10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    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

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (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  x

Number of shares of Common Stock outstanding as of November 2, 2009 115,320,979

 

 

 


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

 

         Page

Cautionary Statement Concerning Forward-Looking Statements

   3

Definitions of Certain Terms and Conventions Used Herein

   4
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

   5
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008

   7
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2009

   8
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008

   9
 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2009 and 2008

   10
 

Notes to Consolidated Financial Statements

   11

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   42

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   59

Item 4.

 

Controls and Procedures

   62
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

   62

Item 1A.

 

Risk Factors

   62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   63

Item 6.

 

Exhibits

   64

Signatures

   65

Exhibit Index

   66

 

2


Table of Contents

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,” “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, 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, international operations and associated international political and economic instability, litigation, the costs and results of drilling and operations, access to and availability of drilling equipment and transportation, processing 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 resource potential and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, 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 Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse impact 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 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” 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, 2008 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. The Company undertakes no duty to publicly update these statements except as required by law.

 

3


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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.

 

 

“Bcf “ means one billion cubic feet.

 

 

“BOE” means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or natural gas liquid.

 

 

“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.

 

 

“CBM” means coal bed methane.

 

 

“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.

 

 

“MBbl” means one thousand Bbls.

 

 

“MBOE” means one thousand BOEs.

 

 

“Mcf” means one thousand cubic feet and is a measure of natural gas volume.

 

 

“MMBbl” means one million Bbls.

 

 

“MMBOE” means one million BOEs.

 

 

“MMBtu” means one million Btus.

 

 

“MMcf” means one million cubic feet.

 

 

“MMcfpd” means one million cubic feet per day.

 

 

“Mont Belvieu–posted-price” 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 Mont Belvieu, Texas.

 

 

“NGL” means natural gas liquid.

 

 

“NYMEX” means the New York Mercantile Exchange.

 

 

“NYSE” means the New York Stock 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 estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

(i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the “proved” classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based.

(iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as “indicated additional reserves”; (B) crude oil, natural gas and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (C) crude oil, natural gas and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas and natural gas liquids that may be recovered from oil shales, coal, gilsonite and other such sources.

 

 

“SEC” means the United States Securities and Exchange Commission.

 

 

“Standardized Measure” means the after-tax present value of estimated future net cash flows of proved reserves, determined in accordance with the rules and regulations of the SEC, using prices and costs in effect at the specified date and a ten percent discount rate.

 

 

“U.S.” means United States.

 

 

“VPP” means volumetric production payment.

 

 

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


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

 

     September 30,
2009
    December 31,
2008 (a)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 55,615     $ 48,337  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $1,437 and $22,464 as of September 30, 2009 and December 31, 2008, respectively

     136,893       206,794  

Due from affiliates

     624       759  

Income taxes receivable

     16,290       60,573  

Inventories

     145,976       76,901  

Prepaid expenses

     12,553       12,464  

Deferred income taxes

     3,417       6,510  

Other current assets:

    

Derivatives

     41,280       59,622  

Other, net of allowance for doubtful accounts of $5,566 and $5,491 as of September 30, 2009 and December 31, 2008, respectively

     10,314       14,951  
                

Total current assets

     422,962       486,911  
                

Property, plant and equipment, at cost:

    

Oil and gas properties, using the successful efforts method of accounting:

    

Proved properties

     10,170,341       10,167,220  

Unproved properties

     212,818       204,183  

Accumulated depletion, depreciation and amortization

     (2,819,643     (2,511,401
                

Total property, plant and equipment

     7,563,516       7,860,002  
                

Deferred income taxes

     2,572       553  

Goodwill

     309,371       310,563  

Other property and equipment, net

     154,956       161,266  

Other assets:

    

Derivatives

     35,772       72,594  

Other, net of allowance for doubtful accounts of $7,172 and $4,410 as of September 30, 2009 and December 31, 2008, respectively

     191,919       269,896  
                
   $ 8,681,068     $ 9,161,785  
                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

(Unaudited)

 

     September 30,
2009
    December 31,
2008 (a)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable:

    

Trade

   $ 201,768     $ 322,688  

Due to affiliates

     18,562       34,284  

Interest payable

     28,481       43,247  

Income taxes payable

     12,745       3,618  

Deferred income taxes

     307       —     

Discontinued operations held for sale

     1,802       —     

Other current liabilities:

    

Derivatives

     91,967       49,561  

Deferred revenue

     104,743       147,905  

Other

     57,445       93,694  
                

Total current liabilities

     517,820       694,997  
                

Long-term debt

     2,867,298       2,899,241  

Derivatives

     65,664       20,584  

Deferred income taxes

     1,408,481       1,501,459  

Deferred revenue

     109,497       177,236  

Other liabilities

     178,076       187,409  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 125,191,035 and 124,566,963 shares issued at September 30, 2009 and December 31, 2008, respectively

     1,252       1,246  

Additional paid-in capital

     2,935,897       2,909,735  

Treasury stock, at cost: 10,863,513 and 10,020,502 shares at September 30, 2009 and December 31, 2008, respectively

     (416,566     (411,659

Retained earnings

     861,922       988,786  

Accumulated other comprehensive income - deferred hedge gains, net of tax

     64,851       88,788  
                

Total stockholders’ equity attributable to common stockholders

     3,447,356       3,576,896  

Noncontrolling interests in consolidating subsidiaries

     86,876       103,963  
                

Total stockholders’ equity

     3,534,232       3,680,859  

Commitments and contingencies

    
                
   $ 8,681,068     $ 9,161,785  
                

 

(a)

Retrospectively adjusted as described in Note B.

The financial information included as of September 30, 2009 has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008 (a)     2009     2008 (a)  

Revenues and other income:

        

Oil and gas

   $ 409,969     $ 600,413     $ 1,148,512     $ 1,777,579  

Interest and other

     503       2,285       99,761       33,697  

Gain (loss) on disposition of assets, net

     (385     190       (447     4,768  
                                
     410,087       602,888       1,247,826       1,816,044  
                                

Costs and expenses:

        

Oil and gas production

     90,394       107,159       285,617       297,299  

Production and ad valorem taxes

     28,089       46,124       79,503       129,670  

Depletion, depreciation and amortization

     162,605       121,265       509,422       338,153  

Impairment of oil and gas properties

     —          89,753       21,091       89,753  

Exploration and abandonments

     25,073       109,420       77,861       172,714  

General and administrative

     34,799       31,622       102,728       103,739  

Accretion of discount on asset retirement obligations

     2,754       1,981       8,259       5,885  

Interest

     43,438       41,176       128,051       123,124  

Hurricane activity, net

     1,830       541       18,280       2,400  

Derivative losses, net

     15,222       3,858       85,583       1,451  

Other

     21,363       33,964       89,467       54,153  
                                
     425,567       586,863       1,405,862       1,318,341  
                                

Income (loss) from continuing operations before income taxes

     (15,480     16,025       (158,036     497,703  

Income tax benefit (provision)

     5,206       (13,165     47,671       (217,615
                                

Income (loss) from continuing operations

     (10,274     2,860       (110,365     280,088  

Income from discontinued operations, net of tax

     12,107       327       13,868       14,718  
                                

Net income (loss)

   $ 1,833       3,187       (96,497     294,806  

Net income attributable to the noncontrolling interests

     (8,998     (8,422     (12,269     (15,388
                                

Net income (loss) attributable to common stockholders

   $ (7,165   $ (5,235   $ (108,766   $ 279,418  
                                

Basic earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ (0.17   $ (0.04   $ (1.07   $ 2.22  

Income from discontinued operations attributable to common stockholders

     0.11       —          0.12       0.12  
                                

Net income (loss) attributable to common stockholders

   $ (0.06   $ (0.04   $ (0.95   $ 2.34  
                                

Diluted earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ (0.17   $ (0.04   $ (1.07   $ 2.20  

Income from discontinued operations attributable to common stockholders

     0.11       —          0.12       0.12  
                                

Net income (loss) attributable to common stockholders

   $ (0.06   $ (0.04   $ (0.95   $ 2.32  
                                

Weighted average shares outstanding:

        

Basic

     114,123       118,110       114,118       118,136  
                                

Diluted

     114,123       118,110       114,118       118,765  
                                

Dividends declared per share

   $ 0.04     $ 0.16     $ 0.08     $ 0.30  
                                

Amounts attributable to common stockholders:

        

Income (loss) from continuing operations

   $ (19,272   $ (5,562   $ (122,634   $ 264,700  

Discontinued operations

     12,107       327       13,868       14,718  
                                

Net income (loss)

   $ (7,165   $ (5,235   $ (108,766   $ 279,418  
                                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except dividends per share)

(Unaudited)

 

          Stockholders’ Equity Attributable To Common Stockholders              
    Shares
Outstanding
    Common
Stock
  Additional
Paid-in
Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 

Balance as of December 31, 2008 (a) 

  114,546     $ 1,246   $ 2,909,735     $ (411,659   $ 988,786     $ 88,788     $ 103,963     $ 3,680,859  

Dividends declared ($0.08 per share)

  —          —       —          —          (9,405     —          —          (9,405

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

  431       —       —          16,648       (8,693     —          —          7,955  

Purchase of treasury stock

  (1,273     —       —          (21,555     —          —          —          (21,555

Purchase of subsidiary noncontrolling units

                (258     (258

Tax provision related to stock-based compensation

  —          —       (3,583     —          —          —          —          (3,583

Compensation costs:

               

Vested compensation awards, net

  624       6     (6     —          —          —          —          —     

Compensation costs included in net income (loss)

  —          —       29,751       —          —          —          164       29,915  

Cash contributions of noncontrolling interests

  —          —       —          —          —          —          150       150  

Cash distributions to noncontrolling interests

  —          —       —          —          —          —          (15,042     (15,042

Net income (loss)

  —          —       —          —          (108,766     —          12,269       (96,497

Other comprehensive loss:

               

Deferred hedging activity, net of tax:

               

Hedge fair value changes, net

  —          —       —          —          —          10,477       3,692       14,169  

Net hedge gains included in continuing operations

  —          —       —          —          —          (34,414     (18,062     (52,476
                                                           

Balance as of September 30, 2009

  114,328     $ 1,252   $ 2,935,897     $ (416,566   $ 861,922     $ 64,851     $ 86,876     $ 3,534,232  
                                                           

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008 (a)  

Cash flows from operating activities:

    

Net income (loss)

   $ (96,497   $ 294,806  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depletion, depreciation and amortization

     509,422       338,153  

Impairment of oil and gas properties

     21,091       89,753  

Exploration expenses, including dry holes

     40,699       93,996  

Hurricane activity, net

     16,200       —     

Deferred income taxes

     (67,397     160,346  

(Gain) loss on disposition of assets, net

     447       (4,768

Accretion of discount on asset retirement obligations

     8,259       5,885  

Discontinued operations

     (5,373     24,609  

Interest expense

     20,694       21,252  

Derivative related activity

     48,305       31,118  

Amortization of stock-based compensation

     29,319       25,571  

Amortization of deferred revenue

     (110,901     (118,644

Other noncash items

     30,664       30,495  

Change in operating assets and liabilities

    

Accounts receivable, net

     71,074       (39,039

Income taxes receivable

     44,762       (9,522

Inventories

     (52,069     (54,990

Prepaid expenses

     (6,900     (7,152

Other current assets

     98,532       (2,561

Accounts payable

     (94,238     15,364  

Interest payable

     (14,766     (12,724

Income taxes payable

     9,127       11,528  

Other current liabilities

     (89,629     (76,972
                

Net cash provided by operating activities

     410,825       816,504  
                

Cash flows from investing activities:

    

Proceeds from disposition of assets, net of cash sold

     24,247       143,352  

Additions to oil and gas properties

     (319,928     (996,721

Additions to other assets and other property and equipment, net

     (17,310     (31,350
                

Net cash used in investing activities

     (312,991     (884,719
                

Cash flows from financing activities:

    

Borrowings under long-term debt

     386,269       794,998  

Principal payments on long-term debt

     (434,269     (732,775

Distributions to noncontrolling interests, net

     (14,892     (2,941

Proceeds from issuance of partnership common units, net of issuance costs

     —          165,978  

Borrowings (payments) of other liabilities

     (1,069     4,686  

Exercise of long-term incentive plan stock options and employee stock purchase plan

     7,955       8,008  

Purchases of treasury stock and subsidiary noncontrolling units

     (21,813     (86,201

Excess tax (provisions) benefits from share-based payment arrangements

     (3,583     381  

Payment of financing fees

     (4,475     (12,377

Dividends paid

     (4,679     (16,896
                

Net cash provided by (used in) financing activities

     (90,556     122,861  
                

Net increase in cash and cash equivalents

     7,278       54,646  

Cash and cash equivalents, beginning of period

     48,337       12,171  
                

Cash and cash equivalents, end of period

   $ 55,615     $ 66,817  
                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008 (a)     2009     2008 (a)  

Net income (loss)

   $ 1,833     $ 3,187     $ (96,497   $ 294,806  
                                

Other comprehensive income (loss):

        

Hedge activity:

        

Hedge fair value changes, net

     —          580,567       22,490       (168,801

Net hedge (gains) losses included in continuing operations

     (25,887     145,106       (103,039     389,016  

Income tax provision (benefit)

     7,272       (269,973     42,242       (82,322
                                

Other comprehensive income (loss)

     (18,615     455,700       (38,307     137,893  
                                

Comprehensive income (loss)

     (16,782     458,887       (134,804     432,699  
                                

Comprehensive (income) loss attributable to noncontrolling interest

     (3,417     (40,097     853       (28,031
                                

Comprehensive income (loss) attributable to common stockholders

   $ (20,199   $ 418,790     $ (133,951   $ 404,668  
                                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

NOTE A.    Organization and Nature of Operations

Pioneer is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company with continuing operations in the United States, South Africa and Tunisia.

NOTE B.    Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 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 GAAP have been condensed or omitted in this Report pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Discontinued operations. During June and August 2009, the Company sold its Mississippi assets and substantially all of its shelf properties in the Gulf of Mexico, respectively. The Company has reflected the results of operations of both of these asset groups as discontinued operations, rather than as components of continuing operations. In April 2006 and November 2007, the Company completed the sale of its Argentine assets and Canadian subsidiaries, respectively. During the three and nine months ended September 30, 2008, the Company continued to realize certain net costs and expenses associated with these divestitures. See Note R for additional information regarding discontinued operations.

Allowances for doubtful accounts. As of September 30, 2009 and December 31, 2008, the Company’s allowances for doubtful accounts totaled $14.2 million and $32.4 million, respectively. The Company establishes allowances for doubtful accounts equal to the estimable portions of accounts and notes receivables for which failure to collect is considered probable. The Company estimates the portions of joint interest receivables for which failure to collect is probable based on percentages of joint interest receivables that are past due. The Company estimates the portions of other receivables for which failure to collect is probable based on the relevant facts and circumstances surrounding the receivable. Allowances for doubtful accounts are recorded as reductions to the carrying values of the receivables included in the Company’s consolidated balance sheets and as charges to other expense in the Company’s consolidated statements of operations in the accounting periods during which failure to collect an estimable portion is determined to be probable.

Changes in the Company’s allowance for doubtful accounts during the three and nine months ended September 30, 2009 are summarized in the following table:

 

     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 
     (in thousands)  

Beginning allowance for doubtful accounts balance

   $ 12,205     $ 32,365  

Amount recorded in other expense for bad debt expense

     1,985       1,241  

Write-offs of uncollectible accounts (a)

     (15     (19,431
                

Ending allowance for doubtful accounts balance

   $ 14,175     $ 14,175  
                

 

(a)

Write-offs of uncollectible accounts for the nine months ended September 30, 2009 are primarily comprised of the allowance for doubtful accounts established to reduce the carrying value of the Company’s pre-petition claims receivable from SemGroup, L.P. (“SemGroup”), which filed bankruptcy during 2008. The Company sold all of its pre-petition SemGroup claims during April 2009 for approximately $10.1 million.

Inventories. Inventories consisted of $212.3 million and $158.7 million of materials and supplies and $4.0 million and $8.4 million of commodities as of September 30, 2009 and December 31, 2008, respectively. The Company’s materials and supplies inventory is primarily comprised of oil and gas drilling or repair items such as

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

tubing, casing, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market, on a first-in, first-out cost basis. “Market,” in the context of inventory valuation, represents net realizable value, which is the amount that the Company is allowed to charge to the joint accounts when the inventory is used in joint operations under joint operating agreements to which the Company is a party. Any valuation reserve allowances of materials and supplies inventory are recorded as reductions to the carrying values of the materials and supply inventories in the Company’s consolidated balance sheets and as charges to other expense in the accompanying consolidated statements of operations. As of September 30, 2009 and December 31, 2008, the Company’s materials and supplies inventory was net of $5.9 million and $4.7 million, respectively, of valuation reserve allowances. The Company estimated that approximately $70.4 million and $90.2 million of its September 30, 2009 and December 31, 2008 materials and supplies inventories, respectively, would not be utilized within one year based on current drilling plans. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

Commodities inventories are carried at the lower of average cost or market, on a first-in, first-out basis. The Company’s commodities inventories consist of oil and natural gas liquids (“NGLs”) held in storage. Any valuation allowances of commodities inventories are recorded as reductions to the carrying values of the commodities inventories included in the Company’s consolidated balance sheets and as charges to other expense in the consolidated statements of operations. As of December 31, 2008, the Company’s commodities inventories were net of $159 thousand of valuation allowances.

Derivatives and hedging. Prior to December 2008, the Company had elected to designate the majority of its commodity derivative instruments as cash flow hedges. During December 2008, the Company began entering into commodity derivative contracts that were not designated as hedges. Changes in the fair values of non-hedge derivative instruments are recognized as gains or losses in the earnings of the period in which they occur. Effective February 1, 2009, the Company discontinued hedge accounting on all existing hedge contracts. The effective portions of the discontinued deferred hedges as of January 31, 2009 are included in accumulated other comprehensive income – deferred hedge gains, net of tax (“AOCI – Hedging”), in the stockholders’ equity section of the accompanying consolidated balance sheets, and are being reclassified to earnings during the same periods in which the hedged transactions are recognized in the Company’s earnings. For the period from February 1, 2009 through September 30, 2009, the Company recognized, and in the future will recognize, all changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities by commodity, whichever the case may be. Net derivative asset values are determined, in part, by utilization of the derivative counterparties’ credit-adjusted risk-free rate curves and net derivative liabilities are determined, in part, by utilization of the Company’s credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates are based on an independent market-quoted credit default swap rate curve for the Company’s or the counterparties’ debt plus the United States Treasury Bill yield curve as of September 30, 2009.

Goodwill. Goodwill is assessed for impairment whenever events or circumstances indicate that impairment of the carrying value of goodwill is likely, but no less often than annually. If the carrying value of goodwill is determined to be impaired, it is reduced for the impaired value with a corresponding charge to pretax earnings in the period in which it is determined to be impaired. During the third quarter of 2009, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment. See Note M for additional information regarding the Company’s impairment assessments. In connection with the August 2009 sale of its Gulf of Mexico shelf properties, the Company reduced its goodwill attributable to the carrying value of those properties by $1.2 million.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 68.3 percent limited partner interest in Pioneer Southwest. Pioneer Southwest owns interests in certain oil and gas properties previously owned by the Company in the Spraberry field in the Permian Basin of West Texas. The financial position, results of operations, and cash flows of Pioneer Southwest are consolidated with those of the Company.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In addition to Pioneer Southwest, the Company owns the majority interests in certain other subsidiaries with operations in the United States. Noncontrolling interest in the net assets of consolidated subsidiaries totaled $86.9 million and $104.0 million as of September 30, 2009 and December 31, 2008, respectively. The Company recorded net income attributable to the noncontrolling interests of $9.0 million and $12.3 million for the three and nine months ended September 30, 2009, (principally related to Pioneer Southwest) compared to $8.4 million and $15.4 million for the three and nine months ended September 30, 2008, respectively. See “New accounting pronouncements” and “Reclassifications and retrospective adjustments” for information regarding the Company’s accounting for noncontrolling interests.

Stock-based compensation. For stock-based compensation awards, compensation expense is being recognized in the Company’s financial statements on a straight line basis over the awards’ vesting periods based on their fair values on the dates of grant. The Company utilizes (i) the Black-Scholes option pricing model to measure the fair value of stock options, (ii) the prior day’s closing stock price on the date of grant for the fair value of restricted stock awards and (iii) the Monte Carlo simulation method for the fair value of performance unit awards.

For the three and nine month periods ended September 30, 2009, the Company recorded $10.1 million and $29.3 million of stock-based compensation costs for all plans, respectively, as compared to $8.3 million and $25.6 million for the same respective periods of 2008.

In accordance with GAAP, the Company’s issued shares, as reflected in the consolidated balance sheets at September 30, 2009 and December 31, 2008, do not include 987,696 and 1,078,267, respectively, of issued but unvested shares awarded under stock-based compensation plans which have voting rights.

The following table summarizes all stock-based awards, lapses and forfeitures that occurred during the nine months ended September 30, 2009:

 

     Restricted Stock
Shares
   Restricted
Stock Units
   Performance
Units
   Stock Options

Awards

   378,497    1,638,711    189,247    361,021

Lapsed restrictions

   452,018    172,054    —      —  

Exercises

   —      —      —      288,114

Forfeitures

   17,050    47,712    —      99,250

As of September 30, 2009, there was approximately $52.5 million of unrecognized compensation expense related to unvested share-based compensation plan awards, restricted stock, restricted stock units, performance unit awards and stock options. This compensation will be recognized over the remaining vesting periods of the awards, which on a weighted average basis is a period of less than three years.

New accounting pronouncements. On June 30, 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 creates a new source of authoritative U.S. accounting and reporting standards for nongovernmental entities, known as the FASB “Accounting Standards Codification” (“ASC”). This statement was effective for interim and annual periods ending after September 15, 2009. On September 30, 2009, the Company adopted the provisions of SFAS 168. Hereafter, all new and existing accounting pronouncements will be referred to by their section in the ASC.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. During February 2008, the FASB issued FASB Staff Position No. 157-2, “FSP FAS 157-2”, which delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. On January 1, 2009, the Company adopted the remaining provisions of ASC 820, for which delayed adoption was allowed.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“ASC 805”). ASC 805 replaces SFAS 141 and provides greater consistency in the accounting and financial reporting of business combinations. ASC 805 requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of the date that the acquirer achieves control over the business acquired. This includes the measurement of the acquirer’s shares issued in consideration for a business combination, the recognition of contingent consideration, the recognition of pre-acquisition contractual and certain non-contractual gain and loss contingencies, the recognition of capitalized research and development costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. The provisions of ASC 805 also require that restructuring costs resulting from the business combination that the acquirer expects but is not required to incur and costs incurred to effect the acquisition be recognized separate from the business combination. ASC 805 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. The Company became subject to the provisions of ASC 805 on January 1, 2009.

In December 2007, the FASB issued SFAS 160 (“ASC 810”). ASC 810 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC 810 requires consolidated earnings to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The Company adopted the provisions of ASC 810 on January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“ASC 815”). ASC 815 changes the disclosure requirements for derivative instruments and hedging activities by requiring entities to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under ASC 815 and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. ASC 815 was adopted by the Company on January 1, 2009. See Note G for disclosures about the Company’s derivative instruments and hedging activities.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC 470”). ASC 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted the provisions of ASC 470 on January 1, 2009. The adoption of ASC 470 increases the annual interest expense that the Company recognizes on its $480 million of 2.875% convertible senior notes due 2038 (“2.875% Convertible Senior Notes”) from an annual yield of 2.875 percent to 6.75 percent, the annual yield equivalent to a nonconvertible debt borrowing at the time of issuance. The adoption of ASC 470 also resulted in the reclassification of the estimated issuance date fair value of the 2.875% Convertible Senior Notes conversion privilege from long-term debt to shareholders’ equity in the accompanying consolidated balance sheets. See “Reclassifications and retrospective adjustments” and Note F for additional information regarding the Company’s adoption of ASC 470.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“ASC 260”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the net income (loss) allocation in computing basic and diluted earnings per share under the two class method prescribed under SFAS 128, “Earnings per Share”. The Company adopted the provisions of ASC 260 on January 1, 2009 and, in accordance with ASC 260, applied its provisions retrospectively to prior-period earnings per share computations. See Note K for additional information regarding the Company’s basic and diluted earnings per share computations for the three and nine months ended September 30, 2009 and 2008.

In December 2008, the SEC released Final Rule, “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”). The Reserve Ruling revises oil and gas reporting disclosures. The Reserve Ruling also permits the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The Reserve Ruling will also allow companies to disclose their probable

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

and possible reserves to investors. In addition, the new disclosure requirements require companies to: (i) report the independence and qualifications of its reserves preparer or auditor, (ii) file reports when a third party is relied upon to prepare reserves estimates or conduct a reserves audit and (iii) report oil and gas reserves using an average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, rather than a year-end price. The Reserve Ruling becomes effective for annual reports on Forms 10-K for fiscal years ending on or after December 31, 2009. During February 2009, the FASB announced a project to amend SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” (“ASC 932”) to conform to the Reserve Ruling. The Company is currently assessing the impact that adoption of the provisions of the Reserve Ruling will have on its financial position, results of operations and disclosures.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”. ASC 825 requires fair value disclosures by publicly traded companies of financial instruments for interim reporting purposes. ASC 825 was adopted by the Company during the second quarter of 2009. See Note D for disclosures about the fair values of the Company’s financial instruments.

Reclassifications and retrospective adjustments. Certain reclassifications have been made to the 2008 amounts in order to conform to the 2009 presentation and for the retrospective application of the adoption of ASC 810. The retrospective application of ASC 810 resulted in the reclassification of $59.2 million from minority interest in consolidated subsidiaries and $44.8 million from AOCI – Hedging to Noncontrolling interest in consolidated subsidiaries at December 31, 2008. In addition, the adoption of ASC 470 and ASC 260 required retrospective adjustments to the Company’s financial statements as of December 31, 2008 and the three and nine months ended September 30, 2008. The retrospective adjustments related to the adoption of ASC 470 decreased the Company’s net income attributable to common stockholders by $2.2 million (approximately $.01 per diluted share) and $6.1 million (approximately $.05 per diluted share), respectively, for the three and nine months ended September 30, 2008. The retrospective application of ASC 470 also increased additional paid-in capital by $49.5 million and decreased retained earnings by $10.0 million as of December 31, 2008. The retrospective application of the provisions of ASC 260 did not change the Company’s diluted earnings for the three months ended September 30, 2008 and reduced the Company’s diluted earnings for the nine months ended September 30, 2008 by approximately $.05 per share, exclusive of the effects from the adoption of ASC 470.

In the second quarter of 2009, the Company inadvertently overstated its depletion, depreciation and amortization (“DD&A”) expense by $7.3 million ($4.6 million net of associated income taxes) attributable to oil and gas volumes sold during that quarter. This overstatement primarily resulted from an exclusion of certain proved reserves from the calculation of the Company’s DD&A expense for the three months ended June 30, 2009. This error also overstated the Company’s accumulated depletion, depreciation and amortization and income taxes payable by $7.3 million and $178 thousand, respectively, and understated the Company’s deferred tax liabilities by $2.9 million. The Company has concluded that the effect of the overstatement was not material to the reported financial position and earnings of the Company as of and for the three and six months ended June 30, 2009 and has reflected the correction in its reported financial position and results of operations as of and for the nine months ended September 30, 2009. The correction reduced the Company’s diluted per share net loss attributable to common stockholders by $.04 for the three and six months ended June 30, 2009.

NOTE C.    Exploratory Well Costs

The Company capitalizes exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. The capitalized exploratory well costs are presented in proved properties in the consolidated balance sheets. If the exploratory well is determined to be impaired, the well costs are charged to exploration and abandonments expense.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The following table reflects the Company’s capitalized exploratory well activity during the three and nine months ended September 30, 2009:

 

     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 
     (in thousands)  

Beginning capitalized exploratory well costs

   $ 113,997     $ 124,014  

Additions to exploratory well costs pending the determination of proved reserves

     20,420       46,758  

Reclassification due to determination of proved reserves

     (5,949     (33,150

Exploratory well costs charged to exploration expense

     (6,798     (15,952
                

Ending capitalized exploratory well costs

   $ 121,670     $ 121,670  
                

The following table provides an aging, as of September 30, 2009 and December 31, 2008, of capitalized exploratory well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:

 

     September 30, 2009    December 31, 2008
     (in thousands, except well counts)

Capitalized exploratory well costs that have been suspended:

     

One year or less

   $ 30,850    $ 54,423

More than one year

     90,820      69,591
             
   $ 121,670    $ 124,014
             

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

     5      4
             

The following table provides an aging of capitalized costs of exploration projects that have been suspended for more than one year as of September 30, 2009:

 

     Total    2009    2008    2007    2006
     (in thousands)

United States:

              

Cosmopolitan Unit

   $ 60,613    $ 1,952    $ 6,344    $ 51,488    $ 829

Tunisia

     30,207      962      20,866      4,434      3,945
                                  

Total

   $ 90,820    $ 2,914    $ 27,210    $ 55,922    $ 4,774
                                  

Cosmopolitan Unit. The Company owns a 100 percent working interest in, and is the operator of, the Cosmopolitan Unit in the Cook Inlet of Alaska. During 2007, the Company drilled the Hansen #1A L1 well, a lateral sidetrack from an existing wellbore, to appraise the resource potential of the unit. The initial unstimulated production test results were encouraging. The Company plans to workover the well in the fourth quarter 2009 to repair the casing. The well may be fracture stimulated in 2010 contingent upon the results of the casing repair and subsequent flow testing. The Company will continue to conduct permitting activities and facilities planning during the fourth quarter of 2009 and may drill another appraisal well in 2010.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Tunisia – Cherouq. The Company has $17.5 million and $5.0 million of suspended well costs recorded for the Hayaat #1 and Hilal #1 wells, respectively, in the Company’s Cherouq production concession area, which is operated by the Company. The Hayaat #1 well began drilling in April 2008 to test several targeted formations. Mechanical failures were encountered during the testing of the well that did not allow completion of the formation assessments. The Company is analyzing seismic and other data to determine the optimal plan forward for completing the well, which may utilize the existing wellbore or a new wellbore adjacent to the existing well. The Company expects to finalize its Hayaat #1 plans and complete its assessment activities during 2010 or 2011.

The Hilal #1 well was originally drilled as an exploration well during 2007. The well was unsuccessful; however, the well is being re-completed to a formation that will be used for water disposal in support of other Cherouq operations. The Company recorded a $1.5 million dry hole charge for the Hilal #1 during 2007, representing the portion of the well costs that will not be used in disposal operations. Installation of the surface equipment is underway and disposal operations are planned to start during the fourth quarter of 2009.

Tunisia – Borj El Khadra. The Company has $7.6 million of suspended well costs attributable to the Nahkil #1 and Abir #1 wells in the Borj El Khadra exploration permit area, which is operated by a third-party. The Nahkil #1 well encountered oil-bearing sands and the Abir #1 well encountered gas-bearing sands. The Company does not record proved reserves associated with discoveries in exploration permit areas until a production concession is granted. Infrastructure planning is underway and further exploration of the permit area is planned to occur in the fourth quarter of 2009 or 2010.

NOTE D.    Disclosures About Fair Value Measurements

The valuation framework of ASC 820, which addresses fair value measurements, is based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. 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. These two types of inputs are further prioritized into the following fair value input hierarchy:

 

   

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.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2009, for each of the fair value hierarchy levels:

 

     Fair Value Measurements at Reporting Date 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,
2009
     (in thousands)

Assets:

           

Trading securities

   $ 231    $ 73    $ —      $ 304

Commodity derivatives

     —        71,706      5,346      77,052

Deferred compensation plan assets

     25,582      —        —        25,582
                           

Total assets

   $ 25,813    $ 71,779    $ 5,346    $ 102,938
                           

Liabilities:

           

Commodity derivatives

   $ —      $ 146,741    $ 3,939    $ 150,680

Interest rate derivatives

     —        6,951      —        6,951
                           

Total liabilities

   $ —      $ 153,692    $ 3,939    $ 157,631
                           

The following tables present the changes in the fair values of the Company’s net commodity derivative assets classified as Level 3 in the fair value hierarchy:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Three Months Ended
September 30, 2009
 
     NGL Swap Contracts  
     (in thousands)  

Beginning balance

   $ 5,466  

Total gains (losses) (a):

  

Net unrealized losses included in earnings

     (1,695

Net realized losses included in earnings

     (2,423

Settlements

     59  
        

Ending balance

   $ 1,407  
        

 

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives in AOCI – Hedging are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Nine Months Ended September 30, 2009  
     NGL Swap
Contracts
    Gas Three-Way
Collars
    Oil Three-Way
Collars
    Total  
     (in thousands)  

Beginning balance

   $ 18,560     $ —        $ —        $ 18,560  

Total gains (losses):

        

Net unrealized gains (losses) included in earnings (a)

     (8,260     (1,697     3,364       (6,593

Net derivative losses included in other comprehensive income

     (1,855     —          —          (1,855

Net realized gains transferred to earnings (a)

     (2,794     —          —          (2,794

Settlements

     (4,244     —          —          (4,244

Transfers into/out of Level 3

     —          1,697       (3,364     (1,667
                                

Ending balance

   $ 1,407     $ —        $ —        $ 1,407  
                                

 

18


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)

 

 

 

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2009 and December 31, 2008:

 

     September 30, 2009    December 31, 2008
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value
     (in thousands)

Assets:

           

Commodity price derivatives

   $ 77,052    $ 77,052    $ 132,216    $ 132,216

Trading securities

   $ 304    $ 304    $ 356    $ 356

Deferred compensation plan assets

   $ 25,582    $ 25,582    $ 18,276    $ 18,276

Notes receivable due 2008 to 2011

   $ 10,573    $ 10,573    $ 11,258    $ 11,258

Liabilities:

           

Commodity price derivatives

   $ 150,680    $ 150,680    $ 60,242    $ 60,242

Interest rate derivatives

   $ 6,951    $ 6,951    $ 9,903    $ 9,903

Pioneer Natural Resources Credit facility

   $ 730,000    $ 723,653    $ 913,000    $ 868,597

Pioneer Southwest Credit facility

   $ 135,000    $ 132,562    $ —      $ —  

2.875% senior convertible notes due 2038

   $ 425,890    $ 459,600    $ 415,194    $ 345,600

5.875 % senior notes due 2012

   $ 6,174    $ 6,183    $ 6,191    $ 5,233

5.875 % senior notes due 2016

   $ 387,274    $ 418,954    $ 382,010    $ 301,583

6.65 % senior notes due 2017

   $ 483,883    $ 458,420    $ 483,792    $ 339,570

6.875 % senior notes due 2018

   $ 449,154    $ 424,777    $ 449,132    $ 292,175

7.20 % senior notes due 2028

   $ 249,923    $ 222,750    $ 249,922    $ 145,000

Trading securities and deferred compensation plan assets. The Company’s trading securities represent equity securities that are not actively traded on major exchanges and trading securities that are actively traded on major exchanges. The Company’s deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges plus unallocated contributions as of the measurement date. As of September 30, 2009, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for trading securities that are not actively traded on major exchanges, which were provided by broker quotes representing Level 2 inputs.

Notes receivable. The fair value of the Company’s notes receivable approximates the carrying values based on the adequacy of the collateral security and interest yields.

Interest rate derivatives. The Company’s interest rate derivative liabilities represent swap contracts for $400 million notional amount of debt, whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate and $50 million notional amount of debt, whereby the Company pays a variable LIBOR-based rate and the counterparty pays a fixed rate of interest. The net derivative liability values attributable to the Company’s interest rate derivative contracts as of September 30, 2009 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company’s interest rate derivative asset measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company’s commodity derivatives represent oil, NGL and gas swap and collar contracts. The Company’s oil and gas swap, collar and three-way collar derivative contract asset and liability measurements represent Level 2 inputs in the hierarchy priority while NGL derivative contract asset and liability measurements represent Level 3 inputs in the hierarchy priority.

Oil derivatives. The Company’s oil derivatives are swap, collar and three-way collar contracts for notional Bbls of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) NYMEX

 

19


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

West Texas Intermediate (“WTI”) oil prices. The asset and liability values attributable to the Company’s oil derivatives as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

NGL derivatives. The Company’s NGL derivatives are swap contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs. The asset and liability values attributable to the Company’s NGL derivatives as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent broker-supplied forward Mont Belvieu-posted-price quotes and (iii) the applicable credit-adjusted risk-free rate yield curve.

Gas derivatives. The Company’s gas derivatives are swap, collar and three-way collar contracts for notional MMBtus of gas contracted at various posted price indexes, including NYMEX Henry Hub (“HH”) swap contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company’s gas derivative contracts as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) averages of forward posted price quotes supplied by independent brokers who are active in buying and selling gas derivatives at the indexes other than HH (iv) the applicable credit-adjusted risk-free rate yield curve and (v) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

The Company corroborated independent broker-supplied forward price quotes by comparing price quote samples to alternate observable market data.

Credit facility. The fair value of the Company’s credit facility is based on (i) contractual interest and fees, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.

Senior notes. The Company’s senior notes represent debt securities that are actively traded on major exchanges.

NOTE E.    Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC 740 (formerly SFAS 109), “Income Taxes” (“ASC 740”). ASC 740 requires that the Company continually assess both positive and negative evidence to determine whether it is more likely than not that deferred tax assets can be realized prior to their expiration. Pioneer monitors Company-specific, oil and gas industry and worldwide economic factors to assess the likelihood that the Company’s net operating loss carryforwards (“NOLs”) and other deferred tax attributes in the U.S. federal, state and foreign tax jurisdictions will be utilized prior to their expiration. As of September 30, 2009 and December 31, 2008, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $44.2 million and $37.5 million, respectively.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized and prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2009, the Company had no unrecognized tax benefits. The Company’s policy is to account for interest charges with respect to income taxes as interest expense and any penalties, with respect to income taxes, as other expense in the consolidated statements of operations. The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. With few exceptions, the Company believes that it is no longer subject to examinations by tax authorities for years before 2004. As of September 30, 2009, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company’s future results of operations or financial position.

On June 30, 2009, pursuant to Tunisian law, the Company established an investment reserve equal to 20 percent of 2008 taxable profits on the Adam and Cherouq concessions and thereby reduced current taxes payable by $13.1 million with a corresponding offset to deferred income taxes in the Company’s accompanying consolidated balance sheets. The investment reserve will be used to fund future drilling activity or pipeline infrastructure projects in Tunisia.

 

20


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

In the reported results for the nine months ended September 30, 2009, the Company recognized an additional deferred provision of $2.9 million and a current tax benefit of $178 thousand related to the Company’s correction of the understatement of reported earnings for the three months ended June 30, 2009. See Note B for additional information regarding this correction.

Income tax (provisions) benefits. The Company’s income tax (provisions) benefits attributable to income from continuing operations consisted of the following for the three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Current:

        

U.S. federal

   $ (1,335   $ (124   $ (934   $ 8,784  

U.S. state

     (2,206     967       (9,142     (630

Foreign

     (8,708     (24,972     (9,650     (65,423
                                
     (12,249     (24,129     (19,726     (57,269
                                

Deferred:

        

U.S. federal

     15,273       17,455       68,796       (125,565

U.S. state

     3,696       (1,377     9,460       (4,246

Foreign

     (1,514     (5,114     (10,859     (30,535
                                
     17,455       10,964       67,397       (160,346
                                

Income tax (provision) benefit

   $ 5,206     $ (13,165   $ 47,671     $ (217,615
                                

Discontinued operations. The Company’s income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Current:

        

Foreign

   $ —        $ (135   $ —        $ (306
                                
     —          (135     —          (306
                                

Deferred:

        

U.S. federal

     (7,153     (438     (8,102     (6,746

Foreign

     —          65       —          935  
                                
     (7,153     (373     (8,102     (5,811
                                

Income tax provision

   $ (7,153   $ (508   $ (8,102   $ (6,117
                                

NOTE F.    Long-term Debt

Lines of credit. During April 2007, the Company entered into an Amended and Restated 5-Year Revolving Credit Agreement (the “Credit Facility”) that matures in April 2012, unless extended in accordance with the terms of the Credit Facility. The Credit Facility provides for initial aggregate loan commitments of $1.5 billion, which may be increased to a maximum aggregate amount of $2.0 billion if the lenders increase their loan commitments or if loan commitments of new financial institutions are added. As of September 30, 2009, the Company had $730.0 million of outstanding borrowings under the Credit Facility and $46.0 million of undrawn letters of credit, all of which were commitments under the Credit Facility, leaving the Company with $724.0 million of unused borrowing capacity under the Credit Facility.

 

21


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

Effective April 29, 2009, the Company and the lenders under the Company’s Credit Facility amended the Credit Facility to provide the Company additional financial flexibility. The Credit Facility contains certain financial covenants, one of which required the Company to maintain a ratio of the net present value of the Company’s oil and gas properties to total debt of at least 1.75 to 1.0 until the Company achieves an investment grade rating by Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group, Inc. The amendment changed that ratio to 1.5 to 1.0 through the period ending March 31, 2011, after which time the ratio would revert to 1.75 to 1.0, and provides that the Company may include in the calculation of the present value of its oil and gas properties 75 percent of the market value of its ownership of limited partner units of Pioneer Southwest. The covenant requiring the Company to maintain a ratio of total debt to total capitalization of no more than 0.60 to 1.0 was not changed.

The amendment also adjusted certain borrowing rates and commitment fees, and changed certain provisions relating to the consequences if a lender under the Credit Facility defaults in its obligations under the agreement. After taking into account the amendment, revolving loans under the Credit Facility bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by JPMorgan Chase Bank or the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System during the last preceding business day plus .5 percent plus a defined alternate base rate spread margin (“ABR Margin”), which is currently one percent based on the Company’s debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the “Applicable Margin”), which is currently two percent and is also determined by the Company’s debt rating. Swing line loans under the Credit Facility bear interest at a rate per annum equal to the “ASK” rate for Federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus .125 percent. The Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company’s debt rating (currently 0.375 percent).

On August 31, 2009, Pioneer Southwest borrowed $138.0 million under its $300 million credit facility (the “Pioneer Southwest Credit Facility”) that matures during 2013 to fund a portion of the purchase consideration of oil and gas properties acquired from Pioneer Natural Resources USA, Inc. (“Pioneer USA”), a wholly-owned subsidiary of the Company, for $169.6 million, including estimated customary closing adjustments, and assumed net obligations associated with certain commodity price derivative positions and certain other liabilities that were assigned by Pioneer USA to Pioneer Southwest. The Pioneer Southwest Credit Facility is available for general partnership purposes, including working capital, capital expenditures and distributions.

Borrowings under the Pioneer Southwest Credit Facility may be in the form of Eurodollar rate loans, base rate committed loans or swing line loans. Eurodollar rate loans bear interest annually at LIBOR, plus a margin (the “Applicable Rate”) (currently 0.875 percent) that is determined by a reference grid based on Pioneer Southwest’s consolidated leverage ratio. Base rate committed loans bear interest annually at a base rate equal to the higher of (i) the Federal Funds Rate plus 0.5 percent or (ii) the Bank of America prime rate (the “Base Rate”) plus a margin (currently zero percent). Swing line loans bear interest annually at the Base Rate plus the Applicable Rate. As of September 30, 2009, there were $135.0 million of outstanding borrowings under the Pioneer Southwest Credit Facility.

The Pioneer Southwest Credit Facility contains certain financial covenants, including (i) the maintenance of a quarter-end consolidated leverage ratio (representing a ratio of consolidated indebtedness of Pioneer Southwest to consolidated earnings before depreciation, depletion and amortization; impairment of long-lived assets; exploration expense; accretion of discount on asset retirement obligations; interest expense; income taxes; gain or loss on the disposition of assets; noncash commodity hedge related activity; and noncash equity-based compensation, (“EBITDAX”) of not more than 3.5 to 1.0, (ii) an interest coverage ratio (representing a ratio of EBITDAX to interest expense) of not less than 2.5 to 1.0 and (iii) the maintenance of a ratio of the net present value of Pioneer Southwest’s projected future cash flows from its oil and gas assets to total debt of at least 1.75 to 1.0.

Because of the net present value covenant, the remaining available borrowing capacity under the Pioneer Southwest Credit Facility was limited to approximately $140 million as of September 30, 2009. The variables on which the calculation of net present value is based (including assumed commodity prices and discount rate) are subject to adjustment by the lenders. As a result, declines in commodity prices could reduce Pioneer Southwest’s borrowing capacity under the Pioneer

 

22


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

Southwest Credit Facility. In addition, the Pioneer Southwest Credit Facility contains various covenants that limit, among other things, Pioneer Southwest’s ability to grant liens, incur additional indebtedness, engage in a merger, enter into transactions with affiliates, pay distributions or repurchase equity, and sell its assets. If any default or event of default (as defined in the Pioneer Southwest Credit Facility) were to occur, the Pioneer Southwest Credit Facility would prohibit Pioneer Southwest from making distributions to unitholders. Such events of default include, among others, nonpayment of principal or interest, violations of covenants, bankruptcy and material judgments and liabilities.

As of September 30, 2009, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

Senior convertible notes. During January 2008, the Company issued $500 million principal amount of 2.875% Convertible Senior Notes, of which $480.0 million remains outstanding at September 30, 2009. Effective January 1, 2009, the Company adopted the provisions of ASC 470 (formerly FSP APB 14-1) and, in accordance therewith, the Company applied the provisions of ASC 470 on a retrospective basis. The initial adoption of ASC 470 decreased the carrying value of the 2.875% Convertible Senior Notes by $63.5 million, increased stockholders’ equity by $39.5 million and increased deferred tax liabilities by $24.0 million. For the three and nine months ended September 30, 2009, the adoption of ASC 470 had the effect of adding $3.6 million and $10.7 million to the Company’s reported interest expense, respectively, and approximately $2.3 million ($.02 per diluted share) and $6.7 million ($.06 per diluted share) to the Company’s respective net losses.

NOTE G.    Derivative Financial Instruments

The Company uses financial derivative contracts to manage exposures to commodity price, interest rate and foreign currency fluctuations. The Company generally does not enter into derivative financial instruments for speculative or trading purposes. The Company also may enter physical delivery contracts to effectively provide commodity price protection. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, physical delivery contracts are not accounted for as derivative financial instruments in the financial statements.

All derivative contracts are recorded on the balance sheet at estimated fair value. Fair value is generally determined based on the credit-adjusted present value difference between the fixed contract price and the underlying market price at the determination date. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments and since that date has accounted for derivative instruments using the mark-to-market accounting method. Therefore, the Company will recognize all future changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

Changes in the fair value of effective cash flow hedges prior to the Company’s discontinuance of hedge accounting on February 1, 2009 were recorded as a component of AOCI – Hedging, which has been or will be transferred to earnings when the hedged transaction is recognized in earnings. Any ineffective portion of changes in the fair value of hedge derivatives prior to February 1, 2009 was recorded in the earnings of the period of change. The ineffective portion was calculated as the difference between the change in fair value of the hedge derivative and the estimated change in cash flows from the item hedged.

Fair value derivatives. The Company monitors the debt capital markets and interest rate trends to identify opportunities to enter into and terminate interest rate derivative contracts, with the objective of reducing the Company’s costs of capital. As of September 30, 2009 and December 31, 2008, the Company was not a party to any fair value hedges.

Cash flow derivatives. The Company utilizes commodity swap and collar contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company’s annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company’s indebtedness and forward currency exchange agreements to reduce the effect of exchange rate volatility.

 

23


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

Oil prices. All material physical sales contracts governing the Company’s oil production have been tied directly or indirectly to the NYMEX prices. The following table sets forth the volumes in Bbls underlying the Company’s outstanding oil derivative contracts and the weighted average NYMEX prices per Bbl for those contracts as of September 30, 2009:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily oil production non-hedge derivatives (a):

              

2009 – Swap Contracts

              

Volume (Bbl)

              11,250      11,250

Price per Bbl

            $ 63.41    $ 63.41

2009 – Collar Contracts

              

Volume (Bbl)

              2,000      2,000

Price per Bbl:

              

Ceiling

            $ 70.38    $ 70.38

Floor

            $ 52.00    $ 52.00

2009 – Collar Contracts with Short Puts

              

Volume (Bbl)

              15,000      15,000

Price per Bbl:

              

Ceiling

            $ 69.72    $ 69.72

Floor

            $ 51.47    $ 51.47

Short Put

            $ 41.47    $ 41.47

2010 – Swap Contracts

              

Volume (Bbl)

     2,500      2,500      2,500      2,500      2,500

Price per Bbl

   $ 93.34    $ 93.34    $ 93.34    $ 93.34    $ 93.34

2010 – Collar Contracts with Short Puts

              

Volume (Bbl)

     24,750      25,000      25,000      25,250      25,000

Price per Bbl:

              

Ceiling

   $ 83.57    $ 83.61    $ 83.61    $ 83.74    $ 83.63

Floor

   $ 66.20    $ 66.24    $ 66.24    $ 66.28    $ 66.24

Short

   $ 53.46    $ 53.48    $ 53.48    $ 53.50    $ 53.48

2011 – Swap Contracts

              

Volume (Bbl)

     750      750      750      750      750

Price per Bbl

   $ 77.25    $ 77.25    $ 77.25    $ 77.25    $ 77.25

2011 – Collar Contracts

              

Volume (Bbl)

     2,000      2,000      2,000      2,000      2,000

Price per Bbl:

              

Ceiling

   $ 170.00    $ 170.00    $ 170.00    $ 170.00    $ 170.00

Floor

   $ 115.00    $ 115.00    $ 115.00    $ 115.00    $ 115.00

2011 – Collar Contracts with Short Puts

              

Volume (Bbl)

     25,000      25,000      25,000      25,000      25,000

Price per Bbl:

              

Ceiling

   $ 94.60    $ 94.60    $ 94.60    $ 94.60    $ 94.60

Floor

   $ 72.80    $ 72.80    $ 72.80    $ 72.80    $ 72.80

Short Put

   $ 58.52    $ 58.52    $ 58.52    $ 58.52    $ 58.52

2012 – Swap Contracts

              

Volume (Bbl)

     3,000      3,000      3,000      3,000      3,000

Price per Bbl

   $ 79.32    $ 79.32    $ 79.32    $ 79.32    $ 79.32

 

24


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

2012 – Collar Contracts with Short Puts

              

Volume (Bbl)

     1,000      1,000      1,000      1,000      1,000

Price per Bbl:

              

Ceiling

   $ 103.50    $ 103.50    $ 103.50    $ 103.50    $ 103.50

Floor

   $ 80.00    $ 80.00    $ 80.00    $ 80.00    $ 80.00

Short Put

   $ 65.00    $ 65.00    $ 65.00    $ 65.00    $ 65.00

2013 – Swap Contracts

              

Volume (Bbl)

     3,000      3,000      3,000      3,000      3,000

Price per Bbl

   $ 81.02    $ 81.02    $ 81.02    $ 81.02    $ 81.02

2013 – Collar Contracts with Short Puts

              

Volume (Bbl)

     1,250      1,250      1,250      1,250      1,250

Price per Bbl:

              

Ceiling

   $ 111.50    $ 111.50    $ 111.50    $ 111.50    $ 111.50

Floor

   $ 83.00    $ 83.00    $ 83.00    $ 83.00    $ 83.00

Short Put

   $ 68.00    $ 68.00    $ 68.00    $ 68.00    $ 68.00

 

(a)

Subsequent to September 30, 2009, the Company entered into additional collar contracts with short puts for (i) 2,000 Bbls per day of the Company’s 2010 production with a ceiling price of $86.50 per Bbl, a floor price of $75.00 per Bbl and a short put price of $60.00 per Bbl, (ii) 9,000 Bbls per day of the Company’s 2011 production with a ceiling price of $107.37 per Bbl, a floor price of $75.00 per Bbl and a short put price of $60.00 per Bbl and (iii) 4,000 Bbls per day of the Company’s 2012 production with a ceiling price of $107.50 per Bbl, a floor price of $80.00 per Bbl and a short put price of $65.00 per Bbl.

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production have been tied directly or indirectly to Mont Belvieu prices. The following table sets forth the volumes in Bbls under outstanding NGL derivative contracts and the weighted average Mont Belvieu-posted-prices per Bbl for those contracts as of September 30, 2009:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily NGL production non-hedge derivatives:

              

2009 – Swap Contracts

              

Volume (Bbl)

              3,750      3,750

Price per Bbl

            $ 34.28    $ 34.28

2010 – Swap Contracts

              

Volume (Bbl)

     1,250      1,250      1,250      1,250      1,250

Price per Bbl

   $ 47.36    $ 47.37    $ 47.38    $ 47.38    $ 47.38

2011 – Swap Contracts

              

Volume (Bbl)

     750      750      750      750      750

Price per Bbl

   $ 34.65    $ 34.65    $ 34.65    $ 34.65    $ 34.65

2010 – Swap Contracts

              

Volume (Bbl)

     750      750      750      750      750

Price per Bbl

   $ 35.03    $ 35.03    $ 35.03    $ 35.03    $ 35.03

 

25


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

Gas prices. All material physical sales contracts governing the Company’s gas production have been tied directly or indirectly to regional index prices where the gas is produced. The Company uses derivative contracts to mitigate gas price volatility and reduce basis risk between NYMEX prices and actual index prices upon which the gas is sold. The following table sets forth the volumes in MMBtus under outstanding gas derivative contracts and the weighted average index prices per MMBtu for those contracts as of September 30, 2009:

 

    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Outstanding
Average
 

Average daily gas production non-hedge derivatives (a):

         

2009 – Swap Contracts

         

Volume (MMBtu)

          137,500        137,500   

Price per MMBtu

        $ 6.13      $ 6.13   

2009 – Collar Contracts

         

Volume (MMBtu)

          20,000        20,000   

Price per MMBtu:

         

Ceiling

        $ 5.90      $ 5.90   

Floor

        $ 4.00      $ 4.00   

2009 – Collar Contracts with Short Puts

         

Volume (MMBtu)

          150,000        150,000   

Price per MMBtu:

         

Ceiling

        $ 5.35      $ 5.35   

Floor

        $ 4.18      $ 4.18   

Short Put

        $ 3.18      $ 3.18   

2009 – Basis Swap Contracts

         

Volume (MMBtu)

          285,000        285,000   

Price per MMBtu

        $ (0.96   $ (0.96

2010 – Swap Contracts

         

Volume (MMBtu)

    177,500        177,500        127,500        127,500        152,295   

Price per MMBtu

  $ 6.30      $ 6.30      $ 6.59      $ 6.59      $ 6.42   

2010 – Collar Contracts

         

Volume (MMBtu)

    30,000        30,000        30,000        30,000        30,000   

Price per MMBtu:

         

Ceiling

  $ 7.52      $ 7.52      $ 7.52      $ 7.52      $ 7.52   

Floor

  $ 6.00      $ 6.00      $ 6.00      $ 6.00      $ 6.00   

2010 – Collar Contracts with Short Puts

         

Volume (MMBtu)

    95,000        95,000        95,000        95,000        95,000   

Price per MMBtu:

         

Ceiling

  $ 7.94      $ 7.94      $ 7.94      $ 7.94      $ 7.94   

Floor

  $ 6.00      $ 6.00      $ 6.00      $ 6.00      $ 6.00   

Short Put

  $ 5.00      $ 5.00      $ 5.00      $ 5.00      $ 5.00   

2010 – Basis Swap Contracts

         

Volume (MMBtu)

    215,000        215,000        215,000        215,000        215,000   

Price per MMBtu

  $ (0.77   $ (0.77   $ (0.77   $ (0.77   $ (0.77

2011 – Swap Contracts

         

Volume (MMBtu)

    2,500        2,500        2,500        2,500        2,500   

Price per MMBtu

  $ 6.65      $ 6.65      $ 6.65      $ 6.65      $ 6.65   

2011 – Collar Contracts with Short Puts

         

Volume (MMBtu)

    175,000        175,000        175,000        175,000        175,000   

Price per MMBtu:

         

Ceiling

  $ 8.69      $ 8.69      $ 8.69      $ 8.69      $ 8.69   

Floor

  $ 6.36      $ 6.36      $ 6.36      $ 6.36      $ 6.36   

Short Put

  $ 4.93      $ 4.93      $ 4.93      $ 4.93      $ 4.93   

2011 – Basis Swap Contracts

         

Volume (MMBtu)

    100,000        100,000        100,000        100,000        100,000   

Price per MMBtu

  $ (0.71   $ (0.71   $ (0.71   $ (0.71   $ (0.71

 

26


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

2012 – Swap Contracts

          

Volume (MMBtu)

     2,500        2,500        2,500        2,500        2,500   

Price per MMBtu

   $ 6.77      $ 6.77      $ 6.77      $ 6.77      $ 6.77   

2012 – Collar Contracts with Short Puts

          

Volume (MMBtu)

     50,000        50,000        50,000        50,000        50,000   

Price per MMBtu:

          

Ceiling

   $ 8.81      $ 8.81      $ 8.81      $ 8.81      $ 8.81   

Floor

   $ 6.25      $ 6.25      $ 6.25      $ 6.25      $ 6.25   

Short Put

   $ 4.50      $ 4.50      $ 4.50      $ 4.50      $ 4.50   

2012 – Basis Swap Contracts

          

Volume (MMBtu)

     20,000        20,000        20,000        20,000        20,000   

Price per MMBtu

   $ (0.78   $ (0.78   $ (0.78   $ (0.78   $ (0.78

2013 – Swap Contracts

          

Volume (MMBtu)

     2,500        2,500        2,500        2,500        2,500   

Price per MMBtu

   $ 6.89      $ 6.89      $ 6.89      $ 6.89      $ 6.89   

2013 – Basis Swap Contracts

          

Volume (MMBtu)

     10,000        10,000        10,000        10,000        10,000   

Price per MMBtu

   $ (0.71   $ (0.71   $ (0.71   $ (0.71   $ (0.71

 

(a)

Subsequent to September 30, 2009, the Company unwound gas swap contracts for 24,795 MMBtu per day of the Company’s 2010 production at an average price of $5.56 per MMBtu.

Interest rate. During August 2009 and January 2008, the Company entered into interest rate swap contracts. The August 2009 contracts were fixed-for-variable-rate swaps on $50 million notional amount of debt at a weighted average fixed annual rate of 3.09 percent. The August 2009 contracts had an effective start date of August 2009 and were scheduled to terminate in August 2014. The January 2008 contracts were variable-for-fixed-rate swaps on $400 million notional amount of debt at a weighted average fixed annual rate of 2.87 percent, excluding any applicable margins. The January 2008 interest rate swaps had an effective start date of February 2008, with $200 million terminating during February 2010 and $200 million during February 2011. During October 2009, the Company terminated the $50 million notional amount, fixed-for-variable rate swap contracts and $111 million notional amount of the variable-for-fixed rate swap contracts. The resulting gains and losses from the terminated contracts completely offset and will have no impact on the Company’s 2009 results of operations

Hedge ineffectiveness. On February 1, 2009, the Company discontinued hedge accounting on all existing derivative contracts. As a result, the Company only recorded ineffectiveness during January 2009, which was nominal. During the three and nine months ended September 30, 2008, the Company recorded net ineffectiveness charges of $4.5 million and $2.6 million, respectively. Hedge ineffectiveness represents the ineffective portions of changes in the fair values of the Company’s cash flow hedging instruments. The primary causes of hedge ineffectiveness were changes in forecasted hedged sales volumes and commodity price correlations.

Tabular disclosure of derivative fair value. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments, and since that date forward has accounted for derivative instruments using the mark-to-market accounting method. All of the Company’s derivatives were made up of non-hedge derivatives as of September 30, 2009 and both hedge derivatives and non-hedge derivatives as of December 31, 2008.

 

27


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

The following tables provide disclosure of the Company’s derivative instruments:

 

Fair Value of Derivative Instruments as of September 30, 2009

    

Asset Derivatives (a)

  

Liability Derivatives (a)

Type

  

Balance Sheet

Location

   Fair
Value
  

Balance Sheet

Location

   Fair
Value
          (in thousands)         (in thousands)

Derivatives not designated as hedging instruments

           

Commodity price derivatives

   Derivatives - current    $ 71,422    Derivatives - current    $ 95,248

Interest rate derivatives

   Derivatives - current      1,280    Derivatives - current      7,027

Commodity price derivatives

   Derivatives - noncurrent      38,537    Derivatives - noncurrent      62,942

Interest rate derivatives

   Derivatives - noncurrent      653    Derivatives - noncurrent      1,856
                   

Total derivatives not designated as hedging instruments

        111,892         167,073
                   

Derivatives designated as hedging instruments (b)

           

Commodity price derivatives

   Derivatives - current      —      Derivatives - current      21,114

Commodity price derivatives

   Derivatives - noncurrent      —      Derivatives - noncurrent      4,284
                   

Total derivatives designated as hedging instruments

        —           25,398
                   

Total derivatives

      $ 111,892       $ 192,471
                   

Fair Value of Derivative Instruments as of December 31, 2008

    

Asset Derivatives (a)

  

Liability Derivatives (a)

Type

  

Balance Sheet

Location

   Fair
Value
  

Balance Sheet

Location

   Fair
Value
          (in thousands)         (in thousands)

Derivatives not designated as hedging instruments

           

Commodity price derivatives

   Derivatives - current    $ 3,606    Derivatives - current    $ 20,233

Commodity price derivatives

   Derivatives - noncurrent      3,972    Derivatives - noncurrent      —  
                   

Total derivatives not designated as hedging instruments

        7,578         20,233
                   

Derivatives designated as hedging instruments

           

Commodity price derivatives

   Derivatives - current      57,367    Derivatives - current      24,195

Interest rate derivatives

   Derivatives - current      —      Derivatives - current      6,484

Commodity price derivatives

   Derivatives - noncurrent      68,622    Derivatives - noncurrent      17,165

Interest rate derivatives

   Derivatives - noncurrent      —      Derivatives - noncurrent      3,419
                   

Total derivatives designated as hedging instruments

        125,989         51,263
                   

Total derivatives

      $ 133,567       $ 71,496
                   

 

(a)

Derivative assets and liabilities shown in the tables above are presented as gross assets and liabilities, without regard to master netting arrangements which are considered in the presentations of derivative assets and liabilities in the accompanying consolidated balance sheets.

(b)

Represent derivative obligations under terminated hedge arrangements.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

         Amount of Gain/(Loss) Recognized in
OCI on Effective Portion
 

Derivatives in Cash Flow Hedging Relationships

        Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
         (in thousands)  

Interest rate derivatives

     $ —        $ (1,424   $ (433   $ 3,677   

Commodity price derivatives

       —          617,321        4,968        (172,478
                                  

Total

     $ —        $ 615,897      $ 4,535      $ (168,801
                                  
    

Location of Gain/(Loss) Reclassified from
AOCI

into Earnings

   Amount of Gain/(Loss) Reclassified
from AOCI into Earnings
 

Derivatives in Cash Flow Hedging Relationships

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
               (in thousands)        

Interest rate derivatives

 

Interest expense

   $ (1,621   $ (467   $ (5,893   $ (772

Commodity price derivatives

 

Oil and gas revenue

     26,261        (144,030     96,173        (388,244
                                  

Total

     $ 24,640      $ (144,497   $ 90,280      $ (389,016
                                  
   

Location of Gain/(Loss)

Recognized in Earnings

on Ineffective Portion

   Amount of Gain/(Loss) Recognized in
Earnings on Ineffective Portion
 
        Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Derivatives in Cash Flow Hedging Relationships

     2009     2008     2009     2008  
         (in thousands)  

Commodity price derivatives

 

Derivative losses, net

   $ —        $ (4,493   $ —        $ (2,585
    

Location of Gain/(Loss) Recognized in
Earnings

on Derivative

   Amount of Gain/(Loss) Recognized in
Earnings on Derivative
 
        Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Derivatives Not Designated as Hedging Instruments

     2009     2008     2009     2008  
               (in thousands)        

Interest rate derivatives

 

Interest expense

   $ 131      $ —        $ (3,120   $ —     

Commodity price derivatives

 

Derivative losses, net

     (15,353     634        (82,463     1,134   
                                  

Total

     $ (15,222   $ 634      $ (85,583   $ 1,134   
                                  

AOCI - Hedging. The fair value of the effective portion of the Company’s derivative contracts that were designated as cash flow hedges on January 31, 2009 was recorded in AOCI-Hedging and is being transferred to oil and gas revenue (for commodity derivatives) and interest expense (for interest rate derivatives) over the remaining term of the contracts. In accordance with the mark-to-market method of accounting, the Company will recognize all future changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which the changes occur.

As of September 30, 2009 and December 31, 2008, AOCI - Hedging represented net deferred gains of $64.9 million and $88.8 million, respectively. The AOCI - Hedging balance as of September 30, 2009 was comprised of $142.2 million of net deferred gains on the effective portions of discontinued commodity hedges, $7.6 million of net deferred losses on the effective portions of discontinued interest rate hedges, $38.1 million of associated net deferred tax provisions and a charge for $31.6 million of AOCI – Hedging attributable to noncontrolling interests. The $23.9 million decrease in net deferred hedge gains comprising AOCI - Hedging during the nine months ended September 30, 2009 was primarily attributable to the transfer of net deferred hedge gains to earnings, partially offset by deferred fair value gains during January 2009 and a decrease in AOCI – Hedging attributable to noncontrolling interests. AOCI - Hedging attributable to noncontrolling interests represented $44.7 million of deferred gains, net of taxes as of December 31, 2008.

 

29


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

During the twelve months ending September 30, 2010, the Company expects to reclassify approximately $92.0 million of AOCI – Hedging net deferred gains to oil and gas revenues and $4.4 million of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify approximately $32.4 million of net deferred income tax provisions associated with hedge derivatives during the year ending September 30, 2010 from AOCI - Hedging to income tax expense.

Discontinued commodity hedges. Effective on February 1, 2009, the Company discontinued all of its commodity and interest rates hedges and began accounting for the associated derivatives using the mark-to-market accounting method. Prior to February 1, 2009, the Company periodically discontinued commodity hedges by terminating the derivative positions when the underlying commodity prices reached a point that the Company believed would be near the high or low price of the commodity prior to the scheduled settlement of the open commodity position. This allowed the Company to lock in gains or minimize losses associated with the open hedge positions. At the time of hedge discontinuation, the amounts recorded in AOCI—Hedging are maintained and amortized to earnings over the periods the production was scheduled to occur.

The following table sets forth, as of September 30, 2009, the scheduled amortization of net deferred gains and (losses) on discontinued commodity hedges that will be recognized as increases or (decreases) to the Company’s future oil and gas revenues:

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Total  
     (in thousands)  

2009 net deferred hedge gains

         $ 24,622     $ 24,622  

2010 net deferred hedge gains

   $ 21,700     $ 22,029     $ 22,353     $ 22,417     $ 88,499  

2011 net deferred hedge gains

   $ 7,989     $ 8,072     $ 8,159     $ 8,021     $ 32,241  

2012 net deferred hedge losses

   $ (810   $ (791   $ (783   $ (773   $ (3,157

NOTE H.    Asset Retirement Obligations

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company does not provide for a market risk premium associated with asset retirement obligations because a reliable estimate cannot be determined. The Company has no assets that are legally restricted for purposes of settling asset retirement obligations. The following table summarizes the Company’s asset retirement obligation transactions during the three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Beginning asset retirement obligations

   $ 154,172     $ 185,911     $ 172,433     $ 208,184  

Liabilities assumed in acquisitions

     —          756       —          777  

New wells placed on production and changes in estimates (a)

     1,202       1,592       16,568       (6,200

Liabilities reclassified to discontinued operations held for sale

     —         —          (1,756     —     

Disposition of wells

     (491     —          (13,334     —     

Liabilities settled

     (15,587     (31,774     (40,562     (50,578

Accretion of discount on continuing operations

     2,754       1,981       8,259       5,885  

Accretion of discount on discontinued operations

     88       199       530       597  
                                

Ending asset retirement obligations

   $ 142,138     $ 158,665     $ 142,138     $ 158,665  
                                

 

(a)

During the nine months ended September 30, 2008, the Company recorded a $9.0 million decrease in the abandonment estimates and associated insurance recovery estimates for the East Cameron facility that was destroyed by Hurricane Rita in 2005. During the nine months ended September 30, 2009, the Company recorded a $16.2 million increase to the abandonment estimate associated with the East Cameron facility. See Note O for additional information regarding the East Cameron facility.

 

30


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

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, 2009 and December 31, 2008, the current portions of the Company’s asset retirement obligations were $9.9 million and $29.9 million, respectively.

NOTE I.    Postretirement Benefit Obligations

As of September 30, 2009 and December 31, 2008, the Company had $9.2 million and $9.6 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities, respectively, in the consolidated balance sheets. These obligations are comprised of five plans of which four relate to predecessor entities that the Company acquired in prior years. These plans had no assets as of September 30, 2009 or December 31, 2008. Other than participants in the Company’s retirement plan, the participants of these plans are not current employees of the Company.

The following table reconciles changes in the Company’s unfunded accumulated postretirement benefit obligations during the three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2009     2008     2009     2008  
     (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 9,364      $ 10,341      $ 9,612      $ 10,494   

Net benefit payments

     (361     (599     (1,052     (1,162

Service costs

     57        47        171        142   

Accretion of interest

     164        158        493        473   
                                

Ending accumulated postretirement benefit obligations

   $ 9,224      $ 9,947      $ 9,224      $ 9,947   
                                

NOTE J.    Commitments and Contingencies

Legal actions. The Company is party to the legal actions that are described below. The Company is also a party to other 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 other proceedings and claims will not have a material adverse effect on the Company’s consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company will continue to evaluate its litigation on a quarter-by-quarter basis and will establish and adjust any litigation reserves as appropriate to reflect its assessment of the then current status of litigation.

MOSH Holding. On April 11, 2005, the Company and its principal United States subsidiary, Pioneer Natural Resources USA, Inc., were named as defendants in MOSH Holding, L.P. v Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc.; Woodside Energy (USA) Inc.; and JPMorgan Chase Bank, N.A., as Trustee of the Mesa Offshore Trust (the “Trust”), which was formerly pending before the Judicial District Court of Harris County, Texas (334th Judicial District) (the “Court”).

In April, 2009, the Company and all parties in the lawsuit reached an agreement to settle the lawsuit. Under the terms of the settlement agreement, the Company will pay to the Trust the sum of $13 million in exchange for a full and final release of all claims made or that could have been made in the lawsuit (the “Claims”). The Company will also contribute to the Trust any proceeds obtained from the Company’s sale of its complete interest, including its working interest, in the Brazos Block A-39 tract, which will be offered for sale in conjunction with the Trust’s sale of its assets.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

The settlement agreement is subject to customary conditions, including a condition that the settlement is not final until it is approved by the Court and the Court issues a final, non-appealable judgment disposing of all Claims. In September, 2009, the Court entered a final judgment approving the settlement and dismissing all Claims. Subsequently, certain unit-holders in the Trust filed an appeal in Texas state court seeking to reverse the Court’s final judgment. The settlement will not be final and completed until such appeal is dismissed and any other post-judgment proceedings are exhausted. Pioneer expects to prevail with respect to any such appeal or any other post-judgment proceedings attempting to avoid the settlement.

Colorado Notice of Violation. On May 13, 2008, the Company was served with a Notice of Violation/Cease and Desist Order by the State of Colorado Department of Public Health and Environmental Water Quality Control Division. The Notice alleges violations of stormwater discharge permits in the Company’s Raton Basin and Lay Creek operations, specifically deficiencies in the Company’s stormwater management plans, failure to implement and maintain best management practices to protect stormwater runoff and failure to conduct inspections of the stormwater management system. The Company has filed an answer to the Notice asserting defenses to the allegations. The Company does not believe that the outcome of this proceeding will materially impact the Company’s liquidity, financial position or future results of operations.

Obligations following divestitures. In April 2006, the Company provided the purchaser of its Argentine assets certain indemnifications. The Company remains responsible for certain contingent liabilities related to such indemnifications, subject to defined limitations. The Company does not believe that these obligations, which primarily pertain to matters of litigation, environmental contingencies, royalty obligations and income taxes, are probable of having a material impact on its liquidity, financial position or future results of operations.

The Company has also retained certain liabilities and indemnified buyers for certain matters in connection with other divestitures, including the sale in 2007 of its Canadian assets.

NOTE K.    Earnings Per Share From Continuing Operations

Basic earnings per share from continuing operations is computed by dividing earnings from continuing operations attributable to common stockholders by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share from continuing operations reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to income from continuing operations were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company. During periods that the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would not be dilutive to loss per share and conversion into common stock is assumed not to occur.

The Company’s earnings from continuing operations attributable to common stockholders is computed as income (loss) from continuing operations less participating share-based earnings. The following table is a reconciliation of the Company’s income (loss) from continuing operations to income (loss) from continuing operations attributable to common stockholders for the three- and nine-month periods ended September 30, 2009 and 2008:

 

     Three Months Ended    Nine Months Ended  
     September 30,    September 30,  
     2009     2008    2009     2008  
    

(in thousands)

 

Income (loss) from continuing operations

   $ (10,274   $ 2,860    $ (110,365   $ 280,088   

Participating share-based earnings (a)

     —          —        (94     (3,440
                               

Income (loss) from continuing operations available to common stockholders

   $ (10,274   $ 2,860    $ (110,459   $ 276,648   
                               

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

 

(a)

In accordance with ASC 260 (formerly FSP EITF 03-6-1), unvested restricted stock share awards and restricted stock unit awards represent participating securities because they participate in nonforfeitable dividends with the Company’s common stock. Participating share-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and restricted stock unit awards do not participate in undistributed net losses as they are not contractually obligated to do so.

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-month periods ended September 30, 2009 and 2008:

 

     Three Months Ended    Nine Months Ended
     September 30,    September 30,
     2009    2008    2009    2008
    

(in thousands)

Weighted average common shares outstanding (a):

           

Basic

   114,123    118,110    114,118    118,136

Dilutive common stock options (b)

   —      —      —      312

Contingently issuable - performance shares (b)

   —      —      —      120

Convertible notes dilution (c)

   —      —      —      197
                   

Diluted

   114,123    118,110    114,118    118,765
                   

 

(a)

In 2007, the Company’s board of directors (“Board”) approved a $750 million share repurchase program of which $355.8 million remained available for purchase as of September 30, 2009. During the first nine months of 2009 and 2008, the Company purchased $16.3 million and $12.8 million of common stock pursuant to the program, respectively.

(b)

Diluted earnings per share were calculated using the two-class method for the three- and nine-months ended September 30, 2009 and 2008. The following common stock equivalents were excluded from the diluted loss per share calculations for the three and nine months ended September 30, 2009 because they would have been anti-dilutive to the calculations: 1,194,518 and 768,049 unvested restricted shares or restricted stock units, respectively; 180,124 and 154,946 outstanding options to purchase the Company’s common stock, respectively; and 203,835 and 126,091 performance units, respectively. Additionally, 1,594,793 unvested restricted shares or restricted stock units, 277,034 outstanding options to purchase the Company’s common stock and 276,544 performance units were excluded from the diluted loss per share calculation for the three months ended September 30, 2008 because they would have been anti-dilutive to the calculation.

(c)

During January 2008, the Company issued $500 million of 2.875% Convertible Senior Notes. Weighted average common shares outstanding have been increased to reflect the dilutive effect that would have resulted if the 2.875% Convertible Senior Notes had qualified for and been converted during the nine-months ended September 30, 2008. The 2.875% Convertible Senior Notes were not dilutive to the per share calculations of 2009 or the three months ended September 30, 2008.

NOTE L.    Geographic Operating Segment Information

The Company’s only operations are oil and gas exploration and producing activities; however, the Company is organizationally structured along geographic operating segments or regions. The Company has reportable operations in the United States, South Africa and Tunisia.

The following tables provide the Company’s geographic operating segment data for the three and nine months ended September 30, 2009 and 2008. Geographic operating segment income tax (provisions) benefits have been determined based on statutory rates existing in the various tax jurisdictions where the Company has oil and gas producing activities. The “Headquarters” table column includes income and expenses that are not routinely included in the earnings measures internally reported to management on a geographic operating segment basis and operations in Equatorial Guinea and Nigeria, where the Company concluded exploration activities during 2007.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended September 30, 2009

  

Revenues and other income:

          

Oil and gas

   $ 350,034      $ 20,836      $ 39,099      $ —        $ 409,969   

Interest and other

     —          —          —          503        503   

Gain (loss) on disposition of assets, net

     80        —          —          (465     (385
                                        
     350,114        20,836        39,099        38        410,087   
                                        

Costs and expenses:

          

Oil and gas production

     84,083        822        5,489        —          90,394   

Production and ad valorem taxes

     28,089        —          —          —          28,089   

Depletion, depreciation and amortization

     128,954        20,813        5,639        7,199        162,605   

Exploration and abandonments

     19,908        114        4,910        141        25,073   

General and administrative

     —          —          —          34,799        34,799   

Accretion of discount on asset retirement obligations

     —          —          —          2,754        2,754   

Interest

     —          —          —          43,438        43,438   

Hurricane activity, net

     1,830        —          —          —          1,830   

Derivative losses, net

     —          —          —          15,222        15,222   

Other

     9,702        —          —          11,661        21,363   
                                        
     272,566        21,749        16,038        115,214        425,567   
                                        

Income (loss) from continuing operations before income taxes

     77,548        (913     23,061        (115,176     (15,480

Income tax benefit (provision)

     (28,693     265        (12,227     45,861        5,206   
                                        

Income (loss) from continuing operations

   $ 48,855      $ (648   $ 10,834      $ (69,315   $ (10,274
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended September 30, 2008

  

Revenues and other income:

          

Oil and gas

   $ 499,606      $ 33,418      $ 67,389      $ —        $ 600,413   

Interest and other

     —          —          —          2,285        2,285   

Gain on disposition of assets, net

     —          —          —          190        190   
                                        
     499,606        33,418        67,389        2,475        602,888   
                                        

Costs and expenses:

          

Oil and gas production

     91,933        10,389        4,837        —          107,159   

Production and ad valorem taxes

     46,124        —          —          —          46,124   

Depletion, depreciation and amortization

     106,085        4,109        3,739        7,332        121,265   

Impairment of oil and gas properties

     89,753        —          —          —          89,753   

Exploration and abandonments

     99,613        —          8,074        1,733        109,420   

General and administrative

     —          —          —          31,622        31,622   

Accretion of discount on asset retirement obligations

     —          —          —          1,981        1,981   

Interest

     —          —          —          41,176        41,176   

Hurricane activity, net

     541        —          —          —          541   

Derivative losses, net

           3,858        3,858   

Other

     5,079        —          —          28,885        33,964   
                                        
     439,128        14,498        16,650        116,587        586,863   
                                        

Income (loss) from continuing operations before income taxes

     60,478        18,920        50,739        (114,112     16,025   

Income tax benefit (provision)

     (22,377     (5,487     (29,268     43,967        (13,165
                                        

Income (loss) from continuing operations

   $ 38,101      $ 13,433      $ 21,471      $ (70,145   $ 2,860   
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Nine Months Ended September 30, 2009:

  

Revenues and other income:

          

Oil and gas

   $ 991,849      $ 50,801      $ 105,862      $ —        $ 1,148,512   

Interest and other

     —          —          —          99,761        99,761   

Gain (loss) on disposition of assets, net

     87        —          —          (534     (447
                                        
     991,936        50,801        105,862        99,227        1,247,826   
                                        

Costs and expenses:

          

Oil and gas production

     257,580        4,763        23,274        —          285,617   

Production and ad valorem taxes

     79,503        —          —          —          79,503   

Depletion, depreciation and amortization

     414,135        57,812        15,706        21,769        509,422   

Impairment of oil and gas properties

     21,091        —          —          —          21,091   

Exploration and abandonments

     61,276        403        15,458        724        77,861   

General and administrative

     —          —          —          102,728        102,728   

Accretion of discount on asset retirement obligations

     —          —          —          8,259        8,259   

Interest

     —          —          —          128,051        128,051   

Hurricane activity, net

     18,280        —          —          —          18,280   

Derivative losses, net

     —          —          —          85,583        85,583   

Other

     48,852        —          3,768        36,847        89,467   
                                        
     900,717        62,978        58,206        383,961        1,405,862   
                                        

Income (loss) from continuing operations before income taxes

     91,219        (12,177     47,656        (284,734     (158,036

Income tax benefit (provision)

     (33,751     3,531        (26,911     104,802        47,671   
                                        

Income (loss) from continuing operations

   $ 57,468      $ (8,646   $ 20,745      $ (179,932   $ (110,365
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Nine Months Ended September 30, 2008:

  

Revenues and other income:

          

Oil and gas

   $ 1,496,590      $ 100,983      $ 180,006      $ —        $ 1,777,579   

Interest and other

     —          —          —          33,697        33,697   

Gain on disposition of assets, net

     513        —          —          4,255        4,768   
                                        
     1,497,103        100,983        180,006        37,952        1,816,044   
                                        

Costs and expenses:

          

Oil and gas production

     254,464        28,738        14,097        —          297,299   

Production and ad valorem taxes

     129,670        —          —          —          129,670   

Depletion, depreciation and amortization

     294,009        13,152        9,116        21,876        338,153   

Impairment of oil and gas properties

     89,753        —          —          —          89,753   

Exploration and abandonments

     144,249        52        21,074        7,339        172,714   

General and administrative

     —          —          —          103,739        103,739   

Accretion of discount on asset retirement obligations

     —          —          —          5,885        5,885   

Interest

     —          —          —          123,124        123,124   

Hurricane activity, net

     2,400        —          —          —          2,400   

Derivative losses, net

     —          —          —          1,451        1,451   

Other

     19,657        —          —          34,496        54,153   
                                        
     934,202        41,942        44,287        297,910        1,318,341   
                                        

Income (loss) from continuing operations before income taxes

     562,901        59,041        135,719        (259,958     497,703   

Income tax benefit (provision)

     (208,273     (17,122