UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. 1-13245
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
----------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039
------------------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Number of shares of Common Stock outstanding as of October 23, 2001.. 98,167,735
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this report, the following oil and gas terms and conventions have
these specific meanings: "Bbl" means a standard barrel containing 42 United
States gallons; "BOE" means a barrel-of-oil equivalent and is a standard
convention used to express oil and gas volumes on a comparable oil equivalent
basis; "Btu" means British thermal unit and is an energy equivalent measure of
natural gas; "MBbl" means one thousand Bbls; "MBOE" means one thousand BOE;
"Mcf" means one thousand cubic feet and is a measure of natural gas volume;
"MMcf" means one million cubic feet; "NGL" means natural gas liquid; "NYMEX"
means The New York Mercantile Exchange; "proved reserves" means the estimated
quantities of crude oil, natural gas, and natural gas liquids which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the power proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately as
"indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Gas equivalents are determined under the relative energy content method
by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.
Unless otherwise specified, wells, acreage and drilling locations
referred to in this report represent gross wells, acreage and drilling
locations. All dollar amounts quoted herein are expressed in United States
dollars.
2
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000........................................... 4
Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000..................... 5
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2001.............................. 6
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 2001 and 2000..................... 7
Consolidated Statements of Comprehensive Income for the three
and nine months ended September 30, 2001 and 2000............ 8
Notes to Consolidated Financial Statements..................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 36
Item 6. Exhibits and Reports on Form 8-K............................... 36
Signatures..................................................... 37
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 20,737 $ 26,159
Accounts receivable:
Trade, net.................................................... 90,389 123,497
Affiliates.................................................... 3,234 2,157
Inventories...................................................... 17,863 14,842
Deferred income taxes............................................ 5,600 4,800
Other current assets:
Derivatives................................................... 114,163 11,391
Other......................................................... 9,095 8,545
---------- ----------
Total current assets........................................ 261,081 191,391
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties............................................. 3,499,104 3,187,889
Unproved properties........................................... 205,763 229,205
Accumulated depletion, depreciation and amortization............. (1,057,758) (902,139)
---------- ----------
2,647,109 2,514,955
---------- ----------
Deferred income taxes.............................................. 83,611 84,400
Other property and equipment, net.................................. 21,011 25,624
Other assets, net.................................................. 166,975 138,065
---------- ----------
$ 3,179,787 $ 2,954,435
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................................... $ 116,042 $ 96,646
Affiliates.................................................... 4,557 5,629
Interest payable................................................. 38,430 38,142
Other current liabilities:
Derivatives................................................... 36,447 24,957
Other......................................................... 51,346 51,140
---------- ----------
Total current liabilities................................... 246,822 216,514
---------- ----------
Long-term debt..................................................... 1,554,552 1,578,776
Other noncurrent liabilities....................................... 169,310 225,740
Deferred income taxes.............................................. 24,973 28,500
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares authorized;
one share issued and outstanding.............................. - -
Common stock, $.01 par value; 500,000,000 shares authorized;
101,738,910 and 101,268,754 shares issued as of September 30,
2001 and December 31, 2000, respectively...................... 1,017 1,013
Additional paid-in capital....................................... 2,358,035 2,352,608
Treasury stock, at cost; 3,571,175 and 2,853,107 shares as of
September 30, 2001 and December 31, 2000, respectively........ (49,178) (37,682)
Accumulated deficit.............................................. (1,302,201) (1,422,703)
Accumulated other comprehensive income:
Deferred hedge gains and losses, net.......................... 182,691 -
Unrealized gain on available for sale securities.............. - 8,154
Cumulative translation adjustment............................. (6,234) 3,515
---------- ----------
Total stockholders' equity.................................. 1,184,130 904,905
Commitments and contingencies......................................
---------- ----------
$ 3,179,787 $ 2,954,435
========== ==========
The financial information included as of September 30, 2001
has been prepared by management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Oil and gas...................................... $ 198,088 $ 228,587 $ 674,685 $ 600,909
Interest and other............................... 6,471 5,200 22,593 14,141
Gain (loss) on disposition of assets, net........ (88) 24,158 8,677 27,751
-------- -------- -------- --------
204,471 257,945 705,955 642,801
-------- -------- -------- --------
Costs and expenses:
Oil and gas production........................... 51,713 49,728 159,489 135,990
Depletion, depreciation and amortization......... 60,065 56,572 169,622 162,029
Exploration and abandonments..................... 24,666 23,431 94,132 64,202
General and administrative....................... 8,153 6,537 26,606 23,259
Interest......................................... 32,261 40,794 102,137 122,412
Other............................................ 2,006 15,495 29,097 60,394
-------- -------- -------- --------
178,864 192,557 581,083 568,286
-------- -------- -------- --------
Income before income taxes and extraordinary item.. 25,607 65,388 124,872 74,515
Income tax (provision) benefit..................... (2,379) 3,900 (5,387) 5,800
-------- -------- -------- --------
Income before extraordinary item................... 23,228 69,288 119,485 80,315
Extraordinary item - gain (loss) on early
extinguishment of debt, net of tax............... 1,374 - 1,374 (12,318)
------- -------- -------- --------
Net income......................................... $ 24,602 $ 69,288 $ 120,859 $ 67,997
======== ======== ======== ========
Net income per share:
Basic:
Income before extraordinary item.............. $ .24 $ .70 $ 1.22 $ .80
Extraordinary item............................ .01 - .01 (.12)
-------- -------- -------- --------
Net income.................................. $ .25 $ .70 $ 1.23 $ .68
======== ======== ======== ========
Diluted:
Income before extraordinary item.............. $ .24 $ .69 $ 1.20 $ .80
Extraordinary item............................ .01 - .01 (.12)
-------- -------- -------- --------
Net income.................................. $ .25 $ .69 $ 1.21 $ .68
======== ======== ======== ========
Weighted average basic shares outstanding:
Basic......................................... 98,468 99,312 98,395 99,718
======== ======== ======== ========
Diluted....................................... 99,523 99,804 99,646 100,052
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income
--------------------------------
Common Deferred
Stock Additional Hedge Investment Total
Shares Common Paid-in Treasury Accumulated Gains & Gains & Translation Stockholders'
Outstanding Stock Capital Stock Deficit Losses Losses Adjustment Equity
----------- ------ ---------- -------- ----------- -------- --------- ----------- ------------
Balance as of January 1,
2001........................ 98,416 $1,013 $2,352,608 $(37,682) $(1,422,703) $ - $ 8,154 $ 3,515 $ 904,905
Exercise of stock options
and employee stock
purchases.................. 582 4 5,427 1,536 (357) - - - 6,610
Treasury stock purchases.... (830) - - (13,032) - - - - (13,032)
Net income.................. - - - - 120,859 - - - 120,859
Other comprehensive income
(loss):
Deferred hedge gains and
losses:
Transition adjustment... - - - - - (197,444) - - (197,444)
Deferred hedge gains.... - - - - - 343,080 - - 343,080
Net losses included in
net income............. - - - - - 37,055 - - 37,055
Gains and losses on
available for sale
securities:
Unrealized holding
losses................ - - - - - - (45) - (45)
Gains included in net
income................ - - - - - - (8,109) - (8,109)
Translation adjustment.... - - - - - - - (9,749) (9,749)
-------- ------ --------- ------- ---------- -------- ------- ------- ---------
Balance as of September 30,
2001........................ 98,168 $1,017 $2,358,035 $(49,178) $(1,302,201) $ 182,691 $ - $ (6,234) $1,184,130
======== ===== ========= ======= ========== ======== ======= ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- -----------
Cash flows from operating activities:
Net income...................................... $ 24,602 $ 69,288 $ 120,859 $ 67,997
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization..... 60,065 56,572 169,622 162,029
Exploration expenses, including dry holes.... 17,250 16,221 80,082 46,273
Deferred income taxes........................ 567 (5,700) (4,095) (9,600)
(Gain) loss on disposition of assets, net.... 88 (24,158) (8,677) (27,751)
Extraordinary item, net of tax............... (1,374) - (1,374) 12,318
Interest related amortization................ 2,559 2,791 8,446 9,179
Other noncash items.......................... 2,525 15,123 5,752 59,011
Changes in operating assets and liabilities:
Accounts receivable.......................... 8,862 (12,620) 36,916 (11,713)
Inventories.................................. (3,489) 2,145 (4,401) (175)
Other current assets......................... (763) (2) (5,795) 1,993
Accounts payable............................. 11,431 16,964 (7,426) 2,504
Interest payable............................. (626) (430) 288 1,782
Other current liabilities.................... 1,203 (20,466) (233) (28,753)
-------- -------- -------- ----------
Net cash provided by operating activities.. 122,900 115,728 389,964 285,094
-------- -------- -------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets............. 57,811 65,204 73,006 93,726
Additions to oil and gas properties............. (125,704) (71,296) (364,428) (183,551)
Other property (additions) dispositions, net.... (6,529) 3,021 (10,490) 3,899
-------- -------- -------- ----------
Net cash used in investing activities...... (74,422) (3,071) (301,912) (85,926)
-------- -------- -------- ----------
Cash flows from financing activities:
Borrowings under long-term debt................. 95,000 17,409 204,175 894,084
Principal payments on long-term debt............ (125,055) (117,573) (249,230) (1,046,250)
Payment of noncurrent liabilities............... (10,971) (7,052) (41,710) (18,054)
Exercise of stock options and employee
stock purchases............................... 1,165 473 6,610 726
Purchase of treasury stock...................... (5,962) (6,340) (13,032) (12,647)
Deferred loan fees/issuance costs............... - 106 - (13,772)
-------- -------- -------- ----------
Net cash used in financing activities..... (45,823) (112,977) (93,187) (195,913)
-------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,655 (320) (5,135) 3,255
Effect of exchange rate changes on cash and
cash equivalents................................ (145) (51) (287) (145)
Cash and cash equivalents, beginning of period.... 18,227 38,269 26,159 34,788
-------- -------- -------- ----------
Cash and cash equivalents, end of period.......... $ 20,737 $ 37,898 $ 20,737 $ 37,898
======== ======== ======== ==========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income........................................ $ 24,602 $ 69,288 $ 120,859 $ 67,997
Other comprehensive income (loss):
Deferred hedge gains and losses:
Transition adjustment........................ - - (197,444) -
Deferred hedge gains......................... 148,116 - 343,080 -
Net (gains) losses included in net income.... (14,800) - 37,055 -
Gains and losses on available for sale
securities:
Unrealized holding gains and losses.......... - (10,529) (45) 32,678
Gains included in net income................. - (25,674) (8,109) (25,674)
Translation adjustment.......................... (7,994) (2,781) (9,749) (7,432)
-------- -------- -------- --------
Other comprehensive income (loss).......... 125,322 (38,984) 164,788 (428)
-------- -------- -------- --------
Comprehensive income.............................. $ 149,924 $ 30,304 $ 285,647 $ 67,569
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company") is a Delaware
corporation whose common stock is listed and traded on the New York Stock
Exchange and the Toronto Stock Exchange. The Company is an oil and gas
exploration and production company with ownership interests in oil and gas
properties located principally in the Mid Continent, Southwestern and onshore
and offshore Gulf Coast regions of the United States and in Argentina, Canada,
Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements of the Company as of September 30, 2001 and for the three and nine
month periods ended September 30, 2001 and 2000 include all adjustments and
accruals, consisting only of normal recurring accrual adjustments, which are
necessary for a fair presentation of the results for the interim periods. These
interim results are not necessarily indicative of results for a full year.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
NOTE C. Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended, the provisions of
which the Company adopted on January 1, 2001.
SFAS 133 requires the accounting recognition of all derivative
instruments as either assets or liabilities at fair value. Derivative
instruments that are not hedges must be adjusted to fair value through net
income. Under the provisions of SFAS 133, changes in the fair value of
derivative instruments that are fair value hedges are offset against changes in
the fair value of the hedged assets, liabilities, or firm commitments, through
net income. Effective changes in the fair value of derivative instruments that
are cash flow hedges are recognized in other comprehensive income until such
time as the hedged items are recognized in net income. Ineffective portions of a
derivative instrument's change in fair value are immediately recognized in net
income.
The adoption of SFAS 133 on January 1, 2001 resulted in a transition
adjustment to (i) reclassify $57.8 million of deferred losses on terminated
hedge positions from other assets (including $11.4 million of other current
assets), (ii) increase other current assets, other assets and other current
liabilities by $7.0 million, $6.2 million and $146.6 million, respectively, to
record the fair value of open hedge derivatives, (iii) increase the carrying
value of hedged long-term debt by $6.2 million and (iv) reduce stockholders'
equity by $197.4 million for the net impact of items (i) through (iii) above.
The $197.4 million reduction in stockholders' equity is reflected as a
transition adjustment in other comprehensive income as of January 1, 2001. See
"Accumulated other comprehensive income - deferred hedge gains and losses, net"
below for additional information regarding the impact to stockholders' equity
from the provisions of SFAS 133 during the nine month period ending September
30, 2001.
Under the provisions of SFAS 133, the Company may designate a derivative
instrument as hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk (a "fair value hedge") or as hedging the exposure to variability in
expected future cash flows that are attributable to a particular risk (a "cash
flow hedge"). Both at the inception of a hedge and on an ongoing basis, a fair
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
value hedge must be expected to be highly effective in achieving offsetting
changes in fair value attributable to the hedged risk during the periods that a
hedge is designated. Similarly, a cash flow hedge must be expected to be highly
effective in achieving offsetting cash flows attributable to the hedged risk
during the term of the hedge. The Company's policy is to assess actual hedge
effectiveness at the end of each calendar quarter.
Fair value hedging strategy. During April 2000 and May 2001, the Company
entered into interest rate swap agreements to hedge the fair value of the
Company's 8-7/8 percent Senior Notes due April 15, 2005 and 8-1/4 percent Senior
Notes due August 15, 2007, respectively. The terms of the 8-7/8 percent interest
rate swap agreements provided for an aggregate notional amount of $150 million
of debt; commenced on April 19, 2000 and had a scheduled maturity on April 15,
2005; required the counterparties to pay the Company a fixed annual rate of
8-7/8 percent on the notional amount; and, required the Company to pay the
counterparties a variable annual rate on the notional amount equal to the
periodic three-month London Interbank Offered Rate ("LIBOR") plus a weighted
average margin rate of 178.2 basis points. The terms of the Company's 8-1/4
percent interest rate swap agreements provided for an aggregate notional amount
of $150 million of debt; commenced on May 29, 2001 and had a scheduled maturity
on August 15, 2007; required the counterparties to pay the Company a fixed
annual rate of 8-1/4 percent on the notional amount; and, required the Company
to pay the counterparties a variable rate on the notional amounts equal to LIBOR
plus a weighted average margin rate of 238.1 basis points.
The terms of the above described fair value hedges perfectly matched the
terms of the underlying hedged fixed rate debt. The Company did not exclude any
component of the derivatives' gains or losses from the measurement of hedge
effectiveness. On September 21, 2001, the Company terminated its 8-7/8 percent
and 8-1/4 percent interest rate swaps for $23.3 million of cash proceeds,
including accrued interest. As of September 30, 2001, the Company has increased
the carrying value of the underlying long-term debt by $21.2 million and such
amount will be amortized as reductions in interest expense over the remaining
original terms of the interest rate swaps.
Cash flow hedging strategy. The Company utilizes commodity swap and
collar contracts to (i) reduce the effect of price volatility on the commodities
the Company produces and sells, (ii) support the Company's annual capital
budgeting and expenditure plans and (iii) reduce commodity price risk associated
with certain capital projects. The Company also utilizes interest rate swap
agreements to reduce the effect of interest rate volatility on the Company's
variable-rate line-of-credit indebtedness.
Oil prices. All material sales contracts governing the Company's oil
production have been tied directly or indirectly to the New York Mercantile
Exchange ("NYMEX") prices. The following table sets forth the Company's
outstanding oil hedge contracts and the weighted average NYMEX prices for those
contracts as of September 30, 2001:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- ------------- -------------
Daily oil production:
2001 - Swap Contracts
Volume (Bbls).......... 24,348 24,348
Price per Bbl.......... $ 27.98 $ 27.98
2001 - Collar Contracts
Volume (Bbls).......... 2,000 2,000
Prices per Bbl......... $25.00-$31.43 $25.00-$31.43
2002 - Swap Contracts
Volume (Bbls).......... 18,000 8,000 7,000 4,000 9,205
Price per Bbl.......... $ 27.40 $ 26.35 $ 25.23 $ 25.19 $ 26.51
2002 - Collar Contracts
Volume (Bbls).......... 10,000 10,000 - - 4,959
Prices per Bbl......... $25.00-$28.56 $25.00-$28.56 $25.00-$28.56
2003 - Swap Contracts
Volume (Bbls).......... 6,000 6,000 - - 2,975
Price per Bbl.......... $ 24.02 $ 24.02 $ 24.02
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of oil
hedges. The following table sets forth the Company's oil prices, both reported
and realized (excluding hedge results), and the net effects of settlements of
oil price hedges to revenue:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Average price reported per Bbl................. $ 25.06 $ 25.48 $ 24.95 $ 23.52
Average price realized per Bbl................. $ 24.84 $ 30.06 $ 25.74 $ 28.37
Increase (reduction) to revenue (in millions).. $ .7 $ (14.4) $ (7.4) $ (45.5)
Natural gas liquids prices. During the three and nine month periods ended
September 30, 2001 and 2000, the Company did not enter into, nor was it a party
to, any NGL hedge contracts.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth the Company's outstanding gas hedge contracts and the
weighted average index price for those contracts as of September 30, 2001:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- -----------
Daily gas production:
2001 - Swap Contracts
Volume (Mcf)............. 120,908 120,908
Index price per MMBtu.... $ 4.31 $ 4.31
2001 - Collar Contracts
Volume (Mcf)............. 54,482 54,482
Index prices per MMBtu... $2.11-$2.74 $2.11-$2.74
2002 - Swap Contracts
Volume (Mcf)............. 140,000 140,000 170,000 170,000 155,123
Index price per MMBtu.... $ 4.28 $ 4.28 $ 4.21 $ 4.21 $ 4.24
2002 - Collar Contracts
Volume (Mcf)............. 20,000 20,000 20,000 20,000 20,000
Index prices per MMBtu... $4.50-$6.00 $4.50-$6.00 $4.50-$6.00 $4.50-$6.00 $4.50-$6.00
2003 - Swap Contracts
Volume (Mcf)............. 50,000 50,000 50,000 50,000 50,000
Index price per MMBtu.... $ 4.07 $ 4.07 $ 4.07 $ 4.07 $ 4.07
2004 - Swap Contracts
Volume (Mcf)............. 190,000 190,000 190,000 190,000 190,000
Index price per MMBtu.... $ 3.98 $ 3.98 $ 3.98 $ 3.98 $ 3.98
The Company reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of gas hedges. The following table sets forth the Company's
gas prices, both reported and realized (excluding hedge results), and the net
effects of settlements of gas price hedges to revenue:
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2001 2000 2001 2000
------- ------- ------- --------
Average price reported per Mcf................. $ 2.66 $ 2.87 $ 3.40 $ 2.49
Average price realized per Mcf................. $ 2.24 $ 3.12 $ 3.59 $ 2.63
Increase (reduction) to revenue (in millions).. $ 14.6 $ (9.0) $ (18.6) $ (14.6)
Interest rates. During the nine months ended September 30, 2001, the
Company entered into interest rate swap agreements and designated the swap
agreements as being cash flow hedges of the interest rate volatility associated
with certain of the Company's variable-rate line-of-credit indebtedness. The
terms of the interest rate swap agreements provide for an aggregate notional
amount of $55 million of debt; commenced on May 21, 2001 and mature on May 20,
2002; require the counterparties to pay the Company a variable rate equal to the
six-month LIBOR plus 125 basis points; and, require the Company to pay the
counterparties a weighted average rate of 5.43 percent on the notional amount.
The fair value of these interest rate swap agreements represented a liability of
$519 thousand as of September 30, 2001.
Hedge ineffectiveness and excluded items. During the three months ended
September 30, 2001, the Company recognized a net decrease to other expense of
$.2 million related to the ineffective portion of its cash flow hedging
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
instruments. During the nine months ended September 30, 2001, the Company
recognized an $8.9 million increase to other expense as a result of hedge
ineffectiveness. Prior to April 2001, the Company excluded changes in the time
and volatility value components of collar contracts that were designated as cash
flow hedges from the measurement of hedge effectiveness. Associated therewith,
the Company recorded a net increase to other expense of $2.1 million during the
nine month period ended September 30, 2001. In April 2001, the Company
discontinued the exclusion of time value and volatility from the measurement of
hedge effectiveness.
Accumulated other comprehensive income - deferred hedge gains and losses,
net. As described above, the Company recorded a transition adjustment associated
with the January 1, 2001 adoption of the provisions of SFAS 133 which reduced
stockholders' equity by $197.4 million. The adjustment to stockholders' equity
was comprised of the fair value of the Company's derivative instruments that
were designated as commodity cash flow hedges, whose fair value amounted to a
liability of $139.6 million as of January 1, 2001, and deferred losses realized
from the early termination of cash flow hedges of $57.8 million. These
adjustments to stockholders' equity were classified as Accumulated other
comprehensive income ("AOCI") - deferred hedge gains and losses at transition.
As of September 30, 2001, AOCI - deferred hedge gains and losses was $182.7
million, an increase of $380.1 million in stockholders' equity since the initial
transition adjustment. The AOCI - deferred hedge gains and losses balance as of
September 30, 2001 was comprised of $197.2 million of unrealized deferred hedge
gains on the effective portions of commodity and interest rate cash flow hedges
that will mature in the future and $14.5 million of net deferred losses from the
early termination of cash flow hedges. The increase in AOCI - deferred hedge
gains and losses since January 1, 2001 is primarily attributable to decreases in
commodity prices during the period which have resulted in an increase in the
fair value of the Company's commodity derivative portfolio.
During the twelve month period ending September 30, 2002, the Company
expects to reclassify $113.9 million of deferred gains associated with cash flow
hedges that will mature during future periods and $38.7 million of deferred
losses for terminated cash flow hedges from AOCI - deferred hedge gains and
losses to oil and gas revenue. Additionally, the Company expects to reclassify
$.2 million of deferred losses from AOCI - deferred hedge gains and losses to
interest expense during the twelve month period ending September 30, 2002.
Non-hedge commodity derivatives. The Company is a party to certain BTU
swap agreements that mature at the end of 2004. The BTU swap agreements were
originally transacted by Mesa Inc. ("Mesa"), prior to the Company's acquisition
of Mesa. Mesa's strategy for entering into the BTU swap agreements was to shift
a portion of their gas price risk to oil prices. As a result of the merger of
Parker & Parsley Petroleum Company and Mesa Inc., the Company became obligated
under the BTU swap agreements during 1997. The BTU swap agreements do not
qualify as hedges. The accompanying Consolidated Statement of Operations for the
nine months ended September 30, 2001 includes a net mark-to-market decrease to
the liability recognized for the BTU swap agreements of $.7 million. During the
three and nine month periods ended September 30, 2000, the Company recorded
mark-to-market increases to the liabilities recognized for the BTU swap
agreements of $10.2 million and $12.9 million, respectively. As of September 30,
2001 and December 31, 2000, the Company's BTU swap liabilities totaled $20.6
million and $25.5 million, respectively, of which $6.3 million and $6.4 million,
respectively, represent current liabilities. During 2001, the Company entered
into offsetting BTU swap agreements that have fixed the Company's remaining
obligation associated with the BTU swap agreements. The undiscounted future
settlement obligations of the Company under the BTU swap agreements are $1.5
million during the three months ending December 31, 2001 and $7.2 million per
year for each of 2002, 2003 and 2004.
During 2000, the Company was a party to options that provided the
counterparties the right to exercise call provisions on 10,000 barrels per day
of oil, at a strike price of $20.00 per barrel, or to exercise call provisions
over that same time period on 100,000 MMBtu per day of natural gas, at a
weighted average price of $2.75 per MMBtu. These contracts, which matured on
December 31, 2000, did not qualify for hedge accounting treatment. The Company's
strategy for entering into these call options was to earn associated call
premiums that were used to purchase other in-the- money commodity derivatives
that qualified for hedge accounting treatment. For the three and nine month
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
periods ended September 30, 2000, other expenses include mark-to-market
increases to the liabilities recognized on these contracts of $3.1 million and
$41.1 million, respectively.
Non-hedge foreign currency agreements. The Company was a party to a
series of forward foreign exchange rate swap agreements that exchanged Canadian
dollars for United States dollars. These agreements matured during the fourth
quarter of 2000. The foreign exchange rate swap agreements were originally
transacted by Chauvco Resources Ltd. ("Chauvco"), prior to the Company's
acquisition of Chauvco. Chauvco entered into the agreements to hedge a portion
of their foreign exchange rate exposure. The Company became obligated under the
foreign exchange rate swap agreements upon the acquisition of Chauvco during
1997. The foreign exchange rate swap agreements did not qualify for hedge
accounting treatment during 2000. The Company recorded mark-to-market
adjustments to increase the associated contract liabilities by $.3 million and
$1.5 million during the three and nine month periods ended September 30, 2000,
respectively.
NOTE D. Investment Securities
As of December 31, 2000, the Company owned 613,215 shares of Prize Energy
Corp. ("Prize") common stock. The Company classified its investment in the Prize
common stock as available for sale securities and carried the investment at its
market-quoted fair value in other assets in the accompanying Consolidated
Balance Sheets. As of December 31, 2000, the fair value of the Company's
investment in Prize common stock was $12.7 million. Associated therewith, the
Company had recorded unrealized gains on available for sale securities of $8.2
million within stockholders' equity in the accompanying December 31, 2000
Consolidated Balance Sheet.
During the nine month period ended September 30, 2001, the Company
divested its remaining holdings in Prize common stock and realized associated
gains of $8.1 million. Additionally, during the nine month period ended
September 30, 2001, the Company recognized, in other comprehensive income in the
accompanying Consolidated Statements of Comprehensive Income, an unrealized loss
of $45 thousand from changes in the fair value of investments in Prize common
stock. During the three and nine month periods ended September 30, 2000, the
Company realized gains of $25.7 million and $34.4 million, respectively, on the
disposition of Prize common stock.
NOTE E. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental
to its business, including, but not limited to, the proceeding described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. The Company believes that
the ultimate disposition of these legal actions will not have a material adverse
effect on the Company's consolidated financial position, liquidity, capital
resources or future results of operations. The Company will continue to evaluate
its litigation matters on a quarter-by- quarter basis and will adjust its
litigation reserves as appropriate to reflect the then current status of
litigation.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows
a "severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for natural gas. Based on a Federal Energy
Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax,
Mesa collected the Kansas ad valorem tax in addition to the otherwise maximum
lawful price. The FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988
that the FERC failed to provide a reasoned basis for its findings and remanded
the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Circuit. Various natural gas producers challenged the FERC's orders on two
grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify
for reimbursement under the NGPA; and (2) the FERC's ruling should, in any
event, have been applied prospectively. Other parties challenged the FERC's
orders on the grounds that the FERC's ruling should have been applied
retroactively to December 1, 1978, the date of the enactment of the NGPA and
producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various natural gas producers
subsequently filed a petition for writ of certiori with the United States
Supreme Court seeking to limit the scope of the potential refunds to tax bills
rendered on or after June 28, 1988 (the effective date originally selected by
the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non- recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
1997 to file claims on refunds sought from producers and refunds totaling
approximately $30 million were made against the Company. During the year ended
December 31, 2000, the Company paid $3.9 million in partial settlement of
original claims presented under this litigation. The Company is unable at this
time to predict the final outcome of this matter or the amount, if any, that
will ultimately be refunded. As of September 30, 2001 and December 31, 2000, the
Company had on deposit $28.8 million and $28.1 million, respectively, including
accrued interest, in an escrow account and had corresponding obligations for
this litigation recorded in other current liabilities in the accompanying
Consolidated Balance Sheets.
NOTE F. Extraordinary Items
On July 2, 2001, the Company redeemed the remaining $22.5 million of
outstanding 11-5/8% Senior Subordinated Discount Notes due July 1, 2006 and $6.8
million of outstanding 10-5/8% Senior Subordinated Notes due July 1, 2006. The
total redemption was $31.0 million and was funded from the Company's credit
facility. Associated with this redemption, the Company recognized an
extraordinary gain of $1.4 million during the three and nine month periods ended
September 30, 2001.
On May 31, 2000, the Company entered into a $575.0 million credit
facility (the "Credit Facility") that matures on March 1, 2005. The Credit
Facility replaced the Company's prior revolving credit facility that had a
maturity date of August 7, 2002 (the "Prior Credit Facility"). As a result of
the early extinguishment of the Prior Credit Facility, the Company recognized an
extraordinary loss of $12.3 million during the nine month period ended September
30, 2000.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE G. Income Per Share Before Extraordinary Item
Following is a reconciliation of the basic and diluted income per share
before extraordinary item computations for the three and nine month periods
ended September 30, 2001:
Income Income
Before Weighted Average Per Share Before
Extraordinary Common Shares Extraordinary
Item Outstanding Item
------------- ---------------- -----------------
(in thousands, except per share amounts)
Three Months Ended September 30, 2001:
Basic..................................... $ 23,228 98,468 $ .24
Effect of dilutive securities:
Common stock options*................... - 1,055
--------- ---------
Diluted................................... $ 23,228 99,523 $ .24
========= =========
Three Months Ended September 30, 2000:
Basic..................................... $ 69,288 99,312 $ .70
Effect of dilutive securities:
Common stock options*................... - 492
--------- ---------
Diluted................................... $ 69,288 99,804 $ .69
========= =========
Nine Months Ended September 30, 2001:
Basic..................................... $ 119,485 98,395 $ 1.22
Effect of dilutive securities:
Common stock options*................... - 1,251
--------- ---------
Diluted................................... $ 119,485 99,646 $ 1.20
========= =========
Nine Months Ended September 30, 2000:
Basic..................................... $ 80,315 99,718 $ .80
Effect of dilutive securities:
Common stock options*................... - 334
--------- ---------
Diluted................................... $ 80,315 100,052 $ .80
========= =========
---------------
* Common stock options to purchase 4,347,845 and 4,159,084 shares of common
stock were outstanding but not included in the computations of diluted
income per share for the three month periods ended September 30, 2001 and
2000, respectively, and common stock options to purchase 3,022,779 shares
and 4,899,586 shares of common stock were outstanding but not included in
the computations of diluted income per share for the nine month periods
ended September 30, 2001 and 2000 respectively, because the exercise prices
of the options were greater than the average market price of the common
shares and would be anti- dilutive to the computations.
NOTE H. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the
oil and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina and Canada.
The following tables provide the Company's interim geographic operating
segment data. Geographic operating segment income tax benefits (provisions) have
been determined based on statutory rates existing in the various tax
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
jurisdictions where the Company has oil and gas producing activities. The
"Headquarters and Other" table column includes revenues and expenses that are
not routinely included in the earnings measures internally reported to
management on a geographic operating segment basis.
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- --------- ------- ------------ ------------
(in thousands)
Three months ended September 30, 2001:
Oil and gas revenue................. $149,283 $ 36,919 $11,886 $ - $ - $ 198,088
Interest and other.................. - - - - 6,471 6,471
Gain (loss) on disposition of
assets, net 8 - (7) - (89) (88)
------- ------- ------ ------ ------- --------
149,291 36,919 11,879 - 6,382 204,471
------- ------- ------ ------ ------- --------
Production costs.................... 41,516 7,059 3,138 - - 51,713
Depletion, depreciation and
amortization...................... 34,061 15,003 7,793 - 3,208 60,065
Exploration and abandonments........ 16,292 2,728 1,440 4,206 - 24,666
General and administrative.......... - - - - 8,153 8,153
Interest............................ - - - - 32,261 32,261
Other............................... - - - - 2,006 2,006
------- ------- ------ ------ ------- --------
91,869 24,790 12,371 4,206 45,628 178,864
------- ------- ------ ------ ------- --------
Income (loss) before income taxes
and extraordinary item............ 57,422 12,129 (492) (4,206) (39,246) 25,607
Income tax benefit (provision)...... (20,098) (4,245) 210 1,473 20,281 (2,379)
------- ------- ------ ------ ------- --------
Income (loss) before extraordinary
item $ 37,324 $ 7,884 $ (282) $(2,733) $(18,965) $ 23,228
======= ======= ====== ====== ======= ========
Three months ended September 30, 2000:
Oil and gas revenue................. $172,825 $ 40,519 $15,243 $ - $ - $ 228,587
Interest and other.................. - - - - 5,200 5,200
Gain (loss) on disposition of
assets, net....................... (1,159) - (48) - 25,365 24,158
------- ------- ------ ------ ------- --------
171,666 40,519 15,195 - 30,565 257,945
------- ------- ------ ------ ------- --------
Production costs.................... 40,867 6,398 2,463 - - 49,728
Depletion, depreciation and
amortization...................... 31,308 14,857 6,510 - 3,897 56,572
Exploration and abandonments........ 15,711 4,711 503 2,506 - 23,431
General and administrative.......... - - - - 6,537 6,537
Interest............................ - - - - 40,794 40,794
Other............................... - - - - 15,495 15,495
------- ------- ------ ------ ------- --------
87,886 25,966 9,476 2,506 66,723 192,557
------- ------- ------ ------ ------- --------
Income (loss) before income taxes... 83,780 14,553 5,719 (2,506) (36,158) 65,388
Income tax benefit (provision)...... (29,323) (5,093) (2,551) 877 39,990 3,900
------- ------- ------ ------ ------- --------
Net income (loss) .................. $ 54,457 $ 9,460 $ 3,168 $(1,629) $ 3,832 $ 69,288
======= ======= ====== ====== ======= ========
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
--------- --------- -------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2001:
Oil and gas revenue................. $ 512,483 $ 104,439 $ 57,763 $ - $ - $ 674,685
Interest and other.................. - - - - 22,593 22,593
Gain on disposition of assets, net.. 224 - 31 - 8,422 8,677
-------- -------- ------- ------- -------- --------
512,707 104,439 57,794 - 31,015 705,955
-------- -------- ------- ------- -------- --------
Production costs.................... 130,196 19,676 9,617 - - 159,489
Depletion, depreciation and
amortization...................... 95,274 41,380 22,273 - 10,695 169,622
Exploration and abandonments........ 50,567 13,211 8,921 21,433 - 94,132
General and administrative.......... - - - - 26,606 26,606
Interest............................ - - - - 102,137 102,137
Other............................... - - - - 29,097 29,097
-------- -------- ------- ------- -------- --------
276,037 74,267 40,811 21,433 168,535 581,083
-------- -------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary item............ 236,670 30,172 16,983 (21,433) (137,520) 124,872
Income tax benefit (provision)...... (82,835) (10,560) (7,238) 7,502 87,744 (5,387)
-------- -------- ------- ------- -------- --------
Income (loss) before extraordinary
item.............................. $ 153,835 $ 19,612 $ 9,745 $(13,931) $ (49,776) $ 119,485
======== ======== ======= ======= ======== ========
Nine months ended September 30, 2000:
Oil and gas revenue................. $ 455,161 $ 104,994 $ 40,754 $ - $ - $ 600,909
Interest and other.................. - - - - 14,141 14,141
Gain (loss) on disposition of
assets, net....................... (1,136) - 204 - 28,683 27,751
-------- -------- ------- ------- -------- --------
454,025 104,994 40,958 - 42,824 642,801
-------- -------- ------- ------- -------- --------
Production costs.................... 111,501 17,394 7,095 - - 135,990
Depletion, depreciation and
amortization...................... 92,108 39,149 19,029 - 11,743 162,029
Exploration and abandonments........ 32,007 22,728 3,256 6,211 - 64,202
General and administrative.......... - - - - 23,259 23,259
Interest............................ - - - - 122,412 122,412
Other............................... - - - - 60,394 60,394
-------- -------- ------- ------- -------- --------
235,616 79,271 29,380 6,211 217,808 568,286
-------- -------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary item............ 218,409 25,723 11,578 (6,211) (174,984) 74,515
Income tax benefit (provision)...... (76,443) (9,003) (5,166) 2,174 94,238 5,800
-------- -------- ------- ------- -------- --------
Income (loss) before extraordinary
item.............................. $ 141,966 $ 16,720 $ 6,412 $ (4,037) $ (80,746) $ 80,315
======== ======== ======= ======= ======== ========
NOTE M. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA) is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed certain
debt securities of the Company. In accordance with practices accepted by the
SEC, the Company has prepared Consolidating Financial Statements in order to
quantify the assets of Pioneer USA as a subsidiary guarantor. The following
Consolidating Condensed Balance Sheets, Consolidating Condensed Statements of
Operations and Comprehensive Income (Loss) and Consolidating Condensed
Statements of Cash Flows present financial information for Pioneer Natural
Resources Company as the Parent on a stand-alone basis (carrying any investments
in subsidiaries under the equity method), financial information for Pioneer USA
on a stand-alone basis (carrying any investment in non-guarantor subsidiaries
under the equity method), the non-guarantor subsidiaries of the Company on a
consolidated basis, the consolidation and elimination entries necessary to
arrive at the information for the Company on a consolidated basis, and the
financial information for the Company on a consolidated basis. Pioneer USA is
not restricted from making distributions to the Company.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2001
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 51 $ 16,036 $ 4,650 $ $ 20,737
Other current assets.................. 1,500,312 (1,106,057) (153,911) 240,344
--------- ---------- -------- ----------
Total current assets............. 1,500,363 (1,090,021) (149,261) 261,081
--------- ---------- -------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,519,358 979,746 3,499,104
Unproved properties................ - 20,997 184,766 205,763
Accumulated depletion, depreciation
and amortization.................... - (790,083) (267,675) (1,057,758)
--------- ---------- -------- ----------
- 1,750,272 896,837 2,647,109
--------- ---------- -------- ----------
Deferred income taxes................... 83,611 - - 83,611
Other property and equipment, net....... - 16,988 4,023 21,011
Other assets, net....................... 17,154 104,001 45,820 166,975
Investment in subsidiaries.............. 959,103 90,760 - (1,049,863) -
--------- ---------- -------- ----------
$2,560,231 $ 872,000 $ 797,419 $ 3,179,787
========= ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 44,456 $ 176,292 $ 26,074 $ $ 246,822
Long-term debt, less current maturities. 1,554,552 - - 1,554,552
Other noncurrent liabilities............ 345 134,689 34,276 169,310
Deferred income taxes................... - - 24,973 24,973
Stockholders' equity.................... 960,878 561,019 712,096 (1,049,863) 1,184,130
Commitments and contingencies...........
--------- ---------- -------- ----------
$2,560,231 $ 872,000 $ 797,419 $ 3,179,787
========= ========== ======== ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2000
(in thousands)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 15 $ 18,387 $ 7,757 $ $ 26,159
Other current assets.................. 2,006,496 (1,245,546) (595,718) 165,232
--------- ---------- -------- ----------
Total current assets............. 2,006,511 (1,227,159) (587,961) 191,391
--------- ---------- -------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,291,872 896,017 3,187,889
Unproved properties................ - 28,103 201,102 229,205
Accumulated depletion, depreciation
and amortization.................... - (692,250) (209,889) (902,139)
--------- ---------- -------- ----------
- 1,627,725 887,230 2,514,955
--------- ---------- -------- ----------
Deferred income taxes................... 84,400 - - 84,400
Other property and equipment, net....... - 20,823 4,801 25,624
Other assets, net....................... 18,877 89,632 29,556 138,065
Investment in subsidiaries.............. 347,370 100,192 - (447,562) -
--------- ---------- -------- ----------
$2,457,158 $ 611,213 $ 333,626 $ 2,954,435
========= ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 37,889 $ 140,415 $ 38,210 $ $ 216,514
Long-term debt, less current maturities. 1,578,776 - - 1,578,776
Other noncurrent liabilities............ - 190,476 35,264 225,740
Deferred income taxes................... - - 28,500 28,500
Stockholders' equity.................... 840,493 280,322 231,652 (447,562) 904,905
Commitments and contingencies...........
--------- ---------- -------- ----------
$2,457,158 $ 611,213 $ 333,626 $ 2,954,435
========= ========== ======== ==========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2001
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- ---------- ------------ ------------ ------------ ---------
Revenues:
Oil and gas.................... $ - $ 494,474 $ 180,211 $ - $ $ 674,685
Interest and other............. - 18,042 4,551 - 22,593
Gain on disposition of assets,
net.......................... - 8,762 (85) - 8,677
-------- --------- --------- --------- --------
- 521,278 184,677 - 705,955
-------- --------- --------- --------- --------
Costs and expenses:
Oil and gas production......... - 128,922 30,567 - 159,489
Depletion, depreciation and
amortization................. - 101,062 68,560 - 169,622
Exploration and abandonments... - 52,713 41,419 - 94,132
General and administrative..... 616 18,434 7,556 - 26,606
Interest....................... 3,823 85,328 12,986 - 102,137
Equity income from subsidiary.. (123,937) 7,030 - - 116,907 -
Other.......................... - 7,374 21,723 - 29,097
-------- --------- --------- --------- --------
(119,498) 400,863 182,811 - 581,083
-------- --------- --------- --------- --------
Income (loss) before income taxes
and extraordinary item......... 119,498 120,415 1,866 - 124,872
Income tax benefit (provision)... - (783) (4,591) (13) (5,387)
-------- --------- --------- --------- --------
Net income before extraordinary
item........................... 119,498 119,632 (2,725) (13) 119,485
Extraordinary item - gain on
early extinguishment of debt,
net of tax..................... 1,374 - - - 1,374
-------- --------- --------- --------- --------
Net income (loss)................ 120,872 119,632 (2,725) (13) 120,859
Other comprehensive income (loss):
Deferred hedge gains and losses:
Transition adjustment........ - (172,007) (25,437) - (197,444)
Unrealized hedge gains
(losses).................... (519) 317,510 26,089 - 343,080
Net losses included in net
income...................... - 19,726 17,329 - 37,055
Gains and losses on available
for sale securities:
Unrealized holding gains
and losses.................. - (45) - - (45)
Gains included in net income. - (8,109) - - (8,109)
Cumulative translation
adjustment.................... - - (9,749) - (9,749)
-------- --------- --------- --------- --------
Comprehensive income............. $ 120,353 $ 276,707 $ 5,507 $ (13) $ 285,647
======== ========= ========= ========= ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2000
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- ---------- ------------ ------------ ------------ ---------
Revenues:
Oil and gas.................... $ - $ 432,463 $ 168,446 $ - $ $ 600,909
Interest and other............. 28 6,581 7,532 - 14,141
Gain (loss) on disposition of
assets, net.................. - 30,859 (3,108) - 27,751
-------- --------- --------- --------- --------
28 469,903 172,870 - 642,801
-------- --------- --------- --------- --------
Costs and expenses:
Oil and gas production......... - 108,764 27,226 - 135,990
Depletion, depreciation and
amortization................. - 98,090 63,939 - 162,029
Exploration and abandonments... - 35,714 28,488 - 64,202
General and administrative..... 143 15,861 7,255 - 23,259
Interest....................... (38,728) 113,322 47,818 - 122,412
Equity income from subsidiary.. (41,653) (5,061) - - 46,714 -
Other.......................... - 57,239 3,155 - 60,394
-------- --------- --------- --------- --------
(80,238) 423,929 177,881 - 568,286
-------- --------- --------- --------- --------
Income (loss) before income taxes
and extraordinary item......... 80,266 45,974 (5,011) - 74,515
Income tax benefit (provision) .. - (4) 5,755 49 5,800
-------- --------- --------- --------- --------
Net income before extraordinary
item........................... 80,266 45,970 744 49 80,315
Extraordinary item - loss on
early extinguishment of debt,
net of tax..................... (12,318) - - - (12,318)
-------- --------- --------- --------- --------
Net income....................... 67,948 45,970 744 49 67,997
Other comprehensive income:
Unrealized gain on available
for sale securities.......... - 32,678 - - 32,678
Realized gain on available for
sale securities.............. - (25,674) - - (25,674)
Translation adjustment......... - - (7,432) - (7,432)
-------- --------- --------- --------- --------
Comprehensive income (loss)...... $ 67,948 $ 52,974 $ (6,688) $ 49 $ 67,569
======== ========= ========= ========= ========
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
----------- --------- ------------ -----------
Cash flows from operating activities:
Net cash provided by operating activities........ $ 30,343 $ 225,330 $ 134,291 $ 389,964
---------- -------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 21,170 51,105 731 73,006
Additions to oil and gas properties.............. - (228,154) (136,274) (364,428)
Other property additions, net.................... - (6,809) (3,681) (10,490)
---------- -------- --------- ----------
Net cash used in investing activities......... 21,170 (183,858) (139,224) (301,912)
---------- -------- --------- ----------
Cash flows from financing activities:
Borrowings under long-term debt.................. 204,175 - - 204,175
Principal payments on long-term debt............. (249,230) - - (249,230)
Payment of noncurrent liabilities................ - (43,823) 2,113 (41,710)
Exercise of stock options and employee
stock purchases................................ 6,610 - - 6,610
Purchase of treasury stock....................... (13,032) - - (13,032)
---------- -------- --------- ----------
Net cash provided by (used in) financing
activities.................................. (51,477) (43,823) 2,113 (93,187)
---------- -------- --------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 36 (2,351) (2,820) (5,135)
Effect of exchange rate changes on cash and
cash equivalents............................... - - (287) (287)
Cash and cash equivalents, beginning of period.... 15 18,387 7,757 26,159
---------- -------- --------- ----------
Cash and cash equivalents, end of period.......... $ 51 $ 16,036 $ 4,650 $ 20,737
========== ======== ========= ==========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2000
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
----------- --------- ------------ -----------
Cash flows from operating activities:
Net cash provided by operating activities........ $ 177,221 $ 49,545 $ 58,328 $ 285,094
---------- -------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets.............. - 84,656 9,070 93,726
Additions to oil and gas properties.............. - (107,701) (75,850) (183,551)
Other property (additions) dispositions, net..... - (6,116) 10,015 3,899
---------- -------- -------- ----------
Net cash used in investing activities......... - (29,161) (56,765) (85,926)
---------- -------- -------- ----------
Cash flows from financing activities:
Borrowings under long-term debt.................. 894,084 - - 894,084
Principal payments on long-term debt............. (1,045,585) (665) - (1,046,250)
Payment of noncurrent liabilities................ - (15,256) (2,798) (18,054)
Exercise of stock options and employee stock
purchases...................................... 726 - - 726
Purchase of treasury stock....................... (12,647) - - (12,647)
Deferred loan fees/issuance costs................ (13,772) - - (13,772)
---------- -------- -------- ----------
Net cash used in financing activities......... (177,194) (15,921) (2,798) (195,913)
---------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 27 4,463 (1,235) 3,255
Effect of exchange rate changes on cash and
cash equivalents............................... - - (145) (145)
Cash and cash equivalents, beginning of period.... 5 22,699 12,084 34,788
---------- -------- -------- ----------
Cash and cash equivalents, end of period.......... $ 32 $ 27,162 $ 10,704 $ 37,898
========== ======== ======== ==========
21
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations(1)
Financial and Operating Performance
The financial and operating performance of Pioneer Natural Resources
Company (the "Company" or "Pioneer") during the three and nine month periods
ended September 30, 2001 was highlighted by drilling and seismic activities in
the United States Gulf of Mexico, South Africa, Gabon and Tunisia (see "Drilling
Highlights", below) and significant increases in year-to-date income and
operating cash flows for the three and nine month periods then ended.
The Company reported net income of $24.6 million ($.25 per diluted share)
and $120.9 million ($1.21 per diluted share) for the three and nine month
periods ended September 30, 2001, as compared to net income of $69.3 million
($.69 per diluted share) and $68.0 million ($.68 per diluted share) for the same
respective periods in 2000. During the three months ended September 30, 2001,
earnings were impacted by declining commodity prices. During the nine months
ended September 30, 2001, earnings were positively impacted by favorable
commodity prices and an $8.7 million gain on the disposition of assets. The
Company's results for the three month period ended September 30, 2000 were
impacted by increases in commodity prices and Argentine production volumes,
$13.5 million of derivative mark- to-market charges to other expenses and a
$24.2 million gain on the disposition of assets, which included a $25.7 million
gain on the sale of a portion of the Company's investment in the common stock of
a non-affiliated entity. The results for the nine months ended September 30,
2000 were significantly impacted by $55.5 million of derivative mark-to- market
charges to other expenses, a $12.3 million extraordinary item - loss on early
extinguishment of debt and a $27.8 million gain on the disposition of assets,
including $34.4 million of gains on the sale of a portion of the Company's
investment in the common stock of a non-affiliated entity. See "Results of
Operations" below for additional discussions pertaining to the Company's
financial and operating performance.
The Company's net cash provided by operating activities grew to $122.9
million and $390.0 million during the three and nine month periods ended
September 30, 2001, respectively, representing increases of six percent and 37
percent, as compared to net cash provided by operating activities of $115.7
million and $285.1 million for the same respective periods in 2000. The
increases in net cash provided by operating activities primarily resulted from
favorable commodity prices and net reductions in working capital used for
operating activities. These positive results were partially offset by production
declines primarily resulting from prior year asset divestitures, temporary
supply, demand and infrastructure issues and increased production costs
primarily resulting from declines in third party gas processing and treating net
margins and increases in production taxes, ad valorem taxes and field fuel costs
associated with higher commodity prices. During the three and nine month periods
ended September 30, 2001, the Company used its net cash provided by operating
activities, together with proceeds from the dispositions of assets, to fund
$125.7 million and $364.4 million, respectively, of additions to oil and gas
properties; to repurchase 408,200 shares of the Company's common stock at an
average price of $14.60 per share and 830,400 shares of the Company's common
stock at an average price of $15.69 per share, respectively; and for other
general corporate needs.
The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Company's total book capitalization at September 30,
2001 was $2.7 billion, consisting of total debt of $1.5 billion and
stockholders' equity of $1.2 billion. Debt as a percentage of total book
capitalization was 57 percent at September 30, 2001 as compared to 64 percent at
December 31, 2000. Total outstanding indebtedness declined by $24.2 million
during the nine months ended September 30, 2001.
Drilling Highlights
During the first nine months of 2001, the Company spent $364.4 million on
capital expenditures including $170.2 million for development activities, $147.9
million for exploration activities and $46.3 million on acquisitions. While
development activities include the costs of related facilities, exploration
activities include geological and geophysical data purchases and acquisitions
include the costs of leasing unproved properties, the majority of the Company's
capital expenditures is spent on drilling wells. The following tables summarize
the Company's development drilling and exploration and extension drilling
activities for the nine months ended September 30, 2001.
22
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast..... 3 19 16 - 6
Permian Basin................. 42 127 129 11 29
Mid-Continent................. 3 34 33 - 4
------ ----- ----- ------ -----
Total Domestic......... 48 180 178 11 39
------ ----- ----- ------ -----
Argentina..................... 1 22 19 - 4
Canada........................ 3 25 26 - 2
------ ----- ----- ------ -----
Total Worldwide........ 52 227 223 11 45
====== ===== ===== ====== =====
Exploration/Extension Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast.... 8 18 13 5 8
Permian Basin................ 1 1 1 - 1
------ ----- ----- ------ -----
Total Domestic........ 9 19 14 5 9
------ ----- ----- ------ -----
Argentina.................... 1 32 20 9 4
Canada....................... 5 20 14 11 -
South Africa................. 2 2 1 2 1
Gabon........................ - 1 - - 1
Tunisia...................... - 1 - 1 -
------ ----- ----- ------ -----
Total Worldwide....... 17 75 49 28 15
====== ===== ===== ====== =====
Domestic. The Company spent $218.8 million during the first nine months
of 2001 on acquisition, drilling and seismic activities in the Gulf Coast,
Permian Basin and Mid-Continent areas of the United States.
Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area,
the Company spent $170.0 million of acquisition, drilling and seismic capital
primarily in the deepwater Gulf of Mexico, the Gulf of Mexico shelf, the Inland
Bays of South Louisiana, the East Texas Bossier Play and the Pawnee field in
South Texas.
In the deepwater Gulf of Mexico, the Company has sanctioned three major
development projects that are in progress as of September 30, 2001. First, the
TotalFinaElf-operated Aconcagua and the Marathon-operated Camden Hills
discoveries in Mississippi Canyon are being jointly developed as part of the
Canyon Express gas project. Facilities construction is underway and installation
has commenced for the TotalFinaElf-operated Canyon Express subsea gathering
system with production scheduled to begin during the second quarter of 2002.
Wells will be brought on sequentially and are expected to achieve a peak rate of
approximately 110 MMcf of natural gas per day and 180 Bbls of condensate per day
net to the Company. During October 2001, the Company announced the acquisition
of an incremental interest in Aconcagua and the Canyon Express gathering system
for $25.5 million, subject to normal post- closing adjustments. Also during
October 2001, the Company entered into gas price hedges on the incremental
production acquired for 2003 through 2005 at a NYMEX gas price of $3.45 per Mcf.
The Company now owns a 23.5 percent equity interest in the Canyon Express
gathering system, a 37.5 percent working interest in Aconcagua and a 33 percent
working interest in Camden Hills. Second, at the Dominion-operated Devils Tower
development project in Mississippi Canyon, the Company successfully drilled two
wells to explore for new reserves in previously undrilled reservoirs and to
further extend previously tested zones. Subsequently, the project was sanctioned
as a spar development project with the owners leasing a spar from a third party
for the life of the field. Construction of the spar is underway and production
is anticipated to begin during the second quarter of 2003. The wells will be
brought on sequentially with peak production reaching 8,000 to 10,000 BOEs per
day net to the Company's interest. Also during 2001, the Company acquired an
23
PIONEER NATURAL RESOURCES COMPANY
incremental interest in Devils Tower, increasing its working interest to 25
percent. Finally, the Mariner- operated Falcon project, which was recently
sanctioned, was successfully drilled and sidetracked during 2001. The Company
owns a 45 percent working interest in Falcon and was the apparent successful
bidder on 21 deepwater Gulf of Mexico blocks, 12 of which are near the Falcon
discovery that the Company shares with its partner, Mariner. Initial production
from Falcon is anticipated during the first quarter of 2003 at initial peak
rates of 79 MMcf of natural gas per day and 220 Bbls of condensate per day net
to the Company's interest. In addition to these development projects, the
Company also successfully drilled the Dominion-operated Turnberry prospect
during 2001. However, sidetrack operations on the Turnberry discovery were
unsuccessful and evaluations of the initial wellbore are in progress to
determine if the discovery has commercial quantities of hydrocarbons. Costs
associated with the sidetrack were charged to exploration and abandonment
expense during the second quarter of 2001. Also, the Company drilled its Argo
prospect during 2001 which was unsuccessful. Drilling is currently underway on
its Marathon-operated Ozona Deep prospect, which should reach target depth
during the fourth quarter. The Company does not plan on drilling any additional
deepwater Gulf of Mexico prospects during the fourth quarter of 2001 and
currently plans on drilling two new deepwater prospects during 2002. However,
significant capital expenditures will be required to complete the three
aforementioned development projects as well as any further exploration success
related to wells currently drilling or any future deepwater prospects drilled.
On the Gulf of Mexico shelf, the Company has participated in drilling
five prospects during the first nine months of 2001 in addition to initiating an
extensive production optimization program at the Company's Inland Bay fields in
Southern Louisiana. First, the Texaco-operated Cyrus prospect was sanctioned
during 2001 and development plans are underway with production expected to
commence during the fourth quarter of 2002 at initial rates of 2.3 MMcf of
natural gas per day and 360 Bbls of condensate per day, net to the Company's
interest. The Company has a 5.7 percent working interest in Cyrus. Second, the
Hall Houston-operated Oneida prospect was successfully drilled and is currently
being completed. Initial production is anticipated during the first quarter of
2002 at rates of 1.1 MMcf of natural gas per day and 30 Bbls of oil per day net
to the Company's 13.7 percent working interest. Third, the Company participated
in the Spinnaker-operated Stirrup prospect during 2001, where the Company owns a
25 percent working interest. An initial discovery well was drilled and tested at
gross rates over 21 MMcf of natural gas per day and 130 Bbls of condensate per
day. A second well is currently being drilled . The Company anticipates first
production in June 2002 at initial rates of 2.7 MMcf of natural gas per day and
20 Bbls of condensate per day net to the Company's interest. Fourth, the Company
drilled its Cruiser prospect that was plugged and abandoned since commercial
quantities of hydrocarbons were not present. The Company owns a 70 percent
working interest in the Cruiser prospect. Finally, the Company is currently
drilling its Malta prospect where results are expected during the fourth quarter
of 2001. The Company has a 67.5 percent working interest in the Malta prospect,
but is only paying 50 percent of the costs before casing point on the initial
well. In addition to the activity on the Gulf of Mexico shelf, the Company also
drilled an exploratory dry hole in its Inland Bay fields in South Louisiana and
initiated an extensive workover and recompletion program in these fields. The
Company has been applying new technology to the fields in an attempt to identify
any untapped potential in the multiple pay zones of these fields that may have
been missed over the years. Results in the program have been encouraging with a
production increase of approximately 1,500 BOE per day being achieved during
2001. The program will continue into the fourth quarter of 2001 and next year as
capital availability permits. The Company has no plans to spud any further
exploration wells on the shelf or the Inland Bays during the fourth quarter of
2001, and 2002 drilling plans are currently being determined.
In the onshore Gulf Coast region of the United States, the Company has
concentrated its drilling efforts in the Bossier Play in East Texas and the
Edwards Reef trend in South Texas. The Company plans to continue this effort for
the remainder of this year and also plans to spud its first exploratory well in
North Louisiana during the fourth quarter of 2001. Plans for 2002 are currently
being determined.
Permian Basin area. In the Permian Basin area, the Company spent $44.1
million of acquisition, drilling and seismic capital during the first nine
months of 2001. The Company concentrated its efforts on the Spraberry oil trend,
the Canyon gas play and the recently discovered My-Way field in Iron County,
Texas. The My-Way Clearfork discovery has generated potentially 20 to 30 future
development locations. Drilling is expected to continue in the Permian Basin
area during the fourth quarter and into 2002.
24
PIONEER NATURAL RESOURCES COMPANY
Mid-Continent area. In the Mid-Continent area, the Company expended $4.7
million of drilling and seismic capital during the first nine months of 2001.
The Company's development drilling in the Mid-Continent area is focused on West
Panhandle and Hugoton gas prospects.
Argentina. In Argentina, the Company spent $67.5 million of acquisition,
drilling and seismic capital during the first nine months of 2001. The majority
of costs was spent in the Company's drilling program, which has been
concentrated in the Bajo Barda Gonzalez and the Loma Negra Norte areas of the
Neuquen Basin. Several successful extension wells have been drilled in each area
this year that have added additional future drilling locations. During the third
quarter, the Company completed the drilling of a horizontal well in the Bajo
Barda Gonzalez field that has produced 115,000 BOEs during the first 90 days of
production from a 1,290 foot horizontal section. The Company currently has three
additional horizontal wells drilling. The Company has also begun construction of
a 36 mile pipeline from the Loma Negra Plant to a major transmission line that
is expected to be operational by the end of 2001 and will enable the Company to
deliver gas to markets downstream of current system bottlenecks. In addition,
the Company acquired 250,000 acres in the Anticlinal Campamento, Dos Hermanas
and La Calera areas of the Neuquen Basin during 2001 for $12.6 million,
representing 5.3 MMBOE of proved reserves and significant future exploration
opportunities.
Canada. In Canada, the Company spent $34.2 million of acquisition,
drilling and seismic capital during the first nine months of 2001. Most of this
capital was spent in the first quarter in the Chinchaga, North Chinchaga and
Martin Creek areas that are only accessible for drilling during the winter
months. The Company drilled an extension well in the Lookout Butte field during
the third quarter that was unsuccessful. Plans are currently underway to begin
the 2001- 2002 winter drilling campaign late in the fourth quarter of 2001.
Africa. In Africa, the Company spent $43.9 million of drilling and
seismic capital during the first nine months of 2001 in South Africa, Gabon and
Tunisia.
South Africa. In South Africa, the Company spent $28.3 million of
drilling and seismic capital to drill two wells on its Company-operated
Boomslang prospect, in which the Company has a 49 percent working interest,
drill a gas appraisal well on the Soekor-operated E-BB tract, in which the
Company has a 40 percent working interest, and acquire two 3-D seismic surveys.
The initial Boomslang well was successful while the appraisal well was wet. One
of the two seismic surveys was acquired over the Boomslang trend area where
several other prospects have been identified. The Company will continue to
evaluate the commercial feasibility of the Boomslang prospect using this new 3-D
data. The appraisal well was charged to exploration and abandonment expense
during the second quarter of 2001. In addition, the Company drilled and tested
the E-BB2 gas well in the center of the Bredasdorp Basin. Results of this well
and other wells drilled in this trend are being assessed as part of a larger gas
development project that is currently being evaluated. The Company also acquired
a 3-D seismic survey in the Port Elizabeth Trough Area of Block 14 during the
second quarter of 2001. During the fourth quarter of 2001, the seismic data
acquired earlier this year is being analyzed and the results from the
aforementioned exploration activities are being evaluated. Therefore, the
Company does not anticipate spending significant capital during the fourth
quarter of 2001 on South Africa exploration activities. However, three
exploration wells are currently planned for 2002.
The partners in the Soekor-operated Sable oil discovery, in which the
Company now owns a 40 percent working interest, have sanctioned the development
of the field. Production is scheduled to begin in the first quarter of 2003 with
expected production for the first year to average approximately 11,600 Bbls of
oil per day net to the Company's interest. Drilling and completion operations
will commence during the fourth quarter of 2001 and will continue until late
2002. The Company anticipates spending an additional $63 million on this project
prior to initial production.
Gabon. In Gabon, the Company spent $12.5 million of drilling and seismic
capital to drill and test the initial exploratory well on its Bigorneau South
prospect, located offshore in the Southern Gabon Basin on its Olowi permit.
Pioneer is the operator of the 314,000 acre permit with a 100 percent working
interest. The Company has entered its application to enter the Second
Exploration Period on the Olowi Permit, which requires two additional
exploratory wells over a two-year period. Seismic evaluations continue on this
discovery and the Company plans to drill two to four additional wells on the
permit during 2002.
25
PIONEER NATURAL RESOURCES COMPANY
Tunisia. In Tunisia, the Company spent $3.1 million of acquisition and
drilling capital to drill its first exploratory well in the Bazma permit which
was unsuccessful and subsequently plugged and abandoned. The Company acquired 50
percent of Eurogas Corporation's rights to explore this permit along with the
Jorf and El Hamra permits by agreeing to pay 100 percent of their drilling costs
to casing point on the first two wells drilled in these permits. The Company has
taken over operatorship of the permits. This acquisition provides the Company
with 2.7 million acres to pursue exploration opportunities in onshore Southern
Tunisia.
In July 2001, the Company announced that, subject to Tunisian government
approval, it has acquired a 30 percent interest in the Anaguid permit in the
Ghadames basin onshore Southern Tunisia for approximately $1.7 million. The
Company will join Anadarko Petroleum Corporation, the operator of this permit,
and Nuevo Energy Company in exploring the 1.1 million-acre permit.
Budgeted capital expenditures. The Company's successful drilling results
during 2001 have led to revisions to the Company's capital commitment plans.
Based on forecasted 2001 cash flows from operating activities and follow-on
capital requirements associated with the Company's successful exploration
programs, the Company has increased its 2001 capital expenditures budget by
approximately 25 percent to $540 million from the $430 million budget originally
established. This includes the recently announced acquisition of an incremental
interest in the Aconcagua field and the Canyon Express gathering system. In
addition, if the limited partners of each of the 46 Parker & Parsley limited
partnerships approve their merger with Pioneer USA, the Company will reflect an
additional $100 million of costs incurred for 2001, although such amount will be
funded 100 percent with common stock (see "Partnership mergers", below).
The Company is currently in the process of approving the capital
expenditure budget for 2002, which is anticipated to be between $400 million to
$425 million based upon current commodity prices. The 2002 capital expenditures
budget includes $200 million of capital earmarked for development of the
Company's deepwater Gulf of Mexico Canyon Express, Devils Tower and Falcon
projects and the Company's Sable oil discovery offshore South Africa (see
"Drilling Highlights", above). Net to the Company's interest, the aggregate
production contributed by these projects is expected to grow the Company's
worldwide annual production by 12 percent during 2002, to 46 MMBOE to 48 MMBOE,
and by 31 percent in 2003, to 60 MMBOE to 63 MMBOE.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $198.1
million and $674.7 million for the three and nine month periods ended September
30, 2001, respectively, compared to $228.6 million and $600.9 million for the
same respective periods in 2000. The decrease in revenues during the three
months ended September 30, 2001, as compared to the prior year third quarter, is
due to commodity price decreases and a five percent decline in production
volumes. The increase in revenues during the nine months ended September 30,
2001, as compared to the prior year same period, is reflective of commodity
price increases which more than offset a four percent decrease in production
volumes that primarily resulted from prior year asset divestitures and temporary
supply, demand and infrastructure issues that are described in more detail
below.
The following table provides the Company's volumes and average reported
price, including the results of hedging activities for the three and nine month
periods ended September 30, 2001 and 2000:
26
PIONEER NATURAL RESOURCES COMPANY
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Production:
Oil (MBbls).................... 3,029 3,156 9,329 9,359
NGLs (MBbls)................... 2,039 2,168 5,838 6,371
Gas (MMcf)..................... 34,452 36,047 97,710 103,451
Total (MBOE)................... 10,809 11,332 31,452 32,972
Average daily production:
Oil (Bbls)..................... 32,920 34,307 34,172 34,157
NGLs (Bbls).................... 22,158 23,565 21,383 23,252
Gas (Mcf)...................... 374,476 391,819 357,912 377,558
Total (BOE).................... 117,491 123,175 115,208 120,335
Average reported prices:
Oil (per Bbl):
United States................ $ 25.15 $ 23.31 $ 24.93 $ 21.37
Argentina.................... $ 24.99 $ 30.95 $ 25.09 $ 29.32
Canada....................... $ 23.70 $ 28.58 $ 23.80 $ 27.72
Worldwide.................... $ 25.06 $ 25.48 $ 24.95 $ 23.52
NGLs (per Bbl):
United States................ $ 14.77 $ 20.52 $ 18.56 $ 19.18
Argentina.................... $ 16.93 $ 22.46 $ 21.93 $ 21.98
Canada....................... $ 18.66 $ 25.42 $ 23.31 $ 22.85
Worldwide.................... $ 15.01 $ 20.73 $ 18.87 $ 19.37
Gas (per Mcf):
United States................ $ 3.54 $ 3.65 $ 4.34 $ 3.06
Argentina.................... $ 1.39 $ 1.28 $ 1.33 $ 1.21
Canada....................... $ 1.69 $ 2.71 $ 3.35 $ 2.41
Worldwide.................... $ 2.66 $ 2.87 $ 3.40 $ 2.49
As discussed above, oil and gas revenues for the three months ended
September 30, 2001 were negatively impacted by declining prices and, during the
nine months ended September 30, 2001, were favorably impacted by commodity price
increases. As compared to the three months ended September 30, 2000, the average
oil price for the three months ended September 30, 2001 decreased by two
percent; the average NGL price decreased by 28 percent; and the average gas
price decreased seven percent. As compared to the nine months ended September
30, 2000, the average oil price for the nine months ended September 30, 2001
increased six percent; the average NGL price decreased by three percent; and the
average gas price increased by 37 percent.
On a BOE basis, average daily production decreased by five percent and
four percent during the three and nine month periods ended September 30, 2001,
respectively, as compared to the same periods in 2000. Per BOE average daily
production, based on a third quarter to third quarter comparison, declined by
eight percent in the United States, where the Company completed asset
dispositions during 2000, production in Argentina decreased by one percent and
production in Canada increased by 19 percent. Comparing the first nine months of
2001 to the same period in 2000, per BOE average daily production declined by
eight percent in the United States, while production in Canada and Argentina
increased by 13 percent and one percent, respectively. In addition to prior year
asset divestitures in the United States, production levels were also negatively
impacted during 2001 by the Company's election not to recover ethane from United
States Mid Continent area gas during January 2001 (this election effectively
raised the Company's MMBtu content, price realizations per Mcf of natural gas
and total revenue, but reduced production volumes by approximately 1,200 BOE per
day during the election period); severe weather in the United States Mid
Continent area during January 2001 which hampered field operations; increased
hydroelectric power availability in Argentina which reduced the demand for
natural gas power generation, unscheduled plant downtime at a large gas
purchaser in the Tierra del Fuego area in Argentina; and, in the Neuquen Basin
area in Argentina, unanticipated compressor maintenance.
27
PIONEER NATURAL RESOURCES COMPANY
Fourth quarter 2001 production volumes are expected to average 111 to 114
MBOE per day. The anticipated decrease in fourth quarter production is due to
expected decreases in electricity demand in Argentina as the southern hemisphere
enters the lower-demand summer season.
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
derivative instruments (swaps and collar contracts) in order to (i) reduce the
effect of the volatility of price changes on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects. On January 1, 2001, the Company adopted the provisions
of SFAS 133. Although SFAS 133 does not change the economics associated with
derivative instruments in general or hedging activities in particular, it has
significantly changed the accounting for derivative instruments and hedging
activities and the requirements that must be met in order for a derivative
instrument to qualify for hedge accounting treatment. See Note C of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
specific information regarding the adoption of SFAS 133 and the Company's
hedging activities.
Interest and other revenue. During the three and nine months ended
September 30, 2001, the Company recorded interest and other revenue of $6.5
million and $22.6 million, respectively, as compared to $5.2 million and $14.1
million, respectively, during the same periods in 2000. Interest and other
revenue for the three months ended September 30, 2001 includes $4.5 million from
the early settlement of a contractual right received as part of a prior
litigation settlement. Interest and other revenue for the nine months ended
September 30, 2001 includes $7.3 million of mark-to- market gains recognized on
the Company's BTU swap agreements. See Note C of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for information regarding
the BTU swap agreements.
Gain (loss) on disposition of assets. During the three months ended
September 30, 2001, the Company recorded an $88 thousand loss on the disposition
of assets and, during the nine months ended September 30, 2001, the Company
recorded a gain of $8.7 million on the disposition of assets, as compared to net
gains of $24.2 million and $27.8 million during the same periods in 2000. During
the nine month period ended September 30, 2001, the Company recognized a gain of
$8.1 million from the sale of its remaining investment in the common stock of a
non-affiliated entity. Similarly, the gains recognized during the three and nine
month periods ended September 30, 2000, were primarily comprised of gains of
$25.7 million and $34.4 million, respectively, from sales of the common stock of
the same non-affiliated entity.
Production costs. During the three and nine month periods ended September
30, 2001, total production costs per BOE increased $.39 and $.95 per BOE,
respectively, as compared to per BOE production costs of the same periods in
2000. The increase in production costs per BOE for the three and nine month
periods ended September 30, 2001, as compared to the same periods in 2000, is
primarily due to declines in third party gas processing and treating margins
and, during the nine months ended September 30, 2001, to significant increases
in per BOE production taxes, ad valorem taxes and field fuel expenses, which are
directly correlated with commodity prices.
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(per BOE)
Lease operating expense.............. $ 2.89 $ 2.45 $ 2.61 $ 2.33
Taxes:
Production........................ .61 .79 .81 .71
Ad valorem........................ .52 .34 .47 .34
Field fuel expenses.................. .60 .70 1.00 .59
Workover costs....................... .16 .11 .18 .15
------ ------ ------ ------
Total production costs......... $ 4.78 $ 4.39 $ 5.07 $ 4.12
====== ====== ====== ======
The Company expects fourth quarter 2001 production costs to average $4.50
to $4.75 per BOE based on current NYMEX strip prices for oil and gas.
28
PIONEER NATURAL RESOURCES COMPANY
Depletion, depreciation and amortization expense. Total depletion,
depreciation and amortization expense per BOE was $5.56 and $5.39 during the
three and nine month periods ended September 30, 2001, respectively, as compared
to $4.99 and $4.91 during the three and nine month periods ended September 30,
2000. Depletion expense, the largest component of depletion, depreciation and
amortization, was $5.26 and $5.05 per BOE during the three and nine month
periods ended September 30, 2001, respectively, as compared to $4.65 and $4.56
per BOE during the same periods in 2000. The increase in depletion expense per
BOE during 2001 is primarily associated with decreases in United States
production, which has a lower cost basis, relative to combined Argentine and
Canadian production, and to downward revisions to proved reserves during 2001
resulting from lower commodity prices.
The Company expects fourth quarter 2001 depletion, depreciation and
amortization expense to average $5.50 to $5.75 per BOE.
Exploration and abandonments/geological and geophysical costs.
Exploration and abandonments/geological and geophysical costs increased to $24.7
million and $94.1 million during the three and nine month periods ended
September 30, 2001, respectively, from $23.4 million and $64.2 million during
the same respective periods in 2000. The increase during the nine months ended
September 30, 2001, as compared to the same period in 2000, is largely the
result of a larger 2001 exploratory drilling budget and increased geological and
geophysical expenditures that are supportive of future exploratory drilling.
The following table provides the Company's geological and geophysical
costs, exploratory dry hole expense, lease abandonments expense and other
exploration expense for the three and nine month periods ended September 30,
2001 and 2000:
United Other
States Argentina Canada Foreign Total
-------- --------- -------- -------- --------
(in thousands)
Three months ended September 30, 2001:
Geological and geophysical costs.......... $ 8,463 $ 827 $ 163 $ 2,617 $ 12,070
Exploratory dry holes..................... 6,764 1,291 1,195 1,589 10,839
Leasehold abandonments and other.......... 1,065 610 82 - 1,757
------- ------- ------- ------- -------
$ 16,292 $ 2,728 $ 1,440 $ 4,206 $ 24,666
======= ======= ======= ======= =======
Three months ended September 30, 2000:
Geological and geophysical costs......... $ 6,368 $ 1,842 $ 270 $ 2,506 $ 10,986
Exploratory dry holes.................... 7,103 1,518 16 - 8,637
Leasehold abandonments and other......... 2,240 1,351 217 - 3,808
------- ------- ------- ------- -------
$ 15,711 $ 4,711 $ 503 $ 2,506 $ 23,431
======= ======= ======= ======= =======
Nine months ended September 30, 2001:
Geological and geophysical costs.......... $ 22,264 $ 2,283 $ 662 $ 11,395 $ 36,604
Exploratory dry holes..................... 25,043 3,423 6,550 10,030 45,046
Leasehold abandonments and other.......... 3,260 7,505 1,709 8 12,482
------- ------- ------- ------- -------
$ 50,567 $ 13,211 $ 8,921 $ 21,433 $ 94,132
======= ======= ======= ======= =======
Nine months ended September 30, 2000:
Geological and geophysical costs......... $ 16,858 $ 3,712 $ 809 $ 6,204 $ 27,583
Exploratory dry holes.................... 10,760 5,698 876 - 17,334
Leasehold abandonments and other......... 4,389 13,318 1,571 7 19,285
------- ------- ------- ------- -------
$ 32,007 $ 22,728 $ 3,256 $ 6,211 $ 64,202
======= ======= ======= ======= =======
29
PIONEER NATURAL RESOURCES COMPANY
The Company expects fourth quarter 2001 exploration and abandonment
expense to be $20 million to $40 million. The range estimated for fourth quarter
2001 exploration and abandonment expense is primarily dependent on the outcome
of the three Gulf of Mexico wells that are currently being drilled and
evaluated: exploratory wells on the Malta and Ozona Deep prospects and an
appraisal well on the Stirrup discovery. See "Drilling Highlights" above for
further discussions regarding the Company's exploration and abandonment
activities during 2001.
General and administrative expense. General and administrative expense
was $8.2 million and $26.6 million for the three and nine months ended September
30, 2001, respectively, as compared to $6.5 million and $23.3 million for the
same periods in 2000, representing increases of 25 percent and 14 percent,
respectively. On a per BOE basis, general and administrative expense was $.75
and $.85 during the three and nine month periods ended September 30, 2001, as
compared to $.58 and $.71 for the same periods in 2000.
The Company expects fourth quarter 2001 general and administrative
expense to be approximately $9 million.
Interest expense. Interest expense for the three and nine months ended
September 30, 2001 was $32.3 million and $102.1 million, respectively, as
compared to $40.8 million and $122.4 million, respectively, for the same periods
in 2000. The decreases in interest expense during the three and nine month
periods ended September 30, 2001, as compared to the same periods in 2000,
reflect decreases of $112.0 million and $151.7 million, respectively, in the
Company's average debt outstanding, the capitalization of $1.5 million and $4.2
million of interest during the three and nine month periods ended September 30,
2001, respectively, and decreases in the Company's weighted average borrowing
rates of 63 basis points and 39 basis points, respectively.
The Company was a party to interest rate swap agreements that hedged a
portion of the Company's fixed rate debt. During the three and nine month
periods ended September 30, 2001, the interest rate swap agreements decreased
the Company's interest expense by $2.4 million and $3.1 million, respectively.
The swap agreements had no impact on interest expense during the three month
period ended September 30, 2000, and decreased the Company's interest expense by
$.3 million during the nine months ended September 30, 2000. During September
2001, the Company terminated the interest rate swap agreements that hedged a
portion of its fixed rate debt. The Company received $23.3 million of cash
proceeds, including accrued interest, from the termination of the interest rate
swap agreements, which was used to reduce borrowings under the Company's $575
million credit facility (the "Credit Facility"). Associated therewith, the
Company recorded a $21.2 million increase to the carrying value of its long-term
debt. This carrying value increment will be amortized as reductions to periodic
interest expense during the remaining original terms of the interest rate swap
agreements. See Note C of Notes to Consolidated Financial Statements included
in"Item 1. Financial Statements" for additional information pertaining to the
Company's interest rate swap agreements.
The Company expects fourth quarter interest expense to range from $31
million to $32 million.
Other costs and expenses. Other costs and expenses for the three and nine
month periods ended September 30, 2001 was $2.0 million and $29.1 million,
respectively, compared to $15.5 million and $60.4 million for the same periods
in 2000. The decrease in other costs and expenses is primarily attributable to
fluctuations in mark-to-market provisions on financial instruments.
Mark-to-market provisions during the three and nine month periods ended
September 30, 2001 included the ineffective portions of changes in the fair
values of commodity derivatives designated as cash flow hedges, which reduced
other expense by $374 thousand and $224 thousand during the three and nine month
periods ended September 30, 2001. Additionally, an increase in the liabilities
associated with the Company's BTU swap agreements of $6.6 million was recognized
during the nine months ended September 30, 2001. During the three and nine month
periods ended September 30, 2000, mark-to-market provisions included increases
in the liabilities associated with non- hedge commodity call contracts of $3.1
million and $41.1 million, respectively; increases in the liabilities associated
with the Company's BTU swap agreements of $10.1 million and $12.9 million,
respectively; and increases in the liabilities associated with forward foreign
currency swap agreements of $.3 million and $1.6 million, respectively. See Note
C of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information pertaining to the Company's financial
instruments that are recorded at fair value.
30
PIONEER NATURAL RESOURCES COMPANY
Income tax provisions (benefits). During the three and nine month periods
ended September 30, 2001, the Company recognized income tax provisions of $2.4
million and $5.4 million, respectively, as compared to tax benefits of $3.9
million and $5.8 million for the three and nine month periods ended September
30, 2000, respectively. The Company's income tax provisions and income tax
benefits for the three and nine month periods ended September 30, 2001 and 2000,
respectively, are primarily associated with the Company's operations in
Argentina and Canada. Due to continuing uncertainties regarding the likelihood
that certain of the Company's net operating loss carryforwards and other credit
carryforwards may expire unused, the Company has established valuation reserves
to reduce the carrying value of its deferred tax assets. The Company's deferred
tax valuation reserves are reduced when the Company's financial results
establish that deferred tax assets previously reserved will be used prior to
their expiration.
The Company expects that its cash taxes will range from $1 million to $3
million during the fourth quarter of 2001.
Extraordinary item - gain (loss) on early extinguishment of debt. On July
2, 2001, the Company redeemed the remaining $22.5 million of outstanding 11-5/8%
Senior Subordinated Discount Notes due July 1, 2006 and $6.8 million of
outstanding 10-5/8% Senior Subordinated Notes due July 1, 2006. The total
redemption was $31.0 million and was funded from the Company's Credit Facility.
Associated with this redemption, the Company recognized an extraordinary gain of
$1.4 million for the three and nine month periods ended September 30, 2001.
During the second quarter of 2000, the Company replaced its existing
credit facility ("Prior Credit Facility") with the Credit Facility. Associated
therewith, the Company recognized a $12.3 million extraordinary loss, comprised
of deferred costs associated with the Prior Credit Facility.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of principal and interest on outstanding indebtedness and working capital
obligations.
The Company's cash expenditures for additions to oil and gas properties
totaled $364.4 million during the first three quarters of 2001. This amount
includes $46.3 million for the acquisition of prospects and properties and
$318.1 million for development and exploratory drilling and seismic
expenditures. Drilling and seismic expenditures during the three quarters of
2001 included $199.2 million in the United States, $52.6 million in Argentina,
$25.0 in Canada, $27.5 million in South Africa and $13.8 million in other
international areas. See "Drilling Highlights" above for specific discussions of
capital investments made during the first nine months of 2001.
Funding for the Company's working capital obligations is provided by
internally-generated cash flow. Funding for the repayment of principal and
interest on outstanding debt may be provided by any combination of internally-
generated cash flows, proceeds from the disposition of assets or alternative
financing sources as discussed in "Capital resources" below.
The Company expects fourth quarter 2001 costs incurred for oil and gas
producing activities to range from $140 million to $150 million.
Capital resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from asset dispositions. The Company expects that its capital resources
will be sufficient to fund its remaining capital commitments in 2001.
31
PIONEER NATURAL RESOURCES COMPANY
Operating activities. Net cash provided by operating activities was
$122.9 million and $390.0 million during the three and nine months ended
September 30, 2001, respectively, as compared to net cash provided by operating
activities of $115.7 million and $285.1 million for the same periods in 2000.
The increase in net cash provided by operating activities primarily resulted
from favorable commodity prices during the nine months ended September 30, 2001
and net reductions in working capital. These positive results were partially
offset by production declines and increased production costs (see "Oil and gas
revenues," above).
Financing activities. The Company had an outstanding balance under its
Credit Agreement at September 30, 2001 of $238.9 million (including outstanding,
undrawn letters of credit of $27.9 million), leaving approximately $336.1
million of unused borrowing capacity immediately available.
As the Company pursues its strategy, it may utilize various financing
sources, including fixed and floating rate debt, convertible securities,
preferred stock or common stock. The Company may also issue securities in
exchange for oil and gas properties, stock or other interests in other oil and
gas companies or related assets. Additional securities may be of a class
preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Company's Board of Directors.
Asset dispositions. During the three and nine months ended September 30,
2001, proceeds from asset dispositions totaled $57.8 million and $73.0 million,
respectively, as compared to $65.2 million and $93.7 million for the same
periods in 2000. During the three months ended September 30, 2001, the primary
source of the Company's proceeds from the disposition of assets was $35.8
million of proceeds from the termination of a portion of the Company's 2003
natural gas hedges and $21.2 million of proceeds, net of accrued interest, on
the termination of the Company's interest rate swaps designated as fair value
hedges (see "Results of Operations - Interest expense", above). During the nine
month period ended September 30, 2001, the proceeds from the aforementioned
hedge terminations and the sale of 613,215 shares of common stock of a
non-affiliated entity for $12.7 million were the primary sources of the
Company's proceeds from asset dispositions. The primary source of proceeds from
asset dispositions during the three months ended September 30, 2000 was the sale
of 2,000,000 shares of common stock of a non-affiliated entity for $40.6 million
and the divestiture of certain United States oil and gas properties for $24.2
million. During the nine months ended September 30, 2000, the sale of 3,404,946
shares of common stock of a non-affiliated entity for $59.7 million, the
divestiture of certain United States oil and gas properties for $24.9 million
and the sale of a Midland office building for $4.5 million were the primary
sources of the Company's proceeds from asset dispositions. The proceeds from
these dispositions were used to reduce the Company's outstanding bank
indebtedness and for general working capital purposes.
Liquidity. At September 30, 2001, the Company had $20.7 million of cash
and cash equivalents on hand, compared to $26.2 million at December 31, 2000.
The Company's ratio of current assets to current liabilities was 1.06 to 1 at
September 30, 2001 and .88 to 1 at December 31, 2000.
Other Items
Partnership mergers. On October 22, 2001, the Company mailed definitive
materials (the "proxy statement/prospectus") to solicit the approval of limited
partners of 46 Parker & Parsley limited partnerships of an agreement and plan of
merger among Pioneer, Pioneer USA and those limited partnerships. The special
meetings of the limited partners to consider and vote on the merger proposal are
scheduled for December 20, 2001. The record date to identify the limited
partners who are entitled to notice of and to vote at the special meetings was
September 21, 2001. Each partnership that approves the agreement and plan of
merger and the other related merger proposals will merge with and into Pioneer
USA. As a result, the partnership interests of those partnerships will be
converted into the right to receive Pioneer common stock.
The proxy statement/prospectus is non-binding and is subject to, among
other things, consideration of offers from third parties to purchase any
partnership or its assets and the majority approval of the limited partnership
interests in each of 44 partnerships and two-thirds approval of the limited
partnership interests in each of two partnerships.
32
PIONEER NATURAL RESOURCES COMPANY
Stockholder's rights plan. During the third quarter of 2001, the Company
announced that its board of directors ("Board of Directors") authorized the
adoption of a stockholders rights plan (the "Plan"). The Plan includes
safeguards against partial or two-tiered tender offers, squeeze-out mergers and
other potentially abusive takeover tactics that limit the ability of all
stockholders to realize the long-term value of their investment in Pioneer.
Under the Plan, each holder of Pioneer common stock and each holder of
exchangeable shares issued by Pioneer Natural Resources Canada, Inc. at the
close of business on July 31, 2001, automatically received a distribution of one
right for each share of common stock or exchangeable share held. Each right
entitles the holder to purchase a new series of junior participating preferred
stock. Because the rights may be redeemed by the Board of Directors under
certain circumstances, they should not interfere with any merger or other
business combination approved by the Board of Directors.
The issuance of the rights is not taxable to the stockholders, has no
dilutive effect, will not affect Pioneer's reported earnings per share and will
not change the way the common stock or exchangeable shares are currently traded.
Item 3. Quantitative and Qualitative Disclosures About Market Risk (1)
The following quantitative and qualitative disclosures about market risk
are supplementary to the quantitative and qualitative disclosures provided in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000. As such, the information contained herein should be read in conjunction
with the related disclosures in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
The following disclosures provide specific information about material
changes that have occurred since December 31, 2000 in the Company's portfolio of
financial instruments. The Company may recognize future earnings gains or losses
on these instruments from changes in market interest rates or commodity prices.
Interest rate sensitivity. During May 2001, the Company entered into
interest rate swap agreements to hedge the fair value of the Company's 8-1/4%
Senior Notes due August 15, 2007 (the "8-1/4% Swap"). The 8-1/4% Swap agreements
were for an aggregate notional amount of $150.0 million of debt; commenced on
May 29, 2001; were to mature on August 15, 2007; required the counterparties to
pay the Company a fixed annual rate of 8-1/4 percent on the notional amount;
and, required the Company to pay the counterparties a variable annual rate on
the notional amount equal to the three-month LIBOR plus a weighted average
margin of 238.1 basis points. On September 21, 2001, the Company terminated the
8-1/4% Swap and its interest rate swap agreements that hedge the fair value of
the Company's 8-7/8% Senior Notes for cash proceeds of $23.3 million, including
accrued interest. Additionally, during the nine months ended September 30, 2001,
the Company entered into interest rate swap agreements to hedge the interest
rate volatility associated with certain of the Company's variable-rate credit
agreement indebtedness (the "Variable Rate Swap"). The terms of the Variable
Rate Swap agreements provide for an aggregate notional amount of $55 million of
debt; commenced on May 21, 2001 and mature on May 20, 2002; require the
counterparties to pay the Company a variable rate equal to the six-month LIBOR
plus 125 basis points; and, require the Company to pay the counterparties an
average annual rate of 5.43 percent on the notional amount. As of September 30,
2001, the fair value of the Variable Rate Swap agreements was a liability of
$519 thousand.
Commodity price sensitivity. During the first nine months of 2001, the
Company entered into additional oil and gas hedge derivatives. The following
tables provide information about the Company's oil and gas derivative financial
instruments that the Company was a party to as of September 30, 2001.
See Note C of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for information regarding the terms of the
Company's derivative financial instruments that are sensitive to changes in oil
and gas commodity prices.
33
PIONEER NATURAL RESOURCES COMPANY
The Company continues to be a party to certain BTU swap agreements that
mature at the end of 2004. The terms of the BTU swap agreements provide for the
Company to be paid ten percent of the NYMEX oil price and to pay the NYMEX gas
price on a notional 13,036 MMBtu daily gas volume. These BTU swap agreements do
not qualify for hedge accounting treatment. Prior to June 30, 2001, the BTU swap
agreements were presented in both of the accompanying Oil Price Sensitivity and
Gas Price Sensitivity tables, since their fair values were sensitive to changes
in the market prices of each commodity. During 2001, the Company entered into
offsetting swap agreements that have fixed the prices that are receivable to and
payable by the Company under the BTU swap agreements. Consequently, the fair
values of the Company's BTU swap agreements, which represent a discounted
liability to the Company of $21.1 million as of September 30, 2001, are no
longer sensitive to changes in oil or gas commodity prices. The undiscounted
future settlement obligations of the Company under the BTU swap agreements are
$1.5 million during the three months ending December 31, 2001 and $7.2 million
per year for each of 2002, 2003 and 2004.
34
PIONEER NATURAL RESOURCES COMPANY
Pioneer Natural Resources Company
Oil Price Sensitivity
Derivative Financial Instruments as of September 30, 2001
2001 2002 2003 Fair Value
--------- --------- --------- ----------
(in thousands, except volumes and prices)
Oil Hedge Derivatives:
Average daily notional Bbl volumes (1):
Swap contracts.............................. 24,348 9,205 2,975 $ 20,301
Weighted average per Bbl fixed price..... $ 27.98 $ 26.51 $ 24.02
Collar contracts............................ 2,000 4,959 $ 2,719
Weighted average short call per Bbl
ceiling price.......................... $ 31.43 $ 28.56
Weighted average long put per Bbl
floor price............................ $ 25.00 $ 25.00
Average forward NYMEX oil
prices (2)................................ $ 22.01 $ 22.04 $ 21.38
---------------
(1) See Note C of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(2) The average forward NYMEX oil prices are based on October 23, 2001 market
quotes.
Pioneer Natural Resources Company
Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2001
2001 2002 2003 2004 Fair Value
--------- --------- -------- -------- ----------
(in thousands, except volumes and prices)
Gas Hedge Derivatives (1):
Average daily notional MMBtu volumes (2):
Swap contracts............................. 120,908 155,123 50,000 190,000 $161,470
Weighted average per MMBtu fixed price.. $ 4.31 $ 4.24 $ 4.07 $ 3.98
Collar contracts........................... 54,482 20,000 $ 13,528
Weighted average short call per MMBtu
ceiling price......................... $ 2.74 $ 6.00
Weighted average long put per MMBtu
contingent floor price............... $ 2.11 $ 4.50
Average forward NYMEX gas
prices (3)............................... $ 2.81 $ 3.15 $ 3.53 $ 3.63
---------------
(1) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connect the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap and
option contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(2) See Note C of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(3) The average forward NYMEX oil and gas prices are based on October 23, 2001
market quotes.
Other price sensitivity. During the nine months ended September 30, 2001,
the Company sold its remaining shares of Prize Energy Corp. common stock for
$12.7 million.
---------------
(1) The information in this document includes forward-looking statements that
are made pursuant to the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, and the business
prospects of Pioneer Natural Resources Company, are subject to a number of
risks and uncertainties which may cause the Company's actual results in
future periods to differ materially from the forward-looking statements.
These risks and uncertainties include, among other things, volatility of
oil and gas prices, product supply and demand, competition, government
regulation or action, litigation, the costs and results of drilling and
operations, the Company's ability to replace reserves or implement its
business plans, access to and cost of capital, uncertainties about
estimates of reserves, quality of technical data and environmental risks.
These and other risks are described in the Company's 2000 Annual Report on
Form 10-K which is available from the United States Securities and Exchange
Commission.
35
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note E of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements", the Company is a party to various
legal actions incidental to its business. The probable damages from such legal
actions are not expected to be in excess of 10 percent of the Company's current
assets and the Company believes none of these actions to be material.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
3.1 - Certificate of Designation of Series A Junior Participating Preferred
Stock (incorporated by reference to Exhibit A to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, File No. 001-13245,
filed with the SEC on July 24, 2001).
4.1 - Rights Agreement dated July 24, 2001, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, File No. 001-13245, filed with
the SEC on July 24, 2001).
Reports on Form 8-K
During the three months ended September 30, 2001, the Company filed
Current Reports on Form 8-K on July 24, 2001, August 1, 2001 and September 26,
2001, respectively. The Form 8-K filed on July 24 announced, under Item 5 and
Item 7, the Company's adoption of a stockholders rights plan. The Form 8-K filed
on August 1 announced, under Item 7 and Item 9, the Company's financial and
operating results for the three and six month periods ended June 30, 2001. The
Form 8-K filed on September 26, announced, under Item 7 and Item 9, the
Company's updated outlook for its third quarter 2001 based on partial quarter
actual results.
36
PIONEER NATURAL RESOURCES COMPANY
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: October 25, 2001 By: /s/ Timothy L. Dove
----------------------------------
Timothy L. Dove
Executive Vice President and
Chief Financial Officer
Date: October 25, 2001 By: /s/ Rich Dealy
----------------------------------
Rich Dealy
Vice President and Chief
Accounting Officer
37
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
3.1 - Certificate of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit A to
Exhibit 4.1 to the Company's Registration Statement on Form
8-A, File No. 001-13245, filed with the SEC on July 24, 2001).
4.1 - Rights Agreement dated July 24, 2001, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A, File No. 001-13245, filed
with the SEC on July 24, 2001).
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* filed herewith
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