the requested lock-ups and the satisfactory resolution of the other less material open matters in the merger agreement. Following that discussion, Vinson & Elkins circulated a revised draft merger agreement to Gibson Dunn reflecting the parties’ agreed terms.
Over the course of October 19, 2020, the parties and their respective advisors negotiated near final versions of the merger agreement, voting agreements, TRA amendment and other definitive documents. During these discussions, Mr. Bryan Sheffield and Mr. Berg, on behalf of Pioneer, negotiated the terms of Mr. Bryan Sheffield’s voting agreement, whereby Mr. Bryan Sheffield agreed to include in his voting agreement a lock-up of the shares beneficially owned by him pursuant to which Mr. Bryan Sheffield may not, without Pioneer’s prior written consent, subject to limited exceptions, offer, sell, transfer or otherwise dispose of more than 15% of the shares of Pioneer common stock issued to Mr. Bryan Sheffield pursuant to the terms of the merger agreement for a period of 90 days following the closing date of the merger,mergers or more than 30% of eachsuch shares for a period of 180 days following the closing date of the following conditions, ormergers. During the waiver thereof bysame time, Messrs. Berg and Dealy discussed with Mr. VanLoh whether Quantum would deliver a similar lock-up. Mr. VanLoh emphasized his confidence in the combination and Quantum’s intent to be a long-term holder, but expressed that Quantum would not agree to a lock-up. Pioneer Southwest:agreed that Quantum would not be required to deliver a lock-up.
eachThe same day, Messrs. Thompson and Alameddine discussed a possible transaction bonus pool program for Parsley employees, but ultimately decided that the parties would not establish a separate transaction bonus pool program. Rather, Parsley would proceed with its normal bonus program. Messrs. Thompson and Alameddine also discussed the treatment of the
representations280(G) excise tax that certain Parsley employees may owe as a result of payments in connection with the mergers.On the evening of October 19, 2020, media reports began to circulate that Pioneer and warranties containedParsley were in merger discussions.
On the morning of October 20, 2020, the Pioneer board convened a meeting, with members of Pioneer senior management and representatives of Gibson Dunn, Morris Nichols, Goldman Sachs and Morgan Stanley in attendance, to consider the proposed final terms of the combination with Parsley. At such meeting, Pioneer senior management provided an update on the due diligence that had been conducted on Parsley, including an overview of the methodology used to calculate the early termination payments payable under the tax receivable agreement. Pioneer senior management also discussed the two members of the Parsley board proposed to be appointed to the Pioneer board upon closing of the mergers, Messrs. Gallagher and Alameddine. Following Pioneer senior management’s presentation, representatives of Gibson Dunn reviewed with the Pioneer board their fiduciary duties with respect to their evaluation of the proposed combination and the key terms of the merger agreement, voting agreements and TRA amendment. Representatives of Morgan Stanley then provided an overview of the exploration and production landscape in the Permian Basin, followed by a review of its financial analysis of the exchange ratio. Morgan Stanley then rendered an oral opinion to the Pioneer Pioneer USA and MergerCo qualified as to materiality or material adverse effect must be true and correctboard (subsequently confirmed in all respects and those not so qualified must be true and correct in all material respects, in each case,a written opinion dated the same date) that, as of the date of such opinion, and based upon and subject to the merger agreementvarious assumptions made, procedures followed, matters considered and upon the closing date with the same effect as though all such representationsqualifications and warranties had been madelimitations on the closing date (in either case, except for any such representations and warranties made as of a specified date, in which case as of such date);
each and allscope of the agreements and covenants of Pioneer, Pioneer USA and MergerCo to be performed and complied withreview undertaken by Morgan Stanley as set forth in its written opinion, the exchange ratio pursuant to the merger agreement on or priorwas fair from a financial point of view to Pioneer, as more fully described below in the section titled “—Opinions of Pioneer’s Financial Advisors—Opinion of Morgan Stanley & Co. LLC”. In addition, representatives of Goldman Sachs reviewed with the Pioneer board Goldman Sachs’ financial analysis summarized in the section titled “—Opinions of Pioneer’s Financial Advisors—Opinion of Goldman Sachs & Co. LLC” and rendered to the closing date must have been duly performed and complied with in all material respects;
Pioneer Southwest must have receivedboard the oral opinion of Goldman Sachs (subsequently confirmed by delivery of a certificate signed bywritten opinion dated the chief executive officer, chief financial officer or executive vice president and general counsel ofsame date) to the Pioneer dated as of the closing date,board to the effect that, as of the conditions describeddate of Goldman Sachs’ written opinion and based upon and subject to the factors and assumptions set forth in Goldman Sachs’ written opinion, the exchange ratio pursuant to the merger agreement was fair from a financial point of view to Pioneer. Prior to the conclusion of the meeting and following discussion of the proposed combination by the Pioneer board and by the disinterested directors in the executive session, the Pioneer board (including Messrs. Scott Sheffield and Gobe) unanimously (i) determined that the mergers and the other transactions contemplated by the merger agreement were in the best interests of, and were advisable to, Pioneer and its stockholders, (ii) approved, adopted and declared advisable the
merger agreement and the transactions contemplated thereby, (iii) directed that the Pioneer stock issuance proposal be submitted to Pioneer stockholders for approval and (iv) resolved to recommend that Pioneer stockholders approve the Pioneer stock issuance at a duly held meeting of Pioneer stockholders for such purpose.
On the afternoon of October 20, 2020, the Parsley board met, with members of Parsley management and representatives of Vinson & Elkins, Credit Suisse and Wells Fargo Securities in attendance to consider the proposed final terms of the combination with Pioneer. At this meeting, Credit Suisse reviewed its financial analysis of the exchange ratio and rendered an oral opinion to the Parsley board (confirmed by delivery of a written opinion addressed to the Parsley board dated the same date) to the effect that, as of such date and based upon and subject to the factors and assumptions considered in connection with the preparation of its opinion, including among others that each Parsley LLC stapled unit is equivalent in value and identical in all other respects material to its analyses and opinion to a share of Parsley Class A common stock, the exchange ratio to be received by the holders of shares of Parsley Class A common stock with respect to their shares of Parsley Class A common stock in the first two bullet points immediately above have been satisfied;merger was fair, from a financial point of view, to the holders of shares of Parsley Class A common stock and
there must not have occurred a material adverse effect the exchange ratio to be received by the holders of shares of Parsley Class B common stock with respect to
their Parsley LLC stapled units in the first merger and the Opco merger was fair, from a financial point of view, to the holders of shares of Parsley Class B common stock, as more fully described below in the section entitled “—Opinions of Parsley’s Financial Advisors—Opinion of Credit SuisseSecurities (USA) LLC”. In addition, representatives of Wells Fargo Securities reviewed with the Parsley board its final financial analysis of the exchange ratio provided for in the merger agreement and then representatives of Wells Fargo Securities rendered an oral opinion to the Parsley board (confirmed by delivery of a written opinion addressed to the Parsley board dated the same date) to the effect that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Wells Fargo Securities in preparing the opinion, including among others the assumption that the Parsley Class A common stock and the Parsley LLC stapled units are equivalent in all respects, the exchange ratio in the proposed mergers was fair, from a financial point of view, to the holders of Parsley Class A common stock and to the holders of Parsley LLC stapled units, as more fully described below in the section entitled “—Opinions of Parsley’s Financial Advisors—Opinion of Wells Fargo Securities, LLC”. A representative of Vinson & Elkins then updated the Parsley board on the key terms in the merger agreement and reviewed with the members of the Parsley board their fiduciary duties with respect to the evaluation of the proposed combination. Prior to the end of the meeting, the Parsley board unanimously (i) declared that the merger agreement and the transactions contemplated thereby (including the integrated mergers) were fair to, and in the best interests of, Parsley and the Parsley stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby (including the integrated mergers) and (iii) recommended that the Parsley stockholders approve and adopt the merger agreement and the transactions contemplated thereby. In addition, the Parsley board authorized certain officers of Parsley to execute written consents on behalf of Parsley, (i) in its capacity as the managing member of Parsley LLC, determining that the merger agreement and the transactions contemplated thereby are fair to, and in the best interests of, Parsley LLC, and approving and declaring advisable the merger agreement and the transactions contemplated thereby and (ii) in its capacity as the holder of more than a majority of the issued and outstanding Parsley LLC units, adopting the merger agreement concurrently with its execution.Later that afternoon, Parsley and Pioneer executed the merger agreement and Pioneer, Parsley and the other parties thereto executed the voting agreements and the TRA amendment. Following the closing of the U.S. stock markets, Pioneer and Parsley issued a joint press release announcing the proposed mergers and Pioneer hosted a conference call to discuss the transaction.
Recommendation of the Pioneer Board and Reasons for the Mergers
At a meeting held on October 20, 2020, the Pioneer board unanimously determined that the mergers and the other transactions contemplated by the merger agreement were in the best interests of, and were advisable to, Pioneer and its stockholders, approved, adopted and declared advisable the merger agreement and the transactions contemplated thereby, directed that the Pioneer stock issuance proposal be submitted to Pioneer
stockholders for approval and resolved to recommend that Pioneer stockholders approve the Pioneer stock issuance at a duly held meeting of Pioneer stockholders for such purpose. The Pioneer board unanimously recommends that Pioneer stockholders vote “FOR” the Pioneer stock issuance proposal.
In deciding to approve the merger agreement and to recommend that Pioneer stockholders approve the Pioneer stock issuance proposal, the Pioneer board consulted with Pioneer’s management and financial and legal advisors and considered several factors.
The Pioneer board considered a number of factors when evaluating the mergers, many of which support the Pioneer board’s determination that the mergers and the other related transactions contemplated by the merger agreement were in the best interests of, and were advisable to, Pioneer and its stockholders. The Pioneer board considered these factors as a whole and without assigning relative weights to each such factor, and overall considered the relevant factors to be favorable to, and in support of, its determinations and recommendations. These factors included:
the belief that the mergers will be accretive on key financial metrics beginning in 2021, including cash flow and free cash flow per share, earnings per share and return on capital employed;
the belief that the combined company will benefit from increased cash flows, further strengthening Pioneer’s investment framework by creating a more robust free cash flow profile, with a lower expected reinvestment rate range of 65% to 75% (based on futures strip pricing for oil and gas as of the time of the Pioneer board’s consideration);
the belief that the mergers will result in annual cost savings of approximately $325 million through operational efficiencies and reductions in general and administrative and interest expenses, with an expected present value in excess of $2 billion over a ten-year period;
the belief that the combined company will be a leading Permian Basin independent exploration and production company with a premium asset base of approximately 930 thousand net acres, with no federal acreage, and a production base of 328 thousand barrels of oil per day and 558 thousand barrels of oil equivalent per day based on reported production for the second quarter of 2020;
that, based on year-end 2019 proved reserves, the mergers will increase Pioneer’s proved reserves by approximately 65%;
that the mergers would enhance Pioneer’s asset base in the Permian Basin through the addition of complementary high-return inventory in the premier shale oil basin in the United States;
the belief that Parsley’s high-margin, oil-weighted asset base will integrate smoothly into Pioneer’s development program;
that the combination of Pioneer’s and Parsley’s acreage positions will create a highly contiguous geographic footprint in the Midland Basin that will allow for significant operational efficiencies;
the expectation that the leverage of the combined company will remain among the lowest in the industry, preserving Pioneer’s financial flexibility and enhancing the return of capital to stockholders, with the combined company expected to benefit from approximately $75 million per year in lower interest expense after the Parsley notes are refinanced at Pioneer’s lower borrowing costs and a gradual reduction of leverage over time to less than 0.75x net debt to EBITDAX;
that both Pioneer and Parsley have demonstrated peer-leading environmental, social and governance practices, and the expectation that the combined company will continue to aggressively pursue improvements and promote a culture that prioritizes sustainable operations;
that the merger consideration represented a premium of 7.9% based on the unaffected closing share prices on October 19, 2020, which the Pioneer board regarded as an attractive valuation relative to other transactions and peer comparisons;
that Pioneer will continue to be led by the current experienced Pioneer management team and that the addition of two directors to the Pioneer board, each of whom currently serves as a member of the Parsley board, in connection with the mergers will add valuable expertise and experience and in-depth familiarity with Parsley’s assets and operations to the Pioneer board, which will enhance the likelihood of attaining the strategic benefits that Pioneer expects to derive from the mergers;
the terms of the merger agreement, including the structure of the transaction, the conditions to each party’s obligation to complete the mergers and the ability of Pioneer to terminate the agreement under certain circumstances;
the belief that the restrictions imposed on Pioneer’s business and operations during the pendency of the mergers are reasonable and not unduly burdensome;
that the exchange ratio is fixed and will not fluctuate in the event that the market price of Parsley Class A common stock increases relative to the market price of Pioneer common stock between the date of the merger agreement and the closing date.
The merger agreement provides that the Pioneer Southwest unitholder voting condition may not be waived. Each of Pioneer and Pioneer Southwest (with the consent of the Pioneer Southwest Conflicts Committee, in mergers;
the caselikelihood of Pioneer Southwest) may choose to complete the merger even though any other condition to its obligation has not been satisfied if the necessary Pioneer Southwest unitholder approval has been obtained and the law allows it to do so.
Unitholder Approval; Acquisition Proposal; Change in Recommendation
Subject to the terms and conditionsconsummation of the merger agreement, and except as described further in “The Merger Agreement — Covenants — Unitholder Approval,” Pioneer Southwest will take, in accordance with applicable law, applicable stock exchange rules and Pioneer Southwest’s partnership agreement, all action necessary to call, hold and convene the Pioneer Southwest special meeting to consider and vote upon the approval of the merger proposal, as promptly as practicable after the registration statement of which this proxy statement/prospectus is a part is declared effective. The Pioneer Southwest Conflicts Committeemergers and the Pioneer Southwest GP Board will recommend approvalboard’s evaluation of the merger proposallikely time frame necessary to close the Pioneer Southwest unitholders, and Pioneer Southwest will take all reasonable lawful action to solicit such approval by the Pioneer Southwest unitholders. Except under certain conditions described in the following paragraph and in “The Merger Agreement — Covenants — Unitholder Approval,” neither the Pioneer Southwest Conflicts Committee nor the Pioneer Southwest GP Board will (A) withdraw, modify or qualify in any manner adverse to Pioneer the recommendation of the Pioneer Southwest Conflicts Committee and the Pioneer Southwest GP Board or (B) publicly approve, adopt or recommend, or publicly propose to approve, adopt or recommend, any “acquisition proposal” (defined and described more fully under “The Merger Agreement — Covenants —mergers;
Acquisition Proposals”). The actions described in the preceding sentence are referred to in this proxy statement/prospectus as a “Pioneer Southwest Change in Recommendation.” None of Pioneer Southwest GP, Pioneer Southwest or any of their subsidiaries will execute or enter into any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar contract providing for any acquisition proposal.
Notwithstanding the above paragraph, at any time prior to obtaining the Pioneer Southwest unitholder approval, the Pioneer Southwest Conflicts Committee or the Pioneer Southwest GP Board may make a Pioneer Southwest Change in Recommendation if it has determined in good faith, after consultation with its outside legal counsel and financial advisors, that failure to make a Pioneer Southwest Change in Recommendation would be inconsistent with its duties under Pioneer Southwest’s partnership agreement or applicable law; provided, however, that neither the Pioneer Southwest Conflicts Committee nor the Pioneer Southwest GP Board will be entitled to exercise its right to make a Pioneer Southwest Change in Recommendation pursuant to this sentence unless (i) Pioneer Southwest has not engaged in a material breach of its covenant related to acquisition proposals, (ii) Pioneer Southwest has provided to Pioneer three business days prior written notice, advising Pioneer that the Pioneer Southwest Conflicts Committee or the Pioneer Southwest GP Board intends to take such action, specifying the reasons for taking such action in reasonable detail, including, if a reason for the Pioneer Southwest Change in Recommendation is an acquisition proposal, that the Pioneer Southwest Conflicts Committee has determined that the acquisition proposal is a “superior proposal” (defined and described more fully under “The Merger Agreement — Covenants — Acquisition Proposals”) and specifying the terms and conditions of such acquisition proposal and the identity of the person making such acquisition proposal (it being understood that any amendment to the terms of any such acquisition proposal will require a new written notice, as described above, and an additional five business day period), (iii) if a reason for the Pioneer Southwest Change in Recommendation is an acquisition proposal, Pioneer Southwest has provided to Pioneer all materials and information delivered or made available to the person or group of persons making such acquisition proposal (to the extent not previously provided to Pioneer), (iv) each of Pioneer Southwest GP, Pioneer Southwest and the Pioneer Southwest Conflicts Committee has negotiated, and has used its commercially reasonable efforts to cause its representatives to negotiate, in good faith with Pioneer during such notice period to enable Pioneer to revise the terms of the merger agreement such that it would obviate the need for making the Pioneer Southwest Change in Recommendation, and (v) following the end of such notice period, the Pioneer Southwest Conflicts Committee will have considered in good faith any changes to the merger agreement proposed by Pioneer and will have determined that the failure to make a Pioneer Southwest Change in Recommendation would continue to be inconsistent with its duties under Pioneer Southwest’s partnership agreement or applicable law even if such revisions proposed by Pioneer were to be given effect and, if a reason for the Pioneer Southwest Change in Recommendation is an acquisition proposal, that the acquisition proposal continues to be a superior proposal even if the revisions proposed by Pioneer were to be given effect. Any Pioneer Southwest Change in Recommendation will not invalidate the approval (or “Special Approval,” as defined in Pioneer Southwest’s partnership agreement) of the merger agreement or any other approval of the Pioneer Southwest Conflicts Committee, including in any respect that would have the effect of causing any state (including Delaware) takeover statute or other similar statute to be applicable to the merger transactions.
Pioneer Southwest GP and Pioneer Southwest will, and they will cause their subsidiaries and representatives to, (i) immediately cease and terminate any solicitation, encouragement, discussions or negotiations with any person that may be ongoing with respect to or that may reasonably be expected to lead to an acquisition proposal, and (ii) request such person to promptly return or destroy all confidential information concerning Pioneer Southwest and its subsidiaries.
Neither Pioneer Southwest GP nor Pioneer Southwest will, and they will cause their subsidiaries and use their commercially reasonable efforts to cause their representatives not to, directly or indirectly, (i) initiate, solicit, knowingly encourage or knowingly facilitate (including by way of furnishing information) any inquiries
regarding, or the making or submission of any proposal or offer that constitutes, or may reasonably be expected to lead to, an acquisition proposal, (ii) conduct or participate in any discussions or negotiations regarding any acquisition proposal, or (iii) furnish to any person any non-public information or data relating to Pioneer Southwest or any of its subsidiaries or afford access to the business, properties, assets, or, except as required by law or Pioneer Southwest’s partnership agreement, books or records of Pioneer Southwest or any of its subsidiaries. Notwithstanding the foregoing, at any time prior to obtaining the Pioneer Southwest unitholder approval, the Pioneer Southwest Conflicts Committee may take the actions described in clauses (ii) and (iii) above with respect to a third person that makes a bona fide unsolicited acquisition proposal that did not result from a material breach of the provisions of the merger agreement described in this paragraph, if (A) the Pioneer Southwest Conflicts Committee, after consultation with its outside legal counsel and financial advisors, determines in good faith that such acquisition proposal constitutes or could reasonably be expected to result in a superior proposal and that the failure to take such action would be inconsistent with its duties under Pioneer Southwest’s partnership agreement or applicable law, and (B) prior to furnishing any such non-public information to such third person, Pioneer Southwest receives from such third person an executed confidentiality agreement as further described under “The Merger Agreement — Covenants — Acquisition Proposals.”
Termination of the Merger Agreement
Pioneer and Pioneer Southwest can agree to terminate the merger agreement by mutual written consent at any time without completing the merger, even after the Pioneer Southwest unitholders have approved the merger proposal. In addition, either party may terminate the merger agreement on its own upon written notice to the other without completing the merger if:
the merger is not completed on or before March 17, 2014; provided, however, that the right to terminate the merger agreement due to the failure to complete the merger on or before March 17, 2014 will not be available to a party whose failure to fulfill any material obligation under the merger agreement or other material breach of the merger agreement has been the primary cause of, or resulted in, the failure of the merger to have been consummated on or before March 17, 2014;
any governmental authority has issued a final and non-appealable statute, rule, order, decree or regulation or taken any other action that permanently restrains, enjoins or prohibits the consummation of the merger, or makes the merger illegal, so long as the terminating party is not then in material breach of the merger agreement;
there has been a material breach of or any material inaccuracy in any of the representations or warranties set forth in the merger agreement on the part of any of the other parties, which breach is not cured within 30 days following receipt by the breaching party of written notice of its breach from the terminating party, or which breach, by its nature, cannot be cured prior to March 17, 2014, provided in any such case that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement. No partyPioneer stockholders will have the right, however,opportunity to terminatevote on the merger agreement pursuantPioneer stock issuance proposal, which is a condition precedent to the provision summarized in this bullet point unless the breach of a representation or warranty, together with all other such breaches, would entitle the party receiving such representation not to consummate the transactions contemplated by the merger agreement because the closing conditions described in the first bullet point under “The Merger Agreement — Conditions to the Merger — Additional Conditions to the Obligations of Pioneer” or “The Merger Agreement — Conditions to the Merger — Additional Conditions to the Obligations of Pioneer Southwest,” as applicable, have not been met;mergers;
there has been a material breach of any of the covenants or agreements set forth in the merger agreement on the part of any of the other parties to the merger agreement, and the breach has not been cured within 30 days following receipt by the breaching party of written notice of such breach from the terminating party, or which breach, by its nature, cannot be cured prior to March 17, 2014, so long as
| the terminating party itself is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement. In no event, however, will any party have the right to terminate the merger agreement pursuant to the provision summarized in this bullet point unless the breach of covenants or agreements, together with all other such breaches, would entitle the party receiving the benefit of such covenants or agreements not to consummate the transactions contemplated by the merger agreement because the closing conditions described in the first bullet point under “The Merger Agreement — Conditions to the Merger — Additional Conditions to the Obligations of Pioneer” or “The Merger Agreement — Conditions to the Merger — Additional Conditions to the Obligations of Pioneer Southwest,” as applicable, have not been met;
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Pioneer Southwest does not obtain the Pioneer Southwest unitholder approval at the Pioneer Southwest special meeting; provided, however, that the right to terminate the merger agreement under the provision described in this bullet point will not be available to the terminating party where the failure to obtain the Pioneer Southwest unitholder approval has been caused by the action or failure to actboard’s knowledge of, the terminating party and such action or failure to act constitutes a material breach by the terminating party of the merger agreement or the voting agreement; or
a Pioneer Southwest Change in Recommendation has occurred.
Federal Income Tax Consequences of the Merger
Tax matters associated with the merger are complicated. Under current law, it is anticipated for U.S. federal income tax purposes that Pioneer Southwest unitholders generally will recognize gain with respect to the exchange of Pioneer Southwest common units for shares of Pioneer common stock in the merger in an amount equal to the excess of (1) each Pioneer Southwest unitholder’s “amount realized” for U.S. federal income tax purposes, which equals the sum of the fair market value of the shares of Pioneer common stock received, plus the unitholder’s allocated share of Pioneer Southwest’s pre-merger liabilities (it being understood that no Pioneer Southwest unitholder bears any personal responsibility or liability in respect of such allocated liabilities), over (2) the unitholder’s aggregate adjusted tax basis in Pioneer Southwest common units (including basis attributable to the unitholder’s share of Pioneer Southwest’s pre-merger liabilities). Pioneer Southwest unitholders generally will recognize loss to the extent that the amount of their basis described in clause (2) above exceeds the amount realized described in clause (1) above. A portion of any amount realized by a unitholder will be treated as income subject to U.S. federal income tax at ordinary rates (up to 39.6% under current law) rather than capital gains rates due to the operation of the recapture rules applicable to depreciation, depletion and intangible drilling cost deductions allocable to the Pioneer Southwest unitholders, even if the Pioneer Southwest unitholder’s aggregate adjusted basis in Pioneer Southwest common units exceeds the amount realized in the exchange. In addition, certain Pioneer Southwest unitholders may be subjected to the 3.8% Medicare tax on unearned income in respect of any net gain from the exchange. Pioneer Southwest unitholders are urged to consult their tax advisors for a full understanding of the U.S. federal, state, local and foreign tax consequences of the merger that will be applicable to them. Please read “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 129 for a more complete discussion of the U.S. federal income tax consequences of the merger.
Other Information Related to the Merger
No Appraisal Rights
Pioneer Southwest unitholders do not have appraisal rights under Pioneer Southwest’s partnership agreement, the merger agreement or Delaware or other applicable law.
Antitrust and Regulatory Matters
No antitrust or other regulatory clearances are required as a condition to the consummation of the merger.
Listing of Pioneer Common Stock to be Issued in the Merger; Delisting and Deregistration of Pioneer Southwest Common Units
Pioneer expects to obtain approval to list on the NYSE the shares of Pioneer common stock to be issued pursuant to the merger agreement, which approval (subject to official notice of issuance) is a condition to the merger. Upon completion of the merger, Pioneer Southwest common units currently listed on the NYSE will cease to be listed on the NYSE and will be subsequently deregistered under the Exchange Act.
Accounting Treatment
The merger will be accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 810,Consolidations — Overall — Changes in Parent’s Ownership Interest in a Subsidiary, which is referred to as ASC 810. As Pioneer will control Pioneer Southwest before and after the merger, the changes in Pioneer’s ownership interest in Pioneer Southwest will be accounted for as an equity transaction and no gain or loss on the merger will be recognized in Pioneer’s consolidated statements of operations.
Comparison of the Rights of Pioneer Stockholders and Pioneer Southwest Unitholders
Pioneer Southwest unitholders will own shares of Pioneer common stock following the completion of the merger, and their rights associateddiscussions with Pioneer common stock will be different from their rights as Pioneer Southwest unitholders due to the differences between the entity forms and governing documents of Pioneer and Pioneer Southwest. See “Comparison of the Rights of Pioneer Stockholders and Pioneer Southwest Unitholders” beginning on page 111 of this proxy statement/prospectus.
Pending Litigation
On May 13, 2013, David Flecker, a purported unitholder of Pioneer Southwest, filed a class action petition on behalf of the Pioneer Southwest unitholders and a derivative suit on behalf of Pioneer Southwest against Pioneer USA, Pioneer Southwest GP and the directors of Pioneer Southwest GP, in the 134th Judicial District of Dallas County, Texas (the “Flecker Lawsuit”). A similar class action petition and derivative suit was filed against the same defendants on May 20, 2013, in the 160th Judicial District of Dallas County, Texas, by purported unitholder Vipul Patel (the “Patel Lawsuit”). On August 27, 2013, the plaintiff in the Flecker Lawsuit filed an amended petition. On September 3, 2013, the court consolidated the Patel Lawsuit into the Flecker Lawsuit (as consolidated, the “Texas State Court Lawsuit”), and the plaintiffs filed a consolidated derivative and class action petition on September 5, 2013.
The Texas State Court Lawsuit alleges, among other things, that the consideration offered by Pioneer is unfair and inadequate and that, by pursuing a transaction that is the result of an allegedly conflicted and unfair process, the defendants have breached their duties under Pioneer Southwest’s partnership agreement as well as the implied covenant of good faith and fair dealing, and are engaging in self-dealing. Specifically, the lawsuit alleges that the director defendants: (i) engaged in self-dealing, failed to act in good faith toward Pioneer Southwest, and breached their duties owed to Pioneer Southwest; (ii) failed to properly value Pioneer Southwestmanagement and its various assets and operations and ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction; and (iii) breached the implied covenant of good faith and fair dealing by engaging in a flawed merger process. The Texas State Court Lawsuit also alleges that defendants Pioneer, Pioneer USA and Pioneer Southwest GP aided and abetted the director defendants in their purported breach of fiduciary duties.
Based on these allegations, the plaintiffs in the Texas State Court Lawsuit seek to enjoin the defendants from proceeding with or consummating the proposed transaction. To the extent that the merger is implemented
before relief is granted, the plaintiffs seek to have the merger rescinded. The plaintiffs also seek money damages and attorneys’ fees. The defendants have filed a motion to dismiss the Texas State Court Lawsuit based on improper forum.
On August 21, 2013, Allan H. Beverly, a purported Pioneer Southwest unitholder, filed a class action complaint against Pioneer Southwest, Pioneer, Pioneer USA, MergerCo and the directors of Pioneer Southwest GP in the United States District Court for the Northern District of Texas (the “Beverly Lawsuit”). The Beverly Lawsuit alleges that the defendants breached their fiduciary duties by agreeing to the merger by means of an unfair process and for an unfair price. Specifically, the lawsuit alleges that the director defendants: (i) failed to maximize the value of Pioneer Southwest to its public unitholders and took steps to avoid competitive bidding; (ii) failed to properly value Pioneer Southwest; and (iii) ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction. The Beverly Lawsuit also alleges that defendants Pioneer, Pioneer USA and MergerCo aided and abetted the director defendants in their purported breach of fiduciary duties.
On September 13, 2013, Douglas Shelton, another purported Pioneer Southwest unitholder, filed a class action complaint against the same defendants in the Beverly Lawsuit (as well as Pioneer Southwest GP) in the same court as the Beverly Lawsuit (the “Shelton Lawsuit”). The Shelton Lawsuit makes similar allegations to the Beverly Lawsuit, and also alleges that Section 7.9 of the Pioneer Southwest partnership agreement fails to alter or eliminate the defendants’ common law fiduciary duties owed to Pioneer Southwest unitholders in the context of the merger. Specifically, the lawsuit alleges: (1) that Pioneer, as controlling unitholder, failed to fulfill its fiduciary duties in connection with the merger because it purportedly cannot establish that the proposed merger is the result of a fair process that will return a fair price to the Pioneer Southwest unaffiliated unitholders; (2) that the director defendants breached their fiduciary duties by failing to exercise due care and diligence in connection with the proposed merger because the proposed merger is purportedly not the result of a fair process that will return a fair price to the Pioneer Southwest unaffiliated unitholders; and (3) that the non-director defendants aided and abetted the director defendants in their purported breach of fiduciary duties. The plaintiffs in the Beverly Lawsuit and the Shelton Lawsuit seek the same remedies as the plaintiffs in the Texas State Court Lawsuit.
Pioneer and Pioneer Southwest cannot predict the outcome of these or any other lawsuits that might be filed subsequent to the date of the filing of this proxy statement/prospectus, nor can Pioneer and Pioneer Southwest predict the amount of time and expense that will be required to resolve these lawsuits. Pioneer, Pioneer Southwest and the other defendants named in the lawsuits intend to defend vigorously against these and any other actions.
Summary of Risk Factors
You should consider carefully all the risk factors together with all of the other information included in this proxy statement/prospectus before deciding how to vote. The risks related to the merger transactions, Pioneer’s business following the merger, Pioneer’s common stock and Pioneer Southwest’s business and common units if the merger does not occur, and tax related risks are described under the caption “Risk Factors” beginning on page 35 of this proxy statement/prospectus.
Organizational Chart
Before the Merger
The following diagram depicts the organizational structure of Pioneer and Pioneer Southwest as of September 16, 2013, before the consummation of the merger and the other merger transactions.
After the Merger
The following diagram depicts the organizational structure of Pioneer and Pioneer Southwest immediately after giving effect to the merger and the other merger transactions.
Selected Historical and Pro Forma Financial and Operating Information of Pioneer and Pioneer Southwest
The following tables set forth, for the periods and at the dates indicated, summary historical financial and operating information for Pioneer and Pioneer Southwest and summary unaudited pro forma financial information for Pioneer after giving effect to the proposed merger. The summary historical financial data as of and for each of the years ended December 31, 2008, 2009, 2010, 2011 and 2012, are derived from and should be read in conjunction with the audited financial statements and accompanying footnotes of Pioneer and Pioneer Southwest, respectively. The summary historical financial data as of and for the six-month periods ended June 30, 2012 and 2013, are derived from and should be read in conjunction with the unaudited financial statements and accompanying footnotes of Pioneer and Pioneer Southwest, respectively.advisors regarding, Pioneer’s and Pioneer Southwest’s consolidated balance sheets as of December 31, 2011 and 2012, and as of June 30, 2013, and the related consolidated statements of operations, comprehensive income, cash flows and equity/partners’ capital for each of the three years in the period ended December 31, 2012, and the six months ended June 30, 2013, are incorporated by reference into this proxy statement/prospectus from Pioneer’s and Pioneer Southwest’s respective Annual Reports on Form 10-K for the year ended December 31, 2012, and their respective Quarterly Reports on Form 10-Q for the six months ended June 30, 2013.
The summary unaudited pro forma condensed consolidated financial information for Pioneer shows the pro forma effect of the proposed merger. For a complete discussion of the pro forma adjustments underlying the amounts in the table on the following page, please read “Unaudited Pro Forma Condensed Consolidated Financial Statements” beginning on page F-2 of this proxy statement/prospectus.
The proposed merger will be accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 810,Consolidations — Overall — Changes in Parent’s Ownership Interest in a Subsidiary, which is referred to as ASC 810. As Pioneer will control Pioneer Southwest before and after the merger, the changes in Pioneer’s ownership interest in Pioneer Southwest will be accounted for as an equity transaction and no gain or loss on the merger will be recognized in Pioneer’s consolidated statements of operations.
The unaudited pro forma condensed consolidated financial statements have been prepared to assist in the analysis of the financial effects of the proposed merger. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2012, and the six months ended June 30, 2013, have been prepared to give effect to the proposed merger as if it had occurred on January 1, 2012. The unaudited pro forma condensed consolidated balance sheet has been prepared to give effect to the proposed merger as if it had occurred on June 30, 2013. The unaudited pro forma condensed consolidated financial statements are based on assumptions that Pioneer and Pioneer Southwest believe are reasonable under the circumstances and are intended for informational purposes only. They are not necessarily indicative of the financial results that would have occurred if the merger transactions had taken place on the dates indicated, nor are they indicative of the future consolidated results of Pioneer. They also do not reflect non-recurring items arising directly from the merger or any cost savings that the combined entity may achieve.
Summary Historical and Pro Forma Financial Information of Pioneer
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pioneer Consolidated Historical | | | Pioneer Pro Forma | |
| | | Year Ended December 31, | | | For the Six Months
Ended June 30, | | | For the
Year Ended
December 31, | | | For the
Six Months
Ended
June 30, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2013 | | | 2012 | | | 2012 | | | 2013 | |
| | | | | | | | | | | | | | | | | | (Unaudited) | | | (Unaudited) | |
| | | (in thousands, except per share amounts) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues and other income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil and gas (a) | | $ | 2,811,660 | | | $ | 2,294,063 | | | $ | 1,718,297 | | | $ | 1,402,436 | | | $ | 1,893,361 | | | $ | 1,632,991 | | | $ | 1,360,693 | | | $ | 2,811,660 | | | $ | 1,632,991 | |
Interest and other | | | 28,310 | | | | 66,880 | | | | 56,972 | | | | 101,589 | | | | 49,402 | | | | 20,474 | | | | 21,194 | | | | 28,310 | | | | 20,474 | |
Derivative gains (losses), net (b) | | | 330,251 | | | | 392,752 | | | | 448,434 | | | | (195,557 | ) | | | (10,148 | ) | | | 102,202 | | | | 367,562 | | | | 330,251 | | | | 102,202 | |
Gain (loss) on disposition of assets, net | | | 58,087 | | | | (3,644 | ) | | | 19,074 | | | | (774 | ) | | | (381 | ) | | | 215,404 | | | | 44,736 | | | | 58,087 | | | | 215,404 | |
Hurricane activity, net (b) | | | — | | | | 1,454 | | | | 138,918 | | | | (17,313 | ) | | | (12,150 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues (b) | | | 3,228,308 | | | | 2,751,505 | | | | 2,381,695 | | | | 1,290,381 | | | | 1,920,084 | | | | 1,971,071 | | | | 1,794,185 | | | | 3,228,308 | | | | 1,971,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil and gas production | | | 635,644 | | | | 447,142 | | | | 364,764 | | | | 345,885 | | | | 363,795 | | | | 348,628 | | | | 281,862 | | | | 635,644 | | | | 348,628 | |
Production and ad valorem taxes | | | 187,757 | | | | 147,664 | | | | 112,141 | | | | 98,371 | | | | 164,417 | | | | 108,134 | | | | 90,291 | | | | 187,757 | | | | 108,134 | |
Depletion, depreciation and amortization | | | 810,191 | | | | 578,268 | | | | 499,856 | | | | 564,149 | | | | 446,951 | | | | 480,353 | | | | 382,339 | | | | 810,191 | | | | 480,353 | |
Impairment of oil and gas properties (c) | | | 532,589 | | | | 354,408 | | | | — | | | | 21,091 | | | | 89,753 | | | | — | | | | 444,880 | | | | 532,589 | | | | — | |
Exploration and abandonments | | | 206,291 | | | | 121,320 | | | | 189,597 | | | | 79,095 | | | | 191,799 | | | | 51,600 | | | | 90,465 | | | | 206,291 | | | | 51,600 | |
General and administrative | | | 248,282 | | | | 193,215 | | | | 164,332 | | | | 130,863 | | | | 131,834 | | | | 130,405 | | | | 118,024 | | | | 248,282 | | | | 130,405 | |
Accretion of discount on asset retirement obligations | | | 9,887 | | | | 8,256 | | | | 7,945 | | | | 8,050 | | | | 5,509 | | | | 6,319 | | | | 4,874 | | | | 9,887 | | | | 6,319 | |
Interest | | | 204,222 | | | | 181,660 | | | | 183,084 | | | | 173,353 | | | | 166,770 | | | | 93,540 | | | | 95,866 | | | | 204,222 | | | | 93,540 | |
Other | | | 113,388 | | | | 63,166 | | | | 78,404 | | | | 94,702 | | | | 114,436 | | | | 40,060 | | | | 54,258 | | | | 113,388 | | | | 40,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses (c) | | | 2,948,251 | | | | 2,095,099 | | | | 1,600,123 | | | | 1,515,559 | | | | 1,675,264 | | | | 1,259,039 | | | | 1,562,859 | | | | 2,948,251 | | | | 1,259,039 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | 280,057 | | | | 656,406 | | | | 781,572 | | | | (225,178 | ) | | | 244,820 | | | | 712,032 | | | | 231,326 | | | | 280,057 | | | | 712,032 | |
Income tax (provision) benefit | | | (92,384 | ) | | | (197,644 | ) | | | (269,627 | ) | | | 83,195 | | | | (99,994 | ) | | | (251,358 | ) | | | (72,617 | ) | | | (110,790 | ) | | | (259,416 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 187,673 | | | | 458,762 | | | | 511,945 | | | | (141,983 | ) | | | 144,826 | | | | 460,674 | | | | 158,709 | | | | 169,267 | | | | 452,616 | |
Income (loss) from discontinued operations, net of tax (d) | | | 55,149 | | | | 423,152 | | | | 134,050 | | | | 99,716 | | | | 86,829 | | | | (465 | ) | | | 22,712 | | | | 55,149 | | | | (465 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | 242,822 | | | | 881,914 | | | | 645,995 | | | | (42,267 | ) | | | 231,655 | | | | 460,209 | | | | 181,421 | | | | 224,416 | | | | 452,151 | |
Net (income) loss attributable to noncontrolling interests | | | (50,537 | ) | | | (47,425 | ) | | | (40,787 | ) | | | (9,839 | ) | | | (21,635 | ) | | | (22,283 | ) | | | (37,194 | ) | | | 590 | | | | 99 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | 192,285 | | | $ | 834,489 | | | $ | 605,208 | | | $ | (52,106 | ) | | $ | 210,020 | | | $ | 437,926 | | | $ | 144,227 | | | $ | 225,006 | | | $ | 452,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pioneer Consolidated Historical | | | Pioneer Pro Forma | |
| | | Year Ended December 31, | | | For the Six Months
Ended June 30, | | | For the
Year Ended
December 31, | | | For the
Six Months
Ended
June 30, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2013 | | | 2012 | | | 2012 | | | 2013 | |
| | | | | | | | | | | | | | | | | | (Unaudited) | | | (Unaudited) | |
| | | (in thousands, except per share amounts) | |
Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations attributable to common stockholders | | $ | 1.10 | | | $ | 3.45 | | | $ | 4.00 | | | $ | (1.33 | ) | | $ | 1.02 | | | $ | 3.24 | | | $ | 0.98 | | | $ | 1.32 | | | $ | 3.26 | |
Income (loss) from discontinued operations attributable to common stockholders | | | 0.44 | | | | 3.56 | | | | 1.14 | | | | 0.87 | | | | 0.74 | | | | — | | | | 0.18 | | | | 0.43 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | 1.54 | | | $ | 7.01 | | | $ | 5.14 | | | $ | (0.46 | ) | | $ | 1.76 | | | $ | 3.24 | | | $ | 1.16 | | | $ | 1.75 | | | $ | 3.26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations attributable to common stockholders | | $ | 1.07 | | | $ | 3.39 | | | $ | 3.96 | | | $ | (1.33 | ) | | $ | 1.02 | | | $ | 3.19 | | | $ | 0.95 | | | $ | 1.28 | | | $ | 3.20 | |
Income (loss) from discontinued operations attributable to common stockholders | | | 0.43 | | | | 3.49 | | | | 1.12 | | | | 0.87 | | | | 0.74 | | | | — | | | | 0.18 | | | | 0.42 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | 1.50 | | | $ | 6.88 | | | $ | 5.08 | | | $ | (0.46 | ) | | $ | 1.76 | | | $ | 3.19 | | | $ | 1.13 | | | $ | 1.70 | | | $ | 3.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 122,966 | | | | 116,904 | | | | 115,062 | | | | 114,176 | | | | 117,462 | | | | 133,263 | | | | 122,754 | | | | 126,917 | | | | 137,214 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | | 126,320 | | | | 119,215 | | | | 116,330 | | | | 114,176 | | | | 117,947 | | | | 135,762 | | | | 125,772 | | | | 130,271 | | | | 139,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared per share | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.30 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.08 | | | $ | 0.04 | |
Amounts attributable to common stockholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 137,136 | | | $ | 411,337 | | | $ | 471,158 | | | $ | (151,822 | ) | | $ | 123,191 | | | $ | 438,391 | | | $ | 121,515 | | | $ | 169,857 | | | $ | 452,715 | |
Income (loss) from discontinued operations, net of tax | | | 55,149 | | | | 423,152 | | | | 134,050 | | | | 99,716 | | | | 86,829 | | | | (465 | ) | | | 22,712 | | | | 55,149 | | | | (465 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 192,285 | | | $ | 834,489 | | | $ | 605,208 | | | $ | (52,106 | ) | | $ | 210,020 | | | $ | 437,926 | | | $ | 144,227 | | | $ | 225,006 | | | $ | 452,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data (at period end): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,069,030 | | | $ | 11,447,156 | | | $ | 9,679,102 | | | $ | 8,867,265 | | | $ | 9,161,785 | | | $ | 14,162,587 | | | $ | 12,569,734 | | | | N/A | | | $ | 14,158,587 | |
Long-term obligations | | $ | 6,166,932 | | | $ | 4,726,507 | | | $ | 4,683,857 | | | $ | 4,653,043 | | | $ | 4,787,175 | | | $ | 5,502,302 | | | $ | 5,683,767 | | | | N/A | | | $ | 5,337,776 | |
Total equity | | $ | 5,867,308 | | | $ | 5,651,138 | | | $ | 4,226,025 | | | $ | 3,643,031 | | | $ | 3,679,613 | | | $ | 7,648,157 | | | $ | 5,756,976 | | | | N/A | | | $ | 7,808,683 | |
(a) | Pioneer’s oil and gas revenues for 2012, as compared to those of 2011, increased by $517.6 million (or 23%) due to increases in oil, NGL and gas sales volumes. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012, for discussions about oil and gas revenues and factors affecting the comparability of such revenues. |
(b) | Pioneer recognized $330.3 million of net derivative gains in its total revenues for 2012, including $65.4 million of noncash MTM losses, as compared to $392.8 million of net derivative gains during 2011, including $225.5 million of noncash MTM gains. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and Notes B and E of Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012, for information about Pioneer’s derivative contracts and associated accounting methods. Pioneer also recognized $138.9 million of net hurricane activity gains during 2010, primarily associated with East Cameron 322 insurance recoveries, and $17.3 million of net hurricane activity charges during 2009. See Note B of Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012, for more information about the East Cameron 322 reclamation and abandonment project. |
(c) | During 2012, Pioneer recorded $604.4 million of pre-tax noncash impairment and abandonment charges to reduce the carrying value of its Barnett Shale field assets. During 2011, Pioneer recorded an impairment charge of $354.4 million related to its Edwards and Austin Chalk net assets in South Texas. See Note D of Notes to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012. During 2009 and 2008, Pioneer recorded impairment charges of $21.1 million and $89.8 million, respectively, to reduce its Uinta/Piceance field’s carrying value. |
(d) | During December 2011, Pioneer committed to a plan to divest Pioneer South Africa and in August 2012, Pioneer completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, resulting in a pre-tax gain of $28.6 million. During December 2010, Pioneer committed to a plan to sell Pioneer Tunisia and in February 2011 completed the sale of Pioneer’s share holdings in Pioneer Tunisia to an unaffiliated party for net cash proceeds of $802.5 million, excluding cash and cash equivalents sold, resulting in a pre-tax gain of $645.2 million. During 2010, Pioneer received $35.3 million of interest on excess royalties paid during the period from January 1, 2003, through December 31, 2005, on oil and gas production from its deepwater Gulf of Mexico properties, which were sold in 2006. During 2009, Pioneer recorded $119.3 million of pre-tax income for the recovery of the excess royalties previously mentioned and a $17.5 million pre-tax gain, primarily from the sale of substantially all of its Gulf of Mexico shelf properties. The results of operations of these properties, and certain other properties sold during the periods presented, are classified as discontinued operations in accordance with GAAP. See Note C of Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012, for more information about Pioneer’s discontinued operations. |
Summary Historical Financial Information of Pioneer Southwest
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pioneer Southwest Consolidated Historical (a) | |
| | | For the Year Ended December 31, | | | For the Six Months
Ended June 30, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 (a) | | | 2008 (a) | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | | | | (Unaudited) | |
| | | (in thousands, except per unit amounts) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil and gas (b)(c) | | $ | 185,848 | | | $ | 213,362 | | | $ | 183,758 | | | $ | 168,717 | | | $ | 193,394 | | | $ | 100,819 | | | $ | 93,270 | |
Interest and other | | | — | | | | 2 | | | | — | | | | 210 | | | | 192 | | | | — | | | | — | |
Derivative gains (losses), net (b) | | | 22,438 | | | | (11,725 | ) | | | (5,431 | ) | | | (78,265 | ) | | | — | | | | 4,150 | | | | 31,768 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 208,286 | | | | 201,639 | | | | 178,327 | | | | 90,662 | | | | 193,586 | | | | 104,969 | | | | 125,038 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil and gas production (d) | | | 49,908 | | | | 38,427 | | | | 38,334 | | | | 34,749 | | | | 38,807 | | | | 28,014 | | | | 22,019 | |
Production and ad valorem taxes | | | 15,915 | | | | 13,784 | | | | 12,119 | | | | 9,547 | | | | 14,213 | | | | 8,480 | | | | 7,827 | |
Depletion, depreciation and amortization. | | | 22,044 | | | | 15,534 | | | | 12,577 | | | | 13,016 | | | | 11,582 | | | | 14,825 | | | | 9,818 | |
General and administrative | | | 7,416 | | | | 7,222 | | | | 6,330 | | | | 4,790 | | | | 6,227 | | | | 3,741 | | | | 3,660 | |
Accretion of discount on asset retirement obligations | | | 758 | | | | 913 | | | | 546 | | | | 484 | | | | 144 | | | | 414 | | | | 378 | |
Interest | | | 2,187 | | | | 1,605 | | | | 1,543 | | | | 1,160 | | | | 621 | | | | 1,821 | | | | 818 | |
Other, net | | | 1,158 | | | | — | | | | — | | | | 549 | | | | 890 | | | | — | | | | 748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses | | | 99,386 | | | | 77,485 | | | | 71,449 | | | | 64,295 | | | | 72,484 | | | | 57,295 | | | | 45,268 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 108,900 | | | | 124,154 | | | | 106,878 | | | | 26,367 | | | | 121,102 | | | | 47,674 | | | | 79,770 | |
Income tax provision | | | (1,337 | ) | | | (1,338 | ) | | | (1,045 | ) | | | (46 | ) | | | (1,326 | ) | | | (586 | ) | | | (951 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 107,563 | | | $ | 122,816 | | | $ | 105,833 | | | $ | 26,321 | | | $ | 119,776 | | | $ | 47,088 | | | $ | 78,819 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of net income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) applicable to Pioneer Southwest’s predecessor | | $ | — | | | $ | — | | | $ | — | | | $ | (1,598 | ) | | $ | 59,038 | | | $ | — | | | $ | — | |
Net income applicable to Pioneer Southwest | | | 107,563 | | | | 122,816 | | | | 105,833 | | | | 27,919 | | | | 60,738 | | | | 47,088 | | | | 78,819 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 107,563 | | | $ | 122,816 | | | $ | 105,833 | | | $ | 26,321 | | | $ | 119,776 | | | $ | 47,088 | | | $ | 78,819 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of net income applicable to Pioneer Southwest: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General partner’s interest | | $ | 108 | | | $ | 123 | | | $ | 106 | | | $ | 28 | | | $ | 61 | | | $ | 47 | | | $ | 79 | |
Limited partners’ interest | | | 107,179 | | | | 122,466 | | | | 105,649 | | | | 27,891 | | | | 60,677 | | | | 46,934 | | | | 78,538 | |
Unvested participating securities’ interest | | | 276 | | | | 227 | | | | 78 | | | | — | | | | — | | | | 107 | | | | 202 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income applicable to Pioneer Southwest | | $ | 107,563 | | | $ | 122,816 | | | $ | 105,833 | | | $ | 27,919 | | | $ | 60,738 | | | $ | 47,088 | | | $ | 78,819 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per common unit — basic and diluted | | $ | 3.00 | | | $ | 3.68 | | | $ | 3.19 | | | $ | 0.92 | | | $ | 2.02 | | | $ | 1.31 | | | $ | 2.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common units outstanding — basic and diluted | | | 35,714 | | | | 33,249 | | | | 33,114 | | | | 30,399 | | | | 30,009 | | | | 35,714 | | | | 35,714 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions declared per common unit | | $ | 2.07 | | | $ | 2.03 | | | $ | 2.00 | | | $ | 2.00 | | | $ | 0.81 | | | $ | 1.04 | | | $ | 1.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data (at period end): | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 430,889 | | | $ | 326,727 | | | $ | 280,060 | | | $ | 256,638 | | | $ | 367,164 | | | $ | 494,629 | | | $ | 374,770 | |
Long-term obligations | | $ | 137,907 | | | $ | 58,768 | | | $ | 124,471 | | | $ | 103,810 | | | $ | 6,429 | | | $ | 188,203 | | | $ | 80,892 | |
Partners’ equity | | $ | 261,633 | | | $ | 227,206 | | | $ | 134,745 | | | $ | 141,273 | | | $ | 347,831 | | | $ | 272,001 | | | $ | 269,614 | |
(a) | In May 2008, Pioneer Southwest completed its initial public offering of 9,487,500 common units representing limited partnership interests (the “2008 Offering”). To effect the 2008 Offering, Pioneer contributed a portion of its ownership of a subsidiary that owned interests in oil and gas properties located in the Spraberry field and sold to Pioneer Southwest its remaining ownership interest in the subsidiary. During August 2009, Pioneer Southwest acquired certain additional oil and gas property interests in the Spraberry field from Pioneer that, together with the property interests conveyed to Pioneer Southwest in 2008 (the “Conveyed Interests”), represented transactions between entities under common control and are reported in Pioneer Southwest’s financial statements similar to a pooling of interests. Pioneer Southwest’s statements of operations for the years ended December 31, 2009 and 2008 include the results of operations of the Conveyed Interests (being the results of operations of the Pioneer Southwest predecessor) prior to their ownership by Pioneer Southwest. |
(b) | Effective February 1, 2009, Pioneer Southwest discontinued hedge accounting for its derivative contracts and began using the MTM method of accounting for derivatives. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and Notes B and D of Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” in Pioneer Southwest’s Annual Report on Form 10-K for the year ended December 31, 2012, for information about Pioneer Southwest’s derivative contracts and associated accounting methods. |
(c) | Oil and gas revenues for 2012, 2011, 2010, 2009 and 2008 include net commodity hedge gains of $0, $36.5 million, $46.7 million, $71.0 million and $14.6 million, respectively. |
(d) | Historical oil and gas production costs associated with the Conveyed Interests includes the direct internal costs of Pioneer to operate the properties for periods presented prior to their ownership by Pioneer Southwest. The oil and gas production costs of the properties after they were acquired by Pioneer Southwest include COPAS fees. |
Comparative Per Share and Per Unit Information
The following table sets forth (i) historical per share information of Pioneer, (ii) the unaudited pro forma per share information of Pioneer after giving pro forma effect to the proposed merger and the other merger transactions, including Pioneer’s issuance of 0.2325 of a share of Pioneer common stock for each outstanding Pioneer Southwest common unit (other than Pioneer Southwest common units owned by Pioneer USA), and (iii) the historical and equivalent pro forma per unit information for Pioneer Southwest.
You should read this information in conjunction with (i) the summary historical financial information included elsewhere in this proxy statement/prospectus, (ii) the historical consolidated financial statements of Pioneer and Pioneer Southwest and related notes that are incorporated by reference into this proxy statement/prospectus, and (iii) the “Unaudited Pro Forma Condensed Consolidated Financial Statements” and related notes included elsewhere in this proxy statement/prospectus. The unaudited pro forma per unit information does not purport to represent what the actual results of operations of Pioneer and Pioneer Southwest would have been had the proposed merger been completed in another period or to project Pioneer’s and Pioneer Southwest’s results of operations that may be achieved if the proposed merger is completed.
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2012 | |
| | | Pioneer | | | Pioneer Southwest | |
| | | Historical | | | Pioneer
Pro Forma (1) | | | Historical | | | Equivalent
Pro Forma (2) | |
Net income from continuing operations per share/unit: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.10 | | | $ | 1.32 | | | $ | 3.00 | | | $ | 0.31 | |
Diluted | | $ | 1.07 | | | $ | 1.28 | | | $ | 3.00 | | | $ | 0.30 | |
Cash dividends/distributions per share/unit | | $ | 0.08 | | | $ | 0.08 | | | $ | 2.07 | | | $ | 0.02 | |
Book value per share/unit | | $ | 46.45 | | | | N/A | | | $ | 7.33 | | | | N/A | |
| | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2013 | |
| | | Pioneer | | | Pioneer Southwest | |
| | | Historical | | | Pioneer
Pro Forma (1) | | | Historical | | | Equivalent
Pro Forma (2) | |
Net income from continuing operations per share/unit: | | | | | | | | | | | | | | | | |
Basic | | $ | 3.24 | | | $ | 3.26 | | | $ | 1.31 | | | $ | 0.76 | |
Diluted | | $ | 3.19 | | | $ | 3.20 | | | $ | 1.31 | | | $ | 0.74 | |
Cash dividends/distributions per share/unit | | $ | 0.04 | | | $ | 0.04 | | | $ | 1.04 | | | $ | 0.01 | |
Book value per share/unit | | $ | 56.33 | | | $ | 55.89 | | | $ | 7.62 | | | $ | 12.99 | |
(1) | Pioneer’s pro forma information includes the effect of the merger on the basis described in the notes to the “Unaudited Pro Forma Condensed Consolidated Financial Statements” included elsewhere in this proxy statement/prospectus. |
(2) | Pioneer Southwest’s equivalent pro forma earnings, book value and cash distribution amounts have been calculated by multiplying Pioneer’s pro forma per share amounts by the exchange ratio. |
Market Prices and Dividend and Distribution Information
Shares of Pioneer common stock trade on the NYSE under the ticker symbol “PXD,” and Pioneer Southwest common units trade on the NYSE under the ticker symbol “PSE.” The following table sets forth, for the periods indicated, the range of high and low sales prices per share for Pioneer common stock and per Pioneer Southwest common unit on the NYSE composite tape, as well as information concerning cash dividends declared and paid on shares of Pioneer common stock and quarterly cash distributions declared and paid on Pioneer Southwest common units. The sales prices are as reported on the NYSE.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pioneer common stock | | | Pioneer Southwest common units | |
| | | High | | | Low | | | Dividends | | | High | | | Low | | | Distributions(1) | |
2010 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 56.88 | | | $ | 41.88 | | | $ | 0.04 | | | $ | 23.87 | | | $ | 20.72 | | | $ | 0.50 | |
Second Quarter | | $ | 74.00 | | | $ | 54.72 | | | | — | | | $ | 25.65 | | | $ | 20.93 | | | $ | 0.50 | |
Third Quarter | | $ | 67.77 | | | $ | 54.89 | | | $ | 0.04 | | | $ | 28.33 | | | $ | 23.53 | | | $ | 0.50 | |
Fourth Quarter | | $ | 88.00 | | | $ | 64.97 | | | | — | | | $ | 30.42 | | | $ | 27.15 | | | $ | 0.50 | |
2011 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 104.29 | | | $ | 85.90 | | | $ | 0.04 | | | $ | 34.79 | | | $ | 28.22 | | | $ | 0.50 | |
Second Quarter | | $ | 106.07 | | | $ | 82.41 | | | | — | | | $ | 35.87 | | | $ | 26.21 | | | $ | 0.51 | |
Third Quarter | | $ | 99.64 | | | $ | 65.73 | | | $ | 0.04 | | | $ | 32.72 | | | $ | 24.17 | | | $ | 0.51 | |
Fourth Quarter | | $ | 97.10 | | | $ | 58.63 | | | | — | | | $ | 31.73 | | | $ | 21.34 | | | $ | 0.51 | |
2012 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 119.19 | | | $ | 90.26 | | | $ | 0.04 | | | $ | 28.07 | | | $ | 25.43 | | | $ | 0.51 | |
Second Quarter | | $ | 117.05 | | | $ | 77.41 | | | | — | | | $ | 28.60 | | | $ | 24.59 | | | $ | 0.52 | |
Third Quarter | | $ | 115.69 | | | $ | 82.18 | | | $ | 0.04 | | | $ | 26.82 | | | $ | 24.19 | | | $ | 0.52 | |
Fourth Quarter | | $ | 110.67 | | | $ | 99.75 | | | | — | | | $ | 26.98 | | | $ | 20.63 | | | $ | 0.52 | |
2013 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 133.68 | | | $ | 107.29 | | | $ | 0.04 | | | $ | 26.40 | | | $ | 21.58 | | | $ | 0.52 | |
Second Quarter | | $ | 157.81 | | | $ | 109.18 | | | | — | | | $ | 37.10 | | | $ | 24.31 | | | $ | 0.52 | |
Third Quarter (through September 12, 2013) | | $ | 190.15 | | | $ | 146.19 | | | $ | 0.04 | | | $ | 44.45 | | | $ | 34.38 | | | | — | (2) |
(1) | Represents cash distributions per Pioneer Southwest common unit declared with respect to the quarter presented and paid in the following quarter. |
(2) | Cash distributions with respect to the third quarter of 2013 are expected to be declared in October 2013 and would be paid in November 2013 if the merger is not consummated prior to the record date for such distribution. |
The last reported sale price of Pioneer Southwest common units on the NYSE on May 6, 2013, the last trading day before Pioneer announced its proposal to acquire all of the Pioneer Southwest common units owned by the public, was $26.00. The last reported sale price of shares of Pioneer common stock on the NYSE on May 6, 2013, was $133.54. The last reported sale price of Pioneer Southwest common units on the NYSE on[—], 2013, the latest practicable date prior to the printing of this proxy statement/prospectus, was $[—]. The last reported sale price of shares of Pioneer common stock on the NYSE on[—], 2013, was $[—].
As of [—], 2013, Pioneer had [—] shares of common stock outstanding held by approximately [—] holders of record.
As of [—], 2013, the record date for the Pioneer Southwest special meeting, Pioneer Southwest had 35,713,700 outstanding common units held by approximately [—] holders of record. Pioneer Southwest’s partnership agreement requires it to distribute all of its “available cash,” as determined by Pioneer Southwest GP in accordance with Pioneer Southwest’s partnership agreement, within 45 days after the end of each quarter.
Prior to the termination of the merger agreement or the effective time of the merger, it is expected that Pioneer Southwest unitholders will continue to receive quarterly distributions on their Pioneer Southwest common units consistent with past practice and not in excess of $0.52 per Pioneer Southwest common unit per quarter (which $0.52 per common unit is equivalent to the most recent distribution declared for the quarter ended June 30, 2013), provided that the record date for such quarterly distribution occurs prior to the effective time of the merger. If the merger agreement terminates, it is expected that distributions would continue, consistent with past practice and in accordance with the terms of Pioneer Southwest’s partnership agreement.
Pioneer’s Dividend Policy
During each of 2012, 2011 and 2010, the Pioneer Board declared semiannual dividends of $0.04 per share of Pioneer common stock. In the first and third quarters of 2013, the Pioneer Board declared semiannual dividends of $0.04 per share of Pioneer common stock. Any payment of future dividends will be at the discretion of the Pioneer Board and will depend on Pioneer’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that the Pioneer Board deems relevant.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the documents Pioneer and Pioneer Southwest have incorporated herein by reference contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not limited to historical facts, but reflect Pioneer’s and/or Pioneer Southwest’s current beliefs, expectations or intentions regarding future events. These forward-looking statements may be identified by the use of words such as “may,” “will,” “could,” “should,” “would,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” “contemplate” and similar expressions that contemplate future events. These statements appear in a number of places in this proxy statement/prospectus and in the documents incorporated by reference.
All statements other than statements of historical fact included or incorporated by reference in this proxy statement/prospectus, including statements regarding Pioneer’s and/or Pioneer Southwest’s financial position,Parsley’s business strategy, production and reserve growth and other plans and objectives for future operations or transactions, and including statements regarding the approval of the merger agreement and the merger transactions, the satisfaction of the closing conditions to the merger, the timing of the completion of the merger, expected U.S. federal income tax consequences, expectations and intentions regarding outstanding litigation, expectations with respect to the synergies, costs and other anticipated effects of the merger and expectations regarding Pioneer Southwest’s business and common units if the merger does not occur, are forward-looking statements.
Although Pioneer and Pioneer Southwest believe that such forward-looking statements are based on reasonable assumptions, neither Pioneer nor Pioneer Southwest gives any assurance that such expectations will in fact occur. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, many of which are generally outside the control of Pioneer and Pioneer Southwest and are difficult to predict. These risks and uncertainties also include those set forth under “Risk Factors,” beginning on page 35, as well as, among others, risks and uncertainties relating to:
the volatility of realized oil, gas and NGL prices and the volatility of the price of shares of Pioneer common stock;
the potential for impairment to the book value of Pioneer’s assets due to future declines in oil, gas and NGL prices;
uncertainties about the estimated quantities of oil, gas and NGL reserves, including uncertainties about the effects of the SEC’s rules governing reserve reporting;
the conditions of the capital markets, liquidity, general economic conditions, interest rates and the availability of credit to support Pioneer’s business requirements;
the discovery, estimation, development and replacement of oil, gas and NGL reserves;
Pioneer’s business and financial strategy;
Pioneer’s future operating results;
uncertainties and risks associated with horizontal drilling;
Pioneer’s drilling locations;
Pioneer’s drilling technology;
Pioneer’s cash flow, liquidity and financial position;
the timing and amount of Pioneer’s future production of oil, gas and NGLs;
Pioneer’s operating expenses, general and administrative costs and finding and development costs;
the availability of drilling and production equipment, labor and other services;
the marketing of oil, gas and NGLs;
competition in the oil, gas and NGLs industry;
the effect of weather and the occurrence of natural disasters such as fires, floods, hurricanes, earthquakes and other catastrophic events and natural disasters;
governmental regulation of the oil, gas and NGL industry;
environmental regulations;
the effect of legislation, regulatory initiatives and litigation related to climate change;
developments in oil-producing and gas-producing countries, including recent developments in the Middle East;
Pioneer’s strategic plans, objectives, expectations and intentions for future operations;
joint ventures;
the possibility that the merger transactions are not consummated in a timely manner or at all;
the diversion of management in connection with the merger and Pioneer’s ability to realize fully or at all the anticipated benefits of the merger; and
other financial, operational and legal risks and uncertainties detailed from time to time in Pioneer’s and Pioneer Southwest’s SEC filings.
Pioneer and Pioneer Southwest caution that the foregoing list of factors is not exclusive. Additional information concerning these and other risk factors is contained in Pioneer’s and Pioneer Southwest’s most recently filed Annual Reports on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other SEC filings. In addition, Pioneer and Pioneer Southwest may be subject to currently unforeseen risks that may have a materially adverse effect on them. All subsequent written and oral forward-looking statements concerning Pioneer, Pioneer Southwest, the proposed merger or other matters and attributable to Pioneer or Pioneer Southwest or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements above. The forward-looking statements speak only as of the date made and, other than as required by law, neither Pioneer nor Pioneer Southwest undertakes any obligation to update publicly or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.
RISK FACTORS
An investment in Pioneer common stock involves risks. You should consider carefully the following risk factors, together with all of the other information included in, or incorporated by reference into, this proxy statement/prospectus before deciding how to vote. In addition, you should read and consider the risks associated with the businesses of Pioneer and Pioneer Southwest. In particular, please read Part I, Item 1. “Business — Competition, Markets and Regulations” and Part I, Item 1A. “Risk Factors,” in the Annual Reports onForm 10-K for the year ended December 31, 2012, for each of Pioneer and Pioneer Southwest, and Part II, Item 1A. “Risk Factors,” in the Quarterly Reports on Form 10-Q for the quarter ended June 30, 2013, for each of Pioneer and Pioneer Southwest, incorporated by reference herein. This proxy statement/prospectus also contains forward-looking statements that involve risks and uncertainties. Please read “Special Note Regarding Forward-Looking Statements.”
Risks Related to the Merger
The exchange ratio is fixed and will not be adjusted in the event of any change in either the price of Pioneer common stock or the price of Pioneer Southwest common units.
If the merger is completed, each Pioneer Southwest common unit outstanding as of immediately prior to the effective time of the merger will be converted into the right to receive 0.2325 of a share of Pioneer common stock. This exchange ratio was fixed in the merger agreement and will not be adjusted for changes in the market price of either shares of Pioneer common stock or Pioneer Southwest common units. Changes in the price of shares of Pioneer common stock prior to the effective time will affect the market value of the merger consideration that Pioneer Southwest unitholders will receive in the merger.
The market price of shares of Pioneer common stock has historically varied greatly. For example, during the period beginning on January 1, 2012, and ending on September 12, 2013, shares of Pioneer common stock traded as high as $190.15 and as low as $77.41 per share. The market price of shares of Pioneer common stock is likely to continue to be volatile because of numerous factors, which may include:
changes in Pioneer’s drilling results and reserve growth outlook;
domestic and worldwide supply of and demand for oil, NGL and gas;
developments in the Middle East, which could affect the global supply of oil and significantly affect oil prices;
quarterly fluctuations in Pioneer’s operating results and those of Pioneer’s competitors;
changes in stock market analysts’ estimates of Pioneer’s future performance and the future performance of Pioneer’s competitors;
purchases and sales of a high volume of shares of Pioneer common stock by Pioneer stockholders;
events affecting other companies that the market deems comparable to Pioneer;
general conditions in the oil and gas industry in which Pioneer operates;
general economic conditions in the United States and other countries;
federal, state and local legislation, governmental regulation and legal developments in the industry in which Pioneer operates; and
changes in market assessments of the likelihood that the merger will be completed.
The price of a share of Pioneer common stock at the effective time of the merger may vary from its price on the date the merger agreement was executed or on the date of the Pioneer Southwest special meeting. As a result, the market value represented by the exchange ratio will also vary. For example, based on the range of closing prices of
shares of Pioneer common stock during the period from May 6, 2013, the last trading day before public announcement of the merger, through September 12, 2013, the final negotiated exchange ratio of 0.2325 represented a market value ranging from a low of $31.05 to a high of $43.43 for each Pioneer Southwest common unit.
If the price of shares of Pioneer common stock declines between the date the merger agreement was executed and the effective time of the merger, including for any of the reasons described above, Pioneer Southwest unitholders will receive shares of Pioneer common stock that have a market value upon completion of the merger that is less than the market value calculated pursuant to the exchange ratio on the date the merger agreement was executed. Therefore, while the number of shares of Pioneer common stock to be issued in the merger is fixed, Pioneer Southwest unitholders cannot be sure of the market value of the shares of Pioneer common stock they will receive upon completion of the merger or the market value of shares of Pioneer common stock at any time after the completion of the merger.
For historical and current market prices of shares of Pioneer common stock and Pioneer Southwest common units, please read “Summary — Market Prices and Dividend and Distribution Information” in this proxy statement/prospectus.
The merger transactions may not be consummated even if Pioneer Southwest unitholders approve the merger proposal.
The merger agreement contains conditions, some of which are beyond the parties’ control, that, if not satisfied or waived, may prevent, delay or otherwise result in the merger not occurring, even though Pioneer Southwest unitholders may have voted to approve the merger proposal. Pioneer and Pioneer Southwest cannot predict with certainty whether and when any of the conditions to the completion of the merger will be satisfied. Any delay in completing the merger could cause Pioneer not to realize, or delay the realization of, some or all of the benefits that Pioneer expects to achieve from the merger. In addition, Pioneer and Pioneer Southwest can agree not to consummate the merger even if the Pioneer Southwest unitholders approve the merger proposal and the conditions to the closing of the merger are otherwise satisfied.
Financial projections by Pioneer and Pioneer Southwest may not prove accurate.
In performing its financial analyses and rendering its opinion regarding the fairness, from a financial point of view, of the exchange ratio to the Pioneer Southwest unaffiliated unitholders, the financial advisor to the Pioneer Southwest Conflicts Committee reviewed and relied on, among other things, internal financial analyses and forecasts for Pioneer and Pioneer Southwest prepared by management. These financial projections include assumptions regarding future production, commodities pricing, operating cash flows, capital expenditures and distributable income of Pioneer Southwest. They speak only as of the date made and will not be updated. These financial projections were not provided with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties, and may not be achieved in full, at all or within projected timeframes. The financial projections on which Pioneer Southwest’s financial advisor based its opinion could turn out to be inaccurate.
The pro forma financial statements are presented for illustrative purposes only and may not be an indication of Pioneer’s financial condition or results of operations following the merger.
The pro forma financial statements contained in this proxy statement/prospectus are presented for illustrative purposes only and may not be an indication of Pioneer’s financial condition or results of operations following the merger for several reasons. The pro forma financial statements have been derived from the historical financial statements of Pioneer and Pioneer Southwest, and adjustments and assumptions have been made after giving effect to the merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the pro forma financial
statements do not reflect all costs that are expected to be incurred by Pioneer and Pioneer Southwest in connection with the merger. As a result, the actual financial condition and results of operations of Pioneer following the merger may not be consistent with, or evident from, these pro forma financial statements.
The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect Pioneer’s financial condition or results of operations following the merger. Any decline or potential decline in Pioneer’s financial condition or results of operations may cause significant variations in the stock price of Pioneer. Please read “Unaudited Pro Forma Condensed Consolidated Financial Statements” beginning on page F-2 of this proxy statement/prospectus.
While the merger agreement is in effect, Pioneer Southwest may lose opportunities to enter into different business combination transactions with other parties on more favorable terms, and may be limited in its ability to pursue other attractive business opportunities.
While the merger agreement is in effect, Pioneer Southwest is prohibited from, directly or indirectly, initiating, soliciting, knowingly encouraging or facilitating any inquiries regarding, or the making or submission of any proposal or offer that constitutes or may reasonably be expected to lead to, a proposal or offer to acquire 20% or more of the assets (by book value or monthly revenues) or common units of Pioneer Southwest, or a proposal or offer to enter into certain transactions such as a merger, consolidation, business combination, reorganization, liquidation, dissolution or similar transaction, with any other person, subject to limited exceptions. As a result of these provisions in the merger agreement, Pioneer Southwest may lose opportunities to enter into more favorable transactions.
In its written proposal of the merger delivered to the chairman of the Pioneer Southwest Conflicts Committee, Pioneer stated that it is interested only in acquiring the outstanding publicly held Pioneer Southwest common units and that it is not interested in selling the Pioneer Southwest common units held by Pioneer USA or Pioneer USA’s interest in Pioneer Southwest GP. Therefore, even if a proposal or offer to acquire the assets or common units of Pioneer Southwest were to materialize, Pioneer USA, which owns a majority of the outstanding Pioneer Southwest common units, would likely decide not to vote or tender its Pioneer Southwest common units in favor of any such transaction.
Pioneer Southwest has also agreed to refrain from taking certain actions with respect to its business and financial affairs pending completion of the merger or termination of the merger agreement. These restrictions and the non-solicitation provisions described above could be in effect for an extended period of time if completion of the merger is delayed and the parties agree to extend the March 17, 2014 termination date.
In addition to the economic costs associated with pursuing a merger, Pioneer Southwest GP’s management continues to devote substantial time and other resources to the proposed transaction and related matters, which could limit Pioneer Southwest’s ability to pursue other attractive business opportunities, including potential joint ventures, standalone projects and other transactions. If Pioneer Southwest is unable to pursue such other attractive business opportunities, its growth prospects and the long-term strategic position of its business could be adversely affected.
If the merger does not occur, Pioneer and Pioneer Southwest will not benefit from the expenses they have incurred in the pursuit of the merger.
The merger may not be completed. If the merger is not completed, Pioneer and Pioneer Southwest will have incurred substantial expenses for which no ultimate benefit will have been received by either company. The parties currently expect to incur merger-related expenses of approximately $4.0 million, consisting of investment banking, engineering, legal and accounting fees, and financial printing and other related charges, much of which may be incurred even if the merger is not completed. In addition, if the merger agreement is terminated under specified circumstances, either Pioneer or Pioneer Southwest will be required to pay certain expenses of the other party. See “The Merger Agreement — Fees and Expenses.”
Pioneer, Pioneer Southwest GP and their directors and officers may have interests that differ from your interests, and these interests may have influenced their decision to propose and to approve the merger agreement and the merger transactions.
The nature of the respective businesses of Pioneer Southwest and Pioneer and its affiliates may give rise to conflicts of interest between Pioneer Southwest and Pioneer. The interests of Pioneer, Pioneer Southwest GP, and their directors and officers may differ from your interests as a result of the relationships among them. A conflict could be perceived to exist, for example, in connection with the number of shares of Pioneer common stock offered as the merger consideration, particularly where three of the seven directors on the Pioneer Southwest GP Board are executive officers of Pioneer. Unlike the strict duty of a fiduciary who must act solely in the best interests of the beneficiary in resolving conflicts of interest, Pioneer Southwest’s partnership agreement permits Pioneer Southwest GP to consider the relative interest of each party to a potential conflict situation and the benefits and burdens relating to such interests which, under certain circumstances, could include the interest of Pioneer Southwest GP and its affiliates.
Furthermore, Pioneer Southwest’s partnership agreement provides that, in the absence of bad faith by Pioneer Southwest GP, any action taken by Pioneer Southwest GP shall not constitute a breach of the Pioneer Southwest partnership agreement or a breach of any standard of care or duty otherwise imposed by Delaware law.
In addition, certain directors and executive officers of Pioneer are also directors and executive officers of Pioneer Southwest GP. For example, Scott D. Sheffield is a director of both Pioneer and Pioneer Southwest GP. The following executive officers hold positions at both Pioneer and Pioneer Southwest GP:
| | | | |
Officer
| | Pioneer
| | Pioneer Southwest
|
Scott D. Sheffield
| | Chairman of the Board and Chief Executive Officer | | Chairman of the Board and
Chief Executive Officer |
Timothy L. Dove
| | President and Chief Operating Officer, Director | | President and Chief Operating
Officer |
Mark S. Berg
| | Executive Vice President and General Counsel | | Executive Vice President and
General Counsel |
Chris J. Cheatwood
| | Executive Vice President, Business Development and Geoscience | | Executive Vice President,
Business Development and
Geoscience |
Richard P. Dealy
| | Executive Vice President and Chief Financial Officer | | Executive Vice President, Chief
Financial Officer and Treasurer,
Director |
Danny L. Kellum
| | Executive Vice President, Permian Operations | | Executive Vice President,
Permian Operations, Director |
Frank W. Hall
| | Vice President and Chief Accounting Officer | | Vice President and Chief
Accounting Officer |
In considering the recommendation of the Pioneer Southwest GP board to approve the merger proposal, you should consider that the directors and executive officers of Pioneer and Pioneer Southwest GP may have interests that differ from, or are in addition to, the interests of Pioneer Southwest unitholders generally. These interests include the following:
all of the directors and officers of Pioneer Southwest GP have the right to indemnification under the organizational documents of Pioneer Southwest GP, the Pioneer Southwest partnership agreement and the merger agreement, and the four independent directors of Pioneer Southwest GP have the right to indemnification under indemnification agreements with Pioneer Southwest. In addition, all of the directors of Pioneer and all of the officers of Pioneer Southwest GP have the right to indemnification under the organizational documents of Pioneer or Pioneer USA and indemnification agreements with Pioneer or Pioneer USA;
each of the officers that are officers of both Pioneer and Pioneer Southwest GP are expected to continue to serve as officers of Pioneer following the merger;
each outstanding phantom unit of Pioneer Southwest held by officers of Pioneer Southwest GP will be converted in the merger into an equivalent restricted stock unit of Pioneer common stock, with adjustments in the number of shares to reflect the exchange ratio, but otherwise on the same terms and conditions as were applicable prior to the merger;
three of the seven directors of Pioneer Southwest GP are executive officers of both Pioneer and Pioneer Southwest GP, and one of these three directors, Scott D. Sheffield, is also the Chairman of the Board of Pioneer. All three of these directors own shares of Pioneer common stock and Pioneer Southwest common units as well as phantom units of Pioneer Southwest; and
certain other Pioneer officers and Pioneer Southwest GP officers own shares of Pioneer common stock and Pioneer Southwest common units, as well as equity-based benefit plan awards related to Pioneer common stock and Pioneer Southwest common units.
See “Certain Relationships; Interests of Certain Persons in the Merger — Interests of Directors and Executive Officers in the Merger.”
Lawsuits have been filed against Pioneer, Pioneer USA, Pioneer Southwest, Pioneer Southwest GP, and the directors and certain officers of Pioneer Southwest GP challenging the merger, and any injunctive relief or adverse judgment for monetary damages could prevent the merger from occurring or could have a material adverse effect on Pioneer following the merger.
Pioneer, Pioneer USA, Pioneer Southwest, Pioneer Southwest GP and the directors and certain officers of Pioneer Southwest GP are named defendants in purported class action petitions and derivative suits brought by purported Pioneer Southwest unitholders in Dallas County, Texas, generally alleging claims of breach of duties under Pioneer Southwest’s partnership agreement, breach of the implied covenant of good faith and fair dealing in connection with the merger transactions, self-dealing and aiding and abetting arising out of the defendants’ pursuit of the merger by way of an allegedly conflicted and unfair process. Similar claims have been filed in the United States District Court for the Northern District of Texas. The plaintiffs seek to enjoin the defendants from proceeding with or consummating the merger and, to the extent that the merger is implemented before relief is granted, plaintiffs seek to have the merger rescinded. The plaintiffs also seek money damages and attorneys’ fees.
One of the conditions to the completion of the merger is that no order, decree or injunction of any court or agency of competent jurisdiction shall be in effect, and no law shall have been enacted or adopted, that enjoins, prohibits or makes illegal consummation of any of the transactions contemplated by the merger agreement. A preliminary injunction could delay or jeopardize the completion of the merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the merger. An adverse judgment for rescission or for monetary damages could have a material adverse effect on Pioneer following the merger.
Because Pioneer USA owns 52.4% of the outstanding Pioneer Southwest common units and has agreed to vote its units to approve the merger proposal, a vote in favor of the merger proposal at the Pioneer Southwest special meeting is assured regardless of how the Pioneer Southwest unaffiliated unitholders vote.
Regardless of how the Pioneer Southwest unaffiliated unitholders vote at the Pioneer Southwest special meeting, a vote to approve the merger proposal is assured because Pioneer USA, which owns 52.4% of the outstanding Pioneer Southwest common units, has agreed to vote its units in favor of the merger proposal. Consequently, Pioneer Southwest unaffiliated unitholders have no control over whether the merger proposal is approved at the Pioneer Southwest special meeting.
Risks Related to Pioneer’s Business After the Merger
Following the merger, Pioneer may fail to develop Pioneer Southwest’s leasehold acreage, including the potential horizontal locations Pioneer has identified on Pioneer Southwest’s leasehold acreage, and any such failure could have an adverse effect on Pioneer’s operations and the price of shares of Pioneer common stock.
There has been a recent trend in Pioneer Southwest’s operating area toward horizontal drilling, which requires greater amounts of capital than vertical drilling but potentially provides higher production and investment returns. Pioneer Southwest’s leasehold acreage and wellbore assignment rights (“Virtual 40s”) are located in good potential resource areas, and Pioneer has identified 125 horizontal locations on Pioneer Southwest’s leasehold acreage with drillable lateral lengths in excess of 5,000 feet as having a potentially attractive value based on geologic analysis and Pioneer’s limited drilling results to date. Under current conditions, Pioneer Southwest would likely be unable to develop certain portions of its remaining leasehold acreage (such acreage, the “stranded leasehold acreage”) and its Virtual 40s through horizontal drilling due to its stranded leasehold acreage position being non-contiguous and not of sufficient size to permit drilling of horizontal wells of sufficient length to be economic. Such stranded leasehold acreage and Virtual 40s are contiguous with Pioneer leasehold acreage and could potentially be developed by Pioneer following the merger. However, there are significant risks and uncertainties associated with horizontal drilling. Following the merger, Pioneer may not be successful in developing the potential horizontal locations it has identified on Pioneer Southwest’s leasehold acreage or the Virtual 40s. If Pioneer is unable to develop these locations for horizontal drilling or otherwise, it could have an adverse effect on Pioneer’s operations, financial results and the price of its common stock.
Risks Related to Pioneer’s Common Stock
There will be material differences between the current rights of Pioneer Southwest unitholders and the rights they can expect to have as Pioneer stockholders.
Pioneer Southwest unitholders will receive shares of Pioneer common stock in the merger and will become Pioneer stockholders. As Pioneer stockholders, their rights as stockholders will be governed by Pioneer’s certificate of incorporation and bylaws. In addition, whereas Pioneer Southwest is a Delaware limited partnership governed by the Delaware Revised Uniform Limited Partnership Act, Pioneer is a Delaware corporation governed by the Delaware General Corporation Law. As a result, there will be material differences between the current rights of Pioneer Southwest unitholders and the rights they can expect to have as Pioneer stockholders, as well as differences in how stockholders and unitholders are taxed. For example, profits at Pioneer Southwest flow through Pioneer Southwest and are taxed once at the unitholder level, regardless of whether distributions are made to Pioneer Southwest unitholders. Profits of Pioneer are subject to tax at the corporation level and potentially again, if and when distributed to Pioneer stockholders, at the stockholder level. For a discussion of other material differences, see “Comparison of the Rights of Pioneer Stockholders and Pioneer Southwest Unitholders.”
Although the Pioneer Board has declared semiannual dividends on Pioneer’s common stock in recent years, Pioneer may not pay cash dividends in the future.
Unlike Pioneer Southwest, Pioneer is not required to distribute its available cash to stockholders. Although Pioneer has paid cash dividends on its common stock in the past, the Pioneer Board may not declare dividends in the future or may reduce the amount of dividends paid in the future. Any payment of future dividends will be at the discretion of the Pioneer Board and will depend on Pioneer’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the Pioneer Board deems relevant. Should the Pioneer Board continue to declare dividends on the Pioneer common stock, the dividend yield of the Pioneer common stock has historically been a fraction of the distribution yield of the Pioneer Southwest common units.
Some provisions of Pioneer’s charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for shares of Pioneer common stock.
Some provisions in Pioneer’s certificate of incorporation and bylaws may have the effect of delaying, discouraging or preventing an acquisition of Pioneer or a merger in which Pioneer is not the surviving company and may otherwise prevent or slow changes in the Pioneer Board and management. In addition, because Pioneer is incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits certain business combinations between it and “interested stockholders” (generally a stockholder owning or controlling 15% of more of Pioneer’s capital stock entitled to vote generally in the election of directors) for three years following the time at which such stockholder became an interested stockholder unless specified conditions, are met. These provisions could discourage an acquisition of Pioneer or other change in control transaction, whether or not it is desired or beneficial to Pioneer stockholders, and thereby negatively affect the price that investors might be willing to pay in the future for shares of Pioneer common stock. In addition, to the extent that these provisions discourage an acquisition of Pioneer or other change in control transaction, they could deprive stockholders of opportunities to realize takeover premiums for their shares of Pioneer common stock.
There may be future dilution of Pioneer common stock, which could adversely affect the market price of shares of Pioneer common stock.
Pioneer is not restricted from issuing additional shares of Pioneer common stock. In the future, Pioneer may issue shares of Pioneer common stock to raise cash for future drilling activities, acquisitions or other purposes. Pioneer may also acquire interests in other companies by using a combination of cash and shares of Pioneer common stock or just shares of Pioneer common stock. Pioneer may also issue securities convertible into, or exchangeable for, or that represent the right to receive, shares of Pioneer common stock. Any of these events may dilute the ownership interests of current Pioneer stockholders in Pioneer, reduce Pioneer’s earnings per share and have an adverse effect on the price of shares of Pioneer common stock.
Sales of a substantial amount of shares of Pioneer common stock in the public market could adversely affect the market price of shares of Pioneer common stock.
Sales of a substantial amount of shares of Pioneer common stock in the public market, or the perception that these sales may occur, could reduce the market price of shares of Pioneer common stock. Because Pioneer common stock is not primarily a yield instrument and because the receipt of the merger consideration will be taxable for U.S. federal income tax purposes, a large number of Pioneer Southwest unitholders may choose to sell the shares of Pioneer common stock they receive promptly following the merger. Such sales could have a material adverse effect on the price of Pioneer common stock.
Risks Related to Pioneer Southwest’s Business and Common Units if the Merger Does Not Occur
If the merger does not occur, it is likely that Pioneer Southwest will not be able to fully develop all of its leasehold acreage for horizontal drilling, which could have a material adverse effect on its results of operations and on the value of its leasehold acreage.
If the merger does not occur, Pioneer Southwest will continue to operate its business as it has in the past. Under current conditions, Pioneer Southwest would likely be unable to fully develop all of its leasehold acreage through horizontal drilling. The potential for Pioneer Southwest to develop all of its acreage through horizontal drilling is limited by the non-contiguous nature of some of Pioneer Southwest’s acreage and by Pioneer Southwest’s rights across some of its acreage. Additionally, a portion of Pioneer Southwest’s acreage is not of sufficient size to permit drilling of horizontal wells of sufficient length to be economic. Furthermore, the potential for horizontal drilling locations can be adversely affected by the location of existing or future vertical wells, which may limit or eliminate Pioneer Southwest’s ability to drill a horizontal well. Such a failure to develop its acreage through horizontal drilling could have a material adverse effect on Pioneer Southwest’s
results of operations and could materially reduce the amount of cash that is available to Pioneer Southwest for distributions. In addition, the continuation of Pioneer Southwest’s vertical drilling program would likely reduce or eliminate the horizontal potential that may exist on Pioneer Southwest’s leasehold acreage as a result of increasing the density of vertical wells, which could result in future diminution in the value of Pioneer Southwest’s leasehold acreage.
If the merger does not occur, Pioneer Southwest may be unable to maintain current levels of distributions on its common units without incurring additional debt.
If the merger agreement is terminated and the merger does not occur, Pioneer Southwest expects that quarterly distributions of available cash will continue, consistent with past practice and in accordance with the terms of Pioneer Southwest’s partnership agreement. In the future, because Pioneer Southwest’s proved reserves and production decline continually over time, Pioneer Southwest’s ability to maintain current levels of quarterly cash distributions will depend on its ability to mitigate these declines through drilling initiatives, production enhancement, and/or acquisitions of income producing assets that provide adequate cash margins, as well as on the prices of oil, NGLs and gas and on the availability of capital, such as Pioneer Southwest’s credit facility or future private and public equity and debt offerings. At current quoted forward NYMEX prices for oil, NGLs and gas and current acquisition and drilling costs, there is significant uncertainty regarding Pioneer Southwest’s ability to maintain or increase its levels of quarterly distributions in the long term. Furthermore, Pioneer Southwest may be unable to maintain current levels of distributions without incurring significant additional debt.
Tax Risks Related to the Merger
In addition to reading the following risk factor, you are urged to read “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 129 for a more complete discussion of the expected material U.S. federal income tax consequences of the merger.
The receipt of the merger consideration will be taxable for U.S. federal income tax purposes, and Pioneer Southwest unitholders could recognize tax gain or have tax liability in excess of the merger consideration received.
Pioneer Southwest unitholders generally will recognize gain with respect to the exchange of Pioneer Southwest common units for shares of Pioneer common stock in the merger in an amount equal to the excess of (1) each Pioneer Southwest unitholder’s “amount realized” for U.S. federal income tax purposes, which equals the sum of the fair market value of the shares of Pioneer common stock, plus the unitholder’s allocated share of Pioneer Southwest’s pre-merger liabilities (it being understood that no Pioneer Southwest unitholder bears any personal responsibility or liability in respect of such allocated liabilities), over (2) such Pioneer Southwest unitholder’s aggregate adjusted tax basis in Pioneer Southwest common units (including basis attributable to the unitholder’s share of Pioneer Southwest’s pre-merger liabilities). Pioneer Southwest unitholders generally will recognize loss to the extent that the amount of their basis described in clause (2) above exceeds the amount realized described in clause (1) above.
Because the “amount realized” includes the amount of Pioneer Southwest’s liabilities allocated to each Pioneer Southwest unitholder immediately prior to the merger, it is possible that the amount of gain Pioneer Southwest unitholders recognize, or even their resulting tax liability, could exceed the fair market value of the shares of Pioneer common stock. The application of other complicated tax rules also may give rise to adverse tax consequences to Pioneer Southwest unitholders. Because the tax consequences of the merger to a Pioneer Southwest unitholder will depend on the unitholder’s particular factual circumstances and are uncertain in some material respects, Pioneer Southwest unitholders should consult their tax advisors regarding the potential tax consequences of exchanging Pioneer Southwest common units for shares of Pioneer common stock in the merger.
THE PIONEER SOUTHWEST SPECIAL MEETING
General Information About the Pioneer Southwest Special Meeting
Time, Place and Date
The special meeting of Pioneer Southwest unitholders will be held at the offices of Pioneer Southwest, 5205 N. O’Connor Blvd., Suite 200, Irving, Texas 75039, on [—], 2013, at [—], local time.
Purposes
The purposes of the special meeting are:
to consider and vote on the merger proposal; and
to consider and vote on the adjournment proposal.
Only Pioneer Southwest GP can introduce new matters for a vote at the Pioneer Southwest special meeting. At this time, Pioneer Southwest GP does not plan on bringing any additional matters before the Pioneer Southwest special meeting for a vote.
Quorum
The presence in person or by proxy at the Pioneer Southwest special meeting of the holders of a majority of outstanding Pioneer Southwest common units on the record date will constitute a quorum and will permit Pioneer Southwest to conduct the proposed business at the Pioneer Southwest special meeting. As a result of Pioneer’s ownership in Pioneer Southwest, and Pioneer’s obligation to vote its Pioneer Southwest common units at the meeting under the voting agreement, a quorum is guaranteed to exist at the meeting. Units held in your name will be counted as present at the special meeting if you:
are present in person at the meeting; or
have submitted a properly executed proxy card or properly submitted your proxy by telephone or internet.
Proxies received but marked as abstentions will be counted as units that are present and entitled to vote for purposes of determining the presence of a quorum. Because the only proposals for consideration at the Pioneer Southwest special meeting are non-discretionary proposals, it is not expected that there will be any broker non-votes at the Pioneer Southwest special meeting. However, if there are any broker non-votes, they will be counted as units that are present and entitled to vote for purposes of determining the presence of a quorum.
Record Date
The record date for the Pioneer Southwest special meeting is the close of business on [—], 2013.
Units Entitled to Vote
Pioneer Southwest unitholders may vote at the special meeting if they owned Pioneer Southwest common units at the close of business on the record date. Pioneer Southwest unitholders may cast one vote for each Pioneer Southwest common unit owned on the record date.
Votes Required
The merger proposal will be approved if the holders, as of the record date of the Pioneer Southwest special meeting, of a majority of the outstanding Pioneer Southwest common units vote in favor of the merger proposal at the Pioneer Southwest special meeting. Failures to vote, abstentions and broker non-votes (if any) will have the same effect as a vote against the merger proposal. Pursuant to the voting agreement discussed elsewhere in the proxy statement/prospectus, Pioneer, Pioneer USA and MergerCo have agreed to vote the Pioneer Southwest
common units owned by them in favor of the merger proposal, including the 18,721,200 Pioneer Southwest common units currently held by Pioneer USA, which units represent 52.4% of the outstanding Pioneer Southwest common units and therefore constitute a sufficient number of Pioneer Southwest common units to approve the merger proposal at the Pioneer Southwest special meeting.
The adjournment proposal will be approved if the holders, as of the record date of the Pioneer Southwest special meeting, of a majority of the outstanding Pioneer Southwest common units vote in favor of the adjournment proposal at the Pioneer Southwest special meeting. Failures to vote, abstentions and broker non-votes (if any) will have the same effect as a vote against this proposal.
Of the Pioneer Southwest common units entitled to vote on the proposals at the Pioneer Southwest special meeting, 0.5% of such Pioneer Southwest common units are held, and eligible to be voted, by certain executive officers and directors, and their affiliates, of Pioneer or Pioneer Southwest (not including the parties to the voting agreement).
Common Units Outstanding
As of the record date, there were 35,713,700 Pioneer Southwest common units outstanding held by approximately [—] holders of record.
Voting Procedures
Voting by Pioneer Southwest Unitholders of Record
Pioneer Southwest unitholders who hold units in their own name may vote using any of the following methods:
call the toll-free telephone number listed on your proxy card and follow the recorded instructions;
go to the internet website listed on your proxy card and follow the instructions provided;
complete, sign and mail your proxy card in the postage-paid envelope; or
attend the Pioneer Southwest special meeting and vote in person.
If you have timely and properly submitted your proxy, clearly indicated your vote and have not revoked your proxy, your Pioneer Southwest common units will be voted as indicated. If you have timely and properly submitted your proxy but have not clearly indicated your vote, your Pioneer Southwest common units will be voted FOR approval of the merger proposal and the adjournment proposal.
Revocation
If you hold your Pioneer Southwest common units in your own name, you may revoke your proxy at any time prior to its exercise by:
giving written notice of revocation to the secretary of Pioneer Southwest GP at or before the special meeting;
appearing and voting in person at the special meeting;
timely submitting a later dated proxy by telephone or internet no later than 5:00 p.m. Dallas, Texas time on the day before the date of the Pioneer Southwest special meeting; or
properly completing and executing a later dated proxy and delivering it to the secretary of Pioneer Southwest GP at or before the Pioneer Southwest special meeting.
Your presence without voting at the special meeting will not automatically revoke your proxy.
Units Held in Street Name
If you hold Pioneer Southwest common units in the name of a bank, broker or other nominee, you should follow the instructions provided by your bank, broker or nominee when voting your Pioneer Southwest common units or when granting or revoking a proxy.
Absent specific instructions from you, your broker is not allowed to vote your common units on any proposal on which your broker, bank or other nominee does not have discretionary authority. The only proposals for consideration at the Pioneer Southwest special meeting are the merger proposal and the adjournment proposal, which are matters for which brokers and other nominees do not have discretionary authority to vote. To instruct your broker or other nominee how to vote, you should follow the directions that your broker or other nominee provides to you.
Please note that you may not vote your Pioneer Southwest common units held in “street name” by returning a proxy card directly to Pioneer Southwest or by voting in person at the Pioneer Southwest special meeting unless you provide a “legal proxy,” which you must obtain from your broker or other nominee. If you do not instruct your broker or other nominee on how to vote your Pioneer Southwest common units, your broker or other nominee may not vote your Pioneer Southwest common units, which will have the same effect as a vote against the merger proposal and the adjournment proposal. You should therefore provide your broker or other nominee with instructions as to how to vote your Pioneer Southwest common units.
Validity
The inspector of election will determine all questions as to the validity, form, eligibility (including time of receipt) and acceptance of proxies. Its determination will be final and binding. The Pioneer Southwest GP Board has the right to waive any irregularities or conditions as to the manner of voting. Pioneer Southwest may accept your proxy by any form of communication permitted by Delaware law so long as Pioneer Southwest is reasonably assured that the communication is authorized by you.
Solicitation of Proxies
The accompanying proxy is being solicited by Pioneer Southwest GP on behalf of the Pioneer Southwest GP Board. The expenses of such solicitation, including the expenses of preparing, printing and mailing the proxy and materials used in the solicitation, will be borne 50% by Pioneer and 50% by Pioneer Southwest.
D.F. King & Co., Inc. has been retained by Pioneer Southwest to aid in the solicitation of proxies for a fee of $6,500, a per call fee and the reimbursement of out-of-pocket expenses. In addition to the mailing of this proxy statement/prospectus, proxies may also be solicited from Pioneer Southwest unitholders by personal interview, telephone, fax or other electronic means by directors and officers of Pioneer Southwest GP and employees of Pioneer and its affiliates who provide services to Pioneer Southwest, who will not receive additional compensation for performing that service. Arrangements also will be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of proxy materials to the beneficial owners of Pioneer Southwest common units held by those persons, and Pioneer Southwest will reimburse them for any reasonable expenses that they incur.
THE MERGER
The discussion in this proxy statement/prospectus of the merger and the material terms of the merger agreement is subject to, and is qualified in its entirety by reference to, the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus and incorporated by reference herein.
General Description of the Merger
Pursuant to the merger agreement, at the effective time of the merger, MergerCo, a direct wholly-owned subsidiary of Pioneer, will merge with and into Pioneer Southwest with Pioneer Southwest surviving the merger as an indirect wholly-owned subsidiary of Pioneer, and each outstanding Pioneer Southwest common unit, other than those Pioneer Southwest common units owned by Pioneer USA, will be cancelled and converted into the right to receive 0.2325 of a share of Pioneer common stock. Applying the original exchange ratio proposed by Pioneer of 0.2234, the merger consideration originally proposed represented a 15% premium to the closing price of the Pioneer Southwest common units based on the closing prices of the Pioneer Southwest common units and shares of Pioneer common stock on May 6, 2013, the last trading day before Pioneer announced its proposal to acquire all of the Pioneer Southwest common units owned by the public. Applying the final exchange ratio agreed upon by the parties of 0.2325, the merger consideration represents a 58% premium to the closing price of the Pioneer Southwest common units based on the closing price of the Pioneer Southwest common units on May 6, 2013, and the closing price of shares of Pioneer common stock on August 8, 2013, the day before the merger agreement was signed.
If the exchange ratio would result in a Pioneer Southwest unitholder’s being entitled to receive a fraction of a share of Pioneer common stock, that Pioneer Southwest unitholder will not receive any fractional share of Pioneer common stock. In lieu of receiving any fractional share of Pioneer common stock to which any Pioneer Southwest unitholder would otherwise have been entitled, after aggregating all fractions of shares to which such unitholder would be entitled, any fractional share will be rounded up to a whole share of Pioneer common stock.
Once the merger is completed, former Pioneer Southwest unitholders who surrender their Pioneer Southwest common units in accordance with the merger agreement will be eligible, in their capacity as Pioneer stockholders, to receive dividends declared by the Pioneer Board, if any, after the effective time of the merger on Pioneer common stock. For a description of Pioneer’s dividend policy, please read “Summary — Market Prices and Dividend and Distribution Information — Pioneer’s Dividend Policy.”
Based on the 16,992,500 Pioneer Southwest common units outstanding as of September 12, 2013, and eligible to be converted into shares of Pioneer common stock pursuant to the merger agreement (which number does not include those owned by Pioneer USA), and without giving effect to rounding of fractional shares, Pioneer expects to issue approximately 3,950,757 shares of Pioneer common stock in connection with the merger. This number will represent approximately 3% of Pioneer’s outstanding shares of common stock after the merger, based on 138,864,386 shares of Pioneer common stock outstanding as of September 12, 2013.
The directors and executive officers of each of Pioneer and Pioneer Southwest GP prior to the merger are expected to continue as the directors and executive officers of Pioneer and Pioneer Southwest GP, respectively, following the merger, with the exception of the four independent directors of Pioneer Southwest GP who are expected to resign following the merger. Information about the current Pioneer directors and executive officers can be found in Pioneer’s Annual Report on Form 10-K for the year ended December 31, 2012, and Pioneer’s proxy statement for its annual meeting of stockholders in 2013. Pioneer’s Annual Report on Form 10-K is incorporated by reference into this proxy statement/prospectus. Information about the current Pioneer Southwest GP directors and executive officers can be found in Pioneer Southwest’s Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information.”
Background of the Merger
Pioneer Southwest Formed
Pioneer Southwest is a master limited partnership formed by Pioneer in June 2007 to own and acquire oil and gas properties in Texas and eight counties in the southeast region of New Mexico. Pioneer Southwest completed an initial public offering of 9,487,500 Pioneer Southwest common units on May 6, 2008. Before the initial public offering, Pioneer owned all of the general and limited partner interests in Pioneer Southwest. Prior to the initial public offering, Pioneer contributed certain oil and gas properties located in the Spraberry field to Pioneer Southwest by way of the transfer to Pioneer Southwest of all of the membership interests in an operating entity holding such oil and gas assets. The contributed assets consisted only of wellbore assignment rights and certain limited contractual rights to develop the acreage around those wellbores, referred to herein as Pioneer Southwest’s “Virtual 40s.” Specifically, the rights Pioneer Southwest received were limited to (1) only those rights that were necessary to produce hydrocarbons from the particular wellbores, but not the right to drill additional wells or to extend the horizontal reach of the wellbore interests (often referred to as wellbore interests), and (2) a contractual right to propose wells within the same 40 acre section of land, or “Virtual 40,” in which the parent wellbore is located, limited to the interval from the surface to the depth of the deepest producing perforation in the parent wellbore, and to participate in wells proposed by Pioneer, if any, in the Virtual 40; provided that, if Pioneer’s proposed well would be drilled to depths deeper than the parent wellbore, Pioneer Southwest would be required to pay the fair market value for its pro rata share of the interests associated with those greater depths.
At the time of Pioneer Southwest’s initial public offering in 2008, the strategy for Pioneer Southwest was to make accretive acquisitions of oil and gas assets so as to allow Pioneer Southwest to maintain its quarterly cash distributions and, over time, increase distributions. At the time, Pioneer expected that, depending on economic conditions over time, Pioneer Southwest could grow through:
acquisitions of producing oil and gas assets from Pioneer; and
acquisitions of producing oil and gas assets from third parties, potentially with Pioneer as a joint purchaser of producing or nonproducing properties.
The expectation was that Pioneer Southwest would have a cost of capital advantage relative to its corporate competitors and a technical advantage due to the scale of Pioneer’s operations. Pioneer Southwest planned to reserve 25% of its cash flow to make acquisitions and maintain access to a revolving credit facility. A significant part of the strategy for Pioneer Southwest was to maintain a balanced capital structure to ensure financial flexibility for acquisitions and to mitigate commodity price risk through commodity derivatives.
From the time of the initial public offering in 2008 through August 2009, Pioneer evaluated various potential acquisitions of producing properties or other assets on behalf of Pioneer Southwest, but no acquisitions were consummated during such time.
Pioneer Southwest Seeks Growth Through Drilling Program
In August 2009, the Pioneer Southwest GP Board, with the approval of the Pioneer Southwest Conflicts Committee, determined that it would be in Pioneer Southwest’s best interests to acquire oil and gas properties from Pioneer that included undeveloped properties, as well as additional interests in producing properties, and commence a drilling program to supplement Pioneer Southwest’s strategy. Up to and during that time the cost of acquiring producing properties had remained high, and Pioneer Southwest determined that a drilling program would provide better returns than a strategy involving only acquisitions. Pioneer Southwest believed the addition of a drilling program would potentially permit Pioneer Southwest to grow its cash flow and distributions.
On August 31, 2009, Pioneer Southwest completed the acquisition of certain oil and gas properties in the Spraberry field consisting of non-operating working interests in approximately 1,100 identified producing wells, and assumed net obligations associated with certain commodity price derivative positions and certain other
liabilities from Pioneer (the “2009 Acquisition”). On November 16, 2009, Pioneer Southwest completed a public offering of 3,105,000 Pioneer Southwest common units (the “2009 Offering”). Following the 2009 Offering, Pioneer owned a 62.0% interest in Pioneer Southwest, including the 0.1% general partner interest and a 61.9% limited partner interest. The successful drilling program resulting from the 2009 Acquisition and the 2009 Offering enabled Pioneer Southwest to increase its distributions per common unit in May 2011 from $0.50 to $0.51. In addition, as Pioneer Southwest’s drilling program continued, Pioneer Southwest benefitted from the knowledge gained by Pioneer in its drilling program, with Pioneer Southwest’s wells being drilled to deeper depths for better rates of return despite the greater costs.
In December 2011, Pioneer Southwest announced an increase in its drilling program to add a third drilling rig, with an expected capital budget ranging from $110 million to $120 million in 2012. The successful drilling program enabled Pioneer Southwest to increase its quarterly distribution per common unit again in May 2012 from $0.51 to $0.52.
On December 16, 2011, Pioneer Southwest completed a public offering of 2,600,000 Pioneer Southwest common units (the “2011 Offering”) for net proceeds of $72.6 million, including $76,000 contributed by Pioneer Southwest GP to maintain its 0.1% general partner interest. Concurrent with the 2011 Offering, Pioneer also sold 1.8 million Pioneer Southwest common units for $50.5 million of net proceeds. Following the 2011 Offering, Pioneer owned a 52.5% interest in Pioneer Southwest, consisting of the 0.1% general partner interest and a 52.4% limited partner interest. Pioneer Southwest used the proceeds it received from the 2011 Offering to reduce outstanding borrowings.
Consideration of Strategic Alternatives
During 2012, Pioneer and third parties in the vicinity of Pioneer Southwest’s area of operations began to focus on drilling horizontal wells rather than vertical wells. Horizontal wells, while providing higher production and investment returns than vertical wells in the same areas, are more expensive to drill, and require larger contiguous tracts of acreage. As Pioneer developed its horizontal drilling program, management of Pioneer became aware that Pioneer Southwest’s potential to fully develop its acreage as a standalone entity through horizontal drilling was uncertain due to potential capital constraints, the non-contiguous nature of some of its acreage, and some of its acreage being not of sufficient size to permit drilling of horizontal wells of sufficient length to be economic.
In early 2013, due to a combination of lower commodities prices, higher operating costs, and the effects of derivatives that were entered into in 2009, management’s financial forecasts projected that net cash flows from Pioneer Southwest’s operations would be insufficient to fund its three-rig vertical drilling program, which would require additional borrowing under Pioneer Southwest’s credit facility to maintain then current levels of distributions for the remainder of 2013. Management believed that, at then current commodities prices and costs, Pioneer Southwest could continue with its current drilling strategy while maintaining distribution levels through the end of 2014, although that would result in increased borrowing levels and reduced liquidity.
The confluence of these factors led Pioneer senior management to believe that the strategy for Pioneer Southwest should be reviewed with the Pioneer Board and the Pioneer Southwest GP Board.
In early 2013, members of Pioneer’s management discussed the possibility of a merger of Pioneer and Pioneer Southwest. After conducting a review of initial modeling and potential strengths, weaknesses, opportunities and threats presented by the possible transaction, the consensus of management was to encourage senior management of Pioneer to pursue the matter further by discussing the possible transaction with the Pioneer Board.
On February 18, 2013, members of Pioneer management contacted Robert L. Kimball, a partner at Vinson & Elkins, and engaged Vinson & Elkins as counsel for Pioneer with regard to the potential transaction.
On February 20, 2013, at a regular quarterly meeting of the Pioneer Board, Scott D. Sheffield, Chairman and Chief Executive Officer of Pioneer and Pioneer Southwest GP, led a discussion on Pioneer’s position in Pioneer Southwest and informed the Pioneer Board that Pioneer management had begun to study the potential effects of a combination of Pioneer and Pioneer Southwest. The Pioneer Board directed Pioneer management to evaluate strategic alternatives with regard to Pioneer’s ownership in Pioneer Southwest and to further consult with the Pioneer Board as the analysis progressed.
On February 28, 2013, Michael D. Wortley, a partner at Vinson & Elkins, on behalf of Pioneer, contacted Louis G. Hering of Morris Nichols and engaged Morris Nichols as Delaware counsel to Pioneer with regard to the potential transaction.
On March 7, 2013, at a regularly scheduled meeting of the Pioneer Southwest GP Board, members of Pioneer management discussed with the independent directors of Pioneer Southwest GP their belief that cash flows from operations would not be sufficient to fund Pioneer Southwest’s drilling program through 2013 without further borrowing under Pioneer Southwest’s credit facility, and that Pioneer Southwest’s potential for horizontal development would likely be limited by the non-contiguous nature of some of its acreage and the other factors outlined above. Pioneer management also discussed a possible strategic transaction with Pioneer Southwest and the independent directors of Pioneer Southwest GP were informed of the Pioneer Board’s directive to Pioneer management to evaluate strategic alternatives with respect to Pioneer’s ownership in Pioneer Southwest. The independent directors of Pioneer Southwest GP were informed that no decision had been made by the Pioneer Board regarding whether to pursue or propose any potential transaction and that any such transaction proposal would first have to be approved by the Pioneer Board. Phillip Gobe, a director of Pioneer Southwest GP, was not present at the March 7, 2013 meeting. Subsequently, Mr. Gobe was briefed on the discussions that took place at the meeting by Richard P. Dealy, Executive Vice President and Chief Financial Officer of Pioneer and Pioneer Southwest GP and a director of Pioneer Southwest GP.
On March 8, 2013, members of the Pioneer Southwest Conflicts Committee contacted the committee’s attorney, G. Michael O’Leary of Andrews Kurth, and discussed the potential transaction. The Pioneer Southwest Conflicts Committee engaged Mr. O’Leary to represent the committee with respect to the potential transaction.
During the first weekend in April 2013, Jim A. Watson, a director of Pioneer, met socially with Royce W. Mitchell, a director of Pioneer Southwest GP, whom Mr. Watson had known for many years. During his conversation with Mr. Mitchell, Mr. Mitchell indicated to Mr. Watson that Mr. Sheffield had informed the Pioneer Southwest GP Board that Pioneer was considering a proposal to acquire the outstanding common units of Pioneer Southwest that it did not already own, and Mr. Watson indicated that he had been informed of such a possibility as well. Mr. Watson and Mr. Mitchell did not discuss any terms of a possible transaction or engage in any negotiations.
On April 24, 2013, a meeting of the Pioneer Southwest GP Board was held in the Houston offices of Andrews Kurth and management of Pioneer Southwest GP presented an update of its analysis of Pioneer Southwest’s strategy and properties from the March 7 board meeting. Mr. Sheffield informed the directors that Pioneer’s management was still reviewing a possible strategic combination of Pioneer and Pioneer Southwest and that no recommendation had been made to Pioneer’s Board with regard to any possible transaction between Pioneer and Pioneer Southwest.
During the April 24th Pioneer Southwest GP Board meeting, Mr. Dealy provided an update of management’s outlook for Pioneer Southwest. As discussed at the Board’s prior meeting in March, Mr. Dealy stated that, under current commodities prices and costs, management believed Pioneer Southwest could continue its 3-rig program for the near and medium term, but that Pioneer Southwest’s financial leverage would continue to increase. Furthermore, management expected that Pioneer Southwest would be unable to continue to run a 3-rig vertical program over the long-term and fund distributions without adding significant incremental debt. Mr. Dealy also noted the trend in Pioneer Southwest’s operating area toward horizontal drilling. Mr. Dealy pointed out that
Pioneer Southwest’s leasehold acreage and wellbore assignment rights (Virtual 40s) were located in good potential resource areas and that Pioneer had identified 125 horizontal locations on Pioneer Southwest’s leasehold acreage with drillable lateral lengths in excess of 5,000 feet as having a potentially attractive value based on geologic analysis and limited drilling results by Pioneer and other industry participants to date. Mr. Dealy also pointed out, however, that, other than the aforementioned 125 horizontal locations on Pioneer Southwest’s leasehold acreage with potentially attractive value, Pioneer Southwest would likely not be able to develop significant portions of its remaining leasehold acreage (such acreage, the “stranded leasehold acreage”) and its Virtual 40s through horizontal drilling because Pioneer Southwest did not hold sufficient contiguous acreage or sufficient rights that would be needed to drill horizontal wells of sufficient length to be economic (Mr. Dealy noted that such stranded leasehold acreage and Virtual 40s that are contiguous with Pioneer leasehold acreage could potentially be developed by Pioneer if all the property was owned by Pioneer). Mr. Dealy further noted that the continuation of Pioneer Southwest’s vertical drilling program would likely reduce or eliminate the horizontal potential that may exist on Pioneer Southwest’s leasehold acreage as a result of increasing the density of vertical wells, which could result in future diminution in the value of Pioneer Southwest’s leasehold acreage if horizontal drilling locations were no longer viable.
Following the presentation, the independent members of the Pioneer Southwest GP Board (which members make up the standing Pioneer Southwest Conflicts Committee) discussed with Mr. O’Leary the presentation and the possibility of a strategic transaction between Pioneer and Pioneer Southwest.
On May 2, 2013, Andrews Kurth, on behalf of the Pioneer Southwest Conflicts Committee, contacted and engaged Richards Layton to serve as the Pioneer Southwest Conflicts Committee’s Delaware legal counsel.
On May 6, 2013, a telephonic meeting of the Pioneer Board was held and the analysis of a potential business combination with Pioneer Southwest was presented. Mr. Dealy presented management’s analysis of the potential transaction between Pioneer and Pioneer Southwest, including management’s financial analyses regarding Pioneer Southwest’s current outlook and properties. The presentation also included an update of management’s outlook for Pioneer Southwest’s net asset value,prospects, taking into account management’s recent technical work regarding the potentialPioneer’s due diligence investigation of Pioneer Southwest’s properties for horizontal development. The Pioneer Board was presented with a draft proposal letter to the Chairman of the Pioneer Southwest Conflicts Committee proposing a combination of Pioneer and Pioneer Southwest. An exchange ratio of 0.2234 of a share of Pioneer common stock per Pioneer Southwest common unit was established based on management’s analysis of Pioneer Southwest’s net asset value, taking into consideration various comparable financial and industry valuation metrics. After extensive discussion, the Pioneer Board unanimously authorized and approved the proposal and authorized Pioneer management to deliver the proposal to the Chairman of the Pioneer Southwest Conflicts Committee.Parsley;
On the evening of May 6, 2013, Messrs. Sheffield, Dealy and Kellum and Mark S. Berg, Executive Vice President and General Counsel of Pioneer and Pioneer Southwest GP, had dinner in Dallas, Texas, with the independent members of the Pioneer Southwest GP Board, before the regularly scheduled Pioneer Southwest GP Board meeting the following morning. Participants at the dinner had initial discussions about the possible mechanics and benefits of a potential business combination of Pioneer and Pioneer Southwest.
On the morning of May 7, 2013, a regularly scheduled quarterly meeting of the Pioneer Southwest GP Board was held at the offices of Pioneer Southwest in Irving, Texas. Mr. O’Leary was present at the board meeting by invitation. At the meeting, Mr. Sheffield presented Arthur L. Smith, Chairman of the Pioneer Southwest Conflicts Committee, with a written proposal from Pioneer pursuant to which Pioneer would acquire all of the outstanding Pioneer Southwest common units not already owned by Pioneer or its subsidiaries. Mr. Sheffield explained that the proposed transaction would be structured as a merger between Pioneer Southwest and a wholly-owned subsidiary of Pioneer, with a proposed exchange ratio of 0.2234 of a share of Pioneer common stock for each outstanding publicly held Pioneer Southwest common unit. Mr. Sheffield noted that, in proposing the exchange ratio, Pioneer had assumed for valuation purposes that a regular quarterly Pioneer Southwest common unit distribution of $0.52 per Pioneer Southwest common unit would be declared in July with respect to the second quarter of 2013 and that, thereafter, common unit distributions would be suspended while
the transaction was pending. Mr. Sheffield further explained that the proposal was non-binding and subject to final Pioneer Board approval and negotiation of definitive agreements. Mr. Sheffield stressed that the written proposal stated that Pioneer was interested only in acquiring the outstanding publicly held Pioneer Southwest common units and was not interested in selling the Pioneer Southwest common units held by Pioneer USA or Pioneer USA’s interest in Pioneer Southwest GP. Mr. Dealy then led a discussion of Pioneer’s valuation methodology. Mr. Dealy discussed the resulting estimated net asset value for Pioneer Southwest, the assumed value of shares of Pioneer common stock based on a 60-trading day trailing average price, and various metrics represented by the proposed exchange ratio. Mr. Dealy also noted that, at the proposed exchange ratio, based on the trading prices of the Pioneer Southwest common units and distributions since Pioneer Southwest’s IPO, no Pioneer Southwest unitholder was expected to experience a cash loss on its investment.
Following Mr. Dealy’s presentation and discussion, the Pioneer Southwest Conflicts Committee met in executive session with Mr. O’Leary to discuss a proposed draft of written resolutions relating to the delegation of authority by the Pioneer Southwest GP Board to the Pioneer Southwest Conflicts Committee. Following the executive session, the participants in the regular session of the Pioneer Southwest GP Board meeting discussed the role of, and the criteria for membership on, the Pioneer Southwest Conflicts Committee. Mr. Thomas Murphy, an in-house attorney of Pioneer, led a discussion of each of the elements required under the Pioneer Southwest partnership agreement for a director to be eligible to serve on the Pioneer Southwest Conflicts Committee. In particular, Mr. Murphy noted that eligibility requirements for a director of Pioneer Southwest GP to serve on the Pioneer Southwest Conflicts Committee are as follows: (1) the director must not (a) be a security holder, officer or employee of Pioneer Southwest GP or any of its affiliates, including Pioneer and its subsidiaries (other than holding Pioneer Southwest common units), (b) be a director of any affiliate of Pioneer Southwest GP, including Pioneer and its subsidiaries, or (c) hold an ownership interest in Pioneer Southwest or its subsidiaries (other than holding Pioneer Southwest common units); (2) the director must meet the independence standards required to serve on an audit committee of a board of directors established by the Exchange Act and the rules and regulations of the SEC and the NYSE, including the requirement under the NYSE Listed Company Manual that “no director qualifies as ‘independent’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company)” (where “listed company” and “company” are understood to include any parent or subsidiary in a consolidated group with the listed company); and (3) the director must not have any relationship that would be required to be disclosed by Pioneer Southwest GP pursuant to Item 404(a) of Regulation S-K under the Securities Act if Pioneer Southwest GP were subject to the provisions of the Exchange Act.
Following this discussion, the directors of the Pioneer Southwest GP Board, acting unanimously, affirmatively confirmed the independence of each of the members of the Pioneer Southwest Conflicts Committee, affirmatively determined, as required under the NYSE Listed Company Manual, that no member of the Pioneer Southwest Conflicts Committee has any material relationship with Pioneer Southwest, Pioneer or any of their respective subsidiaries (either directly or as a partner, shareholder or officer of an organization that has a relationship with Pioneer Southwest, Pioneer or any of their respective subsidiaries), affirmatively confirmed that each member of the Pioneer Southwest Conflicts Committee satisfies all of the criteria for membership on the Pioneer Southwest Conflicts Committee, and resolved to delegate full authority of the Pioneer Southwest GP Board to the Pioneer Southwest Conflicts Committee to, among other things:
review and evaluate the terms and conditions of the proposed merger transactions and any other arrangements or agreements related to the proposed merger transactions (“related arrangements”) or any potential alternative transaction (an “alternative transaction”) on behalf of the Pioneer Southwest GP Board, the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest;
negotiate, or delegate to any person or persons to negotiate, the terms and conditions of the proposed merger transactions and any related arrangements or any alternative transaction;
determine whether or not to recommend to the Pioneer Southwest GP Board the proposed merger transactions and any related arrangements or any alternative transaction, or definitive agreements relating thereto (which such determination would constitute “Special Approval” under the Pioneer Southwest partnership agreement);
determine whether the proposed merger transactions and any related arrangements or any alternative transaction are in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest;
make any recommendation to the Pioneer Southwest unaffiliated unitholders regarding what action, if any, should be taken by the Pioneer Southwest unaffiliated unitholders with respect to the proposed merger transactions and any related arrangements or any alternative transaction;
approve or disapprove of the proposed merger transactions and any related arrangements or any alternative transaction and any definitive agreements relating thereto on behalf of the Pioneer Southwest GP Board; and
take any other actions that the Pioneer Southwest Conflicts Committee deems necessary, appropriate or advisable and in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest with respect to the proposed merger transactions and any related arrangements or any alternative transaction.
The Pioneer Southwest GP Board granted the Pioneer Southwest Conflicts Committee the full power and authority of the Pioneer Southwest GP Board to approve or not approve the proposed merger transactions and any related arrangements or any alternative transaction and definitive agreements relating thereto without the necessity of any Pioneer Southwest GP Board approval. Additionally, the Pioneer Southwest GP Board, acting unanimously, further resolved that, if the Pioneer Southwest Conflicts Committee submitted any recommendation with respect to any of the foregoing transactions, arrangements or agreements to the Pioneer Southwest GP Board, the Pioneer Southwest GP Board would not approve the proposed merger transaction or any related arrangements or any alternative transaction or definitive documents relating thereto without first receiving the prior recommendation of such proposed merger transactions and related arrangements or any alternative transaction and definitive documents relating thereto from the Pioneer Southwest Conflicts Committee.
Later on May 7, 2013, after the closing of trading on the NYSE, Pioneer and Pioneer Southwest each issued a press release announcing Pioneer’s proposal.
On May 8, 2013, Vinson & Elkins sent a draft merger agreement and other draft transaction documents to Mr. O’Leary for review.
Subsequent to receiving the proposal from Pioneer and during the week of May 13, 2013, the Pioneer Southwest Conflicts Committee held discussions regarding potential candidates to serve as the Pioneer Southwest Conflicts Committee’s independent financial advisor.
On May 20, 2013, Messrs. Smith, Gobe and Mitchell and representatives from Andrews Kurth met with three candidates for consideration as the Pioneer Southwest Conflicts Committee’s financial advisor. The Pioneer Southwest Conflicts Committee discussed with each financial advisory firm potential conflicts of interest, its familiarity with Pioneer’s and Pioneer Southwest’s business and current circumstances, its industry expertise and experience in transactions similar to the proposed transaction, and the analytical approach it would use if it were engaged. The Pioneer Southwest Conflicts Committee then reviewed the strengths and weaknesses of each financial advisory firm candidate.
Between May 20, 2013, and June 3, 2013, Mr. Smith spoke telephonically with members of the Pioneer Southwest Conflicts Committee to discuss the financial advisory candidates. On May 23, 2013, in New York City, New York, Mr. Smith met with Mr. Gosule, and later with a senior executive of Evercore, to discuss the proposed
transaction. As a result of these discussions, the Pioneer Southwest Conflicts Committee determined to engage Evercore, based on Evercore’s qualifications, experience, reputation and knowledge of the business and affairs of Pioneer Southwest and its industry, to act as financial advisor to the Pioneer Southwest Conflicts Committee in connection with the proposal by Pioneer to acquire all of the publicly held Pioneer Southwest common units in exchange for shares of Pioneer common stock. On or about June 3, 2013, the Pioneer Southwest Conflicts Committee and Evercore agreed in principle to the terms of Evercore’s engagement, after which Evercore began preliminary due diligence and valuation work. The Pioneer Southwest Conflicts Committee and Evercore entered into a written engagement letter on June 17, 2013.
On June 6, 2013, Evercore entered into a confidentiality agreement with Pioneer. The confidentiality agreement generally required Evercore to maintain the confidentiality of any evaluation materials related to Pioneer or Pioneer Southwest that were or would be provided to Evercore by Pioneer, its affiliates or the Pioneer Southwest Conflicts Committee for Evercore’s use in the evaluation of the proposed merger. Following the execution of the confidentiality agreement, representatives of Evercore met with members of Pioneer Southwest GP management at Pioneer Southwest’s offices at which management gave a detailed presentation to Evercore related to Pioneer Southwest’s properties, including its leasehold acreage, wellbore assignment rights (Virtual 40s) and potential locations for horizontal drilling, as well as the challenges facing the development of Pioneer Southwest’s properties. At the meeting, representatives of Evercore indicated to the Pioneer Southwest GP management team that Evercore would also be requesting that Pioneer management provide projected financial information for Pioneer.
During the week of June 10, 2013, the Pioneer Southwest Conflicts Committee discussed various potential candidates to serve as the Pioneer Southwest Conflicts Committee’s independent reserve engineer. On June 10, 2013, Mr. Smith contacted a reserve engineering firm to discuss a potential engagement with the Pioneer Southwest Conflicts Committee; however, it subsequently became apparent that this reserve engineering firm had a conflict of interest that would prevent it from serving as a disinterested and independent reserve engineering firm to the Pioneer Southwest Conflicts Committee. Subsequent to this discussion, the Pioneer Southwest Conflicts Committee contacted Midland, Texas based Russell K. Hall, a reserve engineering firm with experience in analyzing properties in the Permian Basin.
On June 11, 2013, the Pioneer Southwest Conflicts Committee held a telephonic meeting with Evercore and representatives from Andrews Kurth. The meeting participants discussed the future treatment of distributions in the event that the proposed transaction did not take place, the financial information regarding Pioneer currently available to the Pioneer Southwest Conflicts Committee and its advisors, Evercore’s preliminary due diligence to date and preliminary conversations that took place between Evercore and Pioneer regarding Pioneer Southwest unitholder approval requirements.
On June 13, 2013, Mr. Dealy provided representatives of Evercore with certain projected financial information for Pioneer for the years 2013 through 2015. Evercore inquired of Mr. Dealy as to whether Pioneer would provide projected financial information for an additional two years. Mr. Dealy explained that such projections would have limited value and, in his view, would be unnecessary to Evercore’s analysis given that Pioneer’s market value was so much greater than that of Pioneer Southwest and Pioneer’s common stock was a very liquid security.
On June 18, 2013, members of the Pioneer Southwest Conflicts Committee held a telephonic meeting with representatives from Andrews Kurth. The meeting participants discussed generally the timeline, process and due diligence steps required in order to undertake a review of the proposed transaction. The Pioneer Southwest Conflicts Committee also discussed the financial and reserve information regarding Pioneer currently available to the Pioneer Southwest Conflicts Committee and its advisors, and considered that an additional two years of projections would be speculative and of little value to Evercore and the Pioneer Southwest Conflicts Committee. The Pioneer Southwest Conflicts Committee also discussed engagement of an independent reserve engineering firm to conduct a reserve audit and a reserve and volumetric analysis of Pioneer Southwest’s acreage position.
On June 18, 2013, Mr. O’Leary called Mr. Wortley to relay the message that Evercore would be able to complete its analysis utilizing the financial data previously provided by Pioneer. Mr. O’Leary and Mr. Wortley also discussed the compensation that the Pioneer Southwest GP Board would consider authorizing to be paid to the members of the Pioneer Southwest Conflicts Committee for their services relating to evaluation of the Pioneer proposal.
On June 25, 2013, Mr. Wortley called Mr. O’Leary to continue to discuss compensation for the members of the Pioneer Southwest Conflicts Committee.
On the morning of June 26, 2013, in advance of a meeting with Evercore, the Pioneer Southwest Conflicts Committee met to formally approve the engagement of Russell K. Hall to serve as the Pioneer Southwest Conflicts Committee’s independent reserve engineer based on Russell K. Hall’s experience in analyzing properties in the Permian Basin. The Pioneer Southwest Conflicts Committee discussed the fact that Russell K. Hall had entered into a confidentiality agreement on June 25, 2013, with Pioneer with terms substantially similar to Pioneer’s confidentiality agreement with Evercore. During the meeting, the Pioneer Southwest Conflicts Committee discussed the scope of the review of Pioneer Southwest’s reserves to be conducted by Russell K. Hall. The Pioneer Southwest Conflicts Committee also discussed that it would be necessary to await the completion of Russell K. Hall’s due diligence and analysis, as well as Evercore’s subsequent interpretation of such analysis, before the Pioneer Southwest Conflicts Committee would be able to fully evaluate and respond to the proposal made by Pioneer on May 7, 2013. Subsequent to the meeting, the Pioneer Southwest Conflicts Committee and Russell K. Hall entered into a written engagement letter.
Later on June 26, 2013, Messrs. Smith and Gobe met in person with representatives of Evercore and Andrews Kurth, with Messrs. Gosule and Mitchell joining by telephonic conference call. Evercore presented an overview of the recent price performance and current trading conditions of Pioneer Southwest and Pioneer as they related to the exchange ratio of 0.2234, and discussed its preliminary analysis with respect to various valuation methodologies that Evercore would use in order to evaluate the proposed transaction. Evercore also discussed the opportunity and valuation implications of developing the Wolfcamp Shale formation, and also stated that it was awaiting the analysis of Russell K. Hall in order to finalize its own analyses. Following the discussion with Evercore, the Pioneer Southwest Conflicts Committee discussed aspects of a potential counteroffer, including an increase in the exchange ratio, the committee’s desire that a vote of a majority of the Pioneer Southwest unaffiliated unitholders (i.e. “majority of the minority”) be a condition to consummation of any transaction with Pioneer, and a continuation of the regular quarterly distributions that might occur before the consummation of the proposed transaction. At this time, the Pioneer Southwest Conflicts Committee decided that it would wait for Russell K. Hall’s analysis before moving forward with any negotiations with Pioneer.
The Pioneer Southwest Conflicts Committee also finalized with the other members of the Pioneer Southwest GP Board the compensation to be paid to the members of the Pioneer Southwest Conflicts Committee. The compensation, which is in addition to the regular compensation payable to the members of the Pioneer Southwest Conflicts Committee in their capacity as directors on the Pioneer Southwest GP Board, was set as follows: (1) $20,000 per month (plus an additional $5,000 per month for the chairman) payable monthly in arrears beginning May 1, 2013, until the filing of Pioneer’s registration statement on Form S-4; (2) $7,500 per month (plus an additional $2,500 per month for the chairman) thereafter until the closing of the merger, which fees would terminate upon cessation of discussions relating to the transaction or termination of the merger agreement; and (3) if litigation continues after closing, a fee of $1,000 per hour for time actually spent in connection with such litigation.
On the same date, the Pioneer Southwest Conflicts Committee entered into a confidentiality agreement with Pioneer. The confidentiality agreement generally required the Pioneer Southwest Conflicts Committee to maintain the confidentiality of any evaluation materials related to Pioneer provided to the Pioneer Southwest Conflicts Committee by Pioneer or its affiliates for the committee’s use in the evaluation of the proposed merger.
On July 9, 2013, Mr. Dealy and other members of Pioneer management met with members of Evercore and Russell K. Hall in Pioneer’s offices to discuss matters relating to the transaction.
On the same date of July 9, 2013, the Pioneer Southwest Conflicts Committee held a meeting to discuss the agenda for its upcoming meeting that would take place in Houston on July 17, 2013.
On July 15, 2013, Mr. Wortley called Mr. O’Leary to report that, while the Pioneer Southwest Conflicts Committee had not yet provided comments on the draft merger agreement circulated on May 8, 2013, Vinson & Elkins had made certain updates to the merger agreement, including a revision to the treatment of fractional shares such that any fractional share of Pioneer common stock otherwise issuable in the merger would be rounded up to a whole share of Pioneer common stock. Mr. Wortley also noted to Mr. O’Leary that it was Pioneer’s expectation that if the merger agreement were terminated, Pioneer Southwest would declare a catch-up distribution for all quarters during which regular quarterly distributions had been suspended, and regular quarterly distributions would thereafter resume. The following day, Vinson & Elkins circulated a revised merger agreement draft to Andrews Kurth reflecting the changes discussed on the previous day.
On July 17, 2013, the Pioneer Southwest Conflicts Committee held a meeting to discuss the terms of the proposed transaction. Evercore provided an update on market conditions, noting that Pioneer Southwest’s common unit price had increased 38.2% from the date of the announcement of the proposed transaction to July 16, 2013, while a selected peer group (identified under “The Merger — Opinion of the Pioneer Southwest Conflicts Committee’s Financial Advisor — Valuation of Pioneer Southwest — Peer Group Trading Analysis”) of publicly traded exploration and production partnerships had declined by 5.3% on average during the same time period. Evercore also noted that the implied offer price of Pioneer Southwest’s common units calculated by using the exchange ratio of 0.2234 was slightly below the market price of Pioneer Southwest’s common units, signaling that investors were expecting an increase in the exchange ratio going forward. The Pioneer Southwest Conflicts Committee and its advisors considered Pioneer Southwest’s large base of retail investors, and the risk of not getting sufficient voter turnout by Pioneer Southwest unaffiliated unitholders in connection with a majority of the minority vote, which could result in the voting condition not being met due to low voter turnout. Since the risk of low voter turnout is high, the Pioneer Southwest Conflicts Committee considered that a more practical and appropriate vote requirement would be to condition the approval of the merger proposal on a special vote of the “majority of the minority” of the Pioneer Southwest unitholders actually voting at the special meeting (i.e. “majority of unaffiliated units cast condition”). The Pioneer Southwest Conflicts Committee and Evercore also discussed potential alternatives to the proposed transaction, and considered whether it would be appropriate to shop the company to prospective bidders and to make further inquiry of Pioneer with respect to other alternatives. The committee considered that Pioneer had indicated that it would not sell its Pioneer Southwest common units, sell the general partner interest or sell the operating rights with respect to Pioneer Southwest’s acreage, meaning that a prospective bidder would not be able to gain control of Pioneer Southwest’s operations. The committee concluded that prospective bidders would not be interested in purchasing the outstanding unaffiliated common units without gaining control of operations, and directed Evercore to analyze other strategic alternatives for the Pioneer Southwest Conflicts Committee to consider. The Pioneer Southwest Conflicts Committee also discussed that it was still awaiting the completion of Russell K. Hall’s analysis before moving forward with discussions with Pioneer regarding the proposed transaction.
During late July 2013, on several occasions, members of Pioneer Southwest management, including Mr. Dealy, and members of the Pioneer Southwest Conflicts Committee kept each other apprised about the Pioneer Southwest Conflicts Committee’s timing for review and response to Pioneer’s proposal, and Mr. Wortley and Mr. O’Leary communicated with each other on several occasions about similar matters.
On July 30, 2013, a telephonic meeting was held among the Pioneer Southwest Conflicts Committee, representatives of Evercore, Andrews Kurth and Russell K. Hall to discuss Russell K. Hall’s findings and analysis. Russell K. Hall indicated that it had received ready access to information regarding Pioneer Southwest and Pioneer. Russell K. Hall noted that its analysis had focused on the horizontal drilling prospects with respect to portions of the
Wolfcamp formation in the Permian Basin, and stated that the wells located in the northern portions of the Wolfcamp formation performed better than the wells in the southern portion, thus Russell K. Hall utilized higher estimated ultimate reserve numbers in its analysis than those utilized for the Wolfcamp formation by Pioneer. Russell K. Hall concluded that this divergence meant that more value could be attributed to Pioneer Southwest’s acreage than had been previously contemplated. Evercore discussed the valuation implications of Russell K. Hall’s analysis and updated the Pioneer Southwest Conflicts Committee on market conditions. Evercore next led the Pioneer Southwest Conflicts Committee through its analysis of standalone and transactional strategic alternatives. Evercore’s standalone alternative involved maintaining the status quo, which was considered in terms of the ability of Pioneer Southwest to develop the Wolfcamp formation with horizontal drilling. It was noted that the implied offer price using the exchange ratio of 0.2234 was higher than the estimated valuation of Pioneer Southwest under this scenario based on the most favorable assumptions regarding Pioneer Southwest’s ability to drill the horizontal locations, some of which would have required the approval of Pioneer. The transactional alternatives presented by Evercore included conducting a leveraged recapitalization, accelerating Pioneer Southwest’s drilling program, as well as shopping Pioneer Southwest’s unaffiliated common units to prospective third party bidders. It was noted that if Pioneer Southwest conducted a leveraged recapitalization, the additional leverage incurred by Pioneer Southwest would limit its ability to pursue growth projects. The Pioneer Southwest Conflicts Committee also considered that the estimated valuation of Pioneer Southwest under this scenario was lower than the implied valuation of Pioneer Southwest using the exchange ratio of 0.2234. Evercore then reviewed the alternative of accelerating Pioneer Southwest’s drilling program, which would have to be financed in part by decreasing the distribution to Pioneer Southwest unitholders. The Pioneer Southwest Conflicts Committee discussed the negative effect that such a decrease would have on the trading price of Pioneer Southwest’s common units and its unaffiliated unitholders. Evercore then discussed with the Pioneer Southwest Conflicts Committee the alternative of shopping Pioneer Southwest’s unaffiliated common units to potential third party bidders. Evercore and the Pioneer Southwest Conflicts Committee reaffirmed the conclusion reached at their previous meeting that this was not a feasible alternative.
On the morning of August 1, 2013, the Pioneer Southwest Conflict Committee met telephonically with representatives of Evercore and Andrews Kurth to review the financial analyses supporting various exchange ratios, Pioneer Southwest’s alternatives if it chose not to proceed with a transaction with Pioneer (noting the obstacles to transactions involving third parties or a leveraged recapitalization) and issues pertaining to a majority of the minority voting condition. At the conclusion of the meeting, the Pioneer Southwest Conflicts Committee directed Evercore to first ask Pioneer whether it would: (1) sell its general partner interest in Pioneer Southwest; (2) allow farm-outs; and (3) consider a reduction of regular quarterly distributions to finance a horizontal drilling program. Only if those responses were firmly negative would Evercore then deliver a formal counteroffer that would include an exchange ratio of 0.2500, a majority of unaffiliated votes cast condition, and a confirmation that regular quarterly distributions after the second quarter regular distribution payable in August would continue to be paid until the consummation of the proposed transaction.
On August 1, 2013, Raymond B. Strong III, Senior Managing Director of Evercore, and Mr. Dealy spoke telephonically. Mr. Strong asked Mr. Dealy whether Pioneer would: (1) sell its general partner interest in Pioneer Southwest; (2) allow farm-outs; and (3) consider a reduction of regular quarterly distributions to finance a horizontal drilling program. To the first question, Mr. Dealy stated that Pioneer would not sell the general partner interest in Pioneer Southwest. Regarding questions (2) and (3), Mr. Dealy indicated to Mr. Strong that the Pioneer Southwest Conflicts Committee should evaluate Pioneer’s proposal, but that questions (2) and (3) regarding whether to allow farm-outs and whether to consider reducing regular quarterly distributions to finance a horizontal drilling program were not part of the proposal and should be questions for the Pioneer Southwest GP Board to consider if Pioneer and the committee could not reach an agreement with respect to Pioneer’s proposal. Mr. Strong then verbally delivered the Pioneer Southwest Conflicts Committee’s counteroffer to the Pioneer proposal, which counteroffer consisted of (1) a 12% increase of the exchange ratio to 0.2500, (2) the continuation of regularly quarterly distributions on the Pioneer Southwest common units while the merger is pending, and (3) a majority of unaffiliated units cast condition (i.e., a vote of a majority of the minority of the Pioneer Southwest unitholders actually voting at the special meeting). Shortly after Mr. Strong
delivered the counteroffer orally, Andrews Kurth circulated to Vinson & Elkins a revised draft of the merger agreement reflecting the counteroffer. The revised merger agreement contained additional revisions as well, including a change to the definition of “Superior Proposal” changing the acquisition thresholds within such definition from 80% to 20%. (As summarized in “The Merger Agreement — Covenants — Acquisition Proposals,” among other effects, the thresholds within the definition of “superior proposal” determine when the Pioneer Southwest Conflicts Committee may enter into discussions with third parties in response to unsolicited offers, which would otherwise be prohibited by the merger agreement.)
On August 2, 2013, following internal discussions among Pioneer’s management and Vinson & Elkins, Mr. Dealy called Mr. Strong to respond to the Pioneer Southwest Conflicts Committee’s counteroffer. Mr. Dealy reported that, subject to final approval by the Pioneer Board, Pioneer would be willing to increase the exchange ratio from 0.2234 to 0.2279 and would agree to continued regular quarterly distributions on the Pioneer Southwest common units prior to closing, but that Pioneer would not agree to any special voting requirement. Mr. Dealy also informed Mr. Strong that there were a number of other revisions in the revised draft of the merger agreement that Pioneer objected to, and that Mr. Wortley would call representatives of Andrews Kurth to convey those objections. Later that day, Vinson & Elkins circulated a revised draft of the merger agreement to Andrews Kurth reflecting the comments delivered orally by Mr. Dealy to Mr. Strong and by Mr. Wortley to Andrews Kurth. Among the revisions in the Vinson & Elkins draft was a revision of the definition of “Superior Proposal” back to the original version with acquisition thresholds set at 80%.
On August 5, 2013, there were discussions between Messrs. Smith and Dealy about the committee potentially reducing its proposed exchange ratio to 0.2350 and Pioneer potentially raising its proposed exchange ratio to 0.2300, but no agreement was reached in this regard.
Later that day on August 5, 2013, Mr. Smith and Mr. Dealy discussed the open financial issues, and Mr. Smith informed Mr. Dealy that he would continue to discuss the proposal with the other members of the Pioneer Southwest Conflicts Committee and would respond as soon as possible. Mr. Dealy requested that Pioneer be provided with an estimate of the fees and expenses of the committee’s advisors.
Later on August 5, 2013, the Pioneer Southwest Conflicts Committee and representatives from Evercore and Andrews Kurth met to discuss Evercore’s negotiations, the financial analyses supporting various exchange ratios and its desire to have a majority of unaffiliated units cast condition. At the conclusion of the meeting, the committee determined that it would consider the current counteroffer and reconvene the following day to formalize a response. Later that day, Mr. Smith informed Mr. Dealy that the committee had scheduled a meeting for the following morning.
On August 6, 2013, the Pioneer Southwest Conflicts Committee held a meeting to discuss the proposed transaction, and concluded that Messrs. Smith and Gobe would ask Pioneer to reconsider the Pioneer Southwest Conflicts Committee’s previous counteroffer, which included a majority of unaffiliated votes cast condition and that Pioneer should reconsider its response.
Following the meeting of the Pioneer Southwest Conflicts Committee, Messrs. Smith and Gobe called Mr. Dealy and informed him that the Pioneer Southwest Conflicts Committee reiterated its proposed exchange ratio of 0.2500 and majority of unaffiliated units cast condition. Mr. Dealy informed the Pioneer Southwest Conflicts Committee members that Pioneer believed that the increased exchange ratio, as proposed by Pioneer, together with the continuation of regular quarterly distributions through closing, represented fair consideration for the Pioneer Southwest unaffiliated unitholders, especially in light of the fact that the price of shares of Pioneer common stock had increased significantly since the date on which Pioneer made its proposal, but that Pioneer might also be willing to consider voting 40% of the outstanding Pioneer Southwest units in favor of the proposed transaction, and voting the remainder of its Pioneer Southwest units in proportion to the vote of the Pioneer Southwest unaffiliated unitholders.
Later on August 6, 2013, the Pioneer Southwest Conflicts Committee met with representatives of Evercore and Andrews Kurth to discuss Pioneer’s counteroffer and the voting structure Mr. Dealy mentioned Pioneer
would consider. The Pioneer Southwest Conflicts Committee considered that the voting structure described by Mr. Dealy provided little value, if any, to the Pioneer Southwest unaffiliated unitholders, since Pioneer would continue to control the vote even in the event that a majority of the Pioneer Southwest unaffiliated unitholders voted against the transaction. At the conclusion of the meeting, the Pioneer Southwest Conflicts Committee determined that Messrs. Gosule and Mitchell would contact Mr. Dealy the following day and request a majority of unaffiliated units cast condition and an exchange ratio of 0.2400.
Following the meeting, Mr. Dealy sent an email to Messrs. Gobe and Smith, in which he stated that, upon reflection, Pioneer could not agree to vote the remainder of its Pioneer Southwest common units above 40% in proportion to the vote of the Pioneer Southwest unaffiliated unitholders.
Later on August 6, 2013, members of Vinson & Elkins, including Mr. Wortley, had a telephone call with Mr. O’Leary and other members of Andrews Kurth to discuss the timing and content of Pioneer’s registration statement on Form S-4 assuming approval of a transaction.
On August 7, 2013, Messrs. Mitchell, Gosule, Dealy and Berg further discussed the proposed terms of the transaction. Later that day, Mr. Dealy had two telephone conferences with Messrs. Smith and Gobe. During the final exchange, Mr. Dealy reported to Messrs. Smith and Gobe that Pioneer’s final proposal was the increase of the exchange ratio to 0.2325 with the continuation of regular quarterly distributions. Mr. Dealy stated that this would be Pioneer’s final offer and that there was a strong likelihood that Pioneer would be forced to withdraw its proposal if the parties could not come to an agreement. Mr. Dealy also pointed out that Pioneer Southwest unitholders were receiving a 40% to 50% premium if calculated since the date of the announcement of the proposed transaction. Furthermore, Pioneer would agree to an expansion of the definition of “Superior Proposal,” but Pioneer would not agree to a special majority of unaffiliated units cast condition in the merger agreement.
The Pioneer Southwest Conflicts Committee met the following morning on August 8, 2013, to review the various discussions on August 6th and 7th between and among Messrs. Dealy and Berg for Pioneer and Messrs. Gobe, Gosule, Mitchell and Smith for the Pioneer Southwest Conflicts Committee. The Pioneer Southwest Conflicts Committee considered the performance of Pioneer Southwest’s common unit price relative to its peers from the date of the announcement of the proposed transaction, and noted that the difference in the percentage change in equity prices between Pioneer Southwest and its peers since the date of the announcement of the proposal to August 7, 2013, was roughly 50% to 60%, indicating that Pioneer Southwest had significantly outperformed such peers during that period. The Pioneer Southwest Conflicts Committee also considered the implied offer price relative to the current trading price of Pioneer Southwest’s common units, the risks to Pioneer Southwest’s common units and unaffiliated unitholders in the event that the proposed transaction did not occur, the fact that Mr. Dealy had indicated that this would be Pioneer’s “final offer,” and each committee member’s personal experiences with the principals of Pioneer. At the conclusion of the meeting, the committee agreed to tentatively accept Mr. Dealy’s proposal, and Mr. Smith so informed Mr. Dealy. Mr. Dealy then informed Pioneer management and a meeting of the Pioneer Board was called for later that day at 6:30 p.m. Dallas, Texas time. Members of Andrews Kurth informed Vinson & Elkins that the Pioneer Southwest Conflicts Committee would meet telephonically the following day, August 9, 2013, at 2:00 p.m. Dallas, Texas time, and that a telephonic meeting of the Pioneer Southwest GP Board would be held immediately thereafter.
Later that same day on August 8, 2013, members of Vinson & Elkins and members of Andrews Kurth exchanged e-mails and telephone calls regarding, among other things, the timing and agenda of the Pioneer Southwest GP Board meeting, the status of the merger agreement and other documents, and the status of Evercore’s fairness opinion. Vinson & Elkins circulated a revised merger agreement draft to Andrews Kurth reflecting the agreed upon exchange ratio of 0.2325, the continuation of regular quarterly distributions through closing, and no majority of unaffiliated units cast condition. The revised draft also included a revision of the definition of “Superior Proposal” according to which acquisition thresholds were set at 80%, except that any offer to acquire all or substantially all of the outstanding Pioneer Southwest common units not owned by Pioneer USA would be an “Acquisition Proposal” for purposes of the definition of “Superior Proposal.” Andrews Kurth
agreed to the changes to the merger agreement proposed by Vinson & Elkins, subject to approval by the Pioneer Southwest Conflicts Committee, and Vinson & Elkins circulated a final draft of the merger agreement ready for execution.
At approximately 6:30 p.m. Dallas, Texas time on August 8, 2013, a telephonic meeting of the Pioneer Board was held to consider the proposed merger on the terms that had been agreed to earlier that day. All of the directors on the Pioneer Board were present at the meeting. Representatives of Vinson & Elkins and members of Pioneer management were also in attendance. At the meeting, Mr. Sheffield informed the Pioneer Board that representatives of Pioneer had been in discussions with the Pioneer Southwest Conflicts Committee and its advisors and had agreed in principle to the terms of a transaction, subject to required approvals. He then discussed the agreed upon financial and voting terms and the premium that the financial terms represented over the value of Pioneer’s original proposal on May 7, 2013. Mr. Dealy described the negotiations that had taken place over the prior week, and he reviewed the key terms of the proposed transaction as agreed to by the parties. The Pioneer Board discussed with management the negotiation process, transaction terms, status of the litigation, and the benefits of and reasons for the merger (as set forth under the heading “The Merger—Pioneer’s Reasons for the Merger”). Mr. Berg reviewed the key terms of the proposed merger agreement, including the terms setting forth conditions to closing, representations and warranties, covenants and deal protections. The fiduciary duties of directors in considering the transaction were then reviewed and discussed. The Pioneer Board also discussed procedural matters in connection with its approval of the proposed transactions. After these discussions and deliberation, the Pioneer Board approved the merger agreement and related documents and the issuance of shares of Pioneer common stock in connection with the proposed merger, which vote was unanimous among the directors voting on the proposal. Directors Larry R. Grillot, Stacy P. Methvin and Phoebe A. Wood, who had recently joined the Pioneer Board and who were not familiar with the background of the initial proposal, abstained from the vote.
On August 9, 2013, a telephonic meeting of the Pioneer Southwest Conflicts Committee was held for the committee’s consideration of the proposed transaction. Present at the meeting were the members of the Pioneer Southwest Conflicts Committee, members of Evercore, members of Andrews Kurth and members of Richards Layton. Prior to the meeting, the committee members had received a presentation by Richards Layton, the financial analyses from Evercore, a meeting agenda, and current draft versions and summaries of the merger agreement and voting agreement for the proposed transaction.
During the meeting, Richards Layton reviewed its presentation with the Pioneer Southwest Conflicts Committee and discussed the Pioneer Southwest Conflicts Committee’s fiduciary duties under Delaware law, the modifications of fiduciary duties that may be made under the Delaware Revised Uniform Limited Partnership Act and the standards for approval of the proposed transaction under Pioneer Southwest’s partnership agreement. Andrews Kurth led the Pioneer Southwest Conflicts Committee through a discussion of the merger agreement and voting agreement, and responded to the committee’s questions. Evercore reviewed its financial analyses with the committee and responded to the committee’s questions. Evercore also reviewed with the Pioneer Southwest Conflicts Committee the contents of the written fairness opinion Evercore was prepared to deliver, following which Evercore rendered its oral opinion to the committee (which was confirmed in writing by delivery of Evercore’s written opinion dated August 9, 2013) to the effect that, as of August 9, 2013, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in its opinion, the proposed exchange ratio was fair, from a financial point of view, to the Pioneer Southwest unaffiliated unitholders. The Pioneer Southwest Conflicts Committee discussed whether it was prepared to recommend that the Pioneer Southwest GP Board approve the proposed merger and merger agreement, including in its discussion a review of the factors and considerations set forth under the heading “The Merger — Recommendation of the Pioneer Southwest Conflicts Committee and the Pioneer Southwest GP Board and Reasons for the Merger.” At the conclusion of this discussion, the Pioneer Southwest Conflicts Committee unanimously approved the merger agreement and the merger transactions and determined that the merger agreement and the merger transactions are fair and reasonable to and in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest. This action taken by the Pioneer Southwest Conflicts Committee constituted “Special Approval” of
the merger agreement and the merger transactions under Pioneer Southwest’s partnership agreement. The Pioneer Southwest Conflicts Committee recommended that the Pioneer Southwest GP Board make the same approval and determination as the Pioneer Southwest Conflicts Committee and recommended that the Pioneer Southwest unitholders vote in favor of the merger proposal.
Immediately following the conclusion of the Pioneer Southwest Conflicts Committee meeting, a telephonic meeting of the Pioneer Southwest GP Board was held to consider the proposed transaction. The independent members of the Pioneer Southwest GP Board, members of Evercore and members of Andrews Kurth were among those present at the meeting. Messrs. Sheffield and Dealy and director Danny L. Kellum recused themselves from the meeting given their roles as both directors on the Pioneer Southwest GP Board and directors or executive officers of Pioneer. Since all of the directors present had also been present at the preceding meeting of the Pioneer Southwest Conflicts Committee, the directors determined to dispense with certain presentations and discussions that had been made at such prior meeting, including a presentation of financial analyses by Evercore, a review and discussion of the positive and negative factors relating to approval of the merger agreement and the merger transactions, and a summary by members of Andrews Kurth and Richards Layton of the terms of the merger agreement and the voting agreement, due diligence items, and the standards for approval of the merger agreement, the voting agreement and the merger transactions under Pioneer Southwest’s partnership agreement and applicable law and related duties. Mr. Strong of Evercore orally delivered Evercore’s fairness opinion to the independent directors of the Pioneer Southwest GP Board acting in such capacity, and confirmed that such members are authorized to rely on Evercore’s fairness opinion in such capacity. Following this, the Pioneer Southwest GP Board, by unanimous resolution of the members of the Pioneer Southwest GP Board in attendance, approved the merger agreement and the merger transactions, determined that the merger agreement and the merger transactions are fair and reasonable to and in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest, directed that the merger agreement and the merger transactions be submitted to the Pioneer Southwest unitholders at the Pioneer Southwest special meeting for approval and recommended that the Pioneer Southwest unitholders vote in favor of the merger proposal.
Following the meeting of the Pioneer Southwest GP Board, Pioneer and Pioneer Southwest GP management executed the definitive documents.
On August 12, 2013, Pioneer and Pioneer Southwest issued a joint press release announcing the merger agreement and the proposed merger.
Recommendation of the Pioneer Southwest Conflicts Committee and the Pioneer Southwest GP Board and Reasons for the Merger
On August 9, 2013, the Pioneer Southwest Conflicts Committee unanimously approved the merger agreement and the merger transactions and determined that the merger agreement and the merger transactions are fair and reasonable to and in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest. This action of the Pioneer Southwest Conflicts Committee constitutes “Special Approval” of the merger agreement and the merger transactions under Pioneer Southwest’s partnership agreement. The Pioneer Southwest Conflicts Committee recommended that the Pioneer Southwest GP Board make the same approval and determination as the Pioneer Southwest Conflicts Committee. Based in part on this approval and determination, Special Approval and recommendation, the Pioneer Southwest GP Board approved the merger agreement and the merger transactions (such approval being unanimous among the independent directors, with the non-independent directors of Pioneer Southwest GP recusing themselves from the consideration and vote on such approval) and determined that the merger agreement and the merger transactions are fair and reasonable to and in the best interests of the Pioneer Southwest unaffiliated unitholders and Pioneer Southwest. The Pioneer Southwest GP Board caused Pioneer Southwest GP to approve the merger agreement and the merger transaction and directed that the merger agreement and the merger transactions be submitted to the Pioneer Southwest unitholders at the Pioneer Southwest special meeting for approval. The Pioneer Southwest Conflicts Committee and the Pioneer Southwest GP Board recommend that the Pioneer Southwest unitholders vote in favor of the merger proposal at the Pioneer Southwest special meeting.
The Pioneer Southwest Conflicts Committee considered many factors in making its determination, Special Approval and recommendation. The committee consulted with its financial and legal advisors and viewed the following factors as being generally positive or favorable in coming to its determination and related recommendation:
The exchange ratio of 0.2325 of a share of Pioneer common stock for each Pioneer Southwest common unit in the merger represents a premium of approximately 19% above the $26.00 closing price of Pioneer Southwest common units on May 6, 2013, based on the $133.54 closing price of shares of Pioneer common stock on May 6, 2013 (the day before Pioneer announced its proposal to acquire all of the Pioneer Southwest common units owned by the public).
The exchange ratio is fixed and therefore the value of the merger consideration payable to the Pioneer Southwest unitholders will increase in the event that the market price of shares Pioneer common stock increases prior to the closing.
In the merger, Pioneer Southwest unitholders will receive shares of Pioneer common stock, which have substantially more liquidity than Pioneer Southwest common units because of the significantly larger average daily trading volume of shares of Pioneer common stock and because Pioneer has a broader investor base and a larger public float.
The current and prospective environment and growth prospects for Pioneer Southwest if it continues as a standalone entity is limited as compared to the asset base, financial condition and growth prospects of Pioneer following the merger, taking into consideration Pioneer Southwest’s limited ability to invest capital on acquisitions of additional leasehold acreage, development of its existing leasehold acreage or additional projects due to the limited borrowing capacity under Pioneer Southwest’s credit facility.
Under current commodities prices and costs, Pioneer Southwest could continue its 3-rig program for the near and medium term, but Pioneer Southwest’s financial leverage would continue to increase and Pioneer Southwest would be unable to continue to run a 3-rig vertical program over the long-term and fund distributions without adding significant incremental debt.
Pioneer Southwest is not likely to be able to develop its stranded leasehold acreage and its Virtual 40s through horizontal drilling due to its stranded leasehold acreage position being non-contiguous, and Pioneer would potentially be better able to develop such stranded leasehold acreage and Virtual 40s because they are contiguous with Pioneer leasehold acreage.
The continuation of Pioneer Southwest’s vertical drilling program would likely reduce or eliminate the horizontal potential that may exist on Pioneer Southwest’s leasehold acreage as a result of increasing the density of vertical wells, which could result in future diminution in the value of Pioneer Southwest’s leasehold acreage if horizontal locations were no longer available.
Pioneer has a stronger balance sheet and credit profile than Pioneer Southwest.
The merger will allow Pioneer and Pioneer Southwest to achieve synergies in the form of cost savings and other efficiencies, including reduced SEC filing requirements and a reduction in the number of public company boards and other costs associated with multiple public companies.
The merger has the greatest likelihood of success of achieving in the short term the goals outlined above, as compared to other possible alternatives, including Pioneer Southwest’s raising additional cash in either the public equity or debt capital markets or raising additional cash from joint venture partners, which alternatives are dependent on conditions in the capital markets and third parties and which the Pioneer Southwest Conflicts Committee believes would not be as favorable to Pioneer Southwest as the merger.
Evercore rendered its opinion to the Pioneer Southwest Conflicts Committee and the independent directors of the Pioneer Southwest GP Board acting in such capacity that, as of August 9, 2013, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth
| | • | | that certain Parsley stockholders holding, as of October 20, 2020, approximately 15.8% and 7.6% of the combined voting power of the issued and outstanding shares of Parsley common stock have entered into voting agreements with Pioneer obligating such stockholders to vote or cause to be voted, as applicable, all of their shares of Parsley Class A common stock and Parsley Class B common stock (with respect to any vote solicited by Parsley) and Parsley LLC units (with respect to any vote solicited by Parsley LLC) in itsfavor of the adoption of the merger agreement and against alternative transactions, as more fully described in the sections titled “Parsley Special Meeting—Voting and Support Agreement with Quantum” and “Parsley Special Meeting—Voting and Support Agreement with Bryan Sheffield”; and |
| • | | Goldman Sachs’s and Morgan Stanley’s separate oral opinions rendered to the Pioneer board on October 20, 2020 and subsequently confirmed by delivery of their respective written opinion,opinions dated the same date, to the effect that, as of the date thereof and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken as set forth in such written opinions, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to Pioneer. The full text of the written opinions of Goldman Sachs and Morgan Stanley to the Pioneer Southwest unaffiliated unitholders.board, each dated as of October 20, 2020, are attached as Annex B and Annex C, respectively, to this joint proxy statement/prospectus. For more information, see “—Opinions of Pioneer’s Financial Advisors.” |
The Pioneer Southwest Conflicts Committee believes that the merger and the exchange ratio present the best opportunity to maximize value for the Pioneer Southwest unitholders.
The Pioneer Southwest Conflicts Committee has the ability to enter into discussions with another party in response to an unsolicited written offer if the Pioneer Southwest Conflicts Committee, after consultation with its outside legal counsel and financial advisor, determines in good faith (a) that the unsolicited written offer constitutes or could reasonably be expected to result inboard also considered a superior proposal, and (b) that the failure to take that action would be inconsistent with its duties under the Pioneer Southwest partnership agreement or applicable law.
The termsvariety of the merger agreement permit the Pioneer Southwest Conflicts Committee or the Pioneer Southwest GP Board to change its recommendation of the merger without payment of a termination fee (but with payment of certain of Pioneer’s expenses) if it has determined in good faith, after consultation with its outside legal counsel and financial advisors, that the failure to make such a change in recommendation would be inconsistent with its duties under the Pioneer Southwest partnership agreement or applicable law, provided that if the change in its recommendation is made in response to an acquisition proposal, such acquisition must be a superior proposal.
The Pioneer Southwest Conflicts Committee understands and has reviewed the overall market conditions, and has determined that, in light of these factors, the timing of the potential transaction is favorable to Pioneer Southwest.
The Pioneer Southwest Conflicts Committee has reviewed with its financial and legal advisors the financialrisks and other
terms ofpotentially negative factors concerning the merger agreement and
the related
documents,transactions contemplated thereby. These factors included:the possibility that the mergers may not be completed or that completion may be unduly delayed for reasons beyond the control of Pioneer or Parsley, including the conditionsfailure to the parties’ respective obligations and the termination provisions.
The Pioneer Southwest Conflicts Committee is familiar with, and understands, the businesses, assets, liabilities, results of operations, financial conditions and competitive positions and prospects of Pioneer Southwest and Pioneer.
The merger will eliminate potential conflicts of interest between the Pioneer Southwest unaffiliated unitholders and Pioneer and for persons holding executive positions with both Pioneer Southwest and Pioneer.
The Pioneer Conflicts Committee retained an independent reserve engineering advisor to evaluate the proved and non-proved reserves and undeveloped acreage.
Pioneer and Pioneer Southwest each have a strong commitment to complete the merger on the anticipated schedule.
The results of the due diligence investigations of Pioneer by legal counsel to the Pioneer Southwest Conflicts Committee and the Pioneer Southwest Conflicts Committee’s financial advisor were consistent with the expectationsobtain stockholder approval of the Pioneer Southwest GP Board with respect tostock issuance proposal or the strategic and financial benefits of the merger.Parsley merger proposal;
The terms and conditions ofthat the exchange ratio in the merger were determined through arm’s-length negotiations between Pioneer and the Pioneer Southwest Conflicts Committee and their respective representatives and advisors.
The Pioneer Southwest Conflicts Committee retained independent financial and legal advisors with knowledge and experience with respect to public company merger and acquisition transactions, Pioneer’s and Pioneer Southwest’s industry generally, and Pioneer and Pioneer Southwest particularly, as well as substantial experience advising publicly traded limited partnerships and other companies with respect to transactions similar to the proposed transaction.
The Pioneer Southwest Conflicts Committee considered the following factors to be generally negative or unfavorable in making its determination, Special Approval and recommendation:
The exchange ratio isagreement provides for a fixed and there is a possibility that the pricenumber of shares of Pioneer common stock, could decline relative toand, as such, Pioneer stockholders cannot be certain at the time of the Pioneer Southwest common unit price priorspecial meeting of the market value of the merger consideration to closing, reducingbe paid, and the premium available topossibility that Pioneer Southwest unitholders.
