Pioneer is a large independent oil and gas exploration and production company that explores for, develops and produces oil, NGLs and gas within the United States.States, with operations in the Permian Basin in West Texas. The Company is a Delaware corporation, and its common stock has been listed and traded on the NYSE under the ticker symbol "PXD" since its formation in 1997.
The Company's mission is to be America's leading independent energy company, focused on value, safety, the environment, technology and our greatest asset, ourits people. The Company's long-term growth strategy is centered around the following strategic objectives:
the Eagle Ford Shale gas and liquids field located in South Texas;
the Raton gas field located in southern Colorado;
the West Panhandle gas and liquids field located in the Texas Panhandle;
the Edwards gas field located in South Texas; and
the Sinor Nest Wilcox oil field located in South Texas.
No assurance can be given that the sales will be completed in accordance with the Company's plans or on terms and at prices acceptable to the Company.
PIONEER NATURAL RESOURCES COMPANY
Business Activities
Pioneer's purposeCompetitive advantage is to competitively and profitably explore for, develop and producegained in the oil and gas reserves. In so doing, the Company sells homogeneous oil, NGL and gas units that, except for geographic and relatively minor quality differences, cannot be significantly differentiated from units offered for sale by the Company's competitors. The Company's portfolio of resources and opportunities are primarily located in the Spraberry/Wolfcamp oil field, and provide long-lived, dependable production and lower-risk exploration and development opportunities.industry by employing well-trained and experienced personnel who make prudent capital investment decisions based on management direction, embrace technological innovation and are focused on price and cost management. The Company has a team of dedicated employees who represent the professional disciplines and sciences that the Company believes are necessary to allow Pioneer to maximize the long-term profitability and net asset value inherent in its physical assets.
Petroleum industry.See "Item 1A. Risk Factors - The petroleum industry has been operating in a lower oil price environment since late 2014, when North American oil prices began declining due to a worldwide oversupply of oil. During the fourth quarter of 2016, the Organization of Petroleum Exporting Countries ("OPEC") membersCompany faces significant competition and some nonmembers, led by Russia, pledged to reduce their oil output by roughly 1.8 million barrels a day from October 2016 levelsof its competitors have resources in an effort to draw down a global oversupplyexcess of the Company's available resources" for additional information.
Impact of the COVID-19 Pandemic
A novel strain of the coronavirus ("COVID-19") surfaced in late 2019 and to rebalance supply and demand. The agreement became effective in January 2017 and was originally set to expire in March 2018. During November 2017, OPEC members and some nonmembers agreed to lengthen the output reductions through December 2018. These output reductions represented an unprecedented level of cooperation among oil-producing countries and, coupled with healthy oil demand, resulted in an increase in oil prices during 2017. In 2018, the worldwide demand for oil is expected to increase further as economic growthhas spread around the world, is forecastedincluding to be stronger than the last several years. This demand increase is expected to be met by higher supplies of oil from U.S. shale production growth and further oil inventory drawdowns. The Company expects ongoing oil price volatility as compliance with the output reduction agreement, changes in oil inventories and actual demand growth is reported.
The growth of unconventional shale drilling in the United States has substantially increasedStates. In March 2020, the supply of gasWorld Health Organization declared COVID-19 a pandemic, and NGLs, resulting in a significant decline in related prices as the supply of these products has grown. While the industry has invested in initiatives designed to increase takeaway capacity, such as the construction of liquefied natural gas ("LNG") and NGL export facilities, the supply of these products has exceeded the overall United States and international demand for these commodities. NGL products and gas supplies are expected to increase during 2018, which is expected to cause prices to decline slightly or remain flat during 2018.
Significant factors that are likely to affect 2018 commodity prices include: the effect of new policies enacted by the President of the United States declared the COVID-19 outbreak a national emergency. The COVID-19 pandemic has significantly affected the global economy, disrupted global supply chains and his administration; fiscal challenges facing the United States federal government; enacted changes to the tax lawscreated significant volatility in the United States; expected economic growthfinancial markets. In addition, the COVID-19 pandemic has resulted in travel restrictions, business closures and other restrictions that have disrupted the demand for oil throughout the world; politicalworld and when combined with pressures on the global supply-demand balance for oil and related products, resulted in significant volatility in oil prices beginning in late February 2020. The length of this demand disruption is unknown, and will ultimately depend on various factors beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic developments in North Africa anddownturn, the Middle East; forecasted increased demand from Asian and European markets; the extent to which membersability of OPEC, Russia and other oil exportingproducing nations adhere to manage the global oil supply, additional actions by businesses and agreegovernments in response to extend the agreedpandemic, the speed and effectiveness of responses to combat the virus, including the effectiveness of the COVID-19 vaccines, and the time necessary to balance oil production cuts, which expire in December 2018; the supply and demand fundamentals for NGLs indemand. Additionally, there is significant uncertainty regarding the United States and the pace at which export capacity grows; and overall North American gas supply and demand fundamentals, including incremental LNG export capacity additions and the pace that gas storage is refilled during the year given that gas storage levels are anticipated to be at normal levels at the endlasting impacts of the winter draw season.
Pioneer uses commodity derivative contractspandemic on global demand, as it cannot be predicted as to whether certain demand-reducing behaviors such as declines in business travel and changes in work-from-home practices will persist beyond the resolution of the pandemic. In response to these developments the Company has implemented measures to mitigate the effectimpact of commoditythe COVID-19 pandemic on its employees, operations and financial position. These measures include, but are not limited to, the following:
Employee Health and Safety. The Company has taken steps to keep its employees safe in light of the COVID-19 pandemic by implementing preventative measures and developing response plans intended to minimize unnecessary risk of exposure and infection among its employees, as recommended by the Centers for Disease Control and Prevention (the "CDC"). The Company has also modified certain business practices (including those related to non-operational employee work locations, such as a significant reduction in business travel and physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by the CDC, and other governmental and regulatory authorities.
Expense Management. With the reduction in revenue associated with lower oil prices during 2020, the Company focused its efforts on:
•Optimizing drilling, completion and operational efficiencies, resulting in lower well costs and operating costs and
•Reducing general and administrative and other overhead related costs through:
◦a corporate restructuring to reduce the Company's staffing levels to correspond with a planned reduction in future activity levels, resulting in approximately 300 employees being involuntarily separated from the Company in October 2020 (the "2020 Corporate Restructuring");
◦voluntary salary reductions by the Company's officers and board of directors from March 2020 through December 2020;
◦reductions in 2020 cash incentive compensation;
◦2020 benefit reductions; and
◦other cash cost reductions.
Balance Sheet, Cash Flow and Liquidity. During 2020, the Company also took the following actions to strengthen its financial position and increase liquidity during the COVID-19 pandemic:
•Reduced its 2020 capital budget by over 50 percent,
•Enhanced its liquidity position by refinancing a portion of its existing debt and issuing new debt, with the combined objective of increasing liquidity, extending the Company's debt maturities and lowering the Company's future cash interest expense on long-term debt, and
•Adjusted the Company's derivative positions to reduce the effects of oil price volatility on the Company'sits net cash provided by operating activities and its net asset value. activities.
The Company has entered into commodity derivative contracts for a large portioncontinues to assess the global impacts of the COVID-19 pandemic and may modify its forecasted production for 2018plans as the health and economic impacts of COVID-19 continue to a lesser extent, its forecasted 2019 production; however, commodity prices are volatileevolve.
PIONEER NATURAL RESOURCES COMPANY
See Note 5 and if commodity prices decline, the Company could realize lower prices for unprotected volumes and could see a reduction in the prices at which the Company is able to enter into derivative contracts on additional volumes in the future. As a result, the Company's internal cash flows will be negatively impacted by a reduction in commodity prices. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Note E7 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding the Company's open derivative positions as of December 31, 2017, and subsequent changes to these positions.additional information. Liquidity. In spite of the lower commodity price environment, the Company has maintained a strong liquidity position. The Company's primary needs for cash are for capital expenditures, acquisitions of oil and gas properties, vertical integration assets and facilities, payments of contractual obligations, including debt maturities, dividends, share repurchases and working capital obligations. Principal sources of liquidity include cash and cash equivalents, net cash provided by operating activities, short-term and long-term investments, proceeds from divestitures and proceeds from financing activities (principally borrowings under the Company's credit facility or issuances of debt or equity securities). If internal cash flows do not meet the Company's expectations, the Company may reduce its level of capital expenditures, and/or fund a portion of its capital expenditures (i) by using cash on hand, (ii) through sales of short-term and long-term investments, (iii) with borrowings under the Company's credit facility, (iv) through issuances of debt or equity securities or (v) through other sources, such as sales of nonstrategic assets.
Production. The Company focuses its efforts towards maximizing its average daily production of oil, NGLs and gas through development drilling, production enhancement activities and acquisitions of producing properties, while minimizing controllableAcquisition Activities
PIONEER NATURAL RESOURCES COMPANY
costs associated with production activities. For the year ended December 31, 2017, the Company's production of 99 MMBOE, excluding field fuel usage, represented a 16 percent increase compared to production during 2016. Production, price and cost information with respect to the Company's properties for 2017, 2016 and 2015 is set forth in "Item 2. Properties — Selected Oil and Gas Information — Production, price and cost data."
Acquisition activities.The Company regularly seeks to acquire propertiesor trade acreage that complementcomplements its operations, provideprovides exploration and development opportunities, increases the lateral length of future horizontal wells and potentially provideprovides superior returns on investment. The Company periodically evaluates and pursues acquisition opportunitiesinvestment (including opportunities to acquire particular oil and gas assets or entities owning oil and gas assets and opportunities to engage in mergers, consolidations or other business combinations with such entities). The Company periodically evaluates and pursues acquisition and acreage trade opportunities and at any given time may be in various stages of evaluating such opportunities. Such stages may take the form of internal financial analyses, oil and gas reserve analyses, due diligence, the submission of indications of interest, preliminary negotiations, negotiations of letters of intent or negotiations of definitive agreements. The success of any acquisition or acreage trade is uncertain and depends on a number of factors, some of which are outside the Company's control. See "Item 1A. Risk Factors — The Company may be unable to make attractive acquisitions and any acquisition it completes is subject to substantial risks that could materially and adversely affect its business."
During 2017, 2016 and 2015,On January 12, 2021, the Company spent $136 million, $446 millionacquired Parsley Energy, Inc., a Delaware corporation that previously traded on the NYSE under the symbol "PE" ("Parsley"), pursuant to the Agreement and $36 million, respectively, primarily to purchase undeveloped acreage for future exploitationPlan of Merger, dated as of October 20, 2020, among Pioneer, certain of its subsidiaries, Parsley and exploration activities inParsley's subsidiary, Parsley Energy, LLC (the "Parsley Acquisition"). Although this Annual Report is being filed following the Spraberry/Wolfcamp fieldcompletion of the Permian Basin.Parsley Acquisition, unless otherwise specifically noted, information set forth herein only relates to the period as of and for the fiscal year ended December 31, 2020 and therefore does not include information relating to Parsley or its subsidiaries as of and for such periods. Accordingly, unless otherwise specifically noted, references herein to "Pioneer" or the "Company" refer only to Pioneer and its subsidiaries prior to the Parsley Acquisition and do not include Parsley or its subsidiaries.
2016 Permian Basin acquisition. The Company's 2016 acquisition activities includedParsley Acquisition will be accounted for as a business combination, with the August 2016 acquisition of 28,000 net acres in the Permian Basin, with net production of approximately 1,400 BOEPD, from an unaffiliated third party for $428 million, including normal closing adjustments. The fair value of consideration allocated to the assets acquired included $347 million of unproved property, $79 million of proved property and $5 million of other property and equipment. Theacquisition date fair value of the asset retirement obligationsassets and other liabilities assumed were $2 million and $1 million, respectively.
Exploratory activities. The Company has devoted significant efforts and resources to hiring and developing a highly skilled geoscience, engineering and land staff as well as acquiring a significant portfolioacquired. Parsley's post-acquisition date results of lower-risk exploration opportunities that are expected tooperations will be evaluated and tested over the next decade and beyond. Exploratory and extension drilling involve greater risks of dry holes or failure to find commercial quantities of hydrocarbons than development drilling or enhanced recovery activities. See "Item 1A. Risk Factors - Exploration and development drilling may not result in commercially productive reserves."
Development activities. The Company seeks to increase its proved oil and gas reserves, production and cash flow through development drilling and by conducting other production enhancement activities, such as well recompletions. During the three years ended December 31, 2017, the Company drilled 181 gross (130 net) development wells, with 100 percent of the wells being successfully completed as productive wells, at a total drilling cost (net toconsolidated into the Company's interest) of $2.0 billion.
The Company believes that its current property base provides a substantial inventory of prospects for future reserve, production and cash flow growth. The Company's proved reserves as of December 31, 2017 include proved undeveloped reserves and proved developed non-producing reserves of 45 MMBbls of oil, 22 MMBbls of NGLs and 291 Bcf of gas. The timing of the development of these proved reserves will be dependent upon commodity prices, drilling and operating costs and the Company's expected operating cash flows andinterim consolidated financial condition.
Integrated services. The Company continues to utilize its integrated services to control well costs and operating costs in addition to supporting the execution of its drilling and production activities. The Company owns fracture stimulation fleets totaling approximately 470,000 horsepower that support its drilling operations. The Company also owns other field service equipment that support its drilling and production operations, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, blowout preventers, construction equipment and fishing tools. In addition, Pioneer Sands LLC, the Company's wholly-owned sand mining subsidiary, is supplying high-quality brown sand for proppant, which is being used by the Company to fracture stimulate horizontal wells in the Spraberry and Wolfcamp Shale intervals.
The Company is also constructing a field-wide water distribution system to reduce the cost of water for drilling and completion activities and to secure adequate supplies of water to support the Company's long-term growth plan for the Spraberry/Wolfcamp field. During 2017, the Company expanded its mainline system, subsystems and frac ponds to efficiently deliver water to Pioneer's drilling locations. The Company is purchasing up to 120 thousand barrels per day of effluent water from the City of Odessa and has signed an agreement with the City of Midland to upgrade the city's wastewater treatment plant in return for a dedicated long-term supply of water from the plant. Once the upgrade to the wastewater treatment plant is complete, the Company expects to receive approximately two billion barrels of low-cost, non-potable water over a 28-year contract period (up to 240 thousand barrels per day) to support its completion operations.
PIONEER NATURAL RESOURCES COMPANY
Asset divestitures. The Company regularly reviews its asset base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities, create organizational and operational efficiencies and further the Company's objective of maintaining a strong balance sheet to ensure financial flexibility. In February 2018, the Company announced its intention to divest its properties in South Texas, Raton and the West Panhandle field and focus its efforts and capital resources to its Permian Basin assets. No assurance can be given that the sales will be completed in accordance with the Company's plans orstatements beginning on terms and at prices acceptable to the Company.
Permian Basin. In April 2017, the Company completed the sale of approximately 20,500 acres in the Martin County region of the Permian Basin, with net production of approximately 1,500 BOEPD, to an unaffiliated third party for cash proceeds of $264 million. The sale resulted in a gain of $194 million. In conjunction with the divestiture, the Company reduced the carrying value of goodwill by $2 million, reflecting the portion of the Company's goodwill related to the assets sold.
EFS Midstream. In July 2015, the Company completed the sale of its 50.1 percent equity interest in EFS Midstream LLC ("EFS Midstream") to an unaffiliated third party, with the Company receiving total consideration of $1.0 billion, of which $530 million was received at closing and the remaining $501 million was received in July 2016. The Company recorded a net gain on the disposition of $777 million in September 2015.
The Company will continue to review its acreage in the Permian Basin and negotiate with other operators in the area to sell or trade nonstrategic properties to achieve operating efficiencies and to improve profitability.January 12, 2021. See
Notes C and DNote 19 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for specific information regarding the Company's asset divestitures and impairments. Also see "Item 1A. Risk Factors - The Company's ability to complete dispositions of assets, or interests in assets, may be subject to factors beyond its control, and in certain cases the Company may be required to retain liabilities for certain matters" for a discussion of risks associated with planned divestitures.additional information.Marketing of Production
General. Production from the Company's properties is marketed using methods that are consistent with industry practices. Sales prices for oil, NGL and gas production are negotiated based on factors normally considered in the industry, such as an index or spot price, price regulations, distance from the well to thea major pipeline, commodity quality and prevailing supply and demand conditions. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional discussion regarding price risk.information.
Seasonal nature of business. Generally, but not always, the demand for gas decreases during the summer months and increases during the winter months. Seasonal anomalies such as mild winters or hot summers may impact general seasonal changes in demand.
Significant purchasers. During 2017, the Company's significant purchasersDelivery commitments. The Company has committed certain volumes of oil, NGLs and gas were Occidental Energy Marketing Inc. (24 percent), Sunoco Logistics Partners L.P. (14 percent) and Plains Marketing LP (10 percent). The loss of a significant purchaser or an inability to secure adequate pipeline, gas plant and NGL fractionation infrastructure in its key producing areas could have a material adverse effect on the Company's ability to sell its oil, NGL and gas production.to customers under a variety of contracts, some of which have volumetric firm transportation or fractionation requirements that could require monetary shortfall penalties if the Company's transported or fractionation volumes are insufficient to satisfy associated commitments. See "Item 1A. Risk Factors - The Company may not be able to obtain access on commercially reasonable terms or otherwise to pipelines and storage facilities, gathering systems and other transportation, processing, fractionation, refining and export facilities to market its oil, NGL and gas production; the Company relies on a limited number of purchasers for a majority of its products" and Note L11 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for more information aboutadditional information.Significant purchasers. During 2020 the Company's oil, NGL and gas sales to Sunoco Logistics Partners L.P., Occidental Energy Marketing Inc. and Plains Marketing L.P accounted for 36 percent, 18 percent and 14 percent of the Company's oil and gas revenues, respectively. The loss of one of these significant purchasers or an inability to secure adequate pipeline, gas plant and NGL fractionation infrastructure capacity risksfor its Permian Basin production could have a material adverse effect on the Company's ability to produce and sell its oil, NGL and gas production.
Revenues from sales of purchased oil and gas to Occidental Energy Marketing Inc. accounted for 28 percent of the Company's sales of purchased oil and gas. No other sales customer exceeded ten percent of the Company's sales of purchased oil and gas during 2020. The loss of the Company's significant customers.
Derivative risk management activities. The Company primarily utilizes commodity swap contracts, collar contractspurchaser of purchased oil and collar contracts with short puts that are intendedgas would not be expected to (i) reduce thehave a material adverse 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 derivative contracts intended to reduce the effect of interest rate volatility on the Company's indebtedness and marketing derivativesability to mitigate price risk associated with buy and sell marketing arrangements to fulfill firm pipeline transportation commitments. The Company accounts for its derivative contracts using the mark-to-market ("MTM") method of accounting. commodities it purchases from third parties.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of the Company's derivative risk management activities, "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Note E13 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information aboutadditional information.
PIONEER NATURAL RESOURCES COMPANY
Human Capital
At December 31, 2020, the impactCompany had 1,853 employees, 698 of commodity derivative activities on oil, NGLwhom were employed in field operations and gas revenues256 of whom were employed in vertical integration activities. The Company understands that employee recruiting, retention and net derivative gains and losses during 2017, 2016 and 2015, as well asdevelopment play a critical role to the Company's open commodity derivative positions at December 31, 2017,business activities and subsequent changesits ability to achieve its long-term strategy. The Company offers a competitive compensation and benefits program and has established policies and talent development programs with the goal of creating an inclusive environment to allow all employees to feel respected, valued and connected to the business.
Compensation and benefits program. The Company annually reviews compensation for all employees to adjust compensation for market conditions and attract and retain a highly skilled workforce. The Company considers its employees to be its greatest asset and encourages them to take full advantage of the benefits and programs the Company offers. To ensure Pioneer attracts and retains top talent, the Company maintains an above-average benefits package. Pioneer's employees participate in incentive plans that take into consideration individual and Company performance through a traditional bonus plan that is influenced by individual performance and a variable compensation plan denominated in Company stock. In addition to cash and equity compensation, the Company also offers other employee benefits such as life and health (medical, dental & vision) insurance, paid time off, paid parental leave, flexible work schedules and a 401(k) plan.
Diversity and inclusion. The Company is committed to creating an inclusive environment where all employees feel respected, valued and connected to the business — a workplace to which individuals bring their "authentic" selves and can be successful in achieving their goals. The Company has established a variety of diversity and inclusion initiatives, such as OnePioneer, a single organization that was created in 2019 through the merger of Pioneer's various employee resource groups. OnePioneer is led by a diverse representation of the Company's employees who advance diversity and inclusion across the entire company.
Talent development.The Company's talent planning approach identifies and targets development for critical talent. The Company identifies critical roles based on several factors, including strategic importance, scope and impact, and unique skills. Successor candidates for those positions.critical roles are then identified as those who have the interest, ability and experience to succeed in the critical role within five years. Talent planning enables Pioneer to proactively approach succession planning and offer targeted development for high potential employees and successors, while enabling a cross-functional view of talent to increase visibility and mobility.
Community involvement. Pioneer's dedication to community well-being and success shows in the many ways the Company seeks to be a good neighbor in all of its operating areas. The Company's employees continually seek out events, organizations, initiatives and partnerships to support, and the Company is honored to support their ongoing efforts to enrich the communities where they live and work, including through a charitable matching program. Competition, MarketsHealth, safety and Regulationsenvironment. The Company maintains a culture of continuous improvement in safety and environmental practices, supports a diverse workforce and inspires teamwork to drive innovation, with oversight from the Health, Safety and Environment Committee and the Nominating and Corporate Governance Committee of the board of directors.
Competition.
Regulation
The oil and gas industry is highly competitive inextensively regulated at the exploration forfederal, state, and acquisition of reserves, the acquisition of oil and gas leases and the hiring and retention of staff necessary for the identification, evaluation and acquisition and development of such properties. The Company's competitors include a large number of companies, including major integrated oil and gas companies, other independent oil and gas companies, and individuals engaged in the exploration for and development of oil and gas properties. Somelocal levels. Regulations affecting elements of the Company's competitorsenergy sector are substantially largerunder constant review for amendment or expansion over time and frequently more stringent requirements are imposed. Various federal and state agencies, including the Texas Railroad Commission, the Bureau of Land Management (the "BLM"), the U.S. Environmental Protection Agency (the "EPA"), the U.S. Occupational Safety and Health Administration ("OSHA"), have financiallegal and other resources greater than those of the Company; as such, the Company may be at a competitive disadvantage in the identification, acquisitionregulatory authority and development of properties that complementoversight over the Company's operations.
Competitive advantage is gained in the oil and gas exploration and development industryactivities and operations. Other agencies with certain authority over the Company's business include the Internal Revenue Service (the "IRS"), the SEC and NYSE. Ensuring compliance with the rules, regulations and orders promulgated by employing well-trainedsuch entities requires extensive effort and experienced personnel who make prudent capital investment decisions based on management direction, embrace technological innovationincremental costs to comply, which consequently affects the Company's profitability. Because public policy changes are commonplace, and existing laws and regulations are focused on price and cost management. The Company has a team of dedicated employees who represent the professional disciplines and sciences thatfrequently amended, the Company believes are necessaryis unable to allow Pioneer to maximizepredict the long-term profitability and net asset value inherent in its physical assets.
Markets. The Company's ability to produce and market oil, NGLs and gas profitably depends on numerous factors beyondfuture cost or impact of compliance. However, the Company's control. The effectCompany does not expect that any of these factors cannot be accurately predicted or anticipated. Althoughlaws and regulations will affect its operations materially differently than they would affect other companies with similar operations, size and financial strength.
The following are significant areas of government control and regulation affecting the Company cannot predict the occurrence of events that may affect commodity prices or the degree to which commodity prices will be affected, the prices for any commodity that the Company produces will generally approximate current market prices in the geographic region of the production.Company:
Securities regulations. Enterprises that sell securities in public markets are subject to regulatory oversight by agencies such as the SEC and the NYSE. This regulatory oversight imposes on the Company many requirements, including the
PIONEER NATURAL RESOURCES COMPANY
responsibility for establishing and maintaining disclosure controls and procedures andalongside internal controls over financial reporting, and ensuring that the financial statements and other information included in submissions to the SEC do not contain any untrue statement of a
PIONEER NATURAL RESOURCES COMPANY
material fact or omit to state a material fact necessary to make the statements made in such submissions not misleading. Failure to comply with the rules and regulations of the SEC could subject the Company to litigation from public or private plaintiffs. Failure to comply with the rules of the NYSE could result in the de-listingdelisting of the Company's common stock, which would have an adverse effect on the market price and liquidity of the Company's common stock. Compliance with some of these rules and regulations is costly, and regulations are subject to change or reinterpretation.
Environmental and occupational health and safety matters. The Company'sCompany strives to conduct its operations are subjectin a socially and environmentally responsible manner and is required to stringentcomply with many federal, state and local laws, regulations and executive orders concerning occupational safety and health, the discharge or other release of materials and protection of the environment and natural resources. These environmental legal requirements primarily relate to:
•the discharge or other release of pollutants into federal and state waters;
•assessing the environmental impact of seismic acquisition, drilling or construction activities;
•the generation, storage, transportation and disposal of waste materials, including hazardous substances;
•the emission of certain gases, including GHGs, into the atmosphere;
•the monitoring, abandonment, reclamation and remediation of well and other sites, including sites of former operations;
•the development of emergency response and spill contingency plans;
•the protection of threatened and endangered species; and
•worker protection.
The more significant of these existing environmental and occupational health and safety laws and regulations include the following U.S. legal standards, as amended from time to time:
•the Clean Air Act ("CAA"), which restricts the emission of air pollutants from many sources and imposes various pre construction, operational, monitoring and reporting requirements, and that the EPA has relied upon as authority for adopting climate change regulatory initiatives relating to GHG emissions;
•the Federal Water Pollution Control Act, also known as the Clean Water Act ("CWA"), which regulates discharges of pollutants from facilities to state and federal waters and establishes the extent to which waterways are subject to federal jurisdiction and rulemaking as protected waters of the United States;
•the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), which imposes liability on generators, transporters, disposers and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur;
•the Resource Conservation and Recovery Act ("RCRA"), which governs the generation, treatment, storage, transport and disposal of solid wastes, including oil and gas exploration and production wastes and hazardous wastes;
•the Safe Drinking Water Act ("SDWA"), which ensures the quality of the nation's public drinking water through adoption of drinking water standards and controlling the injection of waste fluids into below-ground formations that may adversely affect drinking water sources;
•OSHA, which establishes workplace standards for the protection of the health and safety of employees, including the implementation of hazard communications programs designed to inform employees about hazardous substances in the workplace, potential harmful effects of these substances, and appropriate control measures; and
•the Endangered Species Act ("ESA"), which restricts activities that may affect federally identified endangered and threatened species or their habitats through the implementation of operating restrictions or a temporary, seasonal or permanent ban in affected areas.
Additionally, there exist tribal, state and local jurisdictions where the Company operates that also have, or are developing or considering developing, similar environmental and occupational health and safety laws and regulations governing worker health and safety,many of these same types of activities. Failure by the discharge of materials into the environment and environmental protection. Numerous governmental entities, including the U.S. Environmental Protection Agency (the "EPA"), the U.S. Occupational Safety and Health Administration (the "OSHA") and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, which may cause the Company to incur significant capital expenditures or take costly actions to achieve and maintain compliance. Failure to comply with these laws, regulations and regulationsregulatory initiatives or controls may result in the assessment of sanctions, including administrative, civil and criminal penalties,penalties; the imposition of investigatory, remedial orand corrective action obligations or the incurrence of obligations,capital expenditures; the occurrence of restrictions, delays or restrictionscancellations in the permitting, development or the performanceexpansion of projectsprojects; and the issuance of orders enjoining the Company from conducting certain operationsinjunctions restricting or prohibiting some or all of our activities in a particular area. WhileHistorically, the Company's environmental and worker safety compliance costs have historically not had a material adverse effect on its results of operations,operations. However, there can be no assurance that such costs will not be material in the future or that new or more stringently applied laws and regulationssuch future compliance will not materially increase the cost of doing business.
The following is a summary of the more significant environmental and worker health and safety laws, as amended from time to time, to which the Company's business operations are or may be subject and with which compliance or the failure to maintain compliance may have a material adverse effect on the Company's capital expenditures, results of operations or financial position.business and operational results.
Hazardous wastes and substances. The federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the authority delegated by the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. The Company generates some amounts of ordinary industrial wastesowns, leases or operates numerous properties that may be regulated as RCRA hazardous wastes. RCRA currently excludes drilling fluids, produced waters and certain other wastes associated with the exploration, development and production of oil or gas from the definition of hazardous waste. These wastes are instead regulated under RCRA's less stringent non-hazardous waste provisions. There have been efforts from time to time to remove this exclusion, which removal could have a material adverse effect on the Company's results of operations and financial position, and it is possible that certainused for oil and gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. For example, in response to a lawsuit filed by several non-governmental environmental groups against the EPAactivities for the agency's failure to timely assess its RCRA Subtitle D criteria regulations for oil and gas wastes, the EPA and the environmental groups entered into a settlement agreement that was finalized in a consent decree issued by the U.S. District Court for the District of Columbia in December 2016, whereby the EPA is required to propose no later than March 15, 2019, a rulemaking for the revision ofmany years. The Company also has acquired certain Subtitle D criteria regulations pertaining to oil and gas wastes or sign a determination that revision of the regulations is not necessary. If the EPA proposes a rulemaking for revised oil and gas waste regulations, the decree requires that the EPA take final action following notice and comment rulemaking no later than July 15, 2021.
The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the Superfund law, and analogous state laws impose joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the current and past owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some instances,properties from third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third-parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Company generates materials in the course of its operations that may be regulated as CERCLA hazardous substances.
See "Item 1A. Risk Factors - The nature of the Company's assets and production operations may impact the environment or cause environmental contamination, which could result in material liabilities to the Company" for further discussion on environmental contamination issues.
Water use, surface discharges and discharges into belowground formations. The Federal Water Pollution Control Act, also known as the Clean Water Act (the "CWA"), and analogous state laws impose restrictions and strict controlswhose actions with respect to the
PIONEER NATURAL RESOURCES COMPANY
dischargerespect to the management and disposal or release of pollutants, including spills and leaks of oil andhydrocarbons, hazardous substances into waters of the United States and state waters. Spill prevention, control and countermeasure plan requirements imposedor wastes at or from such properties were not under the CWA require appropriate containment bermsCompany's control prior to acquiring them. Under certain environmental laws and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill, rupture or leak. Additionally, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of stormwater runoff from certain types of facilities. The CWA also prohibits the discharge of dredge and fill material into regulated waters, including wetlands, unless authorized by an appropriately issued permit. Federal and state regulatory agencies can impose administrative, civil and criminal penalties, as well as require remedial or mitigation measures, for noncompliance with discharge permits or other requirements of the CWA and analogous state laws.
The federal Oil Pollution Act ("OPA") sets minimum standards for prevention, containment and cleanup of oil spills into waters of the United States. Under OPA, responsible parties, including owners and operators of onshore facilities,regulations such as explorationCERCLA and production facilities, may be held strictly liable for oil spill cleanup costs and natural resource damages as well as a variety of public and private damages that may result from oil spills. OPA amends the CWA and thus noncompliance with OPA could result in civil and criminal penalties under the CWA.
In June 2015, the EPA and the U.S. Army Corps of Engineers (the "Corps") published a final rule attempting to clarify the federal jurisdictional reach over waters of the United States, but legal challenges to this rule followed and the rule was stayed nationwide by the U.S. Sixth Circuit Court of Appeals in October 2015 pending resolution of the court challenges. In January 2017, the U.S. Supreme Court accepted review of the rule to determine whether jurisdiction rests with the federal district or appellate courts. Additionally, following the issuance of a presidential executive order to review the rule, the EPA and the Corps proposed a rulemaking in June 2017 to repeal the June 2015 rule. The EPA and the Corps also announced their intent to issue a new rule defining the CWA's jurisdiction. On November 22, 2017, the EPA and the Corps published a proposed rule specifying that the contested June 2015 rule would not take effect until two years after the rule proposed on November 22, 2017 is finalized and published in the federal register. As a result, future implementation of the June 2015 rule is uncertain at this time. To the extent this rule or a revised rule expands the scope of the CWA's jurisdiction,RCRA, the Company could face increased costsincur strict joint and delays with respectseveral liability due to obtaining permitsdamages to natural resources or for dredge and fill activities in wetland areas in connection with any expansion activities.
The Company may disposeremediating hydrocarbons, hazardous substances or wastes disposed of produced water from oil and gas activities in underground wells, which are designed and permitted to placeor released by prior owners or operators. Moreover, an accidental release of materials into the water into non-productive geologic formations that are isolated from fresh water sources. The Underground Injection Control ("UIC") program established under the federal Safe Drinking Water Act ("SDWA") requires issuance of permits from the EPA or an analogous state agency for the construction and operation of disposal wells. Additionally, the UIC program establishes minimum standards for disposal well operations and restricts the types and quantities of fluids that may be disposed. Because some states have become concerned that the disposal of produced water into below ground formations could contribute to seismicity, they have adopted or are considering adopting additional regulations governing such disposal. Should future onerous regulations or bans relating to underground wells be placed in effect in areas where the Company has significant operations, there could be an adverse impact onenvironment during the Company's ability to operate. See "Item 1A. Risk Factors - Pioneer's operations are substantially dependent on the availability of water and its ability to dispose of produced water gathered from drilling and production activities and restrictions on the Company's ability to obtain water or dispose of produced water may have a materially adverse effect on its financial condition, results of operations and cash flows" for further discussion on seismicity issues.
Hydraulic fracturing. Hydraulic fracturing is an important and common practice to stimulate production of oil and gas from dense subsurface rock formations. The process involves the injection of water, sand and additives under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate oil and gas production. The Company routinely conducts hydraulic fracturing in its drilling and completion programs. The process is typically regulated by state oil and gas commissions, but, in recent years, several federal, state and local agencies have asserted regulatory authority over certain aspects of the process. Additionally, from time to time, the U.S. Congress has considered legislation that would provide for federal regulation of hydraulic fracturing and disclosure of chemicals used in the fracturing process but, to date, no such federal legislation has been adopted. The Company participates in FracFocus, a national publicly accessible internet-based registry managed by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. FracFocus provides the public access to Company-reported information on the additives it uses in the hydraulic fracturing process on wells the Company operates. In the event federal, state or local restrictions are adopted in areas where the Company is currently conducting operations, or in the future plans to conduct operations, the Company may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development or production activities, and be limited or precluded in the drilling of wells or the volume that the Company is ultimately able to produce from its reserves.
See "Item 1A. Risk Factors - Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs and additional operating restrictions or delays and materially and adversely affect the Company's production" for further discussion on hydraulic fracturing issues.
PIONEER NATURAL RESOURCES COMPANY
Air emissions. The federal Clean Air Act (the "CAA") and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other compliance requirements. Such laws and regulations could require a facility to obtain pre-approval for construction or modification projects expected to produce air emissions or result in the increase of existing air emissions. Additionally, these legal requirements could impose stringent air permit conditions or utilize specific emission control technologies to limit emissions of certain air pollutants. Federal and state regulatory agencies can also impose administrative, civil and criminal penalties for noncompliance with air permits or other requirements of the CAA and associated state laws and regulations. See "Item 1A. Risk Factors - The Company's operations are subject to stringent environmental and oil and gas-related laws and regulations that could cause it to suspend or curtail its operations or expose it to material costs and liabilities" for further discussion on air emission issues.
Climate change. Climate change continues to attract considerable public, political and scientific attention. As a result, numerous proposals have been made, and are likely to continue to be made, at the international, national, regional and state levels of government to monitor and limit emissions of greenhouse gases ("GHGs"). These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs, and regulations that directly limit GHG emissions from certain sources. The adoption and implementation of any international, federal or state legislation or regulations that require reporting of GHGs or otherwise restrict emissions of GHGs from the Company's equipment and operations could require the Company to incur increased operating costs, such as costs to purchase and operate emissions control systems, acquire emissions allowances or comply with new regulatory or reporting requirements. See "Item 1A. Risk Factors - Climate change legislation and regulatory initiatives restricting emissions of GHGs could result in increased operating costs and reduced demand for the oil, NGLs and gas the Company produces, and the potential physical effects of climate change could disrupt the Company's production and cause it to incur significant costs and liabilities. The Company also could incur costs related to the clean-up of third-party sites to which it sent regulated substances for disposal or to which it sent equipment for cleaning and for damages to natural resources or other claims related to releases of regulated substances at or from such third-party sites.
Over time, the trend in preparing for or respondingenvironmental and occupational health and safety laws and regulations is to those effects" for further discussiontypically place more restrictions and limitations on climate change issues.
Endangered species. The federal Endangered Species Act (the "ESA") and analogous state laws regulate activities that could have an adverse effect on species listed as threatenedmay adversely affect the environment or endangered underexpose workers to injury. If existing legal requirements change or new legislative, regulatory or executive initiatives are developed and implemented in the ESA. Some of the Company's operations are conducted in areas where protected species or their habitats are known to exist. In these areas,future, the Company may be obligatedrequired to developmake significant, unanticipated capital and implement plans to avoid potential adverse effects to protected species and their habitats, and theoperating expenditures. The Company may not have insurance or be prohibited from conducting operations in certain locations or during certain seasons, such as breedingfully covered by insurance against all environmental and nesting seasons, when the Company's operations could have an adverse effect on the species. It is also possible that a federal or state agency could order a complete halt to drilling activities in certain locations if it is determined that such activities may have a serious adverse effect on a protected species. See "Item 1A. Risk Factors - Laws and regulations pertaining to threatened and endangered species could delay or restrict the Company's operations and cause it to incur substantial costs" for further discussion on endangered species issues.
Activities on federal lands. Oil and gas exploration, development and production activities on federal lands are subject to the National Environmental Policy Act ("NEPA"). NEPA requires federal agencies, including the federal Bureau of Land Management (the "BLM"), to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. Currently, the Company has minimal exploration and production activities on federal lands.However, for those current activities, as well as for future or proposed exploration and development plans on federal lands, governmental permits or authorizations that are subject to the requirements of NEPA are required. This process has the potential to delay or limit, or increase the cost of, the development of some of the Company's oil and gas projects. Authorizations under NEPA are also subject to protest, appeal or litigation, any or all of which may delay or halt projects. Moreover, depending on the mitigation strategies recommended in the Environmental Assessments, the Company could incur added costs, which could be substantial.
Occupational health and safety. The Company's operations are subject to the requirements of the federal Occupational Safety and Health Act and comparable state statutes. These laws and the related regulations issued by OSHA strictly govern the protection of theoccupational health and safety of employees. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLArisks. For more information on environmental and similar state statutes require that the Company organize or disclose information about hazardous materials used or produced in the Company's operations.
Additionally, the Company's sand mining operations are subject to mining safety regulation. The U.S. Mining Safety and Health Administration ("MSHA") is the primary regulatory organization that regulates quarries, surface mines, underground mines and the industrial mineral processing facilities associated with and located at quarries and mines. The Company's sand mining operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringentoccupational health and safety standards on numerous aspects of mineral extractionmatters, see the risk factors identified as Health, Safety and processing operations, including the training of personnel, operating procedures, operating equipment and other matters.Environmental Risks in Item 1A. Risk Factors.
PIONEER NATURAL RESOURCES COMPANY
OSHA promulgated new rules in March 2016 for workplace exposure to respirable silica for several other industries. Respirable silica is a known health hazard for workers exposed over long periods. The MSHA has been considering the adoption of similar rules. If any new rule issued by MSHA lowers the workplace exposure limit significantly, the Company could incur significant capital and operating expenditures for equipment to reduce this exposure.
Other regulation of the oil and gas industry. The Company's oil and gas industry is regulated by numerous federal, stateoperations are subject to laws and local authorities. Legislation affecting regulations that relate to matters including:
•the acquisition of seismic data;
•location, drilling and casing of wells;
•hydraulic fracturing;
•well production operations;
•disposal of produced water;
•regulation of transportation and sale of oil, NGLs and gas;
•surface usage;
•calculation and disbursement of royalty payments and production taxes;
•restoration of properties used for oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous federaloperations; and state departments and agencies are authorized by statute to issue rules and regulations that are binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and gas industry may increase the Company's cost of doing business by increasing the cost of production, the Company believes that these burdens generally do not affect the Company any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations
•transportation of production.
Development and production.Development and production operations are subject to various types of regulation at the federal, state and local levels. These types of regulation includeregulations including requiring permits for the drilling of wells, the posting of bonds in connection with various types of activities and filing reports concerning operations. Most states,Texas, and some counties and municipalities in which the Company operates, also regulate one or more of the following:
•the location of wells;
•the method of drilling and casing wells;
•the method and ability to fracture stimulate wells;
•the surface use and restoration of properties upon which wells are drilled;
•the plugging and abandoning of wells; and
•notice to surface owners and other third parties.
State laws regulate the size and shape of drilling and spacing units or proration units governing the poolingdrilling and production of oil and gas properties. Some states allow forced pooling or integration of tracts to facilitate development while other states relyThe Company relies on voluntary pooling, production sharing agreements and the drilling of lands andallocation wells to develop its leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce the Company's interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells and generally prohibit the venting or flaring of gas and impose requirements regarding production rates.without a permit. These laws and regulations may limit the amount of oil and gas the Company can produce from the Company's wells, negatively affect the economic decision to continue to produce these wells or limit the number of wells or the locations that the Company can economically drill. Moreover, each state generally imposes a production or severance tax with respect to
Approximately one percent of the production and sale of oil, NGLs and gas within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but there can be no assurance that they will not do so in the future. The effect of such future regulations may limit the amounts ofCompany's U.S. oil and gas that may be produced fromleases are granted or approved by the federal government and administered by the BLM. All of the Company's wells, negatively affect the economicsfederal leases are outside of production from these wells or limit the number of locationsTexas and the Company can drill.
Regulation of transportationhas no current plans to further develop the leases at this time. Such leases require compliance with detailed federal regulations and sale of gas. The availability, terms and cost of transportation significantly affect sales of gas. Federal and state regulations govern the price and terms for access to gas pipeline transportation. Intrastate gas pipeline transportation activities are subject to various state laws and regulations, as well as orders of state regulatory bodies. The interstate transportation and sale of gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, storage and variousthat regulate, among other matters, primarilydrilling and operations on lands covered by the Federal Energy Regulatory Commission ("FERC"). FERC endeavors to make gas transportation more accessible to gas buyersthese leases and sellers on an open-accesscalculation and non-discriminatory basis.
Pursuantdisbursement of royalty payments to the Energy Policy Act of 2005 ("EPAct 2005") it is unlawful for any entity, suchfederal government.
See the risk factors identified as the Company, to use any deceptive or manipulative device or contrivanceRegulatory Risks and Health, Safety and Environmental Risks in connection with the purchase or sale of gas or transportation services subject to regulation by FERC, in contravention of rules prescribed by FERC. The EPAct 2005 also gives FERC authority to impose civil penalties of up to $1 million per day for each violation of the Natural Gas Act ("NGA"), the Natural Gas Policy Act of 1978 and related regulations.
Under FERC Order 704, which regulates annual gas transaction reporting requirements, any market participant, including a producer such as the Company, that engages in wholesale sales or purchases of gas that equal or exceed 2.2 million MMBtus of physical gas in the previous calendar year must annually report such sales and purchases to FERC on Form No. 552 by May 1 of the year following the calendar year when such sales and purchases occurred. Form No. 552 contains aggregate volumes of wholesale gas purchased or sold in the prior calendar year to the extent such transactions utilize, contribute to or may contribute to the formation of price indices. Order 704 is intended to increase the transparency of the wholesale gas markets and to assist FERC in monitoring those markets and in detecting market manipulation.
Intrastate gas pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate gas pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate gas pipeline rates, vary from state
Item 1A. Risk Factors.
PIONEER NATURAL RESOURCES COMPANY
ITEM 1A.RISK FACTORS
to state. Additional proposals and proceedings that might affect the gas industry are considered from time to time by the U.S. Congress, FERC, state legislatures, state regulatory bodies and the courts. The Company cannot predict when or if any such proposals might become effective or their effect, if any, on its operations. The Company believes that the regulation of intrastate gas pipeline transportation rates will not affect its operations in any way that is materially different from the effects on its similarly situated competitors.
Natural gas processing. The Company's gas processing operations are generally not subject to FERC or state regulation with respect to rates or terms and conditions of service. There can be no assurance that the Company's processing operations will continue to be unregulated in the future. However, although the processing facilities may not be directly regulated, other laws and regulations may affect the availability of gas for processing, such as state regulation of production rates and maximum daily production allowable from gas wells, which could impact the Company's processing business.
Gas gathering. Section 1(b) of the NGA exempts gas gathering facilities from FERC jurisdiction. The Company believes that its gathering facilities meet the traditional tests FERC has used to establish a pipeline system's status as a non-jurisdictional gatherer. There is, however, no bright-line test for determining the jurisdictional status of pipeline facilities. Moreover, the distinction between FERC-regulated transmission services and federally unregulated gathering services is the subject of litigation from time to time, so the classification and regulation of some of the Company's gathering facilities may be subject to change based on future determinations by the FERC and the courts. Thus, the Company cannot guarantee that the jurisdictional status of its gas gathering facilities will remain unchanged.
While the Company owns or operates some gas gathering facilities, the Company also depends on gathering facilities owned and operated by third parties to gather production from its properties, and therefore the Company is affected by the rates charged by these third parties for gathering services. To the extent that changes in federal or state regulation affect the rates charged for gathering services, the Company also may be affected by these changes. The Company does not anticipate that the Company would be affected any differently than similarly situated gas producers.
Regulation of transportation and sale of oil and NGLs. Intrastate liquids pipeline transportation rates, terms and conditionsfinancial results are subject to regulation by numerous federal, state and local authorities and, in a number of instances, the ability to transport and sell such products on interstate pipelines is dependent on pipelines that are also subject to FERC jurisdiction under the Interstate Commerce Act (the "ICA"). The Company does not believe these regulations affect it any differently than other producers.
The ICA requires that pipelines maintain a tariff on file with the FERC. The tariff sets forth the established rates as well as the rules and regulations governing the service. The ICA requires, among other things, that rates and terms and conditions of service on interstate common carrier pipelines be "just and reasonable." Such pipelines must also provide jurisdictional service in a manner that is not unduly discriminatory or unduly preferential. Shippers have the power to challenge new and existing rates and terms and conditions of service before the FERC.
Rates of interstate liquids pipelines are currently regulated by the FERC, primarily through an annual indexing methodology, under which pipelines increase or decrease their rates in accordance with an index adjustment specified by the FERC. For the five-year period beginning in July 2016, the FERC established an annual index adjustment equal to the change in the producer price index for finished goods plus 1.23 percent. This adjustment is subject to review every five years. Under the FERC's regulations, a liquids pipeline can request a rate increase that exceeds the rate obtained through application of the indexing methodology by using a cost-of-service approach, but only after the pipeline establishes that a substantial divergence exists between the actual costs experienced by the pipeline and the rates resulting from application of the indexing methodology. Increases in liquids transportation rates may result in lower revenue and cash flows for the Company.
In addition, due to common carrier regulatory obligations of liquids pipelines, capacity must be prorated among shippers in an equitable manner in the event there are nominations in excess of capacity by current shippers or capacity requests are received from a new shipper. Therefore, new shippers or increased volume by existing shippers may reduce the capacity available to the Company. Any prolonged interruption in the operation or curtailment of available capacity of the pipelines that the Company relies upon for liquids transportation could have a material adverse effect on its business, financial condition, results of operations and cash flows. However, the Company believes that access to liquids pipeline transportation services generally will be available to it to the same extent as to its similarly situated competitors.
In November 2009, the Federal Trade Commission (the "FTC") issued regulations pursuant to the Energy Independence and Security Act of 2007 intended to prohibit market manipulation in the petroleum industry. Violators of the regulations face civil penalties of up to $1 million per violation per day, subject to annual inflation adjustment. The Commodity Futures Trading Commission (the "CFTC") has also issued anti-manipulation rules that subject violators to a civil penalty of up to the greater of $1 million per violation, subject to annual inflation adjustment, or triple the monetary gain to the person for each violation. See "Items 1A. Risk Factors - The Company's transportation of gas, sales and purchases of oil, NGLs, gas or other energy commodities, and any derivative activities related to such energy commodities, expose the Company to potential regulatory risks."
PIONEER NATURAL RESOURCES COMPANY
Energy commodity prices. Sales prices of oil, condensate, NGLs and gas are not currently regulated and sales are made at market prices. Although prices of these energy commodities are currently unregulated, the U.S. Congress historically has been active in their regulation. The Company cannot predict whether new legislation to regulate oil and gas might actually be enacted by the U.S. Congress or the various state legislatures, and what effect, if any, the proposals might have on the Company's operations.
Transportation of hazardous materials. The federal Department of Transportation has adopted regulations requiring that certain entities transporting designated hazardous materials develop plans to address security risks related to the transportation of hazardous materials. The Company does not believe that these requirements will have an adverse effect on the Company or its operations. The Company cannot provide any assurance that the security plans required under these regulations would protect against all security risks and prevent an attack or other incident relateduncertainties, including but not limited to the Company's transportation of hazardous materials.
The nature of the business activities conducted by the Company subjects it to certain hazards and risks. The following is a summary of some of the material risks relating to the Company's business activities.those described below. Other risks are described in "Item 1. Business — Competition, Markets and Regulations," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." These risks are not the only risks facing the Company. The Company's business could also be affected by additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial. If any of these risks actually occurs, it could materially harm the Company's business, financial condition or results of operations or impair the Company's ability to implement business plans or complete development activities as scheduled. In that case, the market price of the Company's common stock could decline. The following risk factors are summarized as general business and industry, operational, financial, health, safety and environmental, regulatory risks and risks associated with the Parsley Acquisition.
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| General Business and Industry Risks | | |
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•The COVID-19 pandemic and recent developments in the global oil markets have had, and may continue to have, material adverse consequences for general economic, business and industry conditions. | | | | |
•Declining general economic, business or industry conditions could have a material adverse effect on the Company's results of operations. | | | | |
•The Company may be unable to make attractive acquisitions and any acquisition it completes is subject to substantial risks that could materially and adversely affect its business. | | | | |
•The Company's ability to complete dispositions of assets, or interests in assets, may be subject to factors beyond its control, and in certain cases the Company may be required to retain liabilities for certain matters. | | | | |
•The Company's operations and drilling activity are concentrated in the Permian Basin of West Texas; such concentration makes the Company vulnerable to risks associated with operating in a limited geographic area. | | | | |
•The Company may not be able to obtain access on commercially reasonable terms or otherwise to pipelines and storage facilities, gathering systems and other transportation, processing, fractionation, refining and export facilities to market its oil, NGL and gas production. | | | | |
•The refining industry may be unable to absorb U.S. oil production; in such a case, the resulting surplus could depress prices and restrict the availability of markets. | | | | |
•Estimates of proved reserves and future net cash flows are not precise. The actual quantities and net cash flows of the Company's proved reserves may prove to be lower than estimated. | | | | |
•Because the Company's producing wells decline continually over time, the Company will need to mitigate these declines through drilling and production enhancement initiatives and/or acquisitions. | | | | |
•A portion of the Company's total estimated proved reserves at December 31, 2020 were undeveloped, and those proved reserves may not ultimately be developed. | | | | |
•The Company faces significant competition and some of its competitors have resources in excess of the Company's available resources. | | | | |
•The Company's business could be materially and adversely affected by security threats, including cybersecurity threats, and other disruptions. | | | | |
•Provisions of the Company's charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for the Company's common stock. | | | | |
•The Company has identified a material weakness in its internal control over financial reporting that, if not remediated, could result in additional material misstatements in its consolidated financial statements. | | | | |
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| Operational Risks | | | | |
| | | | |
•The Company's operations involve many operational risks, some of which could result in unforeseen interruptions to the Company's operations and substantial losses to the Company for which the Company may not be adequately insured. | | | | |
•Exploration and development drilling involve substantial costs and risks and may not result in commercially productive reserves. | | | | |
•Part of the Company's strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application. | | | | |
•The Company's expectations for future drilling activities will be realized over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of such activities. | | | | |
•Multi-well pad drilling may result in volatility in the Company's operating results. | | | | |
•The Company's operations are substantially dependent upon the availability of water and its ability to dispose of produced water gathered from drilling and production activities. | | | | |
•The Company's use of seismic data is subject to interpretation and may not accurately identify the presence of oil and gas, which could materially and adversely affect the results of its drilling operations. | | | | |
PIONEER NATURAL RESOURCES COMPANY
| | | | | | |
•The Company's gas processing, gathering and treating operations are subject to operational and regulatory risks. | | | | |
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| Financial Risks | | | | |
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•The prices of oil, NGL and gas are highly volatile. | | | | |
•Future declines in the price of oil, NGLs, and gas could result in a reduction in the carrying value of the Company's proved oil and gas properties. | | | | |
•The Company's actual production could differ materially from its forecasts. | | | | |
•The Company could experience periods of higher costs if commodity prices rise. | | | | |
•The Company is a party to debt instruments, a credit facility and other financial commitments that may limit the Company's ability to fund future business and financing activities. | | | | |
•The Company's ability to declare and pay dividends and repurchase shares is subject to certain considerations. | | | | |
•A failure by purchasers of the Company's production to satisfy their obligations to the Company could have a material adverse effect on the Company's results of operations. | | | | |
•The failure by counterparties to the Company's derivative risk management activities to perform their obligations could have a material adverse effect on the Company's results of operations. | | | | |
•The Company's derivative risk management activities could result in financial losses, limit the Company’s potential gains or fail to protect the Company from declines in commodity prices. | | | | |
•Pioneer's ability to utilize its historic U.S. net operating loss carryforwards and those of Parsley may be limited. | | | | |
•The Company periodically evaluates its unproved oil and gas properties to determine recoverability of its cost and could be required to recognize noncash charges in the earnings of future periods. | | | | |
•The Company periodically evaluates its goodwill for impairment and could be required to recognize noncash charges in the earnings of future periods. | | | | |
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| Health, Safety and Environmental Risks | | | | |
| | | | |
•The Company's operations are subject to a series of risks arising out of the threat of climate change. | | | | |
•The nature of the Company's assets and production operations may impact the environment or cause environmental contamination. | | | | |
•The Company's hydraulic fracturing and former sand mining operations may result in silica-related health issues and litigation. | | | | |
•Increasing attention to ESG matters may impact the Company’s business. | | | | |
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| Regulatory Risks | | | | |
| | | | |
•The Company's operations are subject to stringent environmental, oil and gas-related and occupational safety and health legal requirements. | | | | |
•Laws, regulations and other executive actions or regulatory initiatives regarding hydraulic fracturing could increase the Company's cost of doing business and result in additional operating restrictions, delays or cancellations that could have a material adverse effect on the Company's business, results of operations and financial condition. | | | | |
•Laws and regulations pertaining to protection of threatened and endangered species or to critical habitat, wetlands and natural resources could delay, restrict or prohibit the Company's operations and cause it to incur substantial costs. | | | | |
•The Company's transportation of gas, sales and purchases of oil, NGLs and gas or other energy commodities, and any derivative activities related to such energy commodities, expose the Company to potential regulatory risks. | | | | |
•The enactment of derivatives legislation could have a material adverse effect on the Company's ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks. | | | | |
•The Company's bylaws provide that the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the exclusive forum for certain legal actions between the Company and its stockholders and that the federal district courts of the United States shall be the sole and exclusive forum for the resolution of causes of action arising under the Securities Act of 1933. | | | | |
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| Risks associated with the Parsley Acquisition | | | | |
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•The financial and operational synergies attributable to the Parsley Acquisition may vary from expectations. | | | | |
•Litigation relating to the Parsley Acquisition could result in substantial costs to the Company. | | | | |
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•The Company may be unable to integrate the business of Parsley successfully and/or realize the anticipated benefits of the Parsley Acquisition. | | | | |
•The Company's future results will suffer if it does not effectively manage its expanded operations. | | | | |
PIONEER NATURAL RESOURCES COMPANY
General business and industry risks.
The COVID-19 pandemic and recent developments in the global oil markets have had, and may continue to have, material adverse consequences for general economic, business and industry conditions and for the Company's operations, financial condition, results of operations, cash flows and liquidity and those of its purchasers, suppliers and other counterparties.
The COVID-19 pandemic has significantly affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the pandemic has resulted in travel restrictions, business closures and other restrictions that have led to a significant reduction in demand for oil, NGL and gas, which, when combined with the oil supply increase attributable to the battle for market share among OPEC, Russia and other oil producing nations that occurred during the first quarter of 2020, resulted in oil prices declining significantly beginning in late February 2020. For instance, on April 20, 2020, WTI crude oil future prices for May reached a record low of negative $37.63 per barrel. As a result of the pandemic and low oil prices, the Company reduced its 2020 drilling, completion, facilities and water infrastructure capital budget significantly in an effort to fund its budget fully from its forecasted cash flow. While prices for oil, NGLs and gas have generally improved during the fourth quarter of 2020 and the first quarter of 2021, if the reduced demand for and prices of oil, NGLs and gas, are highly volatileor the oversupply of oil, were to continue for a prolonged period, the Company may have to make changes to its operations and have declined significantly in recent years. A sustained decline in these commodity prices couldcapital budgets, and the Company's operations, financial condition, results of operations, cash flows and liquidity may be materially and adversely affectaffected. Risks include, but are not limited to, the Company's business, financial condition and results of operations.following:
The Company's revenues, profitability, cash flow and future rate of growth are highly dependent on commodity prices. Commodity prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, NGLs and gas, market uncertainty and a variety of additional factors that are beyond the Company's control, such as:
domestic and worldwide supply of and demand for oil, NGLs and gas;
the price and quantity of foreign imports of oil, NGLs and gas;
worldwide oil, NGL and gas inventory levels, including at Cushing, Oklahoma, the benchmark location for WTI oil prices, and the U.S. Gulf Coast, where the majority of the U.S. refinery capacity exists;
volatility and trading patterns in the commodity-futures markets;
the capacity of U.S. and international refiners to utilize U.S. supplies of oil and condensate;
weather conditions;
overall domestic and global political and economic conditions;
actions of OPEC, its members and other state-controlled oil companies relating to oil price and production controls;
the effect of oil, NGL and LNG imports to and exports from the U.S.;
technological advances affecting energy consumption and energy supply;
domestic and foreign governmental regulations, including environmental regulations, and taxation;
the effect of energy conservation efforts;
shareholder activism or activities by non-governmental organizations to restrict the exploration, development and production of oil and gas so as to minimize emissions of carbon dioxide and methane GHGs;
the proximity, capacity, cost and availability of pipelines and other transportation facilities; and
the price, availability and acceptance of alternative fuels.
In the past, commodity prices have been extremely volatile, and the Company expects this volatility to continue. For the five years ended December 31, 2017, oil prices fluctuated from a high of $110.53 per Bbl in 2013 to a low of $26.21 per Bbl in 2016 while gas prices fluctuated from a high of $6.15 per Mcf in 2014 to a low of $1.64 per Mcf in 2016. Likewise, NGLs have suffered significant recent declines. NGLs are made up of ethane, propane, isobutene, normal butane and natural gasoline, all of which have different uses and different pricing characteristics. A further or•An extended decline in commodity prices could materially and adversely affect the Company's future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures. The Company makes price assumptions that are used for planning purposes, and a significant portion of the Company's cash outlays, including rent, salaries and noncancelable capital commitments, are largely fixed in nature. Accordingly, if commodity prices are below the expectations on which these commitments were based, the Company's financial results are likely to be adversely and disproportionately affected because these cash outlays are not variable in the short term and cannot be quickly reduced to respond to unanticipated decreases in commodity prices.
PIONEER NATURAL RESOURCES COMPANY
Significant or extended price declines could also materially and adversely affect the amount of oil, NGLsNGL and gas that the Company can produce economically, which may result in (i) the Company having to make significant downward adjustments to its estimated proved reserves. A reduction in production could also result inreserves and (ii) a shortfall in expected cash flows, andwhich could require the Company to reduce capital spending or borrow funds to cover any such shortfall. AnyIn addition, the continuation of these factors could negativelydepressed prices may adversely affect the ability of the Company to pay dividends or repurchase shares of common stock in the future.
•The reduced demand for oil, combined with the oversupply of oil, is expected to result in an oil surplus in the United States and worldwide. If the global demand for oil exports to foreign markets, or if the price that can be obtained in foreign markets does not support the transportation and other costs to reach those destinations, it may be uneconomical to invest in new wells and may cause the Company to shut in producing wells. The Company cannot be certain whether shut-in wells can successfully return to pre-shut-in production levels or that the costs required to return the wells to production will be economical.
•The Company's ability to replacedevelop and sell its production could be materially and its future rateadversely affected by the inability or unwillingness of growth.
Thethird parties to provide sufficient processing, fractionation, refining, transportation, storage or export facilities to the Company. For example, oil storage in the United States has, at times, been near full capacity in many locations. If this were to occur for an extended period, the Company's derivative risk management activities could result in financial losses;purchasers might decline to purchase the Company's oil, NGLs and gas, and the Company may not enter into derivative arrangements with respectbe able to future volumes if prices are unattractive.
To mitigate the effectstore its production. Such a lack of commodity price volatility onmarket for or storage capacity for the Company's net cash provided by operating activities and its net asset value, supportproducts could require that the Company's annual capital budgeting and expenditure plans and reduce commodity price risk associated with certain capital projects, the Company's strategy is to enter into derivative arrangements covering aCompany shut in some portion of its production. The amount of oil NGLin storage may also keep oil prices at low levels for an extended period, even after demand begins to rise.
•Under Texas law, the Texas Railroad Commission is empowered to prorate oil production in the state based on market demand. If the Texas Railroad Commission finds that waste is taking place or is reasonably imminent, it is empowered to adopt a rule or order to correct, prevent, or lessen the waste. If the Texas Railroad Commission imposes proration in the future, or if any other similar laws or regulations are imposed, those restrictions would limit the amount of oil and gas production. These derivative arrangements are subject to MTM accounting treatment, and the changes in fair market valueCompany can produce.
•It is possible that any delay, reduction or curtailment of the contracts are reportedCompany's development and producing operations, whether due to regulatory actions or actions by the Company in reaction to market conditions, could result in the Company's statementsloss of operations each quarter, which may result in significant noncash gainsacreage through lease expiration.
•Market conditions resulting from the effects of the COVID-19 pandemic, low oil prices, or losses. These derivative contracts maya negative or recessionary economy could also exposeincrease the Company to risk of financial loss in certain circumstances, including when:
production is less thanthat the contracted derivative volumes;
the counterparty to the derivative contract defaults on its contract obligations; or
the derivative contracts limit the benefit the Company would otherwise receive from increases in commodity prices.
On the other hand, failure to protect against declines in commodity prices exposes the Company to reduced liquidity when prices decline. Although the Company has entered into commodity derivative contracts for a large portion of its forecasted production through 2018, the volumes of protected production for 2019 and future years is substantially less. A sustained lower commodity price environment would result in lower realized prices for unprotected volumes and reduce the prices at which the Company could enter into derivative contracts on future volumes. This could make such transactions unattractive, and, as a result, some or allpurchasers of the Company's production, volumes forecasted for 2019 and beyond may not be protected by derivative arrangements. In addition, the Company's derivatives arrangements may not achieve their intended strategic purposes.
Finally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), enacted in July 2010, established federal oversight and regulation of the over-the-counter derivatives market and entities, such as the Company, that participate in that market. Regulation by the CFTC and banking regulators may materially and adversely affect the cost and availability of derivatives, including by causing the Company's contract counterparties, which are generally financial institutions and other market participants, to curtail or cease their derivatives activities.
The failure bylenders under its credit agreements, counterparties to the Company'sits derivative risk management activities to perform their obligations could have a material adverse effect on the Company's results of operations.
The use of derivative risk management transactions involves the risk that the counterparties willinstruments, and service providers may be unable to meet the financial terms of such transactions. The Company is unable to predict changesfulfill their obligations in a counterparty's creditworthinesstimely manner, or ability to perform. Even if the Company accurately predicts sudden changes, the Company's ability to negate the risk may be limited depending upon market conditions and the contractual terms of the transactions. During periods of declining commodity prices, the Company's derivative receivable positions generally increase, which increases the Company's counterparty credit exposure.at all. If any of the Company's counterpartiessuch counterparty were to default on its obligations, under the Company's derivative arrangements, such a default could have a material adverse effect on the Company's results of operations, and could result in a larger percentage of the Company's future production being subject to commodity price changes and could increase the likelihood that the Company's derivative arrangements may not achieve their intended strategic purposes.operations.
Exploration and development drilling may not result in commercially productive reserves.
Drilling involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled, or become costlier, as a result of a variety of factors, including:
unexpected drilling conditions;
unexpected pressure or irregularities in formations;
equipment failures or accidents;
construction delays;
fracture stimulation accidents or failures;
adverse weather conditions;
restricted access to land for drilling or laying pipelines;
PIONEER NATURAL RESOURCES COMPANY
title defects;
lack of available gathering, transportation, processing, fractionation, storage, refining or export facilities;
lack of available capacity on interconnecting transmission pipelines;
access to, and the cost and availability of, the equipment, services, resources and personnel required to complete the Company's drilling, completion and operating activities; and
delays imposed by or resulting from compliance with environmental and other governmental or regulatory requirements.
The Company's future drilling activities may not be successful and, if unsuccessful, the Company's proved reserves and production would decline, which could have an adverse effect on the Company's future results of operations and financial condition. While all drilling, whether developmental, extension or exploratory, involves these risks, exploratory and extension drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. The Company expects that it will continue to experience exploration and abandonment expense in 2018.
Future price declines could result in a reduction in the carrying value of the Company's proved oil and gas properties, which could materially and adversely affect the Company's results of operations.
Significant or extended price declines could result in the Company having to make downward adjustments to the carrying value of its proved oil and gas properties. •The Company performs assessments of its proved and unproved oil and gas properties whenever events or circumstances indicate that the carrying values of those assets may not be recoverable. In order to perform these assessments, management uses various observable and unobservable inputs, including management's outlooks for (i) proved reserves and risk-adjusted probable and possible reserves, (ii) commodity prices, (iii) production costs, (iv) capital expenditures and (v) production. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of the Company's proved oil and gas properties, the carrying value may not be recoverable and therefore an impairment charge wouldcould be required to reduce the carrying value of theits proved oil and gas properties to their fair value. For example, during 2017 the Company recognized an impairment charge of $285 million attributable to its Raton field in southeast Colorado, and in 2016 the Company recognized an impairment charge of $32 million attributable to its West Panhandle field assets in the panhandle region of Texas, primarily due to declines in commodity prices and downward adjustments to the economically recoverable reserves attributable to each asset. The Company may incur impairment charges in the future, which could materially affect the Company's results of operations in the period incurred. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Impairment of oil and gas properties and other long-lived assets" and Note D of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further information on the Company's impairment charges.
The Company periodically evaluates its unproved oil and gas properties to determine recoverability of its cost and could be required to recognize noncash charges in the earnings of future periods.
At December 31, 2017, the Company carried unproved oil and gas property costs of $558 million. GAAP requires periodic evaluation of these costs on a project-by-project basis. These evaluations are affected by the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of the leases and the contracts and permits appurtenant to such projects. If the quantity of potential reserves determined by such evaluations is not sufficient to fully recover the cost invested in each project, the Company will recognize noncash charges in the earnings of future periods.
The Company periodically evaluates itsIn addition, goodwill for impairment and could be required to recognize noncash charges in the earnings of future periods.
At December 31, 2017, the Company had a carrying value for goodwill of $270 million. Goodwill is assessed for impairment annually during the third quarter and whenever factsit is likely that events or circumstances indicate that the carrying value of thea reporting unit exceeds its fair value.
PIONEER NATURAL RESOURCES COMPANY
•The Company's goodwilloperations may be impaired, whichadversely affected if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, social distancing, government actions, or other restrictions in connection with the COVID-19 pandemic. The Company, as recommended by the CDC, has implemented workplace restrictions, including guidance for employees to work remotely for health and safety reasons, where possible. As some employees may require an estimate of the fair values of the reporting unit's assets and liabilities. Those assessmentshave been or may be affected by (i) additional reserve adjustments both positive and negative, (ii) results of drilling activities, (iii) management's outlook for commodity prices and costs and expenses, (iv) changes in the Company's market capitalization, (v) changes in the Company's weighted average cost of capital and (vi) changes in income taxes. If the fair value of the reporting unit's net assets is not sufficient to fully support the goodwill balance in the future be placed in workplaces where exposure to COVID-19 is possible, the Company may be subject to risk of liability should such employees allege that the Company failed to adequately mitigate the risk of exposure to COVID-19, to the extent obligated to do so. In addition, in order to facilitate remote working arrangements, some employees are accessing workspaces from their personal devices through cloud-based systems, which could increase cybersecurity risks to the Company and to its employees. There can be no assurance that the Company's operations will reducenot be curtailed or suspended or otherwise adversely affected due to such workforce issues.
The Company is not able to predict the carrying valueultimate long-term impact of goodwillthe COVID-19 pandemic on the Company's business, which will depend on numerous evolving factors and future developments that are beyond the Company's control, including the length of time that the pandemic continues, the speed and effectiveness of responses to combat the virus, the impact of the pandemic and its aftermath on the demand for oil, NGLs and gas, the impaired value,response of the overall economy and the financial markets as well as the effect of governmental actions taken in response to the COVID-19 pandemic.
Declining general economic, business or industry conditions could have a material adverse effect on the Company's results of operations.
The economies in the United States and certain countries in Europe and Asia have been growing, with resulting improvements in industrial demand and consumer confidence. However, other economies, such as those of certain South American nations, continue to face economic struggles or slowing economic growth. If these conditions worsen, combined with a corresponding noncash charge to earningsdecline in economic growth in other parts of the world, there could be a significant adverse effect on global financial markets and commodity prices. In addition, continued hostilities in the periodMiddle East, and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. Global or national health concerns, including the outbreak of pandemic or contagious disease, such as the COVID-19 pandemic, may adversely affect the Company by (i) reducing demand for its oil, NGL and gas because of reduced global or national economic activity, (ii) impairing its supply chain (for example, by limiting manufacturing of materials used in operations), and (iii) affecting the health of its workforce, rendering employees unable to work or travel. If the economic climate in the United States or abroad were to deteriorate, demand for petroleum products could diminish or stagnate, which goodwill is determinedcould depress the prices at which the Company could sell its oil, NGLs and gas, affect the ability of the Company's vendors, suppliers and customers to be impaired.continue operations and ultimately decrease the Company's cash flows and profitability. In addition, reduced worldwide demand for debt and equity securities issued by oil and gas companies may make it more difficult for it to raise capital.
The Company may be unable to make attractive acquisitions and any acquisition it completes is subject to substantial risks that could materially and adversely affect its business.
Acquisitions of producing oil and gas properties, including acreage trades, have from time to time contributed to the Company's growth. Acquisition opportunities in the oil and gas industry are very competitive, which can increase the cost of, or cause the Company to refrain from, completing acquisitions. The success of any acquisition will depend on a number of factors and involves potential risks, including, among other things:
PIONEER NATURAL RESOURCES COMPANY
•the inability to accurately forecast future commodity prices and estimate accurately the costs to develop the acquired reserves, the recoverable volumes of the acquired reserves, rates of future production and future net cash flows attainable from the acquired reserves;
•the assumption of unknown liabilities, including environmental liabilities, and losses or costs for which the Company is not indemnified or for which the indemnity the Company receives is inadequate;
•the validity of assumptions about costs, including synergies;
•the effect on the Company's liquidity or financial leverage of using available cash or debt to finance acquisitions;acquisitions or from the amount of debt assumed as part of the acquisition;
•the diversion of management's attention from other business concerns; and
•an inability to hire, train or retain qualified personnel to manage and operate the Company's growing business and assets.
All of these factors affect whether an acquisition will ultimately generate cash flows sufficient to provide a suitable return on investment. Even though the Company performs a review of the properties it seeks to acquire that it believes is consistent with industry practices, such reviews are often limited in scope. As a result, among other risks, the Company's initial estimates of reserves may be subject to revision following an acquisition, which may materially and adversely affect the desired
PIONEER NATURAL RESOURCES COMPANY
The Company's ability to complete dispositions of assets, or interests in assets, may be subject to factors beyond its control, and in certain cases the Company may be required to retain liabilities for certain matters.
From time to time, the Company sells an interest in a strategic assetits oil and gas properties for the purpose of assisting or accelerating the asset's development. In addition, the Company regularly reviews its property base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities and create organizational and operational efficiencies. Various factors could materially affect the ability of the Company to dispose of such interests or nonstrategic assets or complete announced dispositions, including the receipt of approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the interests or purchase the nonstrategic assets on terms and at prices acceptable to the Company.
Sellers typically retain certain liabilities or indemnify buyers for certain pre-closing matters, such as matters of litigation, environmental contingencies, royalty obligations and income taxes. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction and ultimately may be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release the Company from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, the Company may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.
The Company's operations involve many operational risks, some of which could result in unforeseen interruptions to the Company's operations and substantial losses to the Company for which the Company may not be adequately insured.
The Company's operations, including well stimulation and completion activities, such as hydraulic fracturing, and water distribution and disposal activities, are subject to all the risks incident to the oil and gas development and production business, including:
blowouts, cratering, explosions and fires;
adverse weather effects;
environmental hazards, such as NGL and gas leaks, oil and produced water spills, pipeline and vessel ruptures, encountering naturally occurring radioactive materials ("NORM"), and unauthorized discharges of toxic chemicals, gases, brine, well stimulation and completion fluids or other pollutants onto the surface or into the subsurface environment;
high costs, shortages or delivery delays of equipment, labor or other services or water and sand for hydraulic fracturing;
facility or equipment malfunctions, failures or accidents;
title problems;
pipe or cement failures or casing collapses;
uncontrollable flows of oil or gas well fluids;
compliance with environmental and other governmental requirements;
lost or damaged oilfield workover and service tools;
surface access restrictions;
unusual or unexpected geological formations or pressure or irregularities in formations;
terrorism, vandalism and physical, electronic and cyber security breaches; and
natural disasters.
The Company's overall exposure to operational risks may increase as its drilling activity expands and as it increases internally-provided fracture stimulation, water distribution, water disposal and other services. Any of these risks could result in substantial
PIONEER NATURAL RESOURCES COMPANY
losses to the Company due to injury or loss of life, damage to or destruction of wells, production facilities or other property, clean-up responsibilities, regulatory investigations and penalties and suspension of operations.
The Company is not fully insured against certain of the risks described above, either because such insurance is not available or because of the high premium costs and deductibles associated with obtaining such insurance. Additionally, the Company relies to a large extent on facilities owned and operated by third-parties, and damage to or destruction of those third-party facilities could affect the ability of the Company to produce, transport and sell its hydrocarbons.
The Company's gas processing operations are subject to operational risks, which could result in significant damages and the loss of revenue.
As of December 31, 2017, the Company owned interests in 10 gas processing plants and four treating facilities. The Company is the operator of one of the gas processing plants and all four of the treating facilities. Nine of the gas processing plants are operated by third parties and one of the treating facilities is not currently being used. There are significant risks associated with the operation of gas processing plants. Gas and NGLs are volatile and explosive and may include carcinogens. Damage to or improper operation of a gas processing plant or facility could result in an explosion or the discharge of toxic gases, which could result in significant damage claims in addition to interrupting a revenue source.
Part of the Company's strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.
The Company's operations involve utilizing some of the latest drilling and completion techniques as developed by it and its service providers. Risks that the Company faces while drilling horizontal wells include, but are not limited to, the following:
landing the wellboreconcentrated in the desired drilling zone;
staying in the desired drilling zone while drilling horizontally through the formation;
running casing the entire lengthPermian Basin of the wellbore; and
being able to run tools and other equipment consistently through the horizontal wellbore.
Risks that the Company faces while completing wells include, but are not limited to, the following:
theWest Texas, an area of high industry activity, which may affect its ability to fracture stimulateobtain the planned number of stages;
the ability to run tools the entire length of the wellbore during completion operations; and
the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage.
Drilling in emerging areas is more uncertain than drilling in areas that are more developed and have a longer history of established drilling operations. New discoveries and emerging formations have limited or no production history and, consequently, the Company is more limited in assessing future drilling results in these areas. If the Company's drilling results are worse than anticipated, the return on investment for a particular project may not be as attractive as anticipated and the Company may recognize noncash charges to reduce the carrying value of its unproved properties in those areas.
The Company's expectations for future drilling activities will be realized over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of such activities.
The Company has identified drilling locations and prospects for future drilling opportunities, including development, exploratory and infill drilling activities. These drilling locations and prospects represent a significant part of the Company's future drilling plans. For example, the Company's proved reserves as of December 31, 2017 include proved undeveloped reserves and proved developed non-producing reserves of 45 MMBbls of oil, 22 MMBbls of NGLs and 291 Bcf of gas. The Company's ability to drill and develop these locations depends on a number of factors, including the availability and cost of capital, regulatory approvals, negotiation of agreements with third parties, commodity prices, costs, access to and availability ofpersonnel, equipment, services, resources and personnel and drilling results. There can be no assurance thatfacilities access needed to complete its development activities as planned or result in increased costs; such concentration also makes the Company will drill these locationsvulnerable to risks associated with operating in a limited geographic area.
The Company's producing properties are geographically concentrated in the Permian Basin of West Texas. Industry activity is high in the Permian Basin and demand for and costs of personnel, equipment, power, services and resources remains high. Any delay or thatinability to secure the Company will be able to producepersonnel, equipment, power, services and resources could result in oil, orNGL and gas reserves from these locations or any other potential drilling locations. Well results vary by formation and geographic area, andproduction volumes being below the Company's drilling activities are generally focusedforecasted volumes. In addition, any such negative effect on remaining locations that are believed to offer the highest return. Changesproduction volumes, or significant increases in the laws or regulations on which the Company relies in planning and executing its drilling programs could materially and adversely impact the Company's ability to successfully complete those programs. For example, under current Texas laws and regulations the Company may receive permits to drill, and may drill and complete, certain horizontal wells that traverse one or more units and/or leases; a change in those laws or regulations could materially and adversely impact the Company's ability to drill those wells. Because of these uncertainties, the Company cannot give any assurance as to the timing of these activities or that they will ultimately result in the realization of proved reserves or meet the Company's expectations for success. As such, the Company's actual drilling activities may materially differ from the Company's current
PIONEER NATURAL RESOURCES COMPANY
expectations, whichcosts, could have a material adverse effect on the Company's proved reserves, financial condition and results of operations.operations, cash flow and profitability.
A portionAs a result of the Company's total estimated proved reserves at December 31, 2017 were undeveloped, and those proved reserves may not ultimately be developed.
At December 31, 2017, approximately eight percent of the Company's total estimated proved reserves were undeveloped. Recovery of undeveloped proved reserves requires significant capital expenditures and successful drilling. The Company's reserve data assumes that the Company can and will make these expenditures and conduct these operations successfully, which assumptions may not prove correct. If the Company chooses not to spend the capital to develop these proved undeveloped reserves, or if the Company is not otherwise able to successfully develop these proved undeveloped reserves, the Company will be required to write-off these proved reserves. In addition, under the SEC's rules, because proved undeveloped reserves may be booked only if they relate to wells planned to be drilled within five years of the date of booking,this concentration, the Company may be requireddisproportionately exposed to write-off any proved undeveloped reserves that are not developed within this five-year timeframe. As with all oil and gas leases, the Company's leases require the Company to drill wells that are commercially productive and to maintain theimpact of delays or interruptions of operations or production in paying quantities, and if the Company is unsuccessful in drillingthis area caused by external factors such wells and maintaining such production, the Company could lose its rights under such leases. The Company's future production levels and, therefore, its future cash flow and income are highly dependent on successfully developing its proved undeveloped leasehold acreage.
The Company's actual production could differ materially from its forecasts.
From time to time, the Company provides forecasts of expected quantities of future oil and gas production and other financial and operating results. These forecasts are based on a number of estimates and assumptions, including that none of the risks associated with the Company's oil and gas operations summarized in this "Item 1A. Risk Factors" occur. Production forecasts, specifically, are based on assumptions such as:
expectations of production from existing wells and future drilling activity;
the absence of facilityas governmental regulation, state politics, market limitations, water or equipment malfunctions;
the absence of adversesand shortages or extreme weather effects;
expectations of commodity prices, which could experience significant volatility;
expected well costs; and
the assumed effects of regulation by governmental agencies, which could make certain drilling activities or production uneconomical.
Should any of these assumptions prove inaccurate, or should the Company's development plans change, actual production could be materially and adversely affected.
Because the Company's proved reserves and production decline continually over time, the Company will need to mitigate these declines through drilling and production enhancement initiatives and/or acquisitions.
Producing oil and gas reservoirs are characterized by declining production rates, which vary depending upon reservoir characteristics and other factors. Because the Company's proved reserves and production decline continually over time as those reserves are produced, the Company will need to mitigate these declines through drilling and production enhancement initiatives and/or acquisitions of additional recoverable reserves. There can be no assurance that the Company will be able to develop, exploit, find or acquire sufficient additional reserves to replace its current or future production.related conditions.
The Company may not be able to obtain access on commercially reasonable terms or otherwise to pipelines and storage facilities, gathering systems and other transportation, processing, fractionation, refining and export facilities to market its oil, NGL and gas production; the Company relies on a limited number of purchasers for a majority of its products.
The marketing of oil, NGLsNGL and gas production depends in large part on the availability, proximity and capacity of pipelines and storage facilities, gathering systems and other transportation, processing, fractionation, refining and export facilities, as well as the existence of adequate markets. If there were insufficient capacity available on these systems, if these systems were unavailable to the Company or if access to these systems were to become commercially unreasonable, the price offered for the Company's production could be significantly depressed, or the Company could be forced to shut in some production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons while it constructs its own facility or awaits the availability of third party facilities. The Company also relies (and expects to rely in the future) on facilities developed and owned by third parties in order to gather, store, process, transport, fractionate, refine, export and sell its oil, NGL and gas production. The Company's plans to develop and sell production from its oil and gas reserves could be materially and adversely affected by the inability or unwillingness of third parties to provide sufficient gathering, transportation, storage, or processing, fractionation, refining or export facilities to the Company, especially in areas of planned expansion where such facilities do not currently exist. Additionally, certain of these challenges may be compounded by a high level of industry activity in the Permian Basin.
PIONEER NATURAL RESOURCES COMPANY
For example, following Hurricane Harvey in 2017 and Hurricanes Gustav and Ike in 2008, certain Permian Basin gas processors were forced to shut down their plants due to the inability of certain Texas Gulf Coast NGL fractionators to operate. The Company was able to produce its oil wells and vent or flare the associated gas; however, there is no certainty the Company will be able to vent or flare gas in the future due to potential changes in regulations.The amount of oil and gas that can be produced is subject to limitations in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering, transportation, storage, processing, fractionation, refining or
PIONEER NATURAL RESOURCES COMPANY
export facilities, or lack of capacity at such facilities. The Company has periodically experienced high line pressure at its tank batteries, which has occasionally led to the flaring of gas due to the inability of the gas gathering systems in the areas to support the increased gas production. The curtailments arising from these and similar circumstances may last from a few days to several months, and in many cases, the Company may be provided only limited, if any, notice as to when these circumstances will arise and their duration.
To the extent that the Company enters into transportation contracts with pipelines that are subject to FERC regulation, the Company is subject to FERC requirements related to use of such capacity. Any failure on the Company's part to comply with FERC's regulations and policies related to pipeline transportation, reporting requirements, or other regulations, and any failure to comply with a FERC-related pipeline's tariff, could result in the imposition of civil and criminal penalties. In addition, any changes in FERC or state regulations or requirements on pipeline transportation may result in increased transportation costs on pipelines that are subject to such regulation, thereby negatively impacting the Company's profitability.
A limited number of companies purchase a majority of the Company's oil, NGLsNGL and gas. The loss of a significant purchaser could have a material adverse effect on the Company's ability to sell its production.
The Company's operations and drilling activity are concentrated in the Permian Basin of West Texas, an area of high industry activity, which may affect its ability to obtain the personnel, equipment, services, resources and facilities access needed to complete its development activities as planned or result in increased costs; such concentration also makes the Company vulnerable to risks associated with operating in a limited geographic area.
The Company's producing properties are geographically concentrated in the Permian Basin of West Texas. At December 31, 2017, 77 percent of the Company's total estimated proved reserves were attributable to properties located in this area. In addition, the Company's operations and drilling activity are concentrated in this area where industry activity is high. As a result, demand for personnel, equipment, power, services and resources has increased, as well as the costs for these items. Any delay or inability to secure the personnel, equipment, power, services and resources could result in oil, NGL and gas production volumes being below the Company's forecasted volumes. In addition, any such negative effect on production volumes, or significant increases in costs, could have a material adverse effect on the Company's results of operations, cash flow and profitability.
As a result of this concentration, the Company may be disproportionately exposed to the impact of delays or interruptions of operations or production in this area caused by external factors such as governmental regulation, state politics, market limitations, water or sand shortages or extreme weather related conditions.
Pioneer's operations are substantially dependent upon the availability of water and its ability to dispose of produced water gathered from drilling and production activities. Restrictions on the Company's ability to obtain water or dispose of produced water may have a material adverse effect on its financial condition, results of operations and cash flows.
Water is an essential component of both the drilling and hydraulic fracturing processes. Limitations or restrictions on the Company's ability to secure sufficient amounts of water (including limitations resulting from natural causes such as drought), could materially and adversely impact its operations. Severe drought conditions can result in local water districts taking steps to restrict the use of water in their jurisdiction for drilling and hydraulic fracturing in order to protect the local water supply. If the Company is unable to obtain water to use in its operations from local sources, it may need to be obtained from new sources and transported to drilling sites, resulting in increased costs, which could have a material adverse effect on its financial condition, results of operations and cash flows.
In addition, the Company must dispose of the fluids produced from oil and gas production operations, including produced water, which it does directly or through the use of third party vendors. The legal requirements related to the disposal of produced water into a non-producing geologic formation by means of underground injection wells are subject to change based on concerns of the public or governmental authorities regarding such disposal activities. One such concern arises from recent seismic events near underground disposal wells that are used for the disposal by injection of produced water resulting from oil and gas activities. In March 2016, the United States Geological Survey identified Texas and Colorado as being among the states with areas of increased rates of induced seismicity that could be attributed to fluid injection or oil and gas extraction. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells to assess any relationship between seismicity and the use of such wells. For example, in Texas, the Texas Railroad Commission adopted new rules governing the permitting or re-permitting of wells used to dispose of produced water and other fluids resulting from the production of oil and gas in order to address these seismic activity concerns within the state. Among other things, these rules require companies seeking permits for disposal wells to provide seismic activity data in permit applications, provide for more frequent monitoring and reporting for certain wells and allow the state to modify, suspend or terminate permits on grounds that a disposal well is likely to be, or determined to be, causing seismic activity.
PIONEER NATURAL RESOURCES COMPANY
States may issue orders to temporarily shut down or to curtail the injection depth of existing wells in the vicinity of seismic events. Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. These developments could result in additional regulation and restrictions on the use of injection wells by the Company or by commercial disposal well vendors whom the Company may use from time to time to dispose of produced water. Increased regulation and attention given to induced seismicity could also lead to greater opposition, including litigation to limit or prohibit oil and gas activities utilizing injection wells for produced water disposal. Any one or more of these developments may result in the Company or its vendors having to limit disposal well volumes, disposal rates and pressures or locations, or require the Company or its vendors to shut down or curtail the injection into disposal wells, which events could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company could experience periods of higher costs if commodity prices rise. These increases could reduce the Company's profitability, cash flow and ability to complete development activities as planned.
Historically, the Company's capital and operating costs have risen during periods of increasing oil, NGL and gas prices. These cost increases result from a variety of factors beyond the Company's control, such as increases in the cost of electricity, steel and other raw materials that the Company and its vendors rely upon; increased demand for labor, services and materials as drilling activity increases; and increased production and ad valorem taxes. Decreased levels of drilling activity in the oil and gas industry in recent periods have led to cost reductions for some drilling equipment, materials and supplies. However, such costs may rise faster than increases in the Company's revenue if commodity prices rise, thereby negatively impacting the Company's profitability, cash flow and ability to complete development activities as scheduled and on budget. This impact may be magnified to the extent that the Company's ability to participate in the commodity price increases is limited by its derivative risk management activities.
The refining industry may be unable to absorb rising U.S. oil and condensate production; in such a case, the resulting surplus could depress prices and restrict the availability of markets, which could materially and adversely affect the Company's results of operations.
Absent an expansion of U.S. refining and export capacity, risingan increase in U.S. production of oil and condensates could result in a surplus of these products in the U.S., which would likely cause prices for these commodities to fall and markets to constrict. Although U.S. law was changed in 2015 to permit the export of oil, exports may not occur if demand is lacking in foreign markets or the price that can be obtained in foreign markets does not support associated export capacity expansions, transportation and other costs. In such circumstances, the returnsrate of return on the Company's capital projects would decline, possibly to levels that would make execution of the Company's drilling plans uneconomical, and a lack of market for the Company's products could require that the Company shut in some portion of its production. If this were to occur, the Company's production and cash flow could decrease, or could increase less than forecasted, which could have a material adverse effect on the Company's cash flow and profitability.
The Company's operations are subject to stringent environmental and oil and gas-related laws and regulations that could cause it to suspend or curtail its operations or expose it to material costs and liabilities.
The Company's operations are subject to stringent federal, state and local laws and regulations governing, among other things, the drilling of wells, developing rates of production, the size and shape of drilling and spacing units or proration units, the transportation and sale of oil, NGLs and gas, and the discharging of materials into the environment and environmental protection. In connection with its operations, the Company must obtain and maintain numerous environmental and oil and gas-related permits, approvals, and certificates from various federal, state and local governmental authorities, and may incur substantial costs in doing so. The need to obtain permits has the potential to delay the development of oil and gas projects. Over the next several years, the Company may be charged royalties on gas emissions or required to incur certain capital expenditures for air pollution control equipment or other air emissions-related issues. For example, in October 2015, the EPA issued a final rule under the CAA lowering the National Ambient Air Quality Standard ("NAAQS") for ground-level ozone from 75 parts per billion to 70 parts per billion under standards to provide protection of public health and welfare. In November 2017, the EPA published a final rule that issued area designations with respect to ground-level ozone for approximately 85% of the U.S. counties as either "attainment/unclassifiable" or "unclassifiable" but has not yet issued non-attainment designations for the remaining areas of the U.S. not addressed under the November 2017 final rule. Reclassification of areas or imposition of more stringent standards may make it more difficult to construct new or modify air pollution control systems to reduce or eliminate sources of air pollution in newly designated non-attainment areas. Moreover, states are expected to implement regulations implementing the NAAQS rule that may be more stringent than the federal standards. In another example, in June 2016, the EPA published a final rule updating federal permitting regulations for stationary sources in the oil and gas industry by defining and clarifying the meaning of the term "adjacent" for determining when separate surface sites and the equipment at those sites will be aggregated for permitting purposes. Future compliance with these legal requirements or with any new or amended environmental laws or regulations could, among other things, delay, restrict or prohibit the issuance of necessary permits, increase the Company's capital expenditures and operating
PIONEER NATURAL RESOURCES COMPANY
expenses by, for example, requiring installation of new emission controls on some of the Company's equipment, any one or more of which developments could have a material adverse effect on the Company's business, financial condition and results of operations.
There can be no assurance that present or future regulations will not result in a curtailment of production or processing activities, result in a material increase in the costs of production, development, exploration or processing operations or materially and adversely affect the Company's future operations and financial condition. Noncompliance with these laws and regulations may subject the Company to sanctions, including administrative, civil or criminal penalties, remedial cleanups or corrective actions, delays in permitting or performance of projects, natural resource damages and other liabilities. Such laws and regulations may also affect the costs of acquisitions. In addition, these laws and regulations are subject to amendment or replacement by more stringent laws and regulations.
The nature of the Company's assets and production operations may impact the environment or cause environmental contamination, which could result in material liabilities to the Company.
The Company's assets and production operations may give rise to significant environmental costs and liabilities as a result of the Company's handling of petroleum hydrocarbons and wastes, because of air emissions and water discharges related to its operations, and due to past industry operations and waste disposal practices. The Company's oil and gas business involves the generation, handling, treatment, storage, transport and disposal of wastes, hazardous substances and petroleum hydrocarbons and is subject to environmental hazards, such as oil and produced water spills, NGL and gas leaks, pipeline and vessel ruptures and unauthorized discharges of such wastes, substances and hydrocarbons, that could expose the Company to substantial liability due to pollution and other environmental damage. The Company currently owns, leases or operates, and in the past has owned, leased or operated, properties that for many years have been used for oil and gas exploration and production activities, and petroleum hydrocarbons, hazardous substances and wastes may have been released on or under such properties, or on or under other locations, including off-site locations, where such substances have been taken for treatment or disposal. These wastes, substances and hydrocarbons may also be released during future operations. In addition, some of the Company's properties have been operated by predecessors or previous owners or operators whose treatment and disposal of hazardous substances, wastes or petroleum hydrocarbons were not under the Company's control. Joint and several strict liabilities may be incurred in connection with such releases of petroleum hydrocarbons, hazardous substances and wastes on, under or from the Company's properties. Private parties, including lessors of properties on which the Company operates and the owners or operators of properties adjacent to the Company's operations and facilities where the Company's petroleum hydrocarbons, hazardous substances or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as seek damages for noncompliance with environmental laws and regulations or for personal injury or property damage. Such properties and the substances disposed or released on or under them may be subject to CERCLA, RCRA and analogous state laws, which could require the Company to remove previously disposed substances, wastes and petroleum hydrocarbons, remediate contaminated property or perform remedial plugging or pit closure operations to prevent future contamination, the costs of which could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company may not be able to recover some or any of these costs from sources of contractual indemnity or insurance, as pollution and similar environmental risks generally are not fully insurable, either because such insurance is not available or because of the high premium costs and deductibles associated with obtaining such insurance.
Climate change legislation and regulatory initiatives restricting emissions of GHGs could result in increased operating costs and reduced demand for the oil, NGLs and gas the Company produces and the potential physical effects of climate change could disrupt the Company's production and cause the Company to incur significant costs in preparing for or responding to those effects.
Climate change continues to attract considerable public, political and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs, and regulations that directly limit GHG emissions from certain sources.
At the federal level, no comprehensive climate change legislation has been implemented to date. The EPA has, however, adopted regulations under the CAA that, among other things, establish certain permits and construction reviews designed to allow operations while ensuring the prevention of significant deterioration in air quality by GHG emissions from large stationary sources that are already potential sources of significant pollutant emissions. The Company could become subject to these permitting requirements and be required to install "best available control technology" to limit emissions of GHGs from any new or significantly modified facilities that the Company may seek to construct in the future if they would otherwise emit large volumes of GHGs from such sources. The EPA has also adopted rules requiring the reporting of GHG emissions on an annual basis from specified GHG emission sources in the United States, including certain oil and gas production facilities, which include certain of the Company's facilities. Federal agencies also have begun directly regulating emissions of methane, a GHG, from oil and gas
PIONEER NATURAL RESOURCES COMPANY
operations. In June 2016, the EPA published a final rule establishing New Source Performance Standards, known as Subpart OOOOa, that require certain new, modified or reconstructed facilities in the oil and gas sector to reduce certain methane gas and volatile organic compound emissions. These Subpart OOOOa standards expand previously issued New Source Performance Standards, published by the EPA in 2012 and known as Subpart OOOO, by using certain equipment-specific emissions control practices. However, in June 2017, the EPA published a proposed rule to stay certain portions of these Subpart OOOOa standards for two years and revisit the entirety of the 2016 standard, but has not yet published a final rule. As a result, future implementation of the 2016 standards is uncertain at this time. Furthermore, with respect to a final rule published by the BLM in November 2016 and imposing requirements to reduce methane emissions from venting, flaring and leaking on public lands, the BLM has since published a proposed rulemaking in October 2017 that would temporarily suspend certain requirements contained in the November 2016 final rule until January 17, 2019, but the October 2017 rulemaking has not yet been finalized.
At the state level, some states are considering and other states, including Colorado, where the Company conducts operations, have issued requirements for the performance of leak detection programs that identify and repair methane leaks at certain oil and gas sources. State rules may be more stringent than federal rules. Compliance with the EPA's June 2016, the BLM's November 2016 rule or with any future federal or state methane regulations could, among other things, require installation of new emission controls on some of the Company's equipment and significantly increase the Company's capital expenditures and operating costs.
Internationally, in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France that prepared an agreement requiring member countries to review and "represent a progression" in their intended nationally determined contributions, which set GHG emission reduction goals every five years beginning in 2020. This "Paris agreement" was signed by the United States in April 2016 and entered into force in November 2016. Although this agreement does not create any binding obligations for nations to limit their GHG emissions, it does include pledges to voluntarily limit or reduce future emissions. In August 2017, the U.S. State Department officially informed the United Nations of the United States' intention to withdraw from the Paris agreement. The Paris agreement provides for a four-year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States' adherence to the exit process and/or the terms on which the United States may re-enter the Paris agreement or a separately negotiated agreement are unclear at this time.
The adoption and implementation of any federal or state legislation or regulations or international agreements that require reporting of GHGs or otherwise restrict emissions of GHGs from the Company's equipment and operations could require the Company to incur increased operating costs, such as costs to purchase and operate emissions control systems, acquire emissions allowances or comply with new regulatory or reporting requirements, including the imposition of a carbon tax, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, such new legislation or regulatory programs as well as conservation plans and efforts undertaken in response to climate change could also materially and adversely affect demand for the oil, NGLs and gas the Company produces and lower the value of its reserves. Depending on the severity of any such limitations, the effect on the value of the Company's reserves could be material. In addition, recent non-governmental activism directed at shifting funding away from companies with energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector.
Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods, droughts and other extreme climatic events. If any such effects were to occur, they could have a material adverse effect on the Company's exploration and production operations.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs and additional operating restrictions or delays and materially and adversely affect the Company's production.
Hydraulic fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations. The Company conducts hydraulic fracturing in the majority of its drilling and completion programs. The process involves the injection of water, sand and additives under pressure into targeted subsurface formations to stimulate oil and gas production. The process is typically regulated by state oil and gas commissions, but in recent years, several federal agencies have conducted investigations or asserted regulatory authority over certain aspects of the process. For example, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that "water cycle" activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances. Additionally, the EPA has asserted regulatory authority pursuant to the SDWA's UIC program over hydraulic fracturing activities involving the use of diesel and issued guidance covering such activities. Moreover, in June 2016, the EPA published an effluent water final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly-owned wastewater treatment plants, and in 2014, the EPA issued a prepublication of its Advance Notice of Proposed Rulemaking regarding Toxic Substances Control Act reporting of the chemical substances and mixtures used in hydraulic fracturing. Also, the BLM published a final rule
PIONEER NATURAL RESOURCES COMPANY
in March 2015 that established new or more stringent standards relating to hydraulic fracturing on federal and American Indian lands. However, with respect to this BLM rule, a Wyoming federal judge struck down this rule in June 2016, finding that the BLM lacked congressional authority to promulgate the rule, the BLM appealed the decision in July 2017, the appellate court issued a ruling in September 2017 to vacate the Wyoming trial court decision and dismiss the lawsuit challenging the 2015 rule in response to the BLM's issuance of a proposed rulemaking to rescind the 2015 rule and, on December 29, 2017, the BLM published a final rule rescinding the March 2017 rule.
From time to time, the U.S. Congress has considered adopting legislation intended to provide for federal regulation of hydraulic fracturing and to require disclosure of the additives used in the hydraulic-fracturing process. In addition, certain states in which the Company operates, including Texas and Colorado, have adopted, and other states are considering adopting, regulations that could impose new or more stringent permitting, disclosure, disposal and well-construction requirements on hydraulic-fracturing operations. States could elect to prohibit high volume hydraulic fracturing altogether, following the lead of New York. Also, local land use restrictions, such as city ordinances, may restrict or prohibit drilling in general or hydraulic fracturing in particular although in May 2015 in response to one city in Texas voting to ban hydraulic fracturing within city limits the Texas Legislature adopted Texas House Bill 40, which provides that the regulation of oil and gas operations in Texas is under the exclusive jurisdiction of the state and preempted local regulation of those operations. Despite Texas House Bill 40, municipalities and political subdivisions in Texas continue to have the right to enact "commercially reasonable" regulations for surface activities. In the event federal, state or local restrictions pertaining to hydraulic fracturing are adopted in areas where the Company is currently conducting operations, or in the future plans to conduct operations, the Company may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps be limited or precluded in the drilling of wells or in the volume that the Company is ultimately able to produce from its reserves.
Laws and regulations pertaining to threatened and endangered species could delay or restrict the Company's operations and cause it to incur substantial costs.
Various federal and state statutes prohibit certain actions that adversely affect endangered or threatened species and their habitats, migratory birds, wetlands and natural resources. These statutes include the ESA, the Migratory Bird Treaty Act, the CWA, OPA and CERCLA. The U.S. Fish and Wildlife Service (the "FWS") may designate critical habitat and suitable habitat areas that it believes are necessary for survival of threatened or endangered species. Any designation by the FWS of a critical or suitable habitat with respect to a threatened or endangered species could result in further material restrictions to federal land use and private land use and could delay or prohibit land access or oil and gas development. If harm to species or damages to wetlands, habitat or natural resources occur or may occur, government entities or, at times, private parties may act to prevent oil and gas exploration or development activities or seek damages for harm to species, habitat or natural resources resulting from drilling, construction or releases of petroleum hydrocarbons, wastes, hazardous substances or other regulated materials, and, in some cases, may seek criminal penalties. Moreover, as a result of one or more settlements entered into by the FWS, the agency is required to make determinations on the potential listing of numerous species as endangered or threatened under the ESA. The designation of previously unprotected species as threatened or endangered in areas where the Company conducts operations could cause the Company to incur increased costs arising from species protection measures or could result in delays or limitations on its development and production activities that could have a material adverse effect on the Company's ability to develop and produce reserves.
The Company is a party to debt instruments, a credit facility and other financial commitments that may restrict its business and financing activities.
The Company is a borrower under fixed rate senior notes and maintains a credit facility that is currently undrawn. The terms of the Company's borrowings specify scheduled debt repayments and require the Company to comply with certain associated covenants and restrictions. The Company's ability to comply with the debt repayment terms, associated covenants and restrictions is dependent on, among other things, factors outside the Company's direct control, such as commodity prices and interest rates. In addition, from time to time, the Company enters into arrangements and transactions that can give rise to material off-balance sheet obligations, including firm purchase, transportation and fractionation commitments, gathering, processing and transportation commitments on uncertain volumes of future throughput, operating lease agreements and drilling commitments. The Company's financial commitments could have important consequences to its business including, but not limited to, the following:
the incurrence of charges associated with unused commitments if future events do not meet the Company's expectations at the time such commitments are entered into;
increasing its vulnerability to adverse economic and industry conditions;
limiting its flexibility to plan for, or react to, changes in its business and industry;
limiting its ability to fund future development activities or engage in future acquisitions; and
placing it at a competitive disadvantage compared to competitors that have less debt and/or fewer financial commitments.
PIONEER NATURAL RESOURCES COMPANY
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Commitments, Capital Resources and Liquidity" and Notes G and J of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding the Company's outstanding debt and other commitments as of December 31, 2017 and the terms associated therewith.
The Company's ability to obtain additional financing is also affected by the Company's debt credit ratings and competition for available debt financing. A ratings downgrade could materially and adversely impact the Company's ability to access debt markets, increase the borrowing cost under the Company's credit facility and the cost of future debt, and potentially require the Company to post letters of credit or other forms of collateral for certain obligations.
The Company faces significant competition and some of its competitors have resources in excess of the Company's available resources.
The oil and gas industry is highly competitive. The Company competes with a large number of companies, producers and operators in a number of areas such as:
seeking to acquire oil and gas properties suitable for development or exploration;
marketing oil, NGL and gas production; and
seeking to acquire the equipment and expertise, including trained personnel, necessary to evaluate, operate and develop its properties.
Some of the Company's competitors are larger and have substantially greater financial and other resources than the Company. To a lesser extent, the Company also faces competition from companies that supply alternative sources of energy, such as wind or solar power. See "Item 1. Business - Competition, Markets and Regulations" for additional discussion regarding competition.
The Company's transportation of gas, sales and purchases of oil, NGLs, gas or other energy commodities, and any derivative activities related to such energy commodities, expose the Company to potential regulatory risks.
The FERC, the FTC and the CFTC hold statutory authority to monitor certain segments of the physical and futures energy commodities markets relevant to the Company's business. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to the Company's transportation of gas in interstate commerce, physical sales and purchases of oil, NGLs, gas or other energy commodities, and any derivative activities related to these energy commodities, the Company is required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement authority. Failures to comply with such regulations, as interpreted and enforced, could materially and adversely affect the Company's results of operations and financial condition.
Estimates of proved reserves and future net cash flows are not precise. The actual quantities and net cash flows of the Company's proved reserves may prove to be lower than estimated.
Numerous uncertainties exist in estimating quantities of proved reserves and future net cash flows therefrom. The estimates of proved reserves and related future net cash flows set forth in this Report are based on various assumptions, which may ultimately prove to be inaccurate.
Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and gas reserves and estimates of future net cash flows depend upon a number of variable factors and assumptions, including the following:
•historical production from the area compared with production from other producing areas;
•the quality and quantity of available data;
•the interpretation of that data;
•the assumed effects of regulations by governmental agencies;
•assumptions concerning future commodity prices; and
•assumptions concerning future development costs, operating costs, severance, ad valorem and excise taxes, gathering, processing, transportation and fractionation costs and workover and remedial costs.
Because all proved reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating proved reserves:
•the quantities of oil and gas that are ultimately recovered;
•the production costs incurred to recover the reserves;
•the amount and timing of future development expenditures; and
•future commodity prices.
PIONEER NATURAL RESOURCES COMPANY
Furthermore, different reserve engineers may make different estimates of proved reserves and cash flows based on the same available data. The Company's actual production, revenues and expenditures with respect to proved reserves will likely be differentdiffer from the estimates, and the differences may be material.
PIONEER NATURAL RESOURCES COMPANY
As required by the SEC, the estimated discounted future net cash flows from proved reserves are based on average prices preceding the date of the estimate and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as:
•the amount and timing of actual production;
levels•the level of future capital spending;
•increases or decreases in the supply of or demand for oil, NGLsNGL and gas; and
•changes in governmental regulations or taxation.
Standardized Measure is a reporting convention that provides a common basis for comparing oil and gas companies subject to the rules and regulations of the SEC. In general, it requires the use of commodity prices that are based upon a historical 12-month unweighted average, as well as operating and development costs being incurred at the end of the reporting period. Consequently, it may not reflect the prices ordinarily received or that will be received for future oil and gas production because of seasonal price fluctuations or other varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and gas properties. Accordingly, estimates included herein of future net cash flows may be materially different from the future net cash flows that are ultimately received. In addition, the ten percent discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and gas industry in general. Therefore, the estimates of discounted future net cash flows or Standardized Measure in this Report should not be construed as accurate estimates of the current market value of the Company's proved reserves.
Because the Company's producing wells decline continually over time, the Company will need to mitigate these declines through drilling and production enhancement initiatives and/or acquisitions.
Producing oil and gas reservoirs are characterized by declining production rates, which vary depending upon reservoir characteristics and other factors. Because the Company's producing wells decline continually over time as those wells are produced, the Company will need to mitigate these declines through drilling and production enhancement initiatives and/or acquisitions of additional recoverable reserves. There can be no assurance that the Company will be able to develop, exploit, find or acquire sufficient additional reserves to replace its current or future production.
A portion of the Company's total estimated proved reserves at December 31, 2020 were undeveloped, and those proved reserves may not ultimately be developed.
At December 31, 2020, approximately five percent of the Company's total estimated proved reserves were undeveloped. Recovery of undeveloped proved reserves requires significant capital expenditures and successful drilling. The Company's reserve data assumes that the Company can and will make these expenditures and conduct these operations successfully, which assumptions may not prove to be correct. If the Company chooses not to spend the capital to develop these proved undeveloped reserves, or if the Company is not otherwise able to successfully develop these proved undeveloped reserves, the Company will be required to write-off these proved reserves. In addition, under the SEC's rules, because proved undeveloped reserves may be booked only if they relate to wells planned to be drilled within five years of the date of booking, the Company may be required to write-off any proved undeveloped reserves that are not developed within this five-year timeframe. As with all oil and gas leases, the Company's leases require the Company to drill wells that are commercially productive and to maintain the production in paying quantities, and if the Company is unsuccessful in drilling such wells and maintaining such production, the Company could lose its rights under such leases. In addition, the Company's future production levels and, therefore, its future cash flow and profitability will be impacted if it is not able to successfully develop its undeveloped leasehold acreage.
The Company faces significant competition and some of its competitors have resources in excess of the Company's available resources.
The oil and gas industry is highly competitive. The Company competes with a large number of companies, producers and operators in a number of areas such as:
•seeking to acquire oil and gas properties suitable for exploration or development;
•marketing oil, NGL and gas production; and
•seeking to acquire the equipment, services and expertise, including trained personnel, necessary to identify, evaluate, develop and operate its properties.
Some of the Company's competitors are larger and have substantially greater financial and other resources than the Company, and as such, the Company may be at a competitive disadvantage in the identification, acquisition and development of properties that complement the Company's operations. The Company also faces competition from companies that supply alternative sources of energy, such as wind, solar power or other renewable energy. Competition is expected to increase and in
PIONEER NATURAL RESOURCES COMPANY
certain cases, governments are providing tax advantages and other subsidies to support alternative energy sources or are mandating the use of specific fuels or technologies. Governments and other parties are also promoting research into new technologies to accelerate the implementation of alternative energy sources.
The Company's business could be materially and adversely affected by security threats, including cybersecurity threats, and other disruptions.
As an oil and gas producer, the Company faces various security threats, including cybersecurity threats to gain unauthorized access to, or control of, sensitive information or to render data or systems corrupted or unusable; threats to the security of the Company's facilities and infrastructure or third party facilities and infrastructure, such as processing plants and pipelines; and threats from terrorist acts. The potential for such security threats has subjected the Company's operations to increased risks that could have a material adverse effect on the Company's business. In particular, the Company's implementation of various procedures and controls to monitor and mitigate security threats and to increase security for the Company's information, facilities and infrastructure may result in increased capital and operating costs. Costs for insurance may also increase as a result of security threats, and some insurance coverage may become more difficult to obtain, if available at all. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to the Company's operations and could have a material adverse effect on the Company's reputation, financial position, results of operations and cash flows.
Cybersecurity attacks in particular are becoming more sophisticated. The Company relies extensively on information technology systems, including Internetinternet sites, computer software, data hosting facilities and other hardware and platforms, some of which are hosted by third parties, to assist in conducting its business. The Company's technologies systems and networks, and those of its business associates may become the target of cybersecurity attacks, including without limitation denial-of-service attacks, malicious software, data privacy breaches by employees, insiders or others with authorized access, cyber or phishing-attacks, ransomware, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems and materially and adversely affect the Company in a variety of ways, including the following:
•unauthorized access to and release of seismic data, reserves information, strategic information or other sensitive or proprietary information, which could have a material adverse effect on the Company's ability to compete for oil and gas resources;
•data corruption, communication interruption or other operational disruptions during drilling activities, which could result in the failure to reach the intended target or a drilling incident;
•data corruption or operational disruptiondisruptions of production infrastructure, which could result in loss of production or accidental discharge;discharges;
•unauthorized access to and release of personal identifying information of royalty owners, employees and vendors, or the data or confidential information of customers, suppliers or other third parties, which could expose the Company to allegations that it did not sufficiently protect that information;
•a cybersecurity attack on a vendor or service provider, which could result in supply chain disruptions and could delay or halt operations; and
•a cybersecurity attack on third-party gathering, transportation, processing, fractionation, refining, storage or export facilities, which could delay or prevent the Company from transporting and marketing its production, resulting in a loss of revenues.revenues;
•a cybersecurity attack involving commodities exchanges or financial institutions, which could slow or halt commodities trading, thus preventing the Company from marketing its production or engaging in derivative activities, resulting in a loss of revenues;
•a cybersecurity attack on a communications network or power grid, which could cause operational disruptions resulting in the loss of revenues; and
•a cybersecurity attack on the Company's automated and surveillance systems, which could cause a loss in production and potential environmental hazards.
These events could damage the Company's reputation and lead to financial losses from remedial actions, loss of business or potential liability. Additionally, certain cyber incidents, such as surveillance, may remain undetected for an extended period.period of time.
PIONEER NATURAL RESOURCES COMPANY
such attacks. However, there is no assurance that the Company will not suffer such losses in the future. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue
PIONEER NATURAL RESOURCES COMPANY
to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
A failure by purchasers Additionally, the continuing and evolving threat of the Company's production to satisfy their obligations to the Companycybersecurity attacks has resulted in evolving legal and compliance matters, including increased regulatory focus on prevention, which could require the Company to recognize a charge in earnings and have a material adverse effect on the Company's results of operation.
The Company relies on a limited number of purchasersexpend significant additional resources to purchase a majority of its products. To the extent that purchasers of the Company's production rely on access to the credit or equity markets to fund their operations, there is a risk that those purchasers could default in their contractual obligations to the Company ifmeet such purchasers were unable to access the credit or equity markets for an extended period of time. If for any reason the Company were to determine that it was probable that some or all of the accounts receivable from any one or more of the purchasers of the Company's production were uncollectible, the Company would recognize a charge in the earnings of that period for the probable loss.
Declining general economic, business or industry conditions could have a material adverse effect on the Company's results of operations.
Since 2016, the economies in the United States and certain countries in Europe and Asia have continued to stabilize with resulting improvements in industrial demand and consumer confidence. However, other economies, such as those of certain South American nations, continue to face economic struggles or slowing economic growth. If these conditions worsen, combined with a decline in economic growth in other parts of the world, there could be a significant adverse effect on global financial markets and commodity prices. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. If the economic climate in the United States or abroad were to deteriorate, demand for petroleum products could diminish, which could depress the prices at which the Company could sell its oil, NGLs and gas and ultimately decrease the Company's cash flows and profitability.
The Company's use of seismic data is subject to interpretation and may not accurately identify the presence of oil and gas, which could materially and adversely affect the results of its drilling operations.
Even when properly used and interpreted, seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. As a result, the Company's drilling activities may not be successful or economic. In addition, the use of advanced technologies, such as 3-D seismic data, requires greater pre-drilling expenditures than traditional drilling strategies, and the Company could incur losses as a result of such expenditures.
The enactment of derivatives legislation could have a material adverse effect on the Company's ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with its business.
The Dodd-Frank Act enacted in July 2010, established federal oversight and regulation of the over-the-counter derivatives market and entities, such as the Company, that participate in that market. The Dodd-Frank Act requires the CFTC and the SEC to promulgate rules and regulations for its implementation. Although the CFTC has issued final regulations to implement significant aspects of the legislation, others remain to be finalized or implemented and it is not possible at this time to predict when this will be accomplished.
In October 2011, the CFTC issued regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. The initial position limits rule was vacated by the United States District Court for the District of Columbia in September 2012. However, in November 2013, the CFTC proposed new rules that would place limits on positions in certain futures and options contracts and equivalent swaps for or linked to certain physical commodities, subject to exceptions for certain bona fide derivative transactions. As these new position limit rules are not yet final, the impact of those provisions on the Company is uncertain at this time.
The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and the associated rules also will require the Company, in connection with covered derivative activities, to comply with clearing and trade-execution requirements or take steps to qualify for an exemption to such requirements. The CFTC has not yet proposed rules designating any other classes of swaps, including physical commodity swaps, for mandatory clearing. Although the Company believes it qualifies for the end-user exception from the mandatory clearing requirements for swaps entered to mitigate its commercial risks, the application of the mandatory clearing and trade execution requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that the Company uses. If the Company's swaps do not qualify for the commercial end-user exception, or if the cost of entering into uncleared swaps becomes prohibitive, the Company may be required to clear such transactions. The ultimate effect of the proposed rules and any additional regulations on the Company's business is uncertain.
PIONEER NATURAL RESOURCES COMPANY
In addition, certain banking regulators and the CFTC have adopted final rules establishing minimum margin requirements for uncleared swaps. Although the Company expects to qualify for the end-user exception from margin requirements for swaps entered into to manage its commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that the Company uses. If any of the Company's swaps do not qualify for the commercial end-user exception, the posting of collateral could reduce its liquidity and cash available for capital expenditures and could reduce its ability to manage commodity price volatility and the volatility in its cash flows.
The full impact of the Dodd-Frank Act and related regulatory requirements upon the Company's business will not be known until the regulations are implemented and the market for derivatives contracts has adjusted. The Dodd-Frank Act and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks the Company encounters and reduce the Company's ability to monetize or restructure its existing derivative contracts. If the Company reduces its use of derivatives as a result of the Dodd-Frank Act and regulations, the Company's results of operations may become more volatile and its cash flows may be less predictable, which could materially and adversely affect the Company's ability to plan for and fund capital expenditures. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and gas. The Company's revenues could therefore be materially and adversely affected if a consequence of the Dodd-Frank Act and implementing regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on the Company, its financial condition and its results of operations. In addition, the European Union and other non-U.S. jurisdictions are implementing regulations with respect to the derivatives market. To the extent the Company transacts with counterparties in foreign jurisdictions, it may become subject to such regulations. At this time, the impact of such regulations is not clear.
The future of the SEC and CFTC's rulemaking remains uncertain. Regulatory agendas that were released in late 2017 indicated that the SEC and CFTC plan to pursue fewer rulemaking items than in prior years. For example, the CFTC announced its intent to take action on an agency-wide internal review focused on simplifying and modernizing CFTC rules, regulations and practices and focus on streamlining the implementation of existing regulations and practices. Although the SEC and the CFTC's agendas are less expansive than they have been in the past, wholesale deregulation of the markets will not necessarily be the outcome. For example, the CFTC plans to take a new look at passing rules on position limits for certain futures contracts, and the SEC intends to re-propose rules for "plain vanilla" exchange-traded funds and add amendments to the Volcker Rule.
Moreover, regulation by the CFTC and banking regulators of the over-the-counter derivatives market and market participants could cause the Company's contract counterparties, which are generally financial institutions and other market participants, to curtail or cease their derivatives activities, which could materially and adversely affect the cost and availability of derivatives to the Company.
Provisions of the Company's charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for the Company's common stock.
Provisions in the Company's certificate of incorporation and bylaws may have the effect of delaying or preventing an acquisition of the Company or a merger in which the Company is not the surviving company and may otherwise prevent or slow changes in the Company's board of directors and management. In addition, because the Company is incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions could discourage an acquisition of the Company or other change in control transactions and thereby negatively affect the price that investors might be willing to pay in the future for the Company's common stock.
The Company has identified a material weakness in its internal control over financial reporting that, if not remediated, could result in additional material misstatements in its consolidated financial statements.
As described in "Part II, Item 9A — Controls and Procedures," management has identified and evaluated the control deficiencies that gave rise to the accounting corrections related to contracts governing the sale of purchased oil and gas and has concluded that those deficiencies, collectively, represent a material weakness in the Company's internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2020. See Note 2 of Notes to Consolidated Financial Statements and "Unaudited Supplementary Information - Selected Quarterly Financial Results" included in "Item 8. Financial Statements and Supplementary Data" for additional information.
The Company is in the process of developing and implementing a remediation plan to address the material weakness. If the Company’s remediation efforts are insufficient or if additional material weaknesses in its internal control over financial reporting are discovered or occur in the future, the Company's consolidated financial statements may contain material misstatements and it could be required to revise or restate its financial results, which could materially and adversely affect the Company’s business, results of operations and financial condition, restrict its ability to access the capital markets, require it to expend significant resources to correct the material weakness, subject it to fines, penalties or judgments, harm its reputation or otherwise cause a decline in investor confidence.
Operational risks.
The Company's sand mining operations involve many operational risks, some of which could result in unforeseen interruptions to the Company's operations and substantial losses to the Company for which the Company may not be adequately insured.
The Company's operations, including drilling and completion activities and water distribution, collection and disposal activities, are subject to operatingall the risks that are often beyondincident to the Company's control,oil and gas development and production business, including:
•blowouts, cratering, explosions and fires;
•adverse weather effects;
•environmental hazards, such risks may not be covered by insurance.as NGL and gas leaks, oil and produced water spills, pipeline and vessel ruptures, encountering naturally occurring radioactive materials ("NORM"), and unauthorized discharges of toxic chemicals, gases, brine, well stimulation and completion fluids or other pollutants onto the surface or into the subsurface environment;
Ownership•high costs, shortages or delivery delays of industrialequipment, labor or other services or materials, such as water and sand mining operations is subject to risks, manyfor hydraulic fracturing;
•facility or equipment malfunctions, failures or accidents;
•title problems;
•pipe or cement failures or casing collapses;
•uncontrollable flows of which are beyond the Company's control. These risks include:oil, gas or water;
•compliance with environmental and other governmental requirements, including executive actions and regulatory or legislative efforts under a Biden administration;
•lost or damaged oilfield workover and service tools;
•surface access restrictions;
•unusual or unexpected geological formations or pressures;
cave-ins, pit wall failurespressure or rock falls;
unanticipated ground, grade or water conditions;
inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
environmental hazards, such as unauthorized spills, releases and discharges of wastes, vessel ruptures and emission of unpermitted levels of pollutants;
changesirregularities in laws and regulations;
inability to acquire or maintain necessary permits or mining or water rights;
restrictions on blasting operations;
formations;
PIONEER NATURAL RESOURCES COMPANY
•terrorism, vandalism and physical, electronic and cybersecurity breaches and global or national health concerns, including the outbreak of a pandemic or contagious disease, such as the recent COVID-19 pandemic; and
inability•natural disasters.
The Company's overall exposure to obtain necessary production equipment or replacement parts;
reductionoperational risks may increase as its drilling activity expands, along with any associated increases in the amount ofinternally-provided well services, water available for processing;
technical difficulties or failures;
labor disputes;
late delivery of supplies;
fires, explosionsdistribution, water collection, disposal or other accidents;services. In addition, any of these risks could adversely impact the Company's service providers and
facility interruptions suppliers, causing its supply chain to be interrupted, slowed or shutdowns in response to environmental regulatory actions.
rendered inoperable. Any of these risks could result in substantial losses to the Company due to injury or loss of life, damage to or destruction of the Company's mining properties orwells, production facilities personal injury, environmental damage, delays in mining or processing, losses or possible legal liability. Not allother property and natural resources, clean-up responsibilities, regulatory investigations and penalties and suspension of these risks are insurable, and the Company's insurance coverage contains limits, deductibles, exclusions and endorsements. operations.
The Company's insurance coverageCompany may not be sufficientinsured or is not fully insured against certain of the risks described above, either because such insurance is not available or because of the high premium costs and deductibles associated with obtaining such insurance. Additionally, the Company relies to meeta large extent on facilities owned and operated by third-parties, and damage to or destruction of those third-party facilities could adversely affect the ability of the Company to gather, produce, transport, process, fractionate, refine, store, export and sell its needshydrocarbons.
Exploration and development drilling involve substantial costs and risks and may not result in commercially productive reserves.
Drilling involves numerous risks, including the eventrisk that no commercially productive oil or gas reservoirs will be encountered. The cost of lossdrilling, completing and any such lossoperating wells is often uncertain and drilling operations may be curtailed, delayed or canceled, or become costlier, as a result of a variety of factors, including:
•unexpected drilling conditions;
•unexpected pressure or irregularities in formations;
•equipment failures or accidents;
•construction delays;
•fracture stimulation accidents or failures;
•adverse weather conditions;
•restricted access to land for drilling or laying pipelines;
•title defects;
•lack of available gathering, transportation, processing, fractionation, storage, refining or export facilities;
•lack of available capacity on interconnecting transmission pipelines;
•access to, and the cost and availability of, the equipment, services, resources and personnel required to complete the Company's drilling, completion and operating activities; and
•delays imposed by or resulting from compliance with or changes in environmental and other governmental, regulatory or contractual requirements.
The Company's future drilling activities may not be successful and, if unsuccessful, the Company's proved reserves and production would decline, which could have a materialan adverse effect on the Company.Company's future results of operations and financial condition. While all drilling, whether developmental, extension or exploratory, involves these risks, exploratory and extension drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. The Company expects that it will continue to recognize exploration and abandonment expense in 2021.
Part of the Company's strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.
The Company's estimatesoperations involve utilizing some of sand reservesthe latest drilling and resource depositscompletion techniques as developed by it and its service providers. Risks that the Company faces while drilling horizontal wells include, but are imprecisenot limited to, the following:
•landing the wellbore in the desired drilling zone;
•staying in the desired drilling zone while drilling horizontally through the formation;
•running casing the entire length of the wellbore; and actual reserves
•being able to run tools and other equipment consistently through the horizontal wellbore.
Risks that the Company faces while completing wells include, but are not limited to, the following:
•the ability to fracture stimulate the planned number of stages;
•the ability to run tools the entire length of the wellbore during completion operations; and
•the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage.
PIONEER NATURAL RESOURCES COMPANY
Drilling in emerging areas is more uncertain than drilling in areas that are more developed and have a longer history of established drilling operations. New discoveries and emerging formations have limited or no production history and, consequently, the Company is more limited in assessing future drilling results in these areas. If the Company's drilling results are worse than anticipated, the return on investment for a particular project may not be as attractive as anticipated and the Company may recognize noncash charges to reduce the carrying value of its unproved properties in those areas.
The Company's expectations for future drilling activities will be realized over several years, making them susceptible to uncertainties that could be less than estimated.materially alter the occurrence or timing of such activities.
The Company bases its sand reservehas identified drilling locations and resource estimates on engineering, economicprospects for future drilling opportunities, including development, exploratory, extension and geological data assembledinfill drilling activities. These drilling locations and analyzed by engineers and geologists, which are periodically reviewed by outside firms. However, commercial sand reserve estimates are necessarily imprecise and depend to some extent on statistical inferences drawn from availableprospects represent a significant part of the Company's future drilling data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualitiesplans. For example, the Company's proved reserves as of commercial sandDecember 31, 2020 include proved undeveloped reserves and costsproved developed non-producing reserves of 31 MMBbls of oil, 17 MMBbls of NGL and 88 Bcf of gas. The Company's ability to mine recoverable reserves, including many factors beyond the Company's control. Estimates of economically recoverable commercial sand reserves necessarily dependdrill and develop these locations depends on a number of factors, and assumptions, all of which may vary considerably from actual results, such as:
geological and mining conditions or effects from prior mining that may not be fully identified by available data or that may differ from experience;
assumptions concerning future prices of commercial sand products, operating costs, mining technology improvements, development costs and reclamation costs; and
assumptions concerning future effects of regulation, including the issuanceavailability and cost of required permitscapital, regulatory approvals, negotiation of agreements with third parties, commodity prices, costs, access to and taxes by governmental agencies.
The Company's sand mining operations are subject to extensive environmental and occupational health and safety regulations that impose significant costs and potential liabilities.
The Company's sand mining operations are subject to a varietyavailability of federal, state and local environmental requirements affecting the mining and mineral processing industry, including, among others, those relating to employee health and safety, environmental permitting and licensing, air emissions and water discharges, GHG emissions, water pollution, waste management and disposal, remediation of soil and groundwater contamination, land use restrictions, reclamation and restoration of properties, wastes, hazardous substances and other regulated materials and natural resources. Some environmental laws impose substantial penalties for noncompliance, and others, such as the CERCLA, impose strict, retroactive and joint and several liability for the remediation of releases of hazardous substances. Failure to properly handle, transport, store or dispose of wastes, hazardous substances and other regulated materials or otherwise conduct the Company's sand mining operations in compliance with environmental laws could expose the Company to liability for governmental penalties, cleanup costs and civil or criminal liability associated with releases of such materials into the environment, damages to property or naturalequipment, services, resources and other damages, as well as potentially impair the Company's ability to conduct its sand mining operations. In addition, environmental lawspersonnel, and regulations are subject to amendment, replacement or re-interpretation by more stringent and comprehensive legal requirements. While the Company's environmental compliance costs with existing laws and regulations have not historically had a material adverse effect on its results of operations, theredrilling results. There can be no assurance that such coststhe Company will notdrill these locations or that the Company will be materialable to produce oil or gas reserves from these locations or any other potential drilling locations. Well results vary by formation and geographic area, and the Company generally prioritizes its drilling activities to focus on remaining locations that are believed to offer the highest return. Changes in the future. Moreover, such future compliance with existing, newlaws or amended lawsregulations on which the Company relies in planning and regulationsexecuting its drilling programs could restrictmaterially and adversely impact the Company's ability to expand its facilities or extract mineral deposits or could requiresuccessfully complete those programs. For example, under current Texas laws and regulations, the Company may receive permits to acquire costly equipmentdrill, and may drill and complete, certain horizontal wells that traverse one or more units and/or leases; a change in those laws or regulations could materially and adversely impact the Company's ability to incur other significant expensesdrill those wells. Because of these uncertainties, the Company cannot give any assurance as to the timing of these activities or that they will ultimately result in connection with its sand mining operations,the realization of proved reserves or meet the Company's expectations for success. As such, the Company's actual drilling activities may materially differ from the Company's current expectations, which restrictions or costs could have a material adverse effect on the Company's sand miningproved reserves, financial condition and results of operations.
Any failure byMulti-well pad drilling may result in volatility in the Company's operating results.
The Company to comply with applicable environmental lawsutilizes multi-well pad drilling, and regulationswells drilled on a pad are not placed on production until all wells on the pad are drilled and completed. In addition, problems affecting a single well could adversely affect production from all of the wells on the pad. As a result, multi-well pad drilling can cause delays in connection with its sand mining operationsthe scheduled commencement of production, or interruptions in ongoing production. These delays or interruptions may cause governmental authoritiesvolatility in the Company's operating results. Further, any delay, reduction or curtailment of the Company's development and producing operations due to take actions thatoperational delays caused by multi-well pad drilling could result in the loss of acreage through lease expiration.
The Company's operations are substantially dependent upon the availability of water and its ability to dispose of produced water gathered from drilling and production activities. Restrictions on the Company's ability to obtain water or dispose of produced water may have a material adverse effect on its financial condition, results of operations and cash flows.
Water is an essential component of the Company's drilling and hydraulic fracturing processes. Limitations or restrictions on the Company's ability to secure sufficient amounts of water (including limitations resulting from natural causes such as drought), could materially and adversely affectimpact its operations. Severe drought conditions can result in local water districts taking steps to restrict the use of water in their jurisdiction for drilling and hydraulic fracturing in order to protect the local water supply. If the Company including:is unable to obtain water to use in its operations from local sources, it may need to be obtained from new sources and transported to drilling sites, resulting in increased costs, which could have a material adverse effect on its financial condition, results of operations and cash flows.
issuanceIn addition, the Company must dispose of administrative, civilthe fluids produced from oil and criminal penalties;
denial, modification or revocation of permits or other authorizations;
imposition of injunctive obligations or other limitations on the Company'sgas production operations, including interruptionsproduced water, which it does directly or cessationthrough the use of operations;third party vendors. The legal requirements related to the disposal of produced water into a non-producing geologic formation by means of underground injection wells are subject to change based on concerns of the public or governmental authorities regarding such disposal activities. One such concern arises from seismic events near underground disposal wells that are used for the disposal of produced water resulting from oil and
gas activities. In 2016, the United States Geological Survey identified Texas as being among the states with areas of increased rates of induced seismicity that could be attributed to fluid injection or oil and gas extraction. While the agency has seen these rates decrease since that time, concern continues to exist over earthquakes arising from induced seismic activities. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells to assess any relationship between seismicity and the use of such wells. For example, in Texas, the Texas Railroad Commission has adopted rules governing the permitting or re-permitting
PIONEER NATURAL RESOURCES COMPANY
requirementsof wells used to perform site investigatory, remedial or other corrective actions.
In addition to environmental regulation, the Company's sand mining operations are subject to laws and regulations relating to worker health and safety, including such matters as human exposure to crystalline silica dust. Several federal and state regulatory authorities, including the MSHA, may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment.
The Company's sand mining operations are subject to the Federal Mine Safety and Health Actdispose of 1977 and amending legislation, which impose stringent health and safety standards on numerous aspects of the Company's sand mining operations.
The Company's sand mining operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipmentproduced water and other matters. This Act, as amended,fluids resulting from the production of oil and gas in order to address these seismic activity concerns within the state. Among other things, these rules require companies seeking permits for disposal wells to provide seismic activity data in permit applications, provide for more frequent monitoring and reporting for certain wells and allow the state to modify, suspend or terminate permits on grounds that a disposal well is a strict liability statutelikely to be, or determined to be, causing seismic activity.
States may issue orders to temporarily shut down or to curtail the injection depth of existing wells in the vicinity of seismic events. Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and any failurefederal rules regulating waste disposal. These developments could result in additional regulation and restrictions on the use of injection wells by the Company or by commercial disposal well vendors whom the Company may use from time to comply with such existingtime to dispose of produced water. Increased regulation and attention given to induced seismicity could also lead to greater opposition, including litigation to limit or any future standards,prohibit oil and gas activities utilizing injection wells for produced water disposal. Any one or any more stringent interpretationof these developments may result in the Company or enforcement thereof,its vendors having to limit disposal well volumes, disposal rates and pressures or locations, or require the Company or its vendors to shut down or curtail the injection of produced water into disposal wells, which events could have a material adverse effect on the Company's sand miningbusiness, financial condition and results of operations.
The Company's use of seismic data is subject to interpretation and may not accurately identify the presence of oil and gas, which could materially and adversely affect the results of its drilling operations.
Even when properly used and interpreted, seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. As a result, the Company's drilling activities may not be successful or economic. In addition, the use of advanced technologies, such as 3-D seismic data, requires greater pre-drilling expenditures than traditional drilling strategies, and the Company could incur losses as a result of such expenditures.
The Company's gas processing,gathering and treating operations are subject to operational and regulatory risks, which could result in significant damages and the loss of revenue.
As of December 31, 2020, the Company owns interests in 11 gas processing plants, including the related gathering systems. There are significant risks associated with the operation of gas processing plants and the associated gathering systems. Gas and NGLs are volatile and explosive and may include carcinogens. Damage to or otherwise imposeimproper operation of gas processing plants, gathering systems or treating facilities could result in an explosion or the discharge of toxic gases, which could result in significant restrictionsdamage claims in addition to interrupting a revenue source.
Moreover, while the Company's gas processing and gathering systems generally are not currently subject to FERC or state regulation with respect to rates or terms and conditions of service, there can be no assurance that such processing and gathering operations will continue to be unregulated in the future. Although these facilities may not be directly regulated, other laws and regulations may affect the availability of gas for gathering and processing, such as state regulations regarding production rates and the maximum daily production allowable from gas wells, which could impact the Company's business in these areas. Such regulation could result in additional costs and reduced revenues.
Financial risks.
The prices of oil, NGL and gas are highly volatile. A sustained decline in these commodity prices could materially and adversely affect the Company's business, financial condition and results of operations.
The Company's revenues, profitability, cash flow and future rate of growth are highly dependent on commodity prices. Commodity prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, NGL and gas, market uncertainty and a variety of additional factors that are beyond the Company's control, such as:
•domestic and worldwide supply of and demand for oil, NGL and gas;
•worldwide oil, NGL and gas inventory levels, including at Cushing, Oklahoma, the benchmark location for WTI oil prices, and the U.S. Gulf Coast, where the majority of the U.S. refinery capacity exists;
•volatility and trading patterns in the commodity-futures markets;
•the capacity of U.S. and international refiners to utilize U.S. supplies of oil and condensate;
•weather conditions;
•overall domestic and global political and economic conditions, including the imposition of tariffs or trade or other economic sanctions, political instability or armed conflict in oil and gas producing regions;
PIONEER NATURAL RESOURCES COMPANY
•global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus, which may reduce the demand for oil, NGL and gas because of reduced global or national economic activity;
•actions of OPEC, its members and other state-controlled oil companies relating to oil price and production controls;
•the price and quantity of oil, NGL and LNG imports to and exports from the U.S.;
•technological advances or social attitudes or policies affecting energy consumption and energy supply;
•domestic and foreign governmental legislative efforts, executive actions and regulations, including environmental regulations, climate change regulations and taxation;
•the effect of energy conservation efforts;
•stockholder activism or activities by non-governmental organizations to limit certain sources of capital for the energy sector or restrict the exploration, development and production of oil and gas;
•the proximity, capacity, cost and availability of pipelines and other processing, fractionation, refinery, storage and export facilities; and
•the price, availability and acceptance of alternative fuels.
Commodity prices have historically been, and continue to be, extremely volatile. For example, the Brent oil prices in 2020 ranged from a high of $68.91 to a low of $19.33 per Bbl and the NYMEX gas prices in 2020 ranged from a high of $3.35 to a low of $1.48 per MMBtu. The Company expects this volatility to continue. A further or extended decline in commodity prices could materially and adversely affect the Company's future business, financial condition, results of operations, liquidity or its ability to fund planned capital expenditures, pay dividends or repurchase shares of common stock. The Company makes price assumptions that are used for planning purposes, and a significant portion of the Company's cash outlays, including rent, salaries and noncancellable capital and transportation commitments, are largely fixed in nature. Accordingly, if commodity prices are below the expectations on which these commitments were based, the Company's financial results are likely to be adversely and disproportionately affected because these cash outlays are not variable in the short term and cannot be quickly reduced to respond to unanticipated decreases in commodity prices.
Significant or extended price declines could also materially and adversely affect the amount of oil, NGL and gas that the Company can produce economically, which may result in the Company having to make significant downward adjustments to its estimated proved reserves. A reduction in production could also result in a shortfall in expected cash flows and require the Company to reduce capital spending or borrow funds to cover any such shortfall. Any of these factors could negatively affect the Company's ability to conduct mineral extractionreplace its production and processingits future rate of growth.
Future declines in the price of oil, NGLs and gas could result in a reduction in the carrying value of the Company's proved oil and gas properties, which could materially and adversely affect the Company's results of operations.
Significant or extended price declines could result in the Company having to make downward adjustments to the carrying value of its proved oil and gas properties. The Company performs assessments of the recoverability of its oil and gas properties whenever events or circumstances indicate that the carrying values of those assets may not be recoverable. In order to perform these assessments, management uses various observable and unobservable inputs, including management's outlooks for (i) proved reserves and risk-adjusted probable and possible reserves, (ii) commodity prices, (iii) production costs, (iv) capital expenditures and (v) production. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of the Company's oil and gas properties, the carrying value may not be recoverable and therefore an impairment charge would be required to reduce the carrying value of the proved properties to their fair value. For example, during 2018, the Company recorded impairment charges of $77 million attributable to its Raton Basin field in southeast Colorado, primarily due to declines in commodity prices and downward adjustments to the economically recoverable reserves attributable to the asset. The Company may incur impairment charges in the future, which could materially affect the Company's results of operations in the period incurred. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Impairment of oil and gas properties and other long-lived assets" and Note 4 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. The Company's sand mining operationsactual production could differ materially from its forecasts.
From time to time, the Company provides forecasts of expected quantities of future oil and gas production and other financial and operating results. These forecasts are subject to extensive governmental regulationsbased on a number of estimates and assumptions, including that impose significant costs and liabilities.
In addition tonone of the environmental and occupational health and safety regulation discussed above,risks associated with the Company's sand miningoil and gas operations summarized in this "Item 1A. Risk Factors" occur. Production forecasts, specifically, are also subject to extensivebased on assumptions such as:
•expectations of production from existing wells and future drilling activity;
•the absence of facility or equipment malfunctions;
•the absence of adverse weather effects;
PIONEER NATURAL RESOURCES COMPANY
•expectations of commodity prices, which could experience significant volatility;
•expected well costs; and
•the assumed effects of regulation by governmental regulation on matters such as permitting and licensing requirements, reclamation and restorationagencies, which could make certain drilling activities or production uneconomical.
Should any of mining properties after mining is completed, and the effects that mining have on groundwater quality and availability. Also,these assumptions prove inaccurate, or should the Company's sand mining operations require numerous governmental, miningdevelopment plans change, actual production could be materially and other permitsadversely affected.
The Company could experience periods of higher costs if commodity prices rise. These increases could reduce the Company's profitability, cash flow and water rightsability to complete development activities as planned.
Historically, the Company's capital and approvals authorizing operations at each sand mining facility.
In order to obtain permits, renewalsoperating costs have risen during periods of permits or other approvals in the future for its sand mining operations, the Company may be required to prepareincreasing oil, NGL and present data to governmental authorities pertaining to the effect that any such activities may have on the environment. Obtaining or renewing required permits or approvals may be delayed or prevented due to opposition by neighboring property owners, membersgas prices. These cost increases result from a variety of the public or other third parties and other factors beyond the Company's control. Moreover, issuancecontrol, such as increases in the cost of any permits, permit renewalselectricity, steel and other raw materials that the Company and its vendors rely upon; increased demand for labor, services and materials as drilling activity increases; and increased production and ad valorem taxes. Decreased levels of drilling activity in the oil and gas industry have historically led to cost reductions for some drilling equipment, materials and supplies. However, such costs may rise faster than increases in the Company's revenue if commodity prices rise, thereby negatively impacting the Company's profitability, cash flow and ability to complete development activities as scheduled and on budget. This impact may be magnified to the extent that the Company's ability to participate in the commodity price increases is limited by its derivative risk management activities.
The Company is a party to debt instruments, a credit facility and other financial commitments that may limit the Company's ability to fund future business and financing activities.
The Company is a borrower under fixed rate senior and convertible notes and maintains a credit facility that was undrawn as of December 31, 2020. The terms of the Company's borrowings specify scheduled debt repayments and require the Company to comply with certain associated covenants and restrictions. The Company's ability to comply with the debt repayment terms, associated covenants and restrictions is dependent on, among other things, factors outside the Company's direct control, such as commodity prices and interest rates. In addition, from time to time, the Company enters into arrangements and transactions that can give rise to material off-balance sheet obligations, including firm purchase, transportation and fractionation commitments, gathering, processing, transportation and storage commitments on uncertain volumes of future throughput, commitments to purchase minimum volumes of goods and services, operating lease agreements and drilling commitments. The Company's financial commitments could have important consequences to its business including, but not limited to, the following:
•the incurrence of charges associated with unused commitments if actual activities do not meet the Company's expectations at the time such commitments are entered into;
•increasing its vulnerability to adverse economic and industry conditions;
•limiting its flexibility to plan for, or react to, changes in its business and industry;
•limiting its ability to fund future development activities or engage in future acquisitions; and
•placing it at a competitive disadvantage compared to competitors that have less debt and/or fewer financial commitments.
The Company's ability to obtain additional financing is also affected by the Company's debt credit ratings and competition for available debt financing. A ratings downgrade could materially and adversely impact the Company's ability to access debt markets, increase the borrowing cost under the Company's credit facility and the cost of future debt and potentially require the Company to post letters of credit or other approvalsforms of credit support for certain obligations.
The Company's ability to declare and pay dividends and repurchase shares is subject to certain considerations.
Dividends are authorized and determined by governmental agenciesthe Company's board of directors in its sole discretion. The Company's stock repurchase program has no time limit, may be conditionedmodified, suspended or terminated at any time by the board of directors, and the repurchase of shares pursuant to the stock repurchase program approved by the board of directors are made from time to time based on newmanagement's discretion. Decisions regarding the payment of dividends and the repurchase of shares are subject to a number of considerations, including:
•cash available for distribution or modified requirementsrepurchases;
•the Company's results of operations and anticipated future results of operations;
•the Company's financial condition, especially in relation to the anticipated future capital needs;
•the level of cash reserves the Company may establish to fund future capital expenditures;
•the Company's stock price; and
PIONEER NATURAL RESOURCES COMPANY
•other factors the board of directors deems relevant.
The Company can provide no assurance that it will continue to pay dividends or procedures with respectauthorize share repurchases at the current rate or at all. Any elimination of or downward revision in the Company's dividend payout or stock repurchase program could have a material adverse effect on the market price of the Company's common stock.
A failure by purchasers of the Company's production to mining that may be costly or time-consumingsatisfy their obligations to implement. A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval,the Company could have a material adverse effect on the Company's sand miningresults of operation.
The Company relies on a limited number of purchasers to purchase a majority of its products. To the extent that purchasers of the Company's production rely on access to the credit or equity markets to fund their operations, atthere is a risk that those purchasers could default in their contractual obligations to the affected facility. CurrentCompany if such purchasers were unable to access the credit or future regulationsequity markets for an extended period of time. If for any reason the Company were to determine that it was probable that some or all of the accounts receivable from any one or more of the purchasers of the Company's production were uncollectible, the Company would recognize a charge in the earnings of that period for the probable loss.
The failure by counterparties to the Company's derivative risk management activities to perform their obligations could have a material adverse effect on the Company's sand miningresults of operations.
The use of derivative risk management transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The Company is unable to predict changes in a counterparty's creditworthiness or ability to perform. Even if the Company accurately predicts sudden changes, the Company's ability to negate the risk may be limited depending upon market conditions and the contractual terms of the transactions. During periods of declining commodity prices, the Company's derivative receivable positions generally increase, which increases the Company's counterparty credit exposure. If any of the Company's counterparties were to default on its obligations under the Company's derivative arrangements, such a default could (i) have a material adverse effect on the Company's results of operations, (ii) result in a larger percentage of the Company's future production being subject to commodity price changes and (iii) increase the likelihood that the Company's derivative arrangements may not achieve their intended strategic purposes.
The Company's derivative risk management activities could result in financial losses, limit the Company's potential gains or fail to protect the Company from declines in commodity prices; the Company may not enter into derivative arrangements with respect to future volumes if prices are unattractive.
The Company's strategy is to enter into derivative arrangements covering a portion of its oil, NGL and gas production to mitigate the effect of commodity price volatility on the Company's net cash provided by operating activities and its net asset value, support the Company's annual capital expenditure plans and planned dividend payments. In addition, Pioneer assumed existing derivative arrangements in the Parsley Acquisition, and they are now part of the Company's consolidated derivative arrangements. These derivative arrangements, on a combined basis, are subject to mark-to-market accounting treatment, and the changes in fair market value of the contracts are reported in the Company's statements of operations each quarter, which may result in significant noncash gains or losses.
While intended to reduce the effects of oil, NGL and gas price volatility, the Company's derivative arrangements may limit theCompany'spotentialgainsifpricesriseoverthepriceestablishedbysucharrangements.Conversely,theCompany's derivative arrangements may be inadequate to protect the Company from continuing and prolonged declines in the price of oil, NGL or gas. Global commodity prices are volatile. Such volatility challenges the Company's ability to forecast the price of oil, NGL and gas, and, as a result, it may become more difficult for the Company to manage its derivative arrangements. In trying to manage its exposure to commodity price risk, the Company may end up with too many or too few derivatives, depending upon where commodity prices settle relative to the Company's derivative price thresholds and how the Company's oil, NGL and gas volumes and production mix fluctuate relative to expectations when the derivatives were entered.
The Company's derivative arrangements may also expose the Company to risk of financial loss in certain circumstances, including, but not limited to, when:
•production is less than the contracted derivative volumes;
•the counterparty to the derivative contract defaults on its contract obligations;
•there is a change in the expected differential between the underlying price in the derivative contract and actual prices received; or
•a sudden, unexpected event materially impacts oil and gas prices.
Failure to protect against declines in commodity prices exposes the Company to reduced liquidity when prices decline. A sustained lower commodity price environment would result in lower realized prices for unprotected volumes and reduce the
PIONEER NATURAL RESOURCES COMPANY
prices at which the Company could enter into derivative contracts on future volumes. This could make such transactions unattractive, and, as a result, some or all of the Company's production volumes forecasted for 2021 and beyond may not be protected by derivative arrangements. In addition, the Company's derivatives arrangements may not achieve their intended strategic purposes.
Pioneer's ability to utilize its historic U.S. net operating loss carryforwards and those of Parsley may be limited.
As of December 31, 2020, Pioneer and Parsley had U.S. federal net operating loss carryforwards ("NOLs") of $5.3 billion and $1.2 billion, respectively. Pioneer and Parsley NOLs of $2.8 billion and $611 million, respectively, were incurred prior to January 1, 2018 and will begin to expire, if unused, in 2032 and 2034, respectively, and $2.5 billion and $638 million, respectively, were incurred on or after January 1, 2018 and will not expire and will be carried forward indefinitely. Pioneer's ability to utilize these NOLs and other tax attributes to reduce future taxable income depends on many factors, including its future income, which cannot be assured. Section 382 of the Code ("Section 382") generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone an "ownership change" (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least five percent of such corporation's stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change occurs, utilization of the relevant corporation's NOLs would be subject to an annual limitation under Section 382, generally determined, subject to certain adjustments, by multiplying (i) the fair market value of such corporation's stock at the time of the ownership change by (ii) a percentage approximately equivalent to the yield on long-term tax-exempt bonds during the month in which the ownership change occurs. Any unused annual limitation may be carried over to later years.
Parsley underwent an ownership change under Section 382 as a result of the Parsley Acquisition, which, based on information currently available, may trigger a limitation (calculated as described above) on Pioneer's ability to utilize any historic Parsley NOLs and could cause some of Parsley's NOLs incurred prior to January 1, 2018 to expire before Pioneer would be able to renewutilize them to reduce taxable income in future periods. While Pioneer's issuance of stock in the mergers would, standing alone, be insufficient to result in an ownership change with respect to Pioneer, the Company cannot assure that Pioneer will not undergo an ownership change as a result of the mergers taking into account other changes in ownership of Pioneer stock occurring within the relevant three-year period described above. If Pioneer were to undergo an ownership change, it may be prevented from fully utilizing its historic NOLs incurred prior to January 1, 2018.
The Company periodically evaluates its unproved oil and gas properties to determine recoverability of its cost and could be required to recognize noncash charges in the earnings of future periods.
At December 31, 2020, the Company carried unproved oil and gas property costs of $576 million. GAAP requires periodic evaluation of these costs on a project-by-project basis. These evaluations are affected by the results of exploration activities, commodity price outlooks, planned future sales or obtainexpiration of all or a portion of the leases and the contracts and permits appurtenant to such projects. If the quantity of potential reserves determined by such evaluations is not sufficient to fully recover the cost invested in each project, the Company will recognize noncash charges in the earnings in the period in which the unproved oil and gas properties is determined to be impaired.
The Company periodically evaluates its goodwill for impairment and could be required to recognize noncash charges in the earnings of future periods.
At December 31, 2020, the Company had a carrying value for goodwill of $261 million. Goodwill is assessed for impairment annually during the third quarter and whenever facts or circumstances indicate that the carrying value of the Company's goodwill may be impaired, which may require an estimate of the fair values of the reporting unit's assets and liabilities. Those assessments may be affected by (i) positive or negative reserve adjustments, (ii) results of drilling activities, (iii) management's outlook for commodity prices and costs and expenses, (iv) changes in the Company's market capitalization, (v) changes in the Company's weighted average cost of capital and (vi) changes in income taxes. If the fair value of the reporting unit's net assets is not sufficient to fully support the goodwill balance in the future, the Company will reduce the carrying value of goodwill for the impaired value, with a corresponding noncash charge to earnings in the period in which goodwill is determined to be impaired. If incurred, an impairment of the goodwill could result in a material noncash charge to the Company's earnings in the period in which goodwill is determined to be impaired.
PIONEER NATURAL RESOURCES COMPANY
Health, safety and environmental risks.
The Company's operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and gas production may occur, and reduce demand for the oil and gas production it provides.
The threat of climate change continues to attract considerable attention in the United States and around the world. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate such future emissions.
No comprehensive climate change legislation has been implemented at the federal level, but President Biden may pursue new climate change legislation and has already issued executive orders and may issue more orders or other approvalsregulatory initiatives to limit GHG emissions. At the federal level, the EPA has adopted rules that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and gas system sources, and impose new standards reducing methane emissions from oil and gas operations through limitations on venting and flaring and the implementation of enhanced emission leak detection and repair requirements. In recent years, there has been considerable uncertainty surrounding regulation of methane emissions, as the EPA under the Obama Administration published a CAA final rule in 2016 establishing new source performance standards ("NSPS") for methane, but since that time the EPA has undertaken several measures, including publishing in September 2020 final rule policy and technical amendments to the NSPS, for stationary sources of air emissions. The policy amendments, effective September 14, 2020, notably removed the transmission and storage sector from the regulated source category and rescinded methane and volatile organic compound ("VOC") requirements for the remaining sources that were established by former President Obama's Administration, whereas the technical amendments, effective November 16, 2020, included changes to fugitive emissions monitoring and repair schedules for gathering and boosting compressor stations and low-production wells, recordkeeping and reporting requirements, and more. Various state, industry and environmental groups are separately challenging both the original 2016 standards and the EPA's September 2020 final rules and on January 20, 2021, President Biden issued an executive order, that among other things, directed EPA to reconsider the technical amendments and to issue a proposed rule suspending, revising or rescinding those amendments by no later than September 2021. A reconsideration of the September 2020 policy amendments is expected to follow. The January 20, 2021 executive order also directed the establishment of new methane and VOC standards applicable to existing oil and gas operations, including the production, transmission, processing and storage segments.
Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as greenhouse gas cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, President Biden issued executive orders in January 2021 re-committing the United States to the "Paris Agreement," a non-binding agreement for nations to limit their GHG emissions through individually-determined reduction goals every five years after 2020, and directed the federal government to formulate the United States' emissions reduction goal under the agreement. Separately, on January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risks across government agencies and economic sectors.
Litigation risks are also increasing, as a number of states, municipalities and other plaintiffs have sought to bring suit against the largest oil and gas exploration and production companies in state or federal court, alleging, among other things, that such energy companies created public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore, are responsible for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts. There are also increasing financial risks for fossil fuel producers and other companies supportive of the oil and gas industry as shareholders and bondholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the future.future to shift some or all of their investments into non-fossil fuel energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending and investment practices and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, there is the possibility that financial institutions will be required to adopt policies that limit funding for fossil fuel energy companies, as President Biden recently signed an executive order calling for the development of a climate finance plan and, separately, the Federal Reserve announced that it has joined the Network for Greening the Financial System, a consortium of financial regulators focused on addressing climate-related risks in the financial sector.
Finally, increasing concentrations of GHG in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods, rising sea levels and other climatic events. The occurrence of any one or more of these developments with respect to climate change initiatives and further
PIONEER NATURAL RESOURCES COMPANY
restrictions on GHG emissions could have a material adverse effect on the Company's business, financial condition and results of operations.
The nature of the Company's assets and production operations may impact the environment or cause environmental contamination, which could result in material liabilities to the Company.
The Company's assets and production operations may give rise to significant environmental costs and liabilities as a result of the Company's handling of petroleum hydrocarbons and wastes, because of air emissions and water discharges related to its operations, and due to past industry operations and waste disposal practices. The Company's oil and gas business involves the generation, handling, treatment, storage, transport and disposal of wastes, hazardous substances and petroleum hydrocarbons and is subject to environmental hazards, such as oil and produced water spills, NGL and gas leaks, pipeline and vessel ruptures and unauthorized discharges of such wastes, substances and hydrocarbons, that could expose the Company to substantial liability due to pollution and other environmental damage.
In recent years, wells used for the disposal by injection of flowback water or certain other oilfield fluids into non-producing formations have been associated with an increased number of seismic events, with research suggesting that the link between seismic events and wastewater disposal may vary by region and local geology. The U.S. geological survey has in the recent past identified six states with the most significant hazards from induced seismicity, which list included Texas. In response to these concerns, regulators in some states have adopted additional requirements related to seismicity and its potential association with hydraulic fracturing. For example, Texas has issued rules for wastewater disposal wells that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults. Other states, such as Oklahoma, have also issued orders for certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. Another consequence of seismic events may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. The occurrence of any one or more of these developments could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's hydraulic fracturing and former sand mining operations and hydraulic fracturing may result in silica-related health issues and litigation that could have a material adverse effect on the Company.
The Company routinely conducts hydraulic fracturing in its drilling and completion programs, which activity requires management and use of significant volumes of sand. Additionally, the Company owns and formerly operated certain sand mining operations. The inhalation of respirable crystalline silica dust is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders, such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the commercial sand industry. The actual or perceived health risks of mining, processing and handling sand could materially and adversely affect the Company through the threat of product liability or personal injury lawsuits, recently adopted OSHA silica regulations and increased scrutiny by federal, state and local regulatory authorities.
Pioneer Sands LLC ("Pioneer Sands"), the Company's wholly-owned sand mining subsidiary, is named The occurrence of significant silica-related health issues as a defendant, usually among many defendants, in numerous products liability lawsuits brought by or on behalf of current or former employees of Pioneer Sands or its commercial customers alleging damages caused by silica exposure. As of December 31, 2017, Pioneer Sands was the subject of silica exposure claims from 19 plaintiffs. Almost all of the claims pending against Pioneer Sands arise out of the alleged use of Pioneer Sands' sand products in foundries orwell as an abrasive blast media and have been filed in the states of Texas, Mississippi and Alabama, although some cases have been brought in other jurisdictions over the years.
It is possible that Pioneer Sands will have additional silica-related claims filed against it, including claims that allege silica exposure for periods for which there is not insurance coverage. In addition, it is possible that similar claims could be asserted arising out of the Company's other operations, including its hydraulic fracturing operations. Anyany pending or future claims or inadequacies of insurance coverage or contractual indemnification arising out of such issues could have a material adverse effect on the Company's results of operations.
Increasing attention to ESG matters may impact the Company's business.
Businesses across all industries are facing increasing scrutiny from stakeholders related to their ESG practices. Businesses that do not adapt to or comply with investor or stakeholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such business entity could be materially and adversely affected. Increasing attention to climate change, increasing societal expectations on businesses to address climate change, and potential consumer use of substitutes to energy commodities may result in increased costs, reduced demand for the Company's hydrocarbon products, reduced profits, increased investigations and litigation, and negative impacts on its stock price and access to capital markets. Increasing attention to climate change, for example, may result in demand shifts for the Company's hydrocarbon products and additional governmental investigations and private litigation.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating business entities on their approach to ESG matters. Currently, there are no universal standards for such scores or ratings, but the importance of sustainability evaluations is becoming more broadly accepted by investors and shareholders. Such ratings are used by some investors to inform their investment and voting decisions. Additionally, certain investors use these scores to benchmark businesses against their peers and if a business entity is perceived as lagging, these investors may engage with such entities to require improved ESG disclosure or performance. Moreover,
PIONEER NATURAL RESOURCES COMPANY
certain members of the broader investment community may consider a business entity's sustainability score as a reputational or other factor in making an investment decision. Consequently, a low sustainability score could result in exclusion of the Company's stock from consideration by certain investment funds, engagement by investors seeking to improve such scores and a negative perception of the Company's operations by certain investors.
Regulatory risks.
The Company's operations are subject to stringent environmental, oil and gas-related and occupational safety and health legal requirements that could increase its costs of doing business and result in additional operating restrictions, delays or cancellations in the completion of oil and gas wells, which could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company's crude oil and gas exploration and production operations are subject to stringent federal, state and local legal requirements governing among other things, the drilling of wells, rates of production, the size and shape of drilling and spacing units or proration units, the transportation and sale of oil, NGLs and gas, the discharging of materials into the environment, environmental protection and occupational safety and health. These requirements may take the form of laws, regulations, and executive actions, and noncompliance with these legal requirements may subject the Company to sanctions, including administration, civil or criminal penalties, remedial cleanups or corrective actions, delays in permitting or performance of projects, natural resource damages and other liabilities.
In connection with its operations, the Company must obtain and maintain numerous environmental and oil and gas related permits, approvals and certificates from various federal, state and local governmental authorities, and may incur substantial costs in doing so. The need to obtain permits has the potential to delay, curtail or cease the development of oil and gas projects. The Company may in the future be charged royalties on gas emissions or required to incur certain capital expenditures for air pollution control equipment or other air emissions-related issues. For example, in 2015, the EPA under the Obama Administration issued a final rule under the CAA, making the National Ambient Air Quality Standard ("NAAQS") for ground-level ozone more stringent. Since that time, the EPA has issued area designations with respect to ground-level ozone and, more recently, in December 2020, the EPA, under the Trump Administration, published a final action that, upon conducting a periodic review of the ozone standard in accord with CAA requirements, elected to retain the 2015 ozone NAAQS without revision on a going-forward basis; however, several groups have filed litigation over this December decision, and the NAAQS may be subject to further revision under the Biden Administration. State implementation of the revised NAAQS could, among other things, require installation of new emission controls on some of the Company's equipment, result in longer permitting timelines, and significantly increase the Company's capital expenditures and operating costs.
In another example, in 2015, the EPA and U.S. Army Corps of Engineers ("Corps") under the Obama Administration released a final rule outlining federal jurisdictional reach under the CWA over waters of the United States; including wetlands; however, the 2015 rule was repealed by the EPA and the Corps under the Trump Administration in a final rule that became effective in December 2019. The EPA and the Corps also published a final rule in April 2020 re-defining the term "waters of the United States" as applied under the CWA and narrowed the scope of waters subject to federal regulation. The April 2020 final rule is subject to various pending legal challenges, and there is an expectation that this final rule will be reconsidered by the Biden Administration. If the EPA and the Corps revise the June 2020 final rule in a manner similar to or more stringent than the original 2015 final rule, or if any challenge to the June 2020 final rule is successful, the scope of the Clean Water Act's jurisdiction in areas where the Company conducts operations could again be expanded, which could result in increased costs and delay, restrict or halt permitting or development of projects.
Additionally, the Company's operations are subject to federal and state laws and regulations, including the federal OSHA and comparable state statutes, whose purpose is to protect the health and safety of employees. Among other things, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act, and comparable state statutes require that information be maintained concerning hazardous materials used or produced in the Company's operations and that this information be provided to employees, state and local government authorities and citizens.
Compliance with these legal requirements, or any other new environmental or occupational safety and health laws, regulations or executive actions could, among other things, require the Company to install new or modified emission or safety controls on equipment or processes, incur longer permitting timelines, and incur increased capital or operating expenditures, which costs may be significant. Additionally, one or more of these developments could impact the Company's oil and gas exploration, production and development activities, which could have a material adverse effect on its business, results of operations and financial condition.
PIONEER NATURAL RESOURCES COMPANY
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Laws, regulations and other executive actions or regulatory initiatives regarding hydraulic fracturing could increase the Company's cost of doing business and result in additional operating restrictions, delays or cancellations that could have a material adverse effect on the Company's business, results of operations and financial condition.None.The Company routinely conducts hydraulic fracturing in its drilling and completion programs. Hydraulic fracturing is typically regulated by state oil and gas commissions, but the practice continues to attract considerable public, scientific and governmental attention in certain parts of the country, resulting in increased scrutiny and regulation, including by federal agencies.
At the federal level, the EPA asserted federal regulatory authority under the SDWA over certain hydraulic fracturing activities involving the use of diesel fuels and published permitting guidance for such activities. Additionally, the EPA issued a final regulation under the CWA prohibiting discharges to publicly owned treatment works of wastewater from onshore unconventional oil and gas extraction facilities. In late 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that "water cycle" activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances. Also, in 2016, the BLM under the Obama Administration published a final rule imposing more stringent standards on hydraulic fracturing on federal lands; however, in late 2018, the BLM under the Trump Administration published a final rule rescinding the 2016 final rule. Since that time, litigation challenging the BLM's 2016 final rule and the 2018 final rule has resulted in rescission in federal courts of both the 2016 rule and the 2018 final rule but appeals of one or both of those decisions are expected. Notwithstanding these regulatory developments, the Biden Administration has issued executive orders, could issue additional executive orders and could pursue other legislative and regulatory initiatives that restrict hydraulic fracturing activities on federal lands. For example, the Biden Administration issued an order on January 20, 2021 temporarily suspending the issuance of new leases and authorizations, including drilling permits on federal lands and waters for a period of 60 days, and subsequently issued a second order on January 27, 2021 suspending the issuance of new leases on federal lands and waters pending completion of a study of current oil and gas practices. Further constraints may be adopted by the Biden Administration in the future.
At the state level, many states have adopted legal requirements that have imposed new or more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing activities, including in states where the Company's oil and gas exploration and production activities occur. States could also elect to place prohibitions on hydraulic fracturing and local governments may seek to adopt ordinances within their jurisdictions regulating the time, place or manner of drilling activities in general or hydraulic fracturing activities in particular.
Laws and regulations pertaining to protection of threatened and endangered species or to critical habitat, wetlands and natural resources could delay, restrict or prohibit the Company's operations and cause it to incur substantial costs that may have a material adverse effect on the Company's development and production of reserves.
The federal ESA and comparable state laws were established to protect endangered and threatened species. Under the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species' habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act ("MBTA"). The U.S. Fish and Wildlife Service ("FWS"), during the Trump Administration, issued a final rule on January 7, 2021, which clarifies that criminal liability under the MBTA will apply only to actions "directed at" migratory birds, its nests, or its eggs; however, in 2020, the U.S. District Court for the Southern District of New York vacated a Department of Interior memorandum articulating a similar interpretation. The Company expects that the January 7 rulemaking will be subject to litigation or to reconsideration by the Biden Administration. Some of the Company's operations are conducted in areas where protected species or their habitats are known to exist. In these areas, the Company may be obligated to develop and implement plans to avoid potential adverse effects to protected species and their habitats, and the Company may be delayed, restricted or prohibited from conducting operations in certain locations or during certain seasons, such as breeding and nesting seasons, when the Company's operations could have an adverse effect on the species. In addition, the FWS may make new determinations on the listing of species as endangered or threatened under the ESA. The dunes sagebrush lizard is one example of a species that, if listed as endangered or threatened under the ESA in the future, could impact the Company's operations. The designation of previously unprotected species or the re-designation of under protected species as threatened or endangered in areas where the Company conducts operations could cause the Company to incur increased costs arising from species protection measures or could result in delays, restrictions or prohibitions on its development and production activities that could have a material adverse effect on the Company's ability to develop and produce reserves.
PIONEER NATURAL RESOURCES COMPANY
The Company's transportation of gas, sales and purchases of oil, NGLs and gas or other energy commodities, and any derivative activities related to such energy commodities, expose the Company to potential regulatory risks. The FERC, the FTC and the CFTC hold statutory authority to monitor certain segments of the physical and futures energy commodities markets relevant to the Company's business. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to the Company's transportation of gas in interstate commerce, physical sales and purchases of oil, NGL, gas or other energy commodities, and any derivative activities related to these energy commodities, the Company is required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement authority. Failure to comply with such regulations, as interpreted and enforced, could result in agency actions that could materially and adversely affect the Company's results of operations and financial condition.
The enactment of derivatives legislation could have a material adverse effect on the Company's ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with its business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") enacted in July 2010, established federal oversight and regulation of the over-the-counter derivatives market and entities, such as the Company, that participate in that market. The Dodd-Frank Act requires the CFTC and the SEC to promulgate rules and regulations for its implementation. While many Dodd-Frank Act regulations are already in effect, the rulemaking and implementation process is ongoing, and the ultimate effect of the adopted rules and regulations and any future rules and regulations on the Company's business remain uncertain.
In one of the rulemaking proceedings still pending under the Dodd-Frank Act, the CFTC issued in January 2020 (withdrawing previous proposals from 2013 and 2016), proposed rules imposing position limits for certain futures and options contracts in various commodities (including oil and gas) and for swaps that are their economic equivalents. Under the proposed rules on position limits, certain types of derivative transactions are exempt from these limits, provided that such derivative transactions satisfy the CFTC's requirements for certain enumerated "bona fide" derivative transactions. The CFTC has also adopted final rules regarding aggregation of positions, under which a party that controls the trading of, or owns ten percent or more of the equity interests in, another party will have to aggregate the positions of the controlled or owned party with its own positions for purposes of determining compliance with position limits unless an exemption applies. The CFTC's aggregation rules are now in effect, although CFTC staff has granted relief until August 12, 2022 from various conditions and requirements in the final aggregation rules. These rules may affect both the size of the positions that the Company may hold and the ability or willingness of counterparties to trade with the Company, potentially increasing the costs of transactions. Moreover, such changes could materially reduce the Company's access to derivative opportunities, which could adversely affect revenues or cash flow during periods of low commodity prices. As the new position limit rules are not yet final, the impact of those provisions on the Company is uncertain at this time.
The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and the associated rules also will require the Company, in connection with covered derivative activities, to comply with clearing and trade-execution requirements or to take steps to qualify for an exemption to such requirements. Although the Company believes it qualifies for the end-user exception from the mandatory clearing requirements for swaps entered to mitigate its commercial risks, the application of the mandatory clearing and trade execution requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that the Company uses. If the Company's swaps do not qualify for the commercial end-user exception, or if the cost of entering into uncleared swaps becomes prohibitive, the Company may be required to clear such transactions. The ultimate effect of these rules and any additional regulations on the Company's business is uncertain.
In addition, certain banking regulators and the CFTC have adopted final rules establishing minimum margin requirements for uncleared swaps. Although the Company expects to qualify for the end-user exception from margin requirements for swaps entered into to manage its commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that the Company uses. If any of the Company's swaps do not qualify for the commercial end-user exception, the posting of collateral could reduce its liquidity and cash available for capital expenditures and could reduce its ability to manage commodity price volatility and the volatility in its cash flows.
The full impact of the Dodd-Frank Act and related regulatory requirements upon the Company's business will not be known until the regulations are fully implemented and the market for derivatives contracts has adjusted. In addition, it is possible that the Biden administration could expand regulation of the over-the-counter derivatives market and the entities that participate in that market through either the Dodd-Frank Act or the enactment of new legislation. The Dodd-Frank Act (and any regulations implemented thereunder) and any new legislation could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks the Company
PIONEER NATURAL RESOURCES COMPANY
encounters and reduce the Company's ability to monetize or restructure its existing derivative contracts. Further, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and gas. The Company's revenues could therefore be materially and adversely affected if a consequence of the Dodd-Frank Act and implementing regulations is to lower commodity prices.
The European Union and other non-U.S. jurisdictions are implementing regulations with respect to the derivatives market. To the extent the Company transacts with counterparties in foreign jurisdictions or counterparties with other businesses that subject them to regulations in foreign jurisdictions, the Company may become subject to, or otherwise affected by, such regulations. At this time, the impact of such regulations is not clear.
Regulation by the CFTC and banking regulators of the over-the-counter derivatives market and market participants could cause the Company's contract counterparties, which are generally financial institutions and other market participants, to curtail or cease their derivatives activities. The Company believes that these regulatory trends have contributed to a reduction in liquidity of the over-the-counter derivatives market, which could make it more difficult to engage in derivative transactions covering significant volumes of the Company's future production, and which could materially and adversely affect the cost and availability of derivatives to the Company. If the Company reduces its use of derivatives as a result of such regulation, the Company's results of operations may become more volatile and its cash flows may be less predictable, which could materially and adversely affect the Company's ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on the Company, its financial condition and its results of operations.
The Company's bylaws provide, to the fullest extent permitted by law, that the Court of Chancery of the State of Delaware (orif the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the exclusive forum for certain legal actions between the Company and its stockholders and that the federal district courts of the United States shall be the sole and exclusive forum for the resolution of causes of action arising under the Securities Act of 1933. These provisions could increase costs to bring a claim, discourage claims or limit the ability of the Company's stockholders to bring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with the Company or the Company's directors, officers or other employees.
The Company's bylaws provide to the fullest extent permitted by law that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Company, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, other employee or agent or stockholder of the Company to the Company or the Company's stockholders, (c) any action against the Company arising pursuant to any provision of the Delaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (d) any action against the Company or any director, officer, other employee or agent of the Company asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of the Company's certificate of incorporation or the Company's bylaws. The Company's bylaws also provided that the federal district courts of the United States shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Although the Company's bylaws provide for an exclusive forum for causes of action under the Securities Act of 1933, its stockholders will not be deemed to have waived compliance with the federal securities laws and the rules and regulations thereunder. The choice of forum provisions may increase costs to bring a claim, discourage claims or limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or the Company's directors, officers or other employees, which may discourage such lawsuits against the Company or the Company's directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in the Company's bylaws to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions.
Risks associated with the Parsley Acquisition.
The financial and operational synergies attributable to the Parsley Acquisition may vary from expectations.
Pioneer may fail to realize the anticipated benefits and synergies expected from the Parsley Acquisition, which could adversely affect its business, financial condition and operating results. The success of the Parsley Acquisition will depend, in significant part, on Pioneer's ability to successfully integrate the acquired business and realize the anticipated strategic benefits and synergies from the combination. Pioneer believes that the addition of Parsley will complement Pioneer's strategy by providing operational and financial scale, increasing free cash flow and enhancing Pioneer's corporate rate of return. However, achieving these goals requires, among other things, realization of the targeted cost synergies expected from the Parsley Acquisition. The anticipated benefits of the transaction may not be realized fully or at all, or may take longer to realize than expected. Actual operating, technological, strategic and revenue opportunities, if achieved at all, may be less significant than
PIONEER NATURAL RESOURCES COMPANY
expected or may take longer to achieve than anticipated. If Pioneer is not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Parsley Acquisition within the anticipated timing or at all, Pioneer's business, financial condition and operating results may be adversely affected.
Litigation relating to the Parsley Acquisition could result in substantial costs to the Company.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert the time and resources of management. An adverse judgment could result in monetary damages, which could have a negative impact on the Company's liquidity and financial condition.
The Company, subsidiaries, or persons that have indemnification rights against the Company or its subsidiaries have been sued in connection with the Parsley Acquisition. There can be no assurance that the Company and the other defendants will be successful in the outcome of any such pending or any potential future lawsuits. The defense or settlement of any of these pending or future lawsuits may adversely affect the Company's business, liquidity, financial condition and results of operations.
The Company may be unable to integrate the business of Parsley successfully and/or realize the anticipated benefits of the Parsley Acquisition.
The Parsley Acquisition involves the combination of two companies that operated as independent public companies. The combination of two independent businesses is complex, costly and time consuming, and the Company will be required to devote significant management attention and resources to integrating Parsley's business practices and operations with those of the Company. Potential difficulties that the Company may encounter as part of the integration process include the following:
•the inability to successfully combine the business of Parsley in a manner that permits the Company to achieve, on a timely basis or at all, the enhanced revenue opportunities, cost savings and other benefits anticipated to result from the Parsley Acquisition;
•complexities associated with managing the combined businesses, including difficulty addressing possible differences in operational philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on the customers, suppliers, employees and other constituencies;
•the assumption of contractual obligations with less favorable or more restrictive terms;
•potential unknown liabilities and unforeseen increased expenses associated with the Parsley Acquisition;
•diversion of the attention of the Company's management; and
•the disruption of, or the loss of momentum in, the Company's ongoing business or inconsistencies in standards, controls, procedures and policies.
Any of these issues could adversely affect the Company's ability to maintain relationships with customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the Parsley Acquisition, or could reduce the Company's earnings or otherwise adversely affect the Company's business and financial results.
The Company's future results will suffer if it does not effectively manage its expanded operations.
As a result of the Parsley Acquisition, the size and geographic footprint of the Company's business has increased. The Company's future success will depend, in part, upon its ability to manage this expanded business, which may pose substantial challenges for management, including challenges related to the management and monitoring of new operations and basins and associated increased costs and complexity. The Company may also face increased scrutiny from governmental authorities as a result of the increase in the size of its business. There can be no assurances that the Company will be successful or that it will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the Parsley Acquisition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
PIONEER NATURAL RESOURCES COMPANY
ITEM 2.PROPERTIES
Reserve Estimation Procedures and Audits
The information included in this Report about the Company's proved reserves as of December 31, 2017, 20162020, 2019 and 20152018 is based on evaluations prepared by the Company's engineers and audited by Netherland, Sewell & Associates, Inc. ("NSAI"), with respect to the Company's major properties. The Company has no oil and gas reserves from non-traditional sources. Additionally, the Company does not provide optional disclosure of probable or possible reserves..
Reserve estimation procedures. The Company has established internal controls over reserve estimation processes and procedures to support the accurate and timely preparation and disclosure of reserve estimates in accordance with SEC requirements. These controls include oversight of the reserves estimation reporting processes by Pioneer's Corporate Reserves Group ("Corporate Reserves"), and annual external audits of substantial portions of the Company's proved reserves by NSAI.
Corporate Reserves is responsible for the management of the oil and gas proved reserve estimation processes in each of the Company's Permian Basin, South Texas, Raton and West Panhandle asset areas. Corporate Reserves is staffed with reservoir engineers and geoscientists who prepare reserve estimates at the end of each calendar quarter for the assets that they manage, using reservoir engineering information technology. Corporate Reserves interacts with the exploration and production functions to ensure all available engineering and geologic data is taken into account prior to establishing or revising an estimate. There is oversight of the reservoir engineers by the Director of Corporate Reserves and the Vice President of Corporate Reserves, each of whomwho is in turn subject to direct or indirect oversight by the Company's management committee ("MC"). The Company's MC which is comprised of its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and other executive officers. The reserve estimates are prepared by reservoir engineers before being submitted to the Director and Vice President of Corporate Reserves for further review.
The reserve estimates are summarized in reserve reconciliations that quantify reserve changes since the previous year end as revisions of previous estimates, purchases of minerals-in-place, improved recovery, extensions and discoveries, production and
PIONEER NATURAL RESOURCES COMPANY
sales of minerals-in-place. All reserve estimates, material assumptions and inputs used in reserve estimates and significant changes in reserve estimates are reviewed for engineering and financial appropriateness and compliance with SEC rules and GAAP standards by Corporate Reserves, in consultation with the Company's accounting and financial management personnel.U.S. GAAP. Annually, the MC reviews the reserve estimates, and any differences with the reserve auditors (forNSAI for the portion of the reserves audited by NSAI) on a consolidated basisthat it audits, before these estimates are approved. The engineers and geoscientists who participate in the reserve estimation and disclosure process periodically attend training provided by external consultants and through internal Pioneer programs. Additionally, Corporate Reserves has prepared and maintains written policies and guidelines for its staff to reference on reserve estimation and preparation to promote consistency in the preparation of the Company's reserve estimates and compliance with the SEC reserve estimation and reporting rules.
Proved reserves audits. The proved reserve audits performedreserves audited by NSAI, forin aggregate, represented the following:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 |
| Proved reserves audited by NSAI | 89 | % | | 83 | % | | 79 | % |
| Pre-tax present value of proved reserves discounted at ten percent audited by NSAI | 100 | % | | 99 | % | | 95 | % |
In connection with the annual reserves audit, NSAI prepared its own estimates of the Company's proved reserves and compared its estimates to those prepared by the Company. NSAI determined that the Company's estimates of reserves were prepared in accordance with the definitions and regulations of the SEC, including the criteria of "reasonable certainty," as it pertains to expectations about the recoverability of reserves in future years, endedunder existing economic and operating conditions, consistent with the definition in Rule 4-10(a)(24) of Regulation S-X. NSAI issued an unqualified audit opinion on the Company's proved reserves at December 31, 2017, 20162020, 2019 and 2015,2018, respectively, based upon their evaluation. NSAI concluded that the Company's estimates of proved reserves were, in the aggregate, represented 77 percent, 77 percent and 82 percent of the Company's year-end 2017, 2016 and 2015 proved reserves, respectively; and 91 percent, 93 percent and 97 percent of the Company's year-end 2017, 2016 and 2015 associated pre-tax present value of proved reserves discounted at ten percent, respectively.
NSAI follows the general principles set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information" promulgated by the Society of Petroleum Engineers (the "SPE"). A reserve audit as defined by the SPE is not the same as a financial audit. The SPE's definition of a reserve audit includes the following concepts:
A reserve audit is an examination of reserve information that is conducted for the purpose of expressing an opinion as to whether such reserve information, in the aggregate, is reasonable and hashad been presentedprepared in conformityaccordance with the 2007 SPE publication entitled "StandardsStandards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information."
The estimation of reserves is an imprecise science due to the many unknown geologic and reservoir factors that cannot be estimated through sampling techniques. Since reserves are only estimates, they cannot be audited for the purpose of verifying exactness. Instead, reserve information is audited for the purpose of reviewing in sufficient detail the policies, procedures and methods used by a company in estimating its reserves so that the reserve auditors may express an opinion as to whether, in the aggregate, the reserve information furnished by a company is reasonable.
The methods and procedures used by a company, and the reserve information furnished by a company, must be reviewed in sufficient detail to permit the reserve auditor, in its professional judgment, to express an opinion as to the reasonableness of the reserve information. The auditing procedures require the reserve auditor to prepare their own estimates of reserve information for the audited properties.
In conjunction with the audit of the Company's proved reserves and associated pre-tax present value discounted at ten percent, Pioneer provided to NSAI its external and internal engineering and geoscience technical data and analyses. Following NSAI's review of that data, it had the option of honoring Pioneer's interpretations, or making its own interpretations. No data was withheld from NSAI. NSAI accepted without independent verification the accuracy and completeness of the historical information and data furnished by Pioneer with respect to ownership interest, oil and gas production, well test data, commodity prices, operating and development costs, and any agreements relating to current and future operations of the properties and sales of production. However, if in the course of its evaluations something came to its attention that brought into question the validity or sufficiency of any such information or data, NSAI did not rely on such information or data until it had satisfactorily resolved its questions relating thereto or had independently verified such information or data.
In the course of its evaluations, NSAI prepared, for all of the audited properties, its own estimates of the Company's proved reserves and the pre-tax present values of such reserves discounted at ten percent. NSAI reviewed its audit differences with the Company, and, in a number of cases, held meetings with the Company to review additional reserves work performed by the Company's technical teams and any updated performance data related to the proved reserve differences. Such data was incorporated, as appropriate, by both parties into the proved reserve estimates. NSAI's estimates, including any adjustments resulting from additional data, of those proved reserves and the pre-tax present value of such reserves discounted at ten percent did not differ from Pioneer's estimates by more than ten percent in the aggregate. However, when compared on a lease-by-lease, field-by-field or area-by-area basis, some of the Company's estimates were greater than those of the reserve auditors and some were less than the estimates of the reserve auditors. When such differences do not exceed ten percent in the aggregate and NSAI is satisfied that the proved reserves and pre-tax present values of such reserves discounted at ten percent are reasonable and that its audit objectives have been met, NSAI will issue an unqualified audit opinion. Remaining differences are not resolved due to the limited cost benefit of continuing such analyses by the Company and the reserve auditors. At the conclusion of the audit process, it was NSAI's opinion, as set forth in its audit letter, which is included as an exhibit to this Report, that Pioneer's estimates of the Company's proved oil and gas reserves and associated pre-tax present values discounted at ten percent are, in the aggregate, reasonable and have been
PIONEER NATURAL RESOURCES COMPANY
prepared in accordance with the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information"Information promulgated by the SPE.Society of Petroleum Engineers. NSAI's report as of December 31, 2020, which should be read in its entirety, is attached as Exhibit 99.1 to this Annual Report on Form 10-K.
See "Item 1A. Risk Factors," "Critical Accounting Estimates" in "Item 7. Management's Discussion and Analysis and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" for additional discussions regarding proved reserves and their related cash flows.
Qualifications of proved reserves preparers and auditors. Corporate Reserves is staffed by petroleum engineers with extensive industry experience and is managed by the Vice PresidentDirector of Corporate Reserves, the technical person who is primarily responsible for overseeing the Company's reserves estimates. These individuals meet the professional qualifications of reserves estimators and reserves auditors as defined by the "StandardsStandards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information," promulgated by the SPE.Information. The qualifications of the Vice PresidentDirector of Corporate Reserves include 4041 years of international and domestic experience as a petroleum engineer, with 3323 years focused on reserves reporting for independent oil and gas companies, including Pioneer. He has an additional 19 years of Permian Basin-focused production engineering, advanced reservoir engineering, petrophysics, consulting and special project research experience with major oil companies. His educational background includes an undergraduate degree in ChemicalGeological Engineering andwith a Masters of Business Administration degree in Finance. He is also a Chartered Financial Analyst Charterholder.Petroleum Engineering emphasis.
NSAI provides worldwide petroleum property analysis services for energy clients, financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No. F-2699. The technical person primarily responsible for auditing the Company's reserves estimates has been a practicing consulting petroleum engineer at NSAI since 19831998 and has over 3940 years of practical experience in petroleum engineering, including over 3635 years of experience in the estimation and evaluation of proved reserves.
PIONEER NATURAL RESOURCES COMPANY
He graduated with a Bachelor of Science degree in ChemicalPetroleum Engineering in 19781980 and meets or exceeds the education, training and experience requirements set forth in the "StandardsStandards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the board of directors of the SPE.Information.
Technologies used in proved reserves estimates. Proved undeveloped reserves include those reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Undeveloped reserves may be classified as proved reserves on undrilled acreage directly offsetting development areas that are reasonably certain of production when drilled, or where reliable technology provides reasonable certainty of economic producibility. Undrilled locations may be classified as having undeveloped proved reserves only if an ability and intent has been established to drill the reserves within five years, unless specific circumstances justify a longer time period.
In the context of reserves estimations, reasonable certainty means a high degree of confidence that the quantities will be recovered and reliable technology means a grouping of one or more technologies (including computational methods) that has been field-tested and has been demonstrated to provide reasonable certaincertainty that the results with consistencywill be consistent and repeatabilityrepeatable in the formation being evaluated or in an analogous formation. In estimating proved reserves, the Company uses several different traditional methods such as performance-based methods, volumetric-based methods and analogy with similar properties. In addition, the Company utilizes additional technical analysis such as seismic interpretation, wireline formation tests, geophysical logs and core data to provide incremental support for more complex reservoirs. Information from this incremental support is combined with the traditional technologies outlined above to enhance the certainty of the Company's proved reserve estimates.
PIONEER NATURAL RESOURCES COMPANY
Proved Reserves
As of December 31, 2017, 2016 and 2015, theThe Company's oil and gas proved reserves are located entirely inas follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Proved Reserve Volumes |
| | Oil
(MBbls) | | NGLs
(MBbls) | | Gas
(MMcf) (a) | | Total (MBOE) | | % |
| As of December 31, 2020: | | | | | | | | | |
| Developed | 539,320 | | | 362,584 | | | 1,855,607 | | | 1,211,172 | | | 95 | % |
| Undeveloped | 29,464 | | | 16,603 | | | 84,493 | | | 60,149 | | | 5 | % |
| Total proved reserves | 568,784 | | | 379,187 | | | 1,940,100 | | | 1,271,321 | | | 100 | % |
| As of December 31, 2019: | | | | | | | | | |
| Developed | 571,293 | | | 268,468 | | | 1,429,417 | | | 1,077,997 | | | 95 | % |
| Undeveloped | 32,457 | | | 13,515 | | | 70,096 | | | 57,655 | | | 5 | % |
| Total proved reserves | 603,750 | | | 281,983 | | | 1,499,513 | | | 1,135,652 | | | 100 | % |
| As of December 31, 2018: | | | | | | | | | |
| Developed | 521,579 | | | 219,730 | | | 1,330,852 | | | 963,118 | | | 92 | % |
| Undeveloped | 43,431 | | | 21,184 | | | 127,722 | | | 85,902 | | | 8 | % |
| Total proved reserves | 565,010 | | | 240,914 | | | 1,458,574 | | | 1,049,020 | | | 100 | % |
_____________________
(a)Total proved gas reserves include 115,239 MMcf, 100,236 MMcf and 106,948 MMcf of gas that the United States. Company expected to be produced and used as field fuel (primarily for compressors) as of December 31, 2020, 2019 and 2018, respectively.
The Company's Standardized Measure of total proved reserves are as follows:
| | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2020 | | 2019 | | 2018 |
| | (in millions) |
| Proved developed reserves | $ | 6,992 | | | $ | 9,386 | | | $ | 10,694 | |
| Proved undeveloped reserves | 210 | | | 348 | | | 639 | |
| $ | 7,202 | | | $ | 9,734 | | | $ | 11,333 | |
PIONEER NATURAL RESOURCES COMPANY
The NYMEX prices used for oil and gas reserve preparation, based upon SEC guidelines, were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Oil per Bbl | $ | 39.57 | | | $ | 55.93 | | | $ | 65.57 | |
| Gas per Mcf | $ | 1.98 | | | $ | 2.58 | | | $ | 3.10 | |
See Note C of Notes to Consolidated Financial Statements"Unaudited Supplementary Information" included in "Item 8. Financial Statements and Supplementary Data" for additional details of the Company's discontinued operations. The following table provides information regarding the Company's proved reserves as of December 31, 2017, 2016 and 2015:information. |
| | | | | | | | | | | | | | |
| | Summary of Oil and Gas Proved Reserves as of Fiscal Year-End Based on Average Fiscal-Year Prices |
| | Proved Reserve Volumes |
| | Oil
(MBbls) | | NGLs
(MBbls) | | Gas
(MMcf) (a) | | Total (MBOE) | | % |
| December 31, 2017: | | | | | | | | | |
| Developed | 442,364 |
| | 189,434 |
| | 1,629,451 |
| | 903,373 |
| | 92 | % |
| Undeveloped | 40,525 |
| | 21,063 |
| | 122,429 |
| | 81,993 |
| | 8 | % |
| Total proved reserves | 482,889 |
| | 210,497 |
| | 1,751,880 |
| | 985,366 |
| | 100 | % |
| | | | | | | | | | |
| December 31, 2016: | | | | | | | | | |
| Developed | 343,515 |
| | 126,928 |
| | 1,215,861 |
| | 673,085 |
| | 93 | % |
| Undeveloped | 34,681 |
| | 10,013 |
| | 48,868 |
| | 52,840 |
| | 7 | % |
| Total proved reserves | 378,196 |
| | 136,941 |
| | 1,264,729 |
| | 725,925 |
| | 100 | % |
| | | | | | | | | | |
| December 31, 2015: | | | | | | | | | |
| Developed | 266,657 |
| | 112,376 |
| | 1,284,680 |
| | 593,146 |
| | 89 | % |
| Undeveloped | 45,313 |
| | 13,968 |
| | 71,807 |
| | 71,249 |
| | 11 | % |
| Total proved reserves | 311,970 |
| | 126,344 |
| | 1,356,487 |
| | 664,395 |
| | 100 | % |
_____________________ | |
(a) | Total proved gas reserves contain 171,623 MMcf, 137,853 MMcf and 144,955 MMcf of gas that the Company expected to be produced and used as field fuel (primarily for compressors), rather than being delivered to a sales point as of December 31, 2017, 2016 and 2015, respectively. |
The Company's Standardized Measure of total proved reserves as of December 31, 2017 was $8.2 billion, including $7.7 billion and $443 million related to proved developed and proved undeveloped reserves, respectively. The Standardized Measure of total proved reserves as of December 31, 2017 includes the reduction of the federal corporate income tax rate to 21 percent associated with the enactment of the Tax Cut and Jobs Act. The Company's Standardized Measure of total proved reserves as of December 31, 2016 was $4.2 billion, including $4.0 billion and $178 million related to proved developed and proved undeveloped reserves, respectively. The Company's Standardized Measure of total proved reserves as of December 31, 2015 was $3.2 billion, including $3.0 billion and $245 million related to proved developed and proved undeveloped reserves, respectively.
See the "Unaudited Supplementary Information" section included in "Item 8. Financial Statements and Supplementary Data" for additional details of the estimated quantities of the Company's proved reserves, including explanations for material changes in proved developed and proved undeveloped reserves.
PIONEER NATURAL RESOURCES COMPANY
Description of Properties
The following tables summarize the Company's developmentDevelopment and exploration/exploratory/extension drilling activities during 2017:activity is as follows:
| | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Development | | Exploratory/Extension |
| Beginning wells in progress | 5 | | | 234 | |
| Wells spud | 17 | | | 218 | |
| Less: | | | |
| Successful wells | 13 | | | 242 | |
| | | |
| | | |
| Ending wells in progress | 9 | | | 210 | |
|
| | | | | | | | | | | |
| | Development Drilling |
| | Beginning Wells In Progress | | Wells Spud | | Successful Wells | | Ending Wells In Progress |
| Permian Basin | 8 |
| | 22 |
| | 16 |
| | 14 |
|
| South Texas—Eagle Ford Shale | 4 |
| | 1 |
| | 5 |
| | — |
|
| South Texas—Other | — |
| | 5 |
| | 5 |
| | — |
|
| Total | 12 |
| | 28 |
| | 26 |
| | 14 |
|
|
| | | | | | | | | | | | | | |
| | Exploration/Extension Drilling |
| | Beginning
Wells In Progress | | Wells Spud | | Successful Wells | | Unsuccessful Wells | | Ending Wells In Progress |
| Permian Basin | 119 |
| | 214 |
| | 207 |
| | 1 |
| | 125 |
|
| South Texas—Eagle Ford Shale | 14 |
| | 10 |
| | 15 |
| | 1 |
| | 8 |
|
| West Panhandle | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Total | 133 |
| | 227 |
| | 222 |
| | 2 |
| | 136 |
|
The following table summarizes the Company's averageAverage daily oil, NGL,NGLs, gas and total production by asset area during 2017:is as follows:
|
| | | | | | | | | | | |
| | Oil (Bbls) | | NGLs (Bbls) | | Gas (Mcf) (a) | | Total (BOE) |
| Permian Basin | 147,641 |
| | 44,099 |
| | 194,904 |
| | 224,224 |
|
| South Texas—Eagle Ford Shale | 7,754 |
| | 7,141 |
| | 44,039 |
| | 22,235 |
|
| Raton Basin | — |
| | — |
| | 88,497 |
| | 14,750 |
|
| West Panhandle | 1,669 |
| | 3,490 |
| | 7,484 |
| | 6,407 |
|
| South Texas—Other | 1,502 |
| | 277 |
| | 17,531 |
| | 4,700 |
|
| Other | 5 |
| | 1 |
| | 52 |
| | 14 |
|
| Total | 158,571 |
| | 55,008 |
| | 352,507 |
| | 272,330 |
|
_____________________ | | | | | | | |
(a) | | | Year Ended December 31, 2020 |
| | | |
| Oil (Bbls) | | | 210,641 | |
| NGL (Bbls) | | | 85,728 | |
Gas production excludes gas produced and used as field fuel.(Mcf) (a) | | | 425,307 | |
| Total (BOE) | | | 367,253 | |
PIONEER NATURAL RESOURCES COMPANY
(a)Gas production excludes gas produced and used as field fuel.
Costs incurred is as follows:
The following table summarizes the Company's costs incurred by asset area during 2017: | | | | | | | |
| | | Year Ended December 31, 2020 |
| | | |
| | | (in millions) |
| Property acquisition costs: | | | |
| | | |
| Unproved | | | $ | 14 | |
| | | |
| | | |
| Exploration costs | | | 1,167 | |
| Development costs | | | 280 | |
| Asset retirement obligations | | | 112 | |
| | | $ | 1,573 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Property Acquisition Costs | | Exploration Costs | | Development Costs | | Asset Retirement Obligations | | |
| | Proved | | Unproved | | | | | Total |
| | (in millions) |
| Permian Basin | $ | 8 |
| | $ | 128 |
| | $ | 1,950 |
| | $ | 579 |
| | $ | (17 | ) | | $ | 2,648 |
|
| South Texas—Eagle Ford Shale | — |
| | — |
| | 74 |
| | 37 |
| | (4 | ) | | 107 |
|
| Raton Basin | — |
| | — |
| | 1 |
| | 6 |
| | 5 |
| | 12 |
|
| West Panhandle | — |
| | — |
| | 2 |
| | 10 |
| | (4 | ) | | 8 |
|
| South Texas—Other | — |
| | — |
| | — |
| | 15 |
| | 3 |
| | 18 |
|
| Other | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Total | $ | 8 |
| | $ | 128 |
| | $ | 2,031 |
| | $ | 647 |
| | $ | (17 | ) | | $ | 2,797 |
|
Permian Basin. In November 2016, the U.S. Geological Survey ("USGS") announced, based on its estimates, that the Wolfcamp shale in the Permian Basin is the largest continuous oil field in the United States.With approximately 755,000 gross acres (680,000 net acres), Pioneer is the largest acreage holder in the Spraberry/Wolfcamp field with approximately 750,000 gross acres (660,000 net acres).in the Permian Basin of West Texas. Pioneer's interests in the northern portion of the play comprise approximately 550,000560,000 gross acres and its interests in the southern portion of the play, where the Company has a joint venture with Sinochem, comprise approximately 200,000 gross acres. The January 12, 2021 Parsley Acquisition added approximately 290,000 gross acres to the Company's acreage position in the Permian Basin, of which approximately 190,000 gross acres are in the Midland Basin and approximately 100,000 gross acres are in the Delaware Basin. The oil produced from the Spraberry/Wolfcamp fieldPermian Basin is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average energy content of 1,400 Btu. The oil and gas are produced primarily from seven formations, the upper and lower Spraberry, the Jo Mill, the Dean, the Wolfcamp, Bone Spring, the Strawn and the Atoka, at depths ranging from 7,500 feet to 14,000 feet. The Company believes that it has significant resource potential within its Spraberry, Jo Mill, Wolfcamp and WolfcampBone Spring formation acreage, based on itsthe Company and Parsley's extensive geologic data covering the Middle Spraberry, Jo Mill and Lower Spraberry intervals, the Wolfcamp A, B, C and D intervals and itsthe Bone Spring intervals and both the Company and Parsley's drilling results to date.
PIONEER NATURAL RESOURCES COMPANY
During 2017,2020, the Company successfully completed 183206 horizontal wells in the northern portion of the play andwhere approximately 40 horizontal wells in the southern portion of the play. In the northern portion of the play, approximately 50 percent of the horizontal wells placed on production were Wolfcamp BA interval wells, approximately 3530 percent were Wolfcamp AB interval wells and approximately 1530 percent were Lower Spraberry Shaleand Wolfcamp D interval wells. TheAdditionally, the Company successfully completed 49 horizontal wells in the southern portion of the play where the majority of the wells placed on production in the southern portion of the play were Wolfcamp B interval wells. In addition, during 2017, the
The Company completedcontinues to complete acreage trades that allow the Company to drill wells with longer laterals, improving the expected returns of the wells. The Company estimates that the acreage trades completed in 20172020 added approximately 7.24 million lateral feet to the Company's drilling inventory.
The Company plans to operate an average of 18 to 20 drilling rigs in the Spraberry/Wolfcamp fieldPermian Basin in 2018,2021, with 16an average of 15 to 17 rigs operating in the northern portion of the play and fourMidland Basin, three rigs operating in the southern portion of the play.Midland Basin and one rig operating in the Delaware Basin on the acquired acreage from Parsley. During 2018,2021, for the Midland Basin, the Company expects to place on production between 250 and 275approximately 40 percent of its planned horizontal wells (200 to 225 horizontal wells in the northern portion of the play and approximately 50 horizontal wells in the southern portion of the play). Approximately 60 percent of the horizontal wells are planned to be drilled in the Wolfcamp B interval, 2540 percent in the Wolfcamp A interval, 15 percent in the Spraberry intervals and the remaining 15five percent will be a combination of wells in the Spraberry Shale intervals (Jo Mill, Lower Spraberry and Middle Spraberry) and a limited appraisal program for the Clearfork and Wolfcamp D intervals. The Company's 2018 appraisal program includes appraising: (i) its first Clearfork horizontal well (located in Midland County), (ii) seven wells in the Jo Mill and Middle Spraberry intervals in conjunction with nine Lower Spraberry Shale wells to determine an optimal development strategy for the Spraberry formation (these appraisals will test different spacing, staggering, sequencing, and completion design) and (iii) three Wolfcamp D interval wells.
Delaware Basin. The Company expects its Delaware Basin drilling activity to spend $2.6 billiontarget approximately 60 percent of its planned horizontal wells to be drilled in the Spraberry/Wolfcamp field during 2018, including $2.0 billion of horizontal drillingA and completion capital, $300 million for tank batteryB intervals and disposal facilities, $170 million for gas processing facilities and $110 million for land, science and other costs.
The Company continues to utilize its integrated services to control well costs and operating costs in addition to supporting the execution of its drilling and production activitiesapproximately 40 percent in the Spraberry/Wolfcamp field. The majority of 2018 drilling activities will be supported by seven of the Company's eight pressure pumping fleets. The Company also owns other field service equipment that supports its drilling and production operations, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, blowout preventers, construction equipment and fishing tools. The 2018 capital budget includes $78 million for upgrades and maintenance to the Company's pressure pumping and well service equipment.Bone Spring intervals.
The Company's sand mine in Brady, Texas, which is strategically located within close proximity (approximately190 miles) of the Spraberry/Wolfcamp field, provides a secure sand source for the Company's horizontal drilling program. In addition, Pioneer has signed a contract for its initial offtake of sand sourced in West Texas where significant new sand supplies are expected to be
PIONEER NATURAL RESOURCES COMPANY
available in 2018. The Company is evaluating additional contracts for lower cost sand sourced in West Texas. As a result of the expected supply growth of West Texas sand, the planned expansion of the Company’s sand mine at Brady, Texas has been deferred.
In addition to the efficiencies from the Company's integrated services, the Company has been and continues to pursue initiatives to improve drilling and completion efficiencies and reduce costs. The Company's long-term growth plan continues to focus on optimizing the development of the field and addressing the future requirements for water sourcing and disposal, field infrastructure, gas processing, pipeline takeaway capacity for its products, oilfield services, tubulars, electricity, buildings and roads.
The Company is constructing a field-wide water distribution system to reduce the cost of water for drilling and completion activities and to secure adequate supplies of non-potable water to support the Company's long-term growth plan for the Spraberry/Wolfcamp field. Over the past few years, the Company has expanded its mainline system, subsystems and frac ponds to efficiently deliver water to many of Pioneer's drilling locations. The Company is purchasing approximately 120 thousand barrels per day of effluent water from the City of Odessa and has signed an agreement with the City of Midland to upgrade the City's wastewater treatment plant in return for a dedicated long-term supply of water from the plant. Once the Midland plant upgrade is complete, the Company expects to receive approximately two billion barrels of low-cost, non-potable water over a 28-year contract period (up to 240 thousand barrels per day) to support its completion operations. During 2018, the Company expects to spend approximately $135 million to begin the Midland plant upgrade construction and build additional subsystems, frac ponds and produced water reuse facilities.
South Texas Eagle Ford Shale. During 2017, the Company operated two rigs in the Eagle Ford Shale area and drilled 11 new Eagle Ford Shale wells. The objective of this drilling program was to test longer laterals with wider spacing and higher intensity completions in the new wells. The Company's 2017 completions included 25 wells in South Texas, comprising 11 new Eagle Ford Shale wells and nine wells that were drilled but not completed in 2016, as well as five oil wells in the Wilcox formation that were drilled and placed on production during 2017.
See Note Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's plan to sell its South Texas assets.
Raton Basin. The Raton Basin properties are located in the southeast portion of Colorado. The Company owns approximately 180,000 gross acres (165,000 net acres) in the center of the Raton Basin and produces coal bed methane gas from the coal seams in the Vermejo and Raton formations from approximately 2,200 wells.
See Note Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's plan to sell its Raton Basin assets.
West Panhandle. The West Panhandle properties are located in the panhandle region of Texas. These stable, long-lived reserves are attributable to the Red Cave, Brown Dolomite, Granite Wash and fractured Granite formations at depths no greater than 3,500 feet. The Company's gas has an average energy content of 1,400 Btu and is produced from approximately 700 wells on approximately 240,000 gross and net acres covering approximately 375 square miles.
See Note Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's plan to sell its West Panhandle assets.
See Note D of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the impairment charges recorded during 2017, 2016 and 2015 to reduce the carrying value of the Company's properties in the Raton, West Panhandle, South Texas - Eagle Ford Shale and South Texas - Other fields.
Selected Oil and Gas Information
The following tables set forth selected oil and gas information for the Company as of and for each of the years ended December 31, 2017, 2016 and 2015. Because of normal production declines, increased or decreased drilling activities and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
Production, price and cost data. The price that the Company receives for the oil and gas it produces is largely a function of market supply and demand. Demand is affected by general economic conditions, as evidenced by the significant demand reduction during 2020 as a result of the COVID-19 pandemic, weather and other seasonal conditions, including hurricanes and tropical storms. Over or under supply of oil or gas can result in substantial price volatility. Historically, commodity prices have been volatile and the Company expects that volatility to continue in the future. Adecline in oil, NGL and gas prices or poor drilling results could have a material adverse effect on the Company's financial position, results of operations, cash flows, quantities of oil and gas reserves that may be economically produced and the Company's ability to access the capital markets.
PIONEER NATURAL RESOURCES COMPANY
The following tables set forth production, price and cost data with respect to the Company's properties for 2017, 2016 and 2015.properties. These amounts represent the Company's historical results of operations without making pro forma adjustments for any acquisitions, divestitures or drilling activity that occurred during the respective years. The production amounts will not match the proved reserve volume tables in the "Unaudited Supplementary Information" section included in "Item 8. Financial Statements and Supplementary Data" because field fuel volumes are included in the proved reserve volume tables.
Because of normal production declines, increased or decreased drilling activities and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA
| | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Permian Basin | | Total Company |
| Annual sales volumes: | | | |
| Oil (MBbls) | 77,086 | | | 77,095 | |
| NGLs (MBbls) | 31,368 | | | 31,376 | |
| Gas (MMcf) | 155,611 | | | 155,662 | |
| Total (MBOE) | 134,389 | | | 134,415 | |
| Average daily sales volumes: | | | |
| Oil (Bbls) | 210,618 | | | 210,641 | |
| NGLs (Bbls) | 85,706 | | | 85,728 | |
| Gas (Mcf) | 425,167 | | | 425,307 | |
| Total (BOE) | 367,185 | | | 367,253 | |
| Average prices: | | | |
| Oil (per Bbl) | $ | 37.24 | | | $ | 37.24 | |
| NGLs (per Bbl) | $ | 15.62 | | | $ | 15.62 | |
| Gas (per Mcf) | $ | 1.73 | | | $ | 1.73 | |
| Revenue (per BOE) | $ | 27.01 | | | $ | 27.01 | |
| Average costs (per BOE): | | | |
| Production costs: | | | |
| Lease operating | $ | 3.00 | | | $ | 3.00 | |
| Gathering, processing and transportation | 2.59 | | | 2.59 | |
| Net natural gas plant/gathering | (0.76) | | | (0.76) | |
| Workover | 0.24 | | | 0.24 | |
| Total | $ | 5.07 | | | $ | 5.07 | |
| Production and ad valorem taxes: | | | |
| Ad valorem | $ | 0.64 | | | $ | 0.64 | |
| Production | 1.17 | | | 1.17 | |
| Total | $ | 1.81 | | | $ | 1.81 | |
| Depletion expense | $ | 11.55 | | | $ | 11.55 | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Spraberry/ Wolfcamp Field | | Eagle Ford Shale Field | | Raton Field | | Total Company Fields |
| Production information: | | | | | | | |
| Annual sales volumes: | | | | | | | |
| Oil (MBbls) | 53,889 |
| | 2,830 |
| | — |
| | 57,878 |
|
| NGLs (MBbls) | 16,096 |
| | 2,607 |
| | — |
| | 20,078 |
|
| Gas (MMcf) | 71,140 |
| | 16,074 |
| | 32,302 |
| | 128,665 |
|
| Total (MBOE) | 81,842 |
| | 8,116 |
| | 5,384 |
| | 99,401 |
|
| Average daily sales volumes: | | | | | | | |
| Oil (Bbls) | 147,641 |
| | 7,754 |
| | — |
| | 158,571 |
|
| NGLs (Bbls) | 44,099 |
| | 7,141 |
| | — |
| | 55,008 |
|
| Gas (Mcf) | 194,904 |
| | 44,039 |
| | 88,497 |
| | 352,507 |
|
| Total (BOE) | 224,224 |
| | 22,235 |
| | 14,750 |
| | 272,330 |
|
| Average prices: | | | | | | | |
| Oil (per Bbl) | $ | 48.32 |
| | $ | 47.78 |
| | $ | — |
| | $ | 48.24 |
|
| NGL (per Bbl) | $ | 18.69 |
| | $ | 19.39 |
| | $ | — |
| | $ | 19.31 |
|
| Gas (per Mcf) | $ | 2.45 |
| | $ | 3.06 |
| | $ | 2.74 |
| | $ | 2.63 |
|
| Revenue (per BOE) | $ | 37.62 |
| | $ | 28.95 |
| | $ | 16.47 |
| | $ | 35.39 |
|
| Average costs (per BOE): | | | | | | | |
| Production costs: | | | | | | | |
| Lease operating | $ | 4.36 |
| | $ | 4.56 |
| | $ | 5.92 |
| | $ | 4.58 |
|
| Third-party transportation charges | 0.19 |
| | 6.26 |
| | 2.21 |
| | 0.85 |
|
| Net natural gas plant/gathering | (0.63 | ) | | (0.03 | ) | | 2.03 |
| | (0.28 | ) |
| Workover | 0.87 |
| | 0.56 |
| | 0.47 |
| | 0.80 |
|
| Total | $ | 4.79 |
| | $ | 11.35 |
| | $ | 10.63 |
| | $ | 5.95 |
|
| Production and ad valorem taxes: | | | | | | | |
| Ad valorem | $ | 0.58 |
| | $ | 0.41 |
| | $ | 0.54 |
| | $ | 0.57 |
|
| Production | 1.81 |
| | 0.72 |
| | 0.15 |
| | 1.59 |
|
| Total | $ | 2.39 |
| | $ | 1.13 |
| | $ | 0.69 |
| | $ | 2.16 |
|
| Depletion expense | $ | 15.34 |
| | $ | 8.79 |
| | $ | 2.44 |
| | $ | 13.61 |
|
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (continued)
| | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Permian Basin | | Total Company |
| Annual sales volumes: | | | |
| Oil (MBbls) | 77,053 | | | 77,509 | |
| NGLs (MBbls) | 25,960 | | | 26,398 | |
| Gas (MMcf) | 128,848 | | | 133,245 | |
| Total (MBOE) | 124,488 | | | 126,114 | |
| Average daily sales volumes: | | | |
| Oil (Bbls) | 211,104 | | | 212,353 | |
| NGLs (Bbls) | 71,123 | | | 72,323 | |
| Gas (Mcf) | 353,007 | | | 365,055 | |
| Total (BOE) | 341,062 | | | 345,518 | |
| Average prices: | | | |
| Oil (per Bbl) | $ | 53.77 | | | $ | 53.77 | |
| NGLs (per Bbl) | $ | 19.36 | | | $ | 19.33 | |
| Gas (per Mcf) | $ | 1.75 | | | $ | 1.79 | |
| Revenue (per BOE) | $ | 39.13 | | | $ | 38.98 | |
| Average costs (per BOE): | | | |
| Production costs: | | | |
| Lease operating | $ | 4.52 | | | $ | 4.57 | |
| Gathering, processing and transportation | 2.19 | | | 2.24 | |
| Net natural gas plant/gathering | (0.60) | | | (0.59) | |
| Workover | 0.72 | | | 0.71 | |
| Total | $ | 6.83 | | | $ | 6.93 | |
| Production and ad valorem taxes: | | | |
| Ad valorem | $ | 0.62 | | | $ | 0.63 | |
| Production | 1.76 | | | 1.75 | |
| Total | $ | 2.38 | | | $ | 2.38 | |
| Depletion expense | $ | 12.85 | | | $ | 12.78 | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Spraberry/ Wolfcamp Field | | Eagle Ford Shale Field | | Raton Field | | Total Company Fields |
| Production information: | | | | | | | |
| Annual sales volumes: | | | | | | | |
| Oil (MBbls) | 43,049 |
| | 4,418 |
| | — |
| | 48,926 |
|
| NGLs (MBbls) | 10,886 |
| | 3,755 |
| | — |
| | 15,922 |
|
| Gas (MMcf) | 51,528 |
| | 26,133 |
| | 35,368 |
| | 124,428 |
|
| Total (MBOE) | 62,523 |
| | 12,528 |
| | 5,895 |
| | 85,586 |
|
| Average daily sales volumes: | | | | | | | |
| Oil (Bbls) | 117,619 |
| | 12,070 |
| | — |
| | 133,677 |
|
| NGLs (Bbls) | 29,743 |
| | 10,260 |
| | — |
| | 43,504 |
|
| Gas (Mcf) | 140,788 |
| | 71,402 |
| | 96,634 |
| | 339,966 |
|
| Total (BOE) | 170,827 |
| | 34,231 |
| | 16,106 |
| | 233,842 |
|
| Average prices: | | | | | | | |
| Oil (per Bbl) | $ | 40.30 |
| | $ | 35.60 |
| | $ | — |
| | $ | 39.65 |
|
| NGL (per Bbl) | $ | 13.48 |
| | $ | 12.86 |
| | $ | — |
| | $ | 13.49 |
|
| Gas (per Mcf) | $ | 2.11 |
| | $ | 2.36 |
| | $ | 1.87 |
| | $ | 2.11 |
|
| Revenue (per BOE) | $ | 31.84 |
| | $ | 21.32 |
| | $ | 11.25 |
| | $ | 28.25 |
|
| Average costs (per BOE): | | | | | | | |
| Production costs: | | | | | | | |
| Lease operating | $ | 5.35 |
| | $ | 2.87 |
| | $ | 5.07 |
| | $ | 5.02 |
|
| Third-party transportation charges | 0.20 |
| | 6.81 |
| | 2.93 |
| | 1.41 |
|
| Net natural gas plant/gathering | (0.43 | ) | | (0.04 | ) | | 1.96 |
| | 0.01 |
|
| Workover | 0.35 |
| | 0.40 |
| | 0.32 |
| | 0.35 |
|
| Total | $ | 5.47 |
| | $ | 10.04 |
| | $ | 10.28 |
| | $ | 6.79 |
|
| Production and ad valorem taxes: | | | | | | | |
| Ad valorem | $ | 0.50 |
| | $ | 0.31 |
| | $ | 0.07 |
| | $ | 0.46 |
|
| Production | 1.44 |
| | 0.36 |
| | 0.01 |
| | 1.14 |
|
| Total | $ | 1.94 |
| | $ | 0.67 |
| | $ | 0.08 |
| | $ | 1.60 |
|
| Depletion expense | $ | 19.62 |
| | $ | 12.61 |
| | $ | 5.42 |
| | $ | 16.77 |
|
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (continued)
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Permian Basin | | Total Company |
| Annual sales volumes: | | | |
| Oil (MBbls) | 66,212 | | | 69,583 | |
| NGLs (MBbls) | 19,878 | | | 23,280 | |
| Gas (MMcf) | 102,934 | | | 143,588 | |
| Total (MBOE) | 103,245 | | | 116,794 | |
| Average daily sales volumes: | | | |
| Oil (Bbls) | 181,402 | | | 190,639 | |
| NGLs (Bbls) | 54,459 | | | 63,780 | |
| Gas (Mcf) | 282,010 | | | 393,391 | |
| Total (BOE) | 282,862 | | | 319,984 | |
| Average prices: | | | |
| Oil (per Bbl) | $ | 57.13 | | | $ | 57.36 | |
| NGLs (per Bbl) | $ | 30.32 | | | $ | 29.84 | |
| Gas (per Mcf) | $ | 1.90 | | | $ | 2.13 | |
| Revenue (per BOE) | $ | 44.37 | | | $ | 42.73 | |
| Average costs (per BOE): | | | |
| Production costs: | | | |
| Lease operating | $ | 4.27 | | | $ | 4.29 | |
| Gathering, processing and transportation | 2.21 | | | 2.52 | |
| Net natural gas plant/gathering | (0.67) | | | (0.41) | |
| Workover | 1.01 | | | 0.92 | |
| Total | $ | 6.82 | | | $ | 7.32 | |
| Production and ad valorem taxes: | | | |
| Ad valorem | $ | 0.59 | | | $ | 0.60 | |
| Production | 1.94 | | | 1.83 | |
| Total | $ | 2.53 | | | $ | 2.43 | |
| Depletion expense | $ | 13.42 | | | $ | 12.52 | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Spraberry/ Wolfcamp Field | | Eagle Ford Shale Field | | Raton Field | | Total Company Fields |
| Production information: | | | | | | | |
| Annual sales volumes: | | | | | | | |
| Oil (MBbls) | 30,312 |
| | 6,450 |
| | — |
| | 38,452 |
|
| NGLs (MBbls) | 8,507 |
| | 4,230 |
| | — |
| | 14,086 |
|
| Gas (MMcf) | 41,577 |
| | 35,220 |
| | 40,761 |
| | 131,642 |
|
| Total (MBOE) | 45,748 |
| | 16,550 |
| | 6,794 |
| | 74,478 |
|
| Average daily sales volumes: | | | | | | | |
| Oil (Bbls) | 83,046 |
| | 17,670 |
| | — |
| | 105,347 |
|
| NGLs (Bbls) | 23,306 |
| | 11,590 |
| | — |
| | 38,592 |
|
| Gas (Mcf) | 113,909 |
| | 96,492 |
| | 111,675 |
| | 360,662 |
|
| Total (BOE) | 125,336 |
| | 45,343 |
| | 18,613 |
| | 204,050 |
|
| Average prices: | | | | | | | |
| Oil (per Bbl) | $ | 44.30 |
| | $ | 41.74 |
| | $ | — |
| | $ | 43.55 |
|
| NGL (per Bbl) | $ | 12.95 |
| | $ | 13.90 |
| | $ | — |
| | $ | 13.31 |
|
| Gas (per Mcf) | $ | 2.29 |
| | $ | 2.69 |
| | $ | 2.22 |
| | $ | 2.40 |
|
| Revenue (per BOE) | $ | 33.84 |
| | $ | 25.55 |
| | $ | 13.30 |
| | $ | 29.25 |
|
| Average costs (per BOE): | | | | | | | |
| Production costs: | | | | | | | |
| Lease operating | $ | 9.08 |
| | $ | 3.21 |
| | $ | 6.04 |
| | $ | 7.24 |
|
| Third-party transportation charges | 0.26 |
| | 4.90 |
| | 3.12 |
| | 1.60 |
|
| Net natural gas plant/gathering | (0.45 | ) | | 0.02 |
| | 1.82 |
| | 0.16 |
|
| Workover | 0.61 |
| | 0.99 |
| | — |
| | 0.62 |
|
| Total | $ | 9.50 |
| | $ | 9.12 |
| | $ | 10.98 |
| | $ | 9.62 |
|
| Production and ad valorem taxes: | | | | | | | |
| Ad valorem | $ | 0.92 |
| | $ | 0.50 |
| | $ | 0.27 |
| | $ | 0.76 |
|
| Production (a) | 1.62 |
| | 0.65 |
| | (0.01 | ) | | 1.19 |
|
| Total | $ | 2.54 |
| | $ | 1.15 |
| | $ | 0.26 |
| | $ | 1.95 |
|
| Depletion expense | $ | 22.12 |
| | $ | 15.80 |
| | $ | 5.19 |
| | $ | 18.01 |
|
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