UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005March 31, 2006
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 1-13245
PIONEER NATURAL RESOURCES COMPANY
------------------------------------------------------
(Exact name of Registrantregistrant as specified in its charter)
Delaware 75-2702753
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ ----------
(AddressAddress of principal executive offices) (Zip Code)
(972) 444-9001
-------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant 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 check mark whether the Registrantregistrant is a large accelerated filer, an
accelerated filer, (as
definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).
YesAct. (Check
one):
Large accelerated filer /x/ Accelerated filer / x / NoNon-accelerated filer / /
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes / / No / x /
Number of shares of Common Stock outstanding as of November 4, 2005.................................................. 128,531,071May 1, 2006...... 129,300,537
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Cautionary Statement Concerning Forward-Looking Statements.............. 2
Definitions of Certain Terms and Conventions Used Herein..............Herein................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2005March 31, 2006
and December 31, 2004...............................2005................................. 4
Consolidated Statements of Operations for the three
and nine months ended September 30, 2005March 31, 2006 and 2004...2005.................. 6
Consolidated Statement of Stockholders' Equity for the
ninethree months ended September 30, 2005............March 31, 2006..................... 7
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2005March 31, 2006 and 2004...2005.................. 8
Consolidated Statements of Comprehensive LossIncome (Loss)
for the three and nine months ended September 30, 2005March 31, 2006 and 2004............................................2005.... 9
Notes to Consolidated Financial Statements.............Statements............... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 34Operations...................... 32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 49Risk.............................................. 45
Item 4. Controls and Procedures................................ 51Procedures.................................. 46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 51Proceedings........................................ 47
Item 1A. Risk Factors............................................. 47
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds........................................ 52Proceeds.......................................... 47
Item 6. Exhibits............................................... 53Exhibits................................................. 48
Signatures ....................................................... 54......................................................... 49
Exhibit Index ....................................................... 55......................................................... 50
Cautionary Statement Concerning Forward-Looking Statements
The information includedin this quarterly report on Form 10-Q (the "Report")
contains forward-looking statements that involve risks and uncertainties. When
used in this document, includes forward-looking
statements that are made pursuantthe words "believes," "plans," "expects," "anticipates,"
"intends," "continue," "may," "will," "could," "should," "future," "potential,"
"estimate," or the negative of such terms and similar expressions as they relate
to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements and the
business prospects of Pioneer Natural Resources Company ("Pioneer" or the "Company") or its
management are subjectintended to a number ofidentify forward-looking statements. The
forward-looking statements are based on the Company's current expectations,
assumptions, estimates and projections about the Company and the industry in
which the Company operates. Although the Company believes that the expectations
and assumptions reflected in the forward-looking statements are reasonable, they
involve risks and uncertainties which may causethat are difficult to predict and, in many
cases, beyond the Company's control. Accordingly, no assurances can be given
that the actual events and results in future periods to differwill not be materially fromdifferent than the
anticipated results described in the forward-looking statements. These risksSee "Part I,
Item 3. Quantitative and uncertainties include, among other
things, volatility of oilQualitative Disclosures About Market Risk" and gas prices, product supply"Part
II, Item 1A. Risk Factors" in this Report and demand,
competition, the ability to obtain environmental"Item 1. Business -- Competition,
Markets and other permitsRegulations", "Item 1A. Risk Factors" and the
timing thereof, other government regulation or action, international operations"Item 7A. Quantitative and
associated international political and economic instability, legal actions,
the costs and results of drilling and operations, availability of drilling
equipment, the Company's ability to replace reserves, 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 weather risks, acts of war or terrorism. These and other risks
are describedQualitative Disclosures About Market Risk" in the Company's 2004 Annual Report on
Form 10-K and other filings
withfor a description of various factors that could materially affect the
SEC.ability of Pioneer to achieve the anticipated results described in the
forward-looking statements. The Company undertakes no duty to publicly update
these statements except as required by law.
2
Definitions of Certain Terms and Conventions Used Herein
Within this report, the following terms and conventions have specific
meanings:
o "Bbl" means a standard barrel containing 42 United States gallons.
o "Bcf" means billion cubic feet.
o "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. 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 natural gas
liquid.
o "BOEPD" means BOE per day.
o "Btu" means British thermal unit, which is a measure of the amount of
energy required to raise the temperature of one pound of water one
degree Fahrenheit.
o "LIBOR" means London Interbank Offered Rate, which is a market rate of
interest.
o "Mcf" means one thousand cubic feet and is a measure of natural gas
volume.
o "MMBbl" means one million Bbls.
o "MMBOE" means one million BOEs.
o "MMBtu" means one million Btus.
o "NGL" means natural gas liquid.
o "NYMEX" means the New York Mercantile Exchange.
o "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.
o "SEC" means the United States Securities and Exchange Commission.
o With respect 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
the Company's 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.
o Unless otherwise indicated, 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)
September 30,March 31, December 31,
2006 2005
2004----------- ------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...........................................equivalents........................................ $ 64,50842,982 $ 7,25718,802
Accounts receivable:
Trade, net of allowance for doubtful accounts of $5,650$5,567
and $5,409$5,736 as of September 30, 2005March 31, 2006 and December 31, 2004,
respectively................................................... 257,086 209,2972005,
respectively................................................ 186,226 336,062
Due from affiliates.............................................. 871 639
Inventories......................................................... 65,094 40,332affiliates........................................... 971 1,596
Inventories...................................................... 89,942 79,659
Prepaid expenses.................................................... 18,504 10,822expenses................................................. 28,550 18,091
Deferred income taxes............................................... 233,562 115,206taxes............................................ 111,644 158,878
Discontinued operations held for sale............................ 733,409 -
Other current assets:
Derivatives...................................................... 888 209Derivatives................................................... 10,655 1,246
Other, net of allowance for doubtful accounts of $6,425
as of September 30, 2005 and December 31, 2004.................... 9,123 9,6632005..................................... 8,259 9,470
---------- ----------
Total current assets........................................ 649,636 393,425assets..................................... 1,212,638 623,804
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties................................................ 8,096,569 7,654,181properties............................................. 6,900,087 8,499,253
Unproved properties.............................................. 502,984 470,435properties........................................... 176,478 313,881
Accumulated depletion, depreciation and amortization................ (2,478,043) (2,243,549)amortization............. (1,632,887) (2,577,946)
---------- ----------
Total property, plant and equipment......................... 6,121,510 5,881,067equipment...................... 5,443,678 6,235,188
---------- ----------
Deferred income taxes................................................. - 2,963
Goodwill.............................................................. 306,666 315,880Goodwill........................................................... 311,603 311,651
Other property and equipment, net..................................... 89,617 78,696net.................................. 86,058 90,010
Other assets:
Derivatives......................................................... 997 -Derivatives...................................................... 2,281 1,048
Other, net of allowance for doubtful accounts of $92 as of
September 30, 2005March 31, 2006 and December 31, 2004......................... 59,187 56,4362005.......................... 52,991 67,533
---------- ----------
$ 7,227,6137,109,249 $ 6,728,4677,329,234
========== ==========
The financial information included as of September 30, 2005March 31, 2006 has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
September 30,March 31, December 31,
2006 2005
2004
----------------------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................................Trade......................................................... $ 262,698233,066 $ 205,153330,151
Due to affiliates................................................ 10,843 10,898affiliates............................................. 4,336 15,053
Interest payable.................................................... 21,493 45,735payable................................................. 18,442 40,314
Income taxes payable................................................ 19,125 13,520payable............................................. 151,061 22,470
Discontinued operations held for sale............................ 66,322 -
Other current liabilities:
Derivatives...................................................... 575,060 224,612Derivatives................................................... 174,491 320,098
Deferred revenue................................................. 165,063 -
Other............................................................ 77,894 44,541revenue.............................................. 187,412 190,327
Other......................................................... 159,951 114,942
---------- ----------
Total current liabilities................................... 1,132,176 544,459liabilities................................ 995,081 1,033,355
---------- ----------
Long-term debt........................................................ 1,939,296 2,385,950
Derivatives........................................................... 520,324 182,803debt..................................................... 1,159,763 2,058,412
Derivatives........................................................ 262,844 431,543
Deferred income taxes................................................. 618,343 607,415taxes.............................................. 989,564 767,329
Deferred revenue...................................................... 711,669 -revenue................................................... 619,477 664,511
Other liabilities and minority interests.............................. 181,555 176,060interests........................... 126,709 156,982
Stockholders' equity:
Common stock, $.01 par value:value; 500,000,000 shares authorized;
146,955,674145,336,331 and 145,644,828145,200,293 shares issued as of
September 30, 2005at March 31,
2006 and December 31, 2004, respectively...........2005, respectively...................... 1,476 1,470 1,456
Additional paid-in capital.......................................... 3,775,385 3,705,286capital....................................... 3,738,509 3,775,794
Treasury stock, at cost: 13,544,015cost; 18,311,846 and 813,16618,368,109 shares as of
September 30, 2005at
March 31, 2006 and December 31, 2004, respectively........... (635,293) (27,793)2005, respectively............ (879,516) (882,382)
Deferred compensation............................................... (53,261) (22,558)
Accumulated deficit................................................. (323,978) (634,146)compensation............................................ - (45,827)
Retained earnings (accumulated deficit).......................... 340,452 (184,320)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax............................ (698,660) (241,350)tax......................... (301,878) (506,636)
Cumulative translation adjustment................................ 58,587 50,885adjustment............................. 56,768 59,003
---------- ----------
Total stockholders' equity.................................. 2,124,250 2,831,780equity............................... 2,955,811 2,217,102
Commitments and contingenciescontingencies......................................
---------- ----------
$ 7,227,6137,109,249 $ 6,728,4677,329,234
========== ==========
The financial information included as of September 30, 2005March 31, 2006 has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
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,
---------------------------
2006 2005 2004 2005 2004
--------- ---------
---------- ----------
Revenues and other income:
Oil and gas......................................gas............................................... $ 558,382379,468 $ 425,575 $1,593,470 $1,265,744323,115
Interest and other............................... 9,460 1,212 85,689 4,557other........................................ 17,111 2,306
Gain (loss) on disposition of assets, net........ 394 215 2,763 (30)
-------- --------net................. (73) 2,141
--------- ---------
568,236 427,002 1,681,922 1,270,271
-------- --------396,506 327,562
--------- ---------
Costs and expenses:
Oil and gas production........................... 118,422 75,095 330,871 222,707production.................................... 94,683 80,946
Depletion, depreciation and amortization......... 136,367 135,459 431,760 405,758amortization.................. 82,406 73,308
Impairment of long-lived assets.................. 21 34,825 644 34,825assets........................... - 152
Exploration and abandonments..................... 64,198 32,882 183,671 152,233abandonments.............................. 124,642 53,829
General and administrative....................... 32,749 19,431 91,551 54,846administrative................................ 32,247 27,488
Accretion of discount on asset retirement obligations.................................... 1,968 2,030 6,210 6,012
Interest......................................... 29,268 24,827 92,731 67,805
Other............................................ 38,173 2,486 67,475 10,982
-------- --------obligations..... 1,148 1,499
Interest.................................................. 36,576 32,746
Other..................................................... 5,054 8,841
--------- ---------
421,166 327,035 1,204,913 955,168
-------- --------376,756 278,809
--------- ---------
Income from continuing operations before income taxes..................................... 147,070 99,967 477,009 315,103taxes......... 19,750 48,753
Income tax provision............................... (42,483) (22,893) (193,722) (113,688)
-------- --------provision.......................................... (20,717) (21,762)
--------- ---------
Income (loss) from continuing operations.................. 104,587 77,074 283,287 201,415operations...................... (967) 26,991
Income from discontinued operations, net of tax.... 18,986 3,842 110,502 9,391
-------- --------tax............... 544,174 57,666
--------- ---------
Net income.........................................income.................................................... $ 123,573543,207 $ 80,916 $ 393,789 $ 210,806
======== ========84,657
========= =========
Basic earnings per share:
Income (loss) from continuing operations................operations.................. $ .76(.01) $ .65 $ 2.02 $ 1.70.19
Income from discontinued operations, net of tax.. .14 .03 .78 .08
-------- --------tax........... 4.29 .40
--------- ---------
Net income.......................................income................................................ $ .904.28 $ .68 $ 2.80 $ 1.78
======== ========.59
========= =========
Diluted earnings per share:
Income (loss) from continuing operations................operations.................. $ .74(.01) $ .64 $ 1.97 $ 1.67.19
Income from discontinued operations, net of tax.. .14 .03 .77 .08
-------- --------tax........... 4.29 .39
--------- ---------
Net income.......................................income................................................ $ .884.28 $ .67 $ 2.74 $ 1.75
======== ========.58
========= =========
Weighted average shares outstanding:
Basic............................................ 137,655 118,663 140,436 118,745
======== ========Basic..................................................... 126,944 142,898
========= =========
Diluted.......................................... 141,786 120,297 144,770 120,321
======== ========Diluted................................................... 126,944 147,345
========= =========
Dividends declared per share.......................share.................................. $ .12 $ .10 $ .22 $ .20
======== ========
========= =========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Retained Deferred
Additional Earnings Hedge Cumulative Total
Common Paid-in Treasury Deferred Accumulated(Accumulated Losses, Translation Stockholders'
Stock Capital Stock Compensation DeficitDeficit) Net of Tax Adjustment Equity
------ ---------- ----------------- ------------ ----------- ----------- ----------- ------------
Balance as of January 1, 2005..... $1,456 $3,705,2862006.... $1,470 $3,775,794 $(882,382) $ (27,793) $(22,558) $(634,146)(45,827) $(184,320) $(506,636) $ (241,350) $50,885 $ 2,831,78059,003 $2,217,102
Dividends declared ($.22.12 per
common share).................................. - - - - (31,176)(15,510) - - (31,176)(15,510)
Exercise of long-term incentive
plan stock options and
employee stock purchases....... 1 1,310 91,304 - (52,445)options........... - - 40,1704,847 - (2,925) - - 1,922
Purchase of treasury stock.......stock..... - - (698,804)(1,981) - - - - (698,804)(1,981)
Tax benefits related to
stock-based compensation.......compensation..... - 18,1481,062 - - - - - 18,148
Deferred compensation:1,062
Compensation deferred.......... 14 56,016costs:
Adoption of SFAS 123(R)...... - (56,030)(45,827) - 45,827 - - - -
Deferred compensation included
in net income................ - - - 19,619 - - - 19,619
Forfeitures of deferred
compensation................. (1) (5,375) - 5,708 - - - 332
Net income.......................Compensation awards.......... 6 (6) - - - - 393,789 - -
393,789Compensation costs included
in net income.............. - 7,486 - - - - - 7,486
Net income..................... - - - - 543,207 - - 543,207
Other comprehensive income (loss):
Net deferred hedge losses,Deferred hedging activity,
net of tax:
Net deferred hedge losses....gains... - - - - - (1,017,308)41,902 - (1,017,308)41,902
Net hedge losses included
in net income..............continuing operations.. - - - - - 253,50836,584 - 253,508
Tax benefits related to net36,584
Net hedge losses...............losses included
in discontinued
operations................ - - - - - 306,490126,272 - 306,490126,272
Translation adjustment.........adjustment....... - - - - - - 7,702 7,702(2,235) (2,235)
----- --------- -------- --------- -------- -------- ------- -------- ---------- ------ -------------------
Balance as of September 30, 2005.. $1,470 $3,775,385 $(635,293) $(53,261) $(323,978)March 31, 2006..... $1,476 $3,738,509 $(879,516) $ (698,660) $58,587- $ 2,124,250340,452 $(301,878) $ 56,768 $2,955,811
===== ========= ======== ========= ======== ======== ======= ======== ========== ====== ===================
The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,
---------------------- --------------------------March 31,
----------------------------
2006 2005
2004 2005 2004
--------- --------- ----------- ---------------------
Cash flows from operating activities:
Net income......................................income....................................................... $ 123,573543,207 $ 80,916 $ 393,789 $ 210,80684,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization..... 136,367 135,459 431,760 405,758amortization....................... 82,406 73,308
Impairment of long-lived assets.............. 21 34,825 644 34,825assets................................ - 152
Exploration expenses, including dry holes.... 52,817 13,975 157,604 125,415holes...................... 94,582 16,676
Deferred income taxes........................ 30,485 15,377 157,283 94,500taxes.......................................... 16,961 15,197
Loss (gain) on disposition of assets, net.... (394) (215) (2,763) 30
Loss on extinguishment of debt............... 18,633 - 25,975 -net...................... 73 (2,141)
Accretion of discount on asset retirement obligations................................ 1,968 2,030 6,210 6,012obligations.......... 1,148 1,499
Discontinued operations...................... (15,256) 5,249 (84,118) 15,778operations........................................ (539,653) 122,749
Interest expense............................. 1,898 (1,094) 4,270 (12,457)expense............................................... 3,047 197
Commodity hedge related activity............. 1,658 (11,311) (9,069) (33,844)
Amortization of stock-based compensation..... 6,449 2,928 19,619 7,794activity............................... 508 (3,061)
Stock-based compensation....................................... 7,486 5,152
Amortization of deferred revenue............. (21,882) - (53,956) -revenue............................... (47,949) (11,625)
Other noncash items.......................... 3,950 788 10,777 6,492items............................................ 3,714 4,146
Changes in operating assets and liabilities, net of effects
from acquisition:
Accounts receivable, net..................... 9,044 13,450 (45,255) (45,090)
Inventories.................................. (8,964) (5,572) (21,667) (9,752)net....................................... 126,115 (12,033)
Inventories.................................................... (20,131) (1,315)
Prepaid expenses............................. (13,513) (6,881) (7,705) (2,034)expenses............................................... (12,264) 2,449
Other current assets, net.................... 405 380 (124) 1,137net...................................... 9,429 (198)
Accounts payable............................. 27,730 (23,019) 37,294 (27,773)payable............................................... (93,648) 17,593
Interest payable............................. (21,593) (14,526) (25,957) (14,440)payable............................................... (19,100) (16,259)
Income taxes payable......................... (6,314) (1,460) 5,605 2,995payable........................................... 134,051 2,775
Other current liabilities.................... (9,350) (2,160) (15,039) (8,679)
-------- --------liabilities...................................... 13,365 3,736
---------- -------------------
Net cash provided by operating activities.. 317,732 239,139 985,177 757,473
-------- --------activities................... 303,347 303,654
---------- -------------------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired..acquired................... - (849,450) (965) (849,450)
Proceeds from disposition of assets............. 63,598 510 1,184,196 1,050assets.............................. 963,191 600,096
Additions to oil and gas properties............. (414,170) (116,922) (908,727) (467,753)properties.............................. (334,888) (194,940)
Other property additions, net................... (14,337) (9,894) (34,059) (24,137)
-------- --------net.................................... (6,548) (11,062)
---------- -------------------
Net cash provided by (used in) investing activities............................... (364,909) (975,756) 240,445 (1,340,290)
-------- --------activities................... 621,755 393,129
---------- -------------------
Cash flows from financing activities:
Borrowings under long-term debt................. 599,700 876,000 976,112 1,032,477debt.................................. 364,271 155,713
Principal payments on long-term debt............ (66,967) (109,002) (1,440,649) (401,479)debt............................. (1,264,271) (708,713)
Payment of other liabilities.................... (18,462) (28,059) (32,437) (36,178)liabilities..................................... (524) (8,302)
Exercise of long-term incentive plan stock options and employee stock purchases......... 12,736 6,273 40,170 20,281options............... 1,922 25,076
Purchase of treasury stock...................... (472,580) (20,963) (698,804) (36,249)
Payment of financing fees....................... (1,811) (510) (1,811) (642)
Dividends paid.................................. - - (14,332) (12,005)
-------- --------stock....................................... (1,981) (151,976)
---------- -------------------
Net cash provided by (used in)used in financing activities............................. 52,616 723,739 (1,171,751) 566,205
-------- --------activities....................... (900,583) (688,202)
---------- -------------------
Net increase (decrease) in cash and cash equivalents..................................... 5,439 (12,878) 53,871 (16,612)equivalents............................ 24,519 8,581
Effect of exchange rate changes on cash and cash equivalents................................ 618 615 3,380 262equivalents......... (339) 201
Cash and cash equivalents, beginning of period.... 58,451 15,212period....................... 18,802 7,257
19,299
-------- -------- ---------- -------------------
Cash and cash equivalents, end of period..........period............................. $ 64,50842,982 $ 2,949 $ 64,508 $ 2,949
======== ========16,039
========== ===================
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended
Nine months ended
September 30, September 30,
---------------------- -----------------------March 31,
--------------------------
2006 2005 2004 2005 2004
--------- ---------
---------- ---------
Net income.......................................income......................................................... $ 123,573543,207 $ 80,916 $ 393,789 $ 210,806
-------- --------84,657
--------- --------
Other comprehensive income (loss):
Net deferred hedge losses,Deferred hedging activity, net of tax:
Net deferred hedge losses................... (476,023) (267,926) (1,017,308) (505,522)gains (losses)............................ 41,902 (311,906)
Net hedge losses included in net income..... 122,484 55,850 253,508 142,735
Tax benefits related to netcontinuing operations........... 36,584 18,906
Net hedge losses.... 145,116 77,873 306,490 134,452losses included in discontinued operations......... 126,272 12,226
Translation adjustment......................... 12,561 12,005 7,702 6,185
-------- --------adjustment......................................... (2,235) (1,623)
--------- --------
Other comprehensive loss.................. (195,862) (122,198) (449,608) (222,150)
-------- --------income (loss)......................... 202,523 (282,397)
--------- --------
Comprehensive loss...............................income (loss)........................................ $ (72,289) $ (41,282) $ (55,819) $ (11,344)
======== ========745,730 $(197,740)
========= ========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is a large independent oil and gas
exploration and production company with operations in the United States, Argentina, Canada,
Equatorial Guinea, Nigeria, 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, 2005March 31, 2006 and for the threethree-month
periods ended March 31, 2006 and nine months ended September 30, 2005 and 2004 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.
On September 28, 2004, the Company completed a merger with Evergreen
Resources, Inc. ("Evergreen") that added to the Company's United States and
Canadian asset bases and expanded its portfolio of development and exploration
opportunities in North America. Evergreen's operations were primarily focused on
developing and expanding its coal bed methane production from the Raton Basin in
southern Colorado.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations", the merger was accounted
for as a purchase of Evergreen by Pioneer. As a result, the historical financial
statements for the Company are those of Pioneer prior to September 28, 2004. See
Note C for additional information regarding the Evergreen merger.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States ("GAAP") have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the 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 for the year ended December 31, 2004.2005.
Discontinued operations. During May 2005 the Company sold its interest in
Martin Creek, Conroy Black and Lookout Butte oil and gas properties in Canada.
During August 2005,2006, the Company sold its
interests in certainthe following oil and gas properties on the shelfassets and has reflected their results of
the Gulf of Mexico.operations in discontinued operations:
Country Description of Assets Date Divested
------- --------------------- -------------
Canada Martin Creek, Conroy Black May 2005
and Lookout Butte fields
United States Two Gulf of Mexico August 2005
shelf fields
United States Deepwater Gulf of Mexico March 2006
fields
Argentina All Argentine properties April 2006
In accordance with SFASStatement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), the Company has reflected (a) the Argentine assets and liabilities sold
during April 2006 as discontinued operations held for sale as of March 31, 2006
and (b) the results of operations of the disposed propertiesabove divestitures as discontinued
operations, rather than as a component of continuing operations. See Note ON for
additional information regarding discontinued operations.
Inventories. Inventories were comprised of $62.9$88.0 million and $37.9$77.3 million
of materials and supplies and $2.2$1.9 million and $2.4 million of commodities as of
September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively. The Company's materials and
supplies inventory is primarily comprised of oil and gas drilling or repair
items such as tubing, casing, chemicals, operating supplies and ordinary
maintenance materials and parts. The materials and supplies inventory is
primarily acquired for use in future drilling operations or repair operations
and is carried at the lower of cost or market, on a first-in, first-out basis.
Commodities inventory is carried at the lower of average cost or market, on a
10
first-in, first- outfirst-out basis. As of September 30, 2005March 31, 2006 and December 31, 2004,2005, the
Company's materials and supplies inventory was net of $.2$1.5 million and $.4$.2
million, respectively, of valuation reserve allowances.
Goodwill. As described in Note C, the Company recorded $322.8 million of
goodwill associated with the Evergreen merger. The goodwill was recorded to the
Company's United States reporting unit. In accordance with Emerging Issues Task
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Force Abstract Issue No. 00-23, "Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and Financial Accounting Standards Board
("FASB") Interpretation No. 44", the Company has reduced goodwill by $16.2
million since September 28, 2004, including $1.1 million and $7.2 million during
the three and nine months ended September 30, 2005, respectively, for tax
benefits associated with the exercise of fully-vested stock options assumed in
conjunction with the Evergreen merger. In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", goodwill is not amortized to earnings, but is assessed for impairment
whenever events or circumstances indicate that impairment of the carrying value
of goodwill is likely, but no less often than annually. If the carrying value of
goodwill is determined to be impaired, it is reduced for the impaired value with
a corresponding charge to pretax earnings in the period in which it is
determined to be impaired. During the third quarter of 2005, the Company
performed its annual assessment of goodwill impairment of goodwill and determined that there
was no impairment.
In accordance with GAAP, certain qualifying income tax benefits derived
from stock-based compensation are recorded as reductions in the carrying value
of goodwill.
Stock-based compensation. The Company has a long-term incentive plan (the
"Long-Term Incentive Plan") under whichOn January 1, 2006, the Company grantsadopted SFAS No.
123 (revised 2004) "Share-Based Payment" ("SFAS 123(R)") to account for
stock-based compensation. The Company accounts for stock-based compensation granted underAmong other items, SFAS 123(R) eliminates the Long-Term Incentive Plan usinguse of
the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") intrinsic value method of accounting and related interpretations.requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant date fair value of those awards
in the financial statements. The Company did not grant
anyelected to use the modified prospective
method for adoption, which requires compensation expense to be recorded for all
unvested stock options and other equity-based compensation beginning in the
first quarter of adoption. For all unvested stock options outstanding as of
January 1, 2006, the previously measured but unrecognized compensation expense,
based on the fair value on the date of grant, will be recognized in the
Company's financial statements over the remaining vesting period. For
equity-based compensation awards granted or modified subsequent to January 1,
2006, compensation expense, based on the fair value on the date of grant, will
be recognized in the Company's financial statements over the vesting period. The
Company utilizes the Black-Scholes option pricing model to measure fair value of
stock options and utilizes the stock price on the date of grant for the fair
value of restricted stock awards. Prior to the adoption of SFAS 123(R), the
Company followed the intrinsic value method in accordance with APB 25 to account
for stock options. Prior period financial statements have not been restated.
The modified prospective method requires the Company to estimate
forfeitures in calculating the expense related to stock-based compensation as
opposed to its prior policy of recognizing forfeitures as they occurred. The
Company recorded no cumulative effect as a result of adopting SFAS 123(R).
Additionally, under the Long-Term Incentive Plan duringprovisions of SFAS 123(R), deferred compensation
recorded under APB 25 related to equity-based awards should be eliminated
against the nineappropriate equity accounts. As a result, upon adoption of SFAS
123(R), the Company eliminated $45.8 million of deferred compensation cost from
stockholders' equity and reduced by a like amount additional paid-in capital in
the accompanying Consolidated Balance Sheet.
For the three months ended September 30, 2005. Stock-basedMarch 31, 2006, the Company recorded $7.5
million of stock-based compensation costs for all plans. The impact to net
income of adopting SFAS 123(R) for this period was $634 thousand, or less than
$.01 per diluted share. The adoption impact is comprised of $492 thousand of
compensation expense associated with option grants was not recognized in the determinationunvested stock options and $142 thousand of the Company's net
income during the three and nine months ended September 30, 2005 and 2004, 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 the Company's Employee Stock Purchase Plan,
which is a compensatory plan under the provisions of SFAS 123(R).
Pursuant to the provisions of SFAS 123(R), the Company's issued shares, as
reflected in the accompanying Consolidated Balance Sheets, at March 31, 2006 and
December 31, 2005 do not include 2,230,117 shares and 1,756,180 shares,
respectively, related to unvested restricted stock awardsawards. During the three
months ended March 31, 2006, the Company issued 658,381 shares of restricted
stock awards.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
As of March 31, 2006, there is deferred and amortizedapproximately $67.5 million of total
unrecognized compensation expense related to earnings ratablyunvested share-based compensation
plans. This compensation will be recognized over the remaining vesting periodsperiod of
the
awards.less than three years.
The following table illustrates the pro forma effect on net income and net
income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123")123(R) to stock-based compensation during the three and nine months
ended September 30,March 31, 2005 and 2004:(in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported........................reported.......................................... $ 123,573 $ 80,916 $ 393,789 $ 210,80684,657
Plus: Stock-based compensation expense included
in net income for all awards, net of tax (a)............................... 4,095 1,859 12,458 4,949.................. 3,271
Deduct: Stock-based compensation expense determined
under fair value based method for all awards, net of tax (a)............... (4,586) (3,273) (14,669) (9,809)
-------- -------- --------.. (4,242)
--------
Pro forma net income...........................income............................................. $ 123,082 $ 79,502 $ 391,578 $ 205,946
======== ======== ========83,686
========
Net income per share:
Basic - as reported..........................reported........................................... $ .90 $ .68 $ 2.80 $ 1.78
======== ======== ========.59
========
Basic - pro forma............................forma............................................. $ .89 $ .67 $ 2.79 $ 1.73
======== ======== ========.58
========
Diluted - as reported........................reported......................................... $ .88 $ .67 $ 2.74 $ 1.75
======== ======== ========.58
========
Diluted - pro forma..........................forma........................................... $ .87 $ .66 $ 2.72 $ 1.71
======== ======== ========.57
========
- ------------------------
(a) For the three and nine months ended September 30,March 31, 2005, stock-based compensation expense
included in net income is net of tax benefits of $2.4
million and $7.2 million, respectively, as compared to $1.1 million and
$2.8 million for the same respective periods in 2004.$1.9 million. Similarly,
stock-based compensation expense determined under the fair value based
method for the three and nine months ended September 30,March 31, 2005 is net of tax benefits of
$2.4 million. See Note D for additional information regarding the Company's
income taxes.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
benefits of $2.6 million and $8.4 million, respectively, as compared to
$1.9 million and $5.6 million for the same respective periods in 2004. See
Note E for additional information regarding the Company's income taxes.
New accounting pronouncements. The following discussions provide
information about new accounting pronouncements that have been issued by the
FASB:
SFAS 123(R). In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), which is a revision of SFAS 123. SFAS
123(R) also supersedes APB 25 and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach to accounting for stock-based compensation in SFAS
123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R)
will require all share-based payments to employees, including grants of employee
stock options, to be recognized as stock-based compensation expense in the
Company's Consolidated Statements of Operations based on their fair values. Pro
forma disclosure is no longer an alternative.
SFAS 123(R) must be adopted no later than January 1, 2006 and permits
public companies to adopt its requirements using one of two methods:
o A "modified prospective" method in which compensation expense is recognized
beginning with the effective date based on the requirements of SFAS 123(R)
for all share-based payments granted after the adoption date and based on
the requirements of SFAS 123 for all awards granted to employees prior to
the effective date of SFAS 123(R) that remain unvested on the adoption
date.
o A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits companies to
restate either all prior periods presented or prior interim periods of the
year of adoption based on the amounts previously recognized under SFAS 123
for purposes of pro forma disclosures.
The Company has elected to adopt the provisions of SFAS 123(R) on January
1, 2006 using the modified prospective method.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using the intrinsic value method prescribed by APB 25 and
related interpretations. As such, the Company generally does not recognize
compensation expense associated with employee stock option grants. The Company
has not issued stock options to employees since 2003. Consequently, the adoption
of SFAS 123(R)'s fair value method will not have a significant impact on the
Company's future results of operations or financial position. Had the Company
adopted SFAS 123(R) in prior periods, the impact would have approximated the
impact of SFAS 123 as described in the pro forma disclosures above. The adoption
of SFAS 123(R) will have no effect on future results of operations related to
the Company's unvested outstanding restricted stock awards. The Company
estimates that the adoption of SFAS 123(R), based on estimated outstanding
unvested stock options, will result in compensation charges of approximately
$1.1 million during 2006.
The Company has an Employee Stock Purchase Plan (the "ESPP") that allows
eligible employees to annually purchase the Company's common stock at a
discount. The provisions of SFAS 123(R) will cause the ESPP to be a compensatory
plan. However, the change in accounting for the ESPP is not expected to have a
material impact on the Company's financial position, future results of
operations or liquidity. Historically, the ESPP compensatory amounts have been
nominal.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
SFAS 123(R) also requires the tax benefits in excess of recognized
compensation expenses to be reported as a financing cash flow rather than as an
operating cash flow as required under current literature. This requirement may
serve to reduce the Company's future cash flows from operating activities and
increase future cash flows from financing activities, to the extent of
associated tax benefits that may be realized in the future.
FIN 47. In March 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143" ("FIN 47"). FIN 47 clarifies that conditional asset
retirement obligations meet the definition of liabilities and should be
recognized when incurred if their fair values can be reasonably estimated. The
interpretation is effective no later than December 31, 2005. The cumulative
effect of initially applying FIN 47, if any, would be recognized as a change in
accounting principle; however, the Company does not believe that the adoption of
FIN 47 will impact its consolidated financial statements.
FSP FAS 19-1. In April 2005, the FASB issued Staff Position No. FAS 19-1,
"Accounting for Suspended Well Costs" ("FSP FAS 19-1"). FSP FAS 19-1 amends SFAS
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies"
("SFAS 19"), to allow continued capitalization of exploratory well costs beyond
one year from the completion of drilling under circumstances where the well has
found a sufficient quantity of reserves to justify its completion as a producing
well and the enterprise is making sufficient progress assessing the reserves and
the economic and operating viability of the project. FSP FAS 19-1 also amends
SFAS 19 to require enhanced disclosures of suspended exploratory well costs in
the notes to the consolidated financial statements. The Company adopted the new
requirements during the second quarter of 2005. See Note D for additional
information regarding the Company's exploratory well costs. The adoption of FSP
FAS 19-1 did not impact the Company's consolidated financial position or results
of operations.
NOTE C. Evergreen Merger
On September 28, 2004, Pioneer completed its merger with Evergreen, with
Pioneer being the surviving corporation for accounting purposes. The transaction
was accounted for as a purchase of Evergreen by Pioneer. The merger with
Evergreen was accomplished through the issuance of 25.4 million shares of
Pioneer common stock and $851.1 million of cash paid to the Evergreen
shareholders at closing, net of $12.1 million of acquired cash. The cash
consideration paid in the merger was financed through borrowings on a $900
million 364-day senior unsecured revolving credit facility (the "364-Day Credit
Agreement"). See Note F for additional information about the 364-Day Credit
Agreement.
The Company recorded $322.8 million of goodwill associated with the
Evergreen merger, which represented the excess of the purchase consideration
over the net fair value of the identifiable net assets acquired.
The following unaudited pro forma combined condensed financial data for the
three and nine months ended September 30, 2004 was derived from the historical
financial statements of Pioneer and Evergreen giving effect to the Evergreen
merger as if it had occurred on January 1, 2004. The unaudited pro forma
combined condensed financial data have been included for comparative purposes
only, are not necessarily indicative of the results that might have occurred had
the merger taken place on January 1, 2004 and are not intended to be a
projection of future results.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Three months Nine months
ended ended
September 30, 2004 September 30, 2004
------------------ ------------------
(in thousands, except per share amounts)
Revenues........................................... $ 492,557 $1,462,922
========= =========
Income from continuing operations.................. $ 76,148 $ 217,194
Income from discontinued operations, net of tax.... 3,842 9,391
-------- ---------
Net income......................................... $ 79,990 $ 226,585
========= =========
Basic earnings per share:
Income from continuing operations................ $ .53 $ 1.51
Income from discontinued operations, net of tax.. .03 .06
-------- ---------
Net income....................................... $ .56 $ 1.57
========= =========
Diluted earnings per share:
Income from continuing operations................ $ .51 $ 1.47
Income from discontinued operations, net of tax.. .03 .06
-------- ---------
Net income....................................... $ .54 $ 1.53
========= =========
NOTE D. Exploratory Well Costs
The Company capitalizes exploratory well costs until a determination is
made that the well has either found proved reserves or that it is impaired. The
capitalized exploratory well costs are presented in proved properties in the
Consolidated Balance Sheets. If the exploratory well is determined to be
impaired, the well costs are charged to expense.
The following table reflects the Company's capitalized exploratory well
activity during the three and nine months ended September 30, 2005 and the years
ended DecemberMarch 31, 2004 and 2003:2006 (in thousands):
Year ended
Three months Nine months December 31,
ended ended ---------------------
September 30, 2005 September 30, 2005 2004 2003
------------------ ------------------ -------- ---------
(in thousands)
Beginning capitalized exploratory well costs....costs .................... $ 134,587 $ 126,472 $108,986 $ 71,500198,291
Additions to exploratory well costs pending the
determination of proved reserves.............. 50,478 148,502 156,937 216,352reserves.............................. 100,534
Reclassifications due to determination of proved reserves............................... (9,362) (54,261) (56,639) (117,966)reserves........ (53,958)
Disposition of wells............................................. (50,671)
Exploratory well costs charged to expense....... (10,452) (55,462) (82,812) (60,900)
-------- -------- -------expense........................ (36,745)
--------
Ending capitalized exploratory well costs ............................. $ 165,251 $ 165,251 $126,472 $ 108,986
======== ======== =======157,451
========
1412
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
The following table provides an aging as of September 30, 2005March 31, 2006 and December 31,
2004 and 20032005 of capitalized exploratory well costs based on the date the drilling was
completed and the number of wells for which exploratory well costs have been
capitalized for a period greater than one year since the date the drilling was
completed:
March 31, December 31,
September 30, ---------------------2006 2005
2004 2003----------- ------------ --------- --------
(in thousands, except well counts)
Capitalized exploratory well costs that have been
capitalized for a period of one year or less..............less............... $ 74,08488,198 $ 35,046 $ 75,12084,042
Capitalized exploratory well costs that have been
capitalized for a period greater than one year............ 91,167 91,426 33,866year............. 69,253 114,249
------- -------
-------
$165,251 $126,472 $108,986
=======$157,451 $198,291
======= =======
Number of wells with exploratory well costs that have been
capitalized for a period greater than one year.. 7 10 3
=======year............. 11 14
======= =======
The following table provides the capitalized costs of exploration projects
that have been suspended for more than one year as of September 30, 2005March 31, 2006 and
December 31, 2004 and 2003:2005:
March 31, December 31,
September 30, ---------------------2006 2005
2004 2003----------- ------------ --------- --------
(in thousands)
United States:
Ozona Deep..............................................Deep................................................. $ - $ 19,423
$ 19,462 $ 19,003
Oooguruk................................................ 50,507 47,083Thunder Hawk............................................... - 25,769
Oooguruk................................................... 52,205 52,205
Canada - Other............................................ - 1,214 -other................................................ 844 805
South Africa - Gas Project................................ 15,520 14,895 14,863Africa.................................................. 7,227 7,227
Tunisia - Anaguid......................................... 5,717 8,772 -Anaguid............................................. 8,977 8,820
------- -------
-------
Total.................................................Total................................................ $ 91,167 $ 91,426 $ 33,866
=======69,253 $114,249
======= =======
The following discussion describes the history and status of each
significant suspended exploratory project:
Ozona Deep.Deep and Thunder Hawk. The Company's Ozona Deep exploration well was
drilled during 2002 and found quantities of oil believed to be commercial;
however, given its location in the Gulf of Mexico, it iswas necessary to have a
signed production handling agreement ("PHA") with infrastructure in the area to ensure
the economics associated with the discovery prior to doing further appraisal
drilling. During the third quarter of 2005, Pioneer and the operator of Ozona
Deep signed a Capacity Commitment Agreement ("CCA") with a third partythird-party platform to bring
future production from the discovery to the third party'sthird-party's platform.
TheDuring 2004, the Company's initial Thunder Hawk well found quantities of
oil believed to be commercial. Additional appraisal wells were determined
necessary to confirm the commercialization of the discovery.
During March 2006, the Company anticipates entering into a PHA based onsold its interests in the CCAOzona Deep and
drilling an
appraisal well during 2006.Thunder Hawk properties as part of the Company's deepwater Gulf of Mexico
divestiture. See Note N for additional information regarding the Company's
divestiture of its deepwater Gulf of Mexico oil and gas properties.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Oooguruk. During 2003, the Company's Alaskan Oooguruk discovery wells found
quantities of oil believed to be commercial. In 2003, the Company began farm-in
discussions with the owner of undeveloped discoveries in adjacent acreage given
its proximity and the potential cost benefits of a larger scale project. The
farm-in was completed during 2004. Along with completing the farm-in agreement,
Pioneer obtained access to exploration well and seismic data to improve the
Company's understanding, without having to drill additional wells, of the
potential of the discoveries without having to
drill additional wells.discoveries. In late 2004, the Company completed an extensive
technical and economic evaluation of the resource potential within this area and
authorized a front-end engineering design study ("FEED study") for the area
which is expected to be completed bywas completed.
During the endfirst quarter of 2005. If the FEED study and
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
commercial arrangements confirm favorable development economics,2006, the Company sanctioned the development of
the discovery and obtained the necessary regulatory approvals. The Company began
operations to install an offshore gravel drilling and production site and
completed gravel hauling activities during the 2006 winter construction season.
A subsea flowline and facilities will be installed during 2007 to carry produced
liquids to existing onshore processing facilities at the Kuparuk River Unit.
Pioneer plans to drill approximately 40 horizontal wells to develop the
discovery. Depending on weather conditions and facilities completion and
accessibility, drilling could begin development operations during 2006, subjectas early as the fall of 2007. The Company
estimates first production to regulatory
approvals, with first oil sales targetedoccur in 2008.
Simultaneously, the Company is
working to secure throughput agreements to process the associated potential oil
production at a nearby facility should the project be sanctioned.
South Africa - Gas Project.Africa. During 2001, the Company drilled two South African discovery
wells that found quantities of gas and condensate believed to be commercial.
During 2004, 2003 and 2002, the Company actively reviewed the gas supply and
demand fundamentals in South Africa and had discussions with the operator of a
gas-to-liquids ("GTL") plant located at Mossel Bayin the area to purchase the condensate and
gas. During 2004, a FEED study was authorized for the gas development and
infrastructure design. The FEED study was completed in early 2005 and based on
that study, the GTL plant operator initiated purchase orders for long-lead time
infrastructure components. During the third quarter ofIn December 2005, the Company received the final
approvals with its partner in the South Coast gas project. The project will
include subsea tie-back of gas from the Sable field and five to six additional
gas accumulations to the GTL plant operator
announced that they had reached an agreementexisting production facilities on the F-A platform for
transportation via existing pipelines to develop the gas and condensate
fields discovered offshore South Africa. The companies signed a Memorandum of
Understanding finalizing the terms for jointly developing the gas fields to
provide feedstock for the GTL plant. The agreementDevelopment drilling
related to the project commenced in the first quarter of 2006. Production is
subjectexpected to approval bybegin during the GTL plant operator's boardsecond half of directors.2007.
As of December 31, 2005, the remaining costs associated with this project
relate to the Boomslang discovery, which was not included in the initial
development of this project. Boomslang is both an oil and gas discovery.
Continued studies of the commercialization of the project are ongoing. Part of
the ongoing efforts is determining the commercialization of the discovery as an
oil project, gas project or both. If commercialized as an oil discovery,
earliest production would be 2009 and if commercialized as a gas discovery,
earliest production would be 2012.
Tunisia - Anaguid. During 2003, the Company drilled twoan exploration wellswell on
its Anaguid Block in Tunisia which found quantities of gas and condensate
believed to be commercial. During 2004, the wells werewell was scheduled and approved for
extended production tests. However, the project operator delayed the extended
production tests due to issues unrelated to the Company or the project. In the
third quarter of 2005, the project operator, along with the Company, conducted an extended production test of one of the two existing exploration
wells and drilled an
offset appraisal well to the other exploration well.
The results of the extended production test were unfavorable and the
Company has expensed the costs associated with this well in the third quarter of
2005, which were approximately $5.1 million. However, the appraisal well offsetting the second discoveryexploration well encountered gas and
condensate in a similar horizon to the initial well. The Company along with the operator, is currently
reviewing data from the appraisal well to determine whether development of the
area is economical.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE E.D. Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS 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 deferred tax assets can be realized
prior to their expiration. Pioneer monitors Company-specific, oil and gas
industry and worldwide economic factors and assesses the likelihood that the
Company's net operating loss carryforwards ("NOLs") and other deferred tax
attributes in the United States and state, local and foreign tax jurisdictions
will be utilized prior to their expiration. During the three months ended March
31, 2006, the Company utilized all of its available United States NOLs, other
than those subject to limitations, primarily related to the sale of the
deepwater Gulf of Mexico assets; accordingly, this will accelerate the Company's
payment of cash taxes. As of September 30,March 31, 2006 and December 31, 2005, the Company's
valuation allowance was $91.3 million,allowances (relating primarily related to foreign tax jurisdictions.
In October 2004, the American Jobs Creation Act ("AJCA") was signed into
law. The AJCA includes a dividend deduction of 85 percent of qualified foreign
earnings that are repatriated, as defined in the AJCA. During June 2005, the
Company determined that it was advantageous to apply the provisions of the AJCA
to qualified foreign earnings that could be repatriated.jurisdictions) were
$116.1 million and $95.8 million, respectively.
Income tax provision. The Company formalized
a repatriation planrecognized income tax provisions on
continuing operations of $20.7 million and $21.8 million during the three-month
periods ended March 31, 2006 and 2005, respectively. The Company's effective tax
rate on continuing operations of 104.9 percent differs from the combined United
States federal and state statutory rate of approximately 36.5 percent primarily
due to:
o foreign tax rates,
o statutes in June 2005 and repatriated $313 millionforeign jurisdictions that differ from Canada, South
Africa and Tunisia. Based on the current understanding of the provisions of the
AJCA and projections of future foreign earnings, the Company estimates that
approximately $164.3 million of the repatriated funds will qualify for the
dividend exclusion. The Company is obligated by the provisions of the AJCA to
invest the qualifying dividendsthose in the
United States within a reasonable period
of time. The Company estimated the cash tax liabilityand
o expenses for unsuccessful well costs and associated with the
qualifying dividends to be approximately $9.0 million for 2005. During the nine
months ended September 30, 2005,acreage costs
in foreign locations where the Company recognizeddoes not expect to receive
income tax expensebenefits; during the first quarter of $4.7 million2006, this
primarily related to continuing operations and $2.9 million related to
discontinued operations associated with qualifying dividends. If funds are
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
available, the Company may repatriate additional earnings during 2005. Further
repatriation under the AJCA will be dependent upon the Company's financial
results and activities for the remainderNigerian expenses of 2005.approximately $35.5
million.
The Company's income tax provisionprovisions attributable to income from continuing
operations consisted of the following for the threethree-month periods ended March
31, 2006 and nine months ended
September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
---------------------- ----------------------March 31,
--------------------------
2006 2005 2004 2005 2004
--------- ---------
--------- ---------
(in thousands)
Current:
U.S. federal.............................. $ (2,513) $ -
U.S. state and local...................... (9) -
Foreign................................... 6,278 6,565
-------- --------
3,756 6,565
-------- --------
Deferred:
U.S. federal.............................. 9,937 14,728
U.S. state and local...................... (198) (1)
Foreign................................... 7,222 470
-------- --------
16,961 15,197
-------- --------
$ 20,717 $ 21,762
======== ========
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Discontinued operations. The Company's effective tax rate associated with
discontinued operations during the three-month periods ended March 31, 2006 and
2005 was 34.9 percent and 34.3 percent, respectively. The Company's income tax
provisions attributable to income from discontinued operations consisted of the
following for the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
--------------------------
2006 2005
--------- ---------
(in thousands)
Current:
U.S. federal...................federal.............................. $ 3,308140,725 $ - $ 7,965 $ 2,500
U.S. state and local........... (474) 300 (343) 601
Foreign........................ 9,164 7,216 28,817 16,087local...................... 2,140 -
Foreign................................... 1,165 2,325
-------- --------
-------- --------
11,998 7,516 36,439 19,188
-------- --------144,030 2,325
-------- --------
Deferred:
U.S. federal................... 25,828 14,692 147,147 94,058federal.............................. 142,276 26,691
U.S. state and local........... 782 599 5,369 3,662
Foreign........................ 3,875 86 4,767 (3,220)local...................... 6,215 1,149
Foreign................................... (1,004) (64)
-------- --------
-------- --------
30,485 15,377 157,283 94,500
-------- --------147,487 27,776
-------- --------
$ 42,483291,517 $ 22,893 $ 193,722 $ 113,688
======== ========30,101
======== ========
Included in the Company's income tax provision for the nine months ended
September 30, 2005 is the reversal of a $26.9 million tax benefit recorded
principally in the third quarter of 2004 as a result of the cancellation of the
development of the Olowi block and the Company's decision to exit Gabon. The
Company reversed the tax benefit as a result of signing an agreement in June
2005 to sell its shares in the subsidiary that owns the interest in the Olowi
block to an unaffiliated buyer, which made it more likely than not that the
Company would not realize the originally recorded tax benefit. The sale of the
shares in the subsidiary that owns the interest in the Olowi block was completed
during October 2005 and the Company will recognize a gain during the fourth
quarter of approximately $47 million with no associated income tax effect in
either Gabon or the United States. See Note P for additional discussion
regarding the close of the Gabon sale. In accordance with FASB Interpretation
No. 18, "Accounting for Income Taxes in Interim Periods" ("FIN 18"), the
Company's income tax provision for the nine months ended September 30, 2005
includes a portion of the beneficial effect that this tax-free income will have
on the Company's year-end effective tax rate.
NOTE F.E. Long-term Debt
Lines of credit. During September 2005, theThe Company entered intohas an Amended and Restated 5-Year Revolving
Credit Agreement (the "Amended Credit"Credit Agreement") that amended the Company's $700 million 5-Year Revolving Credit Agreement. The
Amended Credit Agreement matures in September 2010 unless
extended in accordance with the terms of the Amended Credit Agreement. The terms of the Amended
Credit Agreement provide for initial aggregate loan commitments of $1.5 billion,
which may be increased to a maximum aggregate amount of $1.8 billion if the
lenders increase their loan commitments or if loan commitments of new financial
institutions are added to the Amended Credit Agreement. In connection with the
fundingAs of the Amended Credit Agreement on September 30, 2005, all amounts
outstanding under the 364-Day Credit Agreement were retired and the 364-Day
Credit Agreement was terminated.
Borrowings under the Amended Credit Agreement may be in the form of
revolving loans or swing line loans. Aggregate outstanding swing line loans may
not exceed $100 million. Revolving loans bear interest, at the option ofMarch 31, 2006, the
Company based on (a) a rate per annum equal to the higher of the prime rate
announced from time to time by JPMorgan Chase Bank or the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System during the last preceding business day plus .5 percent or (b) a
base Eurodollar rate, substantially equal to LIBOR, plus a margin (the
"Applicable Margin") that is determined by reference to a grid based on the
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Company's debt rating (currently .625 percent). The Applicable Margin is
increased by .10 percent to .125 percent per annum, depending on the Company's
debt rating if totalhad no outstanding borrowings under the Amended Credit Agreement, exceed 50
percent of the aggregate loan commitments. Swing line loans bear interest at a
rate per annum equal to the "ASK" rate for Federal funds periodically published
by the Dow Jones Market Service plus the Applicable Margin. The Company pays
commitment fees on the undrawn amounts under the Amended Credit Agreement that
are determined by reference to a grid based on the Company's debt rating, which
commitment fees were .125 percent per annum at September 30, 2005.
As of September 30, 2005,however, if
the Company had $755.0 million borrowed underoutstanding borrowings, the Amended Credit Agreement, bearing interest at an effective rate of 4.75 percent
per annum. Including $35.3 million of undrawn letters of credit, the Company had
$709.7 million of unused borrowing capacity under the Amended Credit Agreement
on September 30, 2005.Company's current additional margin
to LIBOR is .875 percent.
The Amended Credit Agreement contains certain financial covenants, which include
the (i) maintenance of a ratio of the Company's earnings before gain or loss on
the disposition of assets, interest expense, income taxes, depreciation,
depletion and amortization ("DD&A") expense, exploration and abandonments
expense and other noncash charges and expenses to consolidated interest expense
of at least 3.5 to 1.0; (ii) maintenance of a ratio of total debt to book
capitalization less intangible assets, accumulated other comprehensive income
and certain noncash asset impairments not to exceed .60 to 1.0; and if(iii)
because the Company should fallfell below an investment grade rating by both Moody's
Investors Service,Investor Services, Inc. ("Moody's") and Standard & Poor's Ratings Group, Inc.
("S&P") prior to attaining a mid-investment grade rating (as defined in the
Amended Credit Agreement) by either of such rating agencies, then such covenants would also
include the maintenance of an annual ratio of the net present value of the
Company's oil and gas properties to total debt of at least 1.50 to 1.0 for the
first 18 months following the date of the Amended Credit Agreement, and 1.75 to 1.0
thereafter. The lenders may declare any outstanding obligations under the Credit
Agreement immediately due and payable upon the occurrence, and during the
continuance of, an event of default, which includes a defined change in control
of the Company. As of September 30, 2005,March 31, 2006, the Company had unused borrowing capacity
of $1.4 billion under the Credit Agreement.
As of March 31, 2006, the Company had $121.3 million of undrawn letters of
credit, of which $119.6 million were undrawn commitments under the Credit
Agreement. The letters of credit outstanding under the Credit Agreement are
subject to a per annum fee, based on a grid of the Company's debt rating,
currently representing the Company's LIBOR margin (.875 percent at March 31,
2006) plus .125 percent.
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
As of March 31, 2006, the Company was in compliance with all of its debt
covenants.
Senior notes. During the three and nine months ended September 30, 2005,April 2006, the Company redeemed $19.0issued $450 million and $51.4 million, respectively, of principal
amount of its outstanding 9-5/8%6.875%
senior notes due 20102018 (the "9-5/8%"6.875% Notes"). for net proceeds of $446.6 million.
The proceeds from this borrowing will be used to fund a tender offer for the
Company's outstanding 6.50% senior notes due 2008 (the "6.50% Notes") and
general corporate purposes. See Note O for additional information regarding
these transactions and plans.
Rating agencies. In January 2006, Moody's downgraded the Company recognized a pretax charge in other expensefrom Baa3
to Ba1. The downgrade triggered increases in the accompanying
Consolidated Statements of Operations on the redemption of the 9-5/8% Notes of
$4.4 million and $11.7 million for the three and nine months ended September 30,
2005, respectively.
During September 2005, the Company accepted tenders to purchase for cash
$188.4 million in principal amount of its 5.875% Senior Notes due 2012 (the
"5.875% Notes"), which represented 97 percent of the outstanding principal
amount. In addition, the Company received sufficient consents from the holders
of the 5.875% Notes to permanently remove substantially all of the operating
restrictions contained in the indenture governing the 5.875% Notes. Associated
with the tenders to purchase the 5.875% Notes, the Company recorded a $6.9
million debt extinguishment charge during the third quarter of 2005, which is
included in other expense in the accompanying Consolidated Statements of
Operations.
During September 2005, the Company announced its intention to redeempricing grid under the "make-whole" provision contained in the governing indentures the remaining
$12.6 million and $16.2 million of aggregate principal amount outstanding of its
9-5/8% Notes and its 7.50% Senior Notes due 2012 (the "7.50% Notes"),
respectively. During September 2005, the "make-whole" premium was established.
Consequently, the Company accrued the "make-whole" premium, which was paid
during October 2005, and recognized a pretax loss on the redemptions of $7.4
million, which is included in other expense in the accompanying Consolidated
Statements of Operations for the three and nine months ended September 30, 2005.Credit
Agreement.
NOTE G.F. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into orand terminate
interest rate swap contracts with the objective of reducing its costs of
capital. During the nine months ended September 30, 2004, the Company entered
into interest rate swap contracts to hedge a portion of the fair value of its
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
senior notes. The terms of the interest rate swap contracts were for notional
amounts that matched the scheduled maturity of the hedged senior notes, required
the counterparties to pay the Company a fixed annual interest rate equal to the
stated bond coupon rates on the notional amounts and required the Company to pay
the counterparties variable annual interest rates on the notional amounts equal
to the periodic LIBOR plus a weighted average annual margin. During the three
and nine months ended September 30, 2004, settlements of open fair value hedges
reduced the Company's interest expense by $.2 million and $2.2 million,
respectively. As of September 30, 2005March 31, 2006 and December 31, 2004,2005, the Company was not a party
to any open fair value hedges.
As of September 30, 2005,March 31, 2006, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included a $5.7$4.5 million reduction
in the carrying value attributable to net deferred hedge losses on terminated
fair value hedges that are being amortized as net increases or decreases to interest expense
over the original terms of the terminated agreements. TheDuring the three-month
periods ended March 31, 2006 and 2005, the Company's amortization of net
deferred hedge gains on terminated interest rate swaps reduced the Company's
reported interest expense by $.5$.1 million and $3.8$2.2 million, during
the three and nine months ended September 30, 2005, respectively, as compared to
$3.4 and $16.7 million during the same respective periods of 2004.respectively.
The following table sets forth, as of September 30, 2005,March 31, 2006, the scheduled
amortization of net deferred hedge gains and losses on terminated interest rate hedges
(including terminated fair value and cash flow hedges) that will be recognized
as increases in the case of losses, and decreases in the case of
gains, to the Company's future interest expense:
ThreeNine months
ending Year endingEnding December 31,
December 31, ------------------------------------------------------
2005----------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter
------------ ------- ------- ------- ------------------ -------- -------- -------- -------- ----------
(in thousands)
Net deferred hedge gains (losses)...losses...... $ 306(7) $ 175 $(1,809)(1,573) $ (980) $(1,066) $(5,573)
====== ====== ====== ====== ====== ======(554) $ (528) $ (578) $ (4,355)
======= ======= ======= ======= ======= =======
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. As of March 31, 2006, all of the Company's open commodity
hedges are designated as hedges of Canadian and United States forecasted sales.
The Company also, from time to time, utilizes interest rate contracts to reduce
the effect of interest rate volatility on the Company's indebtedness and forward
currency exchange agreements to reduce the effect of U.S. dollar to Canadian
dollar exchange rate volatility.
1917
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
Oil prices. All material physical sales contracts governing the Company's
United States oil production have been tied directly or indirectly to NYMEX prices. As of September 30, 2005, all of the Company's oil hedges were
designated as hedges of United States forecasted sales. The
following table sets forth the volumes hedged in Bbls hedged under outstanding oil
hedge contracts and the weighted average NYMEX prices per Bbl for those
contracts as of September 30, 2005:March 31, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- ------------- -------------
Average daily oil production hedged:
2005 - Swap Contracts
Volume (Bbl)........... 27,000 27,000
Price per Bbl.......... $ 27.97 $ 27.97hedged (a):
2006 - Swap Contracts
Volume (Bbl)............................... 5,000 5,000 5,000 5,000
Price per Bbl................... $ 37.20 $ 37.20 $ 37.20 $ 37.20
2006 - Collar Contracts
Volume (Bbl).................... 7,000 6,500 6,500 6,665
Price per Bbl................... $42.50-$68.45 $41.92-$66.41 $41.92-$66.41 $42.12-$67.12
2007 - Swap Contracts
Volume (Bbl).................... 10,000 10,000 10,000 10,000 10,000
Price per Bbl..........Bbl................... $ 31.6930.96 $ 31.6930.96 $ 31.6930.96 $ 31.6930.96 $ 31.69
2006 - Collar Contracts
Volume (Bbl)........... 8,500 9,000 9,500 9,500 9,129
Price per Bbl.......... $43.82-$73.43 $44.17-$74.63 $44.47-$75.70 $44.47-$75.70 $44.25-$74.92
2007 - Swap Contracts
Volume (Bbl)........... 13,000 13,000 13,000 13,000 13,000
Price per Bbl.......... $ 30.89 $ 30.89 $ 30.89 $ 30.89 $ 30.8930.96
2007 - Collar Contracts
Volume (Bbl)........... 4,500 4,500 4,500 4,500 4,500.................... 2,000 2,000 2,000 2,000 2,000
Price per Bbl..........Bbl................... $50.00-$90.4389.50 $50.00-$90.4389.50 $50.00-$90.4389.50 $50.00-$90.4389.50 $50.00-$90.4389.50
2008 - Swap Contracts
Volume (Bbl)........... 17,000 17,000 17,000 17,000 17,000.................... 10,000 10,000 10,000 10,000 10,000
Price per Bbl..........Bbl................... $ 29.2130.62 $ 29.2130.62 $ 29.2130.62 $ 29.2130.62 $ 29.2130.62
- ------------
(a) Subsequent to March 31, 2006, the Company entered into oil swap contracts,
with an average fixed price of $71.83 per Bbl, designated as hedges for
90,000 Bbls of forecasted June 2006 South African oil sales.
The Company reports average oil prices per Bbl including the effects of oil
quality adjustments, amortization of deferred volumetric production payment
("VPP") revenue and the net effect of oil hedges. The following table sets forth
the Company's oil prices from continuing operations, both reported (including
hedge results)results and amortization of deferred VPP revenue) and realized (excluding
hedge results)results and amortization of deferred VPP revenue), VPP amortization to oil
revenue and the net effect of settlements of oil price hedges on oil revenue for
the threethree-month periods ended March 31, 2006 and nine
months ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
------------------- -------------------March 31,
---------------------
2006 2005
2004 2005 2004
-------- -------- -------- --------------- -------
Average price reported per Bbl.................Bbl....................................... $ 40.6660.01 $ 33.29 $ 36.56 $ 30.4634.99
Average price realized per Bbl.................Bbl....................................... $ 56.6460.10 $ 39.5045.08
VPP increase to oil revenue (in millions)............................ $ 49.1428.9 $ 35.59-
Reduction to oil revenue from hedging activity (in millions) (a)..... $ (61.6)(29.1) $ (25.3) $ (150.7) $ (61.2)(31.5)
- --------------------
(a) Excludes hedge losses of $3.1$12.3 million and $2.3$12.8 million attributable to
discontinued operations for the three monthsthree-month periods ended September 30,March 31, 2006
and 2005, and
2004, respectively, and $11.1 million and $7.4 million attributable to the
nine months ended September 30, 2005 and 2004, respectively.
Natural gas liquids prices. During the threethree-month periods ended March 31,
2006 and nine months ended
September 30, 2005, and 2004, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at September 30, 2005.
20March 31, 2006.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
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
price. As of September 30, 2005, all of the Company's gas hedges were designated
as hedges of United States and Canadian forecasted sales. The following table sets forth the volumes hedged in MMBtus hedged under
outstanding gas hedge contracts and the weighted average index prices per MMBtu
for those contracts as of September 30,
2005:March 31, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ --------------------------
Average daily gas production hedged:
2005 - Swap Contracts
Volume (MMBtu)..................... 253,535 253,535
Index price per MMBtu.............. $ 5.17 $ 5.17
2006 - Swap Contracts
Volume (MMBtu)..................... 73,710........................ 73,790 73,880 73,984 73,84273,885
Index price per MMBtu.............. $ 4.30MMBtu................. $ 4.30 $ 4.31 $ 4.31 $ 4.304.31
2006 - Collar Contracts
Volume (MMBtu)..................... 200,000 175,000 175,000 185,000 183,685........................ 105,000 105,000 115,000 108,345
Index price per MMBtu.............. $6.72-MMBtu................. $6.55-$13.17 $6.58-14.20 $6.55-$13.90 $6.58-14.20 $6.54-$13.90 $6.58-14.39 $6.55-$14.11 $ 6.62-$13.7614.27
2007 - Swap Contracts
Volume (MMBtu)..................... 29,071 29,146 29,231 29,329 29,195........................ 24,071 24,146 24,231 24,329 24,195
Index price per MMBtu..............MMBtu................. $ 4.273.99 $ 4.284.00 $ 4.294.01 $ 4.294.02 $ 4.284.00
2007 - Collar Contracts
Volume (MMBtu)............................................. 215,000 215,000 215,000 215,000 215,000
Index price per MMBtu..............MMBtu................. $6.57-$11.84 $6.57-$11.84 $6.57-$11.84 $6.57-$11.84 $ 6.57-$6.57-$11.84
2008 - Swap Contracts
Volume (MMBtu)..................... 5,000 5,000 5,000 5,000 5,000
Index price per MMBtu.............. $ 5.38 $ 5.38 $ 5.38 $ 5.38 $ 5.38
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments, amortization of deferred VPP
revenue and the net effect of gas hedges. The following table sets forth the
Company's gas prices from continuing operations, both reported (including hedge
results)results and amortization of deferred VPP revenue) and realized (excluding hedge
results)results and amortization of deferred VPP revenue), VPP amortization to gas
revenue and the net effect of settlements of gas price hedges on gas revenue for
the threethree-month periods ended March 31, 2006 and nine months ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
------------------- -------------------March 31,
---------------------
2006 2005
2004 2005 2004
-------- -------- -------- --------------- -------
Average price reported per Mcf.................Mcf...................................... $ 5.706.72 $ 4.11 $ 5.33 $ 4.276.01
Average price realized per Mcf.................Mcf...................................... $ 6.687.05 $ 4.555.61
VPP increase to gas revenue (in millions)........................... $ 5.8219.0 $ 4.6511.6
Reduction to gas revenue from hedging activity (in millions) (a)......... $ (57.7)(28.3) $ (25.7) $ (91.6) $ (67.2)(.3)
- -----------------------
(a) Excludes hedge losses of $2.5$3.4 million and $6.9$7.7 million attributable to
discontinued operations for the threethree-month periods ended March 31, 2006
and nine months ended September 30,
2004.2005, respectively.
Hedge ineffectiveness. During the threethree-month periods ended March 31, 2006
and nine months ended September 30, 2005, the Company recognized hedgenet ineffectiveness chargescredits, or reductions, to
other expense from continuing operations of $12.3$8.2 million and $23.8net ineffectiveness
charges of $5.1 million, respectively, as comparedrelated to a gainthe ineffective portions of
$.3
millionchanges in the fair values of its cash flow hedging instruments. These credits
and a chargecharges primarily result from changes in correlations and derivative fair
values associated with indexes of $1.5 million duringfinancial hedge derivatives and the same respective periodsindexes of
2004.
21the hedged forecasted production for certain fields.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of September 30, 2005March 31, 2006 and December 31, 2004,2005, AOCI
- - Hedging represented net deferred losses of $698.7$301.9 million and $241.4$506.6 million,
respectively. The AOCI - Hedging balance as of September 30, 2005March 31, 2006 was comprised of
$1.1 billion$419.9 million of net deferred losses on the effective portions of open cash
flow hedges, $31.9$55.4 million of net deferred losses on terminated cash flow hedges
(including $3.2$3.1 million of net deferred losses on terminated cash flow interest
rate hedges) and $431.2$173.5 million of associated net deferred tax benefits. The
increasedecrease in AOCI - Hedging during the ninethree months ended September
30, 2005March 31, 2006 was
primarily attributable to increases in future commodity prices
relativethe termination and reclassification to discontinued
operations of the commodity prices stipulated in the hedge contracts, partially
offset byunderlying balances related to hedges that were designated as
deepwater Gulf of Mexico hedges and the reclassification of net deferred hedge
losses to net income as derivatives matured by their terms. The net deferred
losses associated with open cash flow hedges remain subject to market price
fluctuations until the positions are either settled under the terms of the hedge
contracts or terminated prior to settlement. The net deferred losses on
terminated cash flow hedges are fixed.
During the twelve months ending September 30, 2006,March 31, 2007, based on current estimates
of future commodity prices, the Company expects to reclassify $538.3$162.0 million of
net deferred losses associated with open commodity hedges and $7.3$3.6 million of
net deferred losses on terminated commodity hedges from AOCI - Hedging to oil
and gas revenues. The Company also expects to reclassify approximately $199.2$60.5
million of net deferred income tax benefits associated with commodity hedges
during the twelve months ending September 30, 2006March 31, 2007 from AOCI - Hedging to income tax
benefit.
The following table sets forth, as of September 30, 2005,March 31, 2006, the scheduled
amortization of net deferred gains (losses) on terminated commodity hedges that
will be recognized as decreases in the case of losses, and increases in the case
of gains, to the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- --------------- --------- -------- -------- --------
(in thousands)
2005 net deferred hedge losses......... $(1,873) $ (1,873)
2006 net deferred hedge losses......... $(5,098)gains....... $ (302)1,164 $ (59)1,418 $ (727)581 $ (6,186)3,163
2007 net deferred hedge gains (losses). $(3,764)losses...... $ 148(6,768) $ 424(2,843) $ (347)(2,553) $ (3,539)(3,277) (15,441)
2008 net deferred hedge losses......... $(2,877)losses...... $ (372)(8,718) $ (284)(6,123) $ (839)(6,008) $ (4,372)(6,472) (27,321)
2009 net deferred hedge losses......... $(2,330)losses...... $ (2,330) $ (232) $ (230) $ (822) $ (3,614)
2010 net deferred hedge losses.........losses...... $ (667) $ (620) $ (578) $ (539) $ (2,404)
2011 net deferred hedge losses.........losses...... $ (873) $ (889) $ (903)(902) $ (906) $ (3,571)(3,570)
2012 net deferred hedge losses.........losses...... $ (810) $ (791) $ (784) $ (772) $ (3,157)
-------
$(28,716)$(52,344)
=======
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE H.G. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future
plugging and abandonment of proved properties and related facilities. 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 No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 5,
"Accounting for Contingencies" during the threethree-month periods ended March 31,
2006 and nine months ended September 30, 2005 and 2004:
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)2005:
Three months ended
Nine months ended
September 30, September 30,
---------------------- ----------------------March 31,
-------------------------
2006 2005
2004 2005 2004
--------- --------- --------- -----------------
(in thousands)
Beginning asset retirement obligations.....obligations............................... $ 117,753 $ 108,820 $ 120,879 $ 105,036
Liabilities assumed in acquisitions...... 3,013 14,541 3,013 14,541157,035 $120,879
New wells placed on production and changes in estimates (a).............. 32,813 170 35,408 3,238....... 42,000 1,445
Liabilities reclassed to discontinued operations held for sale.... (13,585) -
Disposition of wells..................... (17,863) - (23,101)wells.............................................. (30,085) -
Liabilities settled...................... (3,311) (1,082) (7,566) (4,060)settled............................................... (1,068) (2,400)
Accretion of discount.................... 1,968 2,030 6,210 6,012discount............................................. 1,880 2,140
Currency translation..................... 754 619 284 331translation.............................................. (89) (127)
-------- -------- -------- ---------------
Ending asset retirement obligations ........................................ $ 135,127 $ 125,098 $ 135,127 $ 125,098156,088 $121,937
======== ======== ======== ===============
- -----------
(a) Includes, forFor the three and nine month periodsmonths ended September 30, 2005,March 31, 2006, reflects a $32.8$42 million increase
in the abandonment estimate of the East Cameron facilities that were
destroyed by Hurricane Rita. See Note N for additional
information regarding this loss.Rita, which is reflected in exploration and
abandonments expense in the accompanying Consolidated Statements of
Operations.
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities and minority
interests, respectively, in the accompanying Consolidated Balance Sheets.
NOTE I.H. Postretirement Benefit Obligations
As of September 30, 2005March 31, 2006 and December 31, 2004,2005, the Company had recorded $15.4$18.8
million and $15.5$18.6 million, respectively, of unfunded accumulated postretirement
benefit obligations, the current and noncurrent portions of which are included
in other current liabilities and other liabilities and minority interests,
respectively, in the accompanying Consolidated Balance Sheets. These obligations
are comprised of five plans of which four relate to predecessor entities that
the Company acquired. These plans had no assets as of March 31, 2006 or December
31, 2005. Other than the Company's retirement plan, the participants of these
plans are not current employees of the Company.
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the threethree-month periods
ended March 31, 2006 and nine months
ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
-------------------- --------------------March 31,
------------------------
2006 2005 2004 2005 2004
-------- --------
-------- --------
(in thousands)
Beginning accumulated postretirement benefit obligations..................................obligations........ $ 15,517 $ 15,61118,576 $ 15,534
$ 15,556
Benefit payments............................ (413) (244) (1,042) (758)Net benefit payments......................................... (285) (186)
Service costs...............................costs................................................ 204 81 59 243 176
Accretion of discounts......................discounts....................................... 259 225 226 675 678
------- -------
------- -------
Ending accumulated postretirement benefit obligations..................................obligations........... $ 15,41018,754 $ 15,652 $ 15,410 $ 15,652
======= =======15,654
======= =======
NOTE J.I. Commitments and Contingencies
Legal actions. The Company is party to variousthe legal actions that are described
below. The Company is also party to other proceedings and claims incidental to
its business, including, but not limited to, the proceedings described below.
The majoritybusiness. While many of these legal actions primarilymatters involve claims for damages arising
from oil and gas leases and ownership interest disputes. Theinherent uncertainty, the
Company believes that the ultimate dispositionamount of these legal actionsthe liability, if any, ultimately incurred
with respect to such other proceedings and claims will not have a material
adverse effect on the Company's consolidated financial position as a whole or on
its liquidity, capital resources or future annual 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 its
assessment of the then current status of litigation.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 and the case now contains
two material claims. First, the plaintiffs assert that they were improperly
charged expenses (primarily field compression), which plaintiffs allege are a
"cost of production", and for which the plaintiffs claim they, as royalty
owners, are not responsible. Second, the plaintiffs claim they are entitled to
10050 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 approximately $34$72 million,
related to the cost of production claim and approximately $42 million related to
the helium claim,
plus prejudgment interest. However, the Company believes it has valid defenses
to the plaintiffs' claims and has paid the plaintiffs properly under their
respective oil and gas leases and other agreements, and intends to vigorously
defend itself.
The Company does not believe the costs it has deducted are a "cost of
production". 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 and with the parties'
agreements.
The Company has also vigorously defended against 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 Company has not established a provision
for the helium claim.
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. However, either through a negotiated
settlement or court ruling, the Company could have to pay some part of the cost
of production claim and, accordingly, the Company has established a partial
reserve for this claim. The Company has not established a provision for the
helium claim. Although the amount of any resulting liability, to the extent that
it exceeds the Company's provision, could have a material adverse effect on the
Company's results of operations for the quarterly reporting period in which such
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
liability is recorded, the Company does not expect that any such additional
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.
MOSH Holding. The Company and its principal United States subsidiary,
Pioneer Natural Resources USA, Inc., were named as defendants in MOSH Holding,
L.P. v Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc.;
Woodside Energy (USA) Inc.; and JPMorgan Chase Bank, NA, as Trustee of the Mesa
Offshore Trust, which was filed on April 11, 2005, in the District Court of
Travis County, Texas (250th Judicial District). The plaintiff is a unitholder in
the Mesa Offshore Trust, which was created in 1982 as the sole limited partner
in a partnership that holds an overriding royalty interest in certain oil and
gas leases offshore Louisiana and Texas. The plaintiff alleges that the Company,
together with Woodside Energy (USA) Inc. ("Woodside"), concealed the value of
the royalty interest and worked to terminate the Mesa Offshore Trust prematurely
and to capture for itself and Woodside profits that belong to the Mesa Offshore
Trust. The plaintiff also alleges breaches of fiduciary duty, misapplication of
trust property, common law fraud, gross negligence, and breach of the conveyance
agreement for the overriding royalty interest. The claims appear to relate
principally to farmout arrangements established in 2003 for two offshore
properties, the Brazos Area Block A-7 and Brazos Area Block A-39. The relief
sought by the plaintiff includes monetary and punitive damages and certain
equitable relief, including an accounting of expenses, a setting aside of
certain farmouts, and a temporary and permanent injunction. The Company believes
the claims are without merit and intends to defend the lawsuit vigorously.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Argentine Environmental. The Company's subsidiary in Argentina is involved
in various administrative proceedings with environmental authorities in the
Neuquen Province relating to permits for and discharges from operations in that
province. The Company's subsidiary is cooperating with the proceedings, although
it from time to time challenges whether certain assessed fines are appropriate.
The Company estimates that fines assessed in these proceedings will be
immaterial, but in the aggregate could exceed $100,000. The Company's subsidiary
in Argentina has also been named in a suit against various oil companies
operating in the Neuquen basin entitled Asociacion de Superficiarios de la
Patagonia v. YPF S.A., et. al., originally filed on August 21, 2003, in the
Argentine National Supreme Court of Justice. The plaintiffs, a private group of
landowners, have also named the national government and several provinces as
third parties. The lawsuit alleges injury to the environment generally by the
oil and gas industry without specifically alleging how any of the defendants
caused this injury. The plaintiffs principally seek creation of an insured fund
to remediate the environment. The Company's subsidiary intends to defend itself
in the case. Although the suit is at an early procedural stage and involves
novel theories, the Company does not believe that the lawsuit will have a
material adverse effect on its business or financial condition.
Dorchester Refining Company Site. A subsidiary of the Company has been
notified by a letter from the Texas Commission on Environmental Quality ("TCEQ")
dated August 24, 2005 that the TCEQ considers the subsidiary to be a potentially
responsible party with respect to the Dorchester Refining Company State
Superfund Site located in Mount Pleasant, Texas. In connection with the
acquisition of oil and gas assets in 1991, the Company acquired a group of
companies, one of which was an entity that had owned a refinery located at the
Mount Pleasant site from 1977 until 1984. According to the TCEQ, this refinery
was responsible for releases of hazardous substances into the environment.
Pursuant to applicable Texas law, the Company's subsidiary, which does not own
any material assets or conduct any material operations, may be subject to
strict, joint and several liability for the costs of conducting a study to
evaluate potential remedial options and for the costs of performing any
remediation ultimately required by the TCEQ. The Company does not know the
nature and extent of the alleged contamination, the potential costs of
remediation or the portion, if any, of such costs that may be allocable to the
Company's subsidiary; however, the Company has noted that there appear to be
other operators or owners who may share responsibility for these costs and does
not believeexpect that this matterany such additional liability will have a material adverse
effect on its businessconsolidated financial position as a whole or financial condition.on its liquidity,
capital resources or future annual results of operations.
Environmental Protection Agency Investigation. On November 4, 2005, the
Company learned from the U.S. Environmental Protection Agency ("EPA") that the agency
was conducting a criminal investigation into a 2003 spill that occurred at a
Company-operated drilling rig located on an ice island offshore Kuparuk in
Harrison Bay, Alaska. The investigation is being conducted in conjunction with
the U.S. Attorney's Office for the District of Alaska. The spill was previously
investigated by the Alaska Department of Environmental Conservation ("ADEC")
and, following completion of a clean up, the ADEC issued a letter stating its
determination that, at that time, the site did not pose a threat to human
health, safety or welfare, or the environment. The Company intends to cooperateis fully cooperating
with the EPA'sgovernment's investigation.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE K.J. Income (Loss) Per Share From Continuing Operations
Basic income (loss) per share from continuing operations is computed by
dividing income (loss) from continuing operations by the weighted average number
of common shares outstanding for the period. The computation of diluted income
per share from continuing operations reflects the potential dilution that could
occur if securities or other contracts to issue common stock that are dilutive
to income from continuing operations 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. 25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)During periods that the Company realizes a loss from
continuing operations, securities or other contracts to issue common stock would
be dilutive to loss per share and conversion into common stock is assumed not to
occur.
The following table is a reconciliation of basic income (loss) from
continuing operations to diluted income (loss) from continuing operations for
the threethree-month periods ended March 31, 2006 and nine
months ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
---------------------- ----------------------March 31,
--------------------------
2006 2005 2004 2005 2004
--------- ---------
--------- ---------
(in thousands)
Basic income (loss) from continuing operations............ $ 104,587(967) $ 77,074 $ 283,287 $ 201,41526,991
Interest expense on convertible notes, net of tax..tax......... - 802 - 2,405 -
-------- --------
-------- --------
Diluted income (loss) from continuing operations.......... $ 105,389(967) $ 77,074 $ 285,692 $ 201,415
======== ========27,793
======== ========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
threethree-month periods ended March 31, 2006 and nine months ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,
---------------------- ----------------------March 31,
--------------------------
2006 2005 2004 2005 2004
--------- ---------
--------- ---------
(in thousands)
Weighted average common shares outstanding (a):
Basic........................................... 137,655 118,663 140,436 118,745Basic.................................................. 126,944 142,898
Dilutive common stock options (b)............... 1,106 1,067 1,169 1,108 (c).................. - 1,293
Restricted stock awards......................... 698 567 838 468awards (c)............................ - 827
Convertible notes dilution (c).................. 2,327......................... - 2,327
-
-------- ------- -------- --------
Diluted......................................... 141,786 120,297 144,770 120,321
======== =======Diluted................................................ 126,944 147,345
======== ========
- ---------------
(a) During August 2005, the Company's board of directors (the "Board") approved
a new share repurchase program authorizing the purchase of up to $1 billion of
the Company's common stock, $650$641 million of which was immediately initiated
through open market transactions. Ascompleted in 2005 and
$359 million of September 30, 2005, the Company had
repurchased 9.0 million shares at an aggregate cost of $390.7 million under
the $650 million program. During October 2005, the Company repurchased
another 4.9 million shares at an aggregate cost of $250.0 million pursuant
to a repurchase plan conforming to the requirements of Rule 10b5-1 of the
Securities Exchange Act of 1934. The $650 million programwhich is expected to be completed by the end of 2005. The remaining $350 million is subject to the
completion of the deepwater Gulf of Mexico and Argentine divestments.initiated in mid-May 2006.
(b) Common stock options to purchase 761,313 shares and 274,24630,712 shares of common stock were
outstanding but not included in the computations of diluted income per
share from continuing operations for the three and nine
months ended September 30, 2004March 31, 2005
because the exercise prices of the options were greater than the average
market price of the common shares and would be anti-dilutive to the
computations.
(c) Associated withDue to the Evergreen merger,loss from continuing operations during the Company assumedthree months ended
March 31, 2006, the potential dilutive effects of stock options, restricted
stock awards and convertible notes eligible for 2.3 million shares of the Company's common stock upon
conversion.would be anti-dilutive.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE L.K. 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 Africa and
Other. Africa and Other is primarily comprised of current or past operations in
Equatorial Guinea, Gabon, Morocco, Nigeria, South Africa and Tunisia.
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
As previously referred to in Note B, during 2005, the Company sold Canadian
and United States oil and gas properties having carrying values of $58.9 million
and $31.4 million, respectively, on their dates of sale. Also as previously
referred to in Note B, during 2006, the Company sold Argentine net assets and
United States oil and gas properties having carrying values, including net
deferred hedge losses, of approximately $667 million and $432 million,
respectively. The results of operations of those properties have been
reclassified as discontinued operations in accordance with GAAPSFAS 144 and are
excluded from the geographic operating segment information provided below. See
Note ON for information regarding the Company's discontinued operations.
The following tables provide the Company's interim geographic operating
segment data for the threethree-month periods ended March 31, 2006 and nine months ended September 30, 2005 and 2004.2005.
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" table
column includes income and expenses that are not routinely included in the
earnings measures internally reported to management on a geographic operating
segment basis.
2725
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
-------- --------- -------- --------- ----------------------- ------------
(in thousands)
Three months ended September 30, 2005:March 31, 2006:
Revenues and other income:
Oil and gas........................ $429,789gas................................ $309,881 $ 46,04828,362 $ 29,571 $ 52,97441,225 $ - $ 558,382379,468
Interest and other.................other......................... - - - - 9,460 9,460
Gain17,111 17,111
Loss on disposition of assets, net. 290net......... - - - 104 394(73) (73)
------- ------- ------- ------- --------
------- --------
430,079 46,048 29,571 52,974 9,564 568,236309,881 28,362 41,225 17,038 396,506
------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production............. 90,082 10,125 9,766 8,449production..................... 77,901 10,914 5,868 - 118,42294,683
Depletion, depreciation and amortization.................... 91,872 23,232 8,988 6,796 5,479 136,367
Impairment of long-lived assets....amortization... 63,616 7,230 5,695 5,865 82,406
Exploration and abandonments............... 78,281 3,416 42,945 - 124,642
General and administrative................. - - - 21 - 21
Exploration and abandonments....... 47,994 6,597 1,405 8,202 - 64,198
General and administrative......... - - - - 32,749 32,74932,247 32,247
Accretion of discount on asset retirement
obligations..........obligations............................. - - - - 1,968 1,968
Interest...........................1,148 1,148
Interest................................... - - - - 29,268 29,268
Other..............................36,576 36,576
Other...................................... - - - - 38,173 38,1735,054 5,054
------- ------- ------- ------- --------
------- --------
229,948 39,954 20,159 23,468 107,637 421,166219,798 21,560 54,508 80,890 376,756
------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... 200,131 6,094 9,412 29,506 (98,073) 147,070
Income tax benefit (provision)...... (73,048) (2,134) (3,435) (10,905) 47,039 (42,483)
------- ------- ------- -------- ------- --------
Income (loss) from continuing
operations........................ $127,083 $ 3,960 $ 5,977 $ 18,601 $(51,034) $ 104,587
======= ======= ======= ======== ======= ========
Three months ended September 30, 2004:
Revenues and other income:
Oil and gas........................ $341,241 $ 40,288 $ 10,170 $ 33,876 $ - $ 425,575
Interest and other................. - - - - 1,212 1,212
Gain on disposition of assets, net. - - - - 215 215
------- ------- ------- -------- ------- --------
341,241 40,288 10,170 33,876 1,427 427,002
------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production............. 58,198 8,917 3,761 4,219 - 75,095
Depletion, depreciation and
amortization.................... 103,085 17,304 4,844 7,333 2,893 135,459
Impairment of long-lived assets.... - - - 34,825 - 34,825
Exploration and abandonments....... 18,543 2,898 4,135 7,306 - 32,882
General and administrative......... - - - - 19,431 19,431
Accretion of discount on asset
retirement obligations.......... - - - - 2,030 2,030
Interest........................... - - - - 24,827 24,827
Other.............................. - - - - 2,486 2,486
------- ------- ------- -------- ------- --------
179,826 29,119 12,740 53,683 51,667 327,035
------- ------- ------- -------- ------- --------
Income (loss) from continuing operations
before income taxes.... 161,415 11,169 (2,570) (19,807) (50,240) 99,967taxes........................ 90,083 6,802 (13,283) (63,852) 19,750
Income tax benefit (provision)...... (58,916) (3,909) 970 7,876 31,086 (22,893)................ (32,880) (2,423) 8,698 5,888 (20,717)
------- ------- ------- -------- ------- --------
Income (loss) from continuing operations........................ $102,499operations...... $ 7,26057,203 $ (1,600)4,379 $ (11,931) $(19,154)(4,585) $(57,964) $ 77,074(967)
======= ======= ======= ======= ========
Three months ended March 31, 2005:
Revenues and other income:
Oil and gas................................ $254,936 $ 20,488 $ 47,691 $ - $ 323,115
Interest and other......................... - - - 2,306 2,306
Gain on disposition of assets, net......... 2,032 - - 109 2,141
------- ------- ------- ------- --------
256,968 20,488 47,691 2,415 327,562
------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production..................... 64,099 9,080 7,767 - 80,946
Depletion, depreciation and amortization... 52,353 7,039 9,377 4,539 73,308
Impairment of long-lived assets............ - - 152 - 152
Exploration and abandonments............... 28,803 3,741 21,285 - 53,829
General and administrative................. - - - 27,488 27,488
Accretion of discount on asset retirement
obligations.............................. - - - 1,499 1,499
Interest................................... - - - 32,746 32,746
Other...................................... - - - 8,841 8,841
------- ------- ------- ------- --------
145,255 19,860 38,581 75,113 278,809
------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes........................ 111,713 628 9,110 (72,698) 48,753
Income tax benefit (provision)................ (40,775) (229) (2,060) 21,302 (21,762)
------- ------- ------- ------- --------
Income (loss) from continuing operations...... $ 70,938 $ 399 $ 7,050 $(51,396) $ 26,991
======= ======= ======= ======= ========
2826
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
---------- --------- -------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2005:
Revenues and other income:
Oil and gas........................ $1,245,026 $124,857 $ 73,620 $ 149,967 $ - $1,593,470
Interest and other................. - - - - 85,689 85,689
Gain on disposition of assets, net. 2,322 - - - 441 2,763
--------- ------- ------- -------- -------- ---------
1,247,348 124,857 73,620 149,967 86,130 1,681,922
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oil and gas production............. 252,125 27,527 27,370 23,849 - 330,871
Depletion, depreciation and
amortization.................... 308,401 61,050 23,429 23,434 15,446 431,760
Impairment of long-lived assets.... - - - 644 - 644
Exploration and abandonments....... 119,933 15,031 7,828 40,879 - 183,671
General and administrative......... - - - - 91,551 91,551
Accretion of discount on asset
retirement obligations.......... - - - - 6,210 6,210
Interest........................... - - - - 92,731 92,731
Other.............................. - - - - 67,475 67,475
--------- ------- ------- -------- -------- ---------
680,459 103,608 58,627 88,806 273,413 1,204,913
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations before income taxes.... 566,889 21,249 14,993 61,161 (187,283) 477,009
Income tax benefit (provision)...... (206,915) (7,438) (5,472) (21,440) 47,543 (193,722)
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations........................ $ 359,974 $ 13,811 $ 9,521 $ 39,721 $(139,740) $ 283,287
========= ======= ======= ======== ======== =========
Nine months ended September 30, 2004:
Revenues and other income:
Oil and gas........................ $1,029,625 $ 97,785 $ 31,685 $ 106,649 $ - $1,265,744
Interest and other................. - - - - 4,557 4,557
Gain (loss) on disposition of
assets, net...................... 51 - (252) - 171 (30)
--------- ------- ------- -------- -------- ---------
1,029,676 97,785 31,433 106,649 4,728 1,270,271
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oil and gas production............. 165,146 24,092 12,417 21,052 - 222,707
Depletion, depreciation and
amortization.................... 302,127 44,666 15,177 35,466 8,322 405,758
Impairment of long-lived assets.... - - - 34,825 - 34,825
Exploration and abandonments....... 83,933 14,295 17,527 36,478 - 152,233
General and administrative......... - - - - 54,846 54,846
Accretion of discount on asset
retirement obligations.......... - - - - 6,012 6,012
Interest........................... - - - - 67,805 67,805
Other.............................. - - - - 10,982 10,982
--------- ------- ------- -------- -------- ---------
551,206 83,053 45,121 127,821 147,967 955,168
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations before income taxes.... 478,470 14,732 (13,688) (21,172) (143,239) 315,103
Income tax benefit (provision)...... (174,642) (5,156) 5,167 8,669 52,274 (113,688)
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations........................ $ 303,828 $ 9,576 $ (8,521) $ (12,503) $ (90,965) $ 201,415
========= ======= ======= ======== ======== =========
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(Unaudited)
NOTE M.L. Volumetric Production Payments
During January 2005, the Company sold two percent of its total proved
reserves, or 20.527.8 MMBOE of proved reserves by means of
two volumetric
production payment ("VPP")three VPP agreements for net proceeds of $592.3$892.6 million, including the
assignment of the Company's obligations under certain derivative hedge
agreements. Proceeds from the VPPs were initially used to reduce outstanding
indebtedness. The first January VPP sold 58 Bcf of Hugoton field gas volumes over an expected
five-year term that began in February 2005 for $275.2
million.2005. The second January VPP sold 10.8 MMBbls of Spraberry field
oil volumes over an expected seven-year term beginningthat began in January 2006 for $317.1 million.
During April 2005, the Company sold less than one percent of its total
proved reserves, or 7.3 MMBOE of proved reserves, by means of another VPP for
net proceeds of $300.4 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the VPP
were initially used to reduce outstanding indebtedness.2006. The
Aprilthird VPP sold 6.0 Bcf of Spraberry field gas volumes over an expected 32-month term that began
in May 2005 and 6.2 MMBbls of Spraberry field oil volumes over an expected five-year term beginningthat
began in January 2006.
The Company's VPPs represent limited-term overriding royalty interests in
oil and gas reserves which: (i) entitle the purchaser to receive production
volumes over a period of time from specific lease interests; (ii) are free and
clear of all associated future production costs and capital expenditures; (iii)
are nonrecourse to the Company (i.e., the purchaser's only recourse is to the
assets acquired); (iv) transfer title to the purchaser and (v) allow the Company
to retain the assets after the VPPs volumetric quantities have been delivered.
Under SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies", a VPP is considered a sale of proved reserves and the
related future production of those proved reserves. As a
result, the Company (i) removed the proved reserves associated with the VPPs;
(ii) recognized the VPP proceeds as deferred revenue which are being amortized
on a unit-of-production basis to oil and gas revenues over the terms of the
VPPs; (iii) retained responsibility for 100 percent of the production costs and
capital costs related to VPP interests and (iv) no longer recognizes production
associated with the VPP volumes.
The following table representsprovides information about the breakdown of the componentsdeferred revenue
carrying values of the Company's VPPs:
January VPPs April VPP
-------------------------- -------------------------
Hugoton Spraberry Spraberry Spraberry
Field (Gas) Field (Oil) Field (Gas) Field (Oil)Gas Oil Total
----------- ----------- ----------- ----------- -------------------- --------- ---------
(in thousands)
VPP proceeds, net of transaction costs.. $ 275,161 $ 317,120 $ 37,611 $ 262,779 $ 892,671
Fair value of derivatives conveyed (a).. 12,860 36,759 (526) (11,076) 38,017
---------- ---------- --------- ---------- ----------
Deferred revenue........................ 288,021 353,879 37,085 251,703 930,688
Less 2005 amortization.................. (47,677) - (6,279) - (53,956)
---------- ---------- --------- ---------- ----------
Deferred revenue at September 30, 2005.................December 31, 2005....... $ 240,344249,323 $ 353,879605,515 $ 30,806854,838
Less 2006 amortization...................... (19,028) (28,921) (47,949)
-------- -------- --------
Deferred revenue at March 31, 2006..... $ 251,703230,295 $ 876,732
========== ========== ========= ========== ==========
- -----------
(a) Represents the fair value of the derivative obligations conveyed as part of
the VPP transactions. The fair value is deferred in AOCI - Hedging until
the delivery of the VPP volumes occurs at which time the fair value of the
derivative obligations attributable to the delivered volumes is being
recognized as increases or decreases to oil and gas revenues. See Note G
for additional discussion regarding the Company's hedge positions.
576,594 $ 806,889
======== ======== ========
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
The above deferred revenue amounts will be recognized in oil and gas
revenues in the Consolidated Statements of Operations as noted below, assuming
the related VPP production volumes are delivered as scheduled (in thousands):
Remaining 2005................................2006................................ $ 21,818
2006.......................................... 190,347142,378
2007.......................................... 181,250181,232
2008.......................................... 158,151158,138
2009.......................................... 147,919147,906
2010.......................................... 90,22790,215
2011.......................................... 44,951
2012.......................................... 42,069
---------
$ 876,732806,889
=========
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE N.M. Insurance Claims
Hurricane Ivan. During September 2004, the Company sustained damages as a
result of Hurricane Ivan at its Devils Tower and Canyon Express platform
facilities in the deepwater Gulf of Mexico. The damages delayed scheduled well
completions and interrupted production during the second half of 2004 and the
first half of 2005. The Company maintains business interruption insurance
coverage for such circumstances. During 2004, the Company filed claims with its
insurance providers for its estimated losses associated with Hurricane Ivan.
Based on a settlement agreement between the Company and the insurance
providers, the Company recovered business interruption losses related to
Hurricane Ivan of $67 million. The Company recorded $7.6 million and $59.4
million of the claims in the fourth quarter of 2004 and in the first half of
2005, respectively, in interest and other income in the Company's Consolidated
Statements of Operations.
Fain Plant. During May 2005, the Company sustained damages as a result of a
fire at its Fain gas plant in the West Panhandle field. The damages interrupted
production from mid-May through mid-July of 2005. The Company maintainsmaintained
business interruption and physical damage insurance coverage for such
circumstances and
has filed claims with its insurance providers.circumstances. The Company estimates its
aggregate Fain plantrecognized a total of $17.9 million in business
interruption claims to be approximately $19recoveries and $4.4 million to $20 million, of which amount approximately $14.2 million is
undisputed byin physical damage recoveries
associated with the insurance provider.Fain gas plant fire. The Company is working to resolve the
disputed amounts with the insurance provider. The Company recorded $4.8 million
andrecognized $14.2 million of
the claims, respectively,business interruption recoveries in interest2005 and the remaining $3.7 million
during the three months ended March 31, 2006,which is included in other income
in the Company's accompanying Consolidated Statements of Operations during the threeOperations.
Hurricanes Katrina and nine
months ended September 30, 2005.
Hurricane Katrina/Rita. During August and September 2005, the Company
sustained damages as a result of Hurricanes Katrina and Rita at various
facilities in the Gulf of Mexico. Other than the East Cameron facility discussed
further below, the Company believes the damages to the facilities are covered by
physical damage insurance.
The Company also maintains business interruption
insurance related to specifically designated assets in the event there are
extended periods of revenue interruption.
The Company filed a business interruption claim with its insurance provider
related to its Devils Tower field resulting from its inability to sell
production as a result of damages to third partythird-party facilities. Currently, it is
expected that the third party facilities will be capable of taking the full
production of the Devils Tower field in November 2005. The Company's
business interruption claim is expected to cover losses of revenues from
mid-October 2005 (end(the end of 45-day deductible waiting period) until such point as the
third partythird-party facilities cancould take the full production from the Devils Tower
field.field, which the Company determined to have occurred in early December 2005. At
March 31,
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)2006, the Company estimates that its business interruption recovery on
Devils Tower to be approximately $20 million. The Company has not recorded any
estimated recoveries due to certain pending issues that the Company expects to
have resolved in the near future.
As a result of Hurricane Rita, the Company's East Cameron facility was
destroyed and the Company currently does not plan to rebuild the facility based on the
current economics of the field. The Company is in the process of
evaluatingcontinues to evaluate the magnitude
of the loss. Currently, the Company estimates that it will incur a minimum of
$37$86 million to reclaim and completely abandon the East Cameron facility; thus,
the Company recorded an additional abandonment obligation charge of approximately $32.8$42 million in the third quarter of 2005
which is included in exploration and abandonments in the accompanying
Consolidated Statements of Operations for the three months ended March 31, 2006.
The Company's estimate to reclaim and nine month periods ended September 30, 2005.abandon the facilities is based upon an
analysis and fee proposal prepared by a third-party engineering firm and assumes
that the Company will be able to "reef" a substantial portion of debris in
place. The Company has filed its application with the appropriate regulatory
agency to reef the debris in place.
The Company has filed a claim with its insurance provider regarding the
loss at East Cameron. Under the Company's insurance policy, the East Cameron
facility hashad the following coverages: (a) $14 million of scheduled property
value for the platform, (b) $4 million of scheduled business interruption
insurance after a deductible waiting period, (c) greater of (1) 25 percent of
the scheduled property value of the platform or (2) $5up to $40 million for debris
removal coverage, in total, for all assets per occurrence and (d) $100 million
of "make well safe" coverage, in total, for all assets per occurrence.
TheIn December 2005, the Company has not recognized a loss onreceived the $14 million scheduled value of itsfor
the East Cameron assets asand recognized a gain of $9.7 million during the Company believes expected proceeds from its insurance coverage
will exceed the assets' underlying basis.fourth
quarter of 2005. The Company will not recognize any
recoveries fromearned the $4.0 million of business interruption
coverage until afterrecoveries during the 45-day
deductible waiting period, which is subsequent to mid-November 2005.three months ended March 31, 2006. The Company believes
that its debris removal and make well safe coverages, in combination, will
substantially cover the losses incurred with the abandonment ofcosts to abandon the East Cameron facility. The Company has
not recorded any estimated recoveries related to insurance due to the early
nature of the claim and the need to better quantify the claim.
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE O.N. Discontinued Operations
During May 2005 and 2006, the Company sold its interests in the following oil
and gas assets and has reflected their results of operations in discontinued
operations:
Country Description of Assets Date Divested Net Proceeds Gain
------- --------------------- ------------- ------------ --------
(in millions)
Canada Martin Creek, Conroy Black May 2005 $ 197.2 $ 138.3
and Lookout Butte fields
United States Two Gulf of Mexico August 2005 59.1 27.7
shelf fields
United States Deepwater Gulf of Mexico March 2006 1,160.9(a) 728.4
fields
Argentina All Argentine properties April 2006 675.0 (b)
- -----------
(a) Net proceeds do not reflect the cash payment of $193.2 million for
terminated hedges associated with the deepwater Gulf of Mexico assets.
(b) The Company estimates that it will recognize a nominal gain from the
Argentine divestiture in the second quarter of 2006.
Pursuant to SFAS 144, the Company has reflected (a) the Argentine assets
and liabilities sold during April 2006 as discontinued operations held for sale
as of March 31, 2006 and (b) the results of operations of the above divestitures
as discontinued operations, rather than as a component of continuing operations.
The following table represents the components of the Company's discontinued
operations for the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
--------- ---------
(in thousands)
Revenues and other income:
Oil and gas................................................. $ 181,569 $ 197,197
Interest and other.......................................... 1,847 26,027
Gain on disposition of assets............................... 728,502 80
-------- --------
911,918 223,304
Costs and expenses:
Oil and gas production...................................... 27,955 33,016
Depletion, depreciation and amortization.................... 37,327 82,843
Exploration and abandonments................................ 5,947 13,556
General and administrative.................................. 2,432 2,097
Accretion of discount on asset retirement obligations....... 732 641
Interest.................................................... 344 505
Other....................................................... 1,490 2,879
-------- --------
76,227 135,537
-------- --------
Income from discontinued operations before income taxes........ 835,691 87,767
Income tax provision:
Current..................................................... (144,030) (2,325)
Deferred.................................................... (147,487) (27,776)
-------- --------
Income from discontinued operations, net of tax................ $ 544,174 $ 57,666
======== ========
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
At March 31, 2006, the Argentine assets included in discontinued operations
held for sale and the Argentine liabilities included in discontinued operations
held for sale were comprised of the following components (in thousands):
Assets included in discontinued operations held for sale:
Current assets, including cash and cash equivalents of $7.0 million....... $ 46,980
Property, plant and equipment, net........................................ 677,591
Other assets, net......................................................... 8,838
--------
Total assets......................................................... $ 733,409
========
Liabilities included in discontinued operations held for sale:
Current liabilities....................................................... $ 36,142
Deferred tax liabilities.................................................. 13,943
Other liabilities......................................................... 16,237
--------
Total liabilities.................................................... $ 66,322
========
NOTE O. Subsequent Events
Argentine divestiture. As described in Note N, during April 2006, the
Company sold substantially all of its assets and liabilities in Argentina for
proceeds of approximately $675 million, before normal closing adjustments.
The Company has provided the purchaser of its Argentine assets and
liabilities certain indemnifications, subject to defined limitations. The
indemnifications primarily pertain to matters of litigation, environmental
contingencies, royalty obligations and income taxes, none of which the Company
believes to be probable of having a material impact on its future results of
operations, financial position or liquidity. Below is the Company's previously
disclosed litigation that was assumed by the purchasers, subject to the
indemnifications.
The Company's former subsidiary in Argentina is involved in various
administrative proceedings with environmental authorities in the Neuquen
Province relating to permits for and discharges from operations in that
province. The Company's former subsidiary was cooperating with the proceedings,
although it from time to time challenged whether certain assessed fines were
appropriate. The Company estimated that fines assessed in these proceedings
would be immaterial, but in the aggregate could exceed $100,000. The Company's
former subsidiary in Argentina has also been named in a suit against various oil
companies operating in the Neuquen basin entitled Asociacion de Superficiarios
de la Patagonia v. YPF S.A., et. al., originally filed on August 21, 2003, in
the Argentine National Supreme Court of Justice. The plaintiffs, a private group
of landowners, have also named the national government and several provinces as
third parties. The lawsuit alleges injury to the environment generally by the
oil and gas industry without specifically alleging how any of the defendants
caused this injury. The plaintiffs principally seek creation of an insured fund
to remediate the environment.
Senior notes. As previously discussed in Note E, during April 2006, the
Company issued $450 million of 6.875% Notes and received proceeds, net of
issuance discount and underwriting costs of $446.6 million. The Company will use
the net proceeds from the issuance of the 6.875% Notes to fund a tender offer to
purchase its outstanding $350 million of 6.50% Notes and for general corporate
purposes.
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
During April 2006, the Company commenced an offer to purchase for cash all
of its $350 million of 6.50% Notes. The Company is offering an early tender
payment of $20 per $1,000 principal amount of notes to holders who validly
tender their notes on or before May 10, 2006. The tender offer expires on
Wednesday, May 24, 2006. If all of the 6.50% Notes are validly tendered, the
Company will record a pretax charge of approximately $8.5 million in the second
quarter of 2006.
Long-term incentive plan. In May 2006, the Company's stockholders approved
a new long-term incentive plan (the "Long-Term Incentive Plan") which provides
for the granting of incentive awards in the form of stock options, stock
appreciation rights, performance units, restricted stock and restricted stock
units to directors, officers and employees of the Company. The Long-Term
Incentive Plan provides for the issuance of up to 4.6 million shares of the
Company's common stock. The Company will make no future awards under the 1997
Long-Term Incentive Plan.
31
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the first quarter of
2006 included the following highlights:
o Entered into separate agreements to sell certain of the Company's
deepwater Gulf of Mexico oil and gas properties and its Argentine
net assets that provided for cash proceeds, before normal closing
adjustments, of $1.3 billion and $675 million, respectively. The
Company completed the sale of its deepwater Gulf of Mexico properties
during March 2006, recognizing a first quarter pretax gain of $728.4
million. During April 2006, the Company completed the sale of its
Argentine net assets and expects to recognize a nominal second
quarter pretax gain.
o Approval and commencement of the development of the Pioneer-operated
Oooguruk field on the North Slope of Alaska.
o Approval of a $1.3 billion capital budget for 2006, 80 percent of
which represents capital directed towards onshore North American
activities, including development drilling in Canadacore areas and testing
of new coalbed methane ("CBM") resource projects. The budget
represents a reduction in higher-risk exploration capital from
approximately 30 percent of capital expenditures during 2005 to
approximately 10 percent of budgeted capital expenditures in 2006.
o Recognized a loss from continuing operations of $1.0 million ($.01
per diluted share) for the first quarter of 2006, as compared to
income from continuing operations of $27.0 million ($.19 per diluted
share) for the first quarter of 2005, primarily as a result of a $42
million increase in the abandonment estimate of the East Cameron
facilities that were destroyed by Hurricane Rita, which the Company
believes will substantially be covered by insurance, and a $33.1
million dry hole and acreage impairment on the Company's Block 256
permit in Nigeria.
o Recognition of income from discontinued operations of $544.2 million
($4.29 per diluted share) during the first quarter of 2006
attributable to the Company's deepwater Gulf of Mexico oil and gas
properties sold during March 2006, including the aforementioned
$728.4 million pretax gain, and the Company's Argentine net proceedsassets
that were held for sale as of $197.5March 31, 2006.
o Increase in net income to $543.2 million ($4.28 per diluted share)
for the first quarter of 2006, as compared to $84.7 million ($.58 per
diluted share) for the first quarter of 2005, primarily as a result
of the $728.4 million pretax gain realized from the sale of the
Company's deepwater Gulf of Mexico oil and gas properties, partially
offset by increases of $70.8 million in exploration and abandonments
expense and $260.4 million in worldwide income tax provisions.
o Net cash provided by operating activities remained constant at $303.3
million during the first quarter of 2006 as compared to $303.7
million during the first quarter of 2005.
o Reduction in outstanding debt of $898.6 million, or 44 percent, as of
March 31, 2006 as compared to debt outstanding as of December 31,
2005, resulting in a gaindecrease in the Company's debt to book
capitalization to 28 percent at March 31, 2006 from 48 percent at
December 31, 2005.
Second Quarter 2006 Outlook
Based on current estimates, the Company expects that second quarter 2006
production will average 93,000 to 98,000 BOEPD. This range reflects the
Company's sale of $138.6its deepwater Gulf of Mexico properties, the sale of its
Argentine assets and the typical variability in the timing of oil cargo
shipments in South Africa and Tunisia.
Second quarter production costs (including production and ad valorem taxes)
are expected to average $11.00 to $12.00 per BOE based on current NYMEX strip
prices for oil and gas. DD&A expense is expected to average $9.25 to $10.25 per
BOE.
Total exploration and abandonment expense is expected to be $25 million to
$55 million and includes plans to drill in the resource plays in the Edwards
trend, Canada and Tunisia, carryover costs from the Alaskan winter drilling
32
PIONEER NATURAL RESOURCES COMPANY
season and the acquisition of additional 3-D seismic (which is required to be
expensed under the successful efforts method of accounting) and personnel costs.
General and administrative expense is expected to be $31 million to $34 million.
Interest expense is expected to be $24 million to $27 million, representing a
decrease from the prior quarter primarily as a result of the repayment of
outstanding borrowings under the Credit Agreement as a result of the asset
divestitures. Interest income, primarily from cash investments, is expected to
be $3 million to $4 million. Accretion of discount on asset retirement
obligations is expected to be $1 million to $2 million. The Company's second
quarter effective income tax rate is expected to range from 35 percent to 45
percent based on current capital spending plans. Cash income taxes are expected
to range from $5 million to $15 million.
Acquisitions, Divestments, Operations and Drilling Highlights
During Augustthe first quarter of 2006, the Company completed the divestiture of
certain of its deepwater Gulf of Mexico properties. Additionally, during 2005,
the Company sold its interests in certain oil and gas properties on the shelf of
the Gulf of Mexico for net proceedsand certain fields in Canada. Operating results and the
related gains on disposition of $58.9 million, resulting in a gain of $27.5
million.assets from these divestitures are reported as
discontinued operations.
During the three and nine months ended September 30, 2005,first quarter of 2006, the Company recognizedannounced an agreement to
sell its Argentine net assets for cash proceeds, before normal closing
adjustments, of $675 million. The Company completed this sale during April 2006
and estimates it will recognize a nominal gain in the second quarter of 2006.
The Company's Argentine net assets have been classified as discontinued
operations held for sale as of March 31, 2006 in the accompanying Consolidated
Balance Sheet and the Argentine results of operations for the three-month
periods ended March 31, 2006 and 2005 are included in income from discontinued
operations in the accompanying Consolidated Statements of $19.0 million and $110.5
million, respectively, as comparedOperations.
See Note N of Notes to $3.8 million and $9.4 millionConsolidated Financial Statements included in "Item
1. Financial Statements" for the same
respective periods of 2004. The following table represents the components ofadditional information regarding the Company's
discontinued operations for the three and nine months ended September
30, 2005 and 2004:
32
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Revenues and other income:
Oil and gas................................... $ 6,446 $ 16,149 $ 43,868 $ 47,438
Gain on disposition of assets (a)............. 27,476 - 166,137 -
-------- -------- -------- --------
33,922 16,149 210,005 47,438
-------- -------- -------- --------
Costs and expenses:
Oil and gas production........................ 2,716 7,004 14,446 22,107
Depletion, depreciation and amortization (a).. 1,445 4,532 11,211 13,482
Exploration and abandonments (a).............. (92) 83 241 921
General and administrative.................... - 54 132 162
-------- -------- -------- --------
4,069 11,673 26,030 36,672
-------- -------- -------- --------
Income from discontinued operations
before income taxes........................... 29,853 4,476 183,975 10,766
Income tax provision:
Current....................................... - - (2,869) -
Deferred (a).................................. (10,867) (634) (70,604) (1,375)
-------- -------- -------- --------
Income from discontinued operations.............. $ 18,986 $ 3,842 $ 110,502 $ 9,391
======== ======== ======== ========
- -------------
(a) Represents the noncash components of discontinued operations included in
the Company's Consolidated Statements of Cash Flows excluding $37 thousand
of cash payments for delay rentals included in exploration and abandonments
for the nine months ended September 30, 2005.
NOTE P. Subsequent Event
In October 2005, the Company closed the sale of the shares in a Gabonese
subsidiary that owns the interest in the Olowi block to an unaffiliated buyer
for approximately $48 million of net proceeds. Pioneer will recognize a gain
during the fourth quarter of 2005 of approximately $47 million with no
associated income tax effect either in Gabon or the United States. In addition,
Pioneer retains the potential, under certain circumstances, to receive
additional payments for production from deeper reservoirs discovered on the
block.
33
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Strategic Initiatives
On September 1, 2005, the Company announced that its board of directors
approved the following strategic initiatives to enhance shareholder value and
returns:
o Approval of a $1 billion share repurchase program, $650 million of
which was immediately initiated through open market transactions. The
$650 million program is expected to be completed by the end of 2005.
The remaining $350 million is subject to the completion of the
deepwater Gulf of Mexico and Argentine divestments discussed below.
o Divestment of properties in the deepwater Gulf of Mexico and Tierra
del Fuego in southern Argentina as a result of high commodity prices
and an active asset market.
o Implementation of a plan to exit exploration in deepwater Gulf of
Mexico. Pioneer has expanded and balanced its exploration portfolio in
onshore North America, Alaska and Africa and believes these
opportunities are now better aligned with the Company's current
exploration objectives.
o Reduction of the exploration budget to between 15 percent and 20
percent of total capital from 30 percent.
o Reallocation of capital to North America onshore development and
extension drilling.
o Hedging eligible oil and gas production for 2006 and 2007 using
costless collars.
o Increasing the semiannual dividend on common shares by 20 percent to
$.12 per share.
Financial and Operating Performance
The Company's financial and operating performance for the third quarter of
2005 included the following highlights:
o Average daily sales volumes per BOE decreased one percent during the
third quarter of 2005 as compared to the third quarter of 2004.
o Oil and gas revenues increased 31 percent during the third quarter of
2005 as compared to the third quarter of 2004 primarily as a result of
increases in worldwide oil and Argentine and North American gas
prices.
o Interest and other income increased by $8.2 million during the third
quarter of 2005 as compared to the third quarter of 2004, primarily
due to $4.8 million of business interruption insurance claims related
to the Fain gas plant fire.
o Other expense increased by $35.7 million during the third quarter of
2005 as compared to the third quarter of 2004, primarily due to
increases of $18.6 million and $12.6 million in losses associated with
debt extinguishments and commodity hedge ineffectiveness,
respectively.
o Income from continuing operations before income taxes increased by 47
percent to $147.1 million during the third quarter of 2005 from $100.0
million during the third quarter of 2004.
o Net income increased to $123.6 million ($.88 per diluted share) for
the third quarter of 2005, as compared to $80.9 million ($.67 per
diluted share) for the third quarter of 2004.
o The Company recognized income from discontinued operations of $19.0
million ($.14 per diluted share) during the third quarter of 2005
attributable to certain Gulf of Mexico shelf properties sold during
the third quarter of 2005.
o Net cash provided by operating activities increased by 33 percent to
$317.7 million during the third quarter of 2005 from $239.1 million
during the third quarter of 2004.
o Outstanding debt decreased by $446.7 million, or 19 percent, as of
September 30, 2005 as compared to debt outstanding as of December 31,
2004.
Fourth Quarter 2005 Outlook
Based on current estimates, the Company expects that fourth quarter 2005
production will average 160,000 to 175,000 BOEPD. This range reflects the
Company's expectations on the resumption of production from the Devils Tower
field in November and the typical variability in the timing of oil cargo
shipments in South Africa, Argentina and Tunisia.
34
PIONEER NATURAL RESOURCES COMPANY
Fourth quarter production costs (including production and ad valorem taxes)
are expected to average $7.25 to $7.75 per BOE based on current NYMEX strip
prices for oil and gas. The increase over the prior quarter is primarily the
result of increasing service costs associated with field operations and higher
commodity prices. Depreciation, depletion and amortization ("DD&A") expense is
expected to average $8.75 to $9.25 per BOE.
Total exploration and abandonment expense is expected to be $30 million to
$70 million and includes plans to drill in Alaska, the Gulf of Mexico shelf,
Argentina, Nigeria and Tunisia as well as the acquisition of additional 3-D
seismic. General and administrative expense is expected to be $31 million to $33
million. Interest expense is expected to be $31 million to $34 million,
representing an increase over the prior quarter primarily as a result of the
previously discussed share repurchase program. Accretion of discount on asset
retirement obligations is expected to be $2 million to $3 million.
The Company's fourth quarter effective income tax rate is expected to range
from 34 percent to 37 percent based on current capital spending plans. Cash
income taxes are expected to range from $10 million to $20 million, principally
related to Argentine, Canadian and Tunisian income taxes and nominal alternative
minimum tax in the United States. The Company continues to benefit from the
carryforward of net operating losses and other positive tax attributes in the
United States.
Acquisitions, Divestments, Operations and Drilling Highlightsoperations.
During the first nine monthsquarter of 2005,2006, the Company incurred $957.7$377.8 million in
finding and development costs including $450.1$212.4 million for development
activities, $235.2$132.4 million for exploration activities and $272.4$33.0 million for
acquisitions. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure associated with successful drilling activities.
The following table summarizes by geographic area the Company's finding and
development costs incurred, excluding asset retirement obligations, during the
first quarter of 2006 and the total wells planned to be drilled during the year
ending December 31, 2006:
Property
Acquisition Costs 2006
---------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
--------- ---------- ---------- ---------- ---------- -------
(in thousands)
United States:
Gulf of Mexico (a)....... $ - $ 2 $ 21,843 $ 7,554 $ 29,399 3
Onshore Gulf Coast....... 3 12,452 12,163 6,583 31,201 50
Permian Basin............ 1,867 3,606 1,533 56,870 63,876 360
Mid-Continent............ - - 3 7,495 7,498 40
Rocky Mountains.......... 605 1,979 8,206 43,856 54,646 390
Alaska................... - - 18,578 8,909 27,487 3
-------- --------- --------- --------- --------- ------
2,475 18,039 62,326 131,267 214,107 846
-------- --------- --------- --------- --------- ------
Argentina (a)................ - 2 6,873 17,607 24,482 -
Canada....................... (207) - 38,412 32,060 70,265 260
Nigeria...................... - 7,735 19,551 - 27,286 1
South Africa................. - - 83 31,255 31,338 5
Tunisia...................... - 5,000 1,609 200 6,809 11
Other........................ - - 3,540 - 3,540 -
-------- --------- --------- --------- --------- ------
(207) 12,737 70,068 81,122 163,720 277
-------- --------- --------- --------- --------- ------
Total Worldwide..... $ 2,268 $ 30,776 $ 132,394 $ 212,389 $ 377,827 1,123
======== ========= ========= ========= ========= ======
33
PIONEER NATURAL RESOURCES COMPANY
- -----------
(a) Approximately $8.5 million of the finding and development costs incurred
are associated with the divested deepwater Gulf of Mexico assets and all
the Argentine finding and development costs incurred were not included in
the $1.3 billion 2006 capital budget as the Company was in the process of
selling those assets.
The following tables summarize the Company's development and
exploration/extension drilling activities for the ninethree months ended September 30, 2005:March 31,
2006:
Development Drilling
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States............... 32 383 403States................. 29 136 160 3 2
Argentina..................... 2 15 10 Argentina................... 6 56 48- 7
Canada........................ 3 - - - 3
Africa........................ - 2 1 13
Canada...................... 2 28 26 - 4
---- ---- ---- ---- ----1
------ ------ ------ ------ -----
Total Worldwide......... 40 467 47734 153 171 3 27
==== ==== ==== ==== ====13
====== ====== ====== ====== =====
Exploration/Extension Drilling
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States...............States................ 7 17 13 2 9
18 15 5 7
Argentina................... 8 23 14 9 8
Canada...................... 21 88 43 7 59
Africa......................Argentina.................... 4 4 2 1 5
Canada....................... 109 88 151 6 40
Africa....................... 3 2 - 1 4
---- ---- ---- ---- ---------- ------ ------ ------ ------
Total Worldwide........ 42 133 73 24 78
==== ==== ==== ==== ====
35
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes by geographic area the Company's finding and
development costs incurred, excluding asset retirement obligations, during the
first nine months of 2005 and the total wells planned to be drilled during the
year ending December 31, 2005:
Property
Acquisition Costs
----------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
---------- ---------- ----------- ----------- ---------- ---------
(in thousands)
United States:
Gulf of Mexico........ $ - $ 10,669 $ 103,066 $ 76,402 $ 190,137 8
Onshore Gulf Coast.... 21,430 20,691 8,366 32,197 82,684 23
Permian Basin......... 147,980 1,541 1,010 84,583 235,114 205
Mid-Continent......... 150 - 33 26,891 27,074 65
Rocky Mountain........ 578 14,931 4,290 97,871 117,670 300
Alaska................ - 16,375 23,674 3,728 43,777 4
--------- --------- --------- --------- --------- -----
170,138 64,207 140,439 321,672 696,456 605
--------- --------- --------- --------- --------- -----
Argentina................. 4 357 26,096 64,207 90,664 105
Canada.................... 1,528 6,259 25,257 61,093 94,137 200
Nigeria................... - 29,944 21,860 - 51,804 2
Tunisia................... - - 11,903 2,846 14,749 4
Other..................... - - 9,624 291 9,915 -
--------- --------- --------- --------- --------- -----
1,532 36,560 94,740 128,437 261,269 311
--------- --------- --------- --------- --------- -----
Total Worldwide...... $ 171,670 $ 100,767 $ 235,179 $ 450,109 $ 957,725 916
========= ========= ========= ========= ========= =====Worldwide......... 123 111 166 10 58
====== ====== ====== ====== ======
Gulf of Mexico area. During the third quarter, the Company announced its
plans to pursue the divestment of its deepwater Gulf of Mexico properties to
reduce the exploration risk and production volatility that have been associated
with these properties. No assurance can be given that there will be purchasers
willing to purchase these properties on terms acceptable to the Company.
During August 2005, the Company sold its interests in certain oil and gas
properties on the shelf of the Gulf of Mexico for net proceeds of $58.9 million.
Prior to their divestiture in August 2005, the Company's net production from
these properties averaged approximately 3,100 BOEPD. See Note O of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information regarding the Company's discontinued operations. The Company's East Cameron facilities were destroyed
by Hurricane Rita. As
a result,Rita during the third quarter of 2005. The Company plans to abandon
the East Cameron field because the pre-hurricane production of approximately 600
BOEPD and future production profile do not justify the cost of replacing the
facilities. Devils Tower production was shut-in forDuring the monthfirst quarter of September due2006, the Company increased its estimate
to damageabandon the East Cameron facilities to third party processing$86 million by taking a charge of $42
million. The Company's estimate to reclaim and abandon the facilities from Hurricane Katrina. Devils Tower
production is expectedbased
upon an analysis and fee proposal prepared by a third-party engineering firm and
assumes that the Company will be able to "reef" a substantial portion of debris
in place. The Company has filed its application with the appropriate regulatory
agency to reef the debris in place. The Company expects a substantial portion of
the loss to be restarted in early November, and production is
expected to return to pre-hurricane levels of approximately 5,000 net BOEPD
shortly after start up. The subsea wells at the Triton and Goldfinger satellite
fields have been tied back to the Devils Tower platform and are ready to flow.
Further increases in production from these subsea wells and Devils Tower well
recompletions will occur over the next few months as additional repairs are
completed on the third party processing facilities. Pioneer's remaining
operations in the Gulf of Mexico experienced limited disruptions from Hurricanes
Katrina and Rita. Deepwater facilities at Falcon, Canyon Express and Devils
Tower had little to no damage. Bycovered by insurance.
During October 1, 2005, Falcon and Canyon Express
were fully operational and producing at pre-hurricane levels. See Note N of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information.
Subsequent to quarter end, the Company announced a discovery on its Clipper
prospect in the Green Canyon Blocks 299 Blockand 300 in the deepwater Gulf of Mexico.
The Clipper discovery, which Pioneer operates the block with a 55 percent working
interest. The block isinterest, was not included in Pioneer'sthe Company's deepwater Gulf of Mexico divestment program.
36divestiture
package. The Company intends to develop the Clipper field and has a rig
contracted to drill appraisal and exploratory wells in the field during the
third quarter of 2006.
Gulf Coast area. In the Edwards Trend in South Texas, the Company has
discovered two new fields which are analogous to its Pawnee and Washburn fields.
Four successful wells have been drilled in the first new field discovery in the
Sinor area that tested at between 2.5 and 3.2 million cubic feet per day before
being stimulated. These four wells are expected to be on production by the end
of the second quarter of 2006, and the full field development plan is being
prepared. The second new field discovery was drilled on the Stingray prospect
northeast of the Pawnee field. Early results indicate the new field could have
significant resource potential. The discovery well is anticipated to be online
and producing by late second quarter of 2006.
34
PIONEER NATURAL RESOURCES COMPANY
In October 2005,Three additional new-field prospects are scheduled to be drilled during the
Company spuddedsecond quarter of 2006 to continue the first well of its previously
announced five well shelf program. The first well was a dry hole and will result
in a charge to earnings of approximately $2.1 millionEdwards Trend play expansion. Pioneer
holds more than 200,000 gross acres in the fourth quarter of
2005.
The Company received a subsalt suspension of operations ("SOO") extension
fromtrend area, has four rigs currently
dedicated to the Minerals Management Service related to its subsalt Paladin prospect in
the Garden Banks area of the deepwater Gulf of Mexico. The Company is
reprocessing seismic dataplay and is evaluating alternativesadding two rigs to drill an exploratory
well on the prospectprogram during the SOO period.
In the fourth quarter of 2005, the2006 and at
least one rig during 2007. The Company plans to spud the third well on
its 2004 Thunder Hawk discoverydrill at least 35 Edwards Trend
development and complete the drilling of the previously
spudded second well which was temporarily suspended due to weather.
During the third quarter of 2005, recoverable reserves from the Harrier
field were fully produced. The Harrier field had cumulative production of 51 Bcf
on a total investment of $112.0 million.
The Company was advised by the operator of the Canyon Express system that
sidetrack operations planned for the Aconcagua field later this year will be
postponed pending rig availability. The existing Aconcaguaexploration wells are expected to
reach the end of their productive lives by the end of 2005 or early 2006;
therefore, the Company now anticipates that the system will be shut-in once the
Camden Hills recoverable reserves are fully produced during the first half of
2006 unless a rig becomes available to drill the Aconcagua sidetrack wells.2006.
Alaska area. The Company's 2005 - 2006 winter drilling season program in
Alaska included three exploratory wells in the Central North Slope area where
Pioneer and its partners tested multiple play types that were close to existing
infrastructure. The Company's Arctic Fox drilling rig was utilized for the
three-well program.
Pioneer announced in early March 2006 that the Hailstorm No. 1 well was
unsuccessful. It was drilled to test the first of multiple prospects in the
153,000-acre Pioneer-operated Storms area just south of the Prudhoe Bay field.
The Company announced that it acquiredowns a 1050 percent working interest in the prospect. Additional
prospects have been identified in a variety of established play types and are
likely to be tested in future years.
The Cronus No. 1 well, in which the Company owns a 90 percent working
interest, was planned to test multiple objectives on a prospect just west of the
Meltwater field. A thick, oil-bearing sand section in the Torok and a thin, oil-
bearing sand in the Jurassic-aged Kuparuk C were penetrated by the well.
Wireline and core data are currently being analyzed and integrated with 3-D
seismic to determine if appraisal activities are warranted during the 2006 -
2007 winter drilling season in Alaska.
Drilling of the Antigua No. 1 well on the non-operated Antigua prospect was
unsuccessful. The Company owns a 32 percent working interest in this prospect,
which is adjacent to the Kuparuk River field.
During 2005, the Company acquired a ten percent interest in the
Cosmopolitan Unit located in the Cook Inlet of Alaska withthrough a disproportionate
spending arrangement for a 3-D seismic shoot that was undertaken in 2005 and
completed in the first quarter of 2006. The Company has the option to acquire an
additional 40 percent working interestin the Cosmopolitan Unit and potentially assume operatorship after new 3-D seismic data has been acquired and
interpreted.any time
prior to June 1, 2006. The Company's initial 10 percent interestCompany is being acquired throughcompleting its agreement to pay a disproportionate shareevaluation of the 3-D
seismic survey. The
Company also has three exploratory wells plannedand will make its determination on whether or not to exercise this
option during the North Slope for the
winter drilling season.second quarter of 2006.
Mid-Continent area. The Company's Fain gas plant was shut in due to a fire
on May 15, 2005. The Company completed repairs and resumed operations in
mid-July 2005. The shut-in resulted in a production loss2006 drilling plans are primarily
comprised of approximately 17,000
BOEPD. The Company filed a business interruption claim relating to the fire and
recognized an additional $4.8 million of recoveriesdrilling wells in the third quarter of
2005. See Note N of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information.Hugoton and West Panhandle fields.
Permian Basin and Gulf Coast areas. In July 2005,area. During 2006, the Company completedplans to increase its drilling
activity by approximately 87 percent over the purchase of approximately 70 million BOE of substantially undeveloped proved oil
reserveswells drilled in the United States core areas ofarea during
2005 and almost a 200 percent increase relative to average annual wells drilled
over the Permian Basin and South Texas
for approximately $177 million. The assets acquired were producing approximately
1,800 BOEPD at the date of acquisition and provide an estimated 800 undrilled
locations.past five years.
Rocky Mountain area. In the Raton Basin, production is increasing as a
result of a pipeline expansion that was completed in October 2005.2005 and additional
field and wellhead compression. Pioneer plans to increase its Raton drilling
during 2006 and to leverage its CBM expertise in the Raton area to drill
development wells. Additionally, the Company intends to continue efforts during
2006 to optimize gathering and compression facilities in the area.
In northwest Colorado, the Company's programs to evaluate the CBM resource
potential at Lay Creek and Columbine Springs are progressing. At Lay Creek, the
Company has drilled five pilot wells and completed workovers on two wells
drilled by the previous operator. Results to date indicate that the coals are
permeable and thicker than expected. During the second half of 2006, Pioneer
plans to drill approximately 100 Raton14 development wells inand install the fourthinfrastructure to initiate
sales by the end of 2006. Drilling on two additional pilot wells is expected to
commence during the second quarter of 2005, has
drilled 234 Raton wells during2006. At Columbine Springs, the first nine months of 2005 and expects
production growth from the field of 5 percent to 7 percent during 2005.
Canada. The Company had its first production, in the third quarter of 2005,
from the wells drilled in the Horseshoe Canyon coalbed methane project. The
Company expects fourth quarter Canadian production to increase as additional
Horseshoe Canyon wells are brought onto production. Pioneer has drilled 90 wells
of the planned 180 well program for 2005 in Horseshoe Canyon and
expects to complete the balance of theits seven-well extension pilot program by the end of July
2006 and have these and 23 existing wells on production by the year. Anend of the third
quarter of 2006 to assess production potential and water-handling requirements.
Full-field development could begin in 2007. The Company also plans to drill five
wells to further evaluate its resource play at Castlegate and to test its
conventional Entrada gas play, both in the Uinta Basin in Utah.
35
PIONEER NATURAL RESOURCES COMPANY
Canada. The Company's operations continued to focus upon the Chinchaga
field, the Company's Horseshoe Canyon and Alberta Mannville CBM plays. In the
Chinchaga field, the Company drilled in 44 wells of which 90 percent were
successful, recompleted an additional 180
well program31 wells and upgraded field wide
compression and gathering facilities during the winter drilling season of 2006.
In the Horseshoe Canyon CBM trend, the Company drilled 18 wells of the planned
200 wells for 2006 and is planned forplanning to tie 300 wells into gathering and
compression facilities by the end of 2006. Also,In the Alberta Mannville CBM play,
the Company plans to drill approximately
50eight horizontal wells in its Chinchaga field during the 2006 winter drilling season.
Argentina.to test three new
CBM pilots.
Nigeria. During the thirdfirst quarter of 2006, the Company announced it will pursueparticipated in the
saledrilling of its non-operated positionthe Pina 1-X well on Block 256 in Tierra del Fuego, southern Argentina.
No assurance can be given that there will be purchasers willing to purchase
these properties on terms acceptable to the Company.
37
PIONEER NATURAL RESOURCES COMPANY
Gabon. In October 2005,deepwater of Nigeria, which
was unsuccessful. As a result, the Company closedrecorded a charge of $33.1 million
for the sale of the shares indry hole cost and related acreage impairment. The Company has a subsidiary that owns the25
percent working interest in the Olowi block to an unaffiliated buyer
for approximately $48 millionblock. The well tested multiple objectives on a
large thrust structure located near the western edge of net proceeds. Pioneer will recognize a gain
during the fourth quarter of 2005 of approximately $47 million with no
associated income tax effect either in Gabon or the United States. In addition,
Pioneer retains the potential, under certain circumstances, to receive
additional payments for production from deeper reservoirs discovered on the block. Nigeria.The partners
plan to drill an additional well on Block 256 in 2007 to test a different play
type.
A partially-owned subsidiary of the Company joined Oranto Petroleum and
Orandi Petroleum in an existing production sharing contract on Block 320 in
deepwater Nigeria gaining exploration rights from the Nigerian National
Petroleum Corporation. The subsidiary, which holds a 51 percent interest in
Block 320, is owned 59 percent by the Company and 41 percent by an unaffiliated
third party.third-party. The Company plans to acquireacquired 3-D seismic data of the block during the
fourth quarter of 2005 and is currently processing the seismic. The Company's
subsidiary plans to drill the first well in earlyon the block during 2007.
The Company expects to spud an exploratory well on its non-operated Block
256 in late 2005.
Sao Tome and Principe and Nigeria. Pioneer was awarded exploration rights
to acreage in Blocks 2 and 3 in the Joint Development Zone between Nigeria and
Sao Tome and Principe through a consortium with ERHC Energy Inc. The consortium
was awarded 65 percent interest in Block 2 and a 25 percent interest in Block 3
subject to negotiating acceptable joint operating and production sharing
agreements. The Company is currently negotiating joint operating and production
sharing agreements related to the acreage in Blocks 2 and 3.
South Africa. During the thirdfirst quarter of 2005,2006, the Company and the GTL
plant operator announcedits partner
drilled two wells that they had reached an agreementare awaiting completion and plan to drill four additional
development wells in 2006 and early 2007 to develop the gas and condensate
fields discovered offshore South Africa. The companies signed a
MemorandumCompany also invested $22.3 million
in facilities infrastructure and design work, of Understanding finalizingwhich installation is expected
to commence at the terms for jointly developingend of 2006. First production from the gas
fields to provide feedstock forproject is expected in
the GTL plant, which is located at Mossel Bay.second half of 2007.
Tunisia. The agreement is subject to approval byAdam 4 well drilled during the GTL plant operator's board of
directors.
Tunisia - Anaguid. In the thirdfirst quarter of 2005,2006 was
successful, extending the projectCompany's 100 percent success rate in the concession
where a two-rig drilling program is underway. On the adjacent Jenein Nord block,
the Company acquired the remaining equity interest in February 2006, becoming
the operator of the Company's Anaguid Block in Tunisia, alongblock with 100 percent working interest and is currently
acquiring 3-D seismic on both the Company, conducted an
extended production testJenein Nord block and Adam Concession. A well
is planned during the second quarter of one of2006 on the two existing exploration wells and
drilled an offset appraisal wellBorj El Khadra block which
is adjacent to the other exploration well. The results of
the extended production test were unfavorable and the Company has expensed the
costs associated with this well in the third quarter of 2005, which was
approximately $5.1 million. However, the appraisal well offsetting the second
discovery encountered gas and condensate in a similar horizon to the initial
well. The Company, along with the operator, is currently reviewing data from the
appraisal well to determine whether development of the area is economical.Adam Concession.
Results of Operations
Oil and gas revenues. RevenuesOil and gas revenues from continuing operations
totaled $379.5 million and $323.1 million for the three-month periods ended
March 31, 2006 and 2005, respectively. The increase in oil and gas revenues from
continuing operations totaled $558.4
million and $1.6 billion for the three and nine months ended September 30, 2005,
respectively, as compared to $425.6 million and $1.3 billion for the same
respective periods of 2004. The revenue increase during the three months ended
September 30, 2005, as compared to the same period of 2004, was due to a 2272 percent increase in oil prices, a 2830
percent increase in NGL prices and a 3912 percent increase in gas prices,
including the effects of commodity price hedges and amortization of deferred VPP
revenues, partially offset by a oneten percent decrease in average daily BOE sales
volumes.
The revenue increase during the nine months ended September 30, 2005, as
compared to the same period of 2004, was due to a two percent increase in
average daily BOE sales volumes, a 20 percent increase in oil prices, a 27
percent increase in NGL prices and a 25 percent increase in gas prices,
including the effects of commodity price hedges.
3836
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes from continuing
operations, by geographic area and in total, for the threethree-month periods ended
March 31, 2006 and nine months ended
September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,March 31,
----------------------
----------------------2006 2005
2004 2005 2004
--------- --------- --------- ----------------- --------
Oil (Bbls):
United States................. 24,133 25,930 25,059 23,681
Argentina..................... 7,930 9,316 7,972 8,827
Canada........................ 209 25 194 27
Africa........................ 9,666 8,733 10,686 10,986
--------- --------- --------- ---------
Worldwide..................... 41,938 44,004 43,911 43,521
========= ========= ========= =========States............................. 16,965 22,522
Canada.................................... 277 161
Africa.................................... 7,654 11,967
-------- --------
Worldwide................................. 24,896 34,650
======== ========
NGLs (Bbls):
United States.................States............................. 18,176 18,825 16,835 19,790
Argentina..................... 1,917 1,727 1,814 1,549
Canada........................ 502 381 510 415
--------- --------- --------- ---------
Worldwide..................... 20,595 20,933 19,159 21,754
========= ========= ========= =========17,489
Canada.................................... 419 417
-------- --------
Worldwide................................. 18,595 17,906
======== ========
Gas (Mcf):
United States................. 460,372 472,133 512,834 506,166
Argentina..................... 142,399 137,971 136,023 119,440
Canada........................ 37,562 22,058 36,160 23,627
--------- --------- --------- ---------
Worldwide..................... 640,333 632,162 685,017 649,233
========= ========= ========= =========States............................. 274,773 283,080
Canada.................................... 35,782 34,171
-------- --------
Worldwide................................. 310,555 317,251
======== ========
Total (BOE):
United States................. 119,036 123,444 127,367 127,831
Argentina..................... 33,581 34,039 32,456 30,283
Canada........................ 6,972 4,082 6,731 4,380
Africa........................ 9,666 8,733 10,686 10,986
--------- --------- --------- ---------
Worldwide..................... 169,255 170,298 177,240 173,480
========= ========= ========= =========States............................. 80,937 87,191
Canada.................................... 6,659 6,273
Africa.................................... 7,654 11,967
-------- --------
Worldwide................................. 95,250 105,431
======== ========
On a quarter-to-quarter comparison, average daily sales volumes increased
by 71 percent in Canada and by 11 percent in Africa, while average daily sales
volumes decreased by one percent in Argentina and by four percent in the United
States. On a year-to-date comparison, average daily sales volumes increased by
seven percent in Argentina and by 54six percent in Canada, while average daily sales volumes decreased by threeseven
percent in Africa and remained constant in the
United States.
Average daily sales volumes from continuing operations in the United States was flat principally due to new production from the properties acquiredand by 36 percent in the
Evergreen merger, offset by declining production in the Gulf of Mexico and
downtime at the Fain gas plant.Africa. Canadian average daily
sales volumes from continuing operations increased due to new production from
Canadian properties acquired in the Evergreen merger
and production from new wells drilled and connected to infrastructure during 2005. Argentine averageAverage daily sales
volumes increased as a result of increased
wells drilled and market demand. The Company has maintained its level of capital
expendituresfrom continuing operations in Argentina as the stability of the Argentine peso and the general
economic outlook for Argentina has improved and gas prices have increased.
In Africa, production is downUnited States were lower principally
due to incremental volumes sold under VPPs during 2005 that were effective
beginning in SouthJanuary 2006. Production decreased in Africa due to normal
production declines and timing of oil shipments, partially offset by continued growth in
Tunisia production.
39
PIONEER NATURAL RESOURCES COMPANYshipments.
The following table provides average daily sales volumes recorded from discontinued
operations, during the three and nine months ended September 30,
2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Oil (Bbls):
United States............... 1,066 1,850 1,709 2,587
Canada...................... - 70 38 70
--------- --------- --------- ---------
Worldwide................... 1,066 1,920 1,747 2,657
========= ========= ========= =========
NGLs (Bbls):
United States............... 131 49 87 80
Canada...................... 2 478 149 525
--------- --------- --------- ---------
Worldwide................... 133 527 236 605
========= ========= ========= =========
Gas (Mcf):
United States............... 3,447 5,245 5,529 7,407
Canada...................... 347 16,779 8,676 16,418
--------- --------- --------- ---------
Worldwide................... 3,794 22,024 14,205 23,825
========= ========= ========= =========
Total (BOE):
United States............... 1,771 2,773 2,718 3,902
Canada...................... 60 3,344 1,633 3,331
--------- --------- --------- ---------
Worldwide................... 1,831 6,117 4,351 7,233
========= ========= ========= =========
40
PIONEER NATURAL RESOURCES COMPANY
The following table provides average reported prices from continuing
operations, including the results of hedging activities, and average realized
prices from continuing operations, excluding the results of hedging activities, by geographic area and in total, forduring the threethree-month periods
ended March 31, 2006 and nine months ended September
30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,March 31,
----------------------
----------------------2006 2005
2004 2005 2004
--------- --------- --------- ----------------- --------
Average reported prices:
Oil (per Bbl)(Bbls):
United States............ $ 32.87 $ 30.67 $ 30.41 $ 29.45
Argentina................ $ 40.59 $ 32.25 $ 35.62 $ 26.96
Canada................... $ 68.77 $ 36.57 $ 51.73 $ 42.76
Africa................... $ 59.57 $ 42.17 $ 51.40 $ 35.43
Worldwide................ $ 40.66 $ 33.29 $ 36.56 $ 30.46States............................ 9,732 6,201
Argentina................................ 7,184 8,191
Canada................................... - 69
-------- --------
Worldwide................................ 16,916 14,461
======== ========
NGLs (per Bbl)(Bbls):
United States............ $ 34.40 $ 26.50 $ 29.78 $ 23.37
Argentina................ $ 31.73 $ 29.62 $ 31.02 $ 28.71
Canada................... $ 49.93 $ 33.68 $ 43.22 $ 29.42
Worldwide................ $ 34.53 $ 26.89 $ 30.26 $ 23.87States............................ - 55
Argentina................................ 1,296 1,572
Canada................................... - 184
-------- --------
Worldwide................................ 1,296 1,811
======== ========
Gas (per Mcf)(Mcf):
United States............ $ 7.07 $ 5.12 $ 6.43 $ 5.13
Argentina................ $ .83 $ .63 $ .86 $ .62
Canada................... $ 7.51 $ 4.39 $ 6.57 $ 4.33
Worldwide................ $ 5.70 $ 4.11 $ 5.33 $ 4.27
Average realized prices:
Oil (per Bbl)States............................ 145,002 255,205
Argentina................................ 135,047 130,351
Canada................................... - 15,375
-------- --------
Worldwide................................ 280,049 400,931
======== ========
Total (BOE):
United States............ $ 60.63 $ 40.96 $ 52.45 $ 37.74
Argentina................ $ 40.59 $ 32.25 $ 35.62 $ 29.22
Canada................... $ 68.77 $ 36.57 $ 51.73 $ 42.76
Africa................... $ 59.57 $ 42.94 $ 51.40 $ 36.06
Worldwide................ $ 56.64 $ 39.50 $ 49.14 $ 35.59
NGLs (per Bbl):
United States............ $ 34.40 $ 26.50 $ 29.78 $ 23.37
Argentina................ $ 31.73 $ 29.62 $ 31.02 $ 28.71
Canada................... $ 49.93 $ 33.68 $ 43.22 $ 29.42
Worldwide................ $ 34.53 $ 26.89 $ 30.26 $ 23.87
Gas (per Mcf):
United States............ $ 8.40 $ 5.68 $ 7.07 $ 5.59
Argentina................ $ .83 $ .63 $ .86 $ .62
Canada................... $ 7.82 $ 5.00 $ 6.68 $ 4.99
Worldwide................ $ 6.68 $ 4.55 $ 5.82 $ 4.65States............................ 33,899 48,790
Argentina................................ 30,987 31,488
Canada................................... - 2,816
-------- --------
Worldwide................................ 64,886 83,094
======== ========
Hedging activities.37
PIONEER NATURAL RESOURCES COMPANY
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 and the amortization of deferred VPP revenue. The
following table provides average reported prices from continuing operations
(including the results of hedging activities and the amortization of deferred
VPP revenue), and average realized prices from continuing operations (excluding
the results of hedging activities and the amortization of deferred VPP revenue)
by geographic area and in total, for the three- month periods ended March 31,
2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
Average reported prices:
Oil (per Bbl):
United States......................... $ 59.97 $ 29.94
Canada................................ $ 67.11 $ 50.88
Africa................................ $ 59.84 $ 44.28
Worldwide............................. $ 60.01 $ 34.99
NGLs (per Bbl):
United States......................... $ 33.74 $ 26.12
Canada................................ $ 54.23 $ 37.97
Worldwide............................. $ 34.20 $ 26.39
Gas (per Mcf):
United States......................... $ 6.60 $ 6.01
Canada................................ $ 7.65 $ 5.96
Worldwide............................. $ 6.72 $ 6.01
Average realized prices:
Oil (per Bbl):
United States......................... $ 60.11 $ 45.46
Canada................................ $ 67.11 $ 50.88
Africa................................ $ 59.84 $ 44.28
Worldwide............................. $ 60.10 $ 45.08
NGLs (per Bbl):
United States......................... $ 33.74 $ 26.12
Canada................................ $ 54.23 $ 37.97
Worldwide............................. $ 34.20 $ 26.39
Gas (per Mcf):
United States......................... $ 7.00 $ 5.56
Canada................................ $ 7.44 $ 5.98
Worldwide............................. $ 7.05 $ 5.61
Hedging activities. The Company utilizes commodity swap and collar
contracts in order 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. During the threethree-month periods ended
March 31, 2006 and nine months
ended September 30, 2005, the Company's commodity price hedges decreased oil and
gas revenues from continuing operations by $119.3$57.4 million and $242.3$31.8 million,
respectively, as compared to $51.0 million and $128.4 million during the same
respective periods in 2004.respectively. See Note GF of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for specific information regarding the
Company's hedging activities during the threethree-month periods ended March 31, 2006
and nine months2005.
Deferred revenue. During the three-month periods ended September 30,March 31, 2006 and
2005, the Company's amortization of deferred VPP revenue increased oil and 2004.
41
PIONEER NATURAL RESOURCES COMPANY
Argentina commodity prices. Argentine commodity prices have been
significantly below thosegas
revenues from continuing operations by $47.9 million and $11.6 million,
respectively. See Note L of Notes to Consolidated Financial Statements included
in the world markets"Item 1. Financial Statements" for a period of time. In May
2004, pursuant to a decree, the Argentine government approved measures to permit
producers to renegotiate gas sales contracts, excluding those that could affect
small residential customers. Pursuant to that decree, wellhead prices have risen
from a 2004 year-end range of $.61 to $.78 per Mcf to a range of $.87 to $1.04
per Mcf, depending on the region where the gas is produced. No further gas price
increases are allowed for in the decree. Also, due to the Argentine export tax
(expires in February 2007) and price caps required by the Argentine government
on oil prices paid by Argentine refiners, the price of Argentine oil has been
below that realized in world markets. For additionalspecific information regarding the
suppressed Argentine commodity prices see the Company's Annual Report on Form
10-K for the year ended December 31, 2004. At the present time, no specific
predictions can be made about future commodity prices in Argentina. The Company
has seen recent improvements in spot oil and gas prices in certain areas of
Argentina; however, the Company expects Argentine commodity price realizations
to be less than those in the United States.VPPs.
Interest and other income. Interest and other income from continuing
operations for the threethree-month periods ended March 31, 2006 and nine
months ended September 30, 2005 was $9.5$17.1
million and $85.7$2.3 million, respectively, as compared to $1.2 million and $4.6 million for the same
respective periods of 2004.respectively. The increase in interest and other
income during the
three months ended September 30, 2005, as compared to the same period in 2004,
iswas primarily attributable to the recognition of $4.8due $7.6 million of business interruption insurance claims
related to the East Cameron facility and finalizing the Fain plant fire. ThePlant claims, a
$2.9 million increase in minority interest reimbursements and other income during the nine months ended September 30, 2005, as
compared to the same period in 2004, is primarily attributable to the
recognition of $73.6a $2.1 million in business interruption insurance claims, of which
$59.4 million relates to Hurricane Ivan and $14.2 million to the Fain plant
fire.bad
38
PIONEER NATURAL RESOURCES COMPANY
debt recovery. See Note NM of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for additional information regarding the
Company's business interruption insurance claims.
Oil and gas production costs. The Company recorded oil and gas production
costs from continuing operations of $118.4$94.7 million and $330.9$80.9 million during the
threethree-month periods ended March 31, 2006 and nine months ended
September 30, 2005, respectively, as compared to $75.1 million and $222.7
million for the same respective periods of 2004.respectively. In general,
lease operating expenses and workover expenses represent the components of oil
and gas production costs over which the Company has management control, while
production and ad valorem taxes are directly related to commodity price changes.changes
and third-party transportation charges are related to volumes produced. Total
oil and gas production costs per BOE from continuing operations increased by 59 percent and 4629
percent during the three and nine months ended September 30, 2005, respectively,March 31, 2006, as compared to the same
respective periodsperiod in 20042005, primarily due to (i) an$1.23 per BOE increase resulting from a 261
percent increase in VPP volume deliveries on a BOE basis, for which the Company
records no sales volumes but bears all associated production costs, (ii) general
inflation of field service costs, (iii) a 16 percent increase in per BOE
Canadian gas transportation costs and (iv) increases in ad valorem taxes,
as a result of higher commodity prices, (ii) higher Canadian gas
transportation fees, (iii) the retention of operatingproduction taxes and field utility costs relateddue to VPP
volumes sold (approximately $.25 and $.18 per BOE, respectively, during the
three and nine months ended September 30, 2005, respectively), (iv) new
production added from the Evergreen merger which reflects relatively higher
operating costs and (v) increases in equipment and service costs associated with
rising commodity prices.
The following tables provide the components of the Company's total oil and
gas production costs per BOE from continuing operations and total oil and gas
production costs per BOE from continuing operations by geographic area from continuing operations for the
threethree-month periods ended March 31, 2006 and nine
months ended September 30, 2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,March 31,
----------------------
----------------------2006 2005
2004 2005 2004
--------- --------- --------- ----------------- --------
Lease operating expenses..........expenses.................. $ 5.586.15 $ 3.57 $ 5.04 $ 3.444.80
Third-party transportation charges........ 1.21 .88
Taxes:
Ad valorem..................... .63 .50 .61 .49
Production..................... 1.05 .55 .85 .56valorem............................. 1.20 1.02
Production............................. 1.76 1.21
Workover costs.................... .35 .17 .34 .20
-------- -------- -------- --------costs............................ .72 .62
------- -------
Total production costs......costs................. $ 7.6111.04 $ 4.79 $ 6.84 $ 4.69
======== ======== ======== ========8.53
======= =======
42
PIONEER NATURAL RESOURCES COMPANY
Three months ended
Nine months ended
September 30, September 30,March 31,
----------------------
----------------------2006 2005
2004 2005 2004
--------- --------- --------- ----------------- --------
Total production costs:
United States..................States.......................... $ 8.2310.69 $ 5.128.17
Canada................................. $ 7.2518.21 $ 4.71
Argentina......................16.08
Africa ................................ $ 3.288.52 $ 2.857.21
Worldwide.............................. $ 3.1111.04 $ 2.90
Canada......................... $ 15.23 $ 10.02 $ 14.90 $ 10.35
Africa......................... $ 9.50 $ 5.25 $ 8.19 $ 6.99
Worldwide...................... $ 7.61 $ 4.79 $ 6.84 $ 4.698.53
Depletion, depreciation and amortization expense. The Company's total DD&A
expense from continuing operations was $8.76$9.61 and $8.92$7.73 per BOE for the
threethree-month periods ended March 31, 2006 and nine months ended
September 30, 2005, respectively, as compared to $8.65 and $8.54 per BOE during
the same respective periods of 2004.respectively. Depletion
expense from continuing operations, the largest component of DD&A expense from
continuing operations, was $8.41 and $8.60$8.93 per BOE during the three and nine months ended September 30, 2005,March 31,
2006, as compared to $8.46 and $8.36$7.25 per BOE during the same respective periodsperiod in 2004.2005. The changesincrease
in per BOE depletion expense during the
three and nine months ended September 30, 2005, as compared to the same
respective periods in 2004, arefrom continuing operations was primarily due to lower production from higher
cost-basis Gulf of Mexico production, offset by relatively higher(i)
a generally increasing trend in the Company's oil and gas properties' cost bases
per BOE cost
basis Rocky Mountain area production acquiredof proved and proved developed reserves, (ii) the fourth quarter 2005
downward revisions of proved reserves in the Evergreen mergerRaton field, (iii) the
aforementioned increase in VPP volume deliveries, for which the Company bears
all capital costs but records no production volumes and (iv) a higher$2.35 per BOE
increase in Tunisian depletion rate for the Hugotonexpense primarily associated with a 2005 and Spraberry fields as a result of the
VPP volumes sold. Additionally,2006
decrease in the Company's depletion expense per BOE
increased in Argentina due to downward reserve revisions associated with
negative well performance and drilling results in its deep gas play in the
Neuquen basin, increased in Tunisia due to the Company's proved reserves being
reduced as a result of the Company'sworking interest in the Adam block being reduced to
24 percent from 28 percent in accordance with the terms of the concession and
decreasedConcession, (v) partially
offset by a $.44 per BOE decrease in South Africa as a result of upwardAfrican depletion due to 2005 reserve
revisions attributable to better well performance.
39
PIONEER NATURAL RESOURCES COMPANY
The following table provides depletion expense per BOE from continuing
operations by geographic area for the threethree-month periods ended March 31, 2006
and nine months ended September 30,
2005 and 2004:2005:
Three months ended
Nine months ended
September 30, September 30,March 31,
----------------------
----------------------2006 2005
2004 2005 2004
--------- --------- --------- ----------------- --------
Depletion expense:
United States.................States........................... $ 8.398.73 $ 9.086.67
Canada.................................. $ 8.8712.06 $ 8.63
Argentina.....................12.47
Africa ................................. $ 7.528.27 $ 5.538.71
Worldwide............................... $ 6.898.93 $ 5.38
Canada........................ $ 14.01 $ 12.90 $ 12.75 $ 12.65
Africa........................ $ 7.64 $ 9.13 $ 8.03 $ 11.78
Worldwide..................... $ 8.41 $ 8.46 $ 8.60 $ 8.367.25
43
PIONEER NATURAL RESOURCES COMPANY
Exploration, abandonments, geological and geophysical costs. The following
table provides the Company's geological and geophysical costs, exploratory dry
hole expense, leasehold abandonments and other exploration expense from
continuing operations by geographic area from continuing operations for the threethree-month periods ended March
31, 2006 and nine months ended September
30, 2005 and 2004:2005:
Africa
United and
States Argentina Canada Other Total
--------- --------- --------- --------- -------- -------- -------- ----------
(in thousands)
Three months ended September 30,March 31, 2006:
Geological and geophysical................... $ 20,660 $ 346 $ 10,449 $ 31,455
Exploratory dry holes........................ 15,635 2,504 14,673 32,812
Leasehold abandonments and other............. 41,986 566 17,823 60,375
------- ------- ------- --------
$ 78,281 $ 3,416 $ 42,945 $ 124,642
======= ======= ======= ========
Three months ended March 31, 2005:
Geological and geophysical..................geophysical................... $ 11,92824,397 $ 1,483986 $ 8929,410 $ 3,214 $ 17,51734,793
Exploratory dry holes....................... 375 4,904 184 4,988 10,451holes........................ 2,264 2,664 11,556 16,484
Leasehold abandonments and other............ 35,691 210 329 - 36,230other............. 2,142 91 319 2,552
------- ------- ------- --------
-------- -------- -------- -------
$ 47,99428,803 $ 6,5973,741 $ 1,40521,285 $ 8,202 $ 64,19853,829
======= ======= ======= ======== ======== ======== ======== =======
Three months ended September 30, 2004:
Geological and geophysical.................. $ 15,144 $ 216 $ 783 $ 7,220 $ 23,363
Exploratory dry holes....................... 878 2,664 3,216 85 6,843
Leasehold abandonments and other............ 2,521 18 136 1 2,676
-------- -------- -------- -------- -------
$ 18,543 $ 2,898 $ 4,135 $ 7,306 $ 32,882
======== ======== ======== ======== =======
Nine months ended September 30, 2005:
Geological and geophysical.................. $ 51,285 $ 5,608 $ 3,756 $ 23,073 $ 83,722
Exploratory dry holes....................... 28,386 5,973 3,413 17,487 55,259
Leasehold abandonments and other............ 40,262 3,450 659 319 44,690
-------- -------- -------- -------- -------
$ 119,933 $ 15,031 $ 7,828 $ 40,879 $183,671
======== ======== ======== ======== =======
Nine months ended September 30, 2004:
Geological and geophysical.................. $ 40,251 $ 10,884 $ 2,618 $ 12,066 $ 65,819
Exploratory dry holes....................... 38,741 3,356 11,131 24,404 77,632
Leasehold abandonments and other............ 4,941 55 3,778 8 8,782
-------- -------- -------- -------- -------
$ 83,933 $ 14,295 $ 17,527 $ 36,478 $152,233
======== ======== ======== ======== =======
Significant components of the Company's dry holeexploration and abandonment expense
during the thirdfirst quarter of 20052006 included $5.1(i) $33.1 million onattributable to an
unsuccessful well and related impairment of acreage on the Company's Block 256
permit in Nigeria, (ii) $6.7 million attributable to the write-off of the
Company's Platypus prospect on the shelf of the Gulf of Mexico, (iii) $8.5
million associated with two unsuccessful wells in the Company's Anaguid permit in Tunisia. Significant components of the Company's dry hole
expense during the nine months ended September 30, 2005 included $16.7 million
associated with an unsuccessful well in the Falcon Corridor, $9.5 million
associated with an unsuccessful Nigerian well, $3.5 million on an unsuccessful
well on the Company's El Hamra permit in Tunisia, the aforementioned Anaguid
wellwinter Alaskan
drilling program and other(iv) various United Statesother exploratory wells. The United States
leasehold abandonments and other costs during the three and nine month periods
ended September 30, 2005 include the aforementioned $32.8includes a $42 million increase in East
Cameron abandonment obligations that resulted from hurricaneHurricane Rita damage. See
Note N of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information regarding this matter. During
the ninethree months ended September 30, 2005,March 31, 2006, the Company completed and evaluated 97176
exploration/extension wells, 73166 of which were successfully completed as
discoveries. During the same respective period in 2004,2005, the Company completed
and evaluated 8041 exploration/extension wells, 4432 of which were successfully
completed as discoveries.
General and administrative expense. General and administrative expense from
continuing operations for the threethree-month periods ended March 31, 2006 and nine months ended September 30, 2005
was $32.7$32.2 million and $91.6$27.5 million, respectively, as compared to $19.4 million and $54.8 million during the
same respective periods in 2004.respectively. The increasesincrease in general and
administrative expense arewas primarily due to severance related charges, increases in administrative staff including staff increases associated with the Evergreen
merger,
and performance-related compensation costs including the amortization of
restricted stock awarded to officers, directors and employees during the three
and nine months ended September 30, 2005, as compared to the same respective
periods of 2004.employees.
Interest expense. Interest expense from continuing operations was $29.3$36.6
million and $92.7$32.7 million for the threethree- month periods ended March 31, 2006 and
nine months ended September 30, 2005, respectively, as compared to
$24.8 million and $67.8 million for the same respective periods in 2004.respectively. The weighted average interest rates on the Company's
indebtedness for the three and
nine months ended September 30, 2005 were 4.3March 31, 2006 was 6.2 percent, and 3.6 percent,
respectively, as
compared to 6.0 percent and 5.5 percent for the same respective
44
PIONEER NATURAL RESOURCES COMPANY
periodsperiod in 2004,2005, including the effects of
interest rate derivatives. The increase in interest expense during the three months ended September 30, 2005,
as compared to the same period of 2004, was primarily due to
increased average borrowings under the Company's lines of credit primarily asand a result of the
cash portion of the consideration paid in the Evergreen merger, a $2.9$3.1
million decrease in the amortization of interest rate hedge gains, the assumption of
$300 million of notes in connection with the Evergreen merger and higher
interest rates in 2005. The increase in interest expense during the nine months
ended September 30, 2005, as compared to the same period of 2004, was primarily
due to increased average borrowings under the Company's lines of credit,
primarily as a result of the cash portion of the consideration paid in the
Evergreen merger, a $12.9 million decrease in the amortization of interest rate
hedge gains, the assumption of $300 million of notes in connection with the
Evergreen merger and higher interest rates in 2005.gains.
40
PIONEER NATURAL RESOURCES COMPANY
Other expenses. Other expenses from continuing operations for the
threethree-month periods ended March 31, 2006 and nine months ended
September 30, 2005 were $38.2$5.1 million and $67.5$8.8
million, respectively, as
compared to $2.5 million and $11.0 million forrespectively. The primary components of the same respective periods in
2004. The increasedecrease in other expenses
during the three months ended September 30,
2005, as compared to the same period of 2004, is primarily attributable to an
$18.6were a $13.4 million loss on the redemption of portions of the Company's senior notes,
a $12.6 million increasedecrease in hedge ineffectiveness, and $1.8offset by mark-to-market
losses of approximately $6.6 million recorded in amortizationthe first quarter of noncompete agreements issued in connection2006
associated with the Evergreen
merger. The increase in other expenses during the nine months ended September
30, 2005, as compared to the same period of 2004, is primarily attributable to a
$26.0 million loss on the redemption of portions of the Company's senior notes,
a $22.3 million increase in hedge ineffectiveness, a $3.4 million increase in
legal and environmental accruals and $3.4 million in amortization of noncompete
agreements issued in connection with the Evergreen merger.certain derivative instruments.
Income tax provision. During the three and nine months ended September 30,
2005, theThe Company recognized income tax provisions on
continuing operations of $42.5$20.7 million and $193.7$21.8 million respectively, as compared to $22.9 millionduring the three-month
periods ended March 31, 2006 and $113.7 million for the same respective periods in 2004.2005, respectively. The Company's first quarter
2006 effective tax rate on continuing operations of 28.9104.9 percent and 40.6 percent during the
three and nine months ended September 30, 2005, respectively, differs from
the combined United States federal and state statutory rate of approximately
36.5 percent primarily due to:
o The second quarter reversal of the $26.9 millionforeign tax benefit
recorded principallyrates,
o statutes in the third quarter of 2004 as a result of
the cancellation of the development of the Olowi block and the
Company's decision to exit Gabon. The Company reversed the tax
benefit as a result of signing an agreementforeign jurisdictions that differ from those in June 2005 to sell its
shares in the subsidiary that owns the interest in the Olowi block
which made it more likely than not that the Company would not realize
the originally recorded tax benefit.
o The Company will recognize a gain of approximately $47 million in the
fourth quarter of 2005 relating the sale of shares in a subsidiary
that owns the interest in the Olowi Block located in Gabon. There is
no associated income tax effect either in Gabon or the United
States associated with the gain. In accordance with FIN 18, a portion of the
beneficial effect that this tax-free income will have on the
Company's year-end effective tax rate is being recognized in the
third quarter.and
o Recording of approximately $4.7 million of cash taxes associated with
the repatriation of foreign earnings pursuant to the AJCA.
o Expensesexpenses for unsuccessful well costs and associated acreage costs in
foreign locations where the Company receives no expecteddoes not expect to receive income
tax benefits.
o Foreign tax rates.
o Statutes that differ from those inbenefits; during the United States.first quarter of 2006, this primarily related
to Nigerian expenses of approximately $35.5 million.
See Note ED of Notes to Consolidate Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
income taxes.
Discontinued operations. During 2005 and 2006, the threeCompany sold its
interests in the following oil and nine months ended September
30, 2005, thegas assets and has reflected their results of
operations in discontinued operations:
Country Description of Assets Date Divested
------- --------------------- -------------
Canada Martin Creek, Conroy Black May 2005
and Lookout Butte fields
United States Two Gulf of Mexico August 2005
shelf fields
United States Deepwater Gulf of Mexico March 2006
fields
Argentina All Argentine properties April 2006
The Company recognized income from discontinued operations of $19.0$544.2
million and $110.5$57.7 million respectively, as compared to $3.8 millionduring the three-month periods ended March 31, 2006
and $9.4
million for2005, respectively. During the same respective periodsfirst quarter of 2004. The amounts for2006, the three and
nine months ended September 30, 2005 includeCompany recognized
a gain on the disposition of its deepwater Gulf of Mexico assets of $27.5 million and $166.1 million, respectively, and income tax provisions of
$10.9 million and $73.5 million, respectively.
45
PIONEER NATURAL RESOURCES COMPANY$728.4
million. The Company's high effective tax rate associated with discontinued
operations during the nine monthsthree-month periods ended September 30,March 31, 2006 and 2005 (40 percent) was primarily due to:
o Approximately $17.1 million of United States deferred tax provision
triggered by the gain recorded on the Canadian divestiture. The
Canadian gain caused the recharacterization of Argentine dividend
income from prior years that was previously sheltered by historical
Canadian losses.
o Cash taxes of $2.9 million associated with the repatriation of foreign
earnings under the provisions of the AJCA.
o A decrease in the Canadian valuation allowance of $12.4 million, which
partially offset the above two items. The Canadian divestiture
utilized a substantial portion of the Company's Canadian tax pools.
Consequently, the Company has reassessed the likelihood that the
remaining Canadian tax attributes will be utilized34.9
percent and has determined
it is now more likely than not that it will be able to utilize more of
its tax pools than previously expected.
For periods prior to the Canadian divestiture, the Company's Canadian
discontinued operations reflect no tax provisions due to the Company having
maintained a valuation allowance related to its Canadian deferred tax assets.
During those prior periods, management's expectation was that it was likely that
the Company would not realize its Canadian deferred tax assets. Therefore, in
accordance with GAAP, portions of the Canadian valuation allowance were released
only to the extent that Canadian income was recorded, thereby offsetting any tax
provisions. The Company's effective tax rate for United States discontinued
operations during 2005 and 2004 is approximately 36.5 percent.34.3 percent, respectively.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
development, exploration development and acquisition of oil and gas properties, repayment of
contractual obligations and working capital obligations. Funding for exploration, development and acquisition of oil and gas properties and repayment
of contractual obligationsthese cash
needs, as well as funding for any stock repurchases that the Company may
undertake, may be provided by any combination of internally-generated cash flow,
proceeds from the disposition of non-strategicnonstrategic assets or alternative financing
sources as discussed in "Capital resources" below. Generally, funding for the Company's working capital obligations is
provided by internally-generated cash flow.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the threethree- month periods ended March 31, 2006 and nine months ended September 30,
2005 totaled $414.2$334.9 million and $908.7$194.9 million, respectively, as compared to $116.9
million and $467.8 million during the same respective periods of 2004.respectively. During the three
months ended September 30, 2005,March 31, 2006, the Company's expenditures for additions to oil and
gas properties were funded by $317.7$303.3 million of net cash provided by operating
41
PIONEER NATURAL RESOURCES COMPANY
activities and borrowings ona portion of the $1.0 billion of proceeds received in conjunction
with the sale of the Company's linesdeepwater Gulf of credit, as comparedMexico assets (net of payments
to funding from $239.1terminate derivative instruments associated with the deepwater Gulf of Mexico
assets). During the three months ended March 31, 2005, the Company's
expenditures for additions to oil and gas properties were internally funded by
$303.7 million of net cash provided by operating activities during
the same period of 2004. During the nine months ended September 30, 2005, the
Company's additions to oil and gas properties were funded by $985.2 million of
net cash provided by operating activities, as compared to $757.5 million during
the same period of 2004.activities.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations, other liabilities, transportation
commitments and VPP obligations. From time-to-time, the Company enters into
off-balance sheet arrangements and transactions that can give rise to material
off-balance sheet obligations of the Company. As of September 30, 2005,March 31, 2006, the material
off-balance sheet arrangements and transactions that the Company has entered
into includeincluded (i) undrawn letters of credit, (ii) operating lease agreements,
(iii) drilling commitments, (iv) VPP obligations (to physically deliver volumes
and pay related lease operating expenses in the future) and (v) contractual
obligations for which the ultimate settlement amounts are not fixed and
determinable such as derivative contracts that are sensitive to future changes
in commodity prices and gas transportation commitments. Other than the
off-balance sheet arrangements described above, the Company has no transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are reasonably likely to materially affect the Company's liquidity
or availability of or requirements for capital resources. Since December 31,
2004,2005, the material changes in the Company's contractual obligations were changesincluded (i)
a $900 million reduction in outstanding borrowings under the Credit Agreement,
(ii) an increase of approximately $400 million in the Company's drilling rig
commitments, (iii) a $325 million decrease in derivative obligations and the aforementioned sale(iv) a
$52 million increase in outstanding undrawn letters of VPPs.credit. 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 liabilities
during the ninethree months ended September 30, 2005.
46
PIONEER NATURAL RESOURCES COMPANYMarch 31, 2006.
Environmental contingency. A subsidiary of the Company has been notified by
a letter from the TCEQ dated August 24, 2005 that the TCEQ considers the
subsidiary to be a potentially responsible party with respect to the Dorchester
Refining Company State Superfund Site located in Mount Pleasant, Texas. The
subsidiary, which was acquired by the Company in 1991, owned a refinery located
at the Mount Pleasant site from 1977 until 1984. According to the TCEQ, this
refinery was responsible for releases of hazardous substances into the
environment. The Company does not know the nature and extent of the alleged
contamination, the potential costs of remediation, or the portion, if any, of
such costs that may be allocable to the Company's subsidiary. However, based on
the limited information currently available and assessed regarding this matter,
the Company has no reason to believe that it may have a material adverse effect
on its future financial condition, results of operations or liquidity. See Note
JNotes
I and O of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information regarding this matter as well
as other environmental and legal contingencies involving the Company.
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-strategicnonstrategic assets. TheDuring the next twelve months, the
Company expectsanticipates that these
resourcesnet cash provided by operating activities will be
insufficient to fund its capital commitments; however, net cash provided by
operating activities combined with proceeds from financing activities and sales
of nonstrategic assets are expected to be sufficient to fund its capital commitments
during the remainder of 2005 and for the foreseeable future.
VPPs. During January 2005, the Company sold two percent of its total proved
reserves, or 20.5 MMBOE of proved reserves, by means of two VPPs for net
proceeds of $592.3 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the VPPs
were initially used to reduce outstanding indebtedness.
During April 2005, the Company sold less than one percent of its total
proved reserves, or 7.3 MMBOE of proved reserves, by means of another VPP for
net proceeds of $300.4 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the VPP
were initially used to reduce outstanding indebtedness.
See Note M of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
VPPs.
Asset divestitures. During April 2005, the Company sold all of its
interests in certain East Texas properties for approximately $25.2 million of
net cash proceeds. During May 2005, the Company sold all of its interests in the
Martin Creek, Conroy Black and Lookout Butte oil and gas properties in Canada
for net proceeds of $197.5 million, resulting in a gain of $138.6 million.
During August 2005,March 2006, the Company sold all of its
interests in certain oil and gas properties onin the shelf of thedeepwater Gulf of Mexico for
net proceeds of $58.9 million,$1.2 billion, resulting in a gain of $27.5$728.4 million. Also, the
proceeds were reduced by $193.2 million of net payments to terminate derivative
instruments associated with the deepwater Gulf of Mexico assets. During April
2006, the Company sold all of its interests in its Argentine assets for net
proceeds of $675 million. The net cash proceeds from these divestitures were
used to reduce outstanding indebtedness.indebtedness under the Credit Agreement and for
general corporate purposes.
Operating activities. Net cash provided by operating activities during the
threethree-month periods ended March 31, 2006 and nine months ended September 30, 2005 was $317.7$303.3 million and $985.2$303.7
million, respectively, as comparedrespectively. As a result of the sale of the deepwater Gulf of Mexico
assets, the Company utilized all of its available United States NOLs, other than
those subject to $239.1 million and $757.5 million forlimitations. The use of the same respective periods in 2004. The increases in netavailable United States NOLs will
accelerate the Company's payment of cash provided by operating
activities were primarily due to higher commodity prices.taxes.
42
PIONEER NATURAL RESOURCES COMPANY
Investing activities. Net cash used in investing activities during the
three months ended September 30, 2005 was $364.9 million, as compared to $975.8
million for the same period in 2004. Net cash provided by investing activities during the
nine monthsthree-month periods ended September 30,March 31, 2006 and 2005 was $240.4$621.8 million as compared
to net cash used in investing activities of $1.3 billion for the same period in
2004. The decrease in net cash used in investing activities during the three
months ended September 30, 2005, as compared to the same period of 2004, was
primarily due to $849.5and $393.1
million, of cash consideration paid in the third quarter
of 2004 in connection with the Evergreen merger.respectively. The increase in net cash provided by investing activities
during the nine months ended September 30,
2005, as compared to the same period of 2004, was primarily due to (i) $892.7a $363.1 million of net proceeds received from VPPs sold during the nine months ended
September 30, 2005, (ii) the aforementionedincrease in proceeds from asset divestituresdisposition of
$281.6 million and (iii) $849.5 million of cash consideration paid in the third
quarter of 2004 in connection with the Evergreen merger.
47
PIONEER NATURAL RESOURCES COMPANYassets.
Financing activities. Net cash provided by financing activities during the
three months ended September 30, 2005 was $52.6 million, as compared to $723.7
million during the same period in 2004. Net cash used in financing activities during the
ninethree months ended September 30, 2005March 31, 2006 was $1.2 billion,$900.6 million, as compared to net cash provided by financing activities of $566.2$688.2
million during the same period in 2004. During the three months ended September 30, 2005, the Company
had net borrowings of long-term debt of $532.7 million, as compared to $767.0
million during the same period in 2004. During the nine months ended September
30, 2005, the Company had net repayments of long-term debt of $464.5 million, as
compared to net borrowings of long-term debt of $631.0 million during the same
period in 2004.2005.
During February 2005,2006, the Company's board of directors declared a
semiannual dividend of $.10 per common share, payable on April 15, 2005 to
shareholders of record on March 31, 2005. Associated therewith, the Company paid
$14.3 million of aggregate dividends during April 2005. During September 2005,
the Company's board of directorsBoard declared a semiannual dividend of $.12 per
common share, payable on October 14, 2005April 12, 2006 to shareholders of record on September
30, 2005.March 29,
2006. Associated therewith, the Company paid $16.8$15.5 million of aggregate
dividends during October 2005.April 2006. Future dividends are at the discretion of the
Company's board of directors,Board, and the board of directorsBoard may change the current dividend amount in the future if
warranted by future liquidity and capital resource attributes.
During April 2005, $131.0 million of the Company's 8-7/8% senior notes due
2005 matured and were repaid. The Company also redeemed $19.0 million and $51.4
million principal amount of its 9-5/8% Notes during the three and nine months
ended September 30, 2005, respectively. During September 2005, the Company
accepted tenders to purchase $188.4 million in principal amount of the 5.875%
Notes for $199.9 million. During October 2005, the Company redeemed the
remaining $12.6 million and $16.2 million, respectively, of aggregate principal
amount outstanding of the 9-5/8% Notes and its 7.50% Notes. The Company utilized
unused borrowing capacity under its lines of credit to fund these financing
activities.
During August 2005, the Company's board of directorsBoard approved a new share repurchase program
authorizing the purchase of up to $1 billion of the Company's common stock, $650$641
million of which was immediately initiated through open
market transactions. The $650completed in 2005. Purchase of the remaining $359 million
programof the authorization is expected to be completed by the
end of 2005. The remaining $350 million is subject to the completion of the
deepwater Gulf of Mexico and Argentine divestments.initiated in mid-May 2006. During the
threethree-month periods ended March 31, 2006 and nine
months ended September 30, 2005, the Company expended $453.0$2.0
million to acquire 9.0 million45 thousand shares of treasury stock (these shares were not
repurchased under the Company's $1 billion repurchase program) and $690.3$152.0
million to acquire 14.93.7 million shares of treasury stock, respectively.
As of September 30, 2005,Subsequent to March 31, 2006, the Company had expended $391issued $450 million towardsof 6.875%
Notes for net proceeds of $446.6 million. The Company will use the $650 million portionnet proceeds
from the issuance of the $1 billion
repurchase program6.875% Notes to fund the tender offer to purchase its
outstanding 6.50% Notes and through October 31, 2005 spent an additional $250.0
million pursuant to a repurchase plan adopted by the Company conforming to the
requirements of Rule 10b5-1 of the Securities Exchange Act of 1934 ("the
Exchange Act"). The Company expects to complete the additional $9 million of the
$650 million portion of the repurchase program by the end of 2005.
During September 2005, the Company entered into the Amended Credit
Agreement that provides for initial aggregate loan commitments of $1.5 billion.
In connection with the funding of the Amended Credit Agreement on September 30,
2005, all amounts outstanding under the 364-Day Credit Agreement were retired
and the 364-Day Credit Agreement terminated.general corporate purposes.
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 board of directors.Board.
Liquidity. The Company's principal source of short-term liquidity is cash
on hand and unused borrowing capacity on the
Amended Credit Agreement. There were $755.0 million ofno
outstanding borrowings under the Amended Credit Agreement as of September 30, 2005. Including $35.3March 31, 2006. After
deducting $119.6 million of undrawn and outstanding letters of credit under the
Amended Credit Agreement, the Company had $709.7 million$1.4 billion of unused borrowing capacity as
of September 30, 2005.
48
PIONEER NATURAL RESOURCES COMPANY
The Company's debt will increase as a resultMarch 31, 2006. In the future, to the extent that Pioneer's liquidity results
in cash in excess of the announced $1 billion
stock repurchase program. Including the expected completion of the $650 million
portion of the $1 billion stock repurchase program,immediate capital needs, the Company anticipates that
its debt to book capitalization will be less than 50 percent at the end of 2005
and will decline to below 35 percent by the end of 2006, before considering the
effects of any divestitures.may invest in
short-term cash equivalent securities.
Debt ratings. The Company receives debt credit ratings from S&P and
Moody's, which are subject to regular reviews. Subsequent toDuring the fourth quarter end,of
2005, S&P cut the Company's corporate credit rating to BB+ with a stable outlook
from BBB-. During January 2006, Moody's continues to holdcut the Company's corporate credit
rating at Baa3,
which is an investment-grade rating,to Ba1 with a negative outlook.outlook from Baa3. S&P and Moody's consider many
factors in determining the Company's ratings including: production growth
opportunities, liquidity, debt levels and asset and reserve mix. IfAs a result of
the Company were also to be downgraded by Moody's, it would increasedowngrades, the interest rate and fees the Company pays on the Amended Credit
Agreement have increased and would trigger additional debt covenant requirements under the
Amended Credit Agreement.Agreement were triggered. During January 2006, as a result of the
Company's downgrades by the rating agencies, the Company issued $52 million of
additional letters of credits and will issue approximately $33 million
additional letters of credits during the second quarter of 2006 pursuant to
agreements that contain provisions with rating triggers. The individual
downgrade by S&P isdowngrades are not expected to materially affect the Company's financial
position or liquidity, but could negatively impact the Company's ability to
obtain additional financing or the interest rate and fees associated with such
additional financing.
43
PIONEER NATURAL RESOURCES COMPANY
Book capitalization and current ratio. The Company's book capitalization at
September 30, 2005March 31, 2006 was $4.1 billion, consisting of debt of $1.9$1.2 billion and
stockholders' equity of $2.1$3.0 billion. Consequently, the Company's debt to book
capitalization increaseddecreased to 4828 percent at September 30, 2005March 31, 2006 from 4648 percent at
December 31, 2004.2005. The Company's ratio of current assets to current liabilities
was .571.22 to 1.00 at September 30, 2005March 31, 2006 as compared to .72.60 to 1.00 at December 31,
2004.2005. The declineimprovement in the Company's ratio of current assets to current
liabilities was primarily due to increases in its current derivative liabilities
as a resultthe classification of higher commodity prices and current deferred revenue as a resultall of the VPPs.Argentine
assets and liabilities to current pending its sale which closed in April 2006.
44
PIONEER NATURAL RESOURCES COMPANY
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, 2004.2005.
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, 2004.2005.
Although certain derivative contracts to which the Company has been a party
did not qualify as hedges, the Company does not enter into derivative or other
financial instruments for trading purposes.
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 2005:2006:
Derivative Contract Net Liabilities
---------------------------------------------------------------------------
Foreign
Interest
Exchange
Commodities Rate Rate Total
----------- -------- -------- -------------------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2004...............2005............... $ (406,546)(748,477) $ - $ - $ (406,546)(748,477)
Changes in contract fair valuevalues (a)....... (1,002,493) (4,614) 18 (1,007,089)...... 72,621 148 72,769
Contract maturities...................... 282,953 - (18) 282,93563,218 (148) 63,070
Contract terminations.................... 33,403 4,614188,889 - 38,017
---------- ------- ------ ----------188,889
--------- -------- ---------
Fair value of contracts outstanding
as of September 30, 2005.............. $(1,092,683)March 31, 2006.................. $ (423,749) $ - $ - $(1,092,683)
========== ======= ====== ==========(423,749)
========= ======== =========
- ---------------
(a) At inception, newhistorically derivative contracts entered into by the Company
have no intrinsic value.
Foreign exchange rate sensitivity. From time to time, the Company's
Canadian subsidiary enters into short-term forward currency agreements to
purchase Canadian dollars with U.S. dollar gas sales proceeds. The Company does
not designate these derivatives as hedges due to their short-term nature. There
were no outstanding forward currency agreements at September 30, 2005March 31, 2006 or December
31, 2004.
49
PIONEER NATURAL RESOURCES COMPANY2005.
Interest rate sensitivity. The following table provides information about
other financial instruments to which the Company was a party as of September 30,
2005March 31,
2006 and that are sensitive to changes in interest rates. For debt obligations,
the table presents maturities 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, 2005.
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 LIBOR on November 7, 2005.March 31, 2006.
As of September 30, 2005,March 31, 2006, the Company was not a party to material derivatives that
would subject it to interest rate sensitivity.
Interest Rate Sensitivity
Debt Obligations as of September 30, 2005March 31, 2006
ThreeNine months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------------------------------ September 30,
2005----------------------------------------- March 31,
2006 2007 2008 2009 2010 Thereafter Total 20052006
----------- -------- -------- -------- -------- ---------- ---------- -------------------------
(in thousands, except interest rates)
Total Debt:
Fixed rate principal
maturities (a)................ $ -........... $ - $ 32,075 $350,000 $ - $ 911,794 $1,293,869 $1,441,766- $ 882,985 $1,265,060 $(1,326,852)
Weighted average
interest rate (%).......... 6.31...... 6.31 6.29 6.16 6.16 6.16 Variable rate maturities....... $ - $ - $ - $ - $ - $ 755,000 $ 755,000 $ 755,000
Average interest rate (%)... 4.63 4.95 4.99 5.09 5.18 5.256.16
- -----------------------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) deferred fair value hedge gains and losses.
During October 2005Subsequent to March 31, 2006, the Company redeemed $16.2issued $450 million principal amount of 7.50%6.875%
Notes and $12.6 million principal amountfor net proceeds of 9-5/8%$446.6 million. The Company will use a portion of
the net proceeds from the issuance of the 6.875% Notes which
amounts are included in "Thereafter" maturities in this table.to fund a tender
offer to purchase its outstanding 6.50% Notes.
45
PIONEER NATURAL RESOURCES COMPANY
Commodity price sensitivity. The following tables provide information about
the Company's oil and gas derivative financial instruments that were sensitive
to changes in oil or gas prices as of September 30, 2005.March 31, 2006. As of September 30,
2005,March 31, 2006, all
of the Company's oil and gas derivative financial instruments qualified as
hedges.
See Note GF 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 orand gas
prices.prices as well as hedge volumes and weighted average prices by calendar quarter.
Oil and Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2005March 31, 2006
ThreeNine months LiabilityYear ending YearAsset (Liability)
ending, December 31, Fair Value at
December 31, ------------------------------ September 30,
2005-------------------- March 31,
2006 2007 2008 20052006
----------- -------- -------- -------- ------------------------------
(in thousands)
Oil Hedge Derivatives:
Average daily notional Bbl volumesvolumes:
Swap contracts (a):
Swap contracts........................... 27,000........................ 5,000 10,000 13,000 17,00010,000 $ 552,190(298,371)
Weighted average fixed price per Bbl....Bbl..... $ 27.9737.20 $ 31.6930.96 $ 30.89 $ 29.2130.62
Collar contracts......................... - 9,129 4,500contracts.......................... 6,665 2,000 - $ 27,643(25,147)
Weighted average ceiling price per Bbl..Bbl... $ -67.12 $ 74.92 $ 90.4389.50 $ -
Weighted average floor price per Bbl....Bbl..... $ - $ 44.2542.12 $ 50.00 $ -
Average forward NYMEX oil prices (b)...... $ 59.4076.65 $ 61.3876.79 $ 60.55 $ 59.02
- ---------------
(a) See Note G of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(b) The average forward NYMEX oil prices are based on November 7, 2005 market
quotes.
50
PIONEER NATURAL RESOURCES COMPANY
Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2005
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------ September 30,
2005 2006 2007 2008 2005
----------- -------- -------- -------- -------------
(in thousands)
74.04
Gas Hedge Derivatives (a)(c):
Average daily notional MMBtu volumes (b):volumes:
Swap contracts............................. 253,535 73,842 29,195 5,000contracts............................ 73,885 24,195 - $ 414,081(102,115)
Weighted average fixed price per MMBtu....MMBtu... $ 5.174.31 $ 4.304.00 $ 4.28 $ 5.38-
Collar contracts........................... - 183,685contracts.......................... 108,345 215,000 - $ 98,7691,884
Weighted average ceiling price per MMBtu..MMBtu. $ - $ 13.7614.27 $ 11.84 $ -
Weighted average floor price per MMBtu....MMBtu... $ - $ 6.626.55 $ 6.57 $ -
Average forward NYMEX gas prices (c)........(b)...... $ 11.788.03 $ 10.7010.10 $ 9.39 $ 8.33-
- ---------------
(a) Subsequent to March 31, 2006, the Company entered into oil swap contracts,
with an average fixed price of $71.83 per Bbl, designated as hedges for
90,000 Bbls of forecasted June 2006 South African oil sales.
(b) The average forward NYMEX oil and gas prices are based on May 3, 2006
market quotes.
(c) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connectconvert 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 contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(b) See Note G of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(c) The average forward NYMEX gas prices are based on November 7, 2005 market
quotes.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's management,
with the participation of its principal executive officer and principal
financial officer, have evaluated, as required by Rule 13a-15(b) under 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
quarterly report on Form 10-Q. Based on that evaluation, the principal executive
officer and principal financial officer concluded that the design and operation
of the Company's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting. There have been no
changes in the Company's internal control 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 are reasonably likely to
materially affect the Company's internal control over financial reporting.
46
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to variousthe legal proceedings whichthat are described under
"Legal actions" in Note JI of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements". The Company is also party to other
litigationproceedings and claims incidental to its business. TheWhile many of these matters
involve inherent uncertainty, the Company believes that the damages
fromamount of the
liability, if any, ultimately incurred with respect to such other legal actionsproceedings
and claims will not be in excess of ten percent ofhave a material adverse effect on the Company's current assets.
51
PIONEER NATURAL RESOURCES COMPANYconsolidated
financial position as a whole or on its liquidity, capital resources or future
annual results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the risks discussed in the Company's Annual Report on Form
10-K under the headings "Item 1. Business - Competition, Markets and
Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk", which risks could materially affect the
Company's business, financial condition or future results. There has been no
material change in the Company's risk factors from those described in the Annual
Report on Form 10-K. These risks are not the only risks facing the Company.
Additional risks and uncertainties not currently known to the Company or that it
currently deems to be immaterial also may materially adversely affect the
Company's business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company's purchases of treasury stock
during the three months ended September 30, 2005:March 31, 2006:
Total Number of Shares Approximate Dollar
(or Units) Purchased Amount of Shares
Total Number of Average Price as Part of Publicly that May Yet Be
Shares (or Units) Paid per Share Announced Plans Purchased under
Period Purchased (a) (or Unit) or Programs Plans or Programs
(b)- ------ ----------------- -------------- ---------------------- ---------------------------------------
July 2005.............January 2006............. 3,632 $ 51.08 -
February 2006............ 39,652 $ 43.78 -
March 2006............... 1,349 $ 44.09 -
----------- ---------
Total............ 44,633 $ 44.38 - $ - -
August 2005........... 1,669,933 $ 41.38 1,513,300
September 2005........ 7,512,226 $ 52.03 7,509,700
----------- ----------
Total......... 9,182,159 $ 50.09 9,023,000 $ 259,286,843359,294,950
=========== =================== ============
- -----------
(a) Amounts include shares withheld to fund tax withholding on employees' stock
awards for which restrictions have lapsed.
(b) Excludes the remaining $350 million plan to repurchase shares subject to
the successful completion of the deepwater Gulf of Mexico and Argentine
divestments. Subsequent to September 30, 2005, the Company purchased an
additional $250.0 million of stock pursuant to a repurchase plan adopted by
the Company conforming to the requirements of Rule 10b5-1 of the Exchange
Act.
During August 2005, the Company's board of directorsBoard approved a new share repurchase program
authorizing the purchase of up to $1 billion of the Company's common stock, $650$641
million of which was immediately initiated through open
market transactions. The $650completed in 2005 and $359 million programof which is expected to
be initiated in mid-May 2006 since the Company has completed by the
end of 2005. The remaining $350 million is subject to the completionits divestiture of
the deepwater Gulf of Mexico assets and its Argentine divestments.
52assets.
47
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits
- ------- --------
Exhibits
2.1 Purchase and Sale Agreement by and between Pioneer as Seller and
Marubeni Offshore Production (USA) Inc. as Purchaser (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 February 28, 2006).
4.1 FifthSixth Supplemental Indenture, dated as of September 16, 2005,May 1, 2006, among the
Company, Pioneer Natural Resources USA, Inc., as Guarantor, and WachoviaThe Bank National Association,of New
York Trust Company, N.A., as Trustee, with respect to the
Company'sthat
indenture, dated as of March 10, 2004,January 13, 1998, between the Company and
Wachovia Bank, National Association, asthe Trustee (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on September 21, 2005)May 4, 2006).
10.1 Indemnification Agreement dated August 16, 2005, between4.2 Form of 6.875% Senior Notes due 2018 of the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of
its directors and executive officers identified on the schedule (incorporated by
reference to Exhibit 10.14.2 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on August
17, 2005).
10.2 Severance Agreement dated August 16, 2005, between the Company and
Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of
its executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Severance Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on August 17, 2005).
10.3 Change in Control Agreement, dated August 16, 2005, between the
Company and Scott D. Sheffield, together with a schedule identifying
other substantially identical agreements between the Company and each
of its executive officers identified on the schedule and identifying
the material differences between each of those agreements and the
filed Change in Control Agreement (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on August 17, 2005).
10.4 Amended and Restated 5-Year Revolving Credit Agreement dated as of
September 30, 2005 among the Company, as Borrower, JPMorgan Chase
Bank, N.A. as Administrative Agent and certain other lenders
(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 OctoberMay 4, 2005)2006).
31.1 (a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 (a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 (b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 (b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
53- ---------------
(a) Filed herewith.
(b) Furnished herewith.
48
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
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 heretothereunto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: November 8, 2005May 10, 2006 By: /s/ Richard P. Dealy
------------------------------------------------------------
Richard P. Dealy
Executive Vice President and Chief
Financial Officer
Date: November 8, 2005May 10, 2006 By: /s/ Darin G. Holderness
------------------------------------------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
5449
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
- -------------
2.1 Purchase and Sale Agreement by and between Pioneer as Seller and
Marubeni Offshore Production (USA) Inc. as Purchaser (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 February 28, 2006).
4.1 FifthSixth Supplemental Indenture, dated as of September 16, 2005,May 1, 2006, among the
Company, Pioneer Natural Resources USA, Inc., as Guarantor, and WachoviaThe Bank National Association,of New
York Trust Company, N.A., as Trustee, with respect to the
Company'sthat
indenture, dated as of March 10, 2004,January 13, 1998, between the Company and
Wachovia Bank, National Association, asthe Trustee (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on September 21, 2005)May 4, 2006).
10.1 Indemnification Agreement dated August 16, 2005, between4.2 Form of 6.875% Senior Notes due 2018 of the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
directors and executive officers identified on the schedule (incorporated
by reference to Exhibit 10.14.2 to the Company's Current Report on
Form 8-K, File No. 1-13245, filed with the SEC on August 17,
2005).
10.2 Severance Agreement dated August 16, 2005, between the Company and
Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Severance Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on August 17, 2005).
10.3 Change in Control Agreement, dated August 16, 2005, between the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Change in Control Agreement (incorporated by reference to Exhibit 10.3
to the Company's Current Report on Form 8-K, File No. 1-13245, filed
with the SEC on August 17, 2005).
10.4 Amended and Restated 5-Year Revolving Credit Agreement dated as of
September 30, 2005 among the Company, as Borrower, JPMorgan Chase Bank,
N.A. as Administrative Agent and certain other lenders (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 OctoberMay 4, 2005)2006).
31.1(a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2(a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1(b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2(b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
- -----------------------------------
(a) Filed herewith.
(b) Furnished herewith.
5550