10-Q 1 d235261d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 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 November 1, 2011

  

116,881,280


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

 

         Page  

Cautionary Statement Concerning Forward-Looking Statements

     3   

Definitions of Certain Terms and Conventions Used Herein

     4   
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     5   
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010

     7   
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2011

     8   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

     9   
 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010

     10   
 

Notes to Consolidated Financial Statements

     11   

Item 2.

 

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

     36   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 4.

 

Controls and Procedures

     54   
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     55   

Item 1A.

 

Risk Factors

     55   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 6.

 

Exhibits

     57   

Signatures

     58   

Exhibit Index

     59   

 

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,” “forecasts,” “intends,” “continue,” “may,” “will,” “could,” “should,” “future,” “potential,” “estimate” or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company (“Pioneer” or the “Company”) are intended to identify forward-looking statements. The forward-looking statements are based on the Company’s current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable, 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 (the “SEC”). 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 and “Part II, Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

 

3


Table of Contents

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 – net 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.

 

 

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

 

 

“BOEPD” means BOE per day.

 

 

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

 

 

“Conway” means the daily average natural gas liquids components as priced in Oil Price Information Service (“OPIS”) in the table “U.S. and Canada LP – Gas Weekly Averages” at Conway, Kansas.

 

 

“DD&A” means depletion, depreciation and amortization.

 

 

“GAAP” means accounting principles that are generally accepted in the United States of America.

 

 

“LIBOR” means London Interbank Offered Rate, which is a market rate of interest.

 

 

“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 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.

 

 

“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)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 210,565     $ 111,160  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $755 and $1,155 as of September 30, 2011 and December 31, 2010, respectively

     272,154       237,511  

Due from affiliates

     6,034       7,792  

Income taxes receivable

     2,312       30,901  

Inventories

     260,356       173,615  

Prepaid expenses

     18,910       11,441  

Deferred income taxes

     92,140        156,650  

Discontinued operations held for sale

     —          281,741  

Other current assets:

    

Derivatives

     234,806       171,679  

Other

     6,366       14,693  
  

 

 

   

 

 

 

Total current assets

     1,103,643       1,197,183  
  

 

 

   

 

 

 

Property, plant and equipment, at cost:

    

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

    

Proved properties

     12,092,300       10,739,114  

Unproved properties

     249,537       191,112  

Accumulated depletion, depreciation and amortization

     (3,788,686     (3,366,440
  

 

 

   

 

 

 

Total property, plant and equipment

     8,553,151       7,563,786  
  

 

 

   

 

 

 

Deferred income taxes

     7,358       —     

Goodwill

     298,154       298,182  

Other property and equipment, net

     500,709       283,542  

Other assets:

    

Investment in unconsolidated affiliate

     164,107       72,045  

Derivatives

     224,754       151,011  

Other, net of allowance for doubtful accounts of $348 and $2,519 as of September 30, 2011 and December 31, 2010, respectively

     133,167       113,353  
  

 

 

   

 

 

 
   $ 10,985,043     $ 9,679,102  
  

 

 

   

 

 

 

The financial information included as of September 30, 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.

 

5


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)        
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable:

    

Trade

   $ 583,383     $ 354,890  

Due to affiliates

     48,421       64,260  

Interest payable

     33,955       59,008  

Income taxes payable

     15,604       19,168  

Deferred income taxes

     —          1,144  

Discontinued operations held for sale

     —          108,592  

Other current liabilities:

    

Derivatives

     12,377       80,997  

Deferred revenue

     42,825       44,951  

Other

     39,552       36,210  
  

 

 

   

 

 

 

Total current liabilities

     776,117        769,220  
  

 

 

   

 

 

 

Long-term debt

     2,587,371       2,601,670  

Derivatives

     16,946       56,574  

Deferred income taxes

     2,133,147       1,751,310  

Deferred revenue

     46,701       42,069  

Other liabilities

     228,094       232,234  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 127,614,963 and 126,212,256 shares issued at September 30, 2011 and December 31, 2010, respectively

     1,276       1,262  

Additional paid-in capital

     3,082,058       3,022,768  

Treasury stock, at cost: 11,264,660 and 10,903,743 at September 30, 2011 and December 31, 2010, respectively

     (458,258     (421,235

Retained earnings

     2,446,217       1,510,427  

Accumulated other comprehensive income (loss) - net deferred hedge gains (losses), net of tax

     (58     7,361  
  

 

 

   

 

 

 

Total stockholders’ equity attributable to common stockholders

     5,071,235       4,120,583  

Noncontrolling interests in consolidating subsidiaries

     125,432       105,442  
  

 

 

   

 

 

 

Total stockholders’ equity

     5,196,667       4,226,025  

Commitments and contingencies

    
  

 

 

   

 

 

 
   $ 10,985,043     $ 9,679,102  
  

 

 

   

 

 

 

The financial information included as of September 30, 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.

 

6


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenues and other income:

        

Oil and gas

   $ 610,509     $ 437,411     $ 1,691,570     $ 1,331,498  

Interest and other

     17,573       14,969       68,714       49,929  

Derivative gains, net

     401,072       127,581       386,118       570,585  

Gain (loss) on disposition of assets, net

     1,048       2,383       (1,439     26,971  

Hurricane activity, net

     1,487       3,452       1,418       5,678  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,031,689       585,796       2,146,381       1,984,661  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Oil and gas production

     119,609       100,717       321,995       280,829  

Production and ad valorem taxes

     38,542       33,045       107,702       85,444  

Depletion, depreciation and amortization

     166,536       147,096       460,807       435,833  

Exploration and abandonments

     20,026       21,610       57,583       61,201  

General and administrative

     49,812       43,417       138,562       122,165  

Accretion of discount on asset retirement obligations

     2,806       2,521       8,119       7,909  

Interest

     45,559       45,002       136,554       137,893  

Other

     17,183       19,687       49,452       49,826  
  

 

 

   

 

 

   

 

 

   

 

 

 
     460,073       413,095       1,280,774       1,181,100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     571,616       172,701       865,607       803,561  

Income tax provision

     (185,471     (76,211     (283,016     (303,438
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     386,145       96,490       582,591       500,123  

Income (loss) from discontinued operations, net of tax

     (547     18,083       412,511       63,745  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     385,598       114,573       995,102       563,868  

Net income attributable to the noncontrolling interests

     (34,134     (2,538     (49,467     (39,003
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

   $ 351,464     $ 112,035     $ 945,635     $ 524,865  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Income from continuing operations attributable to common stockholders

   $ 2.96     $ 0.80     $ 4.51     $ 3.92  

Income (loss) from discontinued operations attributable to common stockholders

     —          0.15       3.49       0.54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

   $ 2.96     $ 0.95     $ 8.00     $ 4.46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Income from continuing operations attributable to common stockholders

   $ 2.95     $ 0.79     $ 4.42     $ 3.89  

Income (loss) from discontinued operations attributable to common stockholders

     —          0.15       3.43       0.54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

   $ 2.95     $ 0.94     $ 7.85     $ 4.43  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     116,281       115,191       116,122       114,985  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     117,075       116,021       118,350       115,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.04     $ 0.04     $ 0.08     $ 0.08  
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to common stockholders:

        

Income from continuing operations

   $ 352,011     $ 93,952     $ 533,124     $ 461,120  

Income (loss) from discontinued operations, net of tax

     (547     18,083       412,511       63,745  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 351,464     $ 112,035     $ 945,635     $ 524,865  
  

 

 

   

 

 

   

 

 

   

 

 

 

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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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except dividends per share)

(Unaudited)

 

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

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 ($0.08 per share)

     —          —           —          —          (9,493     —          —          (9,493

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

     79       —           951       3,091       (352     —          —          3,690  

Treasury stock purchases

     (439     —           —          (40,128     —          —          (198     (40,326

Conversion of 2.875% senior convertible notes

     —          —           (20     14       —          —          —          (6

Tax benefit related to stock-based compensation

     —          —           28,123       —          —          —          —          28,123  

Disposition of subsidiary

     —          —           (510     —          —          —          —          (510

Compensation costs:

                 

Vested compensation awards, net

     1,401       14        (14     —          —          —          —          —     

Compensation costs included in net income

     —          —           30,760       —          —          —          940       31,700  

Cash distributions to noncontrolling interests

     —          —           —          —          —          —          (19,944     (19,944

Net income

     —          —           —          —          945,635       —          49,467       995,102  

Other comprehensive activity:

                 

Deferred hedging activity, net of tax:

                 

Net hedge gains included in continuing operations

     —          —           —          —          —          (7,419     (10,275     (17,694
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

     116,350     $ 1,276      $ 3,082,058     $ (458,258   $ 2,446,217     $ (58   $ 125,432     $ 5,196,667  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 995,102     $ 563,868  

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

    

Depletion, depreciation and amortization

     460,807       435,833  

Exploration expenses, including dry holes

     6,008       16,655  

Hurricane activity, net

     —          3,500  

Deferred income taxes

     249,040       283,283  

(Gain) loss on disposition of assets, net

     1,439       (26,971

Accretion of discount on asset retirement obligations

     8,119       7,909  

Discontinued operations

     (407,353     43,339  

Interest expense

     23,412       22,567  

Derivative related activity

     (269,746     (549,387

Amortization of stock-based compensation

     31,525       28,631  

Amortization of deferred revenue

     (33,620     (67,739

Other noncash items

     (15,773     10,440  

Change in operating assets and liabilities

    

Accounts receivable, net

     (35,252     97,873  

Income taxes receivable

     28,588       16,689  

Inventories

     (115,961     (6,459

Prepaid expenses

     (7,558     (8,975

Other current assets

     8,520       2,162  

Accounts payable

     83,632       62,349  

Interest payable

     (25,053     (13,211

Income taxes payable

     (1,807     1,307  

Other current liabilities

     45,969       (21,941
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,030,038       901,722  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from disposition of assets, net of cash sold

     819,638       297,742  

Investment in unconsolidated subsidiary

     (89,620     (15,651

Additions to oil and gas properties

     (1,319,131     (714,014

Additions to other assets and other property and equipment, net

     (265,740     (132,279
  

 

 

   

 

 

 

Net cash used in investing activities

     (854,853     (564,202
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under long-term debt

     102,616       199,784  

Principal payments on long-term debt

     (135,883     (438,894

Contributions from noncontrolling interests

     —          1,151  

Distributions to noncontrolling interests

     (19,944     (20,160

Payments of other liabilities

     (503     (20,668

Exercise of long-term incentive plan stock options

     3,690       6,736  

Purchases of treasury stock

     (40,326     (13,776

Excess tax benefits from share-based payment arrangements

     28,123       4,032  

Payment of financing fees

     (8,741     (145

Dividends paid

     (4,812     (4,783
  

 

 

   

 

 

 

Net cash used in financing activities

     (75,780     (286,723
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     99,405       50,797  

Cash and cash equivalents, beginning of period

     111,160       27,368  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 210,565     $ 78,165  
  

 

 

   

 

 

 

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
September 30,
    Nine Months  Ended
September 30,
 
     2011     2010     2011     2010  

Net income

   $ 385,598     $ 114,573     $ 995,102     $ 563,868  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive activity:

        

Net hedge gains included in continuing operations

     (8,224     (21,913     (24,418     (63,536

Income tax provision

     1,838       5,988       6,724       17,060  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive activity

     (6,386     (15,925     (17,694     (46,476
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     379,212       98,648       977,408       517,392  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (income) loss attributable to the noncontrolling interests

     (30,670     1,898       (39,192     (25,860
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to common stockholders

   $ 348,542     $ 100,546     $ 938,216     $ 491,532  
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

10


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 September 30, 2011 and for the three and nine months ended September 30, 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.

Certain reclassifications have been made to the 2010 financial statement and footnote amounts in order to conform to the 2011 presentations.

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 and nine months ended September 30, 2011 and 2010 in the accompanying consolidated statements of operations (representing a recasting of the Pioneer Tunisia results of operations for the three and nine months ended September 30, 2010, which were originally classified as continuing operations). See Note Q for more information regarding the sale of Pioneer Tunisia.

During the nine months ended September 30, 2011 and 2010, the Bureau of Ocean Energy Management, Regulation, and Enforcement (the “BOEMRE”) paid the Company $2.0 million and $35.3 million, respectively, of interest on excess royalty payments associated with properties that were sold by the Company during 2006. Accordingly, the Company has classified the interest income as components of income from discontinued operations, net of tax in the accompanying consolidated statements of operations.

Allowances for doubtful accounts. As of September 30, 2011 and December 31, 2010, the Company’s allowances for doubtful accounts totaled $1.1 million and $3.7 million, respectively. Changes in the Company’s allowance for doubtful accounts during the three and nine months ended September 30, 2011 are summarized in the following table:

 

     Three Months  Ended
September 30, 2011
    Nine Months  Ended
September 30, 2011
 
     (in thousands)  

Beginning allowance for doubtful accounts balance

   $ 1,414     $ 3,674  

Amount recorded in other expense for bad debt expense (recoveries)

     51       (1,746

Other net decreases

     (362     (825
  

 

 

   

 

 

 

Ending allowance for doubtful accounts balance

   $ 1,103     $ 1,103  
  

 

 

   

 

 

 

Inventories. Inventories used in continuing operations consisted of $283.3 million and $183.4 million of materials and supplies and $4.2 million and $3.9 million of commodities as of September 30, 2011 and December 31, 2010, respectively. As of September 30, 2011 and December 31, 2010, the Company’s materials and supplies inventory was net of $1.0 million and $3.6 million, respectively, of valuation reserve allowances. As of September 30,

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

2011 and December 31, 2010, the Company estimated that $27.2 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 in 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 flow hedges prior to the Company’s discontinuance of hedge accounting were recorded as a component of accumulated other comprehensive income (loss) – net deferred hedge gains (losses), 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 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.

Impairment of long-lived assets. The Company reviews its long-lived assets to be held and used, including oil and gas properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable from their estimated future cash flows.

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

During the third quarter of 2011, events and circumstances provided indications of possible impairment of certain of the Company’s dry gas assets, including assets in the Company’s South Texas (excluding the Eagle Ford Shale), Raton Basin and Barnett Shale areas. The events and circumstances indicating a possible impairment in these areas are primarily related to a reduction in management’s price outlooks that led to a decrease in estimated future undiscounted net cash flows attributable to the properties’ proved reserves. However, the Company’s estimate of undiscounted future net cash flows still indicated that such carrying amounts were expected to be recovered.

The Company’s primary assumptions of the estimated future net cash flows attributable to oil and gas properties include (i) utilizing proved reserves (including development of proved undeveloped reserves) and appropriate risk-adjusted probable and possible reserves and (ii) management’s commodity price outlook. Nonetheless, it is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the near or distant future resulting in the need to impair the assets’ carrying values. The primary factors that may affect future cash flows are (i) future reserve adjustments, both positive and negative, (ii) results of future drilling activities, (iii) management’s outlook on commodity prices and (iv) increases or decreases in production and capital costs associated with these assets.

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 2011, 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

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. 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 $125.4 million and $105.4 million as of September 30, 2011 and December 31, 2010, respectively. The Company recorded net income attributable to the noncontrolling interests of $34.1 million and $49.5 million for the three and nine months ended September 30, 2011, respectively (principally related to Pioneer Southwest), compared to net income attributable to the noncontrolling interests of $2.5 million and $39.0 million for the three and nine months ended September 30, 2010, respectively.

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.

Revenue recognition. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable and (iv) collectability is reasonably assured.

The Company uses the entitlements method of accounting for oil, natural gas liquids (“NGL”) and gas revenues. Sales proceeds in excess of the Company’s entitlement are included in other liabilities and the Company’s share of sales taken by others is included in other assets in the accompanying consolidated balance sheets.

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 at least equal to the portion of the measurement date (normally 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, restricted stock units, partnership unit awards or 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 September 30, 2011 and December 31, 2010, accounts payable – due to affiliates includes $4.5 million and $4.9 million, respectively, of liabilities attributable to Liability Awards.

For the three and nine months ended September 30, 2011, the Company recorded $11.7 million and $38.1 million, respectively, of stock-based compensation costs for all plans, as compared to $11.0 million and $31.6 million for the same respective periods of 2010. As of September 30, 2011, there was $78.0 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $16.9 million attributable to Liability Awards. This compensation will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The Company’s issued shares, as reflected in the consolidated balance sheets at September 30, 2011 and December 31, 2010, do not include 533,125 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 nine months ended September 30, 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

     443,060       202,436       43,495       86,903       6,812       30,039  

Awards vested

     (1,075,993     (69,805     (14,807     —          (11,532     —     

Options exercised

     —          —          —          (30,398     —          —     

Awards forfeited

     (51,204     (20,491     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding at September 30, 2011

     1,875,642       327,274       292,417       564,044       7,492       65,157  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

New accounting pronouncements. In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amended Accounting Standards Codification (“ASC”) 820 to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards. Certain of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures. The amendments will be applied prospectively and are effective for annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its future financial position, results of operation or liquidity.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220).” To increase the prominence of items reported in other comprehensive income, ASU 2011-05 requires comprehensive income, the components of net income, and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 will not impact the Company’s future financial position, results of operations or liquidity.

In September 2011, the FASB issued ASU No. 2011-08 “Intangibles—Goodwill and Other (Topic 350).” ASU 2011-08 amends ASC 350 to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 is not expected to have a material impact on the future carrying value of the Company’s goodwill. See “Goodwill” above for more information about the Company’s policy for assessing goodwill for impairment.

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, is impaired or is sold. The Company’s capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.

 

14


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following table reflects the Company’s capitalized exploratory well and project activity during the three and nine months ended September 30, 2011:

 

     Three Months  Ended
September 30, 2011
    Nine Months  Ended
September 30, 2011
 
     (in thousands)  

Beginning capitalized exploratory costs

   $ 85,111     $ 96,193  

Additions to exploratory costs pending the determination of proved reserves

     158,448       372,793  

Reclassification due to determination of proved reserves

     (139,624     (335,306

Disposition of assets sold

     —          (28,938

Exploratory well costs charged to exploration expense

     (126     (933
  

 

 

   

 

 

 

Ending capitalized exploratory costs

   $ 103,809     $ 103,809  
  

 

 

   

 

 

 

 

15


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following table provides an aging, as of September 30, 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:

 

     September 30, 2011      December 31, 2010  
     (in thousands, except project counts)  

Capitalized exploratory costs that have been suspended:

     

One year or less

   $ 95,790      $ 70,635  

More than one year

     8,019        25,558  
  

 

 

    

 

 

 
   $ 103,809      $ 96,193  
  

 

 

    

 

 

 

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

     1        3  
  

 

 

    

 

 

 

As of September 30, 2011, the Company had one project with exploratory costs that had been suspended for a period of one year or more, which is described below. As of December 31, 2010, the Company had three Tunisian projects with exploratory costs that had been suspended for a period of one year or more, all of which were included in the Pioneer Tunisia assets sold during February 2011.

South Texas Project. As of September 30, 2011, the Company has $8.0 million of suspended exploratory costs associated with a formation test well in South Texas. The well is currently awaiting finalization of the project’s ongoing fracture stimulation and completion designs. The Company successfully completed one other test well in the project and plans to drill a third test well during the fourth quarter of 2011. Information gained from the wells is being utilized to finalize the project’s fracture stimulation and completion designs. Future production from the project would utilize existing production and marketing infrastructure.

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.

 

16


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 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
September 30,
2011
 
     (in thousands)  

Assets:

           

Trading securities

   $ 283      $ 146      $ —         $ 429  

Commodity derivatives

     —           459,560        —           459,560  

Deferred compensation plan assets

     35,786        —           —           35,786  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 36,069      $ 459,706      $ —         $ 495,775  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Commodity derivatives

   $ —         $ 16,659      $ —         $ 16,659  

Interest rate derivatives

     —           12,664        —           12,664  

Pioneer Southwest credit facility

     —           94,917        —           94,917  

5.875% senior notes due 2016

     475,878        —           —           475,878  

6.65% senior notes due 2017

     522,695        —           —           522,695  

6.875% senior notes due 2018

     480,965        —           —           480,965  

7.50% senior notes due 2020

     506,250        —           —           506,250  

7.20% senior notes due 2028

     259,875        —           —           259,875  

2.875% senior convertible notes due 2038 (a)

     578,589        —           —           578,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,824,252      $ 124,240      $ —         $ 2,948,492  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

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

The Company’s natural gas liquid (“NGL”) derivative contracts were classified as Level 3 in the fair value hierarchy prior to the three months ended September 30, 2011. The Company’s NGL derivative contracts are now classified as Level 2 in the fair value hierarchy as a result of the Company being able to obtain independent market-quoted NGL forward prices.

The following table presents changes in the fair values of the Company’s commodity derivative assets and liabilities that were previously classified as Level 3 in the fair value hierarchy:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Three Months  Ended
September 30, 2011
    Nine Months  Ended
September 30, 2011
 
     (in thousands)  

Beginning liability balance

   $ (13,351   $ (9,556

Fair value changes (a):

    

Net unrealized gains included in earnings

     3,983       188  

Net realized losses included in earnings

     (4,478     (11,803

Settlement payments

     4,478       11,803  

Transfers out of Level 3

     9,368       9,368  
  

 

 

   

 

 

 

Ending liability balance

   $ —        $ —     
  

 

 

   

 

 

 

 

(a)

Changes in fair value are included in net derivative gains in the accompanying consolidated statements of operations.

 

17


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (in thousands)  

Assets:

           

Commodity price derivatives

   $ 459,560      $ 459,560      $ 304,434      $ 304,434  

Interest rate derivatives

   $ —         $ —         $ 18,256      $ 18,256  

Trading securities

   $ 429      $ 429      $ 467      $ 467  

Deferred compensation plan assets

   $ 35,786      $ 35,786      $ 36,162      $ 36,162  

Liabilities:

           

Commodity price derivatives

   $ 16,659      $ 16,659      $ 136,867      $ 136,867  

Interest rate derivatives

   $ 12,664      $ 12,664      $ 704      $ 704  

Pioneer credit facility

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

Pioneer Southwest credit facility

   $ 97,000      $ 94,917      $ 81,200      $ 77,241  

5.875 % senior notes due 2016

   $ 403,188      $ 475,878      $ 396,880      $ 475,194  

6.65 % senior notes due 2017

   $ 484,149      $ 522,695      $ 484,046      $ 516,632  

6.875 % senior notes due 2018

   $ 449,217      $ 480,965      $ 449,192      $ 480,969  

7.50 % senior notes due 2020

   $ 446,643      $ 506,250      $ 446,433      $ 494,145  

7.20 % senior notes due 2028

   $ 249,928      $ 259,875      $ 249,925      $ 259,350  

2.875% senior convertible notes due 2038 (a)

   $ 457,246      $ 578,589      $ 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 are comprised of 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 as of the measurement date. As of September 30, 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 corroborated with broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company’s interest rate derivative assets and liabilities as of September 30, 2011 represent interest rate swap contracts that, at their inception, locked in a fixed forward 10-year annual rate of 3.06 percent on $200 million notional amount of debt for a period of one year. The net derivative values attributable to the Company’s interest rate derivative contracts as of September 30, 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, gas and diesel swap contracts, collar contracts, collar contracts with short puts (which are also known as three-way collar contracts) and NGL percentage of oil index contracts. The Company’s oil, gas, NGL and diesel swap, collar, three-way collar and NGL percentage of oil index derivative contract asset and liability measurements represent Level 2 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.

 

18


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 Company has also entered into NGL swaps under terms whereby the Company pays variable NGL component market prices and receives a percentage of NYMEX WTI market prices (“NGL Percentage of WTI Oil Prices”). 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 commodity and NGL component prices, (iii) independent active NYMEX futures price quotes for WTI oil and (iv) 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”) 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.

Diesel derivatives. The Company’s diesel derivatives are comprised of swap contracts for notional Bbls posted as Gulf Coast Ultra Low Sulfur (Pipeline) diesel by a posting service. The asset and liability values attributable to the Company’s diesel derivatives were determined based on (i) the contracted notional volumes, (ii) independent active market-quoted diesel prices and (iii) the applicable credit-adjusted risk-free rate yield curve.

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 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 deferred tax attributes in the U.S., state, local and foreign tax jurisdictions will be utilized prior to their expiration. As of September 30, 2011 and December 31, 2010, the Company’s valuation allowances were $5.3 million and $6.6 million, respectively. As of December 31, 2010, the Company also had a $26.5 million valuation allowance related to Tunisia operations, which 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 September 30, 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 September 30, 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.

 

19


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 and nine months ended September 30, 2011 and 2010:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Current:

        

U.S. federal

   $ —        $ (1,550   $ —        $ (4,850

U.S. state

     (2,978     (1,520     (7,915     (4,644

Foreign

     (8,960     (10,211     (26,061     (10,661
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,938     (13,281     (33,976     (20,155
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

        

U.S. federal

     (174,758     (66,198     (274,918     (269,256

U.S. state

     (5,138     (6,854     5,591       (23,354

Foreign

     6,363       10,122       20,287       9,327  
  

 

 

   

 

 

   

 

 

   

 

 

 
     (173,533     (62,930     (249,040     (283,283
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision

   $ (185,471   $ (76,211   $ (283,016   $ (303,438
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations. The Company’s income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Current:

        

U.S. federal

   $ —        $ (4,700   $ —        $ (4,700

U.S. state

     (99   $ (400   $ (4,034   $ (400

Foreign

     (336     (6,142     (5,937     (11,436
  

 

 

   

 

 

   

 

 

   

 

 

 
     (435     (11,242     (9,971     (16,536
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

        

U.S. federal

     802       4,167       (221,686     (8,672

U.S. state

     (76     —          (2,144     —     

Foreign

     (429     5,606       (8,083     (17,354
  

 

 

   

 

 

   

 

 

   

 

 

 
     297       9,773       (231,913     (26,026
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision

   $ (138   $ (1,469   $ (241,884   $ (42,562
  

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 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

 

20


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

time by Wells Fargo Bank, National Association or the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 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 September 30, 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 nine months ended September 30, 2011 (see Note P).

Convertible senior notes. As of September 30, 2011 and December 31, 2010, the Company had $479.9 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 set forth in the indenture supplement pursuant to which the 2.875% Convertible Senior Notes were issued.

The Company’s stock price during March 2011 caused the Company’s 2.875% Convertible Senior Notes to become convertible at the option of the holders during the three months ended June 30, 2011. Associated therewith, certain holders of the 2.875% Convertible Senior Notes tendered $70 thousand principal amount of the notes for conversion during the three months ended June 30, 2011. During July and August 2011, the Company paid the tendering holders a total of $71 thousand of cash and issued to the tendering holders 340 shares of the Company’s common stock in accordance with the terms of the 2.875% Convertible Senior Notes indenture supplement.

During June 2011 and September 2011, the Company’s stock price performance did not qualify the 2.875% Convertible Senior Notes for conversion at the option of the holders during either of the three months ended September 30, 2011 or December 31, 2011. The Company’s 2.875% Convertible Senior Notes may become convertible in future quarters depending on the Company’s stock price performance or under certain other conditions. If all of the 2.875% Convertible Senior Notes had qualified and been converted on September 30, 2011, the note holders would have received approximately 185 thousand shares of the Company’s common stock, which had a market value of $12.1 million as of the close of business on September 30, 2011.

NOTE G. Derivative Financial Instruments

The Company utilizes commodity derivative contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company’s annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company’s indebtedness 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 oil prices. The following table sets forth the volumes in Bbls outstanding as of September 30, 2011 under the Company’s oil derivative contracts and the weighted average oil prices per Bbl for those contracts:

 

21


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
     Outstanding
Average
 

Average daily oil production associated with derivatives (Bbls):

              

2011 – Swap contracts

              

Volume

              750        750  

NYMEX price

            $ 77.25      $ 77.25  

2011 – Collar contracts

              

Volume

              2,000        2,000  

NYMEX price:

              

Ceiling

            $ 170.00      $ 170.00  

Floor

            $ 115.00      $ 115.00  

2011 – Collar contracts with short puts

              

Volume

              32,000        32,000  

NYMEX price:

              

Ceiling

            $ 99.33      $ 99.33  

Floor

            $ 73.75      $ 73.75  

Short put

            $ 59.31      $ 59.31  

2012 – Swap contracts

              

Volume

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

NYMEX price (a)

   $ 79.32      $ 79.32      $ 79.32      $ 79.32      $ 79.32  

2012 – Collar contracts

              

Volume

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

NYMEX price:

              

Ceiling

   $ 127.00      $ 127.00      $ 127.00      $ 127.00      $ 127.00  

Floor

   $ 90.00      $ 90.00      $ 90.00      $ 90.00      $ 90.00  

2012 – Collar contracts with short puts

              

Volume

     36,000        36,000        36,000        36,000        36,000  

NYMEX price:

              

Ceiling

   $ 117.99      $ 117.99      $ 117.99      $ 117.99      $ 117.99  

Floor

   $ 80.42      $ 80.42      $ 80.42      $ 80.42      $ 80.42  

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 (a)

              

Volume

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

NYMEX price:

              

Ceiling

   $ 120.62      $ 120.62      $ 120.62      $ 120.62      $ 120.62  

Floor

   $ 83.68      $ 83.68      $ 83.68      $ 83.68      $ 83.68  

Short put

   $ 65.82      $ 65.82      $ 65.82      $ 65.82      $ 65.82  

2014 – Collar contracts with short puts (a)

              

Volume

     16,500        16,500        16,500        16,500        16,500  

NYMEX price:

              

Ceiling

   $ 129.69      $ 129.69      $ 129.69      $ 129.69      $ 129.69  

Floor

   $ 88.48      $ 88.48      $ 88.48      $ 88.48      $ 88.48  

Short put

   $ 71.97      $ 71.97      $ 71.97      $ 71.97      $ 71.97  

 

(a)

Subsequent to September 30, 2011, the Company entered into (i) NYMEX swap contracts on 3,000 Bbls per day of March 2012 through May 2012 forecasted production, whereby the Company receives $0.28 per Bbl and pays the difference between (a) each day’s price per Bbl of WTI for the first nearby month less (b) the price per Bbl of WTI for the second nearby NYMEX month, multiplied by .6667; plus (c) each day’s price per Bbl of WTI for the first nearby month less (d) the price per Bbl of WTI for the third nearby NYMEX month, multiplied by .3333 and (ii) additional collar contracts with short puts for 3,000 Bbls per day of the Company’s 2013 production with a ceiling price of $111.95 per Bbl, a floor price of $85.00 per Bbl and a short put price of $70.00 per Bbl and (iii) terminated collar contracts with short puts for 6,500 Bbls per day of the Company’s 2014 production with an average ceiling price of $133.12 per Bbl, an average floor price of $90.00 per Bbl and an average short put price of $65.00 per Bbl.

 

22


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities’ NGL product component prices. Historically, NGL market prices have correlated well with WTI oil prices. The Company has entered into a limited number of NGL Percentage of WTI Oil Prices derivatives to reduce the risk of volatility in NGL to WTI price differentials. The following table sets forth the volumes in Bbls outstanding as of September 30, 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  

Blended index price

         $ 51.50     $ 51.50  

2011 – Collar contracts

          

Volume

           2,650       2,650  

Blended index price:

          

Ceiling

         $ 64.23     $ 64.23  

Floor

         $ 53.29     $ 53.29  

2012 – Swap contracts

          

Volume

     750       750       750       750       750  

Blended index price

   $ 35.03     $ 35.03     $ 35.03     $ 35.03     $ 35.03  

2012 – NGL Percentage of WTI Oil Prices contracts (a)

          

Volume

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

Percent of WTI oil price

     85     85     85     85     85

 

(a)

Subsequent to September 30, 2011, the Company (i) entered into additional NGL Percentage of WTI Oil Prices contracts for 1,000 Bbls per day of the Company’s 2012 production priced at 68 percent of WTI and (ii) converted 3,000 Bbls per day of the Company’s 2012 production from NGL Percentage of WTI Oil Prices contracts to NGL collar contracts with short puts with an average ceiling price of $79.99 per Bbl, an average floor price of $67.70 per Bbl and an average short put price of $55.76 per Bbl.

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 HH prices and actual index prices at which the gas is sold. The following table sets forth the volumes in MMBtus outstanding as of September 30, 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  

NYMEX price

            $ 6.13     $ 6.13  

2011 – Collar contracts with short puts

             

Volume

              200,000       200,000  

NYMEX price:

             

Ceiling

            $ 8.55     $ 8.55  

Floor

            $ 6.32     $ 6.32  

Short put

            $ 4.88     $ 4.88  

2011 – Basis swap contracts

             

Volume

              143,500       143,500  

Price differential

            $ (0.56   $ (0.56

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  

 

23


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

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  

2012 – Basis swap contracts

          

Volume

     136,000       136,000       136,000       136,000       136,000  

Price differential

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

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

     72,500       72,500       72,500       72,500       72,500  

Price differential

   $ (0.26   $ (0.26   $ (0.26   $ (0.26   $ (0.26

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

     60,000       60,000       60,000       60,000       60,000  

NYMEX price:

          

Ceiling

   $ 7.80     $ 7.80     $ 7.80     $ 7.80     $ 7.80  

Floor

   $ 5.83     $ 5.83     $ 5.83     $ 5.83     $ 5.83  

Short put

   $ 4.42     $ 4.42     $ 4.42     $ 4.42     $ 4.42  

2014 – Basis swap contracts

          

Volume

     55,000       55,000       55,000       55,000       55,000  

Price differential

   $ (0.24   $ (0.24   $ (0.24   $ (0.24   $ (0.24

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  

 

24


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

2015 – Collar contracts with short puts

              

Volume

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

NYMEX price:

              

Ceiling

   $ 7.11      $ 7.11      $ 7.11      $ 7.11      $ 7.11  

Floor

   $ 5.00      $ 5.00      $ 5.00      $ 5.00      $ 5.00  

Short put

   $ 4.00      $ 4.00      $ 4.00      $ 4.00      $ 4.00  

Diesel prices. As of September 30, 2011, the Company has diesel derivative swap contracts for 250 notional Bbls per day for the period from October 2011 through December 2011 at an average per Bbl fixed price of $123.90 and for all of 2012 at an average per Bbl fixed price of $119.28. The diesel derivative swap contracts are priced at an index that is highly correlated to the prices that the Company incurs to fuel its drilling rigs and fracture stimulation fleet equipment. The Company purchases diesel derivative swap contracts to mitigate fuel price risk.

Interest rates. As of September 30, 2011, the Company is a party to interest rate derivative contracts that lock in, through July 2012, a fixed forward 10-year annual interest rate of 3.06 percent on $200 million notional amount of debt.

During July 2011, the Company terminated $470 million notional amount of fixed-for-variable interest rate derivative contracts and received $26.1 million of cash proceeds.

Tabular disclosure of derivative financial instruments. All of the Company’s derivatives are accounted for as non-hedge derivatives as of September 30, 2011 and December 31, 2010. The following tables provide disclosure of the Company’s derivative instruments:

 

Fair Value of Derivative Instruments as of September 30, 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    $ 247,036      Derivatives - current    $ 24,607  

Commodity price derivatives

   Derivatives - noncurrent      230,875      Derivatives - noncurrent      10,403  

Interest rate derivatives

   Derivatives - noncurrent      —         Derivatives - noncurrent      12,664  
     

 

 

       

 

 

 
      $ 477,911         $ 47,674  
     

 

 

       

 

 

 

 

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  
     

 

 

       

 

 

 
      $ 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.

 

25


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

Derivatives in Cash Flow Hedging Relationships

   Location of Gain/(Loss) Reclassified
from
AOCI
into Earnings
   Amount of Gain/(Loss) Reclassified from
AOCI into Earnings
 
      Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
      2011     2010     2011     2010  
          (in thousands)  

Commodity price derivatives

   Oil and gas revenue    $ 8,295     $ 21,976     $ 24,627     $ 67,634  

Interest rate derivatives

   Interest expense      (71     (63     (209     (1,633

Interest rate derivatives

   Derivative gains, net      —          —          —          (2,465
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 8,224     $ 21,913     $ 24,418     $ 63,536  
     

 

 

   

 

 

   

 

 

   

 

 

 

 

Derivatives Not Designated as Hedging Instruments

   Location of Gain (Loss)
Recognized in Earnings on
Derivatives
     Amount of Gain (Loss) Recognized in
Earnings on Derivatives
 
      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2011     2010      2011      2010  
            (in thousands)  

Commodity price derivatives

     Derivative gains, net       $ 407,407     $ 112,733      $ 380,030      $ 520,486  

Interest rate derivatives

     Derivative gains, net         (6,335     14,848        6,088        52,564  
     

 

 

   

 

 

    

 

 

    

 

 

 

Total

      $ 401,072     $ 127,581      $ 386,118      $ 573,050  
     

 

 

   

 

 

    

 

 

    

 

 

 

AOCI - Hedging. As of September 30, 2011 AOCI – Hedging represented net deferred losses of $58 thousand compared to net deferred gains of $7.4 million as of December 31, 2010. The AOCI – Hedging balance as of September 30, 2011 was comprised of $5.1 million of net deferred gains on the effective portions of discontinued commodity hedges, $1.8 million of net deferred losses on the effective portions of discontinued interest rate hedges and $0.1 million of associated net deferred tax benefits, reduced by $3.5 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

During the twelve months ending September 30, 2012, the Company expects to reclassify $5.9 million of AOCI – Hedging net deferred gains to oil revenues (including $3.5 million related to noncontrolling interests) and $308 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $777 thousand of net deferred income tax provisions associated with hedge derivatives during the twelve months ending September 30, 2012 from AOCI – Hedging to income tax expense.

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.

 

26


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following table summarizes the Company’s asset retirement obligation activity during the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Beginning asset retirement obligations

   $ 151,970     $ 137,181     $ 152,291     $ 166,434  

Liabilities assumed in acquisitions

     —          —          6       6  

New wells placed on production

     1,132       2,356       3,206       7,000  

Changes in estimates (a)

     (5,453     —          (5,331     —     

Disposition of wells

     —          (131     (448     (29,671

Liabilities settled

     (2,808     (6,141     (10,277     (16,096

Accretion of discount from continuing operations

     2,806       2,521       8,119       7,909  

Accretion of discount from discontinued operations

     —          105       81       309  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending asset retirement obligations

   $ 147,647     $ 135,891     $ 147,647     $ 135,891  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Changes in estimates during 2011 are primarily associated with the deferral of the future abandonment of the Company’s South Africa oil and gas properties to allow Petroleum Oil and Gas Corporation of South Africa, Ltd (“PetroSA”) to recover take-or-pay make up gas (see Note M) and a $1.5 million reduction in East Cameron 322 reclamation costs.

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of September 30, 2011 and December 31, 2010, the current portions of the Company’s asset retirement obligations were $13.6 million and $19.9 million, respectively.

NOTE I. Postretirement Benefit Obligations

As of September 30, 2011 and December 31, 2010, the Company had $6.9 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 are predecessor plans of entities acquired by the Company. These plans had no assets as of September 30, 2011 or December 31, 2010. The participants of the predecessor plans are not current employees of the Company.

The following table reconciles changes in the Company’s unfunded accumulated postretirement benefit obligations during the three and nine months ended September 30, 2011 and 2010:

 

     Three Months
Ended

September 30,
    Nine Months
Ended

September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 6,996     $ 8,968     $ 7,408     $ 9,075  

Net benefit payments

     (271     (543     (962     (1,127

Service costs

     61       80       183       241  

Net actuarial losses

     —          100       —          200  

Accretion of interest

     79       108       236       324  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated postretirement benefit obligations

   $ 6,865     $ 8,713     $ 6,865     $ 8,713  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

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 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. 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 net income attributable to common stockholders.

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

 

28


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following tables reconcile the Company’s net income from continuing operations, income (loss) from discontinued operations and 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 per share amounts for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Continuing
Operations
    Discontinued
Operations
    Total     Continuing
Operations
    Discontinued
Operations
    Total  
     (in thousands)  

Income (loss) as reported

   $ 386,145     $ (547   $ 385,598     $ 582,591     $ 412,511     $ 995,102  

Net income attributable to the noncontrolling interests

     (34,134     —          (34,134     (49,467     —          (49,467

Participating basic earnings

     (6,797     —          (6,797     (10,062     (7,124     (17,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) attributable to common stockholders

     345,214       (547     344,667       523,062       405,387       928,449  

Reallocation of participating earnings

     189       —          189       268       190       458  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) attributable to common stockholders

   $ 345,403     $ (547   $ 344,856     $ 523,330     $ 405,577     $ 928,907  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 
     Continuing
Operations
    Discontinued
Operations
    Total     Continuing
Operations
    Discontinued
Operations
    Total  
     (in thousands)  

Income as reported

   $ 96,490     $ 18,083     $ 114,573     $ 500,123     $ 63,745     $ 563,868  

Net income attributable to the noncontrolling interests

     (2,538     —          (2,538     (39,003     —          (39,003

Participating basic earnings

     (2,265     (424     (2,689     (10,661     (1,359     (12,020
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income attributable to common stockholders

     91,687       17,659       109,346       450,459       62,386       512,845  

Reallocation of participating earnings

     16       3       19       112       15       127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income attributable to common stockholders

   $ 91,703     $ 17,662     $ 109,365     $ 450,571     $ 62,401     $ 512,972  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Weighted average common shares outstanding:

           

Basic

     116,281        115,191        116,122        114,985  

Dilutive common stock options

     166        168        181        218  

Convertible senior notes dilution

     185        —           1,618        —     

Contingently issuable performance unit shares

     443        662        429        629  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     117,075        116,021        118,350        115,832  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 and nine months ended September 30, 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 September 30, 2011

  

Revenues and other income:

        

Oil and gas

   $ 591,147     $ 19,362     $ —        $ 610,509  

Interest and other

     13,691       —          3,882       17,573  

Derivative gains, net

     —          —          401,072       401,072  

Gain (loss) on disposition of assets, net

     1,523       —          (475     1,048  

Hurricane activity, net

     1,487       —          —          1,487  
  

 

 

   

 

 

   

 

 

   

 

 

 
     607,848       19,362       404,479       1,031,689  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Oil and gas production

     118,989       620       —          119,609  

Production and ad valorem taxes

     38,542       —          —          38,542  

Depletion, depreciation and amortization

     142,632       8,449       15,455       166,536  

Exploration and abandonments

     20,026       —          —          20,026  

General and administrative

     —          —          49,812       49,812  

Accretion of discount on asset retirement obligations

     2,072       734       —          2,806  

Interest

     —          —          45,559       45,559  

Other

     9,773       —          7,410       17,183  
  

 

 

   

 

 

   

 

 

   

 

 

 
     332,034       9,803       118,236       460,073  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     275,814       9,559       286,243       571,616  

Income tax provision

     (102,051     (2,677     (80,743     (185,471
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 173,763     $ 6,882     $ 205,500     $ 386,145  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

     United
States
    South Africa     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended September 30, 2010

  

Revenues and other income:

        

Oil and gas

   $ 416,112     $ 21,299     $ —        $ 437,411  

Interest and other

     268       —          14,701       14,969  

Derivative gains, net

     —          —          127,581       127,581  

Gain (loss) on disposition of assets, net

     2,429       —          (46     2,383  

Hurricane activity, net

     3,452       —          —          3,452  
  

 

 

   

 

 

   

 

 

   

 

 

 
     422,261       21,299       142,236       585,796  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Oil and gas production

     99,717       1,000       —          100,717  

Production and ad valorem taxes

     33,045       —          —          33,045  

Depletion, depreciation and amortization

     119,726       18,338       9,032       147,096  

Exploration and abandonments

     21,308       302       —          21,610  

General and administrative

     —          —          43,417       43,417  

Accretion of discount on asset retirement obligations

     1,899       622       —          2,521  

Interest

     —          —          45,002       45,002  

Other

     9,682       —          10,005       19,687  
  

 

 

   

 

 

   

 

 

   

 

 

 
     285,377       20,262       107,456       413,095  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     136,884       1,037       34,780       172,701  

Income tax provision

     (50,647     (290     (25,274     (76,211
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 86,237     $ 747     $ 9,506     $ 96,490  
  

 

 

   

 

 

   

 

 

   

 

 

 
      United
States
    South Africa     Headquarters     Consolidated
Total
 
     (in thousands)  

Nine Months Ended September 30, 2011

  

Revenues and other income:

        

Oil and gas

   $ 1,629,287     $ 62,283     $ —        $ 1,691,570  

Interest and other

     30,294       —          38,420       68,714  

Derivative gains, net

     —          —          386,118       386,118  

Gain (loss) on disposition of assets, net

     1,523       —          (2,962     (1,439

Hurricane activity, net

     1,418       —          —          1,418  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,662,522       62,283       421,576       2,146,381  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Oil and gas production

     319,564       2,431       —          321,995  

Production and ad valorem taxes

     107,702       —          —          107,702  

Depletion, depreciation and amortization

     387,035       35,671       38,101       460,807  

Exploration and abandonments

     57,242       341       —          57,583  

General and administrative

     —          —          138,562       138,562  

Accretion of discount on asset retirement obligations

     6,164       1,955       —          8,119  

Interest

     —          —          136,554       136,554  

Other

     31,302       —          18,150       49,452  
  

 

 

   

 

 

   

 

 

   

 

 

 
     909,009       40,398       331,367       1,280,774  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     753,513       21,885       90,209       865,607  

Income tax benefit (provision)

     (278,800     (6,128     1,912       (283,016
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 474,713     $ 15,757     $ 92,121     $ 582,591  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

     United
States
    South Africa     Headquarters     Consolidated
Total
 
     (in thousands)  

Nine Months Ended September 30, 2010

  

Revenues and other income:

        

Oil and gas

   $ 1,264,316     $ 67,182     $ —        $ 1,331,498  

Interest and other

     1,776       —          48,153       49,929  

Derivative gains, net

     —          —          570,585       570,585  

Gain (loss) on disposition of assets, net

     27,408       —          (437     26,971  

Hurricane activity, net

     5,678       —          —          5,678  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,299,178       67,182       618,301       1,984,661  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Oil and gas production

     278,157       2,672       —          280,829  

Production and ad valorem taxes

     85,444       —          —          85,444  

Depletion, depreciation and amortization

     353,090       58,677       24,066       435,833  

Exploration and abandonments

     60,773       428       —          61,201  

General and administrative

     —          —          122,165       122,165  

Accretion of discount on asset retirement obligations

     6,043       1,866       —          7,909  

Interest

     —          —          137,893       137,893  

Other

     30,233       —          19,593       49,826  
  

 

 

   

 

 

   

 

 

   

 

 

 
     813,740       63,643       303,717       1,181,100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     485,438       3,539       314,584       803,561  

Income tax provision

     (179,612     (991     (122,835     (303,438
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 305,826     $ 2,548     $ 191,749     $ 500,123  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Consolidating Assets by Geographic Area:

  

United States

   $ 10,775,975       $ 8,987,141  

South Africa

     86,710        134,901  

Tunisia

     —           325,942  

Headquarters

     122,358         231,118  
  

 

 

    

 

 

 

Total consolidated assets

   $ 10,985,043      $ 9,679,102  
  

 

 

    

 

 

 

NOTE M.    Deferred Revenue

The Company’s deferred revenue is associated with a United States volumetric production payment obligation (“VPP”) and take-or-pay gas receipts under the Company’s South Africa gas sales agreement that are each expected to be recovered volumetrically by the purchasers.

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) transferred title of the reserves to the purchaser and (v) allows 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.

 

32


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

 

The following table provides information about changes in the deferred revenue carrying values of the Company’s VPP for the nine months ended September 30, 2011 (in thousands):

 

VPP Deferred revenue at December 31, 2010

   $ 87,020  

Less: 2011 VPP amortization

     (33,620
  

 

 

 

VPP Deferred revenue at September 30, 2011

   $ 53,400  
  

 

 

 

The remaining VPP 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

   $ 11,329  

2012

   $ 42,071  

During July 2011, the Company received $36.1 million of cash take-or-pay proceeds from PetroSA in accordance with the terms of its South Coast Gas Project gas sales agreement (the “GSA”). The terms of the GSA obligate PetroSA to purchase certain minimum volumes of gas per year as a source for its gas-to-liquids plant in South Africa. Under certain circumstances, if PetroSA fails to take such minimum volumes, then PetroSA is contractually obligated to make take-or-pay payments to the Company. The GSA allows PetroSA to take delivery of available take-or-pay make up volumes during certain stipulated periods, including a period of one year beyond the date the GSA would otherwise expire.