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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

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

For the quarterly period ended September 30, 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 October 27, 2010                                                                           116,096,190

 

 

 


Table of Contents

 

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

 

         Page  

Cautionary Statement Concerning Forward-Looking Statements

     3   

Definitions of Certain Terms and Conventions Used Herein

     4   
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     5   
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009

     7   
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2010

     8   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

     9   
 

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

     39   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4.

 

Controls and Procedures

     56   
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     57   

Item 1A.

 

Risk Factors

     57   

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 six thousand cubic feet of gas to one Bbl of oil or natural gas liquid.

 

 

“BOEPD” means BOE per day.

 

 

“Btu” means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.

 

 

“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.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

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

Current assets:

    

Cash and cash equivalents

   $ 78,165     $ 27,368  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $2,294 and $1,310 as of September 30, 2010 and December 31, 2009, respectively

     211,066       330,711  

Due from affiliates

     650       1,037  

Income taxes receivable

     8,333       25,022  

Inventories

     182,238       139,177  

Prepaid expenses

     17,868       9,011  

Deferred income taxes

     —          26,857  

Other current assets:

    

Derivatives

     189,635       48,713  

Other, net of allowance for doubtful accounts of $0 and $5,689 as of September 30, 2010 and December 31, 2009, respectively

     1,521       8,222  
                

Total current assets

     689,476       616,118  
                

Property, plant and equipment, at cost:

    

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

    

Proved properties

     10,794,371       10,276,244  

Unproved properties

     184,837       236,660  

Accumulated depletion, depreciation and amortization

     (3,312,709     (2,946,048
                

Total property, plant and equipment

     7,666,499       7,566,856  
                

Deferred income taxes

     15,045       387  

Goodwill

     298,413       309,259  

Other property and equipment, net

     257,413       154,830  

Other assets:

    

Derivatives

     210,823       43,631  

Other, net of allowance for doubtful accounts of $11,157 and $7,300 as of September 30, 2010 and December 31, 2009, respectively

     159,451       176,184  
                
   $ 9,297,120     $ 8,867,265  
                

 

The financial information included as of September 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 BALANCE SHEETS (continued)

(in thousands, except share data)

 

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

Current liabilities:

    

Accounts payable:

    

Trade

   $ 321,256     $ 221,359  

Due to affiliates

     42,538       32,224  

Interest payable

     33,798       47,009  

Income taxes payable

     18,718       17,411  

Deferred income taxes

     52,043       128  

Other current liabilities:

    

Derivatives

     34,730       116,015  

Deferred revenue

     56,097       90,215  

Other

     37,041       46,830  
                

Total current liabilities

     596,221       571,191  
                

Long-term debt

     2,539,416       2,761,011  

Derivatives

     31,477       133,645  

Deferred income taxes

     1,694,575       1,470,899  

Deferred revenue

     53,400       87,021  

Other liabilities

     224,193       200,467  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 126,193,615 and 125,203,502 shares issued at September 30, 2010 and December 31, 2009, respectively

     1,262       1,252  

Additional paid-in capital

     3,015,986       2,981,450  

Treasury stock, at cost: 10,929,778 and 10,828,171 at September 30, 2010 and December 31, 2009, respectively

     (422,107     (415,211

Retained earnings

     1,430,566       917,688  

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

     17,675       51,009  
                

Total stockholders’ equity attributable to common stockholders

     4,043,382       3,536,188  

Noncontrolling interests in consolidating subsidiaries

     114,456       106,843  
                

Total stockholders’ equity

     4,157,838       3,643,031  

Commitments and contingencies

    
                
   $ 9,297,120     $ 8,867,265  
                

The financial information included as of September 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
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues and other income:

        

Oil and gas

   $ 471,372     $ 409,969     $ 1,441,310     $ 1,148,512  

Interest and other

     11,864       503       51,930       99,761  

Derivative gains (losses), net

     127,581       (15,222     570,585       (85,583

Gain (loss) on disposition of assets, net

     2,383       (385     26,971       (447

Hurricane activity, net

     3,452       (1,830     5,678       (18,280
                                
     616,652       393,035       2,096,474       1,143,963  
                                

Costs and expenses:

        

Oil and gas production

     104,339       90,394       291,348       285,617  

Production and ad valorem taxes

     33,045       28,089       85,444       79,503  

Depletion, depreciation and amortization

     152,838       162,605       453,920       509,422  

Impairment of oil and gas properties

     —          —          —          21,091  

Exploration and abandonments

     22,963       25,073       70,883       77,861  

General and administrative

     44,759       34,799       128,081       102,728  

Accretion of discount on asset retirement obligations

     2,626       2,754       8,218       8,259  

Interest

     45,002       43,438       137,893       128,051  

Other

     20,927       21,363       52,228       89,467  
                                
     426,499       408,515       1,228,015       1,301,999  
                                

Income (loss) from continuing operations before income taxes

     190,153       (15,480     868,459       (158,036

Income tax benefit (provision)

     (76,661     5,206       (331,828     47,671  
                                

Income (loss) from continuing operations

     113,492       (10,274     536,631       (110,365

Income from discontinued operations, net of tax

     1,082       12,107       27,238       13,868  
                                

Net income (loss)

     114,574       1,833       563,869       (96,497

Net income attributable to the noncontrolling interests

     (2,538     (8,998     (39,003     (12,269
                                

Net income (loss) attributable to common stockholders

   $ 112,036     $ (7,165   $ 524,866     $ (108,766
                                

Basic earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ 0.94     $ (0.17   $ 4.23     $ (1.07

Income from discontinued operations attributable to common stockholders

     0.01       0.11       0.23       0.12  
                                

Net income (loss) attributable to common stockholders

   $ 0.95     $ (0.06   $ 4.46     $ (0.95
                                

Diluted earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ 0.93     $ (0.17   $ 4.20     $ (1.07

Income from discontinued operations attributable to common stockholders

     0.01       0.11       0.23       0.12  
                                

Net income (loss) attributable to common stockholders

   $ 0.94     $ (0.06   $ 4.43     $ (0.95
                                

Weighted average shares outstanding:

        

Basic

     115,191       114,123       114,985       114,118  
                                

Diluted

     116,021       114,123       115,832       114,118  
                                

Dividends declared per share

   $ 0.04     $ 0.04     $ 0.08     $ 0.08  
                                

Amounts attributable to common stockholders:

        

Income (loss) from continuing operations

   $ 110,954     $ (19,272   $ 497,628     $ (122,634

Income from discontinued operations, net of tax

     1,082       12,107       27,238       13,868  
                                

Net income (loss)

   $ 112,036     $ (7,165   $ 524,866     $ (108,766
                                

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 ($0.08 per share)

    —          —          —          —          (9,469     —          —          (9,469

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

    236       1       2,577       6,677       (2,519     —          —          6,736  

Treasury stock purchases

    (275     —          —          (13,573     —          —          (203     (13,776

Tax benefit related to stock-based compensation

    —          —          4,032       —          —          —          —          4,032  

Compensation costs:

               

Vested compensation awards, net

    928       9       (8     —          —          —          —          1  

Compensation costs included in net income

    —          —          27,935       —          —          —          964       28,899  

Cash contributions from noncontrolling interests

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

Cash distributions to noncontrolling interests

    —          —          —          —          —          —          (20,160     (20,160

Net income

    —          —          —          —          524,866       —          39,003       563,869  

Other comprehensive loss:

               

Deferred hedging activity, net of tax:

               

Net hedge gains included in continuing operations

    —          —          —          —          —          (33,334     (13,142     (46,476
                                                               

Balance as of September 30, 2010

    115,264     $ 1,262     $ 3,015,986     $ (422,107   $ 1,430,566     $ 17,675     $ 114,456     $ 4,157,838  
                                                               

The financial information included herein has been prepared by management without audit by independent registered public accountants.

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

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ 563,869     $ (96,497

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

    

Depletion, depreciation and amortization

     453,920       509,422  

Impairment of oil and gas properties

     —          21,091  

Exploration expenses, including dry holes

     16,771       40,699  

Hurricane activity, net

     3,500       16,200  

Deferred income taxes

     300,303       (67,397

(Gain) loss on disposition of assets, net

     (26,971     447  

Accretion of discount on asset retirement obligations

     8,218       8,259  

Discontinued operations

     8,626       (5,373

Interest expense

     22,567       20,694  

Derivative related activity

     (549,387     48,305  

Amortization of stock-based compensation

     28,631       29,319  

Amortization of deferred revenue

     (67,739     (110,901

Other noncash items

     9,620       30,664  

Change in operating assets and liabilities

    

Accounts receivable, net

     97,873       71,074  

Income taxes receivable

     16,689       44,762  

Inventories

     (6,459     (52,069

Prepaid expenses

     (8,975     (6,900

Other current assets

     2,162       98,532  

Accounts payable

     62,349       (94,238

Interest payable

     (13,211     (14,766

Income taxes payable

     1,307       9,127  

Other current liabilities

     (21,941     (89,629
                

Net cash provided by operating activities

     901,722       410,825  
                

Cash flows from investing activities:

    

Proceeds from disposition of assets

     297,742       24,247  

Additions to oil and gas properties

     (714,014     (319,928

Additions to other assets and other property and equipment, net

     (147,930     (17,310
                

Net cash used in investing activities

     (564,202     (312,991
                

Cash flows from financing activities:

    

Borrowings under long-term debt

     199,784       386,269  

Principal payments on long-term debt

     (438,894     (434,269

Contributions from noncontrolling interests

     1,151       150  

Distributions to noncontrolling interests

     (20,160     (15,042

Payments of other liabilities

     (20,668     (1,069

Exercise of long-term incentive plan stock options

     6,736       7,955  

Purchases of treasury stock

     (13,776     (21,813

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

     4,032       (3,583

Payment of financing fees

     (145     (4,475

Dividends paid

     (4,783     (4,679
                

Net cash used in financing activities

     (286,723     (90,556
                

Net increase in cash and cash equivalents

     50,797       7,278  

Cash and cash equivalents, beginning of period

     27,368       48,337  
                

Cash and cash equivalents, end of period

   $ 78,165     $ 55,615  
                

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Net income (loss)

   $ 114,574     $ 1,833     $ 563,869     $ (96,497
                                

Other comprehensive loss:

        

Hedge fair value changes, net

     —          —          —          12,974  

Net hedge gains included in continuing operations

     (21,913     (24,640     (63,536     (90,280

Income tax provision

     5,988       6,025       17,060       38,999  
                                

Other comprehensive loss

     (15,925     (18,615     (46,476     (38,307
                                

Comprehensive income (loss)

     98,649       (16,782     517,393       (134,804
                                

Comprehensive (income) loss attributable to noncontrolling interest

     1,898       (3,417     (25,860     853  
                                

Comprehensive income (loss) attributable to common stockholders

   $ 100,547     $ (20,199   $ 491,533     $ (133,951
                                

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 September 30, 2010 and for the three and nine months ended September 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 United States Securities and Exchange Commission (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.

Discontinued operations. During June and August 2009, the Company sold its oil and gas properties in Mississippi and substantially all of its shelf properties in the Gulf of Mexico, respectively. 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 nine months ended September 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. During the nine months ended September 30, 2010, the MMS paid the Company the $119.3 million receivable plus an additional $35.3 million of associated interest on the excess royalty payments. The properties that were the source of these royalty and interest recoveries were sold by the Company during 2006. Accordingly, the interest income was recorded as a component of income from discontinued operations, net of tax in the accompanying consolidated statement of operations for the nine months ended September 30, 2010. See Note S for additional information about discontinued operations.

Allowances for doubtful accounts. As of September 30, 2010 and December 31, 2009, the Company’s allowances for doubtful accounts totaled $13.5 million and $14.3 million, respectively. Changes in the Company’s allowance for doubtful accounts during the three and nine months ended September 30, 2010 are summarized in the following table:

 

    Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 
    (in thousands)  

Beginning allowance for doubtful accounts balance

  $ 13,104     $ 14,299  

Amount recorded in other expense for bad debt expense

    358       328  

Other net decreases

    (11     (1,176
               

Ending allowance for doubtful accounts balance

  $ 13,451     $ 13,451  
               

Inventories. Inventories consisted of $205.9 million and $205.6 million of materials and supplies and $3.9 million and $3.2 million of commodities as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company’s materials and supplies inventory was net of $7.1 million and $5.2 million, respectively, of valuation reserve allowances. As of September 30, 2010 and December 31, 2009, the Company estimated that $27.6 million and $69.6 million, respectively, of its materials and supplies inventory would not be utilized or sold within one year. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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 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 their independent market-quoted credit default swap rate curves plus the United States Treasury Bill yield curve as of the valuation date. 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. During June 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. Tax benefits associated with the exercise of fully-vested stock options assumed in conjunction with the business combination for which the goodwill is attributable also reduced its carrying value by $222 thousand during 2010. 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 2010, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment.

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.

During January 2010, Pioneer Natural Resources USA, Inc. (“PNR USA,” a wholly-owned subsidiary of the Company) formed Sendero Drilling Company, LLC (“Sendero”). Sendero was formed to own and operate land-based drilling rigs in the United States. As of September 30, 2010, Sendero owns nine drilling rigs operating under contract to PNR USA in the Spraberry field in the West Texas Permian Basin. PNR USA is the majority owner of Sendero.

In addition to Pioneer Southwest and Sendero, 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 $114.5 million and $106.8 million as of September 30, 2010 and December 31, 2009, respectively. The Company recorded net income attributable to the noncontrolling interests of $2.5 million and $39.0 million for the three and nine months ended September 30, 2010, respectively (principally related to Pioneer Southwest), compared to $9.0 million and $12.3 million for the three and nine months ended September 30, 2009, respectively.

Investment in unconsolidated affiliate. During the second quarter 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 September 30, 2010.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

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, the Company’s investment in unconsolidated affiliates 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. The Company’s investment in unconsolidated affiliates is included in other noncurrent assets in the accompanying consolidated balance sheets.

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 issued by 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 and August of 2010, the Company issued 208,620 and 20,935 restricted stock awards, respectively, to employees that represent liability awards, of which 11,161 liability awards have been forfeited or lapsed since the award dates. As of September 30, 2010, account payable – affiliates includes $2.6 million of liabilities attributable to the liability awards.

For the three and nine months ended September 30, 2010, the Company recorded $11.0 million and $31.6 million, respectively, of stock-based compensation costs for all plans, as compared to $10.1 million and $29.3 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 September 30, 2010 and December 31, 2009, do not include 827,861 and 979,493 common shares, respectively, associated with unvested stock-based compensation awards that have voting rights.

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

 

     Restricted Stock
Awards
    Performance
Units
     Stock Options  

Outstanding at December 31, 2009

     2,999,370       347,031        596,033  

Awards (a)

     741,131       74,482        116,120  

Lapsed restrictions

     (827,229     —           —     

Exercises

     —          —           (173,441

Forfeitures

     (84,356     —           (1,799
                         

Outstanding at September 30, 2010

     2,828,916       421,513        536,913  
                         

 

(a)

Restricted stock awards include 218,394 of liability awards.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

Subsidiary issuances of unit-based compensation. During the nine months ended September 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 $147 thousand of compensation expense during the nine months ended September 30, 2010. During the nine months ended September 30, 2010, the General Partner awarded 8,744 Pioneer Southwest restricted common units to the independent directors of the General Partner and restrictions on 13,653 Pioneer Southwest common unit director awards lapsed. There were no forfeitures of Pioneer Southwest restricted common units during the nine months ended September 30, 2010.

During the nine months ended September 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 $765 thousand of compensation expense during the nine months ended September 30, 2010.

As of September 30, 2010, there was $62.6 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $11.8 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. Effective December 31, 2009, the Company adopted the SEC’s final rule on “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”) and the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“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 February 2010, the FASB issued 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 disclosure about subsequent events.

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. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. See Note D for the Company’s disclosures about fair value measurements.

During July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310).” ASU No. 2010-20 amends ASC Topic 310 to provide enhanced disclosures related to (i) the nature of credit risk inherent in an entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. ASU No. 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company is currently assessing the impact that adoption of ASU No. 2010-20 will have on its disclosures.

NOTE C.     Exploratory Costs

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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

 

    Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 
    (in thousands)  

Beginning capitalized exploratory costs

  $ 151,431     $ 127,574  

Additions to exploratory costs pending the determination of proved reserves

    50,177       164,302  

Reclassification due to determination of proved reserves

    (57,321     (132,063

Disposition of assets sold

    —          (15,526
               

Ending capitalized exploratory costs

  $ 144,287     $ 144,287  
               

The following table provides an aging, as of September 30, 2010 and December 31, 2009 of capitalized exploratory costs and the number of projects for which exploratory costs have been capitalized for a period greater than one year, based on the date drilling was completed:

 

    September 30, 2010     December 31, 2009  
    (in thousands, except project counts)  

Capitalized exploratory costs that have been suspended:

   

One year or less

  $ 40,696     $ 21,634  

More than one year

    103,591       105,940  
               
  $ 144,287     $ 127,574  
               

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

    4       8  
               

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

 

     Total      2010      2009      2008      2007     2006  
     (in thousands)  

U.S. – Cosmopolitan Unit

   $ 78,033      $ 11,119      $ 8,253      $ 6,344      $ 51,488     $ 829  

Tunisia

     25,558        209        274        21,145        (15     3,945  
                                                    

Total

   $ 103,591      $ 11,328      $ 8,527      $ 27,489      $ 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 unstimulated 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 concluded flow testing during the second quarter of 2010. The Company will continue to conduct permitting activities and facilities planning and may drill another appraisal well during 2011.

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 completion plans in early 2011 and execute the well completion during 2011.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

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 third-party operator and the Company have project personnel at appropriate levels committed to and actively participating in infrastructure planning and assessment of the area. During the first nine months 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 area during the fourth quarter of 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.

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

September 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 September 30, 2010, for each of the fair value hierarchy levels:

 

     Fair Value Measurements at Reporting Date Using      Fair Value at
September 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

   $ 298      $ 102      $ —         $ 400  

Commodity derivatives

     —           367,783        502        368,285  

Interest rate derivatives

     —           32,173        —           32,173  

Deferred compensation plan assets

     32,896        —           —           32,896  
                                   

Total assets

   $ 33,194      $ 400,058      $ 502      $ 433,754  
                                   

Liabilities:

           

Commodity derivatives

   $ —         $ 59,665      $ 4,835      $ 64,500  

Interest rate derivatives

     —           1,707        —           1,707  

Pioneer Southwest credit facility

     —           71,019        —           71,019  

5.875% senior notes due 2016

     470,185        —           —           470,185  

6.65% senior notes due 2017

     511,781        —           —           511,781  

6.875% senior notes due 2018

     478,718        —           —           478,718  

7.50% senior notes due 2020

     496,687        —           —           496,687  

7.20% senior notes due 2028

     255,000        —           —           255,000  

2.875% senior convertible notes due 2038 (a)

     601,200        —           —           601,200  
                                   

Total liabilities

   $ 2,813,571      $ 132,391      $ 4,835      $ 2,950,797  
                                   

 

(a)

The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege. On 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 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 September 30, 2010  
     NGL Swap
Contracts
 
     (in thousands)  

Beginning asset balance

   $ 4,639  

Total gains and losses:

  

Net unrealized losses included in earnings (a)

     (7,131

Net realized losses transferred to earnings (a)

     (566

Settlement receipts

     (1,275
        

Ending liability balance

   $ (4,333
        

 

(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 net derivative gains or losses in the accompanying consolidated statements of operations.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Nine Months Ended September 30, 2010  
     NGL Swap
Contracts
    Notes
Receivable
    Total  
     (in thousands)  

Beginning asset (liability) balance

   $ (12,904   $ 4,727     $ (8,177

Total gains and losses:

      

Net unrealized gains included in earnings (a)

     14,073       —          14,073  

Net realized losses transferred to earnings (a)

     (4,417     —          (4,417

Notes receivable valuation allowance recoveries included in earnings (b)

     —          187       187  

Settlement receipts (c)

     (1,085     (4,914     (5,999
                        

Ending asset balance

   $ (4,333   $ —        $ (4,333
                        

 

(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 net derivative gains or losses in the accompanying consolidated statements of operations.

(b)

The valuation allowance recoveries associated with the Company’s notes receivable are 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 September 30, 2010 and December 31, 2009:

 

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

Assets:

           

Commodity price derivatives

   $ 368,285      $ 368,285      $ 84,080      $ 84,080  

Interest rate derivatives

   $ 32,173      $ 32,173      $ 8,264      $ 8,264  

Trading securities

   $ 400      $ 400      $ 335      $ 335  

Deferred compensation plan assets

   $ 32,896      $ 32,896      $ 27,890      $ 27,890  

Notes receivable

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

Liabilities:

           

Commodity price derivatives

   $ 64,500      $ 64,500      $ 223,555      $ 223,555  

Interest rate derivatives

   $ 1,707      $ 1,707      $ 26,105      $ 26,105  

Pioneer credit facility

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

Pioneer Southwest credit facility

   $ 74,000      $ 71,019      $ 67,000      $ 61,718  

5.875 % senior notes due 2012

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

5.875 % senior notes due 2016

   $ 394,871      $ 470,185      $ 389,109      $ 437,170  

6.65 % senior notes due 2017

   $ 484,011      $ 511,781      $ 483,914      $ 472,546  

6.875 % senior notes due 2018

   $ 449,184      $ 478,718      $ 449,161      $ 438,402  

7.50 % senior notes due 2020

   $ 446,366      $ 496,687      $ 446,172      $ 449,566  

7.20 % senior notes due 2028

   $ 249,925      $ 255,000      $ 249,924      $ 230,868  

2.875% senior convertible notes due 2038 (a)

   $ 441,058      $ 601,200      $ 429,563      $ 508,320  

 

(a)

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

 

18


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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 compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges plus unallocated contributions as of the measurement date. As of September 30, 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 September 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 September 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 and 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 and Dated Brent oil prices. The asset and liability values attributable to the Company’s oil derivatives as of September 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 Dated 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 September 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. As of December 31, 2009, 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 volumes of gas (expressed in millions of British thermal units “MMBtus”) contracted at various posted price indexes, including NYMEX Henry Hub (“HH”) swap contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company’s gas derivative contracts as of September 30, 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.

 

19


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Credit facilities. The fair value of Pioneer Southwest’s credit facility is based on (i) forecasted contractual interest and fee payments, (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 September 30, 2010.

Senior notes. The Company’s senior notes represent debt securities that are actively traded on major exchanges. The fair values of the Company’s senior notes are based on their periodic values as quoted on the major exchanges.

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 carry forwards (“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 September 30, 2010 and December 31, 2009, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $38.9 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 September 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 September 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 nine months ended September 30, 2010 and 2009:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Current:

        

U.S. federal

   $ (1,550   $ (1,335   $ (4,850   $ (934

U.S. state

     (1,520     (2,206     (4,644     (9,142

Foreign

     (16,340     (8,708     (22,031     (9,650
                                
     (19,410     (12,249     (31,525     (19,726
                                

Deferred:

        

U.S. federal

     (66,125     15,273       (268,921     68,796  

U.S. state

     (6,854     3,696       (23,354     9,460  

Foreign

     15,728       (1,514     (8,028     (10,859
                                
     (57,251     17,455       (300,303     67,397  
                                

Income tax (provision) benefit

   $ (76,661   $ 5,206     $ (331,828   $ 47,671  
                                

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.

 

20


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Credit facility repayment. During the second quarter of 2010, the Company repaid its outstanding borrowings under the Pioneer credit facility.

As of September 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 may also enter into physical delivery contracts to effectively provide commodity price protection. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, physical delivery contracts are not accounted for as derivative financial instruments in the financial statements.

All 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 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 February 1, 2009 discontinuance of hedge accounting were recorded as a component of AOCI – Hedging, which is being transferred to earnings when the hedged transaction is recognized in earnings. Any ineffective portion of changes in the fair value of hedge derivatives prior to February 1, 2009 was recorded in the earnings of the period of change. The ineffective portion was calculated as the difference between the change in fair value of the hedge derivative and the estimated change in cash flows from the item hedged.

Fair value derivatives. The Company monitors the debt capital markets and interest rate trends to identify opportunities to enter into and terminate interest rate derivative contracts, with the objective of reducing the Company’s costs of capital. As of September 30, 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.

 

21


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Oil prices. All material physical sales contracts governing the Company’s oil production are tied directly or indirectly to NYMEX WTI or Dated Brent oil prices. The following table sets forth the volumes in Bbls outstanding as of September 30, 2010 under the Company’s oil derivative contracts and the weighted average NYMEX or Dated Brent 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  

Price per Bbl

            $ 93.34      $ 93.34  

2010 – Collar contracts with short puts

              

Volume (Bbl)

              30,250        30,250  

Price per Bbl:

              

Ceiling

            $ 85.09      $ 85.09  

Floor

            $ 68.38      $ 68.38  

Short put

            $ 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  

2011 – Collar contracts with short puts

              

Volume (Bbl)

     32,000        32,000        32,000        32,000        32,000  

Price per Bbl:

              

Ceiling

   $ 99.33      $ 99.33      $ 99.33      $ 99.33      $ 99.33  

Floor

   $ 73.75      $ 73.75      $ 73.75      $ 73.75      $ 73.75  

Short put

   $ 59.31      $ 59.31      $ 59.31      $ 59.31      $ 59.31  

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)

     31,000        31,000        31,000        31,000        31,000  

Price per Bbl:

              

Ceiling

   $ 119.70      $ 119.70      $ 119.70      $ 119.70      $ 119.70  

Floor

   $ 80.48      $ 80.48      $ 80.48      $ 80.48      $ 80.48  

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)

     21,250        21,250        21,250        21,250        21,250  

Price per Bbl:

              

Ceiling

   $ 117.38      $ 117.38      $ 117.38      $ 117.38      $ 117.38  

Floor

   $ 80.18      $ 80.18      $ 80.18      $ 80.18      $ 80.18  

Short put

   $ 65.18      $ 65.18      $ 65.18      $ 65.18      $ 65.18  

 

(a)

Subsequent to September 30, 2010, the Company entered into additional collar contracts with short puts for 6,000 Bbls per day of the Company’s 2012 production with a ceiling price of $111.33 per Bbl, a floor price of $80.00 per Bbl and a short put price of $65.00 per Bbl.

 

22


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities’ NGL product component prices. The following table sets forth the volumes in Bbls outstanding as of September 30, 2010 under the Company’s 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)

              1,650        1,650  

Price per Bbl

            $ 40.85      $ 40.85  

2010 – Collar contracts

              

Volume (Bbl)

              2,000        2,000  

Price per Bbl:

              

Ceiling

            $ 49.98      $ 49.98  

Floor

            $ 41.58      $ 41.58  

2010 – Collar contracts with short puts

              

Volume (Bbl)

              2,000        2,000  

Price per Bbl:

              

Ceiling

            $ 58.92      $ 58.92  

Floor

            $ 47.64      $ 47.64  

Short put

            $ 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  

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 are tied directly or indirectly to regional index prices where the gas is sold. The Company uses derivative contracts to manage 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 the volumes in MMBtus outstanding as of September 30, 2010 under the Company’s gas derivative contracts and the weighted average index prices per MMBtu for those contracts:

 

23


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Outstanding
Average
 

Average daily gas production derivatives:

          

2010 – Swap contracts

          

Volume (MMBtu)

           167,500       167,500  

Price per MMBtu

         $ 6.26     $ 6.26  

2010 – Collar contracts

          

Volume (MMBtu)

           40,000       40,000  

Price per MMBtu:

          

Ceiling

         $ 7.19     $ 7.19  

Floor

         $ 5.75     $ 5.75  

2010 – Collar contracts with short puts

          

Volume (MMBtu)

           95,000       95,000  

Price per MMBtu:

          

Ceiling

         $ 7.94     $ 7.94  

Floor

         $ 6.00     $ 6.00  

Short put

         $ 5.00     $ 5.00  

2010 – Basis swap contracts

          

Volume (MMBtu)

           245,109       245,109  

Price per MMBtu

         $ (0.69   $ (0.69

2011 – Swap contracts

          

Volume (MMBtu)

     117,500       117,500       117,500       117,500       117,500  

Price per MMBtu

   $ 6.13     $ 6.13     $ 6.13     $ 6.13     $ 6.13  

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)

     133,500       133,500       133,500       133,500       133,500  

Price per MMBtu

   $ (0.58   $ (0.58   $ (0.58   $ (0.58   $ (0.58

2012 – Swap contracts

          

Volume (MMBtu)

     105,000       105,000       105,000       105,000       105,000  

Price per MMBtu

   $ 5.82     $ 5.82     $ 5.82     $ 5.82     $ 5.82  

2012 – Collar contracts

          

Volume (MMBtu)

     65,000       65,000       65,000       65,000       65,000  

Price per MMBtu:

          

Ceiling

   $ 6.60     $ 6.60     $ 6.60     $ 6.60     $ 6.60  

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)

     116,000       116,000       116,000       116,000       116,000  

Price per MMBtu

   $ (0.37   $ (0.37   $ (0.37   $ (0.37   $ (0.37

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  

 

24


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

2013 – Collar contracts

          

Volume (MMBtu)

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

Price per MMBtu:

          

Ceiling

   $ 6.50     $ 6.50     $ 6.50     $ 6.50     $ 6.50  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

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)

     32,500       32,500       32,500       32,500       32,500  

Price per MMBtu

   $ (0.34   $ (0.34   $ (0.34   $ (0.34   $ (0.34

2014 – Swap contracts

          

Volume (MMBtu)

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

Price per MMBtu

   $ 6.05     $ 6.05     $ 6.05     $ 6.05     $ 6.05  

2014 – Collar contracts

          

Volume (MMBtu)

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

Price per MMBtu:

          

Ceiling

   $ 7.20     $ 7.20     $ 7.20     $ 7.20     $ 7.20  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

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  

2014 – Basis swap contracts

          

Volume (MMBtu)

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

Price per MMBtu

   $ (0.16   $ (0.16   $ (0.16   $ (0.16   $ (0.16

Interest rates. The following table sets forth as of September 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   

Tabular disclosure of derivative financial instruments. All of the Company’s derivatives are accounted for as non-hedge derivatives as of September 30, 2010 and December 31, 2009, except for $4.4 million and $17.9 million of net obligations on terminated hedges, respectively. The following tables provide disclosure of the Company’s derivative instruments:

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

Fair Value of Derivative Instruments as of September 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

   $ 201,339     

Derivatives - current

   $ 51,612  

Interest rate derivatives

  

Derivatives - current

     11,739     

Derivatives - current

     2,149  

Commodity price derivatives

  

Derivatives - noncurrent

     206,342     

Derivatives - noncurrent

     47,872  

Interest rate derivatives

  

Derivatives - noncurrent

     22,599     

Derivatives - noncurrent

     1,723  
                       

Total derivatives not designated as hedging instruments

        442,019           103,356  
                       

Derivatives designated as hedging
instruments (b)
 

           

Commodity price derivatives

  

Derivatives - current

     118     

Derivatives - current

     4,530  
                       

Total derivatives designated as hedging instruments

        118           4,530  
                       

Total derivatives

      $ 442,137         $ 107,886  
                       

 

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
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
     (in thousands)  

Interest rate derivatives

   $ —         $ —         $ —         $ (433

Commodity price derivatives

     —           —           —           13,407  
                                   

Total

   $ —         $ —         $ —         $ 12,974  
                                   

 

26


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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
September 30,
    Nine Months Ended
September 30,
 
      2010     2009     2010     2009  
          (in thousands)  

Interest rate derivatives

  

Interest expense

   $ (63   $ (1,621   $ (1,633   $ (5,893

Interest rate derivatives

  

Derivative gains (losses), net

     —          —          (2,465     —     

Commodity price derivatives

  

Oil and gas revenue

     21,976       26,261       67,634       96,173  
                                   

Total

      $ 21,913     $ 24,640     $ 63,536     $ 90,280  
                                   

 

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
September 30,
    Nine Months Ended
September 30,
 
      2010      2009     2010      2009  
          (in thousands)  

Interest rate derivatives

  

Derivative gains (losses), net

   $ 14,848      $ 131     $ 52,564      $ (3,120

Commodity price derivatives

  

Derivative gains (losses), net

     112,733        (15,353     520,486        (82,463
                                     

Total

      $ 127,581      $ (15,222   $ 573,050      $ (85,583
                                     

AOCI – Hedging. As of September 30, 2010 and December 31, 2009, AOCI – Hedging represented net deferred gains of $17.7 million and $51.0 million, respectively. The AOCI – Hedging balance as of September 30, 2010 was comprised of $51.2 million of net deferred gains on the effective portions of discontinued commodity hedges, $2.0 million of net deferred losses on the effective portions of discontinued interest rate hedges and $13.3 million of associated net deferred tax provisions, reduced by $18.2 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

During the twelve months ending September 30, 2011, the Company expects to reclassify $46.0 million of AOCI – Hedging net deferred gains to oil and gas revenues (including $14.8 million related to noncontrolling interests) and $203 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $12.6 million of net deferred income tax provisions associated with hedge derivatives during the twelve months ending September 30, 2011 from AOCI – Hedging to income tax expense. For the remaining three months of 2010 and the year ending December 31, 2011, the Company expects to reclassify deferred gains on discontinued commodity hedges of $21.4 million and $32.9 million, respectively, to oil and gas revenues. During 2012, the Company expects to reclassify deferred losses on commodity hedges of $3.1 million to oil and gas revenues. The $2.0 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.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

The following table summarizes the Company’s asset retirement obligation activity during the three and nine months ended September 30, 2010 and 2009:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Beginning asset retirement obligations

   $ 137,181     $ 154,172     $ 166,434     $ 172,433  

Liabilities assumed in acquisitions

     —          —          6       —     

New wells placed on production and changes in estimates

     2,356       1,202       7,000       16,568  

Liabilities reclassified to discontinued operations held for sale

     —          —          —          (1,756

Disposition of wells

     (131     (491     (29,671     (13,334

Liabilities settled

     (6,141     (15,587     (16,096     (40,562

Accretion of discount from continuing operations

     2,626       2,754       8,218       8,259  

Accretion of discount from discontinued operations

     —          88       —          530  
                                

Ending asset retirement obligations

   $ 135,891     $ 142,138     $ 135,891     $ 142,138  
                                

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of September 30, 2010 and December 31, 2009, the current portions of the Company’s asset retirement obligations were $6.5 million and $13.9 million, respectively.

NOTE I.    Postretirement Benefit Obligations

As of September 30, 2010 and December 31, 2009, the Company had $8.7 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 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 September 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 nine months ended September 30, 2010 and September 30, 2009:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 8,968     $ 9,364     $ 9,075     $ 9,612  

Net benefit payments

     (543     (361     (1,127     (1,052

Service costs

     80       57       241       171  

Net actuarial losses

     100       —          200       —     

Accretion of interest

     108       164       324       493  
                                

Ending accumulated postretirement benefit obligations

   $ 8,713     $ 9,224     $ 8,713     $ 9,224  
                                

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.

 

28


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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.

 

29


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 30, 2010 and 2009:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Net income (loss) attributable to common stockholders

   $ 112,036     $ (7,165   $ 524,866     $ (108,766

Participating basic distributed earnings (a)

     (18     —          (125     (94

Participating basic undistributed earnings (a)

     (2,672     —          (11,895     —     
                                

Basic net income (loss) attributable to common stockholders

     109,346       (7,165     512,846       (108,860

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

     19       —          128       —     
                                

Diluted net income (loss) attributable to common stockholders

   $ 109,365     $ (7,165   $ 512,974     $ (108,860
                                

 

(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 nine months ended September 30, 2010 and 2009:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
     (in thousands)  

Weighted average common shares outstanding (a):

           

Basic

     115,191        114,123        114,985        114,118  

Dilutive common stock options (b)

     168        —           218        —     

Contingently issuable - performance shares (b)

     662        —           629        —     
                                   

Diluted

     116,021        114,123        115,832        114,118  
                                   

 

(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 purchases as of September 30, 2010. During the first nine months of 2010, the Company did not purchase any common stock pursuant to the program. During the first nine months 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 nine months ended September 30, 2010 and 2009. The following common stock equivalents were excluded from the diluted loss per share calculations for the three and nine months ended September 30, 2009 because they would have been anti-dilutive to the calculations: 1,194,518 and 768,049 unvested restricted shares or restricted stock units, respectively; 180,124 and 154,946 outstanding options to purchase the Company’s common stock, respectively; and 203,835 and 126,091 performance units, respectively.

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.

 

30


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

The following tables provide the Company’s geographic operating segment data for the three and nine months ended September 30, 2010 and 2009. Geographic operating segment income tax (provisions) benefits have been determined based on statutory rates existing in the various tax jurisdictions where the Company has oil and gas producing activities. The “Headquarters” table column includes income and expenses that are not routinely included in the earnings measures internally reported to management on a geographic operating segment basis.

 

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

Three Months Ended September 30, 2010

          

Revenues and other income:

          

Oil and gas

   $ 416,108     $ 21,299     $ 33,965     $ —        $ 471,372  

Interest and other

     —          —          —          11,864       11,864  

Derivative gains, net

     —          —          —          127,581       127,581  

Gain (loss) on disposition of assets, net

     2,429       —          —          (46     2,383  

Hurricane activity, net

     3,452       —          —          —          3,452  
                                        
     421,989       21,299       33,965       139,399       616,652  
                                        

Costs and expenses:

          

Oil and gas production

     99,711       1,000       3,628       —          104,339  

Production and ad valorem taxes

     33,045       —          —          —          33,045  

Depletion, depreciation and amortization

     119,726       18,338       5,576       9,198       152,838  

Exploration and abandonments

     21,308       302       1,353       —          22,963  

General and administrative

     —          —          —          44,759       44,759  

Accretion of discount on asset retirement obligations

     1,899       622       105       —          2,626  

Interest

     —          —          —          45,002       45,002  

Other

     9,682       —          —          11,245       20,927  
                                        
     285,371       20,262       10,662       110,204       426,499  
                                        

Income from continuing operations before income taxes

     136,618       1,037       23,303       29,195       190,153  

Income tax provision

     (50,549     (290     (12,101     (13,721     (76,661
                                        

Income from continuing operations

   $ 86,069     $ 747     $ 11,202     $ 15,474     $ 113,492  
                                        

 

31


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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

Three Months Ended September 30, 2009

          

Revenues and other income:

          

Oil and gas

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

Interest and other

     —          —          —          503       503  

Derivative losses, net

     —          —          —          (15,222     (15,222

Gain (loss) on disposition of assets, net

     80       —          —          (465     (385

Hurricane activity, net

     (1,830     —          —          —          (1,830
                                        
     348,284       20,836       39,099       (15,184     393,035  
                                        

Costs and expenses:

          

Oil and gas production

     84,083       822       5,489       —          90,394  

Production and ad valorem taxes

     28,089       —          —          —          28,089  

Depletion, depreciation and amortization

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

Exploration and abandonments

     19,908       114       4,910       141       25,073  

General and administrative

     —          —          —          34,799       34,799  

Accretion of discount on asset retirement obligations

     2,014       637       103       —          2,754  

Interest

     —          —          —          43,438       43,438  

Other

     9,702       —          —          11,661       21,363  
                                        
     272,750       22,386       16,141       97,238       408,515  
                                        

Income (loss) from continuing operations before income taxes

     75,534       (1,550     22,958       (112,422     (15,480

Income tax benefit (provision)

     (27,948     450       (12,227     44,931       5,206  
                                        

Income (loss) from continuing operations

   $ 47,586     $ (1,100   $ 10,731     $ (67,491   $ (10,274
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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

Nine Months Ended September 30, 2010

          

Revenues and other income:

          

Oil and gas

   $ 1,264,315     $ 67,182     $ 109,813     $ —        $ 1,441,310  

Interest and other

     —          —          —          51,930       51,930  

Derivative gains, net

     —          —          —          570,585       570,585  

Gain (loss) on disposition of assets, net

     27,408       —          —          (437     26,971  

Hurricane activity, net

     5,678       —          —          —          5,678  
                                        
     1,297,401       67,182       109,813       622,078       2,096,474  
                                        

Costs and expenses:

          

Oil and gas production

     278,154       2,672       10,522       —          291,348  

Production and ad valorem taxes

     85,444       —          —          —          85,444  

Depletion, depreciation and amortization

     353,090       58,677       17,593       24,560       453,920  

Exploration and abandonments

     60,773       428       9,354       328       70,883  

General and administrative

     —          —          —          128,081       128,081  

Accretion of discount on asset retirement obligations

     6,043       1,866       309       —          8,218  

Interest

     —          —          —          137,893       137,893  

Other

     30,233       —          —          21,995       52,228  
                                        
     813,737       63,643       37,778       312,857       1,228,015  
                                        

Income from continuing operations before income taxes

     483,664       3,539       72,035       309,221       868,459  

Income tax provision

     (178,956     (991     (37,653     (114,228     (331,828
                                        

Income from continuing operations

   $ 304,708     $ 2,548     $ 34,382     $ 194,993     $ 536,631  
                                        

 

33


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

 

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

Nine Months Ended September 30, 2009

          

Revenues and other income:

          

Oil and gas

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

Interest and other

     —          —          —          99,761       99,761  

Derivative losses, net

     —          —          —          (85,583     (85,583

Gain (loss) on disposition of assets, net