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 March 31, 2011

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 May 2, 2011

  

116,755,591  

 

 

 


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 March 31, 2011 and December 31, 2010

     5   
  

Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010

     7   
  

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011

     8   
  

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010

     9   
  

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010

     10   
  

Notes to Consolidated Financial Statements

     11   

Item 2.

  

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

     32   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4.

  

Controls and Procedures

     47   
PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     48   

Item 1A.

  

Risk Factors

     48   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     48   

Item 6.

  

Exhibits

     49   

Signatures

     50   

Exhibit Index

     51   

 

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, 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 impacts of climate change, international operations and acts of war or terrorism. These and other risks are described in the Company’s Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the United States Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk” and “Part II, Item 1A. Risk Factors” in this Report and “Part I, Item 1. Business — Competition, Markets and Regulations,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 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:

 

 

“AOCI - Hedging” means accumulated other comprehensive income – deferred hedge gains, net of tax, a component of the Company’s consolidated stockholders’ equity in the accompanying consolidated balance sheets.

 

 

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

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

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

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

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

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

 

 

“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.

 

 

With respect to information on the working interest in wells, drilling locations and acreage, “net” wells, drilling locations and acres are determined by multiplying “gross” wells, drilling locations and acres by the Company’s working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.

 

 

Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     March 31,
2011
    December 31,
2010
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 520,651     $ 111,160  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $1,171 and $1,155 as of March 31, 2011 and December 31, 2010, respectively

     276,338       237,511  

Due from affiliates

     955       7,792  

Income taxes receivable

     30,900       30,901  

Inventories

     187,715       173,615  

Prepaid expenses

     10,010       11,441  

Deferred income taxes

     22,802       156,650  

Discontinued operations held for sale

     —          281,741  

Other current assets:

    

Derivatives

     147,643       171,679  

Other

     38,579       14,693  
                

Total current assets

     1,235,593       1,197,183  
                

Property, plant and equipment, at cost:

    

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

    

Proved properties

     11,069,563       10,739,114  

Unproved properties

     200,209       191,112  

Accumulated depletion, depreciation and amortization

     (3,495,838     (3,366,440
                

Total property, plant and equipment

     7,773,934       7,563,786  
                

Goodwill

     298,145       298,182  

Other property and equipment, net

     380,376       283,542  

Other assets:

    

Investment in unconsolidated affiliate

     109,391       72,045  

Derivatives

     106,210       151,011  

Other, net of allowance for doubtful accounts of $2,364 and $2,519 as of March 31, 2011 and December 31, 2010, respectively

     122,337       113,353  
                
   $ 10,025,986     $ 9,679,102  
                

The financial information included as of March 31, 2011 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)

 

     March 31,
2011
    December 31,
2010
 
     (Unaudited)        

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable:

    

Trade

   $ 350,030     $ 354,890  

Due to affiliates

     19,303       64,260  

Interest payable

     33,942       59,008  

Income taxes payable

     33,072       19,168  

Deferred income taxes

     —          1,144  

Discontinued operations held for sale

     —          108,592  

Other current liabilities:

    

Derivatives

     173,628       80,997  

Deferred revenue

     44,327       44,951  

Other

     41,562       36,210  
                

Total current liabilities

     695,864       769,220  
                

Long-term debt

     2,562,688       2,601,670  

Derivatives

     179,914       56,574  

Deferred income taxes

     1,763,976       1,751,310  

Deferred revenue

     31,610       42,069  

Other liabilities

     238,367       232,234  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 127,469,647 and 126,212,256 shares issued at March 31, 2011 and December 31, 2010, respectively

     1,275       1,262  

Additional paid-in capital

     3,060,249       3,022,768  

Treasury stock, at cost: 11,276,450 and 10,903,743 at March 31, 2011 and December 31, 2010, respectively

     (456,359     (421,235

Retained earnings

     1,854,041       1,510,427  

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

     3,439       7,361  
                

Total stockholders’ equity attributable to common stockholders

     4,462,645       4,120,583  

Noncontrolling interests in consolidating subsidiaries

     90,922       105,442  
                

Total stockholders’ equity

     4,553,567       4,226,025  

Commitments and contingencies

    
                
   $ 10,025,986     $ 9,679,102  
                

The financial information included as of March 31, 2011 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
March 31,
 
     2011     2010  

Revenues and other income:

    

Oil and gas

   $ 497,130     $ 472,045  

Interest and other

     32,687       18,008  

Gain (loss) on disposition of assets, net

     (2,191     16,943  
                
     527,626       506,996  
                

Costs and expenses:

    

Oil and gas production

     99,931       86,100  

Production and ad valorem taxes

     33,296       27,061  

Depletion, depreciation and amortization

     140,373       144,428  

Exploration and abandonments

     17,643       16,848  

General and administrative

     44,106       38,315  

Accretion of discount on asset retirement obligations

     2,655       2,859  

Interest

     45,227       47,523  

Hurricane activity, net

     71       (7,410

Derivative (gains) losses, net

     244,432       (265,476

Other

     17,881       15,946  
                
     645,615       106,194  
                

Income (loss) from continuing operations before income taxes

     (117,989     400,802  

Income tax benefit (provision)

     47,151       (144,007
                

Income (loss) from continuing operations

     (70,838     256,795  

Income from discontinued operations, net of tax

     414,642       3,811  
                

Net income

     343,804       260,606  

Net (income) loss attributable to the noncontrolling interests

     4,790       (15,352
                

Net income attributable to common stockholders

   $ 348,594     $ 245,254  
                

Basic earnings per share:

    

Income (loss) from continuing operations attributable to common stockholders

   $ (0.57   $ 2.06  

Income from discontinued operations attributable to common stockholders

     3.53       0.03  
                

Net income attributable to common stockholders

   $ 2.96     $ 2.09  
                

Diluted earnings per share:

    

Income (loss) from continuing operations attributable to common stockholders

   $ (0.57   $ 2.05  

Income from discontinued operations attributable to common stockholders

     3.53       0.03  
                

Net income attributable to common stockholders

   $ 2.96     $ 2.08  
                

Weighted average shares outstanding:

    

Basic

     115,869       114,655  
                

Diluted

     115,869       115,462  
                

Dividends declared per share

   $ 0.04     $ 0.04  
                

Amounts attributable to common stockholders:

    

Income (loss) from continuing operations

   $ (66,048   $ 241,443  

Income from discontinued operations, net of tax

     414,642       3,811  
                

Net income

   $ 348,594     $ 245,254  
                

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, 2010

     115,309     $ 1,262      $ 3,022,768     $ (421,235   $ 1,510,427     $ 7,361     $ 105,442     $ 4,226,025  

Dividends declared ($0.04 per share)

     —          —           —          —          (4,759     —          —          (4,759

Exercise of long-term incentive plan stock options

     14       —           —          558       (221     —          —          337  

Treasury stock purchases

     (387     —           —          (35,682     —          —          —          (35,682

Tax benefit related to stock-based compensation

     —          —           28,083       —          —          —          —          28,083  

Disposition of subsidiary

     —          —           (508     —          —          —          —          (508

Compensation costs:

                 

Vested compensation awards, net

     1,257       13        (13     —          —          —          —          —     

Compensation costs included in net income

     —          —           9,919       —          —          —          320       10,239  

Cash distributions to noncontrolling interests

     —          —           —          —          —          —          (6,664     (6,664

Net income (loss)

     —          —           —          —          348,594       —          (4,790     343,804  

Other comprehensive loss:

                 

Deferred hedging activity, net of tax:

                 

Net hedge gains included in continuing operations

     —          —           —          —          —          (3,922     (3,386     (7,308
                                                                 

Balance as of March 31, 2011

     116,193     $ 1,275      $ 3,060,249     $ (456,359   $ 1,854,041     $ 3,439     $ 90,922     $ 4,553,567  
                                                                 

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)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 343,804     $ 260,606  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depletion, depreciation and amortization

     140,373       144,428  

Exploration expenses, including dry holes

     1,481       3,587  

Deferred income taxes

     (55,868     141,545  

(Gain) loss on disposition of assets, net

     2,191       (16,943

Accretion of discount on asset retirement obligations

     2,655       2,859  

Discontinued operations

     (408,065     21,558  

Interest expense

     7,637       7,408  

Derivative related activity

     276,683       (281,871

Amortization of stock-based compensation

     10,174       9,624  

Amortization of deferred revenue

     (11,083     (22,483

Other noncash items

     (20,488     (403

Change in operating assets and liabilities

    

Accounts receivable, net

     (25,270     48,080  

Income taxes receivable

     1       21,264  

Inventories

     (29,319     17,429  

Prepaid expenses

     1,342       435  

Other current assets

     3,305       1,226  

Accounts payable

     (89,980     (34,296

Interest payable

     (25,066     (13,314

Income taxes payable

     15,354       (1,536

Other current liabilities

     3,353       (9,840
                

Net cash provided by operating activities

     143,214       299,363  
                

Cash flows from investing activities:

    

Proceeds from disposition of assets, net of cash sold

     810,470       34,985  

Investment in unconsolidated subsidiary

     (37,048     —     

Additions to oil and gas properties

     (309,974     (156,529

Additions to other assets and other property and equipment, net

     (129,280     (44,999
                

Net cash provided by (used in) investing activities

     334,168       (166,543
                

Cash flows from financing activities:

    

Borrowings under long-term debt

     60,610       87,154  

Principal payments on long-term debt

     (105,810     (206,264

Contributions from noncontrolling interests

     —          1,151  

Distributions to noncontrolling interests

     (6,664     (6,605

Borrowings (payments) of other liabilities

     (20     2,818  

Exercise of long-term incentive plan stock options

     337       2,583  

Purchases of treasury stock

     (35,682     (12,978

Excess tax benefits from share-based payment arrangements

     28,083       6,705  

Payment of financing fees

     (8,672     (147

Dividends paid

     (73     (65
                

Net cash used in financing activities

     (67,891     (125,648
                

Net increase in cash and cash equivalents

     409,491       7,172  

Cash and cash equivalents, beginning of period

     111,160       27,368  
                

Cash and cash equivalents, end of period

   $ 520,651     $ 34,540  
                

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

(in thousands)

(Unaudited)

 

     Three Months Ended
March  31,
 
     2011     2010  

Net income

   $ 343,804     $ 260,606  
                

Other comprehensive loss:

    

Net hedge gains included in continuing operations

     (8,056     (20,926

Income tax provision

     748       5,035  
                

Other comprehensive loss

     (7,308     (15,891
                

Comprehensive income

     336,496       244,715  
                

Comprehensive (income) loss attributable to the noncontrolling interests

     8,176       (11,036
                

Comprehensive income attributable to common stockholders

   $ 344,672     $ 233,679  
                

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

March 31, 2011

(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 and South Africa.

NOTE B.    Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 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, 2010.

Discontinued operations. During December 2010, the Company committed to a plan to divest 100 percent of the Company’s share holdings in Pioneer Natural Resources Tunisia Ltd. and Pioneer Natural Resources Anaguid Ltd. (referred to in the aggregate as “Pioneer Tunisia”). In February 2011, the Company completed the sale of Pioneer Tunisia to an unaffiliated third party. Accordingly, the Company classified the assets and liabilities of Pioneer Tunisia as discontinued operations held for sale in the accompanying balance sheet as of December 31, 2010 and has classified the results of operations of Pioneer Tunisia as discontinued operations, net of tax for the three months ended March 31, 2011 and 2010 in the accompanying consolidated statements of operations (representing a recasting of the Pioneer Tunisia results of operations for the three months ended March 31, 2010, which were originally classified as continuing operations). See Note Q for more information regarding the sale of Pioneer Tunisia.

Allowances for doubtful accounts. As of March 31, 2011 and December 31, 2010, the Company’s allowances for doubtful accounts totaled $3.5 million and $3.7 million, respectively. Changes in the Company’s allowance for doubtful accounts during the three months ended March 31, 2011 are summarized in the following table:

 

     Three Months Ended
March  31, 2011
 
     (in thousands)  

Beginning allowance for doubtful accounts balance

   $ 3,674  

Amount recorded in other expense for bad debt expense

     18  

Other net decreases

     (157
        

Ending allowance for doubtful accounts balance

   $ 3,535  
        

Inventories. Inventories used in continuing operations consisted of $206.8 million and $183.4 million of materials and supplies and $3.8 million and $3.9 million of commodities as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011 and December 31, 2010, the Company’s materials and supplies inventory was net of $3.8 million and $3.6 million, respectively, of valuation reserve allowances. As of March 31, 2011 and December 31, 2010, the Company estimated that $22.9 million and $13.7 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. As of December 31, 2010, the Company also had inventory in Tunisia totaling $13.6 million that is classified as discontinued operations held for sale in the accompanying consolidated balance sheet as of December 31, 2010.

Derivatives and hedging. All derivatives are recorded on the accompanying consolidated balance sheets at estimated fair value. See Note D for further information regarding the fair value of the Company’s derivatives. 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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

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. 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 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.

The Company also owns a majority interest in Sendero Drilling Company, LLC (“Sendero”), which owns and operates land-based drilling rigs in the United States. As of March 31, 2011, Sendero owned 14 drilling rigs operating, or being readied to operate, under contracts to the Company in the Spraberry field. In addition, 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 $90.9 million and $105.4 million as of March 31, 2011 and December 31, 2010, respectively. The Company recorded a net loss attributable to the noncontrolling interests of $4.8 million for the three months ended March 31, 2011 (principally related to Pioneer Southwest), compared to net income attributable to the noncontrolling interests of $15.4 million for the three months ended March 31, 2010. The net loss attributable to noncontrolling interests for the first quarter of 2011 was primarily due to noncash mark-to-market derivative losses recorded by Pioneer Southwest during the three months ended March 31, 2011.

Investment in unconsolidated affiliate. The Company owns a 50.1 percent interest in EFS Midstream LLC (“EFS Midstream”), which owns and operates natural gas and liquids gathering, treating and transportation assets in the Eagle Ford Shale area of South Texas.

The Company accounts for the EFS Midstream 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 investor’s interests sold and the investor’s share of the investee’s net losses. The Company’s equity interest in the net income of EFS Midstream is recorded in interest and other income in the Company’s accompanying consolidated statements of operations.

Stock-based compensation. For stock-based compensation equity awards granted or modified, 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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

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 or unit awards and phantom unit awards that are expected to be settled wholly in the Company’s common stock or Pioneer Southwest common units (“Equity 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 shares or units (“Liability Awards”). Stock-based Liability Awards are recorded as accounts payable – affiliates based on the fair value of the services that have been rendered on the unvested portions 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 unvested portions of the awards for which services have been rendered are recorded as increases or decreases to compensation expense. As of March 31, 2011, accounts payable – affiliates includes $1.6 million of liabilities attributable to the Liability Awards.

For the three months ended March 31, 2011, the Company recorded $13.0 million of stock-based compensation costs for all plans, as compared to $9.8 million for the same period of 2010. As of March 31, 2011, there was $109.1 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $28.0 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.

The Company’s issued shares, as reflected in the consolidated balance sheets at March 31, 2011 and December 31, 2010, do not include 566,389 and 825,796 common shares, respectively, associated with unvested stock-based compensation awards that have voting rights.

The following table summarizes the activity that occurred during the three months ended March 31, 2011, for each type of share-based incentive award issued by Pioneer:

 

     Restricted Stock
Equity Awards
    Restricted Stock
Liability
Awards
    Performance
Units
     Stock Options     Pioneer
Southwest
LTIP
Restricted
Units
     Pioneer
Southwest
LTIP
Phantom
Units
 

Outstanding at December 31, 2010

     2,559,779       215,134       263,729        507,539       12,212        35,118  

Awards granted

     404,002       182,982       43,495        86,903       —           30,039  

Awards vested

     (954,070     (63,232     —           —          —           —     

Options exercised

     —          —          —           (14,290     —           —     

Awards forfeited

     (16,011     (4,718     —           —          —           —     
                                                  

Outstanding at March 31, 2011

     1,993,700       330,166       307,224        580,152       12,212        65,157  
                                                  

New accounting pronouncements. During December 2010, the FASB issued ASU No. 2010-28, “Intangibles-Goodwill and Other (Topic 350).” ASU No. 2010-28 modifies step one of the goodwill impairment test for reporting units with zero or negative carrying amounts, requiring that an entity perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists for those reporting units. The Company adopted the provisions of ASU No. 2010-28 effective January 1, 2011. The adoption of ASU No. 2010-28 has no effect on the Company’s goodwill balance or the financial position, results of operations or liquidity. See “Goodwill” above for more information about the Company’s policy for assessing impairment of its goodwill.

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

March 31, 2011

(Unaudited)

 

The following table reflects the Company’s capitalized exploratory well and project activity during the three months ended March 31, 2011:

 

     Three Months Ended
March  31, 2011
 
     (in thousands)  

Beginning capitalized exploratory costs

   $ 96,193  

Additions to exploratory costs pending the determination of proved reserves

     74,264  

Reclassification due to determination of proved reserves

     (60,344

Disposition of assets sold

     (28,938

Exploratory well costs charged to exploration expense

     (645
        

Ending capitalized exploratory costs

   $ 80,530  
        

The following table provides an aging, as of March 31, 2011 and December 31, 2010 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:

 

     March 31, 2011      December 31, 2010  
     (in thousands, except project counts)  

Capitalized exploratory costs that have been suspended:

     

One year or less

   $ 80,530      $ 70,635  

More than one year

     —           25,558  
                 
   $ 80,530      $ 96,193  
                 

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

     —           3  
                 

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.

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2011, for each of the fair value hierarchy levels:

 

     Fair Value Measurements at Reporting Date Using         
     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair Value at
March 31,
2011
 
     (in thousands)  

Assets:

           

Trading securities

   $ 319      $ 25,118      $ —         $ 25,437  

Commodity derivatives

     —           241,894        —           241,894  

Interest rate derivatives

     —           11,959        —           11,959  

Deferred compensation plan assets

     39,582        —           —           39,582  
                                   

Total assets

   $ 39,901      $ 278,971      $ —         $ 318,872  
                                   

Liabilities:

           

Commodity derivatives

   $ —         $ 335,279      $ 16,675      $ 351,954  

Interest rate derivatives

     —           1,588        —           1,588  

Pioneer Southwest credit facility

     —           81,289        —           81,289  

5.875% senior notes due 2016

     482,663        —           —           482,663  

6.65% senior notes due 2017

     523,908        —           —           523,908  

6.875% senior notes due 2018

     481,415        —           —           481,415  

7.50% senior notes due 2020

     507,374        —           —           507,374  

7.20% senior notes due 2028

     250,000        —           —           250,000  

2.875% senior convertible notes due 2038 (a)

     854,400        —           —           854,400  
                                   

Total liabilities

   $ 3,099,760      $ 418,156      $ 16,675      $ 3,534,591  
                                   

 

(a)

The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege.

The following table presents 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 March 31, 2011  
     (in thousands)  

Beginning liability balance

   $ (9,556

Total gains and losses:

  

Net unrealized losses included in earnings (a)

     (7,118

Net realized losses included in earnings (a)

     (2,696

Settlement payments

     2,695  
        

Ending liability balance

   $ (16,675
        

 

(a)

Non-hedge derivatives gains and losses are included in net derivative gains (losses) in the accompanying consolidated statements of operations.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of March 31, 2011 and December 31, 2010:

 

     March 31, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (in thousands)  

Assets:

           

Commodity price derivatives

   $ 241,894      $ 241,894      $ 304,434      $ 304,434  

Interest rate derivatives

   $ 11,959      $ 11,959      $ 18,256      $ 18,256  

Trading securities

   $ 25,437      $ 25,437      $ 467      $ 467  

Deferred compensation plan assets

   $ 39,582      $ 39,582      $ 36,162      $ 36,162  

Liabilities:

           

Commodity price derivatives

   $ 351,954      $ 351,954      $ 136,867      $ 136,867  

Interest rate derivatives

   $ 1,588      $ 1,588      $ 704      $ 704  

Pioneer credit facility

   $ —         $ —         $ 49,000      $ 58,382  

Pioneer Southwest credit facility

   $ 85,000      $ 81,289      $ 81,200      $ 77,241  

5.875 % senior notes due 2016

   $ 398,936      $ 482,663      $ 396,880      $ 475,194  

6.65 % senior notes due 2017

   $ 484,079      $ 523,908      $ 484,045      $ 516,632  

6.875 % senior notes due 2018

   $ 449,200      $ 481,415      $ 449,192      $ 480,969  

7.50 % senior notes due 2020

   $ 446,502      $ 507,374      $ 446,433      $ 494,145  

7.20 % senior notes due 2028

   $ 249,926      $ 250,000      $ 249,925      $ 259,350  

2.875% senior convertible notes due 2038 (a)

   $ 449,045      $ 854,400      $ 444,994      $ 728,400  

 

(a)

The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege.

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 March 31, 2011, 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 March 31, 2011 represent 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 values attributable to the Company’s interest rate derivative contracts as of March 31, 2011 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. The asset and liability values attributable to the Company’s oil derivatives were determined based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

NGL derivatives. The Company’s NGL derivatives include swap and collar contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs, Conway-posted-price NGLs or NGL component prices per Bbl. The asset and liability values attributable to the Company’s NGL derivatives were determined 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.

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 were determined based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) independent market-quoted forward index prices, (iv) the applicable credit-adjusted risk-free rate yield curve and (v) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts and three-way collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling gas options and were corroborated by market-quoted volatility factors.

Credit facility. The fair value of the Company’s credit facility and 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.

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 March 31, 2011 and December 31, 2010, the Company’s valuation allowances were $6.6 million and $33.1 million, respectively. The valuation allowance as of December 31, 2010 includes $26.5 million related to Tunisia operations that was classified as discontinued operations held for sale.

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 March 31, 2011, 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 2005. As of March 31, 2011, 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Income tax (provisions) benefits. The Company’s income tax (provisions) benefits attributable to income from continuing operations consisted of the following for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (in thousands)  

Current:

    

U.S. federal

   $ —        $ (1,101

U.S. state

     (2,398     (1,324

Foreign

     (6,319     (37
                
     (8,717     (2,462
                

Deferred:

    

U.S. federal

     40,787       (131,128

U.S. state

     10,425       (9,460

Foreign

     4,656       (957
                
     55,868       (141,545
                

Income tax (provision) benefit

   $ 47,151     $ (144,007
                

Discontinued operations. The Company’s income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (in thousands)  

Current:

    

U.S. state

   $ (5,725   $ —     

Foreign

     (1,849     444  
                
     (7,574     444  
                

Deferred:

    

U.S. federal

     (227,321     70  

U.S. state

     (2,148     —     

Foreign

     (12,323     (16,981
                
     (241,792     (16,911
                

Income tax provision

   $ (249,366   $ (16,467
                

NOTE F.    Long-term Debt

Credit Facility. During March 2011, the Company entered into a Second Amended and Restated 5-Year Revolving Credit Agreement (the “Credit Facility”) with a syndicate of financial institutions that matures in March 2016, unless extended in accordance with the terms of the Credit Facility. The Credit Facility replaces the Company’s Amended and Restated 5-Year Revolving Credit Agreement entered into in April 2007 (the “Expired Credit Facility”) and provides for aggregate loan commitments of $1.25 billion. As of March 31, 2011, the Company had no outstanding borrowings under the Credit Facility and $65.1 million of undrawn letters of credit, all of which were commitments under the Credit Facility, leaving the Company with $1.2 billion of unused borrowing capacity under the Credit Facility.

Borrowings under the Credit Facility may be in the form of revolving loans or swing line loans. Aggregate outstanding swing line loans may not exceed $150 million. Revolving loans under the Credit Facility bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by Wells Fargo Bank, National Association or the weighted average of the rates on overnight Federal funds

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent plus a defined alternate base rate spread margin (“ABR Margin”), which is currently one percent based on the Company’s debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the “Applicable Margin”), which is currently two percent and is also determined by the Company’s debt rating. Swing line loans under the Credit Facility bear interest at a rate per annum equal to the “ASK” rate for Federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent. The Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company’s debt rating (currently 0.375 percent).

The Credit Facility contains certain financial covenants, which include the maintenance of a ratio of total debt to book capitalization less intangible assets, accumulated other comprehensive income and certain noncash asset impairments not to exceed .60 to 1.0. The covenants also include the maintenance of a ratio of the net present value of the Company’s oil and gas properties to total debt of at least 1.75 to 1.0 until the Company achieves an investment grade rating by Moody’s Investors Service, Inc. or Standard & Poors Ratings Group, Inc.

As of March 31, 2011, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

In accordance with GAAP, the Company accounted for the entry into the Credit Facility as an extinguishment of the Expired Credit Facility. Associated therewith, the Company recorded a $2.4 million loss on extinguishment of debt to write off the unamortized issuance costs of the Company’s expired credit facility, which is included in other expense in the accompanying consolidated statement of operations for the three months ended March 31, 2011 (see Note P).

Convertible senior notes. As of March 31, 2011 and December 31, 2010, the Company had $480 million of 2.875% Convertible Senior Notes outstanding. The 2.875% Convertible Senior Notes are convertible under certain circumstances, using a net share settlement process, into a combination of cash and the Company’s common stock pursuant to a formula.

Effective April 1, 2011, the Company’s 2.875% Convertible Senior Notes became convertible at the option of the holders for the quarter ended June 30, 2011, and may become convertible in future quarters depending on the Company’s stock price or other conditions. If the 2.875% Convertible Senior Notes had qualified for and been converted as of March 31, 2011, the note holders would have received $480.0 million of cash and approximately 2.9 million shares of the Company’s common stock, which was valued at $295.4 million at March 31, 2011.

NOTE G.    Derivative Financial Instruments

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

Oil prices. All material physical sales contracts governing the Company’s oil production are tied directly or indirectly to NYMEX WTI.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table sets forth the volumes in Bbls outstanding as of March 31, 2011 under the Company’s oil derivative contracts and the weighted average oil prices per Bbl for those contracts:

 

     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
     Outstanding
Average
 

Average daily oil production associated with derivatives (Bbls):

              

2011 – Swap contracts

              

Volume

        750        750        750        750  

NYMEX price

      $ 77.25      $ 77.25      $ 77.25      $ 77.25  

2011 – Collar contracts

              

Volume

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

NYMEX price:

              

Ceiling

      $ 170.00      $ 170.00      $ 170.00      $ 170.00  

Floor

      $ 115.00      $ 115.00      $ 115.00      $ 115.00  

2011 – Collar contracts with short puts

              

Volume

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

NYMEX price:

              

Ceiling

      $ 99.33      $ 99.33      $ 99.33      $ 99.33  

Floor

      $ 73.75      $ 73.75      $ 73.75      $ 73.75  

Short put

      $ 59.31      $ 59.31      $ 59.31      $ 59.31  

2012 – Swap contracts

              

Volume

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

NYMEX price

   $ 79.32      $ 79.32      $ 79.32      $ 79.32      $ 79.32  

2012 – Collar contracts with short puts

              

Volume

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

NYMEX price:

              

Ceiling

   $ 118.34      $ 118.34      $ 118.34      $ 118.34      $ 118.34  

Floor

   $ 80.41      $ 80.41      $ 80.41      $ 80.41      $ 80.41  

Short put

   $ 65.00      $ 65.00      $ 65.00      $ 65.00      $ 65.00  

2013 – Swap contracts

              

Volume

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

NYMEX price

   $ 81.02      $ 81.02      $ 81.02      $ 81.02      $ 81.02  

2013 – Collar contracts with short puts

              

Volume

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

NYMEX price:

              

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  

2014 – Collar contracts with short puts

              

Volume

     12,000        12,000        12,000        12,000        12,000  

NYMEX price:

              

Ceiling

   $ 128.16      $ 128.16      $ 128.16      $ 128.16      $ 128.16  

Floor

   $ 87.92      $ 87.92      $ 87.92      $ 87.92      $ 87.92  

Short put

   $ 72.92      $ 72.92      $ 72.92      $ 72.92      $ 72.92  

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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table sets forth the volumes in Bbls outstanding as of March 31, 2011 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 associated with derivatives (Bbls):

              

2011 – Swap contracts

              

Volume

        1,150        1,150        1,150        1,150  

Blended index price

      $ 51.38      $ 51.50      $ 51.50      $ 51.46  

2011 – Collar contracts

              

Volume

        2,650        2,650        2,650        2,650  

Index price:

              

Ceiling

      $ 64.23      $ 64.23      $ 64.23      $ 64.23  

Floor

      $ 53.29      $ 53.29      $ 53.29      $ 53.29  

2012 – Swap contracts

              

Volume

     750        750        750        750        750  

Index price

   $ 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 March 31, 2011 under the Company’s gas derivative contracts and the weighted average gas prices per MMBtu for those contracts:

 

     First
Quarter
     Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Outstanding
Average
 

Average daily gas production associated with derivatives (MMBtus):

           

2011 – Swap contracts

           

Volume

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

NYMEX price

      $ 6.13     $ 6.13     $ 6.13     $ 6.13  

2011 – Collar contracts with short puts

           

Volume

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

NYMEX price:

           

Ceiling

      $ 8.55     $ 8.55     $ 8.55     $ 8.55  

Floor

      $ 6.32     $ 6.32     $ 6.32     $ 6.32  

Short put

      $ 4.88     $ 4.88     $ 4.88     $ 4.88  

2011 – Basis swap contracts

           

Volume

        153,500       143,500       143,500       146,809  

Price differential

      $ (0.53   $ (0.56   $ (0.56   $ (0.55

2012 – Swap contracts

           

Volume

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

NYMEX price

   $ 5.82      $ 5.82     $ 5.82     $ 5.82     $ 5.82  

2012 – Collar contracts

           

Volume

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

NYMEX price:

           

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

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

NYMEX price:

           

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  

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

                                

2012 – Basis swap contracts

          

Volume

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

Price differential

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

2013 – Swap contracts

          

Volume

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

NYMEX price

   $ 6.11     $ 6.11     $ 6.11     $ 6.11     $ 6.11  

2013 – Collar contracts

          

Volume

     150,000       150,000       150,000       150,000       150,000  

NYMEX price:

          

Ceiling

   $ 6.25     $ 6.25     $ 6.25     $ 6.25     $ 6.25  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

2013 – Collar contracts with short puts

          

Volume

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

NYMEX price:

          

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

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

Price differential

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

2014 – Swap contracts

          

Volume

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

NYMEX price

   $ 6.05     $ 6.05     $ 6.05     $ 6.05     $ 6.05  

2014 – Collar contracts

          

Volume

     140,000       140,000       140,000       140,000       140,000  

NYMEX price:

          

Ceiling

   $ 6.44     $ 6.44     $ 6.44     $ 6.44     $ 6.44  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

2014 – Collar contracts with short puts

          

Volume

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

NYMEX price:

          

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

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

Price differential

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

2015 – Collar contracts

          

Volume

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

NYMEX price:

          

Ceiling

   $ 7.92     $ 7.92     $ 7.92     $ 7.92     $ 7.92  

Floor

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

Interest rates. The following table sets forth as of March 31, 2011 the notional amount of the Company’s debt under outstanding 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)                

Fixed-for-variable

   $ 400,000        2.87 percent         July 2016   

Fixed-for-variable

   $ 70,000        3.23 percent         March 2017   

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Tabular disclosure of derivative financial instruments. All of the Company’s derivatives are accounted for as non-hedge derivatives as of March 31, 2011 and December 31, 2010. The following tables provide disclosure of the Company’s derivative instruments:

 

Fair Value of Derivative Instruments as of March 31, 2011

 
     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

      $ 145,952       

Derivatives - current

      $ 183,747  

Interest rate derivatives

    

Derivatives - current

        11,810       

Derivatives - current

        —     

Commodity price derivatives

    

Derivatives - noncurrent

        118,591       

Derivatives - noncurrent

        190,856  

Interest rate derivatives

    

Derivatives - noncurrent

        9,306       

Derivatives - noncurrent

        10,745  
                       

Total derivatives not designated as hedging instruments

        285,659           385,348  
                       

Total derivatives

      $ 285,659         $ 385,348  
                       

Fair Value of Derivative Instruments as of December 31, 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

      $ 167,406       

Derivatives - current

      $ 87,741  

Interest rate derivatives

    

Derivatives - current

        11,903       

Derivatives - current

        886  

Commodity price derivatives

    

Derivatives - noncurrent

        152,731       

Derivatives - noncurrent

        64,829  

Interest rate derivatives

    

Derivatives - noncurrent

        15,762       

Derivatives - noncurrent

        9,227  
                       

Total derivatives not designated as hedging instruments

        347,802           162,683  
                       

Total derivatives

      $ 347,802         $ 162,683  
                       

 

(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.

 

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
March 31,
 
      2011     2010  
            (in thousands)  

Interest rate derivatives

     Interest expense      $ (68   $ (1,058

Interest rate derivatives

     Derivative gains (losses), net         —          (1,142

Commodity price derivatives

     Oil and gas revenue         8,124       23,126  
                   

Total

      $ 8,056     $ 20,926  
                   

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

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
March 31,
 
     2011     2010  
           (in thousands)  

Interest rate derivatives

     Derivative gains (losses), net      $ (2,152   $ 11,399  

Commodity price derivatives

     Derivative gains (losses), net        (242,280     255,219  
                  

Total

     $ (244,432   $ 266,618  
                  

AOCI - Hedging. As of March 31, 2011 and December 31, 2010, AOCI - Hedging represented net deferred gains of $3.4 million and $7.4 million, respectively. The AOCI - Hedging balance as of March 31, 2011 was comprised of $21.6 million of net deferred gains on the effective portions of discontinued commodity hedges, $1.9 million of net deferred losses on the effective portions of discontinued interest rate hedges and $5.9 million of associated net deferred tax provisions, reduced by $10.4 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

During the twelve months ending March 31, 2012, the Company expects to reclassify $24.0 million of AOCI – Hedging net deferred gains to oil revenues (including $10.4 million related to noncontrolling interests) and $291 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $8.5 million of net deferred income tax provisions associated with hedge derivatives during the twelve months ending March 31, 2012 from AOCI - Hedging to income tax expense. For the remaining nine months of 2011, the Company expects to reclassify deferred gains on discontinued commodity hedges of $24.8 million to oil revenues. During 2012, the Company expects to reclassify deferred losses on commodity hedges of $3.2 million to oil revenues. The aforementioned $1.9 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 following table summarizes the Company’s asset retirement obligation activity during the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (in thousands)  

Beginning asset retirement obligations

   $ 152,291     $ 166,434  

Liabilities assumed in acquisitions

     6       —     

New wells placed on production

     671       278  

Changes in estimates

     300       —     

Disposition of wells

     (81     (26,248

Liabilities settled

     (1,234     (1,154

Accretion of discount from continuing operations

     2,655       2,859  

Accretion of discount from discontinued operations

     81       101  
                

Ending asset retirement obligations

   $ 154,689     $ 142,270  
                

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 March 31, 2011 and December 31, 2010, the current portions of the Company’s asset retirement obligations were $19.4 million and $19.9 million, respectively.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

NOTE I.    Postretirement Benefit Obligations

As of March 31, 2011 and December 31, 2010, the Company had $7.2 million and $7.4 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 March 31, 2011 or December 31, 2010. 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 months ended March 31, 2011 and March 31, 2010:

 

     Three Months Ended
March  31,
 
     2011     2010  
     (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 7,408     $ 9,075  

Net benefit payments

     (316     (312

Service costs

     61       80  

Accretion of interest

     78       108  
                

Ending accumulated postretirement benefit obligations

   $ 7,231     $ 8,951  
                

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.

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 Company’s investigation were reported to the agencies. In December 2010, the AOGCC investigator submitted a report outlining its findings, which (i) found that the Company’s operating practices have not harmed the project’s oil reservoirs and (ii) raised certain regulatory compliance issues, all of which the Company previously reported or has since taken actions to remedy. Although the Company does not know at this time what action the AOGCC will take in response to the report, based on the facts as known to date, the Company believes that compliance with any order or other action of the AOGCC 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, including matters of litigation, environmental contingencies, royalty obligations and income taxes.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

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 and the February 2011 sale of Pioneer Tunisia. The Company does not believe that these obligations are probable of having a material impact on its liquidity, financial position or future results of operations.

NOTE K.     Net Income (Loss) Per Share

In accordance with GAAP, the Company uses the two-class method of calculating net income (loss) per share because certain of the Company’s and its consolidated subsidiaries’ unvested share-based awards qualify as participating securities. Participating securities participate in the Company’s dividend distributions and are assumed to participate in the Company’s undistributed income proportionate to weighted average outstanding common shares, but are not assumed to participate in the Company’s net losses because they are not contractually obligated to do so. Accordingly, allocations of earnings to participating securities are included in the Company’s calculations of basic and diluted earnings per share from continuing operations, discontinued operations and total net income attributable to common stockholders.

During periods in which the Company realizes a loss from continuing operations attributable to common stockholders, such as during the three months ended March 31, 2011, securities or other contracts to issue common stock would be dilutive to loss per share from continuing operations; therefore, conversion into common stock is assumed not to occur.

The following tables reconcile the Company’s net income (loss) from continuing operations, discontinued operations and total net income attributable to common stockholders to the basic and diluted earnings used in the two-class method to determine the Company’s net income (loss) per share amounts for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended March 31, 2011  
     Continuing
Operations
    Discontinued
Operations
    Total  
     (in thousands)  

Income (loss) as reported

   $ (70,838   $ 414,642      $ 348,594  

Net loss attributable to the noncontrolling interests

     4,790        —          —    

Participating basic earnings

     —          (6,140     (6,140
                        

Basic income (loss) attributable to common stockholders

     (66,048     408,502        342,454  

Diluted adjustments to earnings

     —          —          —    
                        

Diluted income (loss) attributable to common stockholders

   $ (66,048   $ 408,502      $ 342,454  
                        
     Three Months Ended March 31, 2010  
     Continuing
Operations
    Discontinued
Operations
    Total  
     (in thousands)  

Income as reported

   $ 256,795      $ 3,811      $ 245,254  

Net income attributable to the noncontrolling interests

     (15,352     —          —    

Participating basic earnings

     (5,254     (83     (5,337
                        

Basic income attributable to common stockholders

     236,189        3,728        239,917  

Diluted adjustments to earnings

     50        1        51  
                        

Diluted income attributable to common stockholders

   $ 236,239      $ 3,729      $ 239,968  
                        

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011      2010  
     (in thousands)  

Weighted average common shares outstanding:

     

Basic

     115,869        114,655  

Dilutive common stock options (a)

     —           224  

Contingently issuable - performance shares (a)

     —           583  
                 

Diluted

     115,869        115,462  
                 

 

(a)

The following common stock equivalents were excluded from the diluted income per share calculation for the three months ended March 31, 2011 because they would have been anti-dilutive to the loss from continuing operations: 198,463 outstanding options to purchase the Company’s common stock, 416,703 common shares attributable to unvested performance units and 2,898,761 common shares issuable if holders of the Company’s 2.875% Convertible Senior Notes had exercised their conversion rights (see Note F).

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

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 and South Africa.

The following tables provide the Company’s geographic operating segment data for the three months ended March 31, 2011 and 2010. 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     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended March 31, 2011

        

Revenues and other income:

        

Oil and gas

   $ 475,729     $ 21,401     $ —        $ 497,130  

Interest and other

     —          —          32,687       32,687  

Loss on disposition of assets, net

     —          —          (2,191     (2,191
                                
     475,729       21,401       30,496       527,626  
                                

Costs and expenses:

        

Oil and gas production

     98,835       1,096       —          99,931  

Production and ad valorem taxes

     33,296       —          —          33,296  

Depletion, depreciation and amortization

     116,540       13,685       10,148       140,373  

Exploration and abandonments

     17,485       158       —          17,643  

General and administrative

     —          —          44,106       44,106  

Accretion of discount on asset retirement obligations

     2,044       611       —          2,655  

Interest

     —          —          45,227       45,227  

Hurricane activity, net

     71       —          —          71  

Derivative losses, net

     —          —          244,432       244,432  

Other

     5,159       —          12,722       17,881  
                                
     273,430       15,550       356,635       645,615  
                                

Income (loss) from continuing operations before income taxes

     202,299       5,851       (326,139     (117,989

Income tax benefit (provision)

     (74,851     (1,638     123,640       47,151  
                                

Income (loss) from continuing operations

   $ 127,448     $ 4,213     $ (202,499   $ (70,838
                                

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

     United
States
    South Africa     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended March 31, 2010

        

Revenues and other income:

        

Oil and gas

   $ 446,664     $ 25,381     $ —        $ 472,045  

Interest and other

     —          —          18,008       18,008  

Gain (loss) on disposition of assets, net

     17,419       —          (476     16,943  
                                
     464,083       25,381       17,532       506,996  
                                

Costs and expenses:

        

Oil and gas production

     85,324       776       —          86,100  

Production and ad valorem taxes

     27,061       —          —          27,061  

Depletion, depreciation and amortization

     115,505       21,897       7,026       144,428  

Exploration and abandonments

     16,776       72       —          16,848  

General and administrative

     —          —          38,315       38,315  

Accretion of discount on asset retirement obligations

     2,237       622       —          2,859  

Interest

     —          —          47,523       47,523  

Hurricane activity, net

     (7,410     —          —          (7,410

Derivative gains, net

     —          —          (265,476     (265,476

Other

     10,281       —          5,665       15,946  
                                
     249,774       23,367       (166,947     106,194  
                                

Income from continuing operations before income taxes

     214,309       2,014       184,479       400,802  

Income tax provision

     (79,294     (564     (64,149     (144,007
                                

Income from continuing operations

   $ 135,015     $ 1,450     $ 120,330     $ 256,795  
                                

 

     March 31,
2011
     December 31,
2010
 
     (in thousands)  

Consolidating Assets by Geographic Area:

     

United States

   $ 9,818,634      $ 8,987,141  

South Africa

     111,703        134,901  

Tunisia

     —           325,942  

Headquarters

     95,649        231,118  
                 

Total consolidated assets

   $ 10,025,986      $ 9,679,102  
                 

NOTE M.    Volumetric Production Payments

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

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table provides information about changes in the deferred revenue carrying values of the Company’s VPP for the three months ended March 31, 2011 (in thousands):

 

Deferred revenue at December 31, 2010

   $ 87,020  

Less: 2011 amortization

     (11,083
        

Deferred revenue at March 31, 2011

   $ 75,937  
        

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

 

Remaining 2011

   $ 33,866  

2012

     42,071  
        
   $ 75,937  
        

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

For the three months ended March 31, 2011, the Company recorded $2.2 million of net losses on disposition of assets from continuing operations as compared to $16.9 million of net gains from continuing operations for the three months ended March 31, 2010.

The Company’s $2.2 million net loss during the three months ended March 31, 2011 was primarily associated with sales of excess materials and supplies inventory. During the three months ended March 31, 2010, the Company’s net gain was primarily associated with certain proved and unproved oil and gas properties divested in the Uinta/Piceance area.

See Note Q for information about the Company’s gain during the three months ended March 31, 2011 from the sale of its Tunisia subsidiaries, representing discontinued operations.

NOTE O.    Interest and Other Income

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

 

     Three Months Ended
March 31,
 
     2011      2010  
     (in thousands)  

Alaskan Petroleum Production Tax credits (a)

   $ 27,452      $ 14,248  

Drilling and servicing margin

     2,878        510  

Deferred compensation plan income

     867        510  

Other income

     1,002         691  

Equity interest in income of unconsolidated affiliate

     298        —     

Interest income

     190        384  

Insurance claim recovery

     —           1,665  
                 

Total interest and other income

   $ 32,687      $ 18,008  
                 

 

(a)

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

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

NOTE P.    Other Expense

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

 

     Three Months Ended
March 31,
 
     2011      2010  
     (in thousands)  

Transportation commitment charge (a)

   $ 5,272      $ —     

Excess and terminated rig related costs (b)

     5,159        10,281  

Other

     2,494        650   

Loss on extinguishment of debt

     2,367        —     

Contingency and environmental accrual adjustments

     1,295        153  

Cancelled well costs

     991        —     

Inventory impairment (c)

     285        1,557  

Bad debt expense

     18        224  

Well servicing operations (d)

     —           3,081  
                 

Total other expense

   $ 17,881      $ 15,946  
                 

 

(a)

Primarily represents firm transportation contract deficiency payment obligations.

(b)

Represents above market drilling rig costs, idle rig costs and costs incurred to terminate contractual drilling rig commitments prior to their contractual maturities.

(c)

Represents impairment charges on excess materials and supplies inventories.

(d)

Represents idle well servicing costs.

NOTE Q.    Discontinued Operations

During December 2010, the Company committed to a plan to sell Pioneer Tunisia and in February 2011 completed the sale of 100 percent of the Company’s share holdings in Pioneer Tunisia to an unaffiliated party for net cash proceeds of $845.2 million, resulting in a pretax gain of $649.9 million. Accordingly, the historical results of operations of Pioneer Tunisia have been classified as discontinued operations herein. The net cash proceeds from the sale of Pioneer Tunisia were determined in accordance with the sale and purchase agreement that the Company entered into with the purchaser, which provides for certain customary adjustments for matters occurring after the effective date of the sale, such as capital contributions and distributions, and working capital adjustments. Adjustments to net cash proceeds involve management’s best estimate about the realizable value of working capital items, including that the amounts are reasonably assured of collection. Differences between actual working capital amounts and management’s estimates recorded as of March 31, 2011, if any, will be recorded as income or loss from discontinued operations in future periods.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The following table represents the components of the Company’s discontinued operations for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (in thousands)  

Revenues and other income:

    

Oil and gas

   $ 22,130     $ 35,752  

Interest and other (a)

     4,568       1,795  

Gain on disposition of assets, net

     649,872       —     
                
     676,570       37,547  
                

Costs and expenses:

    

Oil and gas production

     2,126       3,616  

Depletion, depreciation and amortization (b)

     —          6,340  

Exploration and abandonments

     2,554       3,950  

General and administrative

     6,619       2,633  

Accretion of discount on asset retirement obligations (b)

     81       101  

Other

     1,182       629  
                
     12,562       17,269  
                

Income from discontinued operations before income taxes

     664,008       20,278  

Current tax (provision) benefit

     (7,574     444  

Deferred tax provision (b)

     (241,792     (16,911
                

Income from discontinued operations

   $ 414,642     $ 3,811  
                

 

(a)

Includes $2.0 million of interest received during the first quarter of 2011 from the Bureau of Ocean Energy Management, Regulation, and Enforcement related to the recovery of excess royalties paid by the Company on qualifying deepwater leases in the Gulf of Mexico.

(b)

Represents the significant noncash components of discontinued operations.

NOTE R.    Subsequent Events

The Company has evaluated subsequent events through the date of issuance of its unaudited consolidated financial statements. Except as disclosed in Note F, the Company is not aware of any reportable subsequent events.

 

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PIONEER NATURAL RESOURCES COMPANY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial and Operating Performance

The Company’s financial and operating performance for the first quarter of 2011 included the following highlights:

 

 

The Company completed the sale of 100 percent of the capital stock of two subsidiaries through which its Tunisian operations were conducted (collectively “Pioneer Tunisia”) during February 2011 for net cash proceeds of $845.2 million, resulting in a pretax gain of $649.9 million.

 

 

Earnings attributable to common stockholders was $348.6 million ($2.96 per diluted share), as compared to $245.3 million ($2.08 per diluted share) for the first quarter of 2010. The increase in earnings attributable to common stockholders is primarily due to the gain on the sale of Pioneer Tunisia. Partially offsetting the effects of the Tunisia gain were $275.8 million of noncash mark-to-market derivative losses during the first quarter of 2011, as compared to $266.9 million of noncash mark-to-market derivative gains during the first quarter of 2010.

 

 

Net cash provided by operating activities decreased to $ 143.2 million for the three months ended March 31, 2011, as compared to $ 299.4 million for the three months ended March 31, 2010. The $156.2 million decrease in net cash provided by operating activities was primarily due to working capital changes, including collection of $93.6 million of deepwater Gulf of Mexico royalty receivables during the first quarter of 2010.

 

 

Net debt to book capitalization decreased to 31 percent at March 31, 2011, as compared to 37 percent at December 31, 2010, principally due to the cash proceeds received from the sale of Pioneer Tunisia.

 

 

Average reported oil and NGL prices increased during the first quarter of 2011 to $95.62 per Bbl and $42.17 per Bbl, respectively, as compared to respective prices of $91.48 per Bbl and $41.82 per Bbl during the first quarter of 2010. Average reported gas prices decreased from $5.26 per Mcf during the first quarter of 2010 to $4.14 per Mcf during the first quarter of 2011.

 

 

In spite of severe winter weather disruptions to production during the first quarter of 2011, daily sales volumes increased by two percent to 111,215 BOEPD, as compared to 108,910 BOEPD during the first quarter of 2010. The increase in first quarter 2011 sales volumes, as compared to the first quarter of 2010, was primarily due to the Company’s successful drilling program in 2010 and the first quarter of 2011.

 

 

Average per-BOE oil and gas production costs (including production and ad valorem taxes and transportation costs) increased during the first quarter of 2011 to $13.31, as compared to $11.54 per BOE during the first quarter of 2010, primarily as a result of repairs associated with downtime resulting from the severe weather in the first quarter of 2011, inflation of well servicing costs and an increase in production taxes associated with higher oil prices.

Second Quarter 2011 Outlook

Based on current estimates, the Company expects that second quarter 2011 production will average 116 to 121 MBOEPD.

Second quarter production costs (including production and ad valorem taxes and transportation costs) are expected to average $12.00 to $14.00 per BOE based on current NYMEX strip prices for oil, NGLs and gas. Depletion, depreciation and amortization (“DD&A”) expense is expected to average $13.50 to $15.00 per BOE.

Total exploration and abandonment expense for the quarter is expected to be $25 million to $35 million. General and administrative expense is expected to be $45 million to $49 million. Interest expense is expected to be $44 million to $47 million, and other expense is expected to be $20 million to $25 million. Accretion of discount on asset retirement obligations is expected to be $2 million to $4 million.

Noncontrolling interest in consolidated subsidiaries’ net income, excluding noncash mark-to-market adjustments, is expected to be $9 million to $12 million, primarily reflecting the public ownership in Pioneer Southwest.

The Company’s second quarter effective income tax rate is expected to range from 35 percent to 45 percent, assuming current capital spending plans and no significant mark-to-market changes in the Company’s derivative position. Cash income taxes are expected to range from $5 million to $10 million, principally related to South African income taxes.

 

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PIONEER NATURAL RESOURCES COMPANY

 

Operations and Drilling Highlights

The following table summarizes the Company’s average daily oil, NGL, gas and total production by asset area during the three months ended March 31, 2011:

 

     Oil (Bbls)      NGLs (Bbls)      Gas (Mcf)      Total (BOE)  

United States:

           

Permian Basin

     23,608        10,278        44,043        41,226  

Mid-Continent

     3,584        6,134        51,301        18,268  

Raton Basin

     —           —           162,036        27,006  

Barnett Shale

     147        884        7,399        2,264  

South Texas

     100        —           46,251        7,809  

Eagle Ford Shale

     1,741        1,348        14,099        5,439  

Alaska

     4,744        —           —           4,744  

Other

     2        1        40        10  
                                   
     33,926        18,645        325,169        106,766  
                                   

South Africa

     526        —           23,537        4,449  
                                   

Total Worldwide

     34,452        18,645        348,706        111,215  
                                   

The Company’s 2011 capital expenditures, including integrated services capital expenditures but excluding the effects of acquisitions, asset retirement obligations, capitalized interest, geological and geophysical administrative costs and EFS Midstream investments, are expected to be funded by internally-generated operating cash flow for the year and by redeploying a portion of the proceeds from the Pioneer Tunisia sale.

The following table summarizes by geographic area the Company’s finding and development costs incurred from continuing operations during the three months ended March 31, 2011:

 

                                Asset         
     Acquisition Costs     Exploration      Development      Retirement         
     Proved      Unproved     Costs      Costs      Obligations      Total  
     (in thousands)  

United States:

                

Permian Basin

   $ 3,123      $ 3,742     $ 15,269      $ 210,294      $ 594      $ 233,022  

Mid-Continent

     3        (2     314        2,864        —           3,179  

Raton Basin

     50        (55     2,112        4,310        —           6,417  

Barnett Shale

     —           1,574       41,273        1,831        78        44,756  

South Texas

     —           157       5,428        6,948        3        12,536  

Eagle Ford Shale

     —           5,552       19,232        1,199        2        25,985  

Alaska

     —           —          1,526        28,200        300        30,026  

Other

     —           409       700        —           —           1,109  
                                                    
     3,176        11,377       85,854        255,646        977        357,030  
                                                    

South Africa

     —           —          158        —           —           158  
                                                    

Total Worldwide

   $ 3,176      $ 11,377     $ 86,012      $ 255,646      $ 977      $ 357,188  
                                                    

The following table summarizes the Company’s development and exploration/extension drilling activities for the three months ended March 31, 2011:

 

     Development Drilling  
     Beginning Wells
in Progress
     Wells
Spud
     Successful
Wells
     Unsuccessful
Wells
     Ending Wells
in Progress
 

United States

     23        143        139        —           27  

 

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PIONEER NATURAL RESOURCES COMPANY

 

     Exploration/Extension Drilling  
     Beginning Wells
in Progress
     Wells
Spud
     Successful
Wells
     Unsuccessful
Wells
     Ending Wells
in Progress
 

United States

     38        36        17        —           57  

Permian Basin area. During the first quarter of 2011, the Company drilled 141 wells in the Spraberry field. The Company is currently utilizing 32 rigs, with plans to increase its rig count to 35 by mid-2011 and to 45 rigs in 2012. The Company’s drilling program continues to include the deepening of wells to the Lower Wolfcamp formation and in certain drilling areas down to the Strawn interval with positive production results. In addition, the Company has recently drilled two wells to the Atoka formation.

The Company continues to expand its integrated services to control drilling costs and support execution of its accelerating drilling program. The Company has increased its owned drilling rigs to 14 and has three Company-owned fracture stimulation fleets currently operating. One additional fracture stimulation fleet has been delivered and is expected to start operating in early May and another fleet is being built, with delivery scheduled during the fourth quarter of 2011. To support its growing operations, the Company also owns other field service equipment, including pulling units, fracture stimulation tanks, water transport trucks and fishing tools. In addition, the Company has contracted for its forecasted fracture stimulation sand supply requirements through 2015, its tubular and pumping unit requirements through 2012 and is negotiating an agreement with a third-party to supply well cementing services through 2016.

The Company has completed thirty-eight wells in the Strawn interval since the testing program began in the first quarter of 2010. Early results suggest an increase of up to 20 percent in cumulative production over the first 12 months compared to production from offset Lower Wolfcamp wells over the same time period. The incremental cost per well for this deeper drilling and one additional frac stage is approximately $60 thousand. The Company believes that the Strawn interval is prospective in 40 percent of its Spraberry acreage and expects to target the Strawn interval in 50 percent of the wells in its 2011 drilling program.

The Company is currently completing its first two vertical Atoka wells. The Company plans to test the Atoka interval for two months and then comingle this production with production from upper intervals in the Spraberry and Wolfcamp zones. The incremental cost to drill an Atoka well is estimated to be $500 thousand to $750 thousand, reflecting deeper drilling and adding an intermediate casing string and carbon dioxide fracture stimulation. The Company plans to drill 10 to 20 Atoka wells during 2011.

The Company has also commenced a program to test horizontal drilling applications in multiple intervals of the Spraberry field. The first two wells in the program have been drilled and completed. Both wells had 4,000-foot laterals with 15-stage fracture stimulation completions.

The first horizontal well was drilled in a Wolfcamp carbonate interval. Microseismic tests indicated the completion did not effectively stimulate the targeted zone. As a result, the well had an initial production rate of approximately 100 barrels of oil per day (“BOPD”), but the production declined more quickly than expected. Given the ineffective stimulation, the Company does not view this well as a representative test of the potential for a horizontal well in this interval and plans to test additional horizontal wells in this interval.

The second horizontal well targeted the Lower Wolfcamp shale interval. It was completed in late April. Microseismic tests indicated the successful stimulation of the interval. The well is currently unloading the fracture stimulation water, and with 30 percent of the water unloaded, the well is producing at an early test rate of 150 BOPD.

The Company plans to drill six to eight additional horizontal wells. These wells will target the Lower Wolfcamp shale, Tippett shale (Middle Wolfcamp), Wolfcamp carbonate and Jo Mill (Middle Spraberry) intervals.

Water injection was initiated in the third quarter of 2010 on the Company’s 7,000-acre waterflood project in the Upper Spraberry interval. Early results are encouraging, as the production decline from 110 producing wells in the surveillance area continues to flatten. Early production response has been observed in several wells and there has been no premature water breakthrough. Based on the results of historical waterflood projects, an ultimate uptick in production of 50 percent from the flooded Upper Spraberry interval is expected.

The Company continues to test downspacing in the Spraberry field from 40 acres to 20 acres. Eighteen 20-acre wells were drilled in 2010, with 14 of these wells on production. These 20-acre wells are capturing pay from the Lower Wolfcamp, Strawn and shale/silt intervals, with encouraging results. The Company plans to drill twenty 20-acre downspaced wells in 2011.

South Texas and Eagle Ford Shale area. The Company’s drilling activities in the South Texas area during 2011 continue to be primarily focused on delineation and development of Pioneer’s substantial acreage position in the Eagle Ford Shale play. The Company is currently running nine drilling rigs in the Eagle Ford Shale play, with plans to increase the Eagle Ford Shale rig count to 12 rigs by mid-year, to 14 rigs in 2012 and to 16 rigs in 2013.

The Company has drilled 50 horizontal Eagle Ford Shale wells in aggregate through the end of the first quarter of 2011. Twenty-four of the wells are producing and, of the remaining 26 wells, five are completed and awaiting hookup. Completion of the remaining 21 wells has been slower than anticipated due to limited third-party fracture stimulation fleet availability.

To improve the execution of its drilling and completions program and reduce costs, the Company has purchased two fracture stimulation fleets for Eagle Ford Shale operations. One fleet was placed in service in April 2011 and the other is expected to be operational during the fourth quarter of 2011. The Company also entered into a two-year contract for a dedicated third-party fracture stimulation fleet which commenced operating in April 2011.

The unconsolidated affiliate formed by the Company to operate gathering facilities in the Eagle Ford Shale area, EFS Midstream, is obligated to construct midstream assets in the Eagle Ford Shale area. Construction of the midstream assets is underway, with the majority of the construction expected to be completed by 2013. Four of the 12 planned central gathering plants (“CGPs”) were completed as of March 31, 2011, and a fifth was completed during April 2011. EFS Midstream plans to build three additional CGPs during the remainder of 2011. As construction of CGPs is completed, EFS Midstream will provide gathering, treating and transportation services for the Company during a 20-year contractual term.

Alaska. The Company owns a 70 percent working interest and is the operator of the Oooguruk development project. The Company has drilled 11 production wells and six injection wells of the estimated 17 production and 16 injection wells planned to fully develop this project. In addition, the Company drilled a horizontal exploration well in the Torok formation during 2010 and recently concluded a second Torok well in the first quarter of 2011. Based on the performance to date, the Company plans to drill and fracture stimulate an additional Torok well in early 2012 to further evaluate the productivity of the formation and the feasibility of future development expansion.

Barnett Shale. During the first quarter of 2011, the Company operated two rigs. Since beginning drilling activities during the fourth quarter of 2010, the Company has drilled 24 wells, of which ten wells have been completed, with five wells currently producing. In addition, the Company has acquired 160 square miles of 3-D seismic covering its acreage and expects to increase this coverage to 200 square miles by year end. The Company is utilizing the 3-D seismic to high-grade future drilling location selections.

 

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Results of Operations

Oil and gas revenues. Oil and gas revenues totaled $497.1 million for the three months ended March 31, 2011, as compared to $472.0 million for the same respective period of 2010.

The increase in oil and gas revenues during the three months ended March 31, 2011, as compared to the same period of 2010, is reflective of increases in worldwide average reported oil and NGL prices and United States oil sales volumes, partially offset by decreases in average United States NGL and gas sales volumes and South Africa oil and gas sales volumes.

During February 2011, the Company’s operations in Texas, Kansas and Colorado were disrupted by extremely cold temperatures and substantial ice and snow accumulations. The Company experienced extensive pipeline freeze-ups, power outages and limited access to well locations. Drilling and completion operations in the Spraberry field and the Barnett Shale Combo play were also curtailed. In some cases, the Company’s operations were affected until early-March by the severe weather event.

In addition to the weather-related impacts, a third-party fractionator for the Company’s Mid-Continent NGL production experienced a longer-than-anticipated turnaround during March 2011. As a result, the NGL production was inventoried in March and will be fractionated and sold during the second quarter of 2011. The impact of the fractionators turnaround delay decreased first quarter NGL sales by approximately 1 MBOEPD.

The following table provides average daily sales volumes from continuing operations, by geographic area and in total, for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011      2010  

Oil (Bbls):

     

United States

     33,926        25,803  

South Africa

     526        1,111  
                 

Worldwide

     34,452        26,914  
                 

NGLs (Bbls):

     

United States

     18,645        19,115  
                 

Gas (Mcf):

     

United States

     325,169        346,248  

South Africa

     23,537        31,033  
                 

Worldwide

     348,706        377,281  
                 

Total (BOE):

     

United States

     106,766        102,627  

South Africa

     4,449        6,283  
                 

Worldwide

     111,215        108,910  
                 

In the United States, average daily BOE sales volumes increased by four percent for the three months ended March 31, 2011 as compared to the same period of 2010 due to results from the Company’s successful drilling programs and declines in scheduled VPP deliveries. For the three months ended March 31, 2011, average daily BOE sales volumes decreased by 29 percent in South Africa, as compared to the same respective period of 2010, due to normal well decline rates.

During the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, oil volumes delivered under the Company’s VPPs decreased by 46 percent. The Company completed oil delivery obligations under one of the VPP agreements at the end of 2010.

The oil, NGL and gas prices that the Company reports are based on the market prices received for the commodities adjusted for transfers of the Company’s commodity hedge gains and losses from AOCI-Hedging and the amortization of deferred VPP revenue. See “Derivative activities” and “Deferred revenue” discussion below for additional information regarding the Company’s cash flow hedging activities and the amortization of deferred VPP revenue.

 

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The following table provides average reported prices (including transfers of deferred hedge gains and losses and the amortization of deferred VPP revenue) and average realized prices (excluding transfers of deferred hedge gains and losses and the amortization of deferred VPP revenue) by geographic area and in total, for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March  31,
 
     2011      2010  

Average reported prices:

     

Oil (per Bbl):

     

United States

   $ 95.46      $ 92.08  

South Africa

   $ 106.38      $ 77.58  

Worldwide

   $ 95.62      $ 91.48  

NGL (per Bbl):

     

United States

   $ 42.17      $ 41.82  

Gas (per Mcf):

     

United States

   $ 3.88      $ 5.16  

South Africa

   $ 7.73      $ 6.31  

Worldwide

   $ 4.14      $ 5.26  

Total (per BOE)

     

United States

   $ 49.51      $ 48.36  

South Africa

   $ 53.45      $ 44.89  

Worldwide

   $ 49.67      $ 48.16  

Average realized prices:

     

Oil (per Bbl):

     

United States

   $ 89.17      $ 73.60  

South Africa

   $ 106.38      $ 77.58  

Worldwide

   $ 89.43      $ 73.77  

NGL (per Bbl):

     

United States

   $ 42.17      $ 40.77  

Gas (per Mcf):

     

United States

   $ 3.88      $ 5.13  

South Africa

   $ 7.73      $ 6.31  

Worldwide

   $ 4.14      $ 5.23  

Total (per BOE)

     

United States

   $ 47.51      $ 43.42  

South Africa

   $ 53.45      $ 44.89  

Worldwide

   $ 47.75      $ 43.51  

Derivative activities. The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts in order 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. See Note G of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for the scheduled amortization of net deferred gains and losses on discontinued commodity hedges that will be recognized as increases or decreases to future oil revenues.

 

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The following table provides the transfers of deferred hedge gains from AOCI-Hedging associated with oil, NGL and gas price cash flow hedges to oil, NGL and gas revenue for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March  31,
 
     2011      2010  
     (in thousands)  

Increase to oil revenue from AOCI-Hedging transfers

   $ 8,124      $ 20,417  

Increase to NGL revenue from AOCI-Hedging transfers

     —           1,799  

Increase to gas revenue from AOCI-Hedging transfers

     —           910  
                 

Total

   $ 8,124      $ 23,126  
                 

Deferred revenue. During the three months ended March 31, 2011, the Company’s amortization of deferred VPP revenue increased oil revenues by $11.1 million, as compared to an increase of $22.5 million during the same period of 2010. See Note M of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for specific information regarding the Company’s VPPs.

Interest and other income. Interest and other income for the three months ended March 31, 2011 was $32.7 million, as compared to $18.0 million for the same period in 2010. The $14.7 million increase in interest and other income during the three months ended March 31, 2011, as compared to the same period in 2010, was primarily due to a $13.2 million increase in Alaskan Petroleum Production tax credit recoveries. See Note O of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding interest and other income.

Gain (Loss) on disposition of assets, net. The Company recorded net losses on the disposition of assets of $2.2 million during the three months ended March 31, 2011, as compared to net gains on the disposition of assets of $16.9 million for the three months ended March 31, 2010. The decrease in net gains is primarily associated with gains from the first quarter 2010 sale of certain proved and unproved oil and gas properties in the Uinta/Piceance area. The Company reported net losses on the sale of excess materials and supplies inventories during the three months ended March 31, 2011. See Note N of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding the Company’s gains and losses on dispositions of assets.

Oil and gas production costs. The Company recorded oil and gas production costs of $99.9 million during the three months ended March 31, 2011, as compared to $86.1 million during the same period of 2010. In general, lease operating expenses and workover expenses represent the components of oil and gas production costs over which the Company has management control, while third-party transportation charges represent the cost to transport volumes produced to a sales point. Net natural gas plant/gathering charges represent the net costs to gather and process the Company’s gas, reduced by net revenues earned from gathering and processing of third party gas in Company-owned facilities.

Total oil and gas production costs per BOE from continuing operations increased by 14 percent during the three months ended March 31, 2011, as compared to the same period in 2010. The increase in United States production costs per BOE is primarily due to repairs associated with severe winter weather disruptions encountered during the first quarter of 2011 and inflation in well servicing costs, partially offset by the reduction in VPP delivery commitments. South Africa production costs per BOE increased during the three months ended March 31, 2011, as compared to the same respective periods of 2010 primarily due to the effects of sales volumes variations on the fixed components of South Africa production costs.

 

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The following tables provide the components of the Company’s oil and gas production costs per BOE from continuing operations and total production costs per BOE from continuing operations by geographic area for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March  31,
 
     2011      2010  

Lease operating expenses

   $ 7.83      $ 7.16  

Third-party transportation charges

     0.99        0.86  

Net natural gas plant/gathering charges (credits)

     0.39        (0.25

Workover costs

     0.78        1.01  
                 

Total production costs

   $ 9.99      $ 8.78  
                 

United States

   $ 10.28      $ 9.24  

South Africa

   $ 2.74      $ 1.37  

Worldwide

   $ 9.99      $ 8.78  

Production and ad valorem taxes. The Company recorded production and ad valorem taxes of $33.3 million during the three months ended March 31, 2011, as compared to $27.1 million for the same period of 2010. In general, production and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. Consequently, during the three months ended March 31, 2011, the Company’s production and ad valorem taxes per BOE have, in the aggregate, increased 20 percent, primarily reflecting increasing oil prices during the relevant period.

The following table provides the Company’s production and ad valorem taxes per BOE from continuing operations for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March  31,
 
     2011      2010  

Ad valorem taxes

   $ 1.44      $ 1.48  

Production taxes