... 249,348 210,203 16,326 103,870 (241,942) 337,805
Cumulative effect of change in
accounting principle, net of tax... - 11,859 3,554 - - 15,413
-------- --------- -------- ---------------- -------- --------
Net income........................... 249,348 222,062 19,880 103,870 (241,942) 353,218income.................................... 96,697 101,341 6,681 (36,509) (108,022) 60,188
Other comprehensive income (loss):
Net deferred hedge gains (losses),losses, net of tax:
Net deferred hedge losses........losses................ - (176,351) (12,407)(111,230) (6,162) - - (188,758)
Deferred income tax valuation
reserve adjustment(117,392)
Tax benefits related to hedging....................net deferred
hedge losses........................... - - 167 31,704 - 23,288 - 23,28831,871
Net hedge losses included in net income........................income.. - 93,114 7,75824,367 6,405 - - 100,87230,772
Translation adjustment.............adjustment..................... - - 28,808(2,241) - - 28,808(2,241)
------- ------- -------- --------- -------- --------------- -------- --------
Comprehensive income.................income.......................... $ 249,34896,697 $ 138,82514,478 $ 44,0394,850 $ 127,158 $(241,942)(4,805) $(108,022) $ 317,4283,198
======= ======= ======== ========= ======== ========= ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax Consolidated
Parent USA Subsidiaries Provision Eliminations Total
--------- ---------- ------------ ------------ ------------ ------------
Revenues and other income:
Oil and gas........................ $ - $ 386,021 $ 120,265 $ - $ - $ 506,286
Interest and other................. - 7,143 1,946 - - 9,089
Gain on disposition of assets, net. - 3,224 1,150 - - 4,374
------- --------- -------- --------- -------- --------
- 396,388 123,361 - - 519,749
------- --------- -------- --------- -------- --------
Costs and expenses:.................
Oil and gas production............ - 127,402 23,303 - - 150,705
Depletion, depreciation and
amortization.................... - 98,268 57,813 - - 156,081
Exploration and abandonments...... - 41,131 16,173 - - 57,304
General and administrative........ 945 27,518 6,679 - - 35,142
Interest.......................... 62,036 9,166 203 - - 71,405
Equity (income) loss from
subsidiaries.................... (24,243) 5,856 - - 18,387 -
Other............................. (47,031) 56,430 28,204 - - 37,603
-------- --------- -------- --------- -------- --------
(8,293) 365,771 132,375 - 18,387 508,240
-------- --------- -------- --------- -------- --------
Income (loss) before income taxes 8,293 30,617 (9,014) - (18,387) 11,509
Income tax provision ............... - - (3,216) - - (3,216)
-------- --------- -------- --------- -------- --------
Net income (loss)................... 8,293 30,617 (12,230) - (18,387) 8,293
Other comprehensive income (loss):
Net deferred hedge gains (losses),
net of tax:
Net deferred hedge losses....... (4) (94,816) (18,540) - - (113,360)
Net hedge (gains) losses
included in net income
(loss)........................ 447 (29,023) (5,571) - - (34,147)
Translation adjustment............ - - 1,827 - - 1,827
-------- --------- -------- --------- -------- --------
Comprehensive income (loss)......... $ 8,736 $ (93,222) $ (34,514) $ - $ (18,387) $(137,387)
======== ========= ======== ================ ======== ========
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,March 31, 2004
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
-------- --------- ------------ ------------ ------------
Revenues and other income:
Oil and gas............................... $ - $ 214,715 $ 70,284 $ - $ 284,999
Interest and other........................ - 786 1,927 - 2,713
Gain on disposition of assets, net........ - 1,230 196 - 1,426
------- -------- -------- ------- ---------
- 216,731 72,407 - 289,138
------- -------- -------- ------- ---------
Costs and expenses:
Oil and gas production.................... - 50,529 17,338 - 67,867
Depletion, depreciation and amortization.. - 51,830 18,219 - 70,049
Exploration and abandonments.............. - 19,792 16,075 - 35,867
General and administrative................ 295 12,310 2,876 - 15,481
Accretion of discount on asset
retirement obligations.................. - 857 237 - 1,094
Interest.................................. 5,081 17,192 218 - 22,491
Equity (income) loss from subsidiaries.... (89,626) 5,454 - 84,172 -
Other..................................... 30 813 4,335 - 5,178
------- -------- -------- ------- ---------
(84,220) 158,777 59,298 84,172 218,027
------- -------- -------- ------- ---------
Income before income taxes and cumulative
effect of change in accounting
principle................................. 84,220 57,954 13,109 (84,172) 71,111
Income tax provision......................... - - (2,304) - (2,304)
------- -------- -------- ------- ---------
Income before cumulative effect of change
in accounting principle................... 84,220 57,954 10,805 (84,172) 68,807
Cumulative effect of change in accounting
principle, net of tax..................... - 11,859 3,554 - 15,413
------- -------- -------- ------- ---------
Net income................................... 84,220 69,813 14,359 (84,172) 84,220
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses............... - (103,549) (12,615) - (116,164)
Tax benefits related to net deferred
hedge losses.......................... - - (268) - (268)
Net hedge losses included in net income. - 44,444 5,919 - 50,363
Translation adjustment.................... - - 12,192 - 12,192
-------- -------- -------- ------- ---------
Comprehensive income......................... $ 84,220 $ 10,708 $ 19,587 $(84,172) $ 30,343
======= ======== ======== ======= =========
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the NineThree Months Ended September 30,March 31, 2004
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by operating activities......... $ 86,721 $ 109,212 $ 57,697 $ 253,630
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............... - 285 - 285
Additions to oil and gas properties............... - (106,430) (60,796) (167,226)
Other property additions, net..................... - (3,612) (1,748) (5,360)
-------- -------- -------- --------
Net cash used in investing activities.......... - (109,757) (62,544) (172,301)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................... 56,083 - - 56,083
Principal payments on long-term debt.............. (146,083) - - (146,083)
Payment of other liabilities...................... - (2,617) (1,738) (4,355)
Purchase of treasury stock........................ (5,566) - - (5,566)
Exercise of long-term incentive plan stock
options......................................... 8,495 - - 8,495
-------- -------- -------- --------
Net cash used in financing activities.......... (87,071) (2,617) (1,738) (91,426)
-------- -------- -------- --------
Net decrease in cash and cash equivalents.......... (350) (3,162) (6,585) (10,097)
Effect of exchange rate changes on cash and
cash equivalents................................. - - (180) (180)
Cash and cash equivalents, beginning of period..... 369 4,225 14,705 19,299
-------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 19 $ 1,063 $ 7,940 $ 9,022
======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities........activities...................................... $(106,957) $ 21,453198,841 $ 355,79944,905 $ 169,424 $ 546,676136,789
-------- -------- -------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 18,267 16,124 615 35,006assets............... - 15,472 81 15,553
Additions to oil and gas properties..............properties............... - (351,174) (170,811) (521,985)(204,983) (47,770) (252,753)
Other property (additions) dispositions, net.....net...... - (10,948) 2,778 (8,170)(2,358) 77 (2,281)
-------- -------- -------- ---------
----------
Net cash provided by (used in)used in investing activities.................................. 18,267 (345,998) (167,418) (495,149)activities.......... - (191,869) (47,612) (239,481)
-------- -------- -------- --------- ----------
Cash flows from financing activities:
Borrowings under long-term debt.................. 222,725debt................... 116,628 - - 222,725116,628
Principal payments on long-term debt............. (270,262)debt.............. (15,000) - - (270,262)(15,000)
Payment of other noncurrent liabilities..........liabilities...................... - (9,822) (1,275) (11,097)(6,292) (88) (6,380)
Exercise of long-term incentive plan stock
options and employee stock
purchases..................................... 12,342options......................................... 5,346 - - 12,342
Purchase of treasury stock....................... (2,349) - - (2,349)5,346
-------- -------- -------- ---------
----------
Net cash used inprovided by (used in) financing
activities......... (37,544) (9,822) (1,275) (48,641)activities................................... 106,974 (6,292) (88) 100,594
-------- -------- -------- --------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,176 (21) 731 2,886equivalents...................................... 17 680 (2,795) (2,098)
Effect of exchange rate changes on cash and
cash equivalents...............................equivalents................................. - - 1,275 1,275466 466
Cash and cash equivalents, beginning of period....period..... 6 1,783 6,701 8,490
-------- -------- -------- --------- ----------
Cash and cash equivalents, end of period..........period........... $ 2,18223 $ 1,7622,463 $ 8,7074,372 $ 12,6516,858
========= ======== ======== ======== ========= ==========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE K. Subsequent Events
Permian Basin acquisition. On April 1, 2004, the Nine Months Ended September 30, 2002
(in thousands)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities..................................... $(299,553) $ 259,502 $ 268,305 $ 228,254
-------- -------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 31,994 85,682 1,155 118,831
Additions to oil and gas properties.............. - (284,367) (205,366) (489,733)
Other property additions, net.................... - (7,466) (1,069) (8,535)
-------- -------- --------- ----------
Net cash provided by (used in) investing
activities.................................. 31,994 (206,151) (205,280) (379,437)
-------- -------- --------- ----------
Cash flows from financing activities:
Borrowings under long-term debt.................. 466,668 - - 466,668
Principal payments on long-term debt............. (442,583) - - (442,583)
Common stock issuance proceeds, net of issuance
costs.......................................... 236,000 - - 236,000
Payment of other noncurrent liabilities.......... - (43,886) (59,818) (103,704)
Exercise of stock options and employee stock
purchases...................................... 10,756 - - 10,756
Deferred debt issuance costs..................... (3,293) - - (3,293)
-------- -------- --------- ----------
Net cash provided by (used in) financing
activities.................................. 267,548 (43,886) (59,818) 163,844
-------- -------- --------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... (11) 9,465 3,207 12,661
Effect of exchange rate changes on cash and
cash equivalents............................... - - (1,493) (1,493)
Cash and cash equivalents, beginning of period.... 79 10,900 3,355 14,334
-------- -------- --------- ----------
Cash and cash equivalents, end of period.......... $ 68 $ 20,365 $ 5,069 $ 25,502
======== ======== ========= ==========
23Company completed the
acquisition of various working interests in approximately 600 Spraberry field
oil wells, 400 of which were already operated by the Company. The total purchase
price of this acquisition was $19.7 million, including normal purchase
adjustments.
Proposed merger with Evergreen Resources, Inc. On May 3, 2004, the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Evergreen Resources, Inc. ("Evergreen"), a publicly traded independent oil and
gas company primarily engaged in the operation, development, production,
exploration and acquisition of North American unconventional natural gas.
Evergreen is based in Denver, Colorado and is one of the leading developers of
coal bed methane reserves in the United States. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary. The Merger Agreement
provides for a merger by which Evergreen will become a subsidiary of Pioneer
(the "Proposed Merger").
In accordance with the Merger Agreement, holders of 44 million shares of
Evergreen common stock will have the right to receive an aggregate of
approximately 25 million shares of Pioneer common stock (with related
stockholders rights) and a total of approximately $850 million in cash. This
represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock-based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be as set forth in the
first sentence of this paragraph.
In addition, Evergreen will seek to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment of the greater of (i) $.35 per share (approximately $15
million) as consideration from Pioneer for the Kansas properties in the Proposed
Merger, or (ii) the gross proceeds less transaction costs from the sale of the
Kansas properties to a third party that closes before the closing date of the
Proposed Merger.
The Company intends to file with the SEC a Registration Statement on Form
S-4 relating to the shares of Pioneer common stock to be issued in the Proposed
Merger. A portion of such registration statement will constitute a proxy
statement/prospectus to be submitted to the stockholders of Evergreen's common
stock and the Company's common stock for special meetings to be held by each
company's stockholders in connection with the Proposed Merger. It is expected
that such proxy statement/prospectus will be mailed to all stockholders during
the third quarter of 2004, and that such meeting will be held, and the Proposed
Merger will be consummated, during the second half of 2004. Since meetings of
both Evergreen's and Pioneer's stockholders are required in connection with the
Proposed Merger, in addition to a number of other conditions, there can be no
assurance that the Proposed Merger will occur.
25
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information included in Item 2 and Item 3 of this document includes
forward-looking statements that are made pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, and the business prospects of Pioneer Natural Resourcesthe Company, (the
"Company" or "Pioneer"), are subject to a number
of risks and uncertainties which may cause the Company's actual results in
future periods to differ materially from the forward-looking statements. These
risks and uncertainties include, among other things, volatility of oil and gas
prices, product supply and demand, competition, international operations and
associated international political and economic instability, government
regulation or action, litigation, the costs and results of drilling and
operations, the Company's ability to replace reserves or implement its business
plans, or complete its development
projects as scheduled, access to and cost of capital, uncertainties about estimates of reserves,
quality of technical data environmental and weatherenvironmental risks, acts of war and terrorism.
These and other risks are described in the Company's 20022003 Annual Report on Form
10-K that is available from the United
States Securities and Exchange Commission ("SEC").SEC.
Financial and Operating Performance
The Company's financial and operating performance for the thirdfirst quarter of
2004 included the following highlights:
o A 57% increase in oil and gas revenue over that of the first quarter
of 2003, was highlighted by strong productionresulting from increases in commodity prices and volumes
sold, as further described below.
o Growth in the Company's deepwater Gulf of Mexico Canyon Express andsales volumes,
including initial production from the Company-operated FalconHarrier field gas projects and
increasedduring January
2004.
o Higher than anticipated Argentine oil and gas sales in Argentina. Argentinevolumes,
primarily due to strong gas demand throughout their summer season.
o Higher than anticipated South African oil drilling results
exceeded expectations while a strengthening Argentine economy boosted gas sales.
The production growth achieved bysales due to one
additional cargo shipment during the Company, together with favorable worldwide
oil and North American gas prices, has resultedquarter.
o An 85 percent increase in significant increases in the
Company's net income and net cash provided by operating activities,
during the
three and nine month periods ended September 30, 2003, as compared to the same
respective periodsfirst quarter of 2002.2003, primarily resulting from
increased oil and gas sales.
o A $.10 per common share semiannual dividend declared by the board of
directors, payable on April 13, 2004 to shareholders of record on
March 29, 2004.
o Rating agencies upgrade of the Company to investment grade status in
response to improved financial position and earnings trends, along
with other factors specific to the Company.
The Company reportedrecorded net income of $191.8$60.2 million ($1.62 per diluted
share) and $353.2 million ($2.99.50 per diluted share)
for the three and nine month
periodsmonths ended September 30, 2003, respectively,March 31, 2004, as compared to a net loss of
$890 thousand ($.01 per diluted share) and net income of $8.3$84.2
million ($.07.71 per diluted share) for the same respective periods of 2002. The Company's net income
for the nine months ended September 30,period in 2003, includesincluding a $15.4
million ($.13 per
share) benefit from the cumulative effect of change in accounting principle,
net of tax, associated with the Company's adoption of Statement of Financial
Accounting Standards No.SFAS 143 "Accounting for Asset Retirement Obligations"
("SFAS 143") on January 1,
2003. See Notes B and FE of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for additional information regarding the
Company's adoption of newSFAS 143. Income before income taxes and cumulative effect
of change in accounting pronouncements.
Net income forprinciple increased by $28.9 million, or 41 percent,
during the threefirst quarter of 2004 as compared to that of the first quarter of
2003. However, as a result of the increase in earnings and nine month periods ended September 30, 2003 was
also positively impacted by the reversal of the
Company's United States deferred tax asset valuation allowances. See "Resultsallowances during the third
quarter of Operations - Income2003, the Company's income tax benefits
(provisions)" for information regardingprovision increased by $37.5 million
in the reversal of the United States
deferred tax asset valuation allowances.first-quarter-2004 to first-quarter-2003 comparison.
The Company's net cash provided by operating activities was $222.5
million and $546.7$253.6 million
for the three and nine month periodsmonths ended September
30, 2003, respectively,March 31, 2004, representing increasesan increase of $134.8$116.8
million, or 154
percent, and $318.4 million, or 140 percent, over theas compared to net cash provided by operating activities of $136.8
million for the same respective periods of 2002. Net cash provided
by operating activities during the three and nine month periods ended September
30, 2002 was $87.7 million and $228.3 million, respectively.period in 2003. During the three months ended September 30, 2003,March 31,
2004, the Company used its net cash provided by operating activities together with proceeds from the disposition of assets, to fund
$134.9$167.2 million of additions to oil and gas properties and, together with a
decease in cash on hand, to repay $92.0$90.0 million of long-term debt. Duringborrowings under
the nine months ended September 30, 2003,Company's $700 million revolving credit agreement (the "Revolving Credit
Agreement").
Proposed Merger with Evergreen Resources, Inc.
As described in Note K of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements", on May 3, 2004, the Company used its net cash provided by operating activities, togetherentered
into the Merger Agreement with proceeds from the disposition of assets, to fund $522.0 million of additions toEvergreen, a publicly traded independent oil and
gas company primarily engaged in the operation, development, production,
exploration and acquisition of North American unconventional natural gas.
26
Evergreen's operations are principally focused on developing and expanding its
coal bed methane project located in the Raton Basin in southern Colorado and its
recently acquired producing properties in the Piceance Basin in western
Colorado, the Uintah Basin in eastern Utah and the Western Canada Sedimentary.
The Merger Agreement provides for a merger by which Evergreen will become a
subsidiary of Pioneer.
Proposed purchase terms. In accordance with the Merger Agreement, holders
of 44 million shares of Evergreen common stock will have the right to repay $47.5receive an
aggregate of approximately 25 million shares of Pioneer common stock (with
related stockholders rights) and a total of approximately $850 million in cash.
This represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock- based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be as set forth in the
first sentence of this paragraph.
In addition, Evergreen will seek to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment of the greater of (i) $.35 per share (approximately $15
million) as consideration from Pioneer for the Kansas properties in the Proposed
Merger, or (ii) the gross proceeds less transaction costs from the sale of the
Kansas properties to a third party that closes before the closing date of the
Proposed Merger.
Strategic rationale. Pioneer's business strategy for sustaining above
average growth in per share value is predicated on the leveraging of its
long-lived foundation assets. Those foundation assets generate dependable
operating cash flows while requiring relatively low amounts of maintenance
capital. As a result, the Company's foundation assets provide free cash flows
(i.e., operating cash flows after maintenance capital expenditures) that finance
investments in high-impact, high-return exploration and acquisition
opportunities, such as the Company's investments in the deepwater Gulf of
Mexico, Alaska, South Africa, Tunisia and Gabon. The Proposed Merger offers an
opportunity for the Company to rebalance its portfolio of long-lived foundation
assets with the addition of Evergreen's onshore producing asset base and
low-risk development drilling program. Additionally, the Company's decision to
pursue the Proposed Merger was positively impacted by the compatible technical
and corporate cultures of Pioneer and Evergreen, Evergreen's substantial acreage
position in key growth basins of the United States Rockies area and the
opportunity to leverage Evergreen's technical expertise in the area of coal bed
methane operations.
Liquidity and capital structure. The completion of the Proposed Merger is
expected to result in a short-term increase of approximately $1.2 billion in the
Company's long-term debt, comprised of the funding of $850 million in cash
consideration paid, approximately $30 million of long-term debt.transaction costs associated
with the Proposed Merger, approximately $15 million to fund the purchase of
Evergreen's Kansas assets if Evergreen is unable to sell those assets prior to
closing the Proposed Merger and the assumption of (i) $100 million of Evergreen
4.75 percent convertible senior subordinated bonds that are callable in December
2006 and (ii) $200 million of Evergreen 5.875 percent senior subordinated bonds
due in 2012. The Company intends to finance the cash costs of the Proposed
Merger with a new $900 million, 364-day senior unsecured revolving credit
facility (the "364-day Facility"), the terms of which will essentially mirror
those of the Company's Revolving Credit Agreement, including the bearing of a
variable annual rate of interest equal to the 6-month LIBOR rate plus a 100
basis point LIBOR margin. The Company also intends to exercise its option under
the Revolving Credit Agreement allowing an increase in the facility's borrowing
commitment to $1 billion. During the one-year period subsequent to the closing
of the Proposed Merger, the Company may repay the 364-day Facility with
available operating cash flows, available commitments under the Revolving Credit
Agreement or any combination of those or other available capital sources.
The completion of the Proposed Merger is expected to increase the Company's
stockholders' equity by approximately $900 million as a result of the associated
issuance of approximately 25 million shares of Pioneer common stock. The
Company's ratio of debt to book capitalization is expected to approximate 47
percent immediately after the Proposed Merger closes in the latter part of 2004.
27
The Company has targeted a ratio of debt to book capitalization of 40
percent or less by the end of 2005. To achieve this target, the Company intends
to implement an aggressive commodity hedging program of Pioneer's and
Evergreen's 2004 and 2005 forecasted oil and gas production. The Company began
implementing this program prior to the announcement of the Proposed Merger,
utilizing commodity swap contracts entered into with highly-rated financial
institution counterparties. Consistent with this program, Evergreen has hedged
approximately 75 percent of its 2004 and 2005 forecasted gas production. The
Company has hedged approximately 35 percent and 45 percent of its remaining
forecasted 2004 worldwide liquids and North American gas production,
respectively, and 30 percent of its forecasted 2005 worldwide liquids and North
American gas production. See Note D of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" and "Item 3. Quantitative
and Qualitative Disclosures About Market Risk" for more information regarding
the Company's commodity hedge positions.
Regulatory and shareholders approvals. The Company intends to file with the
SEC a Registration Statement on Form S-4 relating to the shares of Pioneer
common stock to be issued in the Proposed Merger. A portion of such registration
statement will constitute a proxy statement/prospectus to be submitted to the
stockholders of Evergreen's common stock and the Company's common stock for
special meetings to be held by each company's stockholders in connection with
the Proposed Merger. It is expected that such proxy statement/prospectus will be
mailed to all stockholders during the third quarter of 2004, and that such
meeting will be held, and the Proposed Merger will be consummated, during the
second half of 2004. Since meetings of both Evergreen's and Pioneer's
stockholders are required in connection with the Proposed Merger, in addition to
a number of other conditions, there can be no assurance that the Proposed Merger
will occur.
Drilling Highlights
During the first nine monthsquarter of 2003,2004, the Company incurred $531.8$164.1 million in capital expendituresof
finding and development costs including $207.3$102.0 million for exploration
activities, $55.7 million for development activities $192.7and $6.4 million for exploration activities and $131.8 million on
acquisitions. The majority of the Company's developmentexploration and explorationdevelopment
expenditures was spent on drilling wells, acquiring seismic data and
constructing infrastructure for the Company's significant development projects. The primary component of the
24
PIONEER NATURAL RESOURCES COMPANY
acquisition expenditures was the Company's purchase of the 25 percent working
interest it did not already own in the Falcon field, the Harrier field and
surrounding satellite prospects during March 2003.
The following tables summarize the Company's development drilling and
exploration and extension drilling activities for the ninethree months ended September 30, 2003:March
31, 2004:
Development Drilling
--------------------------------------------------------------------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells inIn Progress
--------------- ------- --------------- ---------- ------------- -----------------------
Gulf of Mexico/Gulf Coast..... 3 4 1 18 18 - 16
Permian Basin................. 2 115 112 2 3- 29 25 - 4
Mid-Continent................. 4 95 93 3 3
------ ------ ------ ------ ------25 21 30 - 16
----- ---- ----- ---- -----
Total Domestic......... 7 228 223 5 7
------ ------ ------ ------ ------28 54 56 - 26
Argentina..................... 3 26 26 2 1
Canada........................ 4 10 78 7 - Tunisia.......................4
Canada........................ 6 3 7 - 12
Africa ....................... - 1 - - ------ ------ ------ ------ ------1
----- ---- ----- ---- -----
Total Worldwide........ 14 265 257 14 8
====== ====== ====== ====== ======37 66 70 - 33
===== ==== ===== ==== =====
Exploration/Extension Drilling
--------------------------------------------------------------------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells inIn Progress
--------------- ------- --------------- ---------- ------------- -----------------------
Gulf of Mexico/Gulf Coast.... - 11 4 6 1 2 3 2
Mid-Continent................ 2 - - - 2
Alaska....................... - 3 - - - 3
Mid-Continent................ - 2 2 - -
------ ------ ------ ------ ----------- ---- ----- ---- -----
Total Domestic.......... - 16 611 1 2 3 7
Argentina.................... 10 6 4 ------ ------ ------ ------ ------
Argentina.................... 6 241 11
Canada....................... 11 35 19 718 9
Africa....................... 2 5 1 4 Canada....................... 4 46 16 26 8
South Africa................. - 3 - 3 -
Tunisia...................... - 4 - 1 3
------ ------ ------ ------ ------2
----- ---- ----- ---- -----
Total Worldwide......... 10 93 41 43 19
====== ====== ====== ====== ======34 47 26 26 29
===== ==== ===== ==== =====
28
Domestic. The Company spent $405.1$99.3 million during the first nine monthsquarter of 20032004
on acquisition, drilling and seismic activities in the Gulf of Mexico/Gulf
Coast, Alaska, Permian Basin and Mid-Continent areas of the United States.
Gulf of Mexico/Gulf Coast area.Area. In the Gulf of Mexico/Gulf Coast area, the
Company spent $278.4$69.7 million of acquisition, drilling and seismic capital. In the
deepwater Gulf of Mexico, the Company completed one development project, had
development activities on two significant projects underway and had three
significant exploration wells being drilled during the first quarter of 2004.
o Falcon Area - During the first quarter of 2003, the Company drilled its
Harrier discovery, which was completed as a one-well subsea tie-back to the
Falcon field developmentfacilities and placed on production in mid-MarchJanuary 2004. In
addition, during the third quarter of 2003, and, as previously discussed, purchased the
remaining 25 percent working interest in Falcon and related prospects that the Company did not already own.successfully
drilled the Tomahawk and Raptor prospects, which are being developed as
single-well subsea tie-backs to the Falcon field facilities. To accommodate
the incremental production from Harrier, Tomahawk and Raptor as well as
potential throughput associated with additional planned exploration, an
additional parallel pipeline connecting the Falcon field to the Falcon
platform on the Gulf of Mexico shelf has been added, doubling its capacity
to 400 MMcf of gas per day. The Tomahawk and Raptor discoveries are
expected to start production during the latter half of the second quarter
of 2004. In addition, the Company has two major development projects that
remain in progress asmay drill an additional Falcon area
exploration prospect during the fourth quarter of September 30, 2003:2004.
o Devils Tower Area - The Dominion-operated Devils Tower development project in
Mississippi Canyon
was sanctioned in 2001 as a spar development project with the owners
leasing a spar from a third party for the life of the field. The hull of the spar was constructed in Indonesia and was
successfully transported to the United States during the first quarter of
2003 where the topsides will be added during the fourth quarter of 2003.
The spar has
slots for eight dry tree wells and up to threetwo subsea tie-back wellsrisers and is
capable of handling 60 MBbls of oil per day and 60 MMcf of gas per day.
Eight Devils Tower wells and onethree subsea tie-back wellwells in the Triton and
Goldfinger fields have been drilled and are awaiting completion. Subsequent
to quarter-end, completion operations on the first Devils Tower well were
commenced and production is scheduled
to beginbegan in the second quarter of 2004 andearly May. Production will be phased inincrease as
the wells are individually completed from the spar. The Company also plans to spud
its satellite Goldfinger prospect and participate in an appraisal well on
the Triton prospect during the fourth quarter of 2003. If successful, these
wells could be the second and third subsea tie-back wells. The Company
holds a 25
percent working interest in theseeach of the above projects.
o Harrier/Tomahawk/Raptor - The Company discovered the Harrier field during
the first quarter of 2003 and the Tomahawk and Raptor fields during the
third quarter of 2003. The Company operates the blocks with a 100 percent
25
PIONEER NATURAL RESOURCES COMPANY
working interest subsequent to the acquisition discussed above, and is
developing all three fields as single- well subsea tie-backs to the Falcon
field facilities which were designed to be expandable. To accommodate this
incremental production and potential throughput associated with additional
planned exploration, an additional parallel pipeline connecting the Falcon
field to the Falcon platform on the Gulf of Mexico shelf is being added,
doubling its capacity to 400 MMcf of gas per day. The Company expects first
gas production from the Harrier field in early 2004 with combined daily gas
production from the Falcon field and the Harrier field expected to reach
275 MMcf per day. In addition, the Company expects first gas production
from the Tomahawk and Raptor fields in the third quarter of 2004 thereby
approaching full capacity on the Falcon subsea systems.
The Company plans to spud a well on the BP-operated Juno prospect in the
Mississippi Canyon area in early November 2003. The Juno well will test a
high-potential deep structure. The Company owns a 25 percent working interest in
this prospect.
In addition to the development projects described above in the deepwater Gulf of
Mexico, the Company drilled two exploratory dry holesparticipated in the
Falcon areathree sub-salt deepwater prospects during
the first quarter. The Company controls 32 blocks in the area
providing numerous exploration opportunities for future subsea tiebacks to the
Falcon systems.
During January 2003,quarter of 2004 exposing the Company announced ato significant reserve potential,
two of which were noncommercial. The operator of the third prospect is
conducting open-hole evaluations to assess the rock and fluid properties and
structural position of the well. Project sanctioning of the Company's Ozona Deep
discovery is expected to be completed during the latter part of 2004.
The Company's joint exploration agreement with Woodside Energy (USA), Inc.
("Woodside"), a subsidiary of Woodside Energy Ltd. of Australia, has been
extended for a two-year drilling programan additional year through 2005 over the shallow-water Texas shelf
region of the Gulf of Mexico. UnderThe Midway prospect, the agreement, Woodsidefourth well drilling
under this partnership, encountered 30 feet of net gas pay and is expected to be
tied back to an existing production platform with first production anticipated
during the second half of 2004. Three other intervals with an additional 60 feet
of gas bearing sands were also encountered and will require additional analysis
to determine future commercial potential. The Company has taken a 5037.5 percent working
interest in 47 offshore exploration blocks operated by the
Company.this well. The agreement covers eight prospects and 19 leads and includes five
exploratory wells to be drilled in 2003 and three in 2004. Most of thefour additional wells to be drilled under the
agreement, will target gas plays below 15,000 feet. The
eight wellswere mutually agreed to be drilleddeferred until more technical work can be
performed on the prospects by the parties in 2003 and 2004 are on prospects
generated and leased by the Company since 1997. The first three wells under this
joint agreement were unsuccessful. The fourth well is in progress and the
results are expected to be known in December 2003.both companies. Additionally, the Company and
Woodside will evaluateare evaluating shallower gas prospects on the Gulf of Mexico shelf on
other blocks covered by the leases for
potentialpossible inclusion in the 2004 drilling program.
InAlaska area. The Company spent $8.3 million of acquisition and seismic
capital to add to its leasehold position and to acquire seismic data over the
onshore Gulf Coast regionnewly acquired acreage. During the fourth quarter of the United States,2002, the Company has
concentrated its drilling effortsacquired
a 70 percent working interest and operatorship in ten state leases on Alaska's
North Slope. Associated therewith, the Pawnee field in South Texas, whereCompany drilled three development wells and one extension well were successfully completed
during the first nine months of 2003. The Company plans to drill an additional
four development wells and two extensionexploratory wells
during the remainder of 2003.
Alaska. In Alaska, the Company spent $34.1 million during the first nine
months of 2003 to drill three exploration wells on the NW Kuparuk prospect to test a possible extension of the productive sands in the Kuparuk
River field into the shallow waters offshore. Although all three of the wells
found the sands filled with oil, they were too thin to be considered commercial. Thecommercial
on a stand-alone basis. However, the wells also encountered thick sections of
oil-bearingoil- bearing Jurassic-aged sands. Thesands, and the first well flowed at a sustained rate of
approximately 1,300 barrels per day. The test
results are currently being evaluatedIn January 2004, the Company farmed-into a
large acreage block to determine the commercial viabilitysouthwest of the Jurassic reservoir.
OnCompany's discovery. During the
North Sloperemainder of Alaska,2004, the Company recently participated in a
state lease saleplans to analyze seismic data and wastechnical
information from other wells drilled southwest of its discovery and evaluate the
apparent high bidder on 53 tracts covering
approximately 150,000 acres, establishing a leasehold over a varietyfeasibility of prospects.potential development options.
29
Permian Basin area. In the Permian Basin area, theThe Company spent $49.6$11.0 million of capital during the
first nine monthsquarter of 20032004 primarily on development drilling in the Spraberry field. The Company plans to drill approximately 140 wells in
the Spraberry field during 2003. The Company has drilled 114 wells in the
Permian Basin area during the nine months ended September 30, 2003, 103 of which
were drilled in the Spraberry field.
Mid-Continent area. In the Mid-Continent area, the Company spent $43.0
million during the first nine months of 2003, primarily in the West Panhandle
fieldoil
trend where the Company plans to drill approximately 100 wells during 2004.
Included in the capital spent during the first quarter of 2004 was a $1.0
million deposit related to the acquisition of various working interests in
approximately 600 Spraberry oil wells, 400 of which were already operated by the
Company. On April 1, 2004, the Company consummated this year.transaction for an
additional $18.7 million paid at closing.
Mid-Continent area. The Company spent $10.3 million of capital during the
first quarter of 2004 primarily in the West Panhandle field in Texas where the
Company plans to drill approximately 110 wells during 2004. The Company also
plans to drill approximately 20 Hugoton wells this year. Duringyear in the nine
months ended September 30, 2003, the Company has drilled 79 West PanhandleHugoton field wells and 19 Hugoton wells.in Kansas.
Argentina. In Argentina, theThe Company spent $36.7$22.8 million of acquisition, drilling and
seismic capital during the first nine monthsquarter of 2003.2004. With the economic environment
in Argentina stabilizing and the potential for improvements in future gas
prices, the Company has doubled its capital budget in Argentina for 2004.
The majorityCompany's drilling activities in Argentina continue to confirm the
presence of costssignificant deep gas reserves. First quarter 2004 Argentine gas
production was spent to drill extension and development wells targeting oil
reservesthe highest summer production in the Neuquen Basin.
26
PIONEER NATURAL RESOURCES COMPANYsegment's history and
Pioneer expects to complete the expansion of its Loma Negra gas plant in
Argentina over the next few months, increasing plant capacity by 25 percent as
demand peaks during the winter months in Argentina. The Company is also
acquiring additional 3-D seismic in support of future Argentine drilling plans.
Canada. In Canada, theThe Company spent $41.2$27.4 million of acquisition, drilling and
seismic capital during the first nine monthsquarter of 2003,2004, primarily in the Chinchaga,
Martin Creek and LadyfernLookout Butte areas that are onlymainly accessible for drilling
during the winter months.
Africa. The Company tested several shallow gas plays
finding multiple gas-bearing zones based on open-hole logs and mud log shows in
several wells. However, unseasonably warm weather resulted in a very short
drilling season in Canada, and approximately eight of the wells drilled will
have to be tested during next year's winter drilling season. Three wells were
drilled to test the Slave Point formation in the Ladyfern field area. One well
was unsuccessful, and two wells were unsuccessful in the Slave Point formation
but are being evaluated for uphole potential in another formation.
Africa. In Africa, the Company spent $48.8$14.6 million of acquisition, drilling and
seismic capital during the first nine monthsquarter of 20032004 in South Africa, Tunisia and
Gabon.
South Africa. In South Africa,Near the end of the first quarter of 2004, the Company spent $32.8 million of capital
to drill three exploratory wells and to continue development of itsbegan
drilling a water injection well at the Sable field that beganin an attempt to enhance
production. The production during August 2003. First salesimpact of Sable oil occurred
during October 2003. During the second quarterwater injection well is not expected to
be known until later in 2004. The Company also continues to evaluate the
potential to develop its large quantity of 2003, the Company drilled
three 2003 planned exploratory wells in South Africa, none of which were
commercial.gas reserves by attempting to
establish a contract to supply gas to an existing synthetic fuels plant.
Tunisia. In Tunisia, theThe Company spent $14.0$1.5 million of capital during the first nine monthsquarter
of 2003. The2004, primarily to place its most recent discovery, Hawa, on production.
During 2004, the Company drilledplans to drill one to two exploration wells on the
Anadarko-operated AnaguidCompany-operated El Hamra permit, a development well at Hawa and another
exploration well on the ENI-operated Adam concession.
Gabon. The Company spent $12.7 million of capital during the first quarter
of 2004 to drill five exploration wells, one of which was successful in
extending the planned development area to the south. The remaining four wells,
although unsuccessful and expensed as dry holes, were helpful in defining the
future development of the oil rim. The Company is currently in the process of
completing the plan of development to be filed with the government late in the
second quarter of 2003. The CEM-1
encountered 95 feet of net gas and condensate pay in upper Ordovician
sandstones. In a drill stem test, the unstimulated well flowed at a rate of
3,600 Mcf per day and 540 Bbls per day. A second well, the SEA-1, encountered 52
feet of net pay in the same section. Both wells have been suspended pending the
evaluation of commercial2004. If approved, development plans.
On the Borj El Khadra permit, the Company completed development
activities on the Adam 1 discovery well and began production in late May 2003.
The well has been producing at a gross stabilized rate of over 3,500 Bbls per
dayoperations will commence with
first sales occurring during the third quarter of 2003. The Company
participatedproduction expected in the successful Adam 2 development well, the first development
well in the 860 square kilometer Adam concession. The Company also began
drilling the Hawa exploration well in the southern portion of the Adam
concession and results are expected during the fourth quarter of 2003. The
Company has a 28 percent interest in the Adam concession. In addition, the
Company drilled an unsuccessful exploration well on the Jorf permit early in
2003.
Gabon. In Gabon, the Company spent $2.0 million during the first nine
months of 2003. The Company has received ministerial approval for the improved
terms negotiated for the Olowi permit, in which the Company has a 100 percent
working interest. The Company plans to commence a multi-well drilling program in
early 2004 to further define the scale of a development plan, initially focusing
on the Lower Gamba. The Company has begun to solicit interest from possible new
partners in the project.2006.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $332.5
million and $953.6$446.5
million for the three and nine month periodsmonths ended September
30, 2003, respectively,March 31, 2004, compared to $168.3 million and $506.3$285.0 million
for the same respective periods of 2002.period in 2003. The increase in oil and gas revenues during the
three and nine month periods ended September 30, 2003,first quarter of 2004 as compared to the same
respective periodsfirst quarter of 2002, was2003 is principally
attributable to incremental(i) increased gas salesproduction from the Company's deepwater Gulf
of Mexico Canyon Express andprojects, including a full quarter of production from the Company's
Falcon field that first produced during March 2003, incremental Falcon
production attributable to the March 28, 2003 purchase of the remaining 25
percent interest in the field and initial production in January 2004 from the
Harrier field in the deepwater Gulf of Mexico; (ii) oil production from the
Company's Tunisian and South African projects which first began producing
operations during the second and third quarters of 2003, respectively; (iii)
increased oil, NGL and gas salesproduction from the Company's Argentine assets,
primarily due to strengthening demand fundamentals in Argentinathe country; and commodity price
increases. As expected, declines(iv)
increases in Canadian production partially offset the above described increases toCompany's reported oil, NGL and gas revenues.
27prices including the
results of hedging activities.
30
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's average daily production volumes
and average reported prices, including the results of hedging activities, by
geographic area and in total, for the three and nine
monththree-month periods ended September 30, 2003March 31, 2004
and 2002:2003:
Three months ended
Nine months ended
September 30, September 30,
--------------------- --------------------March 31,
----------------------
2004 2003
2002 2003 2002
-------- -------- -------- -----------------
Production:
Oil (MBbls).................. 3,088 2,724 8,877 8,639
NGLs (MBbls)................. 2,085 2,088 6,129 6,008
Gas (MMcf)................... 59,117 35,404 156,336 96,065
Worldwide (MBOE)............. 15,025 10,713 41,062 30,658
Average daily production:
Oil (Bbls)................... 33,560 29,611 32,517 31,646:
United States................................. 24,971 24,086
Argentina..................................... 8,628 7,673
Canada........................................ 100 135
Africa........................................ 14,034 -
Worldwide..................................... 47,733 31,894
NGLs (Bbls).................. 22,658 22,693 22,451 22,007:
United States................................. 20,936 20,024
Argentina..................................... 1,424 1,130
Canada........................................ 1,046 879
Worldwide..................................... 23,406 22,033
Gas (Mcf).................... 642,579 384,822 572,659 351,888
Worldwide:
United States................................. 550,480 339,598
Argentina..................................... 97,818 66,633
Canada........................................ 40,019 40,876
Worldwide..................................... 688,317 447,107
Total (BOE).............. 163,314 116,441 150,411 112,301:
United States................................. 137,653 100,708
Argentina..................................... 26,355 19,909
Canada........................................ 7,816 7,827
Africa........................................ 14,034 -
Worldwide..................................... 185,858 128,444
Average reported prices:
Oil (per Bbl):
United States..............States................................. $ 25.0426.67 $ 22.2825.85
Argentina..................................... $ 25.0627.93 $ 23.74
Argentina..................25.61
Canada........................................ $ 26.1035.00 $ 20.2531.81
Africa........................................ $ 25.31 $ 20.27
Canada..................... $ 28.97 $ 24.67 $ 28.67 $ 21.32
Tunisia.................... $ 26.9431.41 $ -
Worldwide..................................... $ 26.9428.31 $ -
Worldwide.................. $ 25.35 $ 21.77 $ 25.14 $ 22.8625.82
NGLs (per Bbl):
United States..............States................................. $ 18.29 $ 14.12 $ 18.98 $ 13.05
Argentina..................21.52 $ 21.63
Argentina..................................... $ 12.7329.16 $ 22.8624.27
Canada........................................ $ 13.12
Canada.....................26.51 $ 23.6227.51
Worldwide..................................... $ 14.5722.21 $ 26.10 $ 15.85
Worldwide.................. $ 18.71 $ 14.10 $ 19.51 $ 13.1722.00
Gas (per Mcf):
United States..............States................................. $ 4.385.11 $ 3.084.72
Argentina..................................... $ 4.64 $ 3.12
Argentina...................58 $ .54
Canada........................................ $ .424.22 $ .555.38
Worldwide..................................... $ .49
Canada.....................4.41 $ 3.57 $ 2.31 $ 4.00 $ 2.41
Worldwide.................. $ 3.64 $ 2.25 $ 3.91 $ 2.394.16
On a BOE basis, worldwide average daily production increased by 40
percent and 3445 percent
during the three and nine month periodsmonths ended September
30, 2003, respectively,March 31, 2004, as compared to the same respective periods of 2002.
During the third quarter of 2003 as compared to the third quarter of 2002,
worldwide oil production increased by 13 percent, NGL production remained
virtually unchanged and gas production, augmented by incremental production from
both the Canyon Express and Falcon field gas projects, increased by 67 percent.period in
2003. During the first nine monthsquarter of 2003,2004, as compared to the first nine monthsquarter of
2002,2003, worldwide oil production increased by three percent,50 percent; NGL production increased by
two percentsix percent; and gas production augmented by nine months of
production from Canyon Express and production since March from the Falcon field,
increased by 6354 percent. Per BOE average daily
production, on a third- quarterfirst-quarter to third-quarterfirst-quarter comparison, increased by 5437
percent and 32 percent in the United States and by
15 percent in Argentina, respectively, while
production in Canada decreased by 16 percent.
Duringa negligible amount. Production from the
first nine monthsCompany's Tunisian and South African oil projects began during the second and
third quarters of 2003, as compared to the first nine months of
2002, per BOE average daily production increased by 45 percent in the United
States and by 13 percent in Argentina, while production in Canada decreased by
14 percent.
Fourth quarter 2003 production is expected to average 150,000 to 165,000
BOE per day. During the fourth quarter, the Company expects the first cargo
sales for oil produced into storage in both South Africa and Tunisia. However,
due to uncertainty regarding the timing of cargos, total sales during the fourth
quarter are difficult to predict. In South Africa, volume estimates reflect a
slower ramp-up of Sable field production due to mechanical problems with
compression equipment.respectively.
As in past years, Argentine gas sales are expected to be impacted by the
seasonal decline in gas demand as Argentina enters their summer season. Fourth
quarter gas sales will also be impacted, as expected, by a one to two week
shut-in of the Falcon field in order to tie in the Harrier satellite discovery
for first production in early 2004.
28
PIONEER NATURAL RESOURCES COMPANY
As previously discussed above, oil and gas revenues for the three and nine
month periodsmonths ended September 30, 2003March
31, 2004 were positively impacted by commodity price increases. Comparing the
thirdfirst quarter of 20032004 to the same respective
period in 2002,2003, the Company's average
worldwide oil price increased 16ten percent, average worldwide NGL pricesprice increased
33one percent and average worldwide gas prices increased 62 percent. Comparing the first nine months of 2003 to the same
respective period in 2002, the Company's average worldwide oil price increased 10 percent,six percent.
31
Second quarter 2004 production is expected to average worldwide NGL prices increased 48 percent180,000 to 195,000
BOEs per day, reflecting the incremental production expected from Devils Tower,
Tomahawk and average
worldwideRaptor, the variability of oil cargo shipments in Tunisia and South
Africa, and the seasonal increase in gas prices increased 64 percent.demand during Argentina's winter
season.
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
derivative instruments (swapswap and collar contracts)contracts in order to (i) reduce the effect of theprice volatility of price changes
on the commodities the Company produces and sells, (ii) support the Company's
annual capital budgeting and expenditure plans and (iii) reduce commodity price
risk associated with certain capital projects. During the three and nine month periods ended September 30,
2003,first quarter of 2004,
the Company's commodity price hedges decreased oil and gas revenues by $28.0$30.7
million and $100.9 million, respectively, as compared to decreasing oil
and gas revenues by $1.4$50.4 million and increasing oil and gas revenues by $34.5
millionof commodity hedge losses during the same
respective periodsperiod in 2002.2003. See Note ED of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for specific information regarding
the Company's hedging activities during the three
and nine monththree-month periods ended September 30, 2003March 31,
2004 and 2002.
During October 2003,2003.
Subsequent to March 31, 2004, the Company entered into new swap contracts
to hedge 6,315(i) 6,189 Bbls per day of fourth quarter 2003 oil sales at a weighted average fixed
price per Bbl of $31.51, 4,227 Bbls per day ofthe nine months ended December 31, 2004 oil
sales at a weighted average fixed price per Bbl of $29.20, 4,000$36.74, (ii) 10,000 Bbls per
day of 20082005 oil sales at a weighted average fixed price per Bbl of $26.05 and 20,000$33.14, (iii)
30,000 Mcf per day of July through December 2004 gas sales at a weighted average
fixed price per McfMMBtu of $4.96. Additionally, the Company
terminated its collar contracts that hedged 20,000$6.42 and (iv) 114,904 Mcf per day of 20042005 gas sales.
Interestsales at
a weighted average fixed price per MMBtu of $5.54. See "Proposed Merger with
Evergreen Resources, Inc. - Liquidity and other revenues. Interest and other revenues during the three
and nine month periods ended September 30, 2003 totaled $348 thousand and $4.3
million, respectively, as compared to $7.1 million and $9.1 million during the
same respective periods in 2002.
Gain on disposition of assets. During the three and nine month periods
ended September 30, 2003, the Company recorded $46 thousand and $1.6 million,
respectively, of net gains on the disposition of assets, as compared to $3.4
million and $4.4 million, respectively, of net gains on the disposition of
assets during the same respective periods in 2002. See "Capital resources -
Sales of assets"capital structure", for additional information
regarding proceeds from sales of
assets.the Company's hedge program.
Oil and gas production costs. During the three and n ine month periodsmonths ended September 30, 2003,March 31, 2004,
total production costs per BOE averaged $4.78 and
$5.00, respectively,$5.27, representing an increasea decrease of $.12$.60
per BOE, (three percent)
and an increase of $.08 per BOE (two percent), respectively,or ten percent, as compared to total production costs per BOE of $4.66 and $4.92$5.87
during the same respective
periodsfirst quarter of 2002.2003. Lease operating expenses and workover expenses
represent the components of production costs for which the Company has
management control, while production and ad valorem taxes and field fuel
expenses are directly related to commodity price changes.
The increasedecrease in total production costs per BOE during the three months ended
September 30, 2003,first quarter of
2004, as compared to the same respective periodfirst quarter of 2003, is primarily comprised of
decreases in 2002, can be
attributed to an increase in lease operatingproduction taxes and field fuel expenses, partially
offset by lower production and ad valorem taxes and workover costs. The increase
in lease operating expenses is primarily due to the strengthening of both the
Argentine peso and the Canadian dollar, while the increase in field fuel
expenses is the result of higher gas prices. Thecosts resulting from a $.42 per Mcf
decrease in per BOE production
and ad valorem taxes is primarily due torealized gas prices excluding hedge results.
The following tables provide the incremental production associated
with Canyon Express and Falcon which are not subject to production or ad valorem
taxes.
The increase incomponents of the Company's total
production costs per BOE during the nine months ended
September 30, 2003, as compared to the same respective period in 2002, can be
attributed to an increase in field fuel and lease operating expenses as well as
production taxes, partially offset by lower ad valorem taxes and workover costs.
The increase in field fuel expenses is the result of higher gas prices, and the
increase in production taxes, while benefitting from incremental production from
Canyon Express and Falcon where there are no production taxes, still increased
due to higher commodity prices.
29
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company'stotal production costs per BOE by geographic area
for the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and 2002:2003:
Three months ended
Nine months ended
September 30, September 30,March 31,
-------------------
------------------2004 2003 2002 2003 2002
------- -------
------- -------
(per BOE)
Lease operating expense.............expense..................... $ 3.033.36 $ 2.63 $ 3.00 $ 2.933.35
Taxes:
Production....................... .55 .60 .65Production............................... .58 .84
Ad valorem....................... .37 .54 .41 .54valorem............................... .46 .48
Field fuel expenses................. .68 .63 .79 .59expenses......................... .65 1.00
Workover costs...................... .15 .26 .15 .28costs.............................. .22 .20
------ ------ ------ -----------
Total production costs........costs................... $ 4.785.27 $ 4.665.87
====== ======
Three months ended
March 31,
-------------------
2004 2003
------- -------
Total production costs:
United States............................ $ 5.005.27 $ 4.92
====== ====== ====== ======6.13
Argentina................................ $ 2.82 $ 3.02
Canada................................... $ 11.18 $ 9.82
Africa .................................. $ 6.64 $ -
Worldwide................................ $ 5.27 $ 5.87
Based on market-quoted commodity prices during October 2003,April 2004, the Company
expects fourthsecond quarter 20032004 production costs to average $4.75$5.20 to $5.15$5.70 per BOE.
The potential increase is primarily due to higher per BOE lease operating
expenses associated with forecasted Sable production and an increase in expected
workover costs.32
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $6.89$8.07 and $6.68$6.06 for
the three and nine monththree-month periods ended September 30,March 31, 2004 and 2003, respectively, as
compared to $5.11 and $5.09 during the same respective periods of 2002.respectively. Depletion
expense per BOE, the largest component of depletion, depreciation and
amortization, expense, was $6.73 and $6.50increased to $7.91 per BOE during the three and nine
month periodsmonths ended September 30, 2003, respectively,March 31,
2004, as compared to $4.91 and
$4.88$5.86 per BOE during the same respective periods of 2002. The increaseperiod in per
BOE depletion expense is2003, primarily due
to increases in higher cost-basis deepwater Gulf of Mexico, Tunisian and South
African production volumes.
The following table provides the Company's depletion expense per BOE by
geographic area for the three-month periods ended March 31, 2004 and 2003:
Three months ended
March 31,
-------------------
2004 2003
------- -------
Depletion expense:
United States........................... $ 7.77 $ 5.83
Argentina............................... $ 5.23 $ 4.65
Canada.................................. $ 10.51 $ 9.30
Africa ................................. $ 12.84 $ -
Worldwide............................... $ 7.91 $ 5.86
The Company expects fourthsecond quarter 20032004 depletion, depreciation and
amortization expense to average $6.90$8.00 to $7.30$8.50 per BOE. The increase is
principally attributable to higher cost-basis Sable production volumes.
Exploration, abandonments, geological and geophysical costs. Exploration,
abandonments, geological and geophysical costs were $24.5 million and $107.4$80.5 million during the
three and nine month periodsmonths ended September 30, 2003,
respectively,March 31, 2004, as compared to $18.3 million and $57.3$35.9 million during the same
respective periodsperiod in 2002.2003. The increase in exploration, abandonments, geological and
geophysical costsexpense during the first nine monthsquarter of 20032004 as compared to the same
period of 2003 is comprised of a $31.0 million increase in dry hole expense, an
$11.4 million increase in geological and geophysical expenses and a $2.2 million
increase in leasehold abandonments and other exploration expenses. Significant
components of the Company's dry hole expense during the first nine monthsquarter of 2002 is primarily due to increased
exploration/extension drilling in2004
included $26.4 million and $10.7 million on the Company's deepwater Gulf of
Mexico South Africa, CanadaJuno and TunisiaMyrtle Beach prospects, respectively, and increases$6.4 million and $2.8
million on the Company's Olowi and Dentale prospects, respectively, in seismic acquisitions that will contribute to future
exploration activities.Gabon.
During the first nine monthsquarter of 2003,2004, the Company completed and evaluated 8452
exploration/extension wells, 4126 of which were successfully completed as
discoveries. During the same respective period in
2002, the Company completed and evaluated 27 exploration/extension wells, 20 of
which were successfully completed as discoveries.
30
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's geological and geophysical
costs, exploratory dry hole expense, and leaseholdlease abandonments expense and other
exploration expense for the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and 2002:2003:
Africa
United Other Consolidatedand
States Argentina Canada ForeignOther Total
------- --------- -------- --------- --------- ------- --------------------
(in thousands)
Three months ended September 30, 2003:March 31, 2004:
Geological and geophysical..............geophysical............ $15,769 $ 8,1103,130 $ 4581,147 $ 6191,733 $ 774 $ 9,96121,779
Exploratory dry holes................... 7,127 778 1,069 3,403 12,377holes................. 36,968 405 8,170 8,684 54,227
Leasehold abandonments and other........ 2,038 39 101 - 2,178other...... 819 15 3,659 7 4,500
------ ------ ------- ------ -------
------- ------- -------$53,556 $ 17,2753,550 $ 1,27512,976 $10,424 $ 1,789 $ 4,177 $ 24,51680,506
====== ====== ======= ======= ======= ============= =======
Three months ended September 30, 2002:March 31, 2003:
Geological and geophysical.............. 6,210geophysical............ $ 1145,839 $ 6821,732 $ 1,4501,337 $ 8,4561,474 $ 10,382
Exploratory dry holes................... 4,119 1,212 8 45 5,384holes................. 11,358 880 8,714 2,227 23,179
Leasehold abandonments and other........ 2,228 1,517 739 - 4,484other...... 590 432 1,276 8 2,306
------ ------- ------- ------- -------
$ 12,557 $ 2,843 $ 1,429 $ 1,495 $ 18,324
======= ======= ======= ======= =======
Nine months ended September 30, 2003:
Geological and geophysical.............. $ 25,797 $ 6,966 $ 2,534 $ 3,102 $ 38,399
Exploratory dry holes................... 28,306 2,209 10,939 20,859 62,313
Leasehold abandonments and other........ 3,562 1,672 1,476 8 6,718
------- ------- ------- ------- -------
$ 57,665 $ 10,847 $ 14,949 $ 23,969 $107,430
======= ======= ======= ======= =======
Nine months ended September 30, 2002:
Geological and geophysical.............. $ 16,512 $ 3,329 3,049 $ 5,303 $ 28,193
Exploratory dry holes................... 18,803 1,611 1,198 249 21,861
Leasehold abandonments and other........ 4,526 1,691 1,025 8 7,250
------------- ------- ------ -------
-------$17,787 $ 39,8413,044 $ 6,63111,327 $ 5,2723,709 $ 5,560 $ 57,30435,867
====== ====== ======= ======= ======= ============= =======
The Company expects fourthsecond quarter 20032004 exploration, abandonments,
geological and abandonment
expensegeophysical costs to be $20$25 million to $40$50 million, dependent
largely on exploratory drilling results and expected seismic expenditures.
33
General and administrative expense. General and administrative expensesexpense for
the three and nine monththree-month periods ended September 30,March 31, 2004 and 2003 were $15.2was $18.3 million and
$44.3$15.5 million, respectively, as compared to $12.5 million and $35.1 million
during the same respective periods in 2002.respectively. The increases of $2.7 million and
$9.2 millionincrease in general and administrative expense
for the respective three and
nine month periods ended September 30, 2003, as compared to the same respective
periods in 2002, areis primarily due to increases in administrative staff and performance-related
compensation costs.
The Company expects fourthsecond quarter 20032004 general and administrative expense
to be $14$16 million to $15$18 million.
Accretion of discount on asset retirement obligations. During the
three
and nine monththree-month periods ended September 30,March 31, 2004 and 2003, accretion of discount on
asset retirement obligations was $1.3$2.0 million and $3.7$1.1 million, respectively.
The provisions of SFAS 143 require that theincrease in accretion of discount on asset retirement obligations be classifiedis
primarily due to the increase in future plugging and abandonment obligations
related to the consolidated statementdeepwater Gulf of operations
separate from interest expense. Prior to 2003Mexico, Tunisian and the adoption of SFAS 143, the
Company classified accretion of discount on asset retirement obligations as a
component of interest expense. The Company's interest expenseSouth African wells which
began production during the three
and nine month periodstwelve months ended September 30, 2002 included $622 thousand and $1.9
million, respectively, of accretion of discount on asset retirement obligations
that was calculated prior to the adoption of SFAS 143 based on asset retirement
obligations recorded in purchased business combinations.March 31, 2004. See "Cumulative
effect of change in accounting principle" and Notes B and FE of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information regarding the Company's adoption of SFAS 143.
The Company expects fourthsecond quarter 20032004 accretion of discount on asset
retirement obligations to be approximately $1$2 million.
31
PIONEER NATURAL RESOURCES COMPANY
Interest expense. Interest expense was $23.2$21.6 million and $69.5 million
for the three and nine month periods ended September 30, 2003, respectively, as
compared to $20.3 million and $71.4 million for the same respective periods in
2002. The increase of $2.9 million (or 14 percent) in interest expense for the three months
ended September 30, 2003,March 31, 2004, as compared to $22.5 million for the same respective period of 2002,in 2003.
The decrease in interest expense is primarily attributabledue to a $4.3$1.0 million decrease in
capitalized
interest due toincurred on the completion of the Canyon Express gas project and Falcon
field development, partially offset by an increase in recorded hedge gains. The
decrease of $1.9 million (or three percent) in interest expense for the nine
months ended September 30, 2003, as compared to the same respective period of
2002, isRevolving Credit Agreement, primarily attributable to interest savings from the repayment of a
higher yielding capital cost obligationassociated with
reduced borrowings and a portion of the Company's 9-5/8
percent and 8-7/8 percent senior notes, lower underlying market rates of
interest, a 12.5 basis point decrease on May 16, 2003 in the Eurodollar margin
component of the interest rate specified in the Company's $575$.7 million corporate
credit facility (the "Credit Facility"), the aforementioned separate
classification of accretion of discount on asset retirement obligations, and an
increase of $2.3 million in interest rate hedge gains. Partially offsetting the
decreasesgains,
partially offset by a $.9 million decrease in interest expense components described abovecapitalized. The weighted
average interest rate on the Company's indebtedness for the three months ended
March 31, 2004 was a $6.0 million
decline in interest capitalized during the first nine months of 2003,5.31 percent as compared to 5.56 percent for the same respective period
in 2002.2003, including the effects of the Company's interest rate swaps.
The Company expects fourthsecond quarter 20032004 interest expense to be $21$20 million
to $23 million.
Other expenses. Other expenses for the three and nine monththree-month periods ended September 30,March 31,
2004 and 2003 were $1.4$.2 million and $12.2$5.2 million, respectively, as
compared to $21.6 million and $37.6 million for the same respective periods in
2002.respectively. The $20.2 million decrease in
other expenses during the three months ended
September 30, 2003, as compared to the same respective period of 2002, is primarily attributable to a $19.5 million loss recognized from the early
extinguishment of higher yielding senior notes in 2002. The $25.4$1.8 million decrease in other expense during the nine months ended September 30, 2003, as
compared to the same respective period of 2002, is primarily attributable tohedge
ineffectiveness charges and a $22.3$.3 million loss recognized from the early extinguishment of higher yielding
senior notesdecrease in 2002. See "Cumulative effect of change in accounting principle"
presented below for information regarding the reclassification of 2002
extraordinary losses on the early extinguishment of debt.foreign exchange losses.
Income tax benefits (provisions). During the three and nine month periods
ended September 30, 2003, the Company recognized income tax benefits of $99.9
million and $95.0 million, respectively. During the three and nine month periods
ended September 30, 2002, the Company recognized income tax provisions of $2.2
million and $3.2 million, of which $2.1 million and $2.8 million, respectively,
was attributable to Argentine taxable income. The income tax benefit for the
nine months ended September 30, 2003 excludes a $1.3 million Argentine provision
that is associated with the gain recognized from the adoption of SFAS 143 on
January 1, 2003 (see "Cumulative effect of change in accounting principle"
presented below).
Since 1998, the Company has maintained a valuation allowance against a
portion of its deferred tax asset position in the United States. As of December
31, 2002, the Company's deferred tax valuation allowances totaled $247.0
million, comprised of $204.3 million of United States deferred tax valuation
allowances and $42.7 million of international deferred tax valuation allowances.
Statement of Financial Accounting Standards No. 109 requires that the Company
continually assess both positive and negative evidence to determine whether it
is more likely than not that the deferred tax assets can be realized prior to
their expiration. In the third quarter of 2003, the Company concluded that it is
now more likely than not that it will realize its gross deferred tax asset
position in the United States after giving consideration to the following
specific facts:
o Over the past several years, the Company has been steadily improving its
portfolio of assets, including significant proved reserve discoveries and
follow-up development projects that have recently started to produce.
Specifically, Pioneer completed development activities and began production
operations on its Canyon Express gas project in September 2002 and on the
Falcon field in March 2003. The production performance to-date and the
reservoir data that has been accumulated through September 30, 2003 on
these projects provide assurance that these projects will recover the
reserves as predicted.
oprovision. During the three months ended September 30, 2003,March 31, 2004, the
Company announced
additional Falcon area discoveriesrecognized an income tax provision of $39.8 million, as compared to a
$2.3 million tax provision recognized during the same period in 2003. The
increase in the Tomahawk and Raptor fields and
expects first production from these fields inCompany's effective tax rate is primarily attributable to the
second halfreversal of 2004. The
Company also expects to complete its other significantthe Company's United States Gulf
of Mexico development projects, Harrier and Devils Tower, in early and
mid-2004, respectively.
32
PIONEER NATURAL RESOURCES COMPANY
o Commodity market supply and demand fundamentals have continued to stabilizedeferred tax asset valuation allowances
during the third quarter as evidenced by quoted futures prices, that suggest that
North American gas prices will remain relatively flat over the next five
years and that worldwide oil prices may decline modestly over that time
span compared to relatively high current levels for each commodity.
o The Company's future revenues are further protected against price declines
through its significant hedging program. The Company has hedged portions of its oil price risk through 2005 and portions of its gas price risk through
2007.2003. See Note EC of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for additional information
regarding the Company's hedge positions.
o The Company has generated record pretax income fortaxes.
During the thirdsecond quarter of 2003, significant net income for2004, the nine months ended September 30, 2003
and net income in each of the years ended December 31, 2002, 2001 and 2000.
The Company has also generated significant taxable income for the third
consecutive quarter, including the deduction of 100 percent of its
intangible drilling costs for those periods. The Company believes that
these trends will continue for the foreseeable future.
o The Company performed various economic evaluations in the third quarter to
determine if the Company would be able to realize all of its deferred tax
assets, including its net operating loss carryforwards, prior to any
expiration. These evaluations were based on the Company's reserve
projections of existing producing properties and recent discoveries being
developed. These evaluations employed varying price assumptions, some of
which included a significant negative change to commodity prices, and
factored in limitations on the use of the Company's net operating loss
carryforwards. The evaluations did not include assumptions of increases in
proved reserves through future exploration or acquisitions. The evaluations
indicated that the deferred tax assets are realizable in the future.
Accordingly, during the third quarter of 2003, the Company reversed its
valuation allowance in the United States, resulting in the recognition of a
deferred tax benefit of $104.7 million. Further, the reversal of the allowance
increased stockholders' equity by $32.6 million as the Company recognized the
tax effects of previous stock option exercises and deferred hedging gains and
losses in other comprehensive income.
Pioneer will continue to monitor Company-specific, oil and gas industry
and worldwide economic factors and will reassess the likelihood that the
Company's net operating loss carryforwards and other deferred tax attributes
will be utilized prior to their expiration. There can be no assurances that
facts and circumstances will not materially change and require the Company to
reestablish a United States deferred tax asset valuation allowance in a future
period. As of September 30, 2003, the Company does not believe there is
sufficient positive evidence to reverse its valuation allowances related to
certain foreign tax jurisdictions.
The Company estimates that its fourth quarter cash
income taxes will be $4$3 million to $6 million, principally comprised of Argentine income taxes and
nominal alternative minimum tax in the United States as the Company benefits
from its net operating loss carryforwards in the United States and Canada. In
the future, the Company's effective tax rate on earnings in the United States
will approximate statutory rates as a result of the aforementioned reversal of
deferred tax valuation allowances.million.
Cumulative effect of change in accounting principle. As previously
discussed, the Company adopted the provisions of SFAS 143 on January 1, 2003 and
recognized a $15.4 million benefit from the cumulative effect of change in
accounting principle, net of $1.3 million of associated Argentine deferred income taxes.
On January 1, 2003, the Company also adopted the provisions of SFAS 145,
the provisions of which did not result in a cumulative effect adjustment. In
accordance with the provisions of SFAS 145, the Company reclassified to other
expense extraordinary losses from the early extinguishment of debt of $2.8
milliontax. See Notes B and $19.5 million realized during the three month periods ended June 30
and September 30, 2002, respectively.
See Note BE of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information regarding the Company's adoption of SFAS
143 and SFAS 145.
33
PIONEER NATURAL RESOURCES COMPANY143.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of contractual obligations and working capital obligations.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three and nine monththree-month periods ended September
30,March 31, 2004 and
2003 totaled $134.9$167.2 million and $522.0$252.8 million, respectively. The Company's
first quarter 2004 additions to oil and gas properties were funded by $222.5 millionnet cash
provided by operating activities of $253.6 million. The Company's first quarter
2003 additions to oil and $546.7gas properties were funded by $136.8 million of net
cash provided by operating activities, during the three and nine
month periods ended September 30, 2003, respectively. The Company's capital
expenditures during the three months ended September 30, 2002 were funded by
$87.7 million of net cash provided by operating activities, $59.9$15.6 million of proceeds from the
disposition of assets and borrowings under the Credit
Facility. The Company's capital expenditures during the nine months ended
September 30, 2002 were funded by $228.3 million of net cash provided by
operating activities, $118.8 million of proceeds from the disposition of assets
and proceeds from the April 2002 sale of 11.5 million shares of common stock
(the "Stock Offering").long-term debt.
34
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
Btu swap agreements (which are fixed in amount
and are not subject to market risk), terminated commodity hedgesdrilling commitments, derivative obligations and other contracts. During the nine months ended September 30, 2003,liabilities. From time to
time, the Company reduced
its long-term debt by $47.2 million, reduced itsenters into off-balance sheet arrangements and transactions
that can give rise to material off-balance sheet obligations underof the Btu swapCompany. As
of March 31, 2004, the material off-balance sheet arrangements and transactions
that the Company has entered into include (i) undrawn letters of credit, (ii)
operating lease agreements, by $4.9 million(iii) drilling commitments and locked-in $24.2 million of remaining liabilities
associated with the termination of commodity hedges prior to their scheduled
maturity. The Company's(iv) contractual
obligations for which the ultimate settlement amounts are not fixed and
determinable are currently limited tosuch as derivative contracts that are sensitive to future changes
in commodity prices.prices and gas transportation commitments. Other than the Company's
derivative obligations, there have been no material changes in its contractual
obligations since December 31, 2003. See "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for a table of changes in the fair value of the
Company's open derivative contract assets and liabilities during the ninethree
months ended September 30, 2003.March 31, 2004.
Working capital. Funding for the Company's working capital obligations is
provided by internally-generated cash flow. Funding for the repayment of
principal and interest on outstanding debt and the Company's capital expenditure
program may be provided by any combination of internally-generated cash flow,
proceeds from the disposition of non- strategicnon-strategic assets or alternative financing
sources as discussed in "Capital resources" below.
Capital resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of non-strategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments during the
remainder of 2003.2004.
Operating activities. Net cash provided by operating activities during the
three and nine monththree-month periods ended September 30,March 31, 2004 and 2003 were $222.5$253.6 million and $546.7$136.8
million, respectively, as compared to $87.7 million and $228.3
million for the same respective periods in 2002.respectively. The increase in net cash provided by operating activities
during the three and nine month periods ended
September 30, 2003, as compared to the same respective periods in 2002, iswas primarily due to higher gas production volumes and higher commodity prices.
Investing activities. Net cash used in investing activities during the
three-month periods ended March 31, 2004 and 2003 were $172.3 million and $239.5
million, respectively. The decrease in net cash used in investing activities was
primarily due to an $85.5 million decrease in additions to oil and gas
properties. The decrease is primarily attributable to a $119.4 million
acquisition of an additional 25 percent interest in the Falcon field offset by
$15.3 million of proceeds from disposition of assets during the first quarter of
2003.
Financing activities. Net cash used in financing activities during the
three and nine month periodsmonths ended September 30, 2003March 31, 2004 was $94.4$91.4 million and
$48.6 million, respectively. In comparison,as compared to net cash
provided by financing activities was $90.4 million and $163.8of $100.6 million during the three and nine month
periods ended September 30, 2002, respectively. Duringsame period of
2003. The reduction in long-term debt was made possible by the nine months ended
September 30, 2003,combined effects
of increased net cash provided by operating activities has been usedand decreased additions
to fund the Company's capital projects, repay borrowings of $117.7 million during
the first half of 2003, including normal closing adjustments, to acquire an
additional 25 percent working interest in the Falcon field, the Harrier fieldoil and surrounding satellite prospects in the deepwater Gulf of Mexico and to
reduce long-term debt by $47.5 million. During the third quarter of 2003, net
cash provided by operating activities increased while net cash used for
investing activities declined allowing the Company to reduce long-term debt by
$92.0 million.gas properties. During the three and nine month periodsmonths ended September 30, 2002,March 31, 2004, the
Company also used $5.6 million to purchase 183,300 shares of treasury stock.
During March 2004, the Company's board of directors declared a portion$.10 per
common share semiannual dividend, payable on April 13, 2004 to shareholders of
record on March 29, 2004. Associated therewith, the $236.0Company distributed $12
million of net proceeds fromaggregate dividends during April 2004. If declared by the Stock
Offering to fund a portionboard of
the net cash used in investing activities and to
repay a portion of its long-term debt and other noncurrent liabilities.
During August and February 2003, the Company entered into interest rate
swap contracts to hedge a portion of the fair value of its 9-5/8 percent senior
notes. Under the terms of the interest rate swap contracts entered into during
August (the "August Contracts"), the Company was to receive a fixed annual rate
of 9-5/8 percent on $300.0 million notional amount and agreed to pay the
counterparties a variable rate on the notional amount equal to the six-month
34
PIONEER NATURAL RESOURCES COMPANY
LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of
521.0 basis points. The terms of the interest rate swap contracts entered into
during February 2003 (the "February Contracts") differed from those of the
August Contracts only in notional amount and LIBOR Margin, which terms were
$250.0 million and 566.4 basis points, respectively. During September 2003, the
Company terminated the August Contracts for $10.1 million of cash proceeds. The
cash proceeds were comprised of $1.2 million of settlement gains attributable to
the period from August 2003 through the date of termination and $8.9 million
attributable to the fair value, on the date of termination, of the remaining
term of the August Contracts. During May 2003, the Company terminated the
February Contracts for $11.4 million of cash proceeds. The cash proceeds were
comprised of $2.0 million of settlement gains attributable to the period from
February 2003 through the date of termination and $9.4 million attributable to
the fair value, on the date of termination, of the remaining term of the
February Contracts.
Outstanding borrowings under the Credit Facility totaled $218.0 million
as of September 30, 2003, excluding $28.8 million of undrawn letters of credit
issued under the Credit Facility. The weighted average interest rates ondirectors, the Company's indebtedness for the three and nine month periods ended September 30,
2003 were 5.2 percent and 5.3 percent, respectively, as compared to 5.8 percent
and 6.4 percent for the same respective periods in 2002, taking into account the
effect of lower market interest rates and the Company's interest rate swaps.second semiannual dividend will be distributed during
October 2004.
As the Company pursues its strategy, it may utilize various financing
sources, including fixed and floating rate debt, convertible securities,
preferred stock or common stock. The Company may also issue securities in
exchange for oil and gas properties, stock or other interests in other oil and
gas companies or related assets. Additional securities may be of a class
preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Company's Boardboard of Directors.
Sales of assets. During the three and nine month periods ended September
30, 2003, proceeds from the sale of assets totaled $9.3 million and $35.0
million, respectively, as compared to $59.9 million and $118.8 million for the
same respective periods in 2002.directors.
Liquidity. The Company's 2003 asset divestitures were
primarily comprisedprincipal source of derivative assetsshort-term liquidity is the
Revolving Credit Agreement. Outstanding borrowings under the Revolving Credit
Agreement totaled $70.0 million as of March 31, 2004. Including $28.2 million of
undrawn and Gulfoutstanding letters of Mexico shelf prospects, in
which a partial interest was sold to Woodside. The Company's 2002 asset
divestitures were primarily comprisedcredit under the Revolving Credit Agreement,
the Company has $601.8 million of derivative assets.unused borrowing capacity as of March 31,
2004.
35
Book capitalization and liquidity.current ratio. The Company's total debt was $1.6
billion as of September 30, 2003 and $1.7 billion as of December 31, 2002. The
Company's total book capitalization at
September 30, 2003March 31, 2004 was $3.3$3.2 billion, consisting of total debt of $1.6$1.4 billion and
stockholders' equity of $1.7$1.8 billion. Consequently, the Company's debt to total book
capitalization decreased to 45.3 percent at September 30, 2003 was 48.6March 31, 2004 from 46.9 percent and at
December 31, 2002 was 54.8 percent.2003. The Company's ratio of current assets to current liabilities
was .61.48 at September 30, 2003March 31, 2004 and at December 31, 2002 was .54. Including $28.8 million2003.
Status of undrawn and outstanding letters of credit, the Company had $328.2 million of
unused borrowing capacity available under its Credit Facility as of September
30, 2003.
During the fourth quarter of 2003, the Company anticipates that net cash
provided by operating activities, based on current commodity prices, will exceed
budgeted capital expenditures and contractual obligations and be sufficient to
reduce long-term debt by an additional $25 million to $50 million.
New Accounting Interpretation and Recent Developments
During January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which requires the consolidation of certain entities that are determined to be
variable interest entities ("VIE's"). An entity is considered to be a VIE when
either (i) the entity lacks sufficient equity to carry on its principal
operations, (ii) the equity owners of the entity cannot make decisions about the
entity's activities or (iii) the entity's equity neither absorbs losses or
benefits from gains. For VIEs created subsequent to January 31, 2003, the
provisions of FIN 46 must be applied immediately. For VIEs created prior to that
date, the adoption of FIN 46 is required for all reporting periods subsequent to
December 15, 2003.
Subsequent to January 31, 2003, the Company has not acquired an interest
in any VIEs that would require immediate consolidation under FIN 46. The Company
is currently reviewing its financial arrangements to determine whether any VIEs
existed prior to January 31, 2003 that should be consolidated by the Company in
accordance with FIN 46. The Company does not believe that the consolidation of
VIEs that existed prior to January 31, 2003, if any, will have a material impact
on its future financial position, results of operations or liquidity.
35
PIONEER NATURAL RESOURCES COMPANYDevelopment
In its recent review of registrants' filings, the staff of the SEC has taken the
position that Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), requiresrequire oil and gas
entitiescompanies to separately report on their balance sheets the costs of leasehold
mineral interests acquired after June 30, 2001,rights, including related accumulated depletion, as intangible assets
and provide related disclosures.
The Company has historically included producing leasehold mineral rights
costs in the proved properties caption on its balance sheet since the value of the leases is inseparable from the value
of the related oil and gas reserves.Consolidated Balance Sheets. This
classification is consistent with the provisions of Statement of Financial Accounting Standards No.SFAS 19 "Financial
Accounting and Reporting by Oil and Gas Producing Companies", and standard
industry practice. Almost all costs included in the Company's unproved
properties caption on the balance sheetConsolidated Balance Sheets are leasehold mineral
interestsrights that are regularly evaluated for impairment based on lease term and
drilling activity.
The SEC staff has referred the questionissue of SFAS 142 applicability for consideration bywhether leasehold mineral rights
constitute tangible or intangible assets to the Emerging Issues Task Force. IfForce (the
"EITF") of the Financial Accounting Standard Board (the "FASB"). An EITF working
group was created to research this issue and at the March 17 - 18, 2004 EITF
meeting, the working group reached a consensus that leasehold mineral rights
constituted tangible assets. Ratification of the consensus was subject to
resolution of inconsistencies between the characterization of mineral rights as
tangible assets in the working group consensus and the characterization of
mineral rights as intangible assets in SFAS 141 and SFAS 142. On April 2, 2004,
the FASB issued for comment proposed FASB Staff Positions (the "FSP") No. 141-a
and 142-a to eliminate the inconsistencies between the working group consensus
and the provisions of SFAS 142 are determined to
be applicable to oil141 and gas leasehold mineral interests, reclassifications
within property, plantSFAS 142. The FSP was finalized on April 30,
2004 and equipment on the Consolidated Balance Sheets and
additional disclosures may be required. The Company does not believe that the
provisions of SFAS 142, if determined to be applicable, will have a material
impact on its financial position, results of operations or liquidity. At
September 30, 2003, the Company had cumulative expenditures of no more than $450
million on costs of leasehold mineral interests since June 30, 2001, that are
included in oil and gas properties in the Company's Consolidated Balance Sheet.is effective for all reporting periods beginning after April 29, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative disclosures about market risk
are supplementary to the quantitative and qualitative disclosures provided in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.2003.
As such, the information contained herein should be read in conjunction with the
related disclosures in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.2003.
The following table reconciles the changes that occurred in the fair values
of the Company's open derivative contracts during the first nine monthsquarter of 2003:2004:
Derivative Contract Assets (Liabilities)
----------------------------------------------
ForeignNet Liabilities
----------------------------------------
Interest
Exchange
Commodity RateCommodities Rate Total
-------------------- -------- -------- --------------------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2002............... $(108,804)2003............... $(201,422) $ - $ 15 $(108,789)(201,422)
Changes in contract fair value........... (220,470) 21,497 3 (198,970)value (a)....... (122,223) (1,546) (123,769)
Contract realizations:
Maturities........................... 156,539 (3,230) (18) 153,291
Terminationsmaturities...................... 46,655 - cash settlements...... 125 (18,267) - (18,142)
Terminations - future net obligations 53,362 - - 53,36246,655
-------- ------- ----- -----------------
Fair value of contracts outstanding
as of September 30, 2003.............. $(119,248)March 31, 2004.................. $(276,990) $ -(1,546) $ - $(119,248)(278,536)
======== ======= ===== =================
- ---------------
(a) At inception, new derivative contracts entered into by the Company have no
intrinsic value.
36
The following disclosures provide specific information about material
changes that have occurred since December 31, 20022003 in the Company's portfolio of
financial instruments. The Company may recognize future earnings gains or losses
on these instruments from changes in market commodity prices interest rates or foreign exchangeinterest rates.
Interest rate sensitivity. During August and February 2003, the Company
entered into interest rate swap contracts to hedge a portion of the fair value
of its 9-5/8 percent senior notes. Under the terms of the interest rate swap
contracts entered into during August (the "August Contracts"), the Company was
to receive a fixed annual rate of 9-5/8 percent on $300.0 million notional
amount and agreed to pay the counterparties a variable rate on the notional
amount equal to the six-month LIBOR, reset semi-annually, plus a weighted
average margin ("LIBOR Margin") of 521.0 basis points. The terms of the interest
rate swap contracts entered into during February 2003 (the "February Contracts")
differed from those of the August Contracts only in notional amount and LIBOR
Margin, which terms were $250.0 million and 566.4 basis points, respectively.
During September 2003, the Company terminated the August Contracts for $10.1
million of cash proceeds. The cash proceeds were comprised of $1.2 million of
settlement gains attributable to the period from August 2003 through the date of
termination and $8.9 million attributable to the fair value, on the date of
termination, of the remaining term of the August Contracts. During May 2003, the
Company terminated the February Contracts for
36
PIONEER NATURAL RESOURCES COMPANY
$11.4 million of cash proceeds. The cash proceeds were comprised of $2.0 million
of settlement gains attributable to the period from February 2003 through the
date of termination and $9.4 million attributable to the fair value, on the date
of termination, of the remaining term of the February Contracts. The following table provides information about
the debt obligations and derivative financial instruments of the Company that
are sensitive to changes in interest rates as of September 30,
2003. TheMarch 31, 2004. For debt
obligations, the table presents the debt obligationsmaturities by expected maturity dates, the
weighted average interest rates expected to be paid on the debt given current
contractual terms and market conditions and the debt's estimated fair value. For
fixed rate debt, the weighted average interest rate represents the contractual
fixed rates that the Company was obligated to periodically pay on the debt as of
September
30, 2003.March 31, 2004. For variable rate debt, the average interest rate represents the
average rates being paid on the debt projected forward proportionate to the
forward yield curve for the six-month LIBOR.
During March 2004, the Company entered into interest rate swap contracts on
an aggregate $150 million notional amount to hedge the fair value of its 7-1/2
percent senior notes. The terms of the interest rate swap contracts match the
scheduled maturity of the hedged senior notes, require the counterparties to pay
the Company a 7-1/2 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six-month LIBOR plus a weighted average annual margin of 3.71 percent. For
interest rate swap contracts, the table presents the notional amounts together
with the fixed rate to be received by the Company and the variable rate to be
paid estimated based on the current variable rate being paid by the Company
projected forward proportionate to the forward yield curve for the six-month
LIBOR.
Interest Rate Sensitivity
Debt Obligations and Derivative Financial Instruments as of March 31, 2004
Interest Rate Sensitivity
Debt Obligations as of September 30, 2003
ThreeNine months Fair ValueLiability
ended Year ended December 31, LiabilityFair Value at
December 31, -------------------------------------------------- September 30,
2003---------------------------------------------------------- March 31,
2004 2005 2006 2007 2008 Thereafter Total 20032004
----------- ------ -------- -------------- -------- -------- ---------- ---------- -----------------------
(in thousands, except interest rates)
Total Debt:
Fixed rate debt...........maturities...... $ - $134,182 $ - $136,376 $ - $156,393 $1,110,595 $1,403,364 $(1,534,589)$154,218 $353,174 $745,121 $1,386,695 $(1,599,861)
Weighted average
interest rate (%)............... 7.93 7.93 7.95 7.95 7.94 7.917.86 7.83 7.81 8.34 8.37
Variable rate debt........ $ - $ - $218,000maturities... $ - $ - $ - $ 218,000- $ (218,000)70,000 $ - $ 70,000 $ (70,000)
Average interest rate (%). 2.45 3.15 4.61.. 2.80 4.19 5.32 6.07 6.60 -
Interest Rate Hedge
Derivatives (a):
Notional debt amount....... $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $ 150,000 $ (1,546)
Fixed rate receivable (%).. 7.50 7.50 7.50 7.50 7.50 7.50
Variable rate payable (%).. 5.51 6.90 8.03 8.78 9.31 10.64
- ---------------
(a) During April 2004, the Company entered into interest rate swap contracts to
hedge $150 million notional amount of its 9-5/8 percent senior notes at an
average annual variable rate of the six-month LIBOR plus a weighted average
margin of 5.66 percent.
Commodity price sensitivity. During the first nine monthsquarter of 2003,2004, the Company
entered into certain oil and gas hedge derivatives and terminated other oil and
gas hedge derivatives. The following tables provide information about the
Company's oil and gas derivative financial instruments of the Company that were sensitive to
oil andor gas price changes as of September 30, 2003. AllMarch 31, 2004. As of theseMarch 31, 2004, all of the
Company's oil and gas derivative financial instruments qualified as hedges.
37
See Note ED of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil and gas
prices.
Oil Price Sensitivity
Derivative Financial Instruments as of September 30, 2003(3)March 31, 2004
ThreeNine months YearLiability
ended Fair ValueYear ended December 31, LiabilityFair Value at
December 31, -------------------- September 30,
2003---------------------------------------- March 31,
2004 2005 2003
------------2006 2007 2008 2004
----------- -------- -------- -------- ------- -------------
(in thousands)
Oil Hedge Derivatives:Derivatives (a):
Average daily notional Bbl volumes (1):volumes:
Swap contracts............................... 14,000 14,000 12,000 $ (20,467)contracts (b)...................... 17,309 17,000 5,000 1,000 5,000 $(87,260)
Weighted average fixed price per Bbl.................................Bbl... $ 24.3525.50 $ 24.6524.93 $ 24.4426.19 $ 26.00 $ 26.09
Average forward NYMEX oil prices (2)...................................(c)..... $ 28.4738.15 $ 26.9933.94 $ 25.3831.21 $ 29.24 $ 28.49
- ---------------
(1)(a) See Note ED of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(2) The average forward NYMEX oil prices are based on October 30, 2003 market
quotes. The average forward NYMEX oil price per Bbl for calendar 2008, as
of the close of business on October 30, 2003, was $25.91.
(3) During October 2003,(b) Subsequent to March 31, 2004, the Company entered into new oil swap
contracts to hedge 6,3156,189 Bbls per day of fourth quarter 2003the nine months ended December 31,
2004 oil sales at a weighted average fixed price per Bbl of $31.51, 4,227$36.74 and
10,000 Bbls per day of 20042005 oil sales at a weighted average fixed price per
Bbl of $29.20 and 4,000 Bbls per day of
2008 sales at a fixed price per Bbl of $26.05.$33.14.
(c) The average forward NYMEX oil prices are based on May 5, 2004 market
quotes.
37
PIONEER NATURAL RESOURCES COMPANY
Gas Price Sensitivity (a)
Derivative Financial Instruments as of September 30, 2003 (4)March 31, 2004
Three Months Fair ValueNine months Liability
ended Year ended December 31, LiabilityFair Value at
December 31, ----------------------------------------- September------------------------------ March 31,
2003
2004 2005 2006 2007 20032004
----------- -------- -------- -------- -------- -------------
(in thousands)
Gas Hedge Derivatives (1)(b):
Average daily notional Mcf
volumes (2):MMBtu volumes:
Swap contracts.................... 310,000 260,000contracts (c)....................... 280,000 60,000 70,000 20,000 $ (98,720)$(189,730)
Weighted average fixed price per MMBtu......................MMBtu.. $ 4.394.11 $ 4.054.24 $ 4.284.16 $ 4.23 $ 3.75
Collar contracts.................. 20,000 $ (61)
Weighted average short call
ceiling price per MMBtu........ $ 6.60
Weighted average long put
floor price per MMBtu......... $ 4.003.51
Average forward NYMEX gas prices (3)..........................(d)...... $ 4.716.46 $ 4.755.82 $ 4.705.26 $ 4.62 $ 4.655.02
- ---------------
(1)(a) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connect the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap
and
collar contractscontract and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(2)(b) See Note ED of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(3) The average forward NYMEX gas prices are based on October 30, 2003 market
quotes.
(4) During October 2003,(c) Subsequent to March 31, 2004, the Company entered into new gas swap
contracts to hedge 20,00030,000 Mcf per day of July through December 2004 gas
sales at a weighted average fixed price per MMBtu of $4.96. Additionally, the Company terminated its collar
contracts that hedged 20,000$6.42 and 114,904 Mcf
per day of 2005 gas sales at a weighted average fixed price per MMBtu of
$5.54.
(d) The average forward NYMEX gas prices are based on May 5, 2004 sales.market
quotes.
38
Item 4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures. AsThe Company's principal
executive officer and principal financial officer have evaluated, as required by
Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"),
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this Report,quarterly report on
Form 10-Q. Based on that evaluation, the Company's chiefprincipal executive officer ("CEO") and
chiefprincipal financial officer ("CFO") carried out an evaluationconcluded that the design and operation of the effectiveness
of the Company's disclosure controls and procedures. Based on those evaluations,
the Company's CEO and CFO believe (i) that the
Company's disclosure controls and procedures are designed to ensureeffective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and
communicated to the Company's management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure; and (ii)
that the Company's disclosure controls and procedures are effective.
(b)forms.
Changes in internal controls.control over financial reporting. There have been no significant changes
in the Company's internal controlscontrol over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the Company's last fiscal
quarter that have materially affected or in other factors that could significantlyare reasonably likely to materially
affect the Company's internal controls subsequent to the evaluation referred to in Item
4. (a), above, nor have there been any corrective actions with regard to
significant deficiencies or material weaknesses.
38
PIONEER NATURAL RESOURCES COMPANYcontrol over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note G of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements", the Company is a party to various
legal actions incidental to its business. Except for the specific legal actions
described in Note G, the Company believes that the probable damages from such
other legal actions will not be in excess of 10ten percent of the Company's
current assets.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
2.1 Agreement and Plan of Merger dated May 3, 2004, among the Company,
Evergreen Resources, Inc. and BC Merger Sub, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form 8-K,
File No. 1-13245, filed with the SEC on May 5, 2004).
10.1 Consulting and Non-Competition Agreement, dated May 3, 2004, between
the Company and Dennis R. Carlton (incorporated by reference to
Exhibit 99.1 to the Company's current report on Form 8-K, File No. 1-
13245, filed with the SEC on May 5, 2004).
10.2 Consulting and Non-Competition Agreement, dated May 3, 2004, between
the Company and Kevin R. Collins (incorporated by reference to Exhibit
99.2 to the Company's current report on Form 8-K, File No. 1-13245,
filed with the SEC on May 5, 2004).
10.3 Non-Competition Agreement, dated May 3, 2004, between the Company and
Mark S. Sexton (incorporated by reference to Exhibit 99.3 to the
Company's current report on Form 8-K, File No. 1-13245, filed with the
SEC on May 5, 2004).
31.1 Chief Executive Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
During the three months ended September 30, 2003,March 31, 2004, the Company filed with the
SEC current reports on Form 8-K on July 17, JulyFebruary 2, February 18 and March 30, and August 19.2004,
to provide certain information that is deemed furnished, not filed, under the
Exchange Act.
The Company's July 17, 2003February 2, 2004 Form 8-K provided, as an exhibit thereto, a
news release issued by the Company on July 17, 2003February 2, 2004 announcing, together with
related information, (i) anticipatedfinancial and operating results for the quarter and year
ended December 31, 2003, providing an operations update and providing the
Company's first production from the Sable field
offshore of South Africa in August 2003, (ii) updatesquarter 2004 financial outlook based on the Harrier field and
Devils Tower project developments and (iii) an update on second quarter guidance
based upon then known market conditions.current expectations.
39
The Company's July 30, 2003February 18, 2004 Form 8-K provided, as an exhibit thereto, a
news release issued by the Company on July 30, 2003February 18, 2004 announcing, the
Company's
financial and operating results for the quarter ended June 30, 2003; providingdeclaration of a semiannual cash dividend of $0.10 per share on its outstanding
common stock payable on April 13, 2004 to stockholders of record on March 29,
2004 by the Company's third quarter 2003 financial outlook based on then current
expectations and providing information regarding the Company's oil and gas price
hedges.board of directors.
The Company's August 19, 2003March 30, 2004 Form 8-K provided, as an exhibit thereto, a
news release issued by the Company on August 18, 2003March 30, 2004 providing a guidance update
on first quarter production and exploration and abandonment expense based on
current expectations and partial quarter actual results; announcing together with
relatedrecent
drilling results, including information (i) commencementregarding the Company's Juno and Myrtle
Beach prospects; and providing certain forward looking information, including
the acquisition of additional interests in the Spraberry field and timing of
first production from the Sable field, (ii) a
discovery on the Tomahawk prospect in the Falcon field in theCompany's deepwater Gulf of Mexico Devils Tower,
Tomahawk and (iii) the participation in a successful development well in the Adams field in
Tunisia.
39Raptor fields.
40
PIONEER NATURAL RESOURCES COMPANY
S I G N A T U R E SSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereuntohereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: October 31, 2003May 7, 2004 By: /s/ Timothy L. Dove
-----------------------------------
Timothy L. Dove
Executive Vice President and Chief
Financial Officer
Date: October 31, 2003May 7, 2004 By: /s/ Richard P. Dealy
-----------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
4041
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
31.1*2.1 Agreement and Plan of Merger dated May 3, 2004, among the Company,
Evergreen Resources, Inc. and BC Merger Sub, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form
8-K, File No. 1-13245, filed with the SEC on May 5, 2004).
10.1 Consulting and Non-Competition Agreement, dated May 3, 2004,
between the Company and Dennis R. Carlton (incorporated by
reference to Exhibit 99.1 to the Company's current report on Form
8-K, File No. 1-13245, filed with the SEC on May 5, 2004).
10.2 Consulting and Non-Competition Agreement, dated May 3, 2004,
between the Company and Kevin R. Collins (incorporated by
reference to Exhibit 99.2 to the Company's current report on Form
8-K, File No. 1-13245, filed with the SEC on May 5, 2004).
10.3 Non-Competition Agreement, dated May 3, 2004, between the Company
and Mark S. Sexton (incorporated by reference to Exhibit 99.3 to
the Company's current report on Form 8-K, File No. 1-13245, filed
with the SEC on May 5, 2004).
31.1 (a) Chief Executive Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2*31.2 (a) Chief Financial Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1*32.1 (a) Chief Executive Officer certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2*32.2 (a) Chief Financial Officer certification under Section 906 of the
Sarbanes-Oxley Act of 2002.
- -------------
*(a) filed herewith
4142