-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ex8FX8xHH6WWkuA7Cpa6B9NvjSAgJwnA0qeSE4jzKt6rs5haWpH1gsUI7MdJso7D ypr+GAgXdXlaNmqA4g3Wew== 0001038357-98-000019.txt : 19981116 0001038357-98-000019.hdr.sgml : 19981116 ACCESSION NUMBER: 0001038357-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER NATURAL RESOURCES CO CENTRAL INDEX KEY: 0001038357 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752702753 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13245 FILM NUMBER: 98748471 BUSINESS ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 9724449001 MAIL ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q / x / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to ________ Commission File No. 1-13245 PIONEER NATURAL RESOURCES COMPANY (Exact name of Registrant as specified in its charter) Delaware 75-2702753 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039 (Address of principal executive offices) (Zip code) Registrant's Telephone Number, including area code : (972) 444-9001 Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / x / No / / Number of shares of Common Stock outstanding as of October 31, 1998................................................ 100,217,893 PIONEER NATURAL RESOURCES COMPANY TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 .............................................3 Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 1998 and 1997.....................................................5 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1998...................................6 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 1998 and 1997..........................7 Notes to Consolidated Financial Statements..........................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................18 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................29 Item 5. Other Information..................................................29 Item 6. Exhibits and Reports on Form 8-K...................................29 Signatures.........................................................30 Exhibit Index......................................................31 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) September 30, December 31, 1998 1997 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 70,285 $ 71,713 Restricted cash 25,020 1,695 Accounts receivable: Trade, net 42,640 75,432 Oil and gas sales 56,751 116,500 Inventories 17,460 13,576 Deferred income taxes 16,100 16,900 Other current assets 10,238 12,372 ---------- ---------- Total current assets 238,494 308,188 ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties 3,899,703 3,575,971 Unproved properties 464,750 545,074 Accumulated depletion, depreciation and amortization (847,496) (605,203) ---------- ---------- 3,516,957 3,515,842 ---------- ---------- Deferred income taxes 102,200 - Other property and equipment, net 50,694 44,017 Other assets, net 84,281 78,543 ---------- ---------- $ 3,992,626 $ 3,946,590 ========== ========== The financial information included as of September 30, 1998 has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 3 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except share data) September 30, December 31, 1998 1997 ------------ ----------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,712 $ 5,791 Undistributed unit purchases - 1,695 Accounts payable: Trade 108,088 176,697 Affiliates 5,032 9,994 Other current liabilities 112,501 67,375 ---------- ---------- Total current liabilities 227,333 261,552 ---------- ---------- Long-term debt, less current maturities 2,164,259 1,943,718 Other noncurrent liabilities 176,595 180,275 Deferred income taxes - 12,200 Stockholders' equity: Preferred stock, $.01 par value; 100,000,000 shares authorized; one share issued and outstanding at September 30, 1998 and December 31, 1997, respectively - - Common stock, $.01 par value; 500,000,000 shares authorized; 100,755,293 and 101,037,562 shares issued at September 30, 1998 and December 31, 1997, respectively 1,007 1,010 Additional paid-in capital 2,350,996 2,359,992 Treasury stock, at cost; 500,700 and 591 shares at September 30, 1998 and December 31, 1997, respectively (9,911) (21) Unearned compensation (10,101) (16,196) Retained deficit (909,574) (795,940) Accumulated other comprehensive income: Cumulative translation adjustment 2,022 - ---------- ---------- Total stockholders' equity 1,424,439 1,548,845 Commitments and contingencies (Note E) ---------- ---------- $ 3,992,626 $ 3,946,590 ========== ========== The financial information included as of September 30, 1998 has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 4 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) (Unaudited) Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenues: Oil and gas $ 173,462 $ 150,354 $ 554,478 $ 348,980 Interest and other 5,868 816 8,191 3,649 Gain (loss) on disposition of assets, net (461) 108 (136) 2,745 --------- --------- --------- --------- 178,869 151,278 562,533 355,374 --------- --------- --------- --------- Costs and expenses: Oil and gas production 57,753 42,003 169,508 91,674 Depletion, depreciation and amortization 87,150 67,388 247,208 126,897 Exploration and abandonments 35,627 15,513 86,149 34,310 General and administrative 19,236 16,779 56,648 31,769 Reorganization 609 - 21,158 - Interest 41,822 24,110 122,317 44,264 Other 4,874 2,533 18,500 2,982 --------- --------- --------- --------- 247,071 168,326 721,488 331,896 --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item (68,202) (17,048) (158,955) 23,478 Income tax benefit (provision) 24,300 6,000 55,400 (8,500) --------- --------- --------- --------- Income (loss) before extraordinary item (43,902) (11,048) (103,555) 14,978 Extraordinary item - loss on early extinguishment of debt, net of tax - (1,518) - (1,518) --------- --------- --------- --------- Net income (loss) (43,902) (12,566) (103,555) 13,460 --------- --------- --------- --------- Other comprehensive income: Translation adjustment 4,784 - 2,022 - --------- --------- --------- --------- Comprehensive income (loss) $ (39,118) $ (12,566) $ (101,533) $ 13,460 ========= ========= ========= ========= Net income (loss) per share: Basic: Income (loss) before extraordinary item $ (.44) $ (.18) $ (1.04) $ .34 Extraordinary item - (.03) - (.03) --------- --------- --------- --------- Net income (loss) $ (.44) $ (.21) $ (1.04) $ .31 ========= ========= ========= ========= Diluted: Income (loss) before extraordinary item $ (.44) $ (.18) $ (1.04) $ .34 Extraordinary item - (.03) - (.03) --------- --------- --------- --------- Net income (loss) $ (.44) $ (.21) $ (1.04) $ .31 ========= ========= ========= ========= Dividends declared per share $ .05 $ .05 $ .10 $ .10 ========= ========= ========= ========= Weighted average shares outstanding 99,939 59,200 99,982 43,180 ========== ========== ========== ==========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 5 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share data) (Unaudited) Common Accumulated Stock Additional Other Total Shares Common Paid-in Treasury Unearned Retained Comprehensive Stockholders' Outstanding Stock Capital Stock Compensation Deficit Income Equity ----------- ------- ---------- -------- ------------ --------- ------------- ------------ Balance at January 1, 1998 101,036,971 $ 1,010 $2,359,992 $ (21) $ (16,196) $(795,940) $ - $ 1,548,845 Common stock issued: Adjustment to acquisition of Chauvco Resources, Ltd. (401,755) (4) (11,095) - - - - (11,099) Tax provision related to restricted stock - - (600) - - - - (600) Purchase of treasury stock (500,109) - - (9,890) - - - (9,890) Shares awarded 119,486 1 2,699 - (881) - - 1,819 Amortization of unearned compensation - - - - 6,976 - - 6,976 Dividends ($.10 per share) - - - - - (10,079) - (10,079) Net loss - - - - - (103,555) - (103,555) Other comprehensive income: Translation adjustment - - - - - - 2,022 2,022 ----------- ------ --------- ------- --------- -------- ---------- ----------- Balance at September 30, 1998 100,254,593 $ 1,007 $2,350,996 $ (9,911) $ (10,101) $(909,574) $ 2,022 $ 1,424,439 =========== ====== ========= ======= ========= ======== ========== ===========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 6 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (43,902) $ (12,566) $(103,555) $ 13,460 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization 87,150 67,388 247,208 126,897 Exploration expenses, including dry holes 29,832 11,390 65,477 25,581 Deferred income taxes (24,600) (4,800) (53,000) 6,600 (Gain) loss on disposition of assets, net 461 (108) 136 (2,745) Other noncash items 12,232 10,720 38,045 12,900 Change in operating assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable 59,383 (3,032) 96,685 8,992 Inventories 731 729 874 (1,122) Other current assets 236 (544) (1,093) 136 Accounts payable (2,198) (4,074) (26,921) (975) Accrued income taxes and other current liabilities (13,237) (10,628) 2,652 (10,656) -------- -------- -------- -------- Net cash provided by operating activities 106,088 54,475 266,508 179,068 -------- -------- -------- -------- Cash flows from investing activities: Payment for acquisition, net of cash acquired - (519) (424) (519) Proceeds from disposition of assets 3,560 560 19,682 12,838 Additions to oil and gas properties (97,866) (81,300) (427,938) (246,574) Other property additions, net (5,985) (4,902) (23,390) (9,878) -------- -------- -------- -------- Net cash used in investing activities (100,291) (86,161) (432,070) (244,133) -------- -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt 96,709 63,353 922,910 104,896 Principal payments on long-term debt (63,277) (5,477) (694,502) (18,279) Payments of other noncurrent liabilities (4,686) (1,775) (37,001) (2,482) Deferred loan fees/issuance costs (1,765) - (7,199) - Dividends (5,023) (3,722) (10,079) (5,476) Purchase of treasury stock (3,112) - (9,890) (2,932) Exercise of long-term incentive plan stock options - 10,095 - 11,258 -------- -------- -------- -------- Net cash provided by financing activities 18,846 62,474 164,239 86,985 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 24,643 30,788 (1,323) 21,920 Effect of exchange rate changes on cash and cash equivalents (51) - (105) - Cash and cash equivalents, beginning of period 45,693 9,843 71,713 18,711 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 70,285 $ 40,631 $ 70,285 $ 40,631 ======== ======== ======== ========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 7 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (Unaudited) NOTE A. Organization and Nature of Operations Pioneer Natural Resources Company (the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange. The Company was formed by the merger of Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa") on August 7, 1997. The Company was significantly expanded by the subsequent acquisition of the Canadian and Argentine oil and gas business of Chauvco Resources Ltd ("Chauvco"), a publicly traded independent oil and gas company based in Calgary, Canada, on December 18, 1997. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located principally in the MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the United States, and in Canada and Argentina. In accordance with the provisions of Accounting Principles Board Opinion No. 16, "Business Combinations", both the merger with Mesa and the acquisition of Chauvco have been accounted for as purchases by the Company (formerly Parker & Parsley). As a result, the historical financial statements for the Company are those of Parker & Parsley prior to August 1997; for the period from August 1997 through December 31, 1997, the historical financial statements for the Company reflect the above described merger of Parker & Parsley and Mesa; and, as of December 31, 1997, the financial statements for the Company have included the addition of the acquired assets and liabilities of Chauvco. NOTE B. Basis of Presentation In the opinion of management, the unaudited consolidated financial statements of the Company as of September 30, 1998 and for the three and nine months ended September 30, 1998 and 1997 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's 1997 Annual Report on Form 10-K. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which includes, but is not limited to, unrealized gains for marketable securities and future contracts, foreign currency translation adjustments and minimum pension liability adjustments. The accompanying consolidated financial statements for the Company reflect other comprehensive income consisting of foreign currency translation adjustments. NOTE C. Pending Asset Divestiture In September 1998, the Company signed a purchase and sale agreement (the "Agreement") to sell certain non-strategic oil and gas properties for estimated proceeds of $410 million. The Agreement will be effective October 1, 1998 and is anticipated to close by December 31, 1998. The consummation of this Agreement is primarily dependent upon the buyer's successful ability to finance the purchase as well as certain other contingencies defined in the Agreement. As a result, there can be no assurance that the divestiture of any or all of these properties will be completed or that the estimated proceeds will be realized in accordance 8 with the Agreement. The buyer has paid a performance deposit of $25 million to the Company. Such funds have been classified as restricted cash in the accompanying Consolidated Balance Sheet as of September 30, 1998. When the Agreement is consummated, the proceeds will be utilized to reduce the Company's outstanding bank indebtedness. NOTE D. Senior Note Issuances During January 1998, the Company completed the issuance of the following two series of senior notes for total net proceeds of $593 million. The proceeds were used primarily to repay the Company's bank indebtedness. 6.5% senior notes due 2008. $350 million aggregate principal amount 6.5% senior notes dated January 13, 1998, due January 15, 2008. Interest on the 6.5% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. 7.2% senior notes due 2028. $250 million aggregate principal amount 7.2% senior notes dated January 13, 1998, due July 15, 2028. Interest on the 7.2% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. Both senior note issuances are governed by an Indenture between the Company and The Bank of New York dated January 13, 1998. Both senior note issuances are general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. NOTE E. Commitments and Contingencies Legal Actions. The Company is party to various legal actions incidental to its business, including, but not limited to, the proceedings described below. The majority of these lawsuits primarily involve claims for damages arising from oil and gas leases and ownership interest disputes. The Company believes that the ultimate disposition of these legal actions will not have a material adverse effect on the Company's consolidated financial position, liquidity, capital resources or future results of operations. The Company will continue to evaluate its litigation matters on a quarter-by-quarter basis and will adjust its litigation reserve as appropriate to reflect the then current status of its litigation. The Company believes that the costs for compliance with environmental laws and regulations have not and will not have a material effect on the Company's financial position or results of operations. Masterson In February 1992, the current lessors of an oil and gas lease (the "Gas Lease") dated April 30, 1955, between R.B. Masterson et al., as lessor, and Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under the Gas Lease. Under the agreements with CIG, the Company, as successor to Mesa, has an entitlement to gas produced from the Gas Lease. In August 1992, CIG filed a third-party complaint against the Company for any such royalty underpayment which may be allocable to the Company. Plaintiffs alleged that the underpayment was the result of CIG's use of an improper gas sales price upon which to calculate royalties and that the proper price should have been determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment to the Gas Lease. The plaintiffs also sought a declaration by the court as to the proper price to be used for calculating future royalties. The plaintiffs alleged royalty underpayments of approximately $500 million (including interest at 10%) dating from July 1, 1967. In March 1995, the court made certain pretrial rulings that eliminated approximately $400 million of the plaintiff's claims (which related to periods prior to October 1, 1989), but which also reduced a number of the Company's defenses. The Company and CIG filed stipulations with the court whereby the Company would have been liable for between 50% and 60%, depending on the time period covered, of an adverse judgment against CIG for post-February 1988 underpayments of royalties. On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned its verdict. Among its findings, the jury determined that CIG had underpaid royalties for the period after September 30, 1989, in the amount of 9 approximately $140,000. Although the plaintiffs argued that the "favored-nations" clause entitled them to be paid for all of their gas at the highest price voluntarily paid by CIG to any other lessor, the jury determined that the plaintiffs were estopped from claiming that the "favored-nations" clause provides for other than a pricing-scheme to pricing-scheme comparison. In light of this determination, and the plaintiff's stipulation that a pricing-scheme to pricing-scheme comparison would not result in any "trigger prices" or damages, defendants asked the court for a judgment that plaintiffs take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs recover no monetary damages. The plaintiffs filed a motion for new trial on June 22, 1995. The court, on July 18, 1997, denied plaintiffs' motion. The plaintiffs have appealed to the Fifth Circuit Court of Appeals, where oral arguments have been scheduled for December 4, 1998. A decision by the Fifth Circuit Court could be announced as early as the first quarter of 1999. On June 7, 1996, the plaintiffs filed a separate suit against CIG and the Company in state court in Amarillo, Texas, similarly claiming underpayment of royalties under the "favored-nations" clause, but based upon the above-described pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The plaintiffs also claim underpayment of royalties since June 7, 1995, under the "favored-nations" clause based upon either the pricing-scheme to pricing-scheme method or their previously alleged higher price method. The Company believes it has several defenses to this action and intends to contest it vigorously. The Company has not yet determined the amount of damages, if any, that would be payable if such action was determined adversely to the Company. The federal court in the above-referenced first suit issued an order on July 29, 1996, which stayed the state suit pending the resolution of the first suit. Based on the jury verdict and final judgment, the Company does not currently expect the ultimate resolution of either of these lawsuits to have a material adverse effect on its financial position or results of operations. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on a Federal Energy Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa collected the Kansas ad valorem tax in addition to the otherwise maximum lawful price. The FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC failed to provide a reasoned basis for its findings and remanded the case to the FERC for further consideration. On December 1, 1993, the FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. The FERC clarified the effective date of its decision by an order dated May 18, 1994. The order clarified that the effective date applies to tax bills rendered after June 28, 1988, not sales made on or after that date. Numerous parties filed appeals on the FERC's action in the D.C. Circuit. Various natural gas producers challenged the FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in any event, have been applied prospectively. Other parties challenged the FERC's orders on the grounds that the FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996, which holds that producers must make refunds of all Kansas ad valorem tax collected with respect to production since October 4, 1983 as opposed to June 28, 1988. Petitions for rehearing were denied on November 6, 1996. Various natural gas producers subsequently filed a petition for writ of certiori with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by the FERC). Williams Natural Gas Company filed a cross-petition for certiori seeking to impose refund liability back to December 1, 1978. Both petitions were denied on May 12, 1997. The Company and other producers filed petitions for adjustment with the FERC on June 24, 1997. The Company is seeking waiver or set-off from FERC with respect to that portion of the refund associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the higher prices collected, and (iii) interest for all periods. On September 10, 1997, FERC denied this request, and on October 10, 1997, the Company and other producers filed a request for rehearing. Pipelines were given until November 10, 10 1997 to file claims on refunds sought from producers and refunds totaling approximately $30 million were made against the Company. The Company is unable at this time to predict the final outcome of this matter or the amount, if any, that will ultimately be refunded. As of September 30, 1998, the Company has paid $1.4 million and has set aside $29.3 million, including accrued interest, in an escrow account with a similar provision for such litigation recorded in the accompanying Consolidated Balance Sheet as of September 30, 1998. NOTE F. Commodity Hedge Derivatives The Company utilizes various commodity swap and option contracts to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Crude oil. All material purchase contracts governing the Company's oil production are tied directly or indirectly to NYMEX prices. The following table sets forth the Company's outstanding oil hedge contracts as of September 30, 1998. Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ------------ ------------ ------------ ------------ ------------ Daily oil production: 1998 - Swap Contracts Volume (Bbl) 8,900 8,900 Price per Bbl $ 19.74 $ 19.74 1998 - Collar Options Volume (Bbl) 2,000 2,000 Price per Bbl $18.70-20.65 $18.70-20.65 1998 - Long Put Options Volume (Bbl) 2,000 2,000 Price per Bbl $ 18.40 $ 18.40 1999 - Swap Contracts* Volume (Bbl) 12,500 12,500 12,500 12,500 12,500 Price per Bbl $ 17.86 $ 17.86 $ 17.86 $ 17.86 $ 17.86 1999 - Collar Options** Volume (Bbl) 5,000 5,000 5,000 5,000 5,000 Price per Bbl $17.00-19.05 $17.00-19.05 $17.00-19.05 $17.00-19.05 $17.00-19.05
* The counterparties to the 1999 Swap Contracts have the contractual right to extend 7,000 barrels per day through the year 2000 at a price per barrel of $17.79. ** Concurrent with the Company's purchase of the 1999 Collar Options, the Company sold 1999 put options to the counterparties for a volume of 5,000 Bbls per day at a price per barrel of $14.50. Consequently, there is no effective minimum price to be realized from the collar options if the NYMEX price falls below $14.50. The counterparties to the 1999 Collar Options have the contractual right to extend the collar options and the associated put options at the same prices through the year 2000. The Company reports average oil prices per Bbl including the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The following table sets forth the Company's oil prices, both realized (excluding hedge results) and reported, and net effects of settlements of oil price hedges to revenue: Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- Average price reported per Bbl $ 12.97 $ 17.93 $ 13.34 $ 18.70 Average price realized per Bbl $ 11.80 $ 18.03 $ 12.30 $ 19.37 Addition/(reduction) to revenue (in millions) $ 6.2 $ (.4) $ 17.2 $ (6.3) Natural Gas. The Company employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The following table 11 sets forth the Company's outstanding gas hedge contracts as of September 30, 1998. Prices included herein represent the Company's weighted average index price per MMBtu and, as an additional point of reference, the weighted average price for the portion of the Company's gas which is hedged based on NYMEX. Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ---------- ---------- ---------- ---------- ---------- Daily oil production: 1998 - Swap Contracts Volume (Mcf) 51,848 51,848 Index price per MMBtu $ 2.00 $ 2.00 NYMEX price per MMBtu $ 2.32 $ 2.32 1998 - Collar Options* Volume (Mcf) 11,489 11,489 Index price per MMBtu $1.64-1.87 $1.64-1.87 1998 - Long Put Options Volume (Mcf) 254,402 254,402 Index price per MMBtu $ 1.91 $ 1.91 NYMEX price per MMBtu $ 2.32 $ 2.32 1999 - Swap Contracts** Volume (Mcf) 127,500 149,945 145,000 123,451 136,486 Index price per MMBtu $ 2.21 $ 2.23 $ 2.24 $ 2.27 $ 2.24 NYMEX price per MMBtu $ 2.39 $ 2.39 $ 2.39 $ 2.39 $ 2.39 1999 - Collar Contracts*** Volume (Mcf) 179,827 179,827 179,827 170,991 177,600 Index price per MMBtu $2.06-2.65 $2.06-2.60 $2.06-2.60 $2.08-2.65 $2.07-2.63 NYMEX price per MMBtu $ 2.39 $ 2.39 $ 2.39 $ 2.39 $ 2.39 2000 - Swap Contracts** Volume (Mcf) 35,000 35,000 35,000 35,000 35,000 Index price per MMBtu $ 2.41 $ 2.41 $ 2.41 $ 2.41 $ 2.41 2000 - Collar Options**** Volume (Mcf) 74,000 74,000 74,000 71,348 73,534 Index price per MMBtu $2.17-2.85 $2.17-2.85 $2.17-2.85 $2.19-2.88 $2.18-2.86
* Concurrent with the Company's purchase of the 1998 Collar Options, the Company sold 1998 put options to the counterparties for a volume of 11,489 Mcf per day at an index price of $1.35 per MMBtu. Consequently, there is no effective minimum price to be realized from the collar options if the index price falls below $1.35. ** The counterparties to the 1999 and 2000 Swap Contracts have the contractual right to extend 35,000 Mcf per day for one additional year at prices of $2.40 and $2.41 per Mcf, respectively. *** Concurrent with the Company's purchase of certain of the 1999 Collar Options, the Company sold 1999 put options to the counterparties for 125,100 Mcf per day at an average index price of $1.82 per MMBtu. Consequently, there is no effective minimum price to be realized from an equal volume of the 1999 Collar Options if the index price falls below $1.82. 65,000 Mcf per day of the 1999 Collar Options and associated put options sold are extendable at the option of the counterparties for a period of one year at average per Mcf prices of $2.18-$2.79 for the collar options and $1.88 for the put options. **** 70,000 Mcf per day of the 2000 Collar Options are extendable for one year at prices of $2.19-$2.89. Concurrent with the Company's purchase of the 2000 Collar Options, the Company sold 2000 put options to the counterparties for an equal volume at an index price of $1.87 per MMBtu. Consequently, there is no minimum price to be realized from the collar options if the index price falls below $1.87. 70,000 Mcf per day of the put options are extendable for one year at a price of $1.89 per MMBtu. The Company reports average gas prices per Mcf including the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The following table sets forth the Company's gas prices, both realized (excluding hedge results) and reported, and net effects of settlements of gas price hedges to revenue: 12 Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- Average price reported per Mcf $ 1.73 $ 2.16 $ 1.87 $ 2.21 Average price realized per Mcf $ 1.68 $ 2.22 $ 1.83 $ 2.32 Addition/(reduction) to revenue (in millions) $ 2.5 $ (1.8) $ 4.8 $ (7.9) NOTE G. Other Derivatives During 1996, Mesa entered into Btu swap agreements covering 13,036 MMBtu per day from January 1, 1997 through December 31, 2004. Under the terms of these agreements, the Company will receive a premium of $.52 per MMBtu over market natural gas prices from January 1, 1997 through December 31, 1998. Following this two-year period, the Company will receive 10% of the NYMEX oil price for the volumes covered for a six-year period beginning January 1, 1999 and ending December 31, 2004. As these derivative contracts do not qualify as hedges, other expenses in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 1998 include a $3.0 million noncash pre-tax mark-to-market adjustment to the carrying value of the Btu swap agreements. Other expenses in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 1998 also include mark-to-market adjustments totaling $14.5 million relating to certain foreign currency derivative contracts acquired from Chauvco that do not qualify for hedge accounting treatment. These contracts will continue to be marked-to-market at the end of each reporting period during their respective lives and the effects on the Company's results of operations in future periods could be significant. NOTE H. Reorganization In February 1998, the Company announced its plans to sell certain nonstrategic fields and its intentions to reorganize its operations by combining its six domestic operating regions into three geographic regions: the Permian Basin region, the MidContinent region and the onshore and offshore Gulf Coast region. In addition, most of the Company's administrative services are being relocated from Midland, Texas to Dallas, Texas. Shortly after the announcement, the Company formally notified the employees affected by the reorganization whether they were to be severed or relocated. During the nine months ended September 30, 1998, the Company has recognized severance, relocation, lease termination and other costs of approximately $21.2 million relating to this reorganization. NOTE I. Pioneer USA Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned subsidiary of the Company that has fully and unconditionally guaranteed certain debt securities of the Company. The Company has not prepared financial statements and related disclosures for Pioneer USA under separate cover because management of the Company has determined that such information is not material to investors. In accordance with practices accepted by the U.S. Securities and Exchange Commission ("SEC"), the Company has prepared Consolidating Financial Statements in order to quantify the assets of Pioneer USA as a subsidiary guarantor. The following Consolidating Balance Sheet, Consolidating Statement of Operations and Consolidating Statement of Cash Flows present, on a stand-alone basis, financial information for Pioneer Natural Resources Company as the Parent, Pioneer USA and the non-guarantor subsidiaries of the Company. All investments in subsidiaries are presented using the equity method and are eliminated in consolidation. Pioneer USA is not restricted from making distributions to the Company. Pioneer USA's guarantees of the Company's debt securities were executed as a result of the merger with Mesa in August 1997. Consequently, the Consolidating Statements of Operations and Consolidating Statement of Cash Flows for the nine months ended September 30, 1997 have not been presented. 13 CONSOLIDATING BALANCE SHEET As of September 30, 1998 (in thousands) (Unaudited) ASSETS Pioneer Natural Resources Non- Company Pioneer Guarantor The (Parent) USA Subsidiaries Eliminations Company ---------- ----------- ------------ ------------ ---------- Current assets: Cash and cash equivalents $ 17 $ 55,963 $ 14,305 $ - $ 70,285 Restricted cash - 25,020 - - 25,020 Accounts receivable: Trade, net 55 33,928 8,657 - 42,640 Affiliates - 10,382 (10,382) - - Oil and gas sales - 34,720 22,031 - 56,751 Intercompany notes receivable 2,233,305 (1,808,105) (425,200) - - Inventories - 10,163 7,297 - 17,460 Deferred income taxes 14,900 - 1,200 - 16,100 Other current assets 83 8,203 1,952 - 10,238 --------- ---------- ----------- --------- Total current assets 2,248,360 (1,629,726) (380,140) 238,494 --------- ---------- ----------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties - 2,833,297 1,066,406 - 3,899,703 Unproved properties - 121,585 343,165 - 464,750 Accumulated depletion, depreciation and amortization - (699,528) (147,968) - (847,496) --------- ---------- ----------- --------- - 2,255,354 1,261,603 3,516,957 --------- --------- ----------- --------- Deferred income taxes 242,815 - (140,615) - 102,200 Other property and equipment, net - 33,326 17,368 - 50,694 Other assets, net 10,748 35,288 38,245 - 84,281 Investment in subsidiaries 625,269 139,421 (940) (763,750) - --------- ---------- ----------- --------- $3,127,192 $ 833,663 $ 795,521 $3,992,626 ========= ========== =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ - $ 608 $ 1,104 $ - $ 1,712 Accounts payable: Trade 315 86,415 21,358 - 108,088 Affiliates 84 5,193 (245) - 5,032 Other current liabilities 15,053 84,928 12,520 - 112,501 --------- ---------- ----------- --------- Total current liabilities 15,452 177,144 34,737 227,333 --------- ---------- ----------- --------- Long-term debt, less current maturities 1,884,127 24 280,108 - 2,164,259 Other noncurrent liabilities - 145,051 31,544 - 176,595 Deferred income taxes (48) - 48 - - Stockholders' equity: Partners' Capital - - 22 (22) - Common stock 933 - 75 (1) 1,007 Additional paid-in capital 2,146,213 2,032,175 566,102 (2,393,494) 2,350,996 Treasury stock, at cost (9,911) - - - (9,911) Unearned compensation - (10,101) - - (10,101) Retained deficit (909,574) (1,510,630) (119,137) 1,629,767 (909,574) Accumulated other comprehensive income: Cumulative translation adjustment - - 2,022 - 2,022 --------- ---------- ----------- --------- Total stockholders' equity 1,227,661 511,444 449,084 1,424,439 Commitments and contingencies $3,127,192 $ 833,663 $ 795,521 $3,992,626 ========= ========== =========== =========
14 CONSOLIDATING BALANCE SHEET As of December 31, 1997 (in thousands) ASSETS Pioneer Natural Resources Non- Company Pioneer Guarantor The (Parent) USA Subsidiaries Eliminations Company ---------- ----------- ------------ ------------ ---------- Current assets: Cash and cash equivalents $ 41 $ 49,033 $ 22,639 $ $ 71,713 Restricted cash - 1,695 - 1,695 Accounts receivable: Trade, net 5 56,424 19,003 75,432 Oil and gas sales - 82,145 34,355 116,500 Intercompany notes receivable 2,088,082 (1,673,443) (414,639) - Inventories - 11,677 1,899 13,576 Deferred income taxes 16,700 - 200 16,900 Other current assets - 9,293 3,079 12,372 --------- ---------- ---------- --------- Total current assets 2,104,828 (1,463,176) (333,464) 308,188 --------- ---------- ---------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties - 2,453,750 1,122,221 3,575,971 Unproved properties - 98,664 446,410 545,074 Accumulated depletion, depreciation and amortization - (504,628) (100,575) (605,203) --------- ---------- ---------- --------- - 2,047,786 1,468,056 3,515,842 --------- ---------- ---------- --------- Other property and equipment, net - 26,096 17,921 44,017 Other assets, net 4,705 68,715 28,098 (22,975) 78,543 Investment in subsidiaries 645,113 284,046 - (929,159) - --------- ---------- ---------- --------- $2,754,646 $ 963,467 $ 1,180,611 $3,946,590 ========= ========== ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ - $ 538 $ 28,228 $ (22,975) $ 5,791 Undistributed unit purchases - 1,695 - 1,695 Accounts payable: Trade 663 113,432 62,602 176,697 Affiliates 90 9,904 - 9,994 Other current liabilities 5,771 59,953 1,651 67,375 --------- ---------- ---------- --------- Total current liabilities 6,524 185,522 92,481 261,552 --------- ---------- ---------- --------- Long-term debt, less current maturities 1,700,500 565 242,653 1,943,718 Other noncurrent liabilities - 140,668 39,607 180,275 Deferred income taxes (216,253) - 228,453 12,200 Stockholders' equity: Partners' Capital - - 401 (401) - Common stock 901 1 110 (2) 1,010 Additional paid-in capital 2,058,935 2,049,072 739,518 (2,487,533) 2,359,992 Treasury stock, at cost (21) - - (21) Unearned compensation - (16,196) - (16,196) Retained deficit (795,940) (1,396,165) (162,612) 1,558,777 (795,940) --------- ----------- ---------- ---------- Total stockholders' equity 1,263,875 636,712 577,417 1,548,845 Commitments and contingencies $2,754,646 $ 963,467 $ 1,180,611 $3,946,590 ========= ========== =========== =========
15 CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME For the Nine Months Ended September 30, 1998 (in thousands) (Unaudited) Pioneer Natural Resources Non- Consolidated Company Pioneer Guarantor Income The (Parent) USA Subsidiaries Tax Benefit Eliminations Company ---------- ---------- ------------ ------------ ------------ ---------- Revenues: Oil and gas $ - $ 408,885 $ 145,593 $ - $ $ 554,478 Interest and other 38 7,433 84 - 636 8,191 Gain (loss) on disposition of assets, net - (168) 32 - (136) --------- --------- ---------- --------- --------- 38 416,150 145,709 - 562,533 --------- --------- ---------- --------- --------- Costs and expenses: Oil and gas production - 124,411 45,097 - 169,508 Depletion, depreciation and amortization - 163,743 83,465 - 247,208 Exploration and abandonments - 52,335 33,814 - 86,149 General and administrative 1,424 45,161 10,063 - 56,648 Reorganization - 21,158 - - 21,158 Interest (14,309) 121,196 15,430 - 122,317 Equity (income) loss from subsidiary 143,197 (3,929) - - (139,268) - Other 14 3,857 13,993 - 636 18,500 --------- --------- ---------- --------- --------- 130,326 527,932 201,862 - 721,488 --------- --------- ---------- --------- --------- Loss before income taxes (130,288) (111,782) (56,153) - (158,955) Income tax benefit - - 28,667 26,733 55,400 --------- --------- ---------- --------- --------- Net loss (130,288) (111,782) (27,486) 26,733 (103,555) Other comprehensive income: Translation adjustment - - 2,022 - 2,022 --------- --------- ---------- --------- --------- Comprehensive loss $ (130,288) $ (111,782) $ (25,464) $ 26,733 $ (101,533) ========= ========= ========== ========= =========
16 CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine Months ended September 30, 1998 (in thousands) (Unaudited) Pioneer Natural Resources Non- Consolidated Company Pioneer Guarantor Income The (Parent) USA Subsidiaries Tax Benefit Eliminations Company ---------- ---------- ------------ ------------ ------------ ---------- Cash flows from operating activities: Net loss $ (130,288) $ (111,782) $ (27,486) $ 26,733 $ 139,268 $ (103,555) Adjustments to reconcile net loss to net cash provided by operating activities: Depletion, depreciation and amortization - 163,743 83,465 - 247,208 Exploration and abandonments - 38,064 27,413 - 65,477 Deferred income taxes - - (26,267) (26,733) (53,000) Gain on disposition of assets, net - 175 (39) - 136 Other noncash items 150,780 9,867 16,666 - (139,268) 38,045 Change in working capital (170,501) 208,774 33,924 - 72,197 --------- --------- --------- --------- ---------- Net cash provided by (used in) operating activities (150,009) 308,841 107,676 - 266,508 --------- --------- --------- --------- ---------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired - (424) - - (424) Proceeds from disposition of assets - 16,900 2,782 - 19,682 Additions to oil and gas properties - (268,132) (159,806) - (427,938) Other property additions, net - (16,903) (6,487) - (23,390) --------- --------- -------- --------- ---------- Net cash used in investing activities - (268,559) (163,511) - (432,070) --------- --------- -------- --------- ---------- Cash flows from financing activities: Borrowings under long-term debt 805,785 - 117,125 - 922,910 Principal payments on long-term debt (628,635) (476) (65,391) - (694,502) Payment of noncurrent liabilities - (32,873) (4,128) - (37,001) Dividends (10,079) - - - (10,079) Purchase of treasury stock (9,890) - - - (9,890) Deferred loan fees/issuance costs (7,196) (3) - - (7,199) --------- ---------- -------- --------- ---------- Net cash provided by (used in) financing activities 149,985 (33,352) 47,606 - 164,239 --------- ---------- -------- --------- ---------- Net increase (decrease) in cash and cash equivalents (24) 6,930 (8,229) - (1,323) Effect of exchange rate changes on cash and cash equivalents - - (105) - (105) Cash and cash equivalents, beginning of period 41 49,033 22,639 - 71,713 --------- ---------- -------- --------- ---------- Cash and cash equivalents, end of period $ 17 $ 55,963 $ 14,305 $ - $ 70,285 ========= ========= ======== ========= ==========
17 PIONEER NATURAL RESOURCES COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(1) Financial Performance The Company reported a net loss of $43.9 million ($.44 per share) and $103.6 million ($1.04 per share) for the three and nine months ended September 30, 1998, as compared to net loss of $12.6 million ($.21 per share) and a net income of $13.5 million ($.31 per share) for the same periods in 1997. The Company's results have been significantly impacted by declines in 1998 commodity prices as compared to 1997 price levels. For a discussion on commodity prices and other factors impacting the three and nine months ended September 30, 1998, see "Trends and Uncertainties" and "Results of Operations", below. Net cash provided by operating activities was $106.1 million and $266.5 million during the three and nine months ended September 30, 1998, as compared to net cash provided by operating activities of $54.5 million and $179.1 million for the same periods in 1997. These increases are primarily attributable to cash flows generated by the oil and gas properties acquired from Mesa and Chauvco in 1997, offset, to some extent, by decreased commodity prices and increases in interest expense, general and administrative expenses and reorganization costs. The Company strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility to fund future opportunities. The Company's total book capitalization at September 30, 1998 was $3.6 billion, consisting of total long-term debt of $2.2 billion and stockholders' equity of $1.4 billion. Debt as a percentage of total book capitalization was 60% at September 30, 1998, as compared to 56% at December 31, 1997. Drilling Highlights During the first three quarters of 1998, the Company participated in the drilling of 80 gross exploration and extension and 389 gross development wells, including 260 in the Permian Basin region, 30 in the Gulf Coast region, 64 in the MidContinent region, 61 in Argentina, 49 in Canada and five in South Africa. Of these wells, 129 were in progress at December 31, 1997. Of the 469 total wells drilled during the nine months ended September 30, 1998, 436 were completed successfully which resulted in a 93% success rate. In addition to the wells completed in the first three quarters of 1998, the Company had 102 wells in progress at September 30, 1998. Permian Basin. During 1998, the majority of the drilling has been development drilling in the Spraberry units of West Texas. In particular, the Company has focused its activities on the Spraberry Driver Unit where it has completed 57 wells during the first nine months of 1998. In addition, the Company has approved the acceleration of another 100-well drilling program in the Driver Unit starting in the fourth quarter of 1998. The acceleration of the drilling into 1998 is primarily attributable to the Company being able to negotiate lower drilling rates. Gulf Coast. During the first three quarters of 1998, the Company has completed seven wells in the Lopeno field with a resulting increase in production of more than 30 MMcf of gas per day, net to the Company's interest. In addition, two wells were drilled and placed on production in the Pawnee field at a combined rate of three MMcf of gas per day, net to the Company's interest. Mid-Continent. In the West Panhandle field, Pioneer drilled 57 wells during the first three quarters of 1998. Through September 30, 1998, 40 of these wells have been connected and are producing at a combined gross rate of nine MMcf per day. Pioneer holds a 77% interest and plans to drill an additional ten wells this year. Argentina. In the Neuquen Basin of Argentina, the Company has drilled 59 wells with initial production rates from 43 completed wells of approximately 3,300 BOE per day. In addition, the Company's Dorsal gas gathering expansion was completed in June, resulting in increased production of 27 MMcf of gas per day. An additional ten wells are planned for the remainder of 1998. Canada. In the Chinchaga gas field in Northeast British Columbia, the Company's net production is currently averaging 28 MMcf per day, an increase of 22 MMcf per day from 1997 year-end levels. Pioneer drilled 19 development wells 18 PIONEER NATURAL RESOURCES COMPANY and six delineation wells and installed a 50 MMcf per day gas processing facility and gathering system during its winter-access program, more than tripling production from the field. Preparations are underway for the 1999 winter drilling program with access expected to the area in early December. Pending Asset Divestiture In September 1998, the Company signed a purchase and sale agreement (the "Agreement") to sell certain non-strategic oil and gas properties for estimated proceeds of $410 million. The Agreement will be effective October 1, 1998 and is anticipated to close by December 31, 1998. The consummation of this Agreement is primarily dependent upon the buyer's successful ability to finance the purchase as well as certain other contingencies defined in the Agreement. As a result, there can be no assurance that the divestiture of any or all of these properties will be completed or that the estimated proceeds will be realized in accordance with the Agreement. (See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements.") If the Agreement is consummated, the proceeds will be utilized to reduce the Company's outstanding bank indebtedness. Also, once the divestiture is completed, the Company will have significantly fewer domestic fields. These fields will represent the Company's core domestic assets that have production growth opportunities through additional development and exploration activities. 1998 Reorganization Coincidentally with the property divestiture program announced in February 1998, the Company announced its intentions to reorganize its operations to take advantage of the economies of scale provided by the concentration of reserves in a small number of fields. Consequently, the Company combined its six domestic regions into three geographic regions: the Permian Basin region, the MidContinent region and the onshore and offshore Gulf Coast region. In addition, most of the Company's administrative services are being relocated from Midland, Texas to Dallas, Texas. Shortly after the announcement, the Company formally notified the employees affected by the reorganization whether they were to be severed or relocated. During the nine months ended September 30, 1998, the Company has recognized severance, relocation, lease termination and other costs of approximately $21.2 million relating to this reorganization. (See Note H of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements".) Trends and Uncertainties Commodity Prices. The oil and gas prices that the Company reports are based on the market price received for the commodity adjusted by the results of the Company's hedging activities. Historically, worldwide oil and gas prices have been extremely volatile and subject to significant changes in response to real and perceived conditions in world politics, weather patterns and other fundamental supply and demand variables. Since the third quarter of 1997, there has been a declining trend in world oil prices and, more recently, natural gas prices have declined in comparison to 1997 levels. The benchmark daily average NYMEX West Texas Intermediate closing price has declined 28% in each of the three and nine months ended September 30, 1998, in comparison with the same periods ended September 30, 1997; and, the benchmark daily average NYMEX Henry Hub closing natural gas price has declined 19% and 8% during the three and nine months ended September 30, 1998, respectively, in comparison with the same periods ended September 30, 1997. The declines in commodity prices have had, and continue to have, significant impact on the Company's results and cash flows from operations, capital spending programs and general financial conditions. Consequently, the Company is in the process of making organizational changes that are necessary to remain competitive in the current depressed price environment. The organizational changes include closing the Company's Oklahoma City, Oklahoma and Houston, Texas offices and reducing the Company's current staffing. 19 PIONEER NATURAL RESOURCES COMPANY To mitigate the impact of changing prices on the Company's results of operations, cash flows and financial condition, the Company from time to time enters into commodity derivative contracts as hedges against oil and gas price risk (see Note F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements"). Impairments. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived assets and for Long-Lived Assets to be Disposed Of", ("SFAS 121"), the Company reviews its oil and gas properties for impairment whenever events and circumstances indicate a decline in the recoverability of the carrying value of the Company's assets. The Company is currently in the process of completing its oil and gas reserve study and assessing performance issues relative to certain properties in East Texas and the Gulf Coast. Both the declining oil and gas price trends and performance issues may be indicative of a decline in the recoverable value of the Company's assets. As a result, asset impairments may be required in the fourth quarter of 1998. The amount of impairments, if any, cannot be determined until the reserve study and performance assessments are complete. The conditions discussed above are also relevant to the Company's continuing review of its deferred tax asset. As the Company completes its oil and gas reserve study, it will also complete its review of the deferred tax asset for a potential valuation allowance. The amount, if any, of a potential valuation allowance cannot be determined until the reserve study and performance assessments are complete. (See "Income Taxes", below.) Year 2000 Project Readiness. Historically, many computer programs have been developed that use only the last two digits in a date to refer to a year. As the year 2000 nears, the inability of such computer programs and embedded technologies to distinguish between "1900" and "2000" has given rise to the "Year 2000" problem. Theoretically, such computer programs and related technology could fail outright, or communicate inaccurate data, if not remediated or replaced. With the proliferation of electronic data interchange, the Year 2000 problem represents a significant exposure to the entire global community, the full extent of which cannot be accurately assessed. In proactive response to the Year 2000 problem, the Company established a "Year 2000" project to assess, to the extent possible, the Company's internal Year 2000 problem; to take remedial actions necessary to minimize the Year 2000 risk exposure to the Company and significant third parties with whom it has data interchange; and, to test its systems and processes once remedial actions have been taken. The Company has contracted with IBM Global Services to perform the assessment and remedial phases of its Year 2000 project. The assessment phase of the Company's Year 2000 project is 85% complete and has included, but is not limited to, the following procedures: o the identification of necessary remediation, upgrade and/or replacement of existing information technology applications and systems; o the assessment of non-information technology exposures, such as telecommunications systems, security systems, elevators and process control equipment; o the initiation of inquiry and dialogue with significant third party business partners, customers and suppliers in an effort to understand and assess their Year 2000 problems, readiness and potential impact on the Company and its Year 2000 problem; o the implementation of processes designed to reduce the risk of reintroduction of Year 2000 problems into the Company's systems and business processes; and, o the formulation of contingency plans for mission-critical information technology systems. The Company expects to complete the assessment phase of its Year 2000 project by the end of the first quarter of 1999 but is being delayed by limited responses received on inquiries made of third party businesses. To date, the 20 PIONEER NATURAL RESOURCES COMPANY Company has distributed Year 2000 problem inquiries to over 500 entities and has received responses to approximately 10% of those inquiries. The remedial phase of the Company's Year 2000 project is approximately 40% complete, subject to the results of the third party inquiry assessments and the testing phase. The remedial phase has included the upgrade and/or replacement of certain application and hardware systems. The Company has upgraded its Artesia general ledger accounting systems through remedial coding and is currently testing this system for Year 2000 compliance. The remediation of non-information technology is expected to be completed by mid-1999. The Company's Year 2000 remedial actions have not delayed other information technology projects or upgrades. The testing phase of the Company's Year 2000 project is on schedule. The Company expects to complete the testing of the Artesia system upgrades by March 1999 and all other information technology systems by May 1999. The testing of the non-information technology remediation is scheduled to be completed by the end of September 1999. The Company expects that its total costs related to the Year 2000 problem will approximate $3.5 million, of which approximately $500 thousand will have been incurred to replace non-compliant information technology systems. As of September 30, 1998, the Company's total costs incurred on the Year 2000 problem were $1.5 million, of which $200 thousand were incurred to replace non-compliant systems. The Company intends to use its working capital to pay for the costs of the Year 2000 projects. The risks associated with the Year 2000 problem are significant. A failure to remedy a critical Year 2000 problem could have a materially adverse affect on the Company's results of operations and financial condition. The problems which may be encountered as a result of a Year 2000 problem could include information and non-information system failures, the receipt or transmission of erroneous data, lost data or a combination of similar problems of a magnitude that cannot be accurately assessed at this time. In the assessment phase of the Company's Year 2000 project, contingency plans are being designed to mitigate the exposures noted above. However, given the uncertainties regarding the scope of the Year 2000 problem and the compliance of significant third parties, there can be no assurance that contingency plans will have anticipated all Year 2000 scenarios. Accounting for Derivatives. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not determined what effect, if any, SFAS 133 will have on its consolidated financial statements. 21 PIONEER NATURAL RESOURCES COMPANY Results of Operations Oil and Gas Production. The following tables reflect the activities for the Company's oil and gas properties for the nine months ended September 30, 1998 and 1997: Nine Months Ended September 30, 1998 ----------------------------------------------------------- United Other States Canada Argentina Foreign(b) Total ---------- -------- --------- ---------- ---------- Revenues: Oil and gas $ 454,339 $ 49,808 $ 50,331 $ - $ 554,478 Gain on disposition of oil and gas properties, net (117) - - - (117) --------- ------- -------- --------- --------- 454,222 49,808 50,331 - 554,361 --------- ------- -------- --------- --------- Costs and expenses: Oil and gas production (134,292) (19,303) (15,913) - (169,508) Depletion (176,944) (28,390) (31,729) - (237,063) Exploration and abandonments (16,774) (4,526) (7,437) (9,050) (37,787) Geological and geophysical (25,136) (11,221) (8,689) (3,316) (48,362) --------- -------- -------- --------- --------- (353,146) (63,440) (63,768) (12,366) (492,720) --------- -------- -------- --------- --------- Operating profit (loss) (excluding general and administrative expenses and income taxes) $ 101,076 $(13,632) $ (13,437) $ (12,366) $ 61,641 ========= ======= ======== ========= ========= Production: Oil (MBbls) 11,568 2,563 2,378 - 16,509 NGLs (MBbls) 7,616 207 169 - 7,992 Gas (MMcf) 105,481 13,739 19,432 - 138,652 Total (MBOE) 36,765 5,059 5,785 - 47,609 Average daily production: Oil (Bbls) 42,374 9,387 8,710 - 60,471 NGLs (Bbls) 27,900 756 618 - 29,274 Gas (Mcf) 386,378 50,328 71,178 - 507,884 Average oil price (per Bbl) $ 14.20 $ 11.30 $ 11.37 $ - $ 13.34 Average NGL price (per Bbl) $ 9.38 $ 9.84 $ 10.86 $ - $ 9.42 Average gas price (per Mcf) $ 2.07 $ 1.37 $ 1.10 $ - $ 1.87 Costs (per BOE): Lease operating expense $ 3.01 $ 3.73 $ 2.59 $ - $ 3.04 Production taxes $ .51 $ - $ .16 $ - $ .41 Workover costs $ .14 $ .09 $ - $ - $ .11 --------- ------- -------- --------- --------- Total production costs $ 3.66 $ 3.82 $ 2.75 $ - $ 3.56 ========= ======= ======== ========= ========= Depletion $ 4.81 $ 5.61 $ 5.48 $ - $ 4.98 Nine Months Ended September 30, 1997 ----------------------------------------------------------- United Other States Canada Argentina Foreign(b) Total ---------- -------- --------- ---------- ---------- Revenues: Oil and gas $ 346,756 $ - $ 2,224 $ - $ 348,980 Gain on disposition of oil and gas properties, net (a) 1,068 - - - 1,068 --------- ------- -------- --------- --------- 347,824 - 2,224 - 350,048 --------- ------- -------- --------- --------- Costs and expenses: Oil and gas production (90,998) - (676) - (91,674) Depletion (120,322) - (980) - (121,302) Exploration and abandonments (19,821) - (252) - (20,073) Geological and geophysical (11,691) - (1,261) (1,285) (14,237) --------- ------- -------- --------- --------- (242,832) - (3,169) (1,285) (247,286) --------- ------- -------- ---------- --------- Operating profit (loss) (excluding general and administrative expenses and income taxes) $ 104,992 $ - $ (945) $ (1,285) $ 102,762 ========= ======= ======== ========= ========= Production: Oil (MBbls) 9,314 - 111 - 9,425 NGLs (MBbls) 1,151 - - - 1,151 Gas (MMcf) 71,284 - - - 71,284 Total (MBOE) 22,346 - 111 - 22,457 Average daily production: Oil (Bbls) 34,117 - 408 - 34,525 NGLs (Bbls) 4,214 - - - 4,214 Gas (Mcf) 261,113 - - - 261,113 Average oil price (per Bbl) $ 18.69 $ - $ 19.96 $ - $ 18.70 Average NGL price (per (Bbl) $ 12.89 $ - $ - $ - $ 12.89 Average gas price (per Mcf) $ 2.21 $ - $ - $ - $ 2.21 Costs (per BOE): Lease operating expense $ 2.92 $ - $ 5.86 $ - $ 2.94 Production taxes $ .86 $ - $ .21 $ - $ .85 Workover costs $ .29 $ - $ - $ - $ .29 ---------- ------- -------- --------- --------- Total production costs $ 4.07 $ - $ 6.07 $ - $ 4.08 ========== ======= ======== ========= ========= Depletion $ 5.38 $ - $ 8.83 $ - $ 5.40
22 PIONEER NATURAL RESOURCES COMPANY Three Months Ended September 30, 1998 ----------------------------------------------------------- United Other States Canada Argentina Foreign(b) Total ---------- -------- --------- ---------- ---------- Revenues: Oil and gas $ 139,247 $ 16,407 $ 17,808 $ - $ 173,462 Loss on disposition of oil and gas properties, net (391) - - - (391) --------- ------- -------- --------- --------- 138,856 16,407 17,808 - 173,071 --------- ------- -------- --------- --------- Costs and expenses: Oil and gas production (45,812) (6,930) (5,011) - (57,753) Depletion (62,323) (9,017) (12,197) - (83,537) Exploration and abandonments (10,017) (536) (2,111) (5,114) (17,778) Geological and geophysical (7,532) (3,268) (5,784) (1,265) (17,849) --------- ------- -------- --------- --------- (125,684) (19,751) (25,103) (6,379) (176,917) --------- -------- -------- --------- --------- Operating profit (loss) (excluding general and administrative expenses and income taxes) $ 13,172 $ (3,344) $ (7,295) $ (6,379) $ (3,846) ========= ======= ======== ========= ========= Production: Oil (MBbls) 3,746 806 744 - 5,296 NGLs (MBbls) 2,589 76 57 - 2,722 Gas (MMcf) 34,202 5,409 7,780 - 47,391 Total (MBOE) 12,036 1,783 2,097 - 15,916 Average daily production: Oil (Bbls) 40,717 8,761 8,078 - 57,556 NGLs (Bbls) 28,146 821 621 - 29,588 Gas (Mcf) 371,757 58,793 84,570 - 515,120 Average oil price (per Bbl) $ 13.71 $ 10.56 $ 11.88 $ - $ 12.97 Average NGL price (per Bbl) $ 8.31 $ 7.84 $ 8.24 $ - $ 8.30 Average gas price (per Mcf) $ 1.94 $ 1.35 $ 1.09 $ - $ 1.73 Costs (per BOE): Lease operating expense $ 3.20 $ 3.73 $ 2.25 $ - $ 3.13 Production taxes $ .49 $ - $ .14 $ - $ .39 Workover costs $ .12 $ .15 $ - $ - $ .11 --------- ------- -------- --------- --------- Total production costs $ 3.81 $ 3.88 $ 2.39 $ - $ 3.63 ========= ======= ======== ========= ========= Depletion $ 5.18 $ 5.06 $ 5.82 $ - $ 5.25 Three Months Ended September 30, 1997 ----------------------------------------------------------- United Other States Canada Argentina Foreign(b) Total ---------- -------- --------- ---------- ---------- Revenues: Oil and gas $ 149,673 $ - $ 681 $ - $ 150,354 Gain on disposition of oil and gas properties, net (a) (3) - - - (3) --------- ------- -------- --------- --------- 149,670 - 681 - 150,351 --------- ------- -------- --------- --------- Costs and expenses: Oil and gas production (41,787) - (216) - (42,003) Depletion (64,865) - (267) - (65,132) Exploration and abandonments (8,410) - (32) - (8,442) Geological and geophysical (5,900) - (327) (844) (7,071) --------- ------- -------- --------- --------- (120,962) - (842) (844) (122,648) --------- ------- -------- --------- --------- Operating profit (loss) (excluding general and administrative expenses and income taxes) $ 28,708 $ - $ (161) $ (844) $ 27,703 ========= ======= ======== ========= ========= Production: Oil (MBbls) 3,635 - 37 - 3,672 NGLs (MBbls) 1,151 - - - 1,151 Gas (MMcf) 32,327 - - - 32,327 Total (MBOE) 10,174 - 37 - 10,211 Average daily production: Oil (Bbls) 39,509 - 403 - 39,912 NGLS (Bbls) 12,506 - - - 12,506 Gas (Mcf) 351,384 - - - 351,384 Average oil price (per Bbl) $ 17.98 $ - $ 18.36 $ - $ 17.93 Average oil price (per Bbl) $ 12.89 $ - $ - $ - $ 12.89 Average gas price (per Mcf) $ 2.16 $ - $ - $ - $ 2.16 Costs (per BOE): Lease operating expense $ 3.11 $ - $ 5.66 $ - $ 3.11 Production taxes $ .78 $ - $ .16 $ - $ .78 Workover costs $ .22 $ - $ - $ - $ .22 --------- ------- -------- --------- --------- Total production costs $ 4.11 $ - $ 5.82 $ - $ 4.11 ========= ======= ======== ========= ========= Depletion $ 6.38 $ - $ 7.22 $ - $ 6.38
- --------------- (a) The 1997 amounts do not include the gain related to the disposition of the Company's subsidiary which owned an interest in oil and gas properties in Turkey. (b) Other foreign amounts primarily relate to exploratory activities in Guatemala and South Africa. 23 PIONEER NATURAL RESOURCES COMPANY Oil and Gas Revenues. Revenues from oil and gas operations totaled $173.5 million and $554.5 million for the three and nine months ended September 30, 1998 compared to $150.4 million and $349.0 million for the same periods in 1997, representing an increase of 15% and 59%, respectively. The increase is primarily attributable to oil and gas production added from the oil and gas properties acquired from Mesa and Chauvco and the results of the Company's 1998 drilling program, offset by substantial declines in commodity prices. Parker & Parsley historically accounted for processed natural gas production as wellhead production on a wet gas basis while Mesa accounted for processed natural gas production in two components: natural gas liquids and dry residue gas. The combined entities own three major gas processing facilities, and the majority of the gas processed by these facilities is owned by the Company and produced by Company-operated properties. Consequently, the Company now accounts for natural gas production as processed natural gas liquids and dry residue gas, and separate product volumes will not be comparable for periods prior to September 30, 1997. Also, prices for gas products will not be comparable as the price per Mcf for natural gas for the three and nine months ended September 30, 1998 is the price received for dry residue gas and the price per Mcf for natural gas prior to August 1997 is a price for natural gas liquids combined with dry residue gas. On a BOE basis, production increased by 56% and 112% for the three and nine months ended September 30, 1998, respectively, as compared to the same periods in 1997. The additional production volumes from the Mesa properties contributed approximately 28% and 51% of production growth and the Chauvco properties contributed approximately 68% and 43% for the three and nine months ended September 30, 1998, respectively. The remainder of the increases are a direct result of the successes of the Company's exploration and exploitation efforts. Such production growth becomes particularly evident in light of the fact that a portion of the average daily oil and gas production for 1997 related to properties included in the 1997 sale of certain nonstrategic domestic assets. Excluding production associated with assets sold during 1997 and the Mesa and Chauvco properties acquired in 1997, on a BOE basis, production increased 6% and 9% for the three and nine months ended September 30, 1998 as compared to the same periods in 1997. The average oil price for the nine months ended September 30, 1998 decreased 29% (from $18.70 per Bbl to $13.34 per Bbl for the nine months ended September 30, 1997 and 1998, respectively); the average NGL price decreased 27% (from $12.89 per Bbl to $9.42 per Bbl for the nine months ended September 30, 1997 and 1998, respectively); and, the average gas price decreased 15% (from $2.21 per Mcf to $1.87 per Mcf for the nine months ended September 30, 1997 and 1998, respectively). During the three months ended September 30, 1998, the average prices of oil, NGL and gas received decreased 28% (from $17.93 per Bbl during the third quarter of 1997 to $12.97 per Bbl during the third quarter of 1998), 36% (from $12.89 per Bbl during the third quarter of 1997 to $8.30 per Bbl during the third quarter of 1998), and 20% (from $2.16 per Mcf during the third quarter of 1997 to $1.73 per Mcf during the third quarter of 1998), respectively. Hedging Activities The oil and gas prices that the Company reports are based on the market price received for the commodities adjusted by the results of the Company's hedging activities. The Company from time to time enters into commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. During the nine months ended September 30, 1998, the Company's hedging activities increased the average price received for oil and gas sales 8% and 2%, respectively, as discussed below. Crude Oil. All material sales contracts governing the Company's oil production are tied directly or indirectly to NYMEX prices. The average oil price per Bbl that the Company reports includes the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The Company's average realized price for physical oil sales (excluding hedge results) for the three and nine months ended September 30, 1998 was $11.80 per Bbl and $12.30 per Bbl, respectively, while, as a point of reference, the comparable daily average NYMEX closing per Bbl for the same periods was $14.18 per Bbl and $14.95 per Bbl, respectively. The Company recorded net increases to 24 PIONEER NATURAL RESOURCES COMPANY oil revenues of $6.2 million and $17.2 million for the three and nine months ended September 30, 1998, respectively, as a result of its commodity hedges. During the three and nine months ended September 30, 1997, the Company realized an average price for physical oil sales (excluding hedge results) of $18.03 per Bbl and $19.37 per Bbl, respectively, while, as a point of reference, the comparable daily average NYMEX closing per Bbl for the same periods was $19.79 per Bbl and $20.83 per Bbl, respectively. The Company recorded net reductions to oil revenues of $351 thousand and $6.3 million for the three and nine months ended September 30, 1997, respectively, as a result of its commodity hedges. Natural Gas. The Company employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The average gas price per Mcf that the Company reports includes the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The Company's average realized price for physical gas sales (excluding hedge results) for the three and nine months ended September 30, 1998 was $1.68 per Mcf and $1.83 per Mcf, respectively, while as a point of reference, the comparable daily average NYMEX closing for the same periods was $2.02 and $2.14 per Mcf, respectively. The Company recorded a net increase to gas revenues of $2.5 million and $4.8 million, respectively, for the three and nine months ended September 30, 1998, as a result of its commodity hedges. During the three and nine months ended September 30, 1997, the Company realized an average price for physical gas sales (excluding hedge results) of $2.22 per Mcf and $2.32 per Mcf, respectively, while as a point of reference, the comparable daily average NYMEX closing for the same periods was $2.49 and $2.33 per Mcf, respectively. The Company recorded net reductions to gas revenues of $1.8 million and $7.9 million for the three and nine months ended September 30, 1997, respectively, as a result of its commodity hedges. See Note F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for information concerning the Company's open hedge positions at September 30, 1998 and the related prices to be realized. Production Costs. During the three and nine month periods ended September 30, 1998, total production costs per BOE decreased to $3.63 and $3.56, respectively, as compared to production costs per BOE of $4.11 and $4.08, respectively, during the same periods in 1997. The decreases are due to decreases in domestic production taxes caused by lower commodity prices and decreases in workover expense, partially offset by increases in lease operating expenses. Depletion Expense. Depletion expense per BOE decreased to $5.25 and $4.98 during the three and nine months ended September 30, 1998, respectively, as compared to $6.38 and $5.40 per BOE during the same periods in 1997. The decline in depletion expense per BOE during 1998 is primarily associated with the reduction in net depletable basis that resulted from the 1997 impairment charge taken in accordance with SFAS 121. Exploration and Abandonments/Geological and Geophysical Costs. Exploration and abandonments/geological and geophysical costs increased to $35.6 million and $86.1 million during the three and nine months ended September 30, 1998, respectively, from $15.5 million and $34.3 million during the same periods in 1997. The increase is largely the result of increased geological and geophysical activity, both in domestic and international activity, resulting from the Company's increased focus on exploration activities. 25 PIONEER NATURAL RESOURCES COMPANY Three months Nine months ended September 30, ended September 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (in thousands) Exploratory dry holes: United States $ 8,639 $ 7,184 $ 11,440 $ 16,885 Foreign 5,469 34 13,016 253 Geological and geophysical costs: United States 7,531 5,900 25,136 11,690 Foreign 10,318 1,171 23,226 2,547 Leasehold abandonments and other 3,670 1,224 13,331 2,935 ------- ------- ------- ------- $ 35,627 $ 15,513 $ 86,149 $ 34,310 ======= ======= ======= ======= Approximately 25% of the Company's 1998 capital budget will be spent on exploratory projects (compared to 25% in 1997 and 16.7% in 1996). The Company's 1998 exploration efforts have been concentrated in the Gulf Coast region, Canada and Argentina. The Company continues to review opportunities involving exploration joint ventures in domestic or international areas outside the Company's existing core operating areas. General and Administrative Expense General and administrative expense was $19.2 million and $56.6 million for the three and nine months ended September 30, 1998, respectively, as compared to $16.8 million and $31.8 million for the same periods ended September 30, 1997, representing an increase of $2.4 million and $24.8 million, respectively. The increase is primarily attributable to the acquisitions of Mesa and Chauvco; however, general and administrative expense per BOE has declined $.43 and $.22 during the three and nine months ended September 30, 1998, respectively, as compared to the same periods of 1997. Reorganization costs for the nine months ended September 30, 1998 totaled $21.2 million. As announced in February 1998, the Company has consolidated its six domestic operating divisions into three geographic regions and is relocating most of its administrative services to Dallas, Texas. During the nine months ended September 30, 1998, the reorganization charge included severance, relocation, lease termination and other costs. Interest Expense During the three months ended September 30, 1998, interest expense increased $17.7 million to $41.8 million from $24.1 million for the third quarter of 1997. Interest expense for the nine months ended September 30, 1998 increased to $122.3 million as compared to $44.3 million for the same period in 1997. The increase is due to an increase of $1.5 billion in the weighted average outstanding balance of the Company's indebtedness for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. The increase in the weighted average outstanding balance of the Company's indebtedness was primarily the result of the additional debt assumed from Mesa, and to a lesser extent, from Chauvco. This increase is slightly offset by a decrease in the weighted average interest rate on the Company's indebtedness from 8.05% during the first three quarters of 1997 to 7.2% during the first three quarters of 1998. During the three and nine months ended September 30, 1998, the Company was a party to various interest rate swap agreements that resulted in a decrease in interest expense of $58 thousand and an increase in interest expense of $15 thousand, respectively. During the same periods in 1997, such agreements resulted in reductions in interest expense of $5 thousand and $705 thousand, respectively. 26 PIONEER NATURAL RESOURCES COMPANY Income Taxes The Company's income tax benefit of $24.3 million and $55.4 million for the three and nine months ended September 30, 1998, respectively, and the benefit of $6 million and provision of $8.5 million for the three and nine months ended September 30, 1997, respectively, reflect the net benefits and provision resulting from the separate tax calculation prepared for each tax jurisdiction in which the Company is subject to income taxes. At September 30, 1998, the Company has a current deferred tax asset of $16.1 million and a noncurrent deferred tax asset of $102.2 million. Management believes that it is more likely than not that the net deferred tax asset is realizable; however, during the fourth quarter of 1998, the Company will be reviewing its deferred tax asset position in light of evolving economic conditions in the oil and gas industry. Such analysis will include forecasting future operations to determine if it is more likely than not that the deferred tax asset is realizable. Capital Commitments, Capital Resources and Liquidity Capital Commitments. The Company's primary needs for cash are for exploration, development and acquisitions of oil and gas properties, repayment of principal and interest on outstanding indebtedness and working capital obligations. The Company's cash expenditures during the first three quarters of 1998 for additions to oil and gas properties totaled $427.9 million. This amount includes $46.4 million for the acquisition of properties and $381.5 million for development and exploratory drilling. Significant drilling and seismic expenditures in the first three quarters of 1998 included $100.0 million in the Permian Basin region, $137.4 million in the Gulf Coast region, $24.1 million in the MidContinent region, $55.2 million in Canada, $47.7 million in Argentina and $17.1 million in other international areas. Funding for the Company's working capital obligations is provided by internally-generated cash flows. Funding for the repayment of principal and interest on outstanding debt may be provided by any combination of internally-generated cash flows, proceeds from the disposition of nonstrategic assets or alternative financing sources as discussed in "Capital Resources" below. Capital Resources. The Company's primary capital resources are net cash provided by operating activities, proceeds from financing activities and proceeds from sales of nonstrategic assets. The Company expects that these resources will be sufficient to fund its capital commitments. Net cash provided by operating activities was $106.1 million and $266.5 million during the three and nine months ended September 30, 1998, as compared to net cash provided by operating activities of $54.5 million and $179.1 million for the same periods in 1997. These increases are primarily attributable to cash flows generated by the oil and gas properties acquired from Mesa and Chauvco in 1997, offset, to some extent, by decreased commodity prices and increases in interest expense, general and administrative expenses and reorganization costs. Financing Activities. The Company had an outstanding balance under its bank facilities at September 30, 1998 of $993 million (including outstanding, undrawn letters of credit of $23 million), leaving approximately $167 million of unused borrowing base immediately available. At September 30, 1998, the Company had four other outstanding significant debt issuances. Such debt issuances consist of (i) $150 million of 8-7/8% senior notes due in 2005, (ii) $150 million of 8-1/4% senior notes due in 2007, (iii) $350 million of 6.5% senior notes due in 2008 and (iv) $250 million of 7.2% senior notes due in 2028. The weighted average interest rate for the nine months ended September 30, 1998 on the Company's indebtedness was 7.2% as compared to 8.05% for the nine months ended September 30, 1997 (taking into account the effect of interest rate swaps). During January 1998, the Company completed the issuance of the 6.5% senior notes due 2008 and the 7.2% senior notes due 2028 for total net proceeds of $593 million. The proceeds were used primarily to repay the Company's bank indebtedness. Interest on the 6.5% and 7.2% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. These two senior note issuances are governed by an Indenture between the Company and The Bank of New York dated January 13, 1998. Both senior note issuances are 27 PIONEER NATURAL RESOURCES COMPANY general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. As the Company pursues its strategy, it will continue to utilize various financing sources, including fixed and floating rate debt, convertible securities, preferred stock or common stock. The Company may also issue securities in exchange for oil and gas properties, stock or other interests in other oil and gas companies or related assets. Additional securities may be of a class preferred to common stock with respect to such matters as dividends and liquidation rights and may also have other rights and preferences as determined by the Company's Board of Directors. Sales of Nonstrategic Assets. During the nine months ended September 30, 1998 and 1997, proceeds from the sale of domestic nonstrategic assets totaled $19.7 million and $12.8 million, respectively. The proceeds from these sales were utilized to reduce the Company's outstanding bank indebtedness and for general working capital purposes. In February 1998, the Company announced its intentions to sell domestic nonstrategic properties and has since signed a purchase and sale agreement (the "Agreement") to sell certain non-strategic oil and gas properties for estimated proceeds of $410 million. The Agreement will be effective October 1, 1998 and is anticipated to close by December 31, 1998. The proceeds will be utilized to reduce the Company' s outstanding bank indebtedness. The consummation of this Agreement is primarily dependent upon the buyer's successful ability to finance the purchase and certain other contingencies defined in the Agreement. As a result, there can be no assurance that the divestiture of any or all of the properties will be completed or that the estimated proceeds will be realized in accordance with the Agreement. The properties to be divested represent an estimated 10% to 12% of the Company's reserves at December 31, 1997. The Company anticipates that it will continue to sell nonstrategic properties from time to time to increase capital resources available for other activities and to achieve operating and administrative efficiencies and improved profitability. Liquidity. At September 30, 1998, the Company had $70.3 million of unrestricted cash and cash equivalents on hand, compared to $71.7 million at December 31, 1997. The Company's ratio of current assets to current liabilities was 1.05 at September 30, 1998 and 1.18 at December 31, 1997. - --------------- (1) The information in this document includes forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, and the business prospects of Pioneer Natural Resources Company, are subject to a number of risks and uncertainties which may cause the Company's actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties include, among other things, volatility of oil and gas prices, product supply and demand, competition, government regulation or action, litigation, the costs and results of drilling and operations, the Company's ability to replace reserves or implement its business plans, access to and cost of capital, uncertainties about estimates of reserves, quality of technical data and environmental risks. These and other risks are described in the Company's 1997 Annual Report on Form 10-K which is available from the United States Securities and Exchange Commission. 28 PIONEER NATURAL RESOURCES COMPANY PART II. OTHER INFORMATION Item 1. Legal Proceedings Pioneer is party to various legal proceedings, which are described under "Legal Actions" in Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements". Pioneer is also party to other litigation incidental to its business. The claims for damages from such other legal actions are not in excess of 10% of Pioneer's current assets and Pioneer believes none of these actions to be material. Item 5. Other Information Stockholder Proposals Any stockholder of the Company who desires to submit a proposal for action at the Company's 1999 annual meeting of stockholders and wishes to have such proposal (a "Rule 14a-8 Proposal") included in the Company's proxy materials, must submit such Rule 14a-8 Proposal to the Company at its principal executive offices no later than December 14, 1998, unless the Company notifies the stockholders otherwise. Only those Rule 14a-8 proposals that are timely received by the Company and proper for stockholder action (and otherwise proper) will be included in the Company's proxy materials. Any stockholder of the Company who desires to submit a proposal for action at the 1999 annual meeting of stockholders but does not wish to have such proposal (a "Non-Rule 14a-8 Proposal") included in the Company's proxy materials, must submit such Non-Rule 14a-8 Proposal to the Company at its principal executive offices no later than February 27, 1999, unless the Company notifies the stockholders otherwise. If a Non-Rule 14a-8 Proposal is not received by the Company on or before February 27, 1999, then the Company intends to exercise its discretionary voting authority with respect to such Non-Rule 14a-8 Proposal. "Discretionary voting authority" is the ability to vote proxies that stockholders have executed and returned to the Company, on matters not specifically reflected in the Company's proxy materials, and on which stockholders have not had an opportunity to vote by proxy. Item 6. Exhibits and Reports on Form 8-K Exhibits 27.* Financial Data Schedule. * filed herewith Reports on Form 8-K None. 29 PIONEER NATURAL RESOURCES COMPANY S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. PIONEER NATURAL RESOURCES COMPANY Date: November 12, 1998 By: /s/ Scott D. Sheffield ------------------------------------ Scott D. Sheffield President Date: November 12, 1998 By: /s/ M. Garrett Smith ------------------------------------ M. Garrett Smith Executive Vice President and Chief Financial Officer Date: November 12, 1998 By: /s/ Rich Dealy ------------------------------------ Rich Dealy Vice President and Chief Accounting Officer 30 PIONEER NATURAL RESOURCES COMPANY Exhibit Index Page 27.* Financial Data Schedule. * filed herewith 31 EX-27 2
5 0001038357 PNR CO 1,000 9-MOS DEC-31-1998 SEP-30-1998 95,305 0 99,391 0 17,460 238,494 4,449,291 881,640 3,992,626 227,333 0 0 0 1,007 2,350,996 3,992,626 554,478 562,533 0 169,508 429,663 0 122,317 (158,955) (55,400) (103,555) 0 0 0 (103,555) (1.04) (1.04)
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