10-Q 1 pxd-20140630.htm 10-Q PXD-2014.06.30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________
FORM 10-Q 
______________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ________ to ________                     
Commission File Number: 1-13245
______________________________ 
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
______________________________
Delaware
 
75-2702753
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5205 N. O'Connor Blvd., Suite 200, Irving, Texas
 
75039
(Address of principal executive offices)
 
(Zip Code)
(972) 444-9001
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
______________________________
Indicate by check mark whether the 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨    No  ý
Number of shares of Common Stock outstanding as of August 1, 2014                                    143,098,392



PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statement of Equity for the six months ended June 30, 2014
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

2


PIONEER NATURAL RESOURCES COMPANY
Cautionary Statement Concerning Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate" or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.
These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, completion of planned divestitures, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to perform the Company's drilling and operating activities, access to and availability of transportation, processing, fractionation and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer's credit facility and derivative contracts and the purchasers of Pioneer's oil, NGL and gas production, uncertainties about estimates of reserves and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impacts of climate change, the risks associated with the ownership and operation of the Company's industrial sand mining and oilfield services businesses, and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the United States Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Part I, Item 1. Business — Competition, Markets and Regulations," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

3


PIONEER NATURAL RESOURCES COMPANY
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific meanings:
"BBL" means a standard barrel containing 42 United States gallons.
"BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of gas to one BBL of oil or natural gas liquid.
"BOEPD" means BOE per day.
"BTU" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
"Conway" means the daily average natural gas liquids components as priced in Oil Price Information Service ("OPIS") in the table "U.S. and Canada LP – Gas Weekly Averages" at Conway, Kansas.
"DD&A" means depletion, depreciation and amortization.
"GAAP" means accounting principles that are generally accepted in the United States of America.
"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.
"MCF" means one thousand cubic feet and is a measure of gas volume.
"MMBTU" means one million BTUs.
"Mont Belvieu" means the daily average natural gas liquids components as priced in OPIS in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
"Pioneer" or the "Company" means Pioneer Natural Resources Company and its subsidiaries.
"Pioneer Southwest" means Pioneer Southwest Energy Partners L.P. and its subsidiaries.
"Proved reserves" mean the quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons ("LKH") as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil ("HKO") elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
"U.S." means United States.
With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by the Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.
Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

4


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
 
June 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
445

 
$
393

Accounts receivable:
 
 
 
 
Trade, net
 
457

 
431

Due from affiliates
 
8

 
3

Income taxes receivable
 
7

 
5

Inventories
 
221

 
220

Prepaid expenses
 
11

 
16

Assets held for sale
 
193

 
584

Other current assets:
 
 
 
 
Derivatives
 
1

 
76

Other
 
37

 
2

Total current assets
 
1,380

 
1,730

Property, plant and equipment, at cost:
 
 
 
 
Oil and gas properties, using the successful efforts method of accounting:
 
 
 
 
Proved properties
 
14,602

 
13,406

Unproved properties
 
151

 
123

Accumulated depletion, depreciation and amortization
 
(5,279
)
 
(4,903
)
Total property, plant and equipment
 
9,474

 
8,626

Goodwill
 
274

 
274

Other property and equipment, net
 
1,230

 
1,224

Other assets:
 
 
 
 
Investment in unconsolidated affiliate
 
229

 
225

Derivatives
 
10

 
91

Other, net
 
113

 
124

 
 
$
12,710

 
$
12,294







The financial information included as of June 30, 2014 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.


5


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in millions)
 
 
 
June 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
1,074

 
$
910

Due to affiliates
 
71

 
150

Interest payable
 
62

 
62

Income taxes payable
 
1

 

Deferred income taxes
 
36

 
19

Liabilities held for sale
 
45

 
39

Other current liabilities:
 
 
 
 
Derivatives
 
98

 
12

Other
 
78

 
58

Total current liabilities
 
1,465

 
1,250

Long-term debt
 
2,659

 
2,653

Derivatives
 
66

 
10

Deferred income taxes
 
1,475

 
1,473

Other liabilities
 
295

 
293

Equity:
 
 
 
 
Common stock, $.01 par value; 500 million shares authorized; 146 million shares issued as of June 30, 2014 and December 31, 2013, respectively
 
1

 
1

Additional paid-in capital
 
5,128

 
5,080

Treasury stock at cost: 3 million shares as of June 30, 2014 and December 31, 2013, respectively
 
(172
)
 
(144
)
Retained earnings
 
1,784

 
1,665

Total equity attributable to common stockholders
 
6,741

 
6,602

Noncontrolling interests in consolidating subsidiaries
 
9

 
13

Total equity
 
6,750

 
6,615

Commitments and contingencies
 


 


 
 
$
12,710

 
$
12,294







The financial information included as of June 30, 2014 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

6


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(Unaudited) 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
959

 
$
781

 
$
1,869

 
$
1,510

Sales of purchased oil and gas
 
205

 
56

 
353

 
112

Interest and other
 
3

 
(5
)
 
7

 
(5
)
Derivative gains (losses), net
 
(218
)
 
144

 
(322
)
 
102

Gain on disposition of assets, net
 
4

 
183

 
10

 
207

 
 
953

 
1,159

 
1,917

 
1,926

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
173

 
153

 
338

 
303

Production and ad valorem taxes
 
59

 
51

 
116

 
103

Depletion, depreciation and amortization
 
248

 
225

 
469

 
437

Purchased oil and gas
 
198

 
55

 
341

 
111

Exploration and abandonments
 
29

 
18

 
60

 
36

General and administrative
 
82

 
66

 
163

 
128

Accretion of discount on asset retirement obligations
 
3

 
3

 
6

 
6

Interest
 
47

 
43

 
92

 
94

Other
 
22

 
22

 
38

 
42

 
 
861

 
636

 
1,623

 
1,260

Income from continuing operations before income taxes
 
92

 
523

 
294

 
666

Income tax provision
 
(34
)
 
(183
)
 
(87
)
 
(233
)
Income from continuing operations
 
58

 
340

 
207

 
433

Income (loss) from discontinued operations, net of tax
 
(57
)
 
11

 
(83
)
 
27

Net income
 
1

 
351

 
124

 
460

Net income attributable to noncontrolling interests
 

 
(14
)
 

 
(22
)
Net income attributable to common stockholders
 
$
1

 
$
337

 
$
124

 
$
438

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.41

 
$
2.37

 
$
1.44

 
$
3.03

Income (loss) from discontinued operations
 
(0.40
)
 
0.05

 
(0.58
)
 
0.21

Net income
 
$
0.01

 
$
2.42

 
$
0.86

 
$
3.24

Diluted earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.41

 
$
2.35

 
$
1.44

 
$
2.95

Income (loss) from discontinued operations
 
(0.40
)
 
0.05

 
(0.58
)
 
0.24

Net income
 
$
0.01

 
$
2.40

 
$
0.86

 
$
3.19

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
143

 
138

 
143

 
133

Diluted
 
143

 
139

 
143

 
136

Dividends declared per share
 
$

 
$

 
$
0.04

 
$
0.04

 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
58

 
$
326

 
$
207

 
$
411

Income (loss) from discontinued operations, net of tax
 
(57
)
 
11

 
(83
)
 
27

Net income
 
$
1

 
$
337

 
$
124

 
$
438



The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

7


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(in millions, except dividends per share)
(Unaudited)
 
 
 
 
 
Equity Attributable To Common Stockholders
 
 
 
 
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total Equity
Balance as of December 31, 2013
 
143

 
$
1

 
$
5,080

 
$
(144
)
 
$
1,665

 
$
13

 
$
6,615

Dividends declared ($0.04 per share)
 

 

 

 

 
(5
)
 

 
(5
)
Exercise of long-term incentive plan stock options
 

 

 
2

 
5

 

 

 
7

Purchases of treasury stock
 

 

 

 
(33
)
 

 

 
(33
)
Sendero divestiture
 

 

 

 

 

 
(4
)
 
(4
)
Tax benefits related to stock-based compensation
 

 

 
4

 

 

 

 
4

Pioneer Southwest merger transaction costs
 

 

 
(1
)
 

 

 

 
(1
)
Compensation costs included in net income
 

 

 
43

 

 

 

 
43

Net income
 

 

 

 

 
124

 

 
124

Balance as of June 30, 2014
 
143

 
$
1

 
$
5,128

 
$
(172
)
 
$
1,784

 
$
9

 
$
6,750








The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

8


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
124

 
$
460

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depletion, depreciation and amortization
 
469

 
437

Impairment of inventory and other property and equipment
 
4

 
4

Exploration expenses, including dry holes
 
10

 
1

Deferred income taxes
 
69

 
219

Gain on disposition of assets, net
 
(10
)
 
(207
)
Accretion of discount on asset retirement obligations
 
6

 
6

Discontinued operations
 
166

 
60

Interest expense
 
9

 
9

Derivative related activity
 
298

 
(14
)
Amortization of stock-based compensation
 
43

 
34

Other
 
28

 
(8
)
Change in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(59
)
 
(33
)
Income taxes receivable
 
(2
)
 
7

Inventories
 
(8
)
 
(1
)
Prepaid expenses
 
2

 
(10
)
Other current assets
 
(4
)
 
3

Accounts payable
 
30

 
(9
)
Interest payable
 

 
(7
)
Income taxes payable
 
1

 
1

Other current liabilities
 
7

 
(15
)
Net cash provided by operating activities
 
1,183

 
937

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of assets, net of cash sold
 
369

 
675

Additions to oil and gas properties
 
(1,362
)
 
(1,388
)
Additions to other assets and other property and equipment, net
 
(110
)
 
(101
)
Net cash used in investing activities
 
(1,103
)
 
(814
)
Cash flows from financing activities:
 
 
 
 
Borrowings under long-term debt
 
325

 
419

Principal payments on long-term debt
 
(325
)
 
(1,323
)
Proceeds from issuance of common stock, net of issuance costs
 

 
1,281

Distributions to noncontrolling interests
 

 
(18
)
Exercise of long-term incentive plan stock options
 
7

 
4

Purchases of treasury stock
 
(33
)
 
(19
)
Excess tax benefits from share-based payment arrangements
 
4

 
6

Dividends paid
 
(6
)
 
(6
)
Net cash provided by (used in) financing activities
 
(28
)
 
344

Net increase in cash and cash equivalents
 
52

 
467

Cash and cash equivalents, beginning of period
 
393

 
229

Cash and cash equivalents, end of period
 
$
445

 
$
696

  


The financial information included herein has been prepared by management
without audit by independent registered public accountants.
  
The accompanying notes are an integral part of these consolidated financial statements.

9

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)


NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company ("Pioneer" or the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company operating in the United States, with continuing field operations primarily in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Raton field in southeastern Colorado, the Hugoton field in southwest Kansas and the West Panhandle field in the Texas Panhandle.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the consolidated financial statements of the Company as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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 information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
Certain reclassifications have been made to the 2013 financial statement and footnote amounts in order to conform to the 2014 presentation.
New accounting pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. The new guidance is effective for annual reporting periods beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements or decided upon the method of adoption.
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 prospectively changes the criteria for reporting discontinued operations while enhancing disclosures around disposals of assets whether or not the disposal meets the definition of a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning after December 31, 2014 with early adoption permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of this new guidance is not expected to have a material impact on the Company's consolidated financial statements.
NOTE C. Acquisitions and Divestitures
Divestitures Recorded in Continuing Operations
For the three and six months ended June 30, 2014, the Company recorded net gains on disposition of assets in continuing operations of $4 million and $10 million, respectively, as compared to $183 million and $207 million for the same respective periods in 2013. The net gains attributable to the disposition of assets were primarily comprised of the following:

Vertical drilling rigs. During December 2013, the Company committed to a plan to sell the Company's majority interest in Sendero Drilling Company, LLC ("Sendero") to Sendero's minority interest owner. At December 31, 2013, the assets and liabilities of Sendero were classified as held for sale at their estimated fair value. In March 2014, the Company

10

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

completed the sale of Sendero for cash proceeds of $31 million and recognized a gain of $1 million associated with the completion of the sale. As part of the sales agreement, the Company committed to lease from Sendero 12 vertical rigs through December 31, 2015, and eight vertical rigs in 2016.
Permian Basin. During February 2014, the Company completed the sale of proved and unproved properties in Gaines and Dawson counties in the Spraberry field in West Texas for net cash proceeds of $72 million, which resulted in a gain of $2 million on the unproved property.
Southern Wolfcamp. In May 2013, the Company completed the sale of 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field in West Texas to Sinochem Petroleum USA LLC ("Sinochem") for net cash proceeds of $624 million, which resulted in a gain of $181 million related to the unproved property interests conveyed to Sinochem. Sinochem is paying the remaining $1.2 billion of the transaction price by carrying 75 percent of Pioneer's portion of ongoing drilling and facilities costs attributable to the Company's joint operations with Sinochem in the southern portion of the horizontal Wolfcamp Shale play.
West Panhandle. During the first quarter of 2013, the Company completed a sale of its interest in unproved oil and gas properties adjacent to the Company's West Panhandle field operations for net cash proceeds of $38 million, which resulted in a gain of $22 million.
Divestitures Recorded as Discontinued Operations
Alaska. During the fourth quarter of 2013, the Company committed to a plan to sell 100 percent of the capital stock in Pioneer's Alaska subsidiary ("Pioneer Alaska"). In April 2014, the Company completed the sale of Pioneer Alaska to an unaffiliated third party pursuant to an amended purchase and sale agreement for net proceeds of $267 million, including normal closing and other adjustments.
The Company has classified Pioneer Alaska's results of operations as income (loss) from discontinued operations, net of tax, in the accompanying consolidated statements of operations.
Barnett Shale. During the fourth quarter of 2013, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. In August 2014, the Company signed a purchase and sale agreement with an unaffiliated third party for $155 million, before normal closing adjustments. Based on the terms of the purchase and sale agreement, the Company expects to close the sale of the Barnett Shale net assets during the third quarter of 2014. The Company has classified its (i) Barnett Shale assets and liabilities as held for sale in the accompanying consolidated balance sheets and (ii) Barnett Shale results of operations as income (loss) from discontinued operations, net of tax, in the accompanying consolidated statements of operations.
Based upon the estimated sales price for the Barnett Shale net assets at June 30, 2014, the Company recorded an additional noncash impairment charge of $114 million in discontinued operations during the three months ended June 30, 2014 to reduce the carrying value of the Barnett Shale net assets to their estimated sales value. See Note D for additional information about the Barnett Shale impairment charge.

11

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)


The following table represents the components of the Company's discontinued operations for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
40

 
$
64

 
$
107

 
$
123

Interest and other (a)
 

 
6

 
29

 
26

Gain on disposition of assets, net
 
5

 
8

 
5

 
8

 
 
45

 
78

 
141

 
157

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
11

 
26

 
29

 
46

Production and ad valorem taxes
 
2

 
3

 
4

 
6

Depletion, depreciation and amortization
 

 
24

 

 
43

Impairment of oil and gas properties
 
114

 

 
225

 

Exploration and abandonments
 
1

 
5

 
2

 
15

General and administrative
 
1

 
1

 
3

 
2

Other
 
4

 

 
7

 

 
 
133

 
59

 
270

 
112

Income (loss) from discontinued operations before income taxes
 
(88
)
 
19

 
(129
)
 
45

Current tax provision
 

 
(2
)
 
(1
)
 
(4
)
Deferred tax (provision) benefit
 
31

 
(6
)
 
47

 
(14
)
Income (loss) from discontinued operations
 
$
(57
)
 
$
11

 
$
(83
)
 
$
27

 ____________________
(a)
Primarily comprised of cash received associated with Alaskan Petroleum Production Tax credits on qualifying capital expenditures.

The carrying values of the Company's ownership in the Barnett Shale field as of June 30, 2014, and the carrying values of the Company's ownership in Pioneer Alaska, the Barnett Shale field and Sendero as of December 31, 2013, were included in assets and liabilities held for sale in the accompanying consolidated balance sheet and were comprised of the following:
 
 
June 30, 2014
 
December 31, 2013
 
 
(in millions)
Composition of assets included in assets held for sale:
 
 
 
 
Current assets
 
$
25

 
$
58

Property, plant and equipment
 
168

 
526

Total assets
 
$
193

 
$
584

 
 
 
 
 
Composition of liabilities included in liabilities held for sale:
 
 
 
 
Current liabilities
 
$
41

 
$
29

Other liabilities
 
4

 
10

Total liabilities
 
$
45

 
$
39


12

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

NOTE D. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
Level 1 – quoted prices for identical assets or liabilities in active markets.
Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – unobservable inputs for the asset or liability.
Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 for each of the fair value hierarchy levels: 
 
 
Fair Value Measurement at the End of the
Reporting Period Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at June 30, 2014
 
 
(in millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
11

 
$

 
$
11

Deferred compensation plan assets
 
71

 

 

 
71

Total assets
 
71

 
11

 

 
82

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
164

 

 
164

Total liabilities
 

 
164

 

 
164

Total recurring fair value measurements
 
$
71

 
$
(153
)
 
$

 
$
(82
)
Deferred compensation plan assets. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of June 30, 2014, the significant inputs to these asset values represented Level 1 independent active exchange market price inputs.
Commodity derivatives. The Company's commodity derivatives represent oil, natural gas liquids ("NGL") and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.
The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.

13

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities can include inventory, proved and unproved oil and gas properties that are written down to fair value when they are impaired and assets and liabilities associated with other long-lived assets that have been reduced to fair value when they are impaired or held for sale.
Assets classified as held for sale. The Company records assets and liabilities associated with long-lived assets that are classified as held for sale at the lower of the asset's net carrying amount or estimated fair value less costs to sell. At June 30, 2014, the fair value of the Barnett Shale field assets was based upon its estimated sales price, including normal closing adjustments, less costs to sell. Associated therewith, the Company recognized a $114 million impairment charge during the second quarter to reduce the carrying value of the Barnett Shale field assets to their estimated sales price. See Note C for additional information regarding the Company's planned divestiture of its Barnett Shale field assets.
At March 31, 2014, the fair value of the Barnett Shale field assets was based upon a probability weighted average calculation that used management inputs including an estimated sales price and a discounted cash flow model for the proved properties using Level 3 assumptions including (i) management's longer-term commodity price outlooks ("Management's Price Outlooks") for oil and gas prices of $81.58 per barrel ("BBL") for oil and $4.64 per million British thermal units ("MMBTU") for gas, and management's outlooks for (ii) production costs, (iii) capital expenditures, (iv) production and (v) estimated proved reserves. Management's Price Outlooks represent longer-term expectations of oil and gas prices that are developed based on third-party futures price outlooks as of a measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine estimated fair value.
At March 31, 2014, the fair value of Pioneer Alaska was based upon an agreed sales price, including normal closing adjustments, less estimated costs to sell.
The following table presents each of the fair value adjustments made by the Company during 2014 related to assets that were classified as discontinued operations held for sale:
 
 
 
Estimated Fair Value Less Costs to Sell
 
Fair Value Adjustment
 
 
 
(in millions)
Barnett Shale field
June 2014
 
$
148

 
$
(114
)
Barnett Shale field
March 2014
 
$
208

 
$
(14
)
Alaska
March 2014
 
$
253

 
$
(97
)
Inventories. During the three and six months ended June 30, 2014, the Company recorded an impairment charge of $4 million to reduce the carrying value of its excess vertical well pipe inventory. The Company calculated the estimated fair value of the inventory using significant Level 2 assumptions based on third-party price quotes for the asset in an active market. The impairment charge is included in other expense on the Company's accompanying consolidated statements of operations.
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheets as of June 30, 2014 and December 31, 2013 are as follows: 

 
 
June 30, 2014
 
December 31, 2013
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(in millions)
Long-term debt
 
$
2,659

 
$
3,058

 
$
2,653

 
$
3,019

Long-term debt includes the Company's credit facility and the Company's senior notes. The fair value of debt is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy.

14

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Credit facility. The fair value of the Company's credit facility is calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rates and (iii) the applicable credit-adjustments.
Senior notes. The Company's senior notes represent debt securities that are traded on major exchanges but are not actively traded. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.
The Company has other financial instruments consisting primarily of cash equivalents, receivables, prepaid expenses, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include certain assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
NOTE E. Derivative Financial Instruments
The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company uses derivative contracts to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and actual index prices at which the oil is sold.

15

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding oil derivative contracts as of June 30, 2014 and the weighted average oil prices for those contracts: 
 
 
Six Months Ending December 31,
 
Year Ending December 31,
 
 
2014
 
2015
 
2016
Collar contracts with short puts:
 
 
 
 
 
 
Volume (BBL) (a)(b)
 
69,000

 
95,767

 
54,000

Price per BBL:
 
 
 
 
 
 
Ceiling
 
$
114.05

 
$
99.36

 
$
98.36

Floor
 
$
93.70

 
$
87.98

 
$
85.83

Short put
 
$
77.61

 
$
73.54

 
$
74.26

Swap contracts:
 
 
 
 
 
 
Volume (BBL)
 
12,500

 

 

Price per BBL
 
$
95.33

 
$

 
$

Rollfactor swap contracts:
 
 
 
 
 
 
Volume (BBL)
 
10,000

 
5,000

 

NYMEX roll price (c)
 
$
1.10

 
$
0.60

 
$

 ____________________
(a)
Counterparties have the option to extend for an additional year 5,000 BBLs per day of 2015 collar contracts with short puts with a ceiling price of $100.08 per BBL, a floor price of $90.00 per BBL and a short put price of $80.00 per BBL. The option to extend is exercisable on December 31, 2015. These contracts give the counterparties the option to extend the contracts under the same terms for an additional year if the option to extend is exercised by the counterparties on December 31, 2015.
(b)
Subsequent to June 30, 2014, the Company entered into additional collar contracts with short puts for 4,000 BBL per day of the Company's 2016 production with a ceiling price of $100.73 per BBL, a floor price of $90.00 per BBL and a short put price of $80.00 per BBL.
(c)
Represents swaps that fix the difference between (i) each day's price per BBL of WTI for the first nearby month less (ii) the price per BBL of WTI for the second nearby NYMEX month, multiplied by .6667; plus (iii) each day's price per BBL of WTI for the first nearby month less (iv) the price per BBL of WTI for the third nearby NYMEX month, multiplied by .3333.
NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities' NGL component product prices.

16

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding NGL derivative contracts as of June 30, 2014 and the weighted average NGL prices for those contracts: 
 
 
Six Months Ending December 31,
 
 
2014
Collar contracts with short puts (a):
 
 
Volume (BBL)
 
3,500

Price per BBL:
 
 
Ceiling
 
$
97.93

Floor
 
$
90.14

Short put
 
$
81.36

Collar contracts (b):
 
 
Volume (BBL)
 
3,000

Price per BBL:
 
 
Ceiling
 
$
13.72

Floor
 
$
10.78

Swap contracts (c):
 
 
Volume (BBL)
 
2,337

Average price per BBL
 
$
48.11

____________________
(a)
Represent collar contracts with short puts that reduce the price volatility of natural gasoline forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(b)
Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(c)
Represent swap contracts that reduce the price volatility of propane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("HH") gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and actual index prices at which the gas is sold.

17

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding gas derivative contracts as of June 30, 2014 and the weighted average gas prices for those contracts: 
 
 
Six Months Ending December 31,
 
Year Ending December 31,
 
 
2014
 
2015
 
2016
Collar contracts with short puts:
 
 
 
 
 
 
Volume (MMBTU)
 
115,000

 
285,000

 
20,000

Price per MMBTU:
 
 
 
 
 
 
Ceiling
 
$
4.70

 
$
5.07

 
$
5.36

Floor
 
$
4.00

 
$
4.00

 
$
4.00

Short put
 
$
3.00

 
$
3.00

 
$
3.00

Swap contracts:
 
 
 
 
 
 
Volume (MMBTU)
 
195,000

 
20,000

 

Price per MMBTU
 
$
4.04

 
$
4.31

 
$

Basis swap contracts:
 
 
 
 
 
 
Volume (MMBTU) (a)
 
130,000

 
90,000

 

Price per MMBTU
 
$
(0.21
)
 
$
(0.22
)
 
$

____________________
(a)
Subsequent to June 30, 2014, the Company entered into additional basis swap contracts for 20,000 MMBTU per day for August 2014 and 40,000 MMBTU per day for September 2014 with respective price differentials of $0.38 per MMBTU and $0.39 per MMBTU between Permian Basin index prices and southern California index prices.
Marketing and basis transfer derivative activities. Periodically, the Company enters into buy and sell marketing arrangements to fulfill firm pipeline transportation commitments. Associated with these marketing arrangements, the Company may enter into index swaps to mitigate price risk. As of June 30, 2014, the Company had marketing gas index swap contracts for 40,000 MMBTU per day for the remainder of 2014 with a price differential of $0.31 per MMBTU between Permian Basin index prices and southern California index prices.
Interest rate derivative activities. During the three months ended June 30, 2014, the Company terminated its interest rate derivative contracts for cash proceeds of $14 million. Prior to termination, the Company received a fixed interest rate of 3.95 percent in exchange for paying a floating interest rate comprised of the three-month LIBOR plus an average rate of 1.11 percent on a notional amount of $400 million.
Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

18

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The aggregate fair value of the Company's derivative instruments reported in the consolidated balance sheets by type and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:
 
Fair Value of Derivative Instruments as of June 30, 2014
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
14

 
$
(13
)
 
$
1

Commodity price derivatives
 
Derivatives - noncurrent
 
$
20

 
$
(10
)
 
10

 
 
 
 
 
 
 
 
$
11

Liability Derivatives:
 

 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
111

 
$
(13
)
 
$
98

Commodity price derivatives
 
Derivatives - noncurrent
 
$
76

 
$
(10
)
 
66

 
 
 
 
 
 
 
 
$
164


Fair Value of Derivative Instruments as of December 31, 2013
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
73

 
$
(7
)
 
$
66

Interest rate derivatives
 
Derivatives - current
 
$
10

 
$

 
10

Commodity price derivatives
 
Derivatives - noncurrent
 
$
95

 
$
(4
)
 
91

Interest rate derivatives
 
Derivatives - noncurrent
 
$
15

 
$
(15
)
 

 
 
 
 
 
 
 
 
$
167

Liability Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
19

 
$
(7
)
 
$
12

Commodity price derivatives
 
Derivatives - noncurrent
 
$
4

 
$
(4
)
 

Interest rate derivatives
 
Derivatives - noncurrent
 
$
25

 
$
(15
)
 
10

 
 
 
 
 
 
 
 
$
22


The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.


19

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

The following table details the location of gains and losses recognized on the Company's derivative contracts in the accompanying consolidated statements of operations:
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging
 
Location of Gain / (Loss) Recognized in
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Instruments
 
Earnings on Derivatives
 
2014
 
2013
 
2014
 
2013
 
 
 
 
(in millions)
Commodity price derivatives
 
Derivative gains (losses), net
 
$
(226
)
 
$
138

 
$
(340
)
 
$
92

Interest rate derivatives
 
Derivative gains (losses), net
 
8

 
6

 
18

 
10

Total
 
$
(218
)
 
$
144

 
$
(322
)
 
$
102

NOTE F. Exploratory Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Company's capitalized exploratory well and project activity during the three and six months ended June 30, 2014:
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
(in millions)
Beginning capitalized exploratory costs
$
248

 
$
159

Additions to exploratory costs pending the determination of proved reserves
382

 
689

Reclassification due to determination of proved reserves
(265
)
 
(475
)
Disposition of assets
(36
)
 
(36
)
Impairment of properties
(4
)
 
(11
)
Exploratory well costs charged to exploration expense
(3
)
 
(4
)
Ending capitalized exploratory costs (a)
$
322

 
$
322

_______________
(a)
Includes $5 million of capitalized exploratory well costs classified as held for sale in the accompanying consolidated balance sheet as of June 30, 2014.
The following table provides an aging, as of June 30, 2014 and December 31, 2013, of capitalized exploratory costs and the number of projects for which exploratory costs have been capitalized for a period greater than one year based on the date drilling was completed:
 
June 30, 2014
 
December 31, 2013
 
(in millions, except project counts)
Capitalized exploratory costs that have been suspended:
 
 
 
One year or less
$
316

 
$
116

More than one year
6

 
43

 
$
322

 
$
159

 
 
 
 
Number of projects with exploratory costs that have been suspended for a period greater than one year
2

 
1


20

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)



At June 30, 2014, the $6 million of suspended well costs that have been suspended for a period greater than one year are comprised of two wells in eastern Colorado that were drilled as stratigraphic test wells. The costs are capitalized pending the results of further drilling operations in the area during the second half of 2014. The $43 million of suspended well costs suspended for a period greater than one year at December 31, 2013 related to Pioneer Alaska, which was sold in April 2014. See Note C for additional information on the sale of Pioneer Alaska.
NOTE G. Long-term Debt
The Company's long-term debt consists of senior notes and a revolving corporate credit facility (the "Credit Facility"), including the effects of net deferred fair value hedge losses and issuance discounts. The Credit Facility is maintained with a syndicate of financial institutions and has aggregate loan commitments of $1.5 billion that expire in December 2017. As of June 30, 2014, the Company had no outstanding borrowings under the Credit Facility and was in compliance with all of its debt covenants.
NOTE H. Incentive Plans
Stock-based compensation
For the three and six months ended June 30, 2014, the Company recorded $33 million and $62 million, respectively, of stock-based compensation expense for all plans, as compared to $25 million and $53 million for the same respective periods of 2013. As of June 30, 2014, there was $193 million of unrecognized compensation expense related to unvested share-based compensation plan awards, including $58 million attributable to stock-based awards that are expected to be settled on their vesting date in cash, rather than in equity shares ("Liability Awards"). The unrecognized compensation expense will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis. As of June 30, 2014 and December 31, 2013, accounts payable – due to affiliates includes $19 million and $33 million, respectively, of liabilities attributable to Liability Awards.
The following table summarizes the activity that occurred during the six months ended June 30, 2014, for each type of share-based incentive award issued by Pioneer: 
 
 
Restricted
Stock Equity
Awards
 
Restricted
Stock
Liability
Awards
 
Performance
Units
 
Stock
Options
Outstanding as of December 31, 2013
 
1,371,207

 
422,382

 
134,476

 
289,927

Awards granted
 
390,998

 
132,803

 
67,182

 

Awards vested
 
(429,365
)
 
(187,203
)
 
(898
)
 

Options exercised
 

 

 

 
(80,869
)
Awards forfeited
 
(42,854
)
 
(18,278
)
 
(1,078
)
 

Outstanding as of June 30, 2014
 
1,289,986

 
349,704

 
199,682

 
209,058

Postretirement Benefit Obligations
As of June 30, 2014 and December 31, 2013, the Company had $6 million and $8 million, respectively, of unfunded accumulated postretirement benefit obligations. These obligations are comprised of five unfunded plans, of which four relate to predecessor entities that the Company acquired in prior years. Other than the Company's retirement plan, the participants of these plans are not current employees of the Company. The plans had no assets as of June 30, 2014 or December 31, 2013.

21

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

NOTE I. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and facilities. The following table summarizes the Company's asset retirement obligation activity during the three and six months ended June 30, 2014 and 2013: 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Beginning asset retirement obligations
 
$
194

 
$
191

 
$
194

 
$
198

New wells placed on production
 
1

 
1

 
2

 
2

Changes in estimates
 

 
(1
)
 
1

 
(6
)
Dispositions
 

 

 
(1
)
 
(4
)
Liabilities settled
 
(5
)
 
(3
)
 
(9
)
 
(5
)
Accretion of discount
 
3

 
3

 
6

 
6

Ending asset retirement obligations
 
$
193

 
$
191

 
$
193

 
$
191

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of June 30, 2014 and December 31, 2013, the current portions of the Company's asset retirement obligations were both $19 million.
NOTE J. Commitments and Contingencies
The Company is a party to proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
NOTE K. Interest and Other Income
The following table provides the components of the Company's interest and other income for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Other income
 
$
5

 
$
2

 
$
6

 
$
4

Equity interest in income of EFS Midstream (a)
 
3

 
3

 
6

 
6

Deferred compensation plan income
 

 

 
2

 
2

Loss from vertical integration services (b)
 
(5
)
 
(10
)
 
(7
)
 
(17
)
Total interest and other income
 
$
3

 
$
(5
)
 
$
7

 
$
(5
)
 ____________________
(a)
The Company accounts for its investment in EFS Midstream LLC ("EFS Midstream") using the equity method. EFS Midstream is providing gathering, treating and transportation services for the Company during a 20-year contractual term.
(b)
Loss from vertical integration services primarily represents net margins that result from Company-provided fracture stimulation and related service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three and six months ended June 30, 2014, these net margins included $104 million and $196 million of gross vertical integration revenues, respectively, and $109 million and $203 million of total vertical integration costs and expenses, respectively. For the same periods in 2013, these net margins included $47 million and $103 million of gross vertical integration revenues, respectively, and $57 million and $120 million of total vertical integration costs and expenses, respectively.

22

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

 NOTE L. Other Expense
The following table provides the components of the Company's other expense for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Transportation commitment charge (a)
 
$
12

 
$
9

 
$
23

 
$
19

Other
 
6

 
6

 
9

 
10

Impairment of inventory (b)
 
4

 
1

 
4

 
2

Contingency and environmental accrual adjustments
 

 
1

 
2

 
2

Above market and idle drilling and well services equipment charges (c)
 

 
5

 

 
8

Terminated drilling rig contract charges
 

 

 

 
1

Total other expense
 
$
22

 
$
22

 
$
38

 
$
42

 ____________________
(a)
Primarily represents firm transportation payments on excess pipeline capacity commitments.
(b)
Represents charges to reduce excess material and supplies inventories to their market values. See Note D for additional information on the fair value of materials and supplies inventory.
(c)
Primarily represents expenses attributable to the portion of the Company's contracted rig rates that were above market rates and idle rig fees, neither of which were chargeable to joint operations.
NOTE M. Income Taxes
The Company's income tax provisions attributable to income from continuing operations consisted of the following for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Current
 
$
6

 
$
7

 
$
18

 
$
14

Deferred
 
28

 
176

 
69

 
219

Income tax provision
 
$
34

 
$
183

 
$
87

 
$
233

For the three and six months ended June 30, 2014, the Company's effective tax rates, excluding income attributable to the noncontrolling interest, were 37 percent and 30 percent, respectively, as compared to effective rates of 36 percent for each of the same respective periods in 2013. The Company's 2014 effective tax rates differed from the U.S. statutory rate of 35 percent primarily due to state income tax apportionments, nondeductible expenses and, for the six months ended June 30, 2014, the recognition of a $21 million tax benefit resulting from the resolution during the first quarter of 2014 of the tax uncertainty related to net operating loss carryovers and alternative minimum tax credits obtained from the 2012 acquisition of Premier Silica. There are no unrecognized tax benefits as of June 30, 2014.
The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. The Internal Revenue Service has closed examinations of the 2012 and prior tax years and, with few exceptions, the Company believes that it is no longer subject to examinations by state and foreign tax authorities for years before 2008. As of June 30, 2014, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company's liquidity, future results of operations or financial position.

23

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

NOTE N. Net Income Per Share
The following table reconciles the Company's net income from continuing operations attributable to common stockholders to basic and diluted net income from continuing operations attributable to common stockholders for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Net income from continuing operations attributable to common stockholders
 
$
58

 
$
326

 
$
207

 
$
411

Participating basic earnings
 

 
(4
)
 
(1
)
 
(5
)
Basic and diluted income from continuing operations attributable to common stockholders
 
$
58

 
$
322

 
$
206

 
$
406

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six months ended June 30, 2014 and 2013: 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
143

 
138

 
143

 
133

Dilution attributable to convertible senior notes
 

 
1

 

 
3

Diluted (a)
 
143

 
139

 
143

 
136

 ____________________
(a)
Options to purchase 5,707 and 52,263 shares of the Company's common stock were excluded from the diluted income per share calculations for the three and six months ended June 30, 2013, respectively, because they would have been anti-dilutive to the calculation.
NOTE O. Subsequent Events
Divestitures. As discussed in Note C, in August 2014 the Company signed a purchase and sale agreement with an unaffiliated third party to sell its net assets in the Barnett Shale field in North Texas for $155 million, before normal closing adjustments.
In July 2014, the Company entered into a purchase and sale agreement with an unaffiliated third party to sell its net assets in the Hugoton field in southwest Kansas for cash proceeds of $340 million, before normal closing adjustments. Closing of the transaction is expected to occur during the third quarter of 2014 and is subject to customary closing conditions. Associated with the sale of the Hugoton field, the Company expects to record a pretax noncash loss of approximately $20 million during the three months ended September 30, 2014. The financial and operating results of the Hugoton field activities for the quarter ending September 30, 2014 and all prior periods presented in future filings are expected to be reflected as discontinued operations. No impairment of the net assets of the Hugoton field was recorded as of June 30, 2014 due to (i) the probability-weighted undiscounted cash flows of the Hugoton field net assets exceeding their carrying value at June 30, 2014 and (ii) the uncertainty regarding the willingness of third parties to purchase the Hugoton field net assets on terms and at a price acceptable to the Company, which precluded held for sale criteria as of June 30, 2014.


24

PIONEER NATURAL RESOURCES COMPANY

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the second quarter of 2014 included the following highlights:
Net income attributable to common stockholders for the second quarter of 2014 was $1 million ($0.01 per diluted share), as compared to net income of $337 million ($2.40 per diluted share) for the second quarter of 2013. The decrease in net income attributable to common stockholders is comprised of a $268 million decrease in net income from continuing operations and a $68 million decrease in income from discontinued operations, net of tax.
The primary components of the decrease in net income from continuing operations include:
a $362 million increase in net derivative losses, primarily as a result of increases in forward commodity prices and changes in the Company's portfolio of derivatives;
a $179 million decrease in gain on disposition of assets, primarily due to the $181 million gain related to the Company's unproved property interests that were conveyed to Sinochem in the second quarter of 2013;
a $28 million increase in total oil and gas production costs and production and ad valorem taxes, primarily associated with a 12 percent increase in sales volumes;
a $23 million increase in DD&A expense, primarily attributable to a 12 percent increase in sales volumes;
a $16 million increase in general and administrative expense, primarily due to increased personnel, occupancy and information technology costs resulting from the growth in employee headcount in support of the Company's capital expansion initiatives; and
an $11 million increase in exploration and abandonment expense, primarily attributable to the acquisition costs for seismic data covering portions of the Company's Spraberry/Wolfcamp acreage position; partially offset by
a $178 million increase in oil and gas revenues as a result of a 12 percent increase in sales volumes and a 10 percent increase in the average commodity prices received per BOE; and
a $149 million decrease in the Company's income tax provision as a result of the Company's decrease in income from continuing operations before taxes.
The primary components of the decrease in income from discontinued operations, net of tax, include:
a $114 million impairment charge to reduce the carrying value of the Company's Barnett Shale field assets to their estimated sales value less costs to sell;
a $33 million decrease in revenues and other income due to the sale of Pioneer Alaska in April 2014; partially offset by
a $24 million decrease in depletion, depreciation and amortization due to the assets of the Barnett Shale field and Pioneer Alaska being classified as held for sale at December 31, 2013;
a $15 million decrease in oil and gas production costs due to the sale of Pioneer Alaska in April 2014; and
a $39 million change in the Company's income taxes attributable to discontinued operations as a result of the loss from discontinued operations before taxes.
During the second quarter of 2014, average daily sales volumes from continuing operations increased by 12 percent to 182,747 BOEPD, as compared to 163,443 BOEPD during the second quarter of 2013. The increase in second quarter 2014 average daily sales volumes, as compared to the second quarter of 2013, is primarily due to the Company's successful Spraberry/Wolfcamp and Eagle Ford Shale drilling programs.
Average oil, NGL and gas prices increased during the second quarter of 2014 to $95.87 per BBL, $30.65 per BBL and $4.38 per MCF, respectively, as compared to $90.35 per BBL, $28.54 per BBL and $3.76 per MCF, respectively, in the second quarter of 2013.
Net cash provided by operating activities increased to $718 million for the three months ended June 30, 2014, as compared to $576 million for the three months ended June 30, 2013. The $142 million increase in net cash provided by operating activities is primarily due to an increase in sales volumes and commodity prices, partially offset by a decrease in net cash flows from derivative settlements.
As of both June 30, 2014 and December 31, 2013, the Company's net debt to book capitalization was 25 percent.

25

PIONEER NATURAL RESOURCES COMPANY

Recent Developments
Divestitures
During the fourth quarter of 2013, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. In August 2014 the Company signed a purchase and sale agreement with an unaffiliated third party for $155 million, before normal closing adjustments. The Company anticipates that the divestiture will close in the third quarter of 2014 and is subject to customary closing conditions.
In July 2014, the Company entered into a purchase and sale agreement with an unaffiliated third party to sell its net assets in the Hugoton field in southwest Kansas for cash proceeds of $340 million, before normal closing adjustments. Closing of the transaction is expected to occur during the third quarter of 2014 and is subject to customary closing conditions. Associated with the sale of the Hugoton field, the Company expects to record a pretax noncash loss of approximately $20 million during the three months ended September 30, 2014. The financial and operating results of the Hugoton field activities for the quarter ending September 30, 2014 and all prior periods presented in future filings are expected to be reflected as discontinued operations. See Note O of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for more information about the sale of the Hugoton field.

 Third Quarter 2014 Outlook
Based on current estimates, the Company expects the following operating and financial results from continuing operations for the quarter ending September 30, 2014:
Production is forecasted to average 181,000 to 186,000 BOEPD.
Production costs (including production and ad valorem taxes and transportation costs) are expected to average $13.50 to $15.50 per BOE based on current NYMEX strip commodity prices. DD&A expense is expected to average $14.00 to $16.00 per BOE.
Total exploration and abandonment expense is expected to be $25 million to $35 million. General and administrative expense is expected to be $80 million to $85 million. Interest expense is expected to be $47 million to $52 million, and other expense is expected to be $25 million to $35 million. Accretion of discount on asset retirement obligations is expected to be $3 million to $5 million.
The Company's effective income tax rate is expected to range from 35 percent to 40 percent assuming current capital spending plans and no significant mark-to-market changes in the Company's derivative position. Cash income taxes are expected to range from $10 million to $15 million and are primarily attributable to federal alternative minimum tax and state taxes.
Operations and Drilling Highlights
The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during the six months ended June 30, 2014:
 
 
Oil (BBLs)
 
NGLs (BBLs)
 
Gas (MCF)
 
Total (BOE)
Permian Basin
 
58,153

 
18,619

 
78,457

 
89,849

South Texas - Eagle Ford Shale
 
17,228

 
12,915

 
86,714

 
44,595

Raton Basin
 

 

 
125,762

 
20,960

Mid-Continent
 
3,010

 
7,003

 
38,593

 
16,445

South Texas - Other
 
792

 
9