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 June 30, 2010

or

 

¨

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

For the transition period from              to             

Commission File Number: 1-13245

 

 

PIONEER NATURAL RESOURCES COMPANY

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   75-2702753

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5205 N. O’Connor Blvd., Suite 200, Irving, Texas   75039
(Address of principal executive offices)   (Zip Code)

(972) 444-9001

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 July 27, 2010                                                                                       115,994,034

 

 

 


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 June 30, 2010 and December 31, 2009

   5
 

Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   7
 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2010

   8
 

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   9
 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2010 and 2009

   10
 

Notes to Consolidated Financial Statements

   11

Item 2.

 

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

   38

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   51

Item 4.

 

Controls and Procedures

   54
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

   55

Item 1A.

 

Risk Factors

   55

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   57

Item 6.

 

Exhibits

   58

Signatures

   59

Exhibit Index

   60

 

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, availability of equipment, services and personnel required to complete the Company’s operating activities, access to and availability of 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 the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impact of climate change, 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 effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and “Part II, Item 1A. Risk Factors” in this Report and “Part I, Item 1. Business — Competition, Markets and Regulations,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

 

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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 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” means the quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geosciences and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program is based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

(v) Existing conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

 

 

“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 employed in the determination of proved reserves 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)

 

     June 30,
2010
    December 31,
2009
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 197,686     $ 27,368  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $1,359 and $1,310 as of June 30, 2010 and December 31, 2009, respectively

     212,014       330,711  

Due from affiliates

     807       1,037  

Income taxes receivable

     1,582       25,022  

Inventories

     122,393       139,177  

Prepaid expenses

     19,097       9,011  

Deferred income taxes

     —          26,857  

Other current assets:

    

Derivatives

     149,632       48,713  

Other, net of allowance for doubtful accounts of $581 and $5,689 as of June 30, 2010 and December 31, 2009, respectively

     9,367       8,222  
                

Total current assets

     712,578       616,118  
                

Property, plant and equipment, at cost:

    

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

    

Proved properties

     10,560,753       10,276,244  

Unproved properties

     179,886       236,660  

Accumulated depletion, depreciation and amortization

     (3,168,814     (2,946,048
                

Total property, plant and equipment

     7,571,825       7,566,856  
                

Deferred income taxes

     2,356       387  

Goodwill

     298,563       309,259  

Other property and equipment, net

     209,569       154,830  

Other assets:

    

Derivatives

     142,450       43,631  

Other, net of allowance for doubtful accounts of $11,164 and $7,300 as of June 30, 2010 and December 31, 2009, respectively

     174,981       176,184  
                
   $ 9,112,322     $ 8,867,265  
                

The financial information included as of June 30, 2010 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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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

 

     June 30,
2010
    December 31,
2009
 
     (Unaudited)        
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable:

    

Trade

   $ 316,790     $ 221,359  

Due to affiliates

     25,466       32,224  

Interest payable

     54,023       47,009  

Income taxes payable

     12,941       17,411  

Deferred income taxes

     43,158       128  

Other current liabilities:

    

Derivatives

     31,211       116,015  

Deferred revenue

     67,436       90,215  

Other

     36,260       46,830  
                

Total current liabilities

     587,285       571,191  
                

Long-term debt

     2,531,431       2,761,011  

Derivatives

     13,968       133,645  

Deferred income taxes

     1,638,060       1,470,899  

Deferred revenue

     64,730       87,021  

Other liabilities

     218,715       200,467  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 126,102,932 and 125,203,502 shares issued at June 30, 2010 and December 31, 2009, respectively

     1,261       1,252  

Additional paid-in capital

     3,004,139       2,981,450  

Treasury stock, at cost: 10,951,910 and 10,828,171 at June 30, 2010 and December 31, 2009, respectively

     (422,837     (415,211

Retained earnings

     1,323,662       917,688  

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

     29,166       51,009  
                

Total stockholders’ equity attributable to common stockholders

     3,935,391       3,536,188  

Noncontrolling interests in consolidating subsidiaries

     122,742       106,843  
                

Total stockholders’ equity

     4,058,133       3,643,031  

Commitments and contingencies

    
                
   $ 9,112,322     $ 8,867,265  
                

The financial information included as of June 30, 2010 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
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Revenues and other income:

        

Oil and gas

   $ 462,142     $ 370,692     $ 969,938     $ 738,543  

Interest and other

     20,263       88,598       40,066       99,258  

Derivative gains (losses), net

     177,528       (170,224     443,004       (70,361

Gain (loss) on disposition of assets, net

     7,645       53       24,588       (62

Hurricane activity, net

     (5,184     (16,075     2,226       (16,450
                                
     662,394       273,044       1,479,822       750,928  
                                

Costs and expenses:

        

Oil and gas production

     97,294       84,793       187,009       195,223  

Production and ad valorem taxes

     25,338       23,715       52,399       51,414  

Depletion, depreciation and amortization

     150,314       158,673       301,082       346,817  

Impairment of oil and gas properties

     —          —          —          21,091  

Exploration and abandonments

     27,123       21,618       47,920       52,788  

General and administrative

     42,374       33,275       83,322       67,929  

Accretion of discount on asset retirement obligations

     2,632       2,753       5,592       5,505  

Interest

     45,368       43,475       92,891       84,613  

Other

     14,725       36,715       31,301       68,104  
                                
     405,168       405,017       801,516       893,484  
                                

Income (loss) from continuing operations before income taxes

     257,226       (131,973     678,306       (142,556

Income tax benefit (provision)

     (94,693     41,724       (255,167     42,465  
                                

Income (loss) from continuing operations

     162,533       (90,249     423,139       (100,091

Income from discontinued operations, net of tax

     26,156       2,731       26,156       1,761  
                                

Net income (loss)

     188,689       (87,518     449,295       (98,330

Net (income) loss attributable to the noncontrolling interests

     (21,113     522       (36,465     (3,271
                                

Net income (loss) attributable to common stockholders

   $ 167,576     $ (86,996   $ 412,830     $ (101,601
                                

Basic earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ 1.20     $ (0.78   $ 3.29     $ (0.91

Income from discontinued operations attributable to common stockholders

     0.22       0.02       0.22       0.02  
                                

Net income (loss) attributable to common stockholders

   $ 1.42     $ (0.76   $ 3.51     $ (0.89
                                

Diluted earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ 1.19     $ (0.78   $ 3.27     $ (0.91

Income from discontinued operations attributable to common stockholders

     0.22       0.02       0.22       0.02  
                                

Net income (loss) attributable to common stockholders

   $ 1.41     $ (0.76   $ 3.49     $ (0.89
                                

Weighted average shares outstanding:

        

Basic

     115,104       113,979       114,880       114,116  
                                

Diluted

     116,006       113,979       115,735       114,116  
                                

Dividends declared per share

   $ —        $ —        $ 0.04     $ 0.04  
                                

Amounts attributable to common stockholders:

        

Income (loss) from continuing operations

   $ 141,420     $ (89,727   $ 386,674     $ (103,362

Income from discontinued operations

     26,156       2,731       26,156       1,761  
                                

Net income (loss)

   $ 167,576     $ (86,996   $ 412,830     $ (101,601
                                

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, 2009

  114,375     $ 1,252   $ 2,981,450     $ (415,211   $ 917,688     $ 51,009     $ 106,843     $ 3,643,031  

Dividends declared ($0.04 per share)

  —          —       —          —          (4,735     —          —          (4,735

Exercise of long-term incentive plan stock options

  145       —       —          5,573       (2,121     —          —          3,452  

Treasury stock purchases

  (269         (13,199         (203     (13,402

Tax benefit related to stock-based compensation

  —          —       4,090       —          —          —          —          4,090  

Compensation costs:

               

Vested compensation awards, net

  900       9     (8     —          —          —          —          1  

Compensation costs included in net income

  —          —       18,607       —          —          —          645       19,252  

Cash contributions from noncontrolling interests

  —          —       —          —          —          —          1,151       1,151  

Cash distributions to noncontrolling interests

  —          —       —          —          —          —          (13,451     (13,451

Net income

  —          —       —          —          412,830       —          36,465       449,295  

Other comprehensive loss:

               

Deferred hedging activity, net of tax:

               

Net hedge gains included in continuing operations

  —          —       —          —          —          (21,843     (8,708     (30,551
                                                           

Balance as of June 30, 2010

  115,151     $ 1,261   $ 3,004,139     $ (422,837   $ 1,323,662     $ 29,166     $ 122,742     $ 4,058,133  
                                                           

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)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ 449,295     $ (98,330

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

    

Depletion, depreciation and amortization

     301,082       346,817  

Impairment of oil and gas properties

     —          21,091  

Exploration expenses, including dry holes

     8,057       27,954  

Hurricane activity, net

     3,500       15,000  

Deferred income taxes

     243,052       (49,941

(Gain) loss on disposition of assets, net

     (24,588     62  

Accretion of discount on asset retirement obligations

     5,592       5,505  

Discontinued operations

     11,220       5,208  

Interest expense

     14,920       13,529  

Derivative related activity

     (442,087     48,235  

Amortization of stock-based compensation

     19,049       19,223  

Amortization of deferred revenue

     (45,070     (73,695

Other noncash items

     (3,766     24,840  

Change in operating assets and liabilities

    

Accounts receivable, net

     96,376       53,941  

Income taxes receivable

     23,440       31,796  

Inventories

     12,479       (57,689

Prepaid expenses

     (10,204     (14,187

Other current assets

     (7,192     66,920  

Accounts payable

     50,458       (107,388

Interest payable

     7,014       101  

Income taxes payable

     (4,470     13,917  

Other current liabilities

     (14,943     (44,581
                

Net cash provided by operating activities

     693,214       248,328  
                

Cash flows from investing activities:

    

Proceeds from disposition of assets

     297,312       3,742  

Additions to oil and gas properties

     (461,502     (242,150

Additions to other assets and other property and equipment, net

     (74,183     (21,399
                

Net cash used in investing activities

     (238,373     (259,807
                

Cash flows from financing activities:

    

Borrowings under long-term debt

     182,997       172,000  

Principal payments on long-term debt

     (424,107     (103,000

Contributions from noncontrolling interests

     1,151       150  

Distributions to noncontrolling interests

     (13,451     (10,050

Payments of other liabilities

     (20,325     (699

Exercise of long-term incentive plan stock options

     3,452       2,535  

Purchases of treasury stock

     (13,402     (20,399

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

     4,090       (3,918

Payment of financing fees

     (145     (4,475

Dividends paid

     (4,783     (4,679
                

Net cash provided by (used in) financing activities

     (284,523     27,465  
                

Net increase in cash and cash equivalents

     170,318       15,986  

Cash and cash equivalents, beginning of period

     27,368       48,337  
                

Cash and cash equivalents, end of period

   $ 197,686     $ 64,323  
                

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
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net income (loss)

   $ 188,689     $ (87,518   $ 449,295     $ (98,330
                                

Other comprehensive loss:

        

Hedge fair value changes, net

     —          —          —          12,974  

Net hedge gains included in continuing operations

     (20,697     (26,473     (41,623     (65,640

Income tax provision

     6,037       23,440       11,072       32,974  
                                

Other comprehensive loss

     (14,660     (3,033     (30,551     (19,692
                                

Comprehensive income (loss)

     174,029       (90,551     418,744       (118,022
                                

Comprehensive (income) loss attributable to noncontrolling interest

     (16,740     6,057       (27,758     4,270  
                                

Comprehensive income (loss) attributable to common stockholders

   $ 157,289     $ (84,494   $ 390,986     $ (113,752
                                

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

June 30, 2010

(Unaudited)

NOTE A.     Organization and Nature of Operations

Pioneer Natural Resources Company (“Pioneer” or the “Company”) is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company 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 June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed 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, 2009.

During the three months ended June 30, 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 the period then ended. 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. As of 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 corrected the error during the three months ended September 30, 2009. The accompanying consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2009, and the accompanying consolidated statement of cash flows for the six months ended June 30, 2009, have been revised for this correction. The correction of this error decreased the Company’s diluted net loss by $0.04 per share for the three and six months ended June 30, 2009.

Discontinued operations. During the three months ended June 30, 2009, the Company sold its oil and gas properties in Mississippi and committed to a plan to sell substantially all of its shelf properties in the Gulf of Mexico, which were subsequently sold during August 2009. In accordance with GAAP, the Company classified the results of operations of the Mississippi and shelf properties in the Gulf of Mexico as discontinued in its accompanying consolidated statements of operations for the three and six months ended June 30, 2009.

During the fourth quarter of 2009, the Company recorded a $119.3 million receivable from the United States Department of Interior Minerals Management Service (the “MMS,” now the Bureau of Ocean Energy Management, Regulation, and Enforcement) for the recovery of excess royalties paid by the Company on qualifying deepwater leases in the Gulf of Mexico. The MMS paid the Company the $119.3 million receivable during the first half of 2010. Additionally, the MMS paid the Company $35.3 million of associated interest on the excess royalty payments during the three months ended June 30, 2010. The properties that were the source of these royalty and interest recoveries were sold by the Company during 2006. Accordingly, the $35.3 million of interest income recorded during the three and six months ended June 30, 2010 is a component of income from discontinued operations, net of tax in the accompanying consolidated statements of operations for the three and six months ended June 30, 2010. See Note S for additional information about discontinued operations.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Allowances for doubtful accounts. As of June 30, 2010 and December 31, 2009, the Company’s allowances for doubtful accounts totaled $13.1 million and $14.3 million, respectively. Changes in the Company’s allowance for doubtful accounts during the three and six months ended June 30, 2010 are summarized in the following table:

 

     Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2010
 
     (in thousands)  

Beginning allowance for doubtful accounts balance

   $ 14,729     $ 14,299  

Amount recorded in other expense for bad debt recoveries

     (254     (30

Other net decreases

     (1,371     (1,165
                

Ending allowance for doubtful accounts balance

   $ 13,104     $ 13,104  
                

Inventories. Inventories consisted of $193.7 million and $205.6 million of materials and supplies and $3.1 million and $3.2 million of commodities as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010 and December 31, 2009, the Company’s materials and supplies inventory was net of $1.4 million and $5.2 million, respectively, of valuation reserve allowances. As of June 30, 2010 and December 31, 2009, the Company estimated that $74.3 million and $69.6 million, respectively, of its materials and supplies inventory would not be utilized within one year. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

Derivatives and hedging. Changes in the fair values of 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 of its then-existing hedge contracts. 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 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 transferred to earnings during the same periods in which the hedged transactions are recognized in the Company’s earnings. Since February 1, 2009, the Company has recognized all changes in the fair values of its derivative contracts as gains or losses in the earnings of the periods in which they occur.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and master netting counterparty. 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 and Pioneer Southwest Energy Partners L.P.’s (“Pioneer Southwest,” a majority-owned and consolidated subsidiary) credit-adjusted risk-free rate curves. The credit-adjusted risk-free rate curves for the Company and the counterparties are based on independent market-quoted credit default swap rate curves for the parties’ debt plus the United States Treasury Bill yield curve as of June 30, 2010. Pioneer Southwest’s credit-adjusted risk-free rate curve is based on independent market-quoted forward London Interbank Offered Rate (“LIBOR”) curves plus 250 basis points, representing Pioneer Southwest’s estimated borrowing rate.

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. During the first half of 2010, the Company sold 45 percent of its interests in South Texas Eagle Ford Shale oil and gas properties and substantially all of its oil and gas properties in the Uinta/Piceance area. Associated therewith, the Company reduced its goodwill attributable to the sold properties by $10.7 million.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 61.9 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

June 30, 2010

(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 $122.7 million and $106.8 million as of June 30, 2010 and December 31, 2009, respectively. The Company recorded net income attributable to the noncontrolling interests of $21.1 million and $36.5 million for the three and six months ended June 30, 2010, respectively, (principally related to Pioneer Southwest) compared to net loss attributable to the noncontrolling interests of $0.5 million and net income attributable to the noncontrolling interests of $3.3 million for the three and six months ended June 30, 2009, respectively.

Investment in unconsolidated affiliate. During the first half of 2010, the Company formed EFS Midstream LLC (“EFS Midstream”) to own and operate natural gas and liquids gathering, treating and transportation assets in the Eagle Ford Shale area of South Texas. During June 2010, the Company sold a 49.9 percent member interest in EFS Midstream to an unaffiliated third party for $46.4 million of cash proceeds. Associated therewith, the Company recorded a $46.3 million deferred gain that will be amortized as a reduction in production costs over a 20 year period, representing the term of a continuing commitment of Pioneer to deliver production volumes through EFS Midstream handling and gathering facilities. The deferred gain is included in other current and noncurrent liabilities in the Company’s accompanying consolidated balance sheet as of June 30, 2010.

The Company does not have voting control of EFS Midstream. Consequently, the Company accounts for this investment under the equity method of accounting for investments in unconsolidated affiliates. Under the equity method, investment in an unconsolidated affiliate is increased for investments made and the investor’s share of the investee’s net income and decreased for distributions received, the carrying value of member interests sold and the investor’s share of the investee’s net losses.

Stock-based compensation. For stock-based compensation equity 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 amount of compensation expense recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. 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, (iii) the Monte Carlo simulation method for the fair value of performance unit awards and (iv) a probabilistic forecasted fair value method for series B unit awards in the Company’s majority-owned drilling subsidiary, Sendero Drilling Company, LLC (“Sendero”).

Stock-based compensation liability awards are awards that are expected to be settled wholly or partially in cash on their vesting dates, rather than in equity shares or units. Stock-based liability awards are recorded as accounts payable – affiliates based on the vested portion of the fair value of the awards on the balance sheet date. The fair values of liability awards are updated at each balance sheet date and changes in the fair values of the vested portions of the awards are recorded as increases or decreases to compensation expense. During February 2010, the Company issued 208,620 restricted stock awards to employees that represent liability awards. As of June 30, 2010, account payable – affiliates includes $1.3 million of liabilities attributable to the liability awards.

For the three and six months ended June 30, 2010, the Company recorded $10.5 million and $20.6 million, respectively, of stock-based compensation costs for all plans, as compared to $10.9 million and $20.1 million for the same respective periods of 2009.

In accordance with GAAP, the Company’s issued shares, as reflected in the consolidated balance sheets at June 30, 2010 and December 31, 2009, do not include 842,166 and 979,493 common shares, respectively, associated with unvested stock-based compensation awards that have voting rights.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

The following table summarizes all Pioneer equity and liability stock-based awards, lapses and forfeitures that occurred during the six months ended June 30, 2010:

 

     Restricted Stock
Awards
    Performance
Units
   Stock Options  

Outstanding at December 31, 2009

   2,999,370     347,031    596,033  

Awards (a)

   715,577     74,482    116,120  

Lapsed restrictions

   (799,163   —      —     

Exercises

   —        —      (144,845

Forfeitures

   (59,165   —      (1,066
                 

Outstanding at June 30, 2010

   2,856,619     421,513    566,242  
                 

 

(a)

Restricted stock awards include 208,620 of liability awards.

Subsidiary issuances of unit-based compensation. During the six months ended June 30, 2010, Pioneer Natural Resources GP LLC (the “General Partner”), the general partner of Pioneer Southwest, awarded phantom units to certain members of management of the General Partner under Pioneer Southwest’s long-term incentive plan (the “Phantom Units”). The Phantom Units entitle the recipients to receive 35,118 common units of Pioneer Southwest after a three-year vesting period. Associated therewith, Pioneer Southwest and the Company recorded $83 thousand of compensation expense during the six months ended June 30, 2010. During the six months ended June 30, 2010, Sendero entered into Restricted Unit Agreements with two key employees, relating to series B units in Sendero. The series B unit awards vest over a five-year period and do not earn equity rights unless certain defined performance conditions are achieved by Sendero. Associated therewith, the Company recorded $510 thousand of compensation expense during the six months ended June 30, 2010.

During the three months ended June 30, 2010, the General Partner awarded 8,744 Pioneer Southwest restricted common units to directors of the General Partner and restrictions on 13,653 Pioneer Southwest common unit awards lapsed. There were no forfeitures of Pioneer Southwest restricted common units during the six months ended June 30, 2010.

As of June 30, 2010, there was $65.6 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $10.6 million attributable to liability awards. 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. During February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855).” ASU No. 2010-09 amends Accounting Standards Codification (“ASC”) Topic 855 to include the definition of “SEC filer” and alleviate the obligation of SEC filers to disclose the date through which subsequent events have been evaluated. ASU No. 2010-09 became effective during February 2010. See Note T for the Company’s disclosures of subsequent events.

Effective December 31, 2009, the Company adopted the SEC’s final rule on “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”) and the FASB’s ASU 2010-03, which conforms ASC 932 to the Reserve Ruling. Among the items, the Reserve Ruling and ASU 2010-03 require companies to report oil and gas reserves using an average price based upon the prior 12-month period rather than a period-end price.

During January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820).” ASU No. 2010-06 amends ASC Topic 820 to (i) require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, (ii) require separate disclosure of purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), (iii) clarify the level of disaggregation for fair value measurements of assets and liabilities and (iv) clarify disclosures about inputs and valuation techniques used to measure fair values for both recurring and nonrecurring fair value measurements. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010. See Note D for the Company’s disclosures about fair value measurements.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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.

The following table reflects the Company’s capitalized exploratory well activity during the three and six months ended June 30, 2010:

 

     Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2010
 
     (in thousands)  

Beginning capitalized exploratory well costs

   $ 137,581     $ 127,574  

Additions to exploratory well costs pending the determination of proved reserves

     75,873       114,125  

Reclassification due to determination of proved reserves

     (46,497     (74,742

Disposition of wells sold

     (15,526     (15,526
                

Ending capitalized exploratory well costs

   $ 151,431     $ 151,431  
                

The following table provides an aging, as of June 30, 2010 and December 31, 2009 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:

 

     June 30, 2010    December 31, 2009
     (in thousands, except well counts)

Capitalized exploratory well costs that have been suspended:

     

One year or less

   $ 39,953    $ 21,634

More than one year

     111,478      105,940
             
   $ 151,431    $ 127,574
             

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

     5      8
             

The following table provides an aging of capitalized costs of exploration projects that have been suspended for more than one year as of June 30, 2010:

 

     Total    2010    2009    2008    2007     2006
     (in thousands)

U.S. – Cosmopolitan Unit

   $ 77,745    $ 10,831    $ 8,253    $ 6,344    $ 51,488     $ 829

Tunisia

     33,733      331      466      29,006      (15     3,945
                                          

Total

   $ 111,478    $ 11,162    $ 8,719    $ 35,350    $ 51,473     $ 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. The Company drilled a lateral sidetrack during 2007 from an existing wellbore on an onshore site to further appraise the resource potential of the unit. The initial un-stimulated production test results were encouraging. The Company performed casing repair workover operations on the well during the fourth quarter of 2009, fracture-stimulated the well during the first quarter of 2010 and plans to perform extended flow testing and analysis of the well during the remainder of 2010. The Company will continue to conduct permitting activities and facilities planning and may drill another appraisal well during 2011.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Tunisia – Cherouq. The Company has $17.8 million of suspended well costs recorded for the Hayatt #1 well in the Company’s Cherouq production concession area, which is operated by the Company. The Hayatt #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 has project personnel at appropriate levels committed to and actively participating in 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 Hayatt #1 plans during 2010 or early 2011 and execute well completion plans during 2011.

Tunisia – Borj El Khadra. The Company has $7.8 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. The third-party operator and the Company have project personnel at appropriate levels committed to and actively participating in infrastructure planning and assessment of the permit area. During the first half of 2010, a $13.8 million 3-D seismic program was initiated and future plans include the drilling of an additional exploration well in the permit area during 2010. Additionally, project personnel are evaluating the feasibility of using production handling facilities on a nearby production concession to transport Abir #1 production to sales markets.

Tunisia – Anaguid. The Company has $8.2 million of suspended well costs attributable to the Durra #1 well on the Anaguid exploration permit. Project personnel at appropriate levels are committed to and actively participating in the assessment of the Durra #1 well and the Anaguid exploration permit area. During April 2010, the Company and other project participants formally submitted a plan of development for the conversion of the Durra #1 discovery into a concession agreement. Engineering and design work is being progressed, which will allow construction activities to commence once the plan of development is formally approved. During July 2010, government approval was received; however, final approval is subject to publication in the Tunisian Gazette prior to the concession being formally awarded.

NOTE D.     Disclosures About Fair Value Measurements

In accordance with GAAP, fair value measurements are 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2010, for each of the fair value hierarchy levels:

 

     Fair Value Measurements at Reporting Date Using    Fair Value at
June 30,
2010
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant  Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
  
     (in thousands)

Assets:

           

Trading securities

   $ 296    $ 101    $ —      $ 397

Commodity derivatives

     —        265,863      6,311      272,174

Interest rate derivatives

     —        19,908      —        19,908

Deferred compensation plan assets

     29,103      —        —        29,103
                           

Total assets

   $ 29,399    $ 285,872    $ 6,311    $ 321,582
                           

Liabilities:

           

Commodity derivatives

   $ —      $ 40,922    $ 1,672    $ 42,594

Interest rate derivatives

     —        2,585      —        2,585

Pioneer Southwest credit facility

     —        67,990      —        67,990

5.875% senior notes due 2016

     465,631      —        —        465,631

6.65% senior notes due 2017

     489,223      —        —        489,223

6.875% senior notes due 2018

     449,500      —        —        449,500

7.50% senior notes due 2020

     463,500      —        —        463,500

7.20% senior notes due 2028

     246,918      —        —        246,918

2.875% senior convertible notes due 2038 (a)

     562,800      —        —        562,800
                           

Total liabilities

   $ 2,677,572    $ 111,497    $ 1,672    $ 2,790,741
                           

 

(a)

The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege. At the issuance date, the conversion privilege was valued at $81.1 million.

The following tables present the changes in the fair values of the Company’s notes receivable and natural gas liquid (“NGL”) derivative liabilities classified as Level 3 in the fair value hierarchy:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Three Months Ended June 30, 2010  
     NGL Swap
Contracts
    Notes
Receivable
    Total  
     (in thousands)  

Beginning asset (liability) balance

   $ (1,323   $ 1,529     $ 206  

Total gains (losses):

      

Net unrealized gains included in earnings (a)

     7,782       —          7,782  

Net realized losses transferred to earnings (a)

     (772     —          (772

Notes receivable valuation allowance recoveries included in earnings (b)

     —          307       307  

Settlements

     (1,048     (1,836     (2,884
                        

Ending asset balance

   $ 4,639     $ —        $ 4,639  
                        

 

(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 hedge gains and losses are included in derivative gains, net in the accompanying consolidated statements of operations.

(b)

The valuation allowance recoveries associated with the Company’s notes receivable is included in other expense in the accompanying consolidated statements of operations.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Six Months Ended June 30, 2010  
     NGL Swap
Contracts
    Notes
Receivable
    Total  
     (in thousands)  

Beginning asset (liability) balance

   $ (12,904   $ 4,727     $ (8,177

Total gains (losses):

      

Net unrealized gains included in earnings (a)

     21,203       —          21,203  

Net realized losses transferred to earnings (a)

     (3,852     —          (3,852

Notes receivable valuation allowance recoveries included in earnings (b)

     —          187       187  

Settlements (c)

     192       (4,914     (4,722
                        

Ending asset balance

   $ 4,639     $ —        $ 4,639  
                        

 

(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 hedge gains and losses are included in derivative gains, net in the accompanying consolidated statements of operations.

(b)

The valuation allowance recoveries associated with the Company’s notes receivable is included in other expense in the accompanying consolidated statements of operations.

(c)

During the first quarter of 2010, the Company took possession of a drilling rig that represented $3.0 million of collateral value associated with its notes receivable.

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of June 30, 2010 and December 31, 2009:

 

     June 30, 2010    December 31, 2009
     Carrying    Fair    Carrying    Fair
     Value    Value    Value    Value
     (in thousands)

Assets:

           

Commodity price derivatives

   $ 272,174    $ 272,174    $ 84,080    $ 84,080

Interest rate derivatives

   $ 19,908    $ 19,908    $ 8,264    $ 8,264

Trading securities

   $ 397    $ 397    $ 335    $ 335

Deferred compensation plan assets

   $ 29,103    $ 29,103    $ 27,890    $ 27,890

Notes receivable

   $ —      $ —      $ 4,727    $ 4,727

Liabilities:

           

Commodity price derivatives

   $ 42,594    $ 42,594    $ 223,555    $ 223,555

Interest rate derivatives

   $ 2,585    $ 2,585    $ 26,105    $ 26,105

Pioneer credit facility

   $ —      $ —      $ 240,000    $ 259,461

Pioneer Southwest credit facility

   $ 72,000    $ 67,990    $ 67,000    $ 61,718

5.875% senior notes due 2012

   $ —      $ —      $ 6,168    $ 6,154

5.875% senior notes due 2016

   $ 392,906    $ 465,631    $ 389,109    $ 437,170

6.65% senior notes due 2017

   $ 483,978    $ 489,223    $ 483,914    $ 472,546

6.875% senior notes due 2018

   $ 449,176    $ 449,500    $ 449,161    $ 438,402

7.50% senior notes due 2020

   $ 446,300    $ 463,500    $ 446,172    $ 449,566

7.20% senior notes due 2028

   $ 249,924    $ 246,918    $ 249,924    $ 230,868

2.875% senior convertible notes due 2038 (a)

   $ 437,145    $ 562,800    $ 429,563    $ 508,320

 

(a)

The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege. At the issuance date, the conversion privilege was valued at $81.1 million.

Trading securities and deferred compensation plan assets. The Company’s trading securities represent securities that are both actively traded and not actively traded on major exchanges. The Company’s deferred

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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 June 30, 2010, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for certain trading securities that are not actively traded on major exchanges, which were provided by broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company’s interest rate derivative assets and liabilities as of June 30, 2010 represent (i) swap contracts for $189 million notional amount of debt, whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate and (ii) swap contracts for $470 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 asset values attributable to the Company’s interest rate derivative contracts as of June 30, 2010 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 and liability measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company’s commodity derivatives represent oil, NGL and gas swap contracts, collar contracts and collar contracts with short puts (which are also known as three-way 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 barrels (“Bbls”) of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) New York Mercantile Exchange (“NYMEX”) West Texas Intermediate (“WTI”) oil prices. The asset and liability values attributable to the Company’s oil derivatives as of June 30, 2010 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) independent active market-quoted futures Brent price quotes, (iv) the applicable estimated 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 average volatility factors provided by certain independent brokers who are active in buying and selling oil options and were corroborated by market-quoted volatility factors.

NGL derivatives. The Company’s NGL derivatives include swap and collar contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs or NGL component prices per Bbl. The asset and liability values attributable to the Company’s NGL derivatives as of June 30, 2010 are based on (i) the contracted notional volumes, (ii) independent active market-quoted NGL component prices and (iii) the applicable credit-adjusted risk-free rate yield curve. The implied rates of volatility inherent in the Company’s collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling NGL options and were corroborated by market-quoted volatility factors. Prior to June 30, 2010, the Company’s NGL component price inputs were obtained from independent brokers active in buying and selling NGL derivative contracts.

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 June 30, 2010 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) independent market-quoted forward index prices, (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 and three-way collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling gas options and were corroborated by market-quoted volatility factors.

Credit facilities. The fair value of Pioneer Southwest’s credit facility is based on (i) contractual interest, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. Since there are no outstanding borrowings on Pioneer’s credit facility, the fair value is nil at June 30, 2010.

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

NOTE E.    Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC Topic 740, which 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., state, local and foreign tax jurisdictions will be utilized prior to their expiration. As of June 30, 2010 and December 31, 2009, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $45.4 million and $44.2 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 June 30, 2010, the Company had no significant 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 June 30, 2010, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company’s liquidity, future results of operations or financial position.

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 six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Current:

        

U.S. federal

   $ (2,198   $ (669   $ (3,299   $ 401  

U.S. state

     (1,800     (6,259     (3,124     (6,935

Foreign

     (6,098     9,220       (5,692     (942
                                
     (10,096     2,292       (12,115     (7,476
                                

Deferred:

        

U.S. federal

     (71,738     50,514       (202,796     53,521  

U.S. state

     (7,040     5,521       (16,500     5,764  

Foreign

     (5,819     (16,603     (23,756     (9,344
                                
     (84,597     39,432       (243,052     49,941  
                                

Income tax (provision) benefit

   $ (94,693   $ 41,724     $ (255,167   $ 42,465  
                                

NOTE F.    Long-term Debt

Senior notes redemption. On March 15, 2010, the Company redeemed for cash all of its outstanding 5.875% senior notes due 2012 for $6.3 million, which represented the outstanding principal plus accrued and unpaid interest.

Credit facility repayment. During the six months ended June 30, 2010, the Company repaid its outstanding borrowings under the credit facility.

As of June 30, 2010, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

NOTE G.    Derivative Financial Instruments

The Company uses financial derivative contracts to manage exposures to commodity price, interest rate and foreign currency exchange rate 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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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 derivatives 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. The Company accounts for derivative instruments under the mark-to-market accounting rules, which require that all changes in the fair values of the Company’s derivative contracts be recognized 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 June 30, 2010 and December 31, 2009, the Company was not a party to any fair value hedges.

Cash flow derivatives. The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (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 rate agreements to reduce the effect of exchange rate volatility.

Oil prices. All material physical sales contracts governing the Company’s oil production have been tied directly or indirectly to NYMEX oil prices. The following table sets forth, as of June 30, 2010 the volumes in Bbls underlying the Company’s outstanding oil derivative contracts and the weighted average NYMEX prices per Bbl for those contracts:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily oil production derivatives (a):

              

2010 – Swap contracts

              

Volume (Bbl)

           2,500      2,500      2,500

Price per Bbl

         $ 93.34    $ 93.34    $ 93.34

2010 – Collar contracts with short puts

              

Volume (Bbl)

           30,000      30,250      30,125

Price per Bbl:

              

Ceiling

         $ 84.99    $ 85.09    $ 85.04

Floor

         $ 68.37    $ 68.38    $ 68.37

Short put

         $ 55.23    $ 55.23    $ 55.23

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

2011 – Collar contracts with short puts

              

Volume (Bbl)

     37,000      37,000      37,000      37,000      37,000

Price per Bbl:

              

Ceiling

   $ 99.22    $ 99.22    $ 99.22    $ 99.22    $ 99.22

Floor

   $ 73.92    $ 73.92    $ 73.92    $ 73.92    $ 73.92

Short put

   $ 59.41    $ 59.41    $ 59.41    $ 59.41    $ 59.41

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

2012 – Collar contracts with short puts

              

Volume (Bbl)

     28,000      28,000      28,000      28,000      28,000

Price per Bbl:

              

Ceiling

   $ 120.59    $ 120.59    $ 120.59    $ 120.59    $ 120.59

Floor

   $ 80.54    $ 80.54    $ 80.54    $ 80.54    $ 80.54

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 June 30, 2010, the Company (i) entered into additional collar contracts with short puts for 5,000 Bbls per day of the Company’s 2013 production with a ceiling price of $116.30 per Bbl, a floor price of $80.00 per Bbl and a short put price of $65.00 per Bbl and (ii) unwound collar contracts with short puts for 2,750 Bbls per day of the Company’s 2010 production with a ceiling price of $98.54 per Bbl, a floor price of $75.00 per Bbl and a short put price of $60.00 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 or NGL product component prices. The following table sets forth, as of June 30, 2010 the volumes in Bbls under outstanding NGL derivative contracts and the weighted average NGL prices per Bbl for those contracts:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily NGL production derivatives:

              

2010 – Swap contracts

              

Volume (Bbl)

           1,250      1,250      1,250

Price per Bbl

         $ 47.38    $ 47.38    $ 47.38

2010 – Collar contracts

              

Volume (Bbl)

           2,000      2,000      2,000

Price per Bbl:

              

Ceiling

         $ 49.98    $ 49.98    $ 49.98

Floor

         $ 41.58    $ 41.58    $ 41.58

2010 – Collar contracts with short puts

              

Volume (Bbl)

           2,000      2,000      2,000

Price per Bbl:

              

Ceiling

         $ 58.92    $ 58.92    $ 58.92

Floor

         $ 47.64    $ 47.64    $ 47.64

Short put

         $ 38.71    $ 38.71    $ 38.71

2011 – Swap contracts

              

Volume (Bbl)

     750      750      750      750      750

Price per Bbl

   $ 34.65    $ 34.65    $ 34.65    $ 34.65    $ 34.65

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

2011 – Collar contracts

              

Volume (Bbl)

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

Price per Bbl:

              

Ceiling

   $ 50.93    $ 50.93    $ 50.93    $ 50.93    $ 50.93

Floor

   $ 42.21    $ 42.21    $ 42.21    $ 42.21    $ 42.21

2012 – Swap contracts

              

Volume (Bbl)

     750      750      750      750      750

Price per Bbl

   $ 35.03    $ 35.03    $ 35.03    $ 35.03    $ 35.03

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 Henry Hub prices and actual index prices upon which the gas is sold. The following table sets forth as of June 30, 2010 the volumes in millions of British thermal units (“MMBtus”) under outstanding gas derivative contracts and the weighted average index prices per MMBtu for those contracts:

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Outstanding
Average
 

Average daily gas production derivatives (a):

          

2010 – Swap contracts

          

Volume (MMBtu)

         167,500       167,500       167,500  

Price per MMBtu

       $ 6.26     $ 6.26     $ 6.26  

2010 – Collar contracts

          

Volume (MMBtu)

         40,000       40,000       40,000  

Price per MMBtu:

          

Ceiling

       $ 7.19     $ 7.19     $ 7.19  

Floor

       $ 5.75     $ 5.75     $ 5.75  

2010 – Collar contracts with short puts

          

Volume (MMBtu)

         95,000       95,000       95,000  

Price per MMBtu:

          

Ceiling

       $ 7.94     $ 7.94     $ 7.94  

Floor

       $ 6.00     $ 6.00     $ 6.00  

Short put

       $ 5.00     $ 5.00     $ 5.00  

2010 – Basis swap contracts

          

Volume (MMBtu)

         265,000       238,478       251,739  

Price per MMBtu

       $ (0.64   $ (0.71   $ (0.67

2011 – Swap contracts

          

Volume (MMBtu)

     97,500       97,500       97,500       97,500       97,500  

Price per MMBtu

   $ 6.32     $ 6.32     $ 6.32     $ 6.32     $ 6.32  

2011 – Collar contracts with short puts

          

Volume (MMBtu)

     200,000       200,000       200,000       200,000       200,000  

Price per MMBtu:

          

Ceiling

   $ 8.55     $ 8.55     $ 8.55     $ 8.55     $ 8.55  

Floor

   $ 6.32     $ 6.32     $ 6.32     $ 6.32     $ 6.32  

Short put

   $ 4.88     $ 4.88     $ 4.88     $ 4.88     $ 4.88  

2011 – Basis swap contracts

          

Volume (MMBtu)

     120,000       120,000       120,000       120,000       120,000  

Price per MMBtu

   $ (0.62   $ (0.62   $ (0.62   $ (0.62   $ (0.62

2012 – Swap contracts

          

Volume (MMBtu)

     70,000       70,000       70,000       70,000       70,000  

Price per MMBtu

   $ 5.97     $ 5.97     $ 5.97     $ 5.97     $ 5.97  

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

2012 – Collar contracts

          

Volume (MMBtu)

     40,000       40,000       40,000       40,000       40,000  

Price per MMBtu:

          

Ceiling

   $ 6.96     $ 6.96     $ 6.96     $ 6.96     $ 6.96  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

2012 – Collar contracts with short puts

          

Volume (MMBtu)

     190,000       190,000       190,000       190,000       190,000  

Price per MMBtu:

          

Ceiling

   $ 7.96     $ 7.96     $ 7.96     $ 7.96     $ 7.96  

Floor

   $ 6.12     $ 6.12     $ 6.12     $ 6.12     $ 6.12  

Short put

   $ 4.55     $ 4.55     $ 4.55     $ 4.55     $ 4.55  

2012 – Basis swap contracts

          

Volume (MMBtu)

     42,500       42,500       42,500       42,500       42,500  

Price per MMBtu

   $ (0.46   $ (0.46   $ (0.46   $ (0.46   $ (0.46

2013 – Swap contracts

          

Volume (MMBtu)

     67,500       67,500       67,500       67,500       67,500  

Price per MMBtu

   $ 6.11     $ 6.11     $ 6.11     $ 6.11     $ 6.11  

2013 – Collar contracts with short puts

          

Volume (MMBtu)

     45,000       45,000       45,000       45,000       45,000  

Price per MMBtu:

          

Ceiling

   $ 7.49     $ 7.49     $ 7.49     $ 7.49     $ 7.49  

Floor

   $ 6.00     $ 6.00     $ 6.00     $ 6.00     $ 6.00  

Short put

   $ 4.50     $ 4.50     $ 4.50     $ 4.50     $ 4.50  

2013 – Basis swap contracts

          

Volume (MMBtu)

     12,500       12,500       12,500       12,500       12,500  

Price per MMBtu

   $ (0.63   $ (0.63   $ (0.63   $ (0.63   $ (0.63

2014 – Swap contracts

          

Volume (MMBtu)

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

Price per MMBtu

   $ 6.07     $ 6.07     $ 6.07     $ 6.07     $ 6.07  

2014 – Collar contracts with short puts

          

Volume (MMBtu)

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

Price per MMBtu:

          

Ceiling

   $ 8.08     $ 8.08     $ 8.08     $ 8.08     $ 8.08  

Floor

   $ 6.00     $ 6.00     $ 6.00     $ 6.00     $ 6.00  

Short put

   $ 4.50     $ 4.50     $ 4.50     $ 4.50     $ 4.50  

 

(a)

Subsequent to June 30, 2010, the Company entered into additional swap contracts for 20,000 MMBtu, 30,000 MMBtu and 20,000 MMBtu, respectively, of the Company’s 2011, 2012 and 2014 production at an average price of $5.20 per MMBtu, $5.53 per MMBtu and $6.03 per MMBtu, respectively.

Interest rates. The following table sets forth as of June 30, 2010 the notional amount of the Company’s debt under outstanding variable-for-fixed and fixed-for-variable interest rate swap contracts, the weighted average fixed annual interest rate and termination date for those contracts:

 

Type

   Notional
Amount
   Weighted
Average Fixed
Interest Rate
   Termination
Date
     (in thousands)          

Variable-for-fixed

   $ 189,000    3.0 percent    February 2011

Fixed-for-variable

   $ 400,000    2.87 percent    July 2016

Fixed-for-variable

   $ 70,000    3.23 percent    March 2017

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Tabular disclosure of derivative financial instruments. Effective February 1, 2009, the Company discontinued hedge accounting on all existing commodity derivative instruments, and since that date has accounted for derivative instruments under the mark-to-market accounting rules. Consequently, all of the Company’s derivatives were non-hedge derivatives as of June 30, 2010 and December 31, 2009, except for $9.0 million and $17.9 million of net obligations on terminated hedges, respectively. The following tables provide disclosure of the Company’s derivative instruments:

 

Fair Value of Derivative Instruments as of June 30, 2010

    

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

   $ 159,562   

Derivatives - current

   $ 40,254

Interest rate derivatives

  

Derivatives - current

     11,366   

Derivatives - current

     3,255

Commodity price derivatives

  

Derivatives - noncurrent

     146,217   

Derivatives - noncurrent

     26,947

Interest rate derivatives

  

Derivatives - noncurrent

     16,178   

Derivatives - noncurrent

     6,966
                   

Total derivatives not designated as hedging instruments

        333,323         77,422
                   

Derivatives designated as hedging instruments (b) 

           

Commodity price derivatives

  

Derivatives - current

     288   

Derivatives - current

     9,286
                   

Total derivatives designated as hedging instruments

        288         9,286
                   

Total derivatives

      $ 333,611       $ 86,708
                   

 

Fair Value of Derivative Instruments as of December 31, 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

   $ 66,442   

Derivatives - current

   $ 120,112

Interest rate derivatives

  

Derivatives - current

     9,450   

Derivatives - current

     5,169

Commodity price derivatives

  

Derivatives - noncurrent

     48,341   

Derivatives - noncurrent

     116,233

Interest rate derivatives

  

Derivatives - noncurrent

     2,192   

Derivatives - noncurrent

     24,314
                   

Total derivatives not designated as hedging instruments

        126,425         265,828
                   

Derivatives designated as hedging instruments (b) 

           

Commodity price derivatives

  

Derivatives - current

     —     

Derivatives - current

     17,913
                   

Total derivatives designated as hedging
instruments

        —           17,913
                   

Total derivatives

      $ 126,425       $ 283,741
                   

 

(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.

 

Derivatives in Cash Flow Hedging Relationships

   Amount of Gain/(Loss) Recognized in
AOCI on Effective Portion
 
   Three Months Ended
June 30,
   Six Months
Ended June 30,
 
   2010    2009    2010    2009  
     (in thousands)  

Interest rate derivatives

   $ —      $ —      $ —      $ (433

Commodity price derivatives

     —        —        —        13,407  
                             

Total

   $ —      $ —      $ —      $ 12,974  
                             

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Derivatives in Cash Flow Hedging Relationships

  

Location of Gain/(Loss) Reclassified

from

AOCI

into Earnings

   Amount of Gain/(Loss) Reclassified
from AOCI into Earnings
 
      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2010     2009     2010     2009  
          (in thousands)  

Interest rate derivatives

  

Interest expense

   $ (312   $ (2,017   $ (1,370   $ (4,272

Interest rate derivatives

  

Derivative gains, net

     (1,523     —          (2,665     —     

Commodity price derivatives

  

Oil and gas revenue

     22,532       28,490       45,658       69,912  
                                   

Total

      $ 20,697     $ 26,473     $ 41,623     $ 65,640  
                                   

 

Derivatives Not Designated as Hedging Instruments

  

Location of Gain (Loss)

Recognized in Earnings

on Derivatives

   Amount of Gain (Loss) Recognized in
Earnings on Derivatives
 
      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2010    2009     2010    2009  
          (in thousands)  

Interest rate derivatives

  

Derivative gains (losses), net

   $ 26,517    $ (2,319   $ 37,916    $ (3,251

Commodity price derivatives

  

Derivative gains (losses), net

     152,534      (167,905     407,753      (67,110
                                 

Total

      $ 179,051    $ (170,224   $ 445,669    $ (70,361
                                 

AOCI – Hedging. As of June 30, 2010 and December 31, 2009, AOCI – Hedging represented net deferred gains of $29.2 million and $51.0 million, respectively. The AOCI – Hedging balance as of June 30, 2010 was comprised of $73.2 million of net deferred gains on the effective portions of discontinued commodity hedges, $2.1 million of net deferred losses on the effective portions of discontinued interest rate hedges and $19.3 million of associated net deferred tax provisions, reduced by $22.6 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

The Company’s $189 million notional amount of variable-for-fixed interest rate derivatives were, prior to February 1, 2009, hedges of the Company’s LIBOR-based borrowings under its credit facility. During the six months ended June 30, 2010, the Company repaid its LIBOR-based borrowings under its credit facility, rendering ineffective the remaining balance of the associated hedge losses deferred in AOCI – Hedging. Accordingly, the Company transferred $1.5 million and $2.7 million, respectively, of deferred hedge losses from AOCI – Hedging as a reduction to derivative gains, net during the three and six months ended June 30, 2010.

During the twelve months ending June 30, 2011, the Company expects to reclassify $59.7 million of AOCI – Hedging net deferred gains to oil and gas revenues (including $15.8 million related to noncontrolling interests) and $267 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $16.4 million of net deferred income tax provisions associated with hedge derivatives during the twelve months ending June 30, 2011 from AOCI – Hedging to income tax expense. For the remaining six months of 2010 and the year ending December 31, 2011, the Company expects to reclassify deferred gains on discontinued commodity hedges of $43.4 million and $32.9 million, respectively, to oil and gas revenues. During 2012, the Company expects to reclassify deferred losses on discontinued commodity hedges of $3.2 million to oil and gas revenues. The $2.1 million of net deferred hedge losses on the effective portion of interest rate hedges will be transferred from AOCI-Hedging to interest expense ratably through April 2018.

NOTE H.    Asset Retirement Obligations

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. 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 activity during the three and six months ended June 30, 2010 and 2009:

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Beginning asset retirement obligations

   $ 142,270     $ 173,516     $ 166,434     $ 172,433  

Liabilities assumed in acquisitions

     6       —          6       —     

New wells placed on production and changes in estimates

     4,365       15,327       4,644       15,366  

Liabilities reclassified to discontinued operations held for sale

     —          (14,353     —          (14,353

Disposition of wells

     (3,291     (246     (29,540     (246

Liabilities settled

     (8,801     (23,046     (9,955     (24,976

Accretion of discount from continuing operations

     2,632       2,753       5,592       5,505  

Accretion of discount from discontinued operations

     —          220       —          442  
                                

Ending asset retirement obligations

   $ 137,181     $ 154,171     $ 137,181     $ 154,171  
                                

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of June 30, 2010 and December 31, 2009, the current portions of the Company’s asset retirement obligations were $8.8 million and $13.9 million, respectively.

NOTE I.    Postretirement Benefit Obligations

As of June 30, 2010 and December 31, 2009, the Company had $9.0 million and $9.1 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 accompanying 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 June 30, 2010 or December 31, 2009. 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 six months ended June 30, 2010 and June 30, 2009:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 8,951     $ 9,504     $ 9,075     $ 9,612  

Net benefit payments

     (272     (362     (584     (691

Service costs

     81       57       161       114  

Net actuarial losses

     100       —          100       —     

Accretion of interest

     108       165       216       329  
                                

Ending accumulated postretirement benefit obligations

   $ 8,968     $ 9,364     $ 8,968     $ 9,364  
                                

NOTE J.    Commitments and Contingencies

Legal actions. In addition to the legal action described below, the Company is 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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 “Division”). The Notice alleges violations of stormwater discharge permits in the Company’s Raton Basin and former 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 is in advanced discussions with the Division to resolve this matter and does not believe that the outcome of this proceeding will materially impact the Company’s liquidity, financial position or future results of operations.

Investigation by the Alaska Oil and Gas Conservation Commission (the “AOGCC”). During the second quarter of 2010, the AOGCC commenced an investigation into allegations by a former Pioneer employee regarding the Company’s Oooguruk facility on the North Slope of Alaska. Among the allegations are claims that the Company did not have authorization to inject certain non-hazardous substances into its enhanced oil recovery well, that the Company mishandled disposal of waste products and that the Company’s operating practices are harmful to the project’s oil reservoirs. Upon initially becoming aware of the allegations, the Company informed the AOGCC and other relevant federal, state and local agencies and commenced its own investigation, which confirmed injections of non-hazardous fluids into the Oooguruk enhanced oil recovery well without prior authorizations to do so. The results of the investigation have been reported to the agencies, and the Company is cooperating with the AOGCC’s investigation. Although the investigation into the allegations is ongoing, based on the facts as known to date, the Company believes that the outcome of this investigation will not materially and negatively affect 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.    Net Income (Loss) Per Share Attributable To Common Stockholders

The Company’s basic net income (loss) per share attributable to common stockholders is computed as (i) net income (loss) attributable to common stockholders, (ii) less participating share- and unit-based basic earnings (iii) divided by weighted average basic shares outstanding. The Company’s diluted net income (loss) per share attributable to common stockholders is computed as (i) basic net income (loss) attributable to common stockholders, (ii) plus diluted adjustments to participating undistributed earnings (iii) divided by weighted average diluted shares outstanding. During periods in which 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.

 

28


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

The following table is a reconciliation of the Company’s net income (loss) attributable to common stockholders to basic net income (loss) attributable to common stockholders and to diluted net income (loss) attributable to common stockholders for the three and six months ended June 30, 2010:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Net income (loss) attributable to common stockholders

   $ 167,576     $ (86,996   $ 412,830     $ (101,601

Participating basic distributed earnings (a)

     (121     (121     (108     (95

Participating basic undistributed earnings (a)

     (3,962     —          (9,283     —     
                                

Basic net income (loss) attributable to common stockholders

     163,493       (87,117     403,439       (101,696

Diluted adjustments to share- and unit-based earnings (a)

     72       —          110       —     
                                

Diluted net income (loss) attributable to common stockholders

   $ 163,565     $ (87,117   $ 403,549     $ (101,696
                                

 

(a)

In accordance with ASC 260, unvested restricted stock awards and Pioneer Southwest phantom unit awards represent participating securities because they participate in nonforfeitable dividends or distributions with the common equity owners of the Company or Pioneer Southwest, as applicable. Participating share- and unit-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and phantom 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 six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009
     (in thousands)

Weighted average common shares outstanding (a):

           

Basic

   115,104    113,979    114,880    114,116

Dilutive common stock options (b)

   262    —      243    —  

Contingently issuable – performance shares (b)

   640    —      612    —  
                   

Diluted

   116,006    113,979    115,735    114,116
                   

 

(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 June 30, 2010. During the first half of 2010, the Company did not purchase any common stock pursuant to the program. During the first half of 2009, the Company purchased $16.3 million of common stock pursuant to the program.

(b)

Diluted earnings per share were calculated using the two-class method for the three and six months ended June 30, 2010 and 2009. The following common stock equivalents were excluded from the diluted loss per share calculations for the three and six months ended June 30, 2009 because they would have been anti-dilutive to the calculations: 174,438 and 87,219 of performance units, respectively, for which shares are contingently issuable and stock options to purchase 124,057 and 142,358 common shares, respectively.

NOTE L.    Geographic Operating Segment Information

The Company has reportable operations in only one industry segment, that being the oil and gas exploration and production industry; however, the Company is organizationally structured along geographic operating segments or regions. The Company has reportable continuing operations in the United States, South Africa and Tunisia.

The following tables provide the Company’s geographic operating segment data for the three and six months ended June 30, 2010 and 2009. Geographic operating segment income tax (provisions) benefits have been determined

 

29


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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.

 

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

Three Months Ended June 30, 2010

  

Revenues and other income:

          

Oil and gas

   $ 401,545     $ 20,502     $ 40,095     $ —        $ 462,142  

Interest and other

     —          —          —          20,263       20,263  

Derivative gains, net

     —          —          —          177,528       177,528  

Gain on disposition of assets, net

     7,560       —          —          85       7,645  

Hurricane activity, net

     (5,184     —          —          —          (5,184
                                        
     403,921       20,502       40,095       197,876       662,394  
                                        

Costs and expenses:

          

Oil and gas production

     93,120       896       3,278       —          97,294  

Production and ad valorem taxes

     25,338       —          —          —          25,338  

Depletion, depreciation and amortization

     117,859       18,442       5,842       8,171       150,314  

Exploration and abandonments

     22,689       54       4,074       306       27,123  

General and administrative

     —          —          —          42,374       42,374  

Accretion of discount on asset retirement obligations

     —          —          —          2,632       2,632  

Interest

     —          —          —          45,368       45,368  

Other

     10,270       —          —          4,455       14,725  
                                        
     269,276       19,392       13,194       103,306       405,168  
                                        

Income from continuing operations before income taxes

     134,645       1,110       26,901       94,570       257,226  

Income tax provision

     (49,819     (311     (14,053     (30,510     (94,693
                                        

Income from continuing operations

   $ 84,826     $ 799     $ 12,848     $ 64,060     $ 162,533  
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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

Three Months Ended June 30, 2009

  

Revenues and other income:

          

Oil and gas

   $ 314,031     $ 18,160     $ 38,501     $ —        $ 370,692  

Interest and other

     —          —          —          88,598       88,598  

Derivative losses, net

     —          —          —          (170,224     (170,224

Gain on disposition of assets, net

     7       —          —          46       53  

Hurricane activity, net

     (16,075     —          —          —          (16,075
                                        
     297,963       18,160       38,501       (81,580     273,044  
                                        

Costs and expenses:

          

Oil and gas production

     75,389       445       8,959       —          84,793  

Production and ad valorem taxes

     23,715       —          —          —          23,715  

Depletion, depreciation and amortization

     125,212       20,446       5,750       7,265       158,673  

Exploration and abandonments

     17,978       195       3,244       201       21,618  

General and administrative

     —          —          —          33,275       33,275  

Accretion of discount on asset retirement obligations

     —          —          —          2,753       2,753  

Interest

     —          —          —          43,475       43,475  

Other

     18,864       —          3,768       14,083       36,715  
                                        
     261,158       21,086       21,721       101,052       405,017  
                                        

Income (loss) from continuing operations before income taxes

     36,805       (2,926     16,780       (182,632     (131,973

Income tax benefit (provision)

     (13,618     849       (9,638     64,131       41,724  
                                        

Income (loss) from continuing operations

   $ 23,187     $ (2,077   $ 7,142     $ (118,501   $ (90,249
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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

Six Months Ended June 30, 2010

  

Revenues and other income:

          

Oil and gas

   $ 848,207     $ 45,883     $ 75,848     $ —        $ 969,938  

Interest and other

     —          —          —          40,066       40,066  

Derivative gains, net

     —          —          —          443,004       443,004  

Gain (loss) on disposition of assets, net

     24,979       —          —          (391     24,588  

Hurricane activity, net

     2,226       —          —          —          2,226  
                                        
     875,412       45,883       75,848       482,679       1,479,822  
                                        

Costs and expenses:

          

Oil and gas production

     178,443       1,672       6,894       —          187,009  

Production and ad valorem taxes

     52,399       —          —          —          52,399  

Depletion, depreciation and amortization

     233,364       40,339       12,017       15,362       301,082  

Exploration and abandonments

     39,465       126       8,000       329       47,920  

General and administrative

     —          —          —          83,322       83,322  

Accretion of discount on asset retirement obligations

     —          —          —          5,592       5,592  

Interest

     —          —          —          92,891       92,891  

Other

     20,551       —          —          10,750       31,301  
                                        
     524,222       42,137       26,911       208,246       801,516  
                                        

Income from continuing operations before income taxes

     351,190       3,746       48,937       274,433       678,306  

Income tax provision

     (129,940     (1,049     (25,654     (98,524     (255,167
                                        

Income from continuing operations

   $ 221,250     $ 2,697     $ 23,283     $ 175,909     $ 423,139  
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

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

Six Months Ended June 30, 2009

  

Revenues and other income:

          

Oil and gas

   $ 641,815     $ 29,965     $ 66,763     $ —        $ 738,543  

Interest and other

     —          —          —          99,258       99,258  

Derivative losses, net

     —          —          —          (70,361     (70,361

Gain (loss) on disposition of assets, net

     7       —          —          (69     (62

Hurricane activity, net

     (16,450     —          —          —          (16,450
                                        
     625,372       29,965       66,763       28,828       750,928  
                                        

Costs and expenses:

          

Oil and gas production

     173,498       3,941       17,784       —          195,223  

Production and ad valorem taxes

     51,414       —          —          —          51,414  

Depletion, depreciation and amortization

     285,181       37,000       10,066       14,570       346,817  

Impairment of oil and gas properties

     21,091       —          —          —          21,091  

Exploration and abandonments

     41,369       289       10,549       581       52,788  

General and administrative

     —          —          —          67,929       67,929  

Accretion of discount on asset retirement obligations

     —          —          —          5,505       5,505  

Interest

     —          —          —          84,613       84,613  

Other

     39,150       —          3,768       25,186       68,104  
                                        
     611,703       41,230       42,167       198,384       893,484  
                                        

Income (loss) from continuing operations before income taxes

     13,669       (11,265     24,596       (169,556     (142,556

Income tax benefit (provision)

     (5,058     3,267       (14,684     58,940       42,465  
                                        

Income (loss) from continuing operations

   $ 8,611     $ (7,998   $ 9,912     $ (110,616   $ (100,091
                                        

NOTE M.    Impairment of Oil and Gas Properties

During the first half of 2009, the Company recognized a noncash impairment charge of $21.1 million to reduce the carrying value of its Uinta/Piceance area oil and gas properties. The impairment charge resulted from declines in commodity prices and well performance which reduced the Company’s assessment of economically recoverable resource potential. The impairment charge reduced the Company’s Uinta/Piceance area oil and gas property carrying values to their estimated fair value on that date based on the estimated discounted future cash flows attributable to the assets, which were derived from Level 3 fair value inputs.

The Company’s primary assumptions of the estimated future cash flows attributable to oil and gas properties were based on (i) proved reserves and risk-adjusted probable and possible reserves and (ii) management’s commodity price outlook, which is based in part on forward market quotes.

NOTE N.    Volumetric Production Payments

The Company’s VPPs represent limited-term overriding royalty interests in oil reserves that: (i) entitle the purchaser to receive production volumes over a period of time from specific lease interests, (ii) are free and clear of all associated future production costs and capital expenditures associated with the reserves, (iii) are nonrecourse to the Company (i.e., the purchaser’s only recourse is to the reserves acquired), (iv) transfer title of the reserves to the purchaser and (v) allow the Company to retain the remaining reserves after the VPPs volumetric quantities have been delivered.

At the inception of the VPP agreements, the Company (i) removed the proved reserves associated with the VPPs, (ii) recognized VPP proceeds as deferred revenue which are being amortized on a unit-of-production basis to oil revenues over the remaining term of each VPP, (iii) retained responsibility for 100 percent of the production costs and capital costs related to VPP interests and (iv) no longer recognizes production associated with the VPP volumes.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

The following table provides information about changes in the deferred revenue carrying values of the Company’s VPPs for the six months ended June 30, 2010 (in thousands):

 

Deferred revenue at December 31, 2009

   $ 177,236  

Less: 2010 amortization

     (45,070
        

Deferred revenue at June 30, 2010

   $ 132,166  
        

The remaining deferred revenue amounts will be recognized in oil revenues in the consolidated statements of operations as noted below, assuming the related VPP production volumes are delivered as scheduled (in thousands):

 

Remaining 2010

   $ 45,146

2011

     44,951

2012

     42,069
      
   $ 132,166
      

NOTE O.    Gain (Loss) on Disposition of Assets, Net

For the three and six months ended June 30, 2010, the Company recorded $7.6 million and $24.6 million of net gains on disposition of assets, respectively, as compared to $53 thousand of net gains and $62 thousand of net losses for the three and six months ended June 30, 2009, respectively.

The net gains on disposition of assets during the three months ended June 30, 2010 were primarily attributable to the Company’s Eagle Ford Shale joint venture transaction that was completed during June 2010. During June 2010, the Company entered into a purchase and sale agreement whereby it sold (i) 45 percent of its Eagle Ford Shale proved and unproved oil and gas properties to an unaffiliated third party for $225.6 million of cash proceeds, including normal closing adjustments and (ii) sold a 49.9 percent interest in EFS Midstream for $46.4 million of cash proceeds (see Note B for additional information regarding EFS Midstream). The terms of the Eagle Ford Shale transaction also provide that the purchaser will pay 75 percent (up to $886.8 million, including $8.1 million attributable to recently leased acreage that was sold at closing) of the Company’s defined exploration, drilling and completion costs attributable to the Eagle Ford Shale assets during the six years ending on July 1, 2016, subject to extension. Associated with these transactions, the Company recorded a net gain on disposition of assets of $5.7 million during the three and six months ended June 30, 2010, and a deferred gain of $46.3 million that will be amortized to earnings over a 20 year period. During the first half of 2010, the Company also sold certain proved and unproved oil and gas properties in the Uinta/Piceance area for net proceeds of $12.1 million, resulting in net gains of $1.9 million and $17.4 million, respectively, for the three and six months ended June 30, 2010.

The Company’s 2009 asset dispositions primarily comprised sales of excess equipment and inventory.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

NOTE P.    Interest and Other Income

The following table provides the components of the Company’s interest and other income:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
     2010    2009     2010    2009
     (in thousands)

Alaskan Petroleum Production Tax credits (a)

   $ 13,613    $ 87,511     $ 27,861    $ 94,989

Foreign currency remeasurement and exchange gains (b)

     4,098      (735     5,978      617

Insurance claim recovery

     —        —          1,665      —  

Sales and other tax refunds

     944      —          984      —  

Contract drilling margin

     998      —          1,507      —  

Deferred compensation plan income

     174      74       684      861

Interest income

     92      749       480      1,379

Other income

     344      999       907      1,412
                            

Total interest and other income

   $ 20,263    $ 88,598     $ 40,066    $ 99,258
                            

 

(a)

The Company earns Alaskan Petroleum Production Tax (“PPT”) credits on qualifying capital expenditures. The Company recognizes income from PPT credits when they are realized through cash refunds or sales.

(b)

The Company’s operations in Africa periodically recognize monetary assets and liabilities in currencies other than their functional currencies. Associated therewith, the Company realizes foreign currency remeasurement and transaction gains and losses.

NOTE Q.    Other Expense

The following table provides the components of the Company’s other expense:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009