10-Q 1 pxd-20140930.htm 10-Q PXD-2014.09.30
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 September 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 October 30, 2014                               143,147,890



PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statement of Equity for the nine months ended September 30, 2014
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 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)
 
 
 
September 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
550

 
$
393

Accounts receivable:
 
 
 
 
Trade, net
 
483

 
431

Due from affiliates
 
7

 
3

Income taxes receivable
 
22

 
5

Inventories
 
237

 
220

Prepaid expenses
 
23

 
16

Deferred income taxes
 
2

 

Assets held for sale
 

 
584

Other current assets:
 
 
 
 
Derivatives
 
128

 
76

Other
 
39

 
2

Total current assets
 
1,491

 
1,730

Property, plant and equipment, at cost:
 
 
 
 
Oil and gas properties, using the successful efforts method of accounting:
 
 
 
 
Proved properties
 
14,856

 
13,406

Unproved properties
 
154

 
123

Accumulated depletion, depreciation and amortization
 
(5,183
)
 
(4,903
)
Total property, plant and equipment
 
9,827

 
8,626

Goodwill
 
272

 
274

Other property and equipment, net
 
1,303

 
1,224

Other assets:
 
 
 
 
Investment in unconsolidated affiliate
 
221

 
225

Derivatives
 
57

 
91

Other, net
 
101

 
124

 
 
$
13,272

 
$
12,294







The financial information included as of September 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)
 
 
 
September 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
1,228

 
$
910

Due to affiliates
 
102

 
150

Interest payable
 
36

 
62

Income taxes payable
 
1

 

Deferred income taxes
 

 
19

Liabilities held for sale
 

 
39

Other current liabilities:
 
 
 
 
Derivatives
 
1

 
12

Other
 
71

 
58

Total current liabilities
 
1,439

 
1,250

Long-term debt
 
2,662

 
2,653

Derivatives
 

 
10

Deferred income taxes
 
1,734

 
1,473

Other liabilities
 
284

 
293

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

 
1

Additional paid-in capital
 
5,162

 
5,080

Treasury stock at cost: 3 million shares as of September 30, 2014 and December 31, 2013, respectively
 
(170
)
 
(144
)
Retained earnings
 
2,152

 
1,665

Total equity attributable to common stockholders
 
7,145

 
6,602

Noncontrolling interests in consolidating subsidiaries
 
8

 
13

Total equity
 
7,153

 
6,615

Commitments and contingencies
 


 


 
 
$
13,272

 
$
12,294







The financial information included as of September 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
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
967

 
$
820

 
$
2,795

 
$
2,296

Sales of purchased oil and gas
 
202

 
82

 
554

 
194

Interest and other
 
2

 
8

 
9

 
3

Derivative gains (losses), net
 
341

 
(102
)
 
19

 

Gain (loss) on disposition of assets, net
 
1

 
(1
)
 
11

 
206

 
 
1,513

 
807

 
3,388

 
2,699

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
168

 
150

 
493

 
440

Production and ad valorem taxes
 
58

 
49

 
169

 
147

Depletion, depreciation and amortization
 
274

 
222

 
734

 
650

Purchased oil and gas
 
194

 
85

 
535

 
196

Exploration and abandonments
 
22

 
30

 
80

 
65

General and administrative
 
81

 
72

 
244

 
200

Accretion of discount on asset retirement obligations
 
3

 
3

 
9

 
9

Interest
 
46

 
45

 
138

 
139

Other
 
20

 
24

 
55

 
65

 
 
866

 
680

 
2,457

 
1,911

Income from continuing operations before income taxes
 
647

 
127

 
931

 
788

Income tax provision
 
(236
)
 
(48
)
 
(319
)
 
(281
)
Income from continuing operations
 
411

 
79

 
612

 
507

Income (loss) from discontinued operations, net of tax
 
(37
)
 
19

 
(113
)
 
52

Net income
 
374

 
98

 
499

 
559

Net income attributable to noncontrolling interests
 

 
(7
)
 

 
(30
)
Net income attributable to common stockholders
 
$
374

 
$
91

 
$
499

 
$
529

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.84

 
$
0.51

 
$
4.24

 
$
3.49

Income (loss) from discontinued operations
 
(0.26
)
 
0.14

 
(0.79
)
 
0.38

Net income
 
$
2.58

 
$
0.65

 
$
3.45

 
$
3.87

Diluted earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.84

 
$
0.51

 
$
4.23

 
$
3.44

Income (loss) from discontinued operations
 
(0.26
)
 
0.14

 
(0.79
)
 
0.38

Net income
 
$
2.58

 
$
0.65

 
$
3.44

 
$
3.82

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
143

 
139

 
143

 
135

Diluted
 
143

 
139

 
143

 
137

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08

 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
411

 
$
72

 
$
612

 
$
477

Income (loss) from discontinued operations, net of tax
 
(37
)
 
19

 
(113
)
 
52

Net income
 
$
374

 
$
91

 
$
499

 
$
529



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 ($0.08 per share)
 

 

 

 

 
(12
)
 

 
(12
)
Exercise of long-term incentive plan stock options and employee stock purchases
 

 

 
6

 
7

 

 

 
13

Purchases of treasury stock
 

 

 

 
(33
)
 

 

 
(33
)
Sendero divestiture
 

 

 

 

 

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

 

 
14

 

 

 

 
14

Pioneer Southwest merger transaction costs
 

 

 
(1
)
 

 

 

 
(1
)
Compensation costs included in net income
 

 

 
63

 

 

 

 
63

Cash distributions to noncontrolling interests
 

 

 

 

 

 
(1
)
 
(1
)
Net income
 

 

 

 

 
499

 

 
499

Balance as of September 30, 2014
 
143

 
$
1

 
$
5,162

 
$
(170
)
 
$
2,152

 
$
8

 
$
7,153








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)
 
 
Nine Months Ended
September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
499

 
$
559

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depletion, depreciation and amortization
 
734

 
650

Impairment of inventory and other property and equipment
 
7

 
8

Exploration expenses, including dry holes
 
11

 
10

Deferred income taxes
 
315

 
276

Gain on disposition of assets, net
 
(11
)
 
(206
)
Accretion of discount on asset retirement obligations
 
9

 
9

Discontinued operations
 
247

 
114

Interest expense
 
13

 
13

Derivative related activity
 
(39
)
 
122

Amortization of stock-based compensation
 
63

 
53

Other
 
42

 
(8
)
Change in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(77
)
 
(89
)
Income taxes receivable
 
(17
)
 
(3
)
Inventories
 
(27
)
 
(28
)
Prepaid expenses
 
(11
)
 
(7
)
Other current assets
 
(1
)
 
2

Accounts payable
 
96

 
184

Interest payable
 
(26
)
 
(32
)
Income taxes payable
 
1

 

Other current liabilities
 
(30
)
 
(22
)
Net cash provided by operating activities
 
1,798

 
1,605

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of assets, net of cash sold
 
855

 
685

Additions to oil and gas properties
 
(2,259
)
 
(1,987
)
Additions to other assets and other property and equipment, net
 
(224
)
 
(160
)
Net cash used in investing activities
 
(1,628
)
 
(1,462
)
Cash flows from financing activities:
 
 
 
 
Borrowings under long-term debt
 
523

 
444

Principal payments on long-term debt
 
(523
)
 
(1,323
)
Proceeds from issuance of common stock, net of issuance costs
 

 
1,281

Distributions to noncontrolling interests
 
(1
)
 
(27
)
Exercise of long-term incentive plan stock options and employee stock purchases
 
13

 
10

Purchases of treasury stock
 
(33
)
 
(20
)
Excess tax benefits from share-based payment arrangements
 
14

 
13

Dividends paid
 
(6
)
 
(6
)
Net cash provided by (used in) financing activities
 
(13
)
 
372

Net increase in cash and cash equivalents
 
157

 
515

Cash and cash equivalents, beginning of period
 
393

 
229

Cash and cash equivalents, end of period
 
$
550

 
$
744

  


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

9

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 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 September 30, 2014 and for the three and nine months ended September 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. Divestitures
Divestitures Recorded in Continuing Operations
For the three and nine months ended September 30, 2014, the Company recorded net gains on disposition of assets in continuing operations of $1 million and $11 million, respectively, as compared to a net loss of $1 million and a net gain of $206 million for the same respective periods in 2013. The net gains and losses 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
September 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 a lease agreement with Sendero for 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 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 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 cash proceeds of $38 million, which resulted in a gain of $22 million.
Divestitures Recorded as Discontinued Operations
Hugoton. In September 2014, the Company completed the sale of its net assets in the Hugoton field in southwest Kansas for cash proceeds of $328 million, including normal closing adjustments. Associated therewith, the Company reduced the carrying value of goodwill by $2 million, reflecting the portion of the Company's goodwill related to Hugoton field net assets sold. See Note D for information about impairment charges on the Hugoton assets.
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 September 2014, the Company completed the sale of its Barnett Shale net assets for cash proceeds of $150 million, including normal closing adjustments. See Note D for information about impairment charges on the Barnett Shale assets.
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 cash proceeds of $267 million, before normal closing and other adjustments.
The Company has classified its Hugoton, Barnett Shale and Pioneer Alaska results of operations as income (loss) from discontinued operations, net of tax, in the accompanying consolidated statements of operations.


11

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

The following table represents the components of the Company's discontinued operations for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
49

 
$
89

 
$
198

 
$
246

Interest and other (a)
 
1

 
13

 
31

 
39

Gain on disposition of assets, net
 

 

 
5

 
9

 
 
50

 
102

 
234

 
294

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
16

 
32

 
59

 
90

Production and ad valorem taxes
 
3

 
5

 
12

 
15

Depletion, depreciation and amortization
 
2

 
34

 
11

 
87

Impairment of oil and gas properties
 
80

 

 
305

 

Exploration and abandonments
 
1

 
2

 
3

 
18

General and administrative
 

 
2

 
3

 
4

Accretion of discount on asset retirement obligations
 

 

 
1

 
1

Other
 
6

 
(2
)
 
14

 
(2
)
 
 
108

 
73

 
408

 
213

Income (loss) from discontinued operations before income taxes
 
(58
)
 
29

 
(174
)
 
81

Current tax provision
 

 

 
(1
)
 
(4
)
Deferred tax (provision) benefit
 
21

 
(10
)
 
62

 
(25
)
Income (loss) from discontinued operations
 
$
(37
)
 
$
19

 
$
(113
)
 
$
52

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

As of December 31, 2013, the carrying values of the Company's ownership in Pioneer Alaska, the Barnett Shale field and Sendero were included in assets and liabilities held for sale in the accompanying consolidated balance sheet and were comprised of the following (the Company had no assets held for sale at September 30, 2014):
 
 
December 31, 2013
 
 
(in millions)
Composition of assets included in assets held for sale:
 
 
Current assets
 
$
58

Property, plant and equipment
 
526

Total assets
 
$
584

 
 
 
Composition of liabilities included in liabilities held for sale:
 
 
Current liabilities
 
$
29

Other liabilities
 
10

Total liabilities
 
$
39


12

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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 September 30, 2014
 
 
(in millions)
Recurring fair value measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
185

 
$

 
$
185

Deferred compensation plan assets
 
70

 

 

 
70

Total assets
 
70

 
185

 

 
255

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
1

 

 
1

Total liabilities
 

 
1

 

 
1

Total recurring fair value measurements
 
$
70

 
$
184

 
$

 
$
254

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.
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 September 30, 2014, the significant inputs to these asset values represented Level 1 independent active exchange market price inputs.

13

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 and other long-lived assets that are written down to fair value when they are impaired or held for sale. During the three and nine months ended September 30, 2014, the Company recorded charges in other expense in the Company's accompanying consolidated statements of operations of $3 million and $6 million, respectively, to reduce the carrying value of inventory to fair value.
Assets associated with divestitures. Long-lived assets that are classified as held for sale are recorded at the lower of the asset's net carrying amount or estimated fair value less costs to sell. The Hugoton field assets, the Barnett Shale field assets and Pioneer Alaska were classified as held for sale and carried as such until their divestitures in September 2014, September 2014 and April 2014, respectively. Associated therewith, the Company recognized impairment charges during 2014 to reduce the carrying values of the Hugoton field assets, the Barnett Shale field assets and Pioneer Alaska to their sales prices, less costs to sell.
The following table presents the fair value adjustments made by the Company during 2014 related to assets associated with divestitures:
 
 
 
 
Fair Value Adjustment
 
 
Sales Value Less Costs to Sell
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
 
(in millions)
Hugoton field
 
$
328

 
$
(34
)
 
$
(34
)
Barnett Shale field
 
$
149

 
$
(46
)
 
$
(174
)
Pioneer Alaska
 
$
253

 
$

 
$
(97
)
See Note C for additional information regarding the Company's divestitures of the Hugoton field assets, the Barnett Shale field assets and Pioneer Alaska.
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 September 30, 2014 and December 31, 2013 are as follows: 

 
 
September 30, 2014
 
December 31, 2013
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(in millions)
Long-term debt
 
$
2,662

 
$
3,025

 
$
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.
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 assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.

14

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

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

 
95,767

 
59,000

Price per BBL:
 
 
 
 
 
 
Ceiling
 
$
114.05

 
$
99.36

 
$
98.55

Floor
 
$
93.70

 
$
87.98

 
$
86.14

Short put
 
$
77.61

 
$
73.54

 
$
74.75

Swap contracts:
 
 
 
 
 
 
Volume (BBL)
 
15,000

 

 

Price per BBL
 
$
96.31

 
$

 
$

Rollfactor swap contracts:
 
 
 
 
 
 
Volume (BBL) (c)
 
6,630

 
5,000

 

NYMEX roll price (d)
 
$
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)
During the period from October 1, 2014 through October 30, 2014, the Company entered into an additional 11,000 BBL per day of 2016 collar contracts with short puts with a ceiling price of $87.76 per BBL, a floor price of $82.82 per BBL and a short put price of $72.82 per BBL.
(c)
During the period from October 1, 2014 through October 30, 2014, the Company entered into an additional 12,000 BBL per day of 2015 rollfactor swap contracts with a NYMEX roll price of $0.15 per BBL.
(d)
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.

15

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

The following table sets forth the volumes per day associated with the Company's outstanding NGL derivative contracts as of September 30, 2014 and the weighted average NGL prices for those contracts: 
 
 
Three Months Ending December 31,
 
Year Ending December 31,
 
 
2014
 
2015
 
2016
Natural gasoline collar contracts with short puts (a):
 
 
 
 
 
 
Volume (BBL)
 
3,500

 

 

Price per BBL:
 
 
 
 
 
 
Ceiling
 
$
97.93

 
$

 
$

Floor
 
$
90.14

 
$

 
$

Short put
 
$
81.36

 
$

 
$

Ethane collar contracts (a):
 
 
 
 
 
 
Volume (BBL)
 
3,000

 

 

Price per BBL:
 
 
 
 
 
 
Ceiling
 
$
13.72

 
$

 
$

Floor
 
$
10.78

 
$

 
$

Ethane swap contracts (a)(b):
 
 
 
 
 
 
Volume (BBL)
 

 

 
3,000

Average price per BBL
 
$

 
$

 
$
12.39

Propane swap contracts (a):
 
 
 
 
 
 
Volume (BBL)
 
1,674

 

 

Average price per BBL
 
$
47.95

 
$

 
$

____________________
(a)
Represent derivative contracts that reduce the price volatility of natural gasoline, ethane or propane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(b) During the period from October 1, 2014 through October 30, 2014, the Company entered into an additional 1,000 BBL per day of 2016 swap contracts for ethane with a fixed price of $11.97 per BBL.
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 the actual index prices at which the gas is sold.

16

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

The following table sets forth the volumes per day associated with the Company's outstanding gas derivative contracts as of September 30, 2014 and the weighted average gas prices for those contracts: 
 
 
Three 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

 
70,000

Price per MMBTU
 
$
4.04

 
$
4.31

 
$
4.06

Basis swap contracts:
 
 
 
 
 
 
Mid-Continent index swap volume (a)
 
120,000

 
95,000

 

Price differential ($/MMBTU)
 
$
(0.22
)
 
$
(0.24
)
 
$

Permian Basin index swap volume (a)
 
10,000

 
10,000

 

Price differential ($/MMBTU)
 
$
(0.15
)
 
$
(0.13
)
 
$

Permian Basin index swap volume (b)
 
16,630

 

 

Price differential ($/MMBTU)
 
$
0.34

 
$

 
$

____________________
(a)
Represent swaps that fix the basis differentials between the index prices at which the Company sells its Mid-Continent and Permian Basin gas, respectively, and the NYMEX Henry Hub index price used in gas swap and collar contracts.
(b)
Represent swaps that fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in southern California.
Marketing and basis differential 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 September 30, 2014, the Company had (i) 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 and (ii) marketing oil index swap contracts for 10,000 BBL per day for the remainder of 2014 with a price differential of $2.81 per BBL between Cushing WTI and Louisiana Light Sweet oil ("LLS") and 10,000 BBL per day for 2015 with a price differential of $2.99 per BBL between Cushing WTI and LLS.
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 London Interbank Offered Rate ("LIBOR") plus an average rate of 1.11 percent on a notional amount of $400 million.
During the period from October 1, 2014 through October 30, 2014, the Company entered into interest rate derivative contracts that expire on June 30, 2015 for a notional amount of $200 million. The Company will pay an average fixed rate of 2.43 percent in exchange for receiving the 10-year Treasury rate as of the expiration date.
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.

17

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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
 
$
132

 
$
(4
)
 
$
128

Commodity price derivatives
 
Derivatives - noncurrent
 
$
62

 
$
(5
)
 
57

 
 
 
 
 
 
 
 
$
185

Liability Derivatives:
 

 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
5

 
$
(4
)
 
$
1

Commodity price derivatives
 
Derivatives - noncurrent
 
$
5

 
$
(5
)
 

 
 
 
 
 
 
 
 
$
1


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.


18

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
September 30,
 
Nine Months Ended
September 30,
Instruments
 
Earnings on Derivatives
 
2014
 
2013
 
2014
 
2013
 
 
 
 
(in millions)
Commodity price derivatives
 
Derivative gains (losses), net
 
$
341

 
$
(108
)
 
$
1

 
$
(17
)
Interest rate derivatives
 
Derivative gains (losses), net
 

 
6

 
18

 
17

Total
 
$
341

 
$
(102
)
 
$
19

 
$

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 nine months ended September 30, 2014:
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
(in millions)
Beginning capitalized exploratory costs
$
322

 
$
159

Additions to exploratory costs pending the determination of proved reserves
586

 
1,275

Reclassification due to determination of proved reserves
(466
)
 
(941
)
Disposition of assets
(16
)
 
(52
)
Impairment of properties
(1
)
 
(12
)
Exploratory well costs charged to exploration expense
(1
)
 
(5
)
Ending capitalized exploratory costs
$
424

 
$
424

The following table provides an aging, as of September 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:
 
September 30, 2014
 
December 31, 2013
 
(in millions, except project counts)
Capitalized exploratory costs that have been suspended:
 
 
 
One year or less
$
416

 
$
116

More than one year
8

 
43

 
$
424

 
$
159

 
 
 
 
Number of projects with exploratory costs that have been suspended for a period greater than one year
3

 
1

At September 30, 2014, the $8 million of suspended well costs that have been suspended for a period greater than one year are comprised of two wells in eastern Colorado and one well in the Eagle Ford Shale play that were drilled as stratigraphic test wells. The costs are capitalized pending the results of further drilling operations in the area.
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.

19

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

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 September 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 nine months ended September 30, 2014, the Company recorded $27 million and $89 million, respectively, of stock-based compensation expense for all plans, as compared to $33 million and $85 million for the same respective periods of 2013. As of September 30, 2014, there was $160 million of unrecognized compensation expense related to unvested share-based compensation plan awards, including $42 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 September 30, 2014 and December 31, 2013, accounts payable – due to affiliates includes $22 million and $33 million, respectively, of liabilities attributable to Liability Awards.
The following table summarizes the activity that occurred during the nine months ended September 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
 
406,617

 
140,093

 
67,182

 

Awards vested
 
(451,372
)
 
(200,408
)
 
(898
)
 

Options exercised
 

 

 

 
(90,869
)
Awards forfeited
 
(52,542
)
 
(25,534
)
 
(1,078
)
 

Outstanding as of September 30, 2014
 
1,273,910

 
336,533

 
199,682

 
199,058

Postretirement Benefit Obligations
As of September 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 September 30, 2014 or December 31, 2013.

20

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2014 and 2013: 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Beginning asset retirement obligations
 
$
193

 
$
191

 
$
194

 
$
198

New wells placed on production
 
1

 
1

 
3

 
3

Changes in estimates
 
2

 

 
3

 
(6
)
Dispositions
 
(5
)
 

 
(7
)
 
(4
)
Liabilities settled
 
(6
)
 
(4
)
 
(14
)
 
(10
)
Accretion of discount
 
3

 
3

 
9

 
9

Accretion of discount on discontinued operations
 

 

 

 
1

Ending asset retirement obligations
 
$
188

 
$
191

 
$
188

 
$
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 September 30, 2014, the current portion of the Company's asset retirement obligations was $27 million, as compared to $19 million at December 31, 2013.
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.
Obligations following divestitures. In connection with its divestiture transactions, the Company typically retains certain liabilities and provides the purchaser certain indemnifications, subject to defined limitations, which may apply to pre-closing matters such as litigation, environmental contingencies, royalty obligations and income taxes. The Company does not believe these obligations are probable of having a material impact on its liquidity, financial position or future results of operations.

21

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

NOTE K. Interest and Other Income
The following table provides the components of the Company's interest and other income for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Equity interest in income of EFS Midstream (a)
 
$
3

 
$
4

 
$
10

 
$
10

Other income
 
1

 
2

 
5

 
6

Deferred compensation plan income
 

 

 
3

 
2

Income (loss) from vertical integration services (b)
 
(2
)
 
2

 
(9
)
 
(15
)
Total interest and other income
 
$
2

 
$
8

 
$
9

 
$
3

 ____________________
(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)
Income (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 nine months ended September 30, 2014, these net margins included $125 million and $321 million of gross vertical integration revenues, respectively, and $127 million and $330 million of total vertical integration costs and expenses, respectively. For the same periods in 2013, these net margins included $103 million and $206 million of gross vertical integration revenues, respectively, and $101 million and $221 million of total vertical integration costs and expenses, respectively.
 NOTE L. Other Expense
The following table provides the components of the Company's other expense for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Transportation commitment charge (a)
 
$
11

 
$
10

 
$
34

 
$
29

Other
 
4

 
5

 
11

 
14

Impairment of inventory (b)
 
3

 
3

 
6

 
5

Contingency and environmental accrual adjustments
 

 
5

 
2

 
7

Above market and idle drilling and well services equipment charges (c)
 
2

 
1

 
2

 
10

Total other expense
 
$
20

 
$
24

 
$
55

 
$
65

 ____________________
(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.

22

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

NOTE M. Income Taxes
The Company's income tax provisions attributable to income from continuing operations consisted of the following for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Current tax provision (benefit)
 
$
(14
)
 
$
(9
)
 
$
4

 
$
5

Deferred tax provision
 
250

 
57

 
315

 
276

Income tax provision
 
$
236

 
$
48

 
$
319

 
$
281

For the three and nine months ended September 30, 2014, the Company's effective tax rates, excluding income attributable to the noncontrolling interest, were 36 percent and 34 percent, respectively, as compared to effective rates of 40 percent and 37 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 nine months ended September 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 September 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 2009. As of September 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.
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 nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Net income from continuing operations attributable to common stockholders
 
$
411

 
$
72

 
$
612

 
$
477

Participating basic earnings
 
(4
)
 
(1
)
 
(5
)
 
(6
)
Basic and diluted income from continuing operations attributable to common stockholders
 
$
407

 
$
71

 
$
607

 
$
471


23

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

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

 
139

 
143

 
135

Dilution attributable to convertible senior notes
 

 

 

 
2

Diluted (a)
 
143

 
139

 
143

 
137

 ____________________
(a)
The Company excluded 33,591 shares and 11,197 shares attributable to unvested performance units from the diluted income per share calculations for the three and nine months ended September 30, 2014, respectively, because they would have been anti-dilutive to the calculation. Options to purchase 34,842 shares of the Company's common stock were excluded from the diluted income per share calculations for the nine months ended September 30, 2013 because they would have been anti-dilutive to the calculation.
NOTE O. Subsequent Events
During November 2014, the Company announced that it is pursuing the divestment of its 50.1 percent share of EFS Midstream. The Company accounts for EFS Midstream under the equity method of accounting for investments in unconsolidated affiliates. The Company is in the early stages of marketing its equity investment in EFS Midstream and no assurance can be given that the sale will be completed in accordance with the Company's plans or on terms and at a price acceptable to the Company.

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 third quarter of 2014 included the following highlights:
Net income attributable to common stockholders for the third quarter of 2014 was $374 million ($2.58 per diluted share), as compared to net income of $91 million ($0.65 per diluted share) for the third quarter of 2013. The increase in net income attributable to common stockholders is comprised of a $339 million increase in net income from continuing operations attributable to common stockholders and a $56 million decrease in income from discontinued operations, net of tax.
The primary components of the increase in net income from continuing operations include: