UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
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 April 30, 2002....115,908,657
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 ........................................ 4
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001...................... 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2002......................... 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001...................... 7
Consolidated Statements of Comprehensive Loss for the
three months ended March 31, 2002 and 2001................ 8
Notes to Consolidated Financial Statements................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 32
Item 6. Exhibits and Reports on Form 8-K............................. 32
Signatures................................................... 33
Exhibit Index................................................ 34
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and
conventions have specific meanings: "Bbl" means a standard barrel containing 42
United States gallons; "Bcf" means one billion cubic feet; "Tcf" means one
trillion cubic feet; "Bcfe" means a billion cubic feet equivalent and is a
standard convention used to express oil and gas volumes on a comparable gas
equivalent basis; "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 a measure of the amount of energy
required to raise the temperature of one pound of water one degree Fahrenheit;
"MMBtu" means one million Btu's; "MBbl" means one thousand Bbls; "MBOE" means
one thousand BOE; "MMBOE" means one million 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" mean 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 lower 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.
With respect to information on the working interest in wells,
drilling locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by Pioneer
Natural Resources Company's working interest in such wells, drilling locations
or acres. Unless otherwise specified, wells, drilling locations and acreage
statistics quoted herein represent gross wells, drilling locations or acres;
and, all dollar amounts are expressed in U.S. dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 16,757 $ 14,334
Accounts receivable:
Trade, net of reserves for doubtful accounts of $5,570
and $5,553 as of March 31, 2002 and December 31, 2001,
respectively.............................................. 88,476 81,616
Affiliates.................................................. 386 595
Inventories.................................................... 11,974 14,549
Deferred income taxes.......................................... 6,400 6,400
Other current assets:
Derivative assets, net of valuation reserves of $3,153
as of March 31, 2002 and December 31, 2001................ 32,446 127,074
Other....................................................... 10,802 11,075
---------- ----------
Total current assets...................................... 167,241 255,643
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties........................................... 3,783,934 3,691,783
Unproved properties......................................... 187,475 187,785
Accumulated depletion, depreciation and amortization........... (1,143,441) (1,095,310)
---------- ----------
2,827,968 2,784,258
---------- ----------
Deferred income taxes............................................ 84,319 84,319
Other property and equipment, net................................ 21,158 21,560
Other assets, net:
Derivative assets, net of valuation reserves of $1,069
as of March 31, 2002 and December 31, 2001.................. 486 54,486
Other.......................................................... 62,078 70,787
---------- ----------
$ 3,163,250 $ 3,271,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade....................................................... $ 98,399 $ 92,760
Affiliates.................................................. 1,728 6,405
Interest payable............................................... 37,115 37,410
Other current liabilities:
Derivative obligations...................................... 22,898 36,830
Other....................................................... 53,969 54,804
---------- ----------
Total current liabilities................................. 214,109 228,209
---------- ----------
Long-term debt................................................... 1,587,853 1,577,304
Noncurrent derivative obligations................................ 37,337 32,438
Other noncurrent liabilities..................................... 126,507 133,945
Deferred income taxes............................................ 5,633 13,768
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;
107,422,542 and 107,422,467 shares issued as of March 31,
2002 and December 31, 2001, respectively.................... 1,074 1,074
Additional paid-in-capital..................................... 2,462,273 2,462,272
Treasury stock, at cost; 3,074,714 and 3,486,073 shares as
of March 31, 2002 and December 31, 2001, respectively....... (42,338) (48,002)
Accumulated deficit............................................ (1,326,528) (1,323,343)
Accumulated other comprehensive income:
Deferred hedge gains, net................................... 105,122 201,046
Cumulative translation adjustment........................... (7,792) (7,658)
---------- ----------
Total stockholders' equity................................ 1,191,811 1,285,389
Commitments and contingencies
---------- ----------
$ 3,163,250 $ 3,271,053
========== ==========
The financial information included as of March 31, 2002 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
March 31,
----------------------
2002 2001
--------- ---------
Revenues:
Oil and gas....................................... $ 165,539 $ 257,986
Interest and other................................ 1,193 5,167
Gain (loss) on disposition of assets, net......... (74) 7,293
-------- --------
166,658 270,446
-------- --------
Costs and expenses:
Oil and gas production............................ 51,018 55,802
Depletion, depreciation and amortization.......... 50,388 52,161
Exploration and abandonments...................... 21,120 22,883
General and administrative........................ 11,918 10,448
Interest.......................................... 26,317 35,616
Other............................................. 8,266 25,217
-------- --------
169,027 202,127
-------- --------
Income (loss) before income taxes..................... (2,369) 68,319
Income tax (provision) benefit........................ 410 (400)
-------- --------
Net income (loss)..................................... $ (1,959) $ 67,919
======== ========
Net income (loss) per share:
Basic............................................. $ (.02) $ .69
======== ========
Diluted........................................... $ (.02) $ .68
======== ========
Weighted average shares outstanding:
Basic............................................. 104,055 98,379
======== ========
Diluted........................................... 104,055 99,708
======== ========
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 (Loss)
Common ----------------------
Stock Additional Hedge Total
Shares Common Paid-in Treasury Accumulated Gains Translation Stockholders'
Outstanding Stock Capital Stock Deficit (Losses) Adjustment Equity
----------- ------- ---------- -------- ----------- ---------- ----------- -------------
Balance as of January 1, 2002........ 103,936 $ 1,074 $2,462,272 $(48,002) $(1,323,343) $201,046 $(7,658) $1,285,389
Stock options exercised............. 412 - 1 5,664 (1,226) - - 4,439
Net loss............................ - - - - (1,959) - - (1,959)
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses, net of tax. - - - - - (64,082) - (64,082)
Net gains included in net income.. - - - - - (31,842) - (31,842)
Translation adjustment............ - - - - - - (134) (134)
------- ------ --------- ------- ---------- ------- ------ ---------
Balance as of March 31, 2002......... 104,348 $ 1,074 $2,462,273 $(42,338) $(1,326,528) $105,122 $(7,792) $1,191,811
======= ====== ========= ======= ========== ======= ====== =========
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
March 31,
-------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss)............................................... $ (1,959) $ 67,919
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization...................... 50,388 52,161
Exploration expenses, including dry holes..................... 18,666 21,847
Deferred income taxes......................................... (684) (4,800)
(Gain) loss on disposition of assets, net..................... 74 (7,293)
Interest related amortization................................. (992) 2,998
Other noncash items........................................... 12,984 10,559
Changes in operating assets and liabilities:
Accounts receivable........................................... (13,721) 26,449
Inventory..................................................... 2,239 1,124
Other current assets.......................................... (7) (5,954)
Accounts payable.............................................. (14,456) (25,607)
Interest payable.............................................. (295) 720
Other current liabilities..................................... (2,201) (8,389)
------- -------
Net cash provided by operating activities.................. 50,036 131,734
------- -------
Cash flows from investing activities:
Proceeds from disposition of assets............................. 51,644 11,903
Additions to oil and gas properties............................. (88,262) (97,720)
Other property additions, net................................... (2,154) (2,984)
------- -------
Net cash used in investing activities...................... (38,772) (88,801)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt................................. 33,290 60,175
Principal payments on long-term debt............................ (15,290) (99,175)
Payment of noncurrent liabilities............................... (30,504) (6,650)
Exercise of long-term incentive plan stock options.............. 4,439 2,172
Purchase of treasury stock...................................... - (7,070)
------- -------
Net cash used in financing activities...................... (8,065) (50,548)
------- -------
Net increase (decrease) in cash and cash equivalents................ 3,199 (7,615)
Effect of exchange rate changes on cash and cash equivalents........ (776) (239)
Cash and cash equivalents, beginning of period...................... 14,334 26,159
------- -------
Cash and cash equivalents, end of period............................ $ 16,757 $ 18,305
======= =======
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 LOSS
(in thousands)
(Unaudited)
Three months ended
March 31,
---------------------
2002 2001
--------- ---------
Net income (loss)...................................................... $ (1,959) $ 67,919
-------- --------
Other comprehensive income (loss): Deferred hedge gains and losses:
Transition adjustment............................................ - (197,444)
Deferred hedge gains (losses), net of tax........................ (64,082) 53,066
Net (gains) losses included in net income........................ (31,842) 33,871
Unrealized gains (losses) on available for sale securities:
Unrealized holding losses........................................ - (58)
Gains included in net income..................................... - (7,042)
Cumulative translation adjustment.................................. (134) (9,347)
-------- --------
Other comprehensive loss...................................... (96,058) (126,954)
-------- --------
Comprehensive loss..................................................... $ (98,017) $ (59,035)
======== ========
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
March 31, 2002
(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 and Use of Estimates
Basis of presentation. In the opinion of management, the unaudited
consolidated financial statements of the Company as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001 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, 2001.
Use of estimates. As of March 31, 2002, the Company used an exchange rate
of 3.0 pesos to $1 to remeasure the peso-denominated monetary assets and
liabilities of the Company's Argentine subsidiaries.
NOTE C. Derivative Financial Instruments
Hedge Derivatives
Fair value hedges. During the three month periods ended March 31, 2002
and 2001, settlement receipts associated with the Company's interest rate swaps
that are designated as hedges of the fair value of the Company's 8-7/8 percent
senior notes due April 15, 2005, 8-1/4 percent senior notes due August 15, 2007
and 6-1/2 percent senior notes due January 15, 2008 reduced the Company's
reported interest expense by $3.2 million and $258 thousand, respectively.
During those same respective periods, there were no ineffective changes in the
fair value of the Company's interest rate swaps.
During September 2001, the Company terminated interest rate swaps that
were designated as hedges of 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. Associated therewith, the Company recognized deferred hedge gains that
have a remaining unamortized carrying value of $15.5 million as of March 31,
2002. Amortization of these deferred hedge gains reduced the Company's reported
interest expense by $2.9 million during the three months ended March 31, 2002.
Cash flow hedges. The Company, from time to time, uses derivative
instruments as cash flow hedges of its commodity price, interest rate and
currency exchange rate risks.
Oil price hedges. 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 associated weighted average NYMEX prices
for those contracts as of March 31, 2002:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------- ------------ ------------ -------------
Daily oil production:
2002 - Swap Contracts
Volume (Bbl).................. 14,341 21,000 19,000 18,127
Price per Bbl................. $ 25.57 $ 23.88 $ 23.72 $ 24.27
2002 - Collar Contracts
Volume (Bbl).................. 6,000 - - 1,985
Price per Bbl................. $25.00-$28.61 $ - $ - $25.00-$28.61
2003 - Swap Contracts
Volume (Bbl).................. 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 the oil
hedges. The following table sets forth the Company's oil prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of oil price hedges to revenue:
Three months ended
March 31,
------------------
2002 2001
------- -------
Average price reported per Bbl....................... $ 23.17 $ 25.03
Average price realized per Bbl....................... $ 18.54 $ 26.70
Addition (reduction) to revenue (in millions)........ $ 14.4 $ (5.3)
Natural gas liquids prices. During the three month periods ended March
31, 2002 and 2001, the Company did not enter into any NGL hedge contracts.
Gas prices hedges. 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 associated weighted average prices for those contracts as of
March 31, 2002:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- -----------
Daily gas production:
2002 - Swap Contracts
Volume (Mcf)..................... 140,000 190,000 190,000 173,455
Index price per MMBtu............ $ 4.28 $ 4.13 $ 4.14 $ 4.17
2002 - Collar Contracts
Volume (Mcf)..................... 70,000 103,152 120,000 97,818
Index price per MMBtu............ $3.00-$3.91 $2.84-$3.70 $2.79-$3.64 $2.86-$3.73
2003 - Swap Contracts
Volume (Mcf)..................... 40,000 40,000 40,000 40,000 40,000
Index price per MMBtu............ $ 3.55 $ 3.55 $ 3.55 $ 3.55 $ 3.55
2004 - Swap Contracts
Volume (Mcf)..................... 95,000 95,000 95,000 95,000 95,000
Index price per MMBtu............ $ 3.68 $ 3.68 $ 3.68 $ 3.68 $ 3.68
2005 - Swap Contracts
Volume (Mcf)..................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu............ $ 3.73 $ 3.73 $ 3.73 $ 3.73 $ 3.73
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
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 the gas hedges. The following table sets forth the
Company's gas prices, both reported (including hedge results) and realized
(excluding hedge results), and the net effect of settlements of gas price hedges
to revenue:
Three months ended
March 31,
------------------
2002 2001
------- -------
Average price reported per Mcf....................... $ 2.47 $ 4.58
Average price realized per Mcf....................... $ 1.87 $ 5.17
Addition (reduction) to revenue (in millions)........ $ 17.8 $ (17.7)
Interest rates. During the three months ended March 31, 2002, the Company
recognized settlement losses of $290 thousand associated with interest rate swap
agreements that are designated as cash flow hedges. The settlement losses
increased the Company's reported interest expense. The Company recognized no
ineffectiveness associated with these interest rate swaps during the three
months ended March 31, 2002. These interest rate swaps were initiated during the
second quarter of 2001.
Foreign currency rates. During the fourth quarter of 2001, the Company
entered into forward agreements to exchange an aggregate $24.8 million U.S.
dollars during 2002 for Canadian dollars at a weighted average exchange rate of
...6266 U.S. dollars for 1.0 Canadian dollar. These agreements are designated as
hedges of the exchange rate risk associated with forecasted Canadian sales of
gas under U.S. dollar denominated sales agreements. The Company recognized
settlement losses of $38 thousand associated with these forward agreements
during the three months ended March 31, 2002, which decreased the Company's
reported gas sales price. The Company did not recognize any ineffectiveness
associated with changes in the fair values of these derivative instruments
during the three months ended March 31, 2002.
Hedge ineffectiveness and excluded items. During the three month periods
ended March 31, 2002 and 2001, the Company recognized other expense of $78
thousand and $10.9 million, respectively, related to the ineffective portions of
its cash flow commodity price hedges. Additionally, based on Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" interpretive guidance that was in effect prior to April
2001, the Company excluded changes in the time and volatility value components
of collar contracts designated as cash flow hedges from the measurement of hedge
effectiveness. Associated therewith, the Company recorded other expense of $2.4
million during the three months ended March 31, 2001. In April 2001, the Company
discontinued the exclusion of time value and volatility fair value components
from the measurement of hedge effectiveness.
Accumulated other comprehensive income - deferred hedge gains, net. During
the twelve month period ending March 31, 2003, the Company expects to reclassify
$22.7 million of net deferred gains associated with open cash flow hedges and
$15.0 million of net deferred losses on terminated cash flow hedges from
"Accumulated other comprehensive income - deferred hedge gains, net" to oil and
gas revenue.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
The following table sets forth the scheduled reclassifications of deferred
hedge gains and (losses) on terminated cash flow hedges that will be recognized
in the Company's future oil and gas revenues:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- -----------
(in thousands)
2002:
Oil revenue........... $ 1,640 $ - $ - $ 1,640
Gas revenue........... (11,517) (11,643) (11,643) (34,803)
------- ------- ------- -------
$ (9,877) $(11,643) $(11,643) $(33,163)
2003 gas revenue........ $ 18,122 $ 18,167 $ 18,207 $ 18,049 $ 72,545
2004 gas revenue........ $ 10,826 $ 10,776 $ 10,841 $ 10,788 $ 43,231
2005 gas revenue........ $ 301 $ 305 $ 307 $ 307 $ 1,220
Non-hedge Derivatives
Btu swap agreements. The Company is a party to certain Btu swap
agreements that mature at the end of 2004. The Btu swap agreements do not
qualify for hedge accounting treatment. During the second quarter of 2001, the
Company entered into offsetting Btu swap agreements that eliminated the future
market risk associated with the agreements and fixed the Company's remaining
obligations for them. Other expense for the three months ended March 31, 2001
includes a $6.6 million charge associated with the mark-to-market increase to
the liabilities recognized for the Btu swap agreements.
NOTE D. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental to
its business, including, but not limited to, the proceedings 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.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings to add claims regarding
the field compression installed by the Company in the 1990's. The lawsuit now
has two material claims. First, the plaintiffs assert that the expenses related
to the field compression are a "cost of production" for which plaintiffs cannot
be charged their proportionate share under the applicable oil and gas leases.
Second, the plaintiffs claim they are entitled to 100 percent of the value of
the helium extracted at the Company's Satanta gas plant. If the plaintiffs were
to prevail on the above two claims in their entirety, it is possible that the
Company's liability could reach $25 million, plus prejudgment interest. However,
the Company believes it has valid defenses to plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases, and intends to
vigorously defend itself.
The Company believes the cost of the field compression is not a "cost of
production", but is rather an expense of transporting the gas to the Company's
Satanta gas plant for processing, where valuable hydrocarbon liquids and helium
are extracted from the gas. The plaintiffs benefit from such extractions and the
Company believes that charging the plaintiffs with their proportionate share of
such transportation and processing expenses is consistent with Kansas law. The
Company has also vigorously defended against plaintiffs' claims to 100 percent
of the value of the helium extracted, and believes that in accordance with
applicable law, it has properly accounted to the plaintiffs for their fractional
royalty share of the helium under the specified royalty clauses of the
respective oil and gas leases.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to plaintiffs and believes it presented strong
evidence at trial to support its positions. The Company has not yet determined
the amount of damages, if any, that would be payable if the lawsuit was
determined adversely to the Company. However, the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the period in which such liability is recorded, but the Company
does not expect that any such liability will have a material adverse effect on
its consolidated financial position as a whole or on its liquidity, capital
resources or future results of operations.
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 gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, the
Company 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.
Circuit. Various 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 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 refund claims totaling
approximately $30.2 million were made against the Company. Through March 31,
2002, the Company has settled $9.8 million of the original claim amounts. As of
March 31, 2002 and December 31, 2001, the Company had on deposit $24.6 million
and $24.5 million, respectively, including accrued interest, in an escrow
account and had corresponding obligations for the remaining claim recorded in
other current liabilities in the accompanying Consolidated Balance Sheets. The
Company is unable at this time to predict the amount that will ultimately be
refunded, but believes the escrowed amounts, plus accrued interest, will be
sufficient to settle all claims.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE E. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. The computation of diluted net income (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock that are dilutive to net income were exercised or converted into
common stock or resulted in the issuance of common stock.
The following table is a reconciliation of the basic and diluted net
income (loss) per share computations for the three months ended March 31, 2002
and 2001:
Three months ended
March 31,
----------------------
2002 2001
--------- ---------
(in thousands, except
per share amounts)
Basic and diluted net income (loss)................... $ (1,959) $ 67,919
Weighted average common shares outstanding (a):
Basic............................................... 104,055 98,379
Dilutive common stock options (b)................... - 1,329
-------- --------
Diluted............................................. 104,055 99,708
======== ========
Net income (loss) per share:
Basic............................................... $ (.02) $ .69
Diluted............................................. $ (.02) $ .68
<FN>
- ---------------
(a) On April 22, 2002, the Company completed a public offering of 11.5 million
new shares of its common stock. See Note H for additional information
regarding this offering.
(b) Common stock options to purchase 4,998,951 shares and 3,205,578 shares of
common stock were outstanding but not included in the computations of
diluted net income (loss) per share for the three months ended March 31,
2002 and 2001, 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. In-the-money options representing
1,226,746 weighted average equivalent shares of common stock were not
included in the computation of diluted net loss per share for the three
months ended March 31, 2002, since they have a dilutive effect to net loss
per share.
</FN>
NOTE F. 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.
Other foreign is primarily comprised of operations in Gabon, South Africa and
Tunisia.
The following table provides 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
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.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and other Total
-------- --------- -------- ----------- ------------ ------------
(in thousands)
Three months ended March 31, 2002:
Oil and gas revenue............... $131,461 $ 23,259 $ 10,819 $ - $ - $ 165,539
Interest and other................ - - - - 1,193 1,193
Loss on disposition of assets..... - - (11) - (63) (74)
------- ------- ------- ------- ------- --------
131,461 23,259 10,808 - 1,130 166,658
------- ------ ------- ------- ------- --------
Production costs.................. 44,844 3,585 2,589 - - 51,018
Depletion, depreciation and
amortization................... 31,674 10,099 6,464 - 2,151 50,388
Exploration and abandonments...... 13,311 2,140 2,303 3,366 - 21,120
General and administrative........ - - - - 11,918 11,918
Interest.......................... - - - - 26,317 26,317
Other ............................ - - - - 8,266 8,266
------- ------- ------- ------- ------- --------
89,829 15,824 11,356 3,366 48,652 169,027
------- ------- ------- ------- ------- --------
Income (loss) before income taxes. 41,632 7,435 (548) (3,366) (47,522) (2,369)
Income tax benefit (provision).... (14,571) (2,602) 231 1,178 16,174 410
------- ------- ------- ------- ------- --------
Net income (loss)................. $ 27,061 $ 4,833 $ (317) $ (2,188) $(31,348) $ (1,959)
======= ======= ======= ======= ======= ========
United Other Headquarters Consolidated
States Argentina Canada Foreign and other Total
-------- --------- -------- ----------- ------------ ------------
(in thousands)
Three months ended March 31, 2001:
Oil and gas revenue............... $199,421 $ 31,602 $ 26,963 $ - $ - $ 257,986
Interest and other................ - - - - 5,167 5,167
Gain on disposition of assets..... 69 - - - 7,224 7,293
------- ------- ------- ------- ------- --------
199,490 31,602 26,963 - 12,391 270,446
------- ------- ------- ------- ------- --------
Production costs.................. 46,268 6,555 2,979 - - 55,802
Depletion, depreciation and
amortization................... 29,228 12,135 6,682 - 4,116 52,161
Exploration and abandonments...... 5,215 6,610 6,613 4,445 - 22,883
General and administrative........ - - - - 10,448 10,448
Interest.......................... - - - - 35,616 35,616
Other ............................ - - - - 25,217 25,217
------- ------- ------- ------- ------- --------
80,711 25,300 16,274 4,445 75,397 202,127
------- ------- ------- ------- ------- --------
Income (loss) before income taxes. 118,779 6,302 10,689 (4,445) (63,006) 68,319
Income tax benefit (provision).... (41,573) (2,206) (4,769) 1,556 46,592 (400)
------- ------- ------- ------- ------- --------
Net income (loss)................. $ 77,206 $ 4,096 $ 5,920 $ (2,889) $(16,414) $ 67,919
======= ======= ======= ======= ======= ========
NOTE G. 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 Condensed Financial Statements in
order to quantify the assets and results of operations 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.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of March 31, 2002
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ ----------
Current assets:
Cash and cash equivalents............. $ 60 $ 15,953 $ 744 $ $ 16,757
Other current assets.................. 1,415,680 (1,200,221) (64,975) 150,484
--------- ---------- --------- ----------
Total current assets............. 1,415,740 (1,184,268) (64,231) 167,241
--------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,748,200 1,035,734 3,783,934
Unproved properties................ - 25,485 161,990 187,475
Accumulated depletion, depreciation and
amortization........................ - (845,708) (297,733) (1,143,441)
--------- ---------- --------- -----------
- 1,927,977 899,991 2,827,968
--------- ---------- --------- ----------
Deferred income taxes................... 82,811 - 1,508 84,319
Other property and equipment, net....... - 17,492 3,666 21,158
Other assets, net....................... 15,336 29,158 18,070 62,564
Investment in subsidiaries.............. 1,191,553 83,890 - (1,275,443) -
--------- ---------- --------- ----------
$2,705,440 $ 874,249 $ 859,004 $ 3,163,250
========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 29,459 $ 158,987 $ 25,663 $ $ 214,109
Long-term debt.......................... 1,587,853 - - 1,587,853
Other noncurrent liabilities............ 23,835 119,978 20,031 163,844
Deferred income taxes................... - - 5,633 5,633
Stockholders' equity.................... 1,064,293 595,284 807,677 (1,275,443) 1,191,811
Commitments and contingencies
--------- ---------- --------- ----------
$2,705,440 $ 874,249 $ 859,004 $ 3,163,250
========= ========== ========= ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2001
(in thousands)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ ----------
Current assets:
Cash and cash equivalents............. $ 79 $ 10,900 $ 3,355 $ $ 14,334
Other current assets.................. 1,540,985 (1,125,968) (173,708) 241,309
--------- ---------- --------- ----------
Total current assets............. 1,541,064 (1,115,068) (170,353) 255,643
--------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,688,962 1,002,821 3,691,783
Unproved properties................ - 25,222 162,563 187,785
Accumulated depletion, depreciation and
amortization........................ - (815,323) (279,987) (1,095,310)
--------- --------- --------- -----------
- 1,898,861 885,397 2,784,258
--------- --------- --------- ----------
Deferred income taxes................... 82,811 - 1,508 84,319
Other property and equipment, net....... - 17,881 3,679 21,560
Other assets, net....................... 15,911 81,356 28,006 125,273
Investment in subsidiaries.............. 1,060,457 87,636 - (1,148,093) -
--------- ---------- --------- ----------
$2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,745 $ 176,442 $ 21,022 $ $ 228,209
Long-term debt.......................... 1,577,304 - - 1,577,304
Other noncurrent liabilities............ 19,582 124,552 22,249 166,383
Deferred income taxes................... - - 13,768 13,768
Stockholders' equity.................... 1,072,612 669,672 691,198 (1,148,093) 1,285,389
Commitments and contingencies
--------- ---------- --------- ----------
$2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========= ========== ========= ==========
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- -------- ------------ ------------ ------------ ----------
Revenues:
Oil and gas........................ $ - $ 125,921 $ 39,618 $ - $ $ 165,539
Interest and other................. - 741 452 - 1,193
Loss on disposition of assets, net. - - (74) - (74)
------- -------- ------- ------- ---------
- 126,662 39,996 - 166,658
------- -------- ------- ------- ---------
Costs and expenses:
Oil and gas production............. - 44,541 6,477 - 51,018
Depletion, depreciation and
amortization..................... - 32,266 18,122 - 50,388
Exploration and abandonments....... - 13,950 7,170 - 21,120
General and administrative......... 263 9,501 2,154 - 11,918
Interest........................... 22,301 4,008 8 - 26,317
Equity income from subsidiaries.... (2,822) 2,766 - - 56 -
Other.............................. (17,783) 14,229 11,820 - 8,266
------- -------- ------- ------- ---------
1,959 121,261 45,751 - 169,027
------- -------- ------- ------- ---------
Income (loss) before income taxes..... (1,959) 5,401 (5,755) - (2,369)
Income tax benefit................... - - 410 - 410
------- -------- ------- ------- ---------
Net income (loss)..................... (1,959) 5,401 (5,345) - (1,959)
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses, net
of tax........................ (138) (50,485) (13,459) - (64,082)
Net (gains) losses included in
net income.................... 290 (26,547) (5,585) - (31,842)
Cumulative translation adjustment.. - - (134) - (134)
------- -------- ------- ------- ---------
Comprehensive loss.................... $ (1,807) $ (71,631) $(24,523) $ - $ (98,017)
======= ======== ======= ======= =========
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2001
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- -------- ------------ ------------ ------------ ----------
Revenues:
Oil and gas........................ $ - $ 192,794 $ 65,192 $ - $ $ 257,986
Interest and other................. - 3,022 2,145 - 5,167
Gain on disposition of assets, net. - 7,231 62 - 7,293
------- -------- ------- ------- ---------
- 203,047 67,399 - 270,446
------- -------- ------- ------- ---------
Costs and expenses:
Oil and gas production............. - 45,782 10,020 - 55,802
Depletion, depreciation and
amortization..................... - 31,495 20,666 - 52,161
Exploration and abandonments....... - 5,925 16,958 - 22,883
General and administrative......... 177 7,188 3,083 - 10,448
Interest........................... (10,396) 32,120 13,892 - 35,616
Equity income from subsidiaries.... (57,717) (571) - - 58,288 -
Other.............................. - 7,067 18,150 - 25,217
------- -------- ------- ------- ---------
(67,936) 129,006 82,769 - 202,127
------- -------- ------- ------- ---------
Income (loss) before income taxes..... 67,936 74,041 (15,370) 68,319
Income tax benefit.................... - 17 (400) (17) (400)
------- -------- ------- ------- ---------
Net income (loss)..................... 67,936 74,058 (15,770) (17) 67,919
Other comprehensive income (loss):
Deferred hedge losses:
Transition adjustment............ - (172,007) (25,437) - (197,444)
Deferred hedge gains............. - 49,992 3,074 - 53,066
Net losses included in net
income......................... - 22,455 11,416 - 33,871
Unrealized gains (losses) on
available for sale securities:
Unrealized holding gains
(losses)..................... - (58) - - (58)
Gains included in net income... - (7,042) - - (7,042)
Cumulative translation adjustment.. - - (9,347) - (9,347)
------- -------- ------- ------- ---------
Comprehensive income (loss)........... $ 67,936 $ (32,602) $(36,064) $ (17) $ (59,035)
======= ======== ======= ======= =========
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ----------
Cash flows from operating activities:
Net cash provided by operating activities............... $ (73,878) $ 93,313 $ 30,601 $ 50,036
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets..................... 51,420 162 62 51,644
Additions to oil and gas properties..................... - (57,342) (30,920) (88,262)
Other property (additions) dispositions, net............ - (1,092) (1,062) (2,154)
-------- -------- -------- --------
Net cash provided by (used in) investing activities.. 51,420 (58,272) (31,920) (38,772)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt......................... 33,290 - - 33,290
Principal payments on long-term debt.................... (15,290) - - (15,290)
Payment of noncurrent liabilities....................... - (29,988) (516) (30,504)
Exercise of long-term incentive plan
stock options........................................ 4,439 - - 4,439
-------- -------- -------- --------
Net cash provided by (used in) financing activities.. 22,439 (29,988) (516) (8,065)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................................ (19) 5,053 (1,835) 3,199
Effect of exchange rate changes on
cash and cash equivalents.............................. - - (776) (776)
Cash and cash equivalents,
beginning of period.................................... 79 10,900 3,355 14,334
-------- -------- -------- --------
Cash and cash equivalents, end
of period.............................................. $ 60 $ 15,953 $ 744 $ 16,757
======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2001
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ----------
Cash flows from operating activities:
Net cash provided by operating activities............... $ 43,930 $ 45,680 $ 42,124 $ 131,734
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets..................... - 11,725 178 11,903
Additions to oil and gas properties..................... - (59,445) (38,275) (97,720)
Other property (additions) dispositions, net............ - (1,541) (1,443) (2,984)
-------- -------- -------- --------
Net cash used in investing activities................ - (49,261) (39,540) (88,801)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt......................... 60,175 - - 60,175
Principal payments on long-term debt.................... (99,175) - - (99,175)
Payment of noncurrent liabilities....................... - (6,140) (510) (6,650)
Exercise of long-term incentive plan
stock options........................................ 2,172 - - 2,172
Purchase of treasury stock.............................. (7,070) - - (7,070)
-------- -------- -------- --------
Net cash used in financing activities................ (43,898) (6,140) (510) (50,548)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................................ 32 (9,721) 2,074 (7,615)
Effect of exchange rate changes on
cash and cash equivalents.............................. - - (239) (239)
Cash and cash equivalents,
beginning of period.................................... 15 18,387 7,757 26,159
-------- -------- -------- --------
Cash and cash equivalents, end
of period.............................................. $ 47 $ 8,666 $ 9,592 $ 18,305
======== ======== ======== ========
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE H. Subsequent Events
Acquisitions of assets. On April 9, 2002, the Company announced that it
had purchased through two transactions an additional 30 percent working interest
in the Falcon field development and a 25 percent working interest in associated
acreage in the deepwater Gulf of Mexico for a combined purchase price of $55
million before normal closing adjustments. The acquisition of five percent of
this incremental interest in the Falcon field development was completed during
March 2002. As a result of these transactions, the Company will own a 75 percent
working interest and operate the Falcon field development and related
exploration blocks.
The Company has also signed agreements to purchase the remaining 23
percent of the rights that the Company does not already own in its core area
West Panhandle gas field, 100 percent of the West Panhandle reserves
attributable to field fuel, 100 percent of the related West Panhandle field
gathering system and ten blocks surrounding the Falcon discovery. The total
purchase price for these transactions is $138 million before normal closing
adjustments. These transactions are expected to close in the third quarter of
2002.
Common stock offering. On April 22, 2002, the Company completed a public
offering of 11.5 million shares of its common stock at $21.50 per share.
Associated therewith, the Company received $236.1 million of net proceeds after
the payment of issuance costs. The Company used the net proceeds from the public
offering to fund the acquisition of Falcon assets and associated acreage in the
deepwater Gulf of Mexico and to reduce outstanding borrowings under its $575
million corporate credit facility pending the closing of the West Panhandle
transactions.
Senior notes offering. On April 29, 2002, the Company sold $150 million
of 7.5 percent senior notes that will mature on April 15, 2012. The 7.5 percent
senior notes were sold at a price equal to 100 percent of their principal amount
and resulted in net proceeds to the Company, after payment of issuance costs, of
$146.6 million. The net proceeds from this offering will be used to reduce
outstanding borrowings under the Company's corporate credit facility. Interest
is payable to holders of the 7.5 percent senior notes on April 15 and October 15
of each year. The first interest payment will be made on October 15, 2002 and
will consist of interest from the closing date of this offering through October
15, 2002.
19
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information included in Item 2 and Item 3 of 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
("Pioneer" or the "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, international operations and associated international
political and economic instability, 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 2001
Annual Report on Form 10-K that is available from the United States Securities
and Exchange Commission.
Financial and Operating Performance
During the three months ended March 31, 2002, as compared to the same
period in 2001, commodity price declines and continued weakening of the
Argentine peso negatively impacted the Company's financial and operating
results. The Company reported a net loss of $2.0 million ($.02 per share) for
the three months ended March 31, 2002, as compared to net income of $67.9
million ($.68 per diluted share) for the same period in 2001. During the three
months ended March 31, 2002, the Company recorded a $5.4 million ($.05 per
share) noncash charge for the remeasurement of Argentine peso-denominated net
monetary assets. The Company's results for the three months ended March 31, 2001
were impacted by favorable commodity prices, a $7.3 million gain on the
disposition of assets and $8.8 million of derivative mark-to-market charges to
other expenses.
The Company's net cash provided by operating activities was $50.0 million
during the three months ended March 31, 2002, representing a decrease of 62
percent, as compared to net cash provided by operating activities of $131.7
million for the same period in 2001. The decrease in net cash provided by
operating activities was primarily a result of lower commodity prices. During
the three months ended March 31, 2002, the Company used its net cash provided by
operating activities, together with proceeds from the disposition of assets, to
fund additions to oil and gas properties 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 March 31, 2002
was $2.8 billion, consisting of total debt of $1.6 billion and stockholders'
equity of $1.2 billion. Debt as a percentage of total book capitalization was 57
percent at March 31, 2002, as compared to 55 percent at December 31, 2001. The
increase in the ratio of the Company's debt to total book capitalization during
the three months ended March 31, 2002 is primarily due to a $95.9 million
reduction in the fair value of the Company's cash flow hedge derivatives which
are recorded in the "Accumulated other comprehensive income - deferred hedge
gains, net" component of stockholders' equity.
Recent Activities
During April 2002, the Company announced the following transactions:
o the purchase through two transactions of an additional 30 percent
working interest in the Falcon field development and a 25 percent
working interest in associated acreage in the deepwater Gulf of
Mexico for a combined purchase price of $55 million before normal
closing adjustments. As a result of these transactions, the Company
will own a 75 percent working interest in, and operate, the Falcon
field development and related exploration blocks.
o agreements to purchase the remaining 23 percent of the rights that
the Company does not already own in its core area West Panhandle
gas field, 100 percent of the West Panhandle reserves attributable
to field fuel, 100 percent of the related West Panhandle field
gathering system and ten blocks surrounding the Falcon discovery.
20
PIONEER NATURAL RESOURCES COMPANY
The total purchase price for these transactions is $138 million
before normal closing adjustments. These transactions are expected
to close in the third quarter of 2002;
o the completion, on April 22, 2002, of a public offering of 11.5
million new shares of the Company's common stock at $21.50 per
share, which resulted in net proceeds to the Company of $236.1
million (the "Stock Offering"); and,
o the completion, on April 29, 2002, of a public offering of $150
million of 7.5 percent senior notes that will mature on April 15,
2012 (the "Debt Offering"). The Company realized net proceeds,
after payment of issuance costs, of $146.6 million from the Debt
Offering.
Through these transactions, the Company has increased its ownership in
and control over certain of its core assets and significantly improved its
financial flexibility and ratio of debt to total book capitalization.
Drilling Highlights
During the first three months of 2002, the Company continued progress on
its development projects at Canyon Express, Devils Tower and Falcon in the
deepwater Gulf of Mexico and Sable in South Africa and successfully extended the
oil accumulation previously established by the Olowi Marin-1 discovery well in
the shallow water offshore Gabon. In total, the Company spent $88.3 million on
capital expenditures during the first quarter of 2002 including $56.1 million
for development activities, $24.2 million for exploration activities and $8.0
million on acquisitions. The majority of the Company's capital expenditures was
spent on drilling wells and fabricating infrastructure for the Company's
significant development projects. The following tables summarize the Company's
development drilling and exploration and extension drilling activities for the
three months ended March 31, 2002:
Development Drilling
--------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------------ ----------- ------------ ------------
Gulf of Mexico/Gulf Coast..... 3 2 5 - -
Permian Basin................. 17 17 32 1 1
Mid-Continent................. 1 3 4 - -
------ ------ ------ ------ ------
Total Domestic......... 21 22 41 1 1
------ ------ ------ ------ ------
Argentina..................... 1 - - - 1
South Africa.................. - 1 1 - -
Canada........................ 5 12 13 3 1
------ ------ ------ ------ ------
Total Worldwide........ 27 35 55 4 3
====== ====== ====== ====== ======
Exploration/Extension Drilling
--------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------------ ----------- ------------ ------------
Gulf of Mexico/Gulf Coast.... 3 - 2 - 1
------ ------ ------ ------ ------
Total Domestic.......... 3 - 2 - 1
------ ------ ------ ------ ------
Argentina.................... 3 - - - 3
Canada....................... 1 12 8 3 2
Gabon........................ - 1 1 - -
------ ------ ------ ------ ------
Total Worldwide......... 7 13 11 3 6
====== ====== ====== ====== ======
21
PIONEER NATURAL RESOURCES COMPANY
Domestic. The Company spent $56.8 million during the first three months
of 2002 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 $50.6 million of acquisition, drilling and seismic capital
primarily in the deepwater Gulf of Mexico, the Gulf of Mexico shelf, the Pawnee
field in South Texas and in an exploration play in North Louisiana.
In the deepwater Gulf of Mexico, the Company has three major development
projects that remain in progress as of March 31, 2002:
o Canyon Express - 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. The Company s pent $8.4 million during the first quarter
2002 on facilities construction, well completions and gathering
system installation. The TotalFinaElf-operated Canyon Express
subsea gathering system is scheduled to begin flowing gas during
the third quarter of 2002. Once completed, production is expected
to be approximately 110 MMcf of gas per day and 180 Bbls of
condensate per day net to the Company's 37.5 percent working
interest in Aconcagua and 33 percent working interest in Camden
Hills.
o Devils Tower - At the Dominion-operated Devils Tower development
project in Mississippi Canyon, the Company spent $3.9 million
during the first quarter to finish drilling three wells that were
in progress at year end and to drill one additional development
well. The Company has drilled seven wells to date and an eighth
well was spud subsequent to quarter end which will fill all eight
slots on the spar. Construction of the spar is underway with plans
to commence production during the second quarter of 2003. The
Company plans to bring on wells sequentially with peak production
expected to exceed 15,000 BOEs per day net to the Company's 25
percent working interest by the end of 2003. The Company also plans
to drill its Triton prospect during the second quarter of 2002,
which is on a block adjacent to Devils Tower. If successful, this
prospect could be brought on production via a subsea tieback to
Devils Tower. In addition, Dominion and the Company were the high
bidder on another adjacent Mississippi Canyon block at the most
recent lease sale where the Company has identified its Goldfinger
prospect that, if successful, could also be brought on production
via a subsea tieback to Devils Tower.
o Falcon - As previously discussed, the Company now has a 75 percent
working interest in the Falcon project and surrounding exploration
blocks and became the operator of these projects in April 2002. The
Company spent $10.2 million, in addition to the acquisition costs
discussed above, on the Falcon project during the first quarter.
Two development wells are planned for Falcon during 2002. The wells
will be subsea tiebacks flowing to a production platform owned and
operated by El Paso Energy Partners, L.P. 10 miles away on the
shelf. The flowlines and umbilicals are being fabricated as well
as the production platform and related facilities. All work is on
schedule with initial production anticipated for March 2003 at
expected rates of 130 MMcf of gas per day and 350 Bbls of
condensate per day net to the Company's 75 percent working
interest.
In addition to the development projects described above in the deepwater
Gulf of Mexico, the Company spud an appraisal well on the Marathon-operated
Ozona Deep discovery subsequent to quarter end. Depending on the results of this
well, a second appraisal well could be drilled this year. In the deepwater Gulf
of Mexico, the Company also has plans to drill two to three prospects near its
Falcon project during the remainder of 2002.
On the Gulf of Mexico shelf, the Company is a participant in three
significant development projects:
o Stirrup - The Spinnaker-operated Stirrup project in Mustang Island
began production in early April 2002 at initial rates of 2.3 MMcf
of gas and 12 Bbls of condensate per day net to the Company's 25
percent working interest. Three wells have been drilled with one
being completed and put on production. Production on the initial
well is curtailed at this time until certain additional facilities
can be installed at the onshore delivery point. Once the additional
facilities are installed, the initial well can be allowed to flow
22
PIONEER NATURAL RESOURCES COMPANY
at capacity and the Stirrup #2 well can be completed and connected.
The Stirrup #3 well is currently being tested. The Company has a 25
percent working interest in this project.
o Oneida - The Aviara-operated Oneida project in East Cameron has an
estimated initial production date of August 2002 and will be
developed with a tripod platform. Initial production rates from
this prospect are anticipated to be 1.1 MMcf of gas and 10 Bbls of
condensate per day net to the Company's 13.7 percent working
interest. Once production begins, well performance will be
evaluated and the Company will determine if a second well will be
drilled in 2003.
o Cyrus - The ChevronTexaco-operated Cyrus project in High Island,
where the platform is currently being installed, is on schedule to
begin production during the third quarter of 2002. The Company
anticipates initial production from this project to approximate 2.3
MMcf of gas and 340 Bbls of condensate per day, net to the
Company's 5.7 percent working interest.
Other activities on the Gulf of Mexico shelf during 2002 will be
concentrated on evaluating the developed properties in the Company's inventory
to determine if there are any untapped zones in existing wellbores. In addition,
the Company plans to drill one to three prospects during 2002, one of which is
Gallop, a look-alike prospect to the Stirrup discovery.
In the onshore Gulf Coast region of the United States, the Company has
concentrated its drilling efforts in the Pawnee field in South Texas, where two
wells were successfully drilled during the first quarter of 2002. In addition,
the Company drilled its first exploration well in its recently acquired acreage
in North Louisiana. Post-drilling evaluations are underway with results expected
during the second quarter of 2002.
Permian Basin area. In the Permian Basin area, the Company spent $4.1
million during the first three months of 2002 primarily on development drilling
in the Spraberry oil trend. The Company is evaluating its West Texas drilling
program for the remainder of 2002. If drilling costs continue to decline and
align more favorably with commodity prices, the Company may drill as many as 80
to 100 wells during the remainder of 2002.
Mid-Continent area. In the Mid-Continent area, the Company spent $1.5
million during the first three months of 2002 primarily on completing the wells
that were either in progress at year end or spud shortly thereafter. Shortly
after year end, the Company shut down its drilling in the West Panhandle field
with the downturn in gas prices. As previously discussed, the Company recently
announced that it had entered into agreements to purchase the remaining West
Panhandle assets that it does not already own. The acquisition, once completed,
will greatly enhance the economics of future drilling, offer the Company greater
flexibility and provide operational efficiencies in the field. The acquisition,
along with the recent increase in gas prices and the favorable long-term outlook
for gas prices in the United States has caused the Company to reevaluate its
drilling plans and the Company may drill as many as 25 to 30 West Panhandle
wells this year.
Argentina. In Argentina, the Company spent $5.4 million of acquisition,
drilling and seismic capital during the first three months of 2002. The majority
of costs was spent on the construction of the Company's Loma Negra gas plant and
on seismic activities that were in progress at December 31, 2001. Other
significant capital projects during the first quarter of 2002 were suspended due
to the economic instability in Argentina. However, the Company may resume oil
drilling activities in Argentina during the third quarter of 2002 as a result of
improved oil prices, reductions in drilling costs and lease operating expenses
and the improving economic stability within the oil industry (see "Argentina
Update", below).
Canada. In Canada, the Company spent $16.6 million of acquisition,
drilling and seismic capital during the first three months of 2002, primarily in
the Chinchaga, North Chinchaga and Martin Creek areas that are only accessible
for drilling during the winter months. The Company completed 21 wells in Canada
during the 2002 winter drilling season. Daily production from the new wells is
anticipated to be 12 MMcf per day. Capital dollars for the remainder of the year
will be primarily be in preparation for next winter's drilling campaign.
23
PIONEER NATURAL RESOURCES COMPANY
Africa. In Africa, the Company spent $8.7 million of acquisition,
drilling and seismic capital during the first three months of 2002 in South
Africa, Gabon and Tunisia.
South Africa. In South Africa, the Company spent $4.8 million of capital
on the development of its Sable field that is expected to begin production
during December 2002 or January 2003. Development drilling is continuing,
floating production facility upgrades are in progress and subsea trees are being
manufactured. Production for the first year is expected to average approximately
11,600 Bbls of oil per day net to the Company's 40 percent working interest. The
Company is also evaluating its recently acquired seismic data and anticipates
drilling two exploration wells during the second half of 2002.
Gabon. In Gabon, the Company spent $2.2 million drilling its second
exploratory well, the Awena Marin-1, that successfully extended the oil
accumulation previously established by the Olowi Marin-1 discovery to a total
depth of approximately 3,600 feet and found nine feet of net oil pay in its
primary target, the Lower Gamba sand, and 41 feet of higher quality reservoir
sand in the Upper Gamba. As expected, the reservoir thickness and quality of the
Lower Gamba sands were less than in the previous discovery, and, while the
gravity was similar to the Olowi Marin-1 (34 degree API), the well flowed oil at
non-commercial rates from this zone. However, in the Upper Gamba, the quality of
the reservoir sand significantly improved, but the sands were penetrated in the
gas cap of the field, producing approximately 12 MMcf of gas per day during a
two hour test. Most significantly, the Lower Gamba oil rim was found at the same
depth as the discovery well 13 kilometers away as predicted by the Company's
seismic model and could be an indicator that the oil rim is in communication
between the two discoveries. The Company plans to use the well data to further
refine its seismic model to target the location of the oil column within the
Upper Gamba sand and is also evaluating the potential to commercialize the
significant gas reservoir.
The Awena Marin-1 well was the first of at least three wells the Company
plans to drill during 2002 to evaluate the size of the oil and gas field on its
Olowi block offshore Gabon. In May, the Company plans to drill two wells
approximately five kilometers north and south of the first discovery, Olowi
Marin-1, to further appraise the extent of the oil rim in that area.
Tunisia. In Tunisia, the Company spent $1.7 million of capital during the
first three months of 2002 primarily on shooting 3-D seismic data on its blocks
located in Tunisia. Plans for the remainder of 2002 include analyzing the data
acquired and drilling one to two Silurian and TAGI sand prospects in Tunisia
during the last half of the year.
Argentina Update
The Company continues to monitor the political and economic environment
in Argentina. During 2002, the Argentine government has continued to implement
reforms that are intended to stabilize the economy, including the imposition of
a 20 percent tax on oil exports effective March 1, 2002. The Company's oil and
gas revenues will be reduced as a result of the Argentine peso devaluation and
recent export tax; however, the reduction will be mitigated by decreases in the
costs of Argentine operations and administration as a result of the peso
devaluation. The Company is also continuing to monitor the banking industry in
Argentina. The Company currently has $1.5 million in an account at a local
Argentine bank in which the Central Bank of Argentina has suspended banking
activities for 30 days.
The continuing devaluation of the Argentine peso during the first quarter
of 2002 resulted in a noncash charge to other expense of that period of $5.4
million. This charge reflects the remeasurement of the peso-denominated monetary
assets and liabilities of the Company's Argentine subsidiaries, based on an
exchange rate of 3.0 pesos to $1 as of March 31, 2002. Once the exchange rate of
Argentine pesos to U.S. dollars stabilizes, the effect of future remeasurement
assessments should be minimal.
24
PIONEER NATURAL RESOURCES COMPANY
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $165.5
million for the three months ended March 31, 2002, compared to $258.0 million
for the same period in 2001. The decline in revenues is principally attributable
to commodity price decreases.
The following table provides the Company's volumes and average reported
prices, including the results of hedging activities, for the three months ended
March 31, 2002 and 2001:
Three months ended
March 31,
---------------------
2002 2001
-------- --------
Production:
Oil (MBbls)........................... 3,109 3,163
NGLs (MBbls).......................... 1,939 1,838
Gas (MMcf)............................ 29,496 29,942
Total (MBOE).......................... 9,963 9,991
Average daily production:
Oil (Bbls)............................ 34,541 35,140
NGLs (Bbls)........................... 21,539 20,426
Gas (Mcf)............................. 327,736 332,686
Total (BOE)........................... 110,703 111,014
Average reported prices:
Oil (per Bbl):
United States....................... $ 24.27 $ 25.25
Argentina........................... $ 20.61 $ 24.59
Canada.............................. $ 17.55 $ 23.83
Worldwide........................... $ 23.17 $ 25.03
NGLs (per Bbl):
United States....................... $ 10.70 $ 22.51
Argentina........................... $ 8.97 $ 27.04
Canada.............................. $ 12.41 $ 24.33
Worldwide........................... $ 10.73 $ 22.71
Gas (per Mcf):
United States....................... $ 3.05 $ 5.61
Argentina........................... $ .68 $ 1.25
Canada.............................. $ 2.27 $ 5.81
Worldwide........................... $ 2.47 $ 4.58
As discussed above, oil and gas revenues for the quarter ended March 31,
2002 were negatively impacted by commodity price decreases. Comparing the first
quarter of 2002 to the same period in 2001, the Company's average worldwide oil
price decreased seven percent; the Company's average worldwide NGL price
decreased 53 percent; and the Company's average worldwide gas price decreased 46
percent.
On a BOE basis, worldwide average daily production remained relatively
constant during the three months ended March 31, 2002, as compared to the same
period in 2001. Per BOE average daily production, on a first-quarter to first-
quarter comparison, increased by two percent in the United States, while
production in Argentina and Canada decreased by eight percent and three percent,
respectively. Production volumes in Argentina declined primarily due to the
Company's curtailment of drilling activities in 2002 as the Company monitors
developing political and economic reforms.
Second quarter 2002 production volumes are expected to average 110,000 to
115,000 BOE per day. Gas production is expected to rise as a result of first
production from the Stirrup project on the Gulf of Mexico shelf, the successful
winter drilling program in Canada and increased winter demand for gas in
Argentina.
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
25
PIONEER NATURAL RESOURCES 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. During the first quarter of 2002, the Company's
commodity price hedges increased oil and gas revenues by $32.2 million as
compared to $23.0 million of commodity price hedge losses during the same period
in 2001. See Note C of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for specific information regarding the Company's
hedging activities during the three month periods ended March 31, 2002 and 2001.
During the second quarter of 2002, the Company has entered into the
following new oil and gas price hedges: (i) 12,000 Bbls per day of 2003 oil
price swap contracts with average per Bbl fixed prices of $24.11; (ii) 12,000
Bbls per day of 2004 oil price swap contracts with average per Bbl fixed prices
of $22.97; (iii) 170,000 MMBtu per day of 2003 gas price swap contracts with
average per MMBtu fixed prices of $3.86; (iv) 75,000 MMBtu per day of 2004 gas
price swap contracts with average per MMBtu fixed prices of $3.93; and, (v)
20,000 MMBtu per day of 2005, 2006 and 2007 gas price swap contracts with
average per MMBtu fixed prices of $3.75.
Gain (loss) on disposition of assets. During the three months ended March
31, 2002, the Company recorded $.1 million of net losses on the disposition of
assets, as compared to $7.3 million of gains on the disposition of assets during
the same period in 2001. The gain recognized during the first quarter of 2001 is
primarily comprised of a $7.0 million gain from the sale of 532,500 shares of a
non-affiliated entity's common stock.
Production costs. During the three month period ended March 31, 2002,
total production costs per BOE averaged $5.12, representing a decrease of $.47
per BOE (eight percent), as compared to production costs per BOE of $5.59 during
the same period in 2001. Lease operating expenses and workover expenses
represent the components of production costs for which the Company has
management control, while production and ad valorem taxes and field fuel
expenses are directly related to commodity price changes. The decrease in
production costs per BOE during the first quarter of 2002, as compared to the
first quarter of 2001, is primarily due to decreases in production taxes and
field fuel expenses as a result of lower gas prices, offset by declines in third
party gas processing and treating income which is a component of lease operating
expenses.
Three months ended
March 31,
-------------------
2002 2001
------- -------
(per BOE)
Lease operating expense.................. $ 3.29 $ 2.36
Taxes:
Production............................ .50 1.08
Ad valorem............................ .54 .40
Field fuel expenses...................... .49 1.54
Workover costs........................... .30 .21
------ ------
Total production costs................ $ 5.12 $ 5.59
====== ======
Based on market-quoted commodity prices in mid-April 2002, the Company
expects second quarter 2002 production costs to average $5.15 to $5.30 per BOE.
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $5.06 and $5.22 for
the three month periods ended March 31, 2002 and 2001, respectively. Depletion
expense per BOE, the largest component of depletion, depreciation and
amortization, remained relatively constant at $4.84 per BOE during the three
months ended March 31, 2002, as compared to $4.81 per BOE during the same period
in 2001.
The Company expects second quarter 2002 depletion, depreciation and
amortization expense to average $5.00 to $5.20 per BOE.
Exploration and abandonments/geological and geophysical costs.
Exploration and abandonments/geological and geophysical costs were $21.1 million
during the three months ended March 31, 2002, as compared to $22.9 million
26
PIONEER NATURAL RESOURCES COMPANY
during the same period in 2001. During the three months ended March 31, 2002,
the Company's exploratory dry holes in the United States are primarily comprised
of the Turnberry exploratory well that was drilled during 2001 in the Gulf of
Mexico and has now been determined to be noncommercial.
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 month periods ended March 31, 2002 and 2001:
United Other
States Argentina Canada Foreign Total
------- --------- -------- -------- --------
(in thousands)
Three months ended March 31, 2002:
Geological and geophysical costs...... $ 4,300 $ 1,570 $ 1,003 $ 3,332 $ 10,205
Exploratory dry holes................. 7,840 399 1,159 26 9,424
Leasehold abandonments and other...... 1,171 171 141 8 1,491
------ ------ ------- ------ -------
$13,311 $ 2,140 $ 2,303 $ 3,366 $ 21,120
====== ====== ======= ====== =======
Three months ended March 31, 2001:
Geological and geophysical costs...... $ 4,024 $ 653 $ 226 $ 3,616 $ 8,519
Exploratory dry holes................. 159 582 4,955 821 6,517
Leasehold abandonments and other...... 1,032 5,375 1,432 8 7,847
------ ------ ------- ------ -------
$ 5,215 $ 6,610 $ 6,613 $ 4,445 $ 22,883
====== ====== ======= ====== =======
The Company expects second quarter 2002 exploration and abandonment
expense to be $15 million to $30 million, dependent largely on exploratory
drilling results.
Interest expense. Interest expense for the quarter ended March 31, 2002
was $26.3 million as compared to $35.6 million for the same period in 2001. The
$9.3 million (or 26 percent) decrease in interest expense during the first
quarter of 2002, as compared to the first quarter of 2001, is primarily
reflective of a $5.5 million benefit from the Company's interest rate hedging
program, the retirement of the Company's 10-5/8% and 11-5/8% senior notes during
the third quarter of 2001 and an $.9 million increase in interest capitalized
during the first quarter of 2002 as compared to the first quarter of 2001.
The Company expects second quarter 2002 interest expense to be $24
million to $26 million.
Other expenses. Other expenses for the three months ended March 31, 2002
and 2001 were $8.3 million and $25.2 million, respectively. The decrease in
other expense is primarily attributable to a $13.2 million decrease in
recognized hedge ineffectiveness under the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". During the quarter ended March 31, 2001, the Company's
mark-to-market provisions included a $6.6 million increase in the liabilities
associated with the Company's Btu swap agreements (see Note C included in "Item
1. Financial Statements" for information regarding the Company's derivative
instruments). During the second quarter of 2001, the Company entered into
offsetting Btu swap agreements that eliminated the future market risk associated
with the agreements. Partially offsetting the decreases in other expense
referred to above was a $5.4 million charge to other expense during the three
months ended March 31, 2002 for the remeasurement of Argentine peso-denominated
net monetary assets (see "Argentina Update", above).
Income tax provision (benefit). During the three month periods ended
March 31, 2002, the Company recognized an income tax benefit of $.4 million as
compared to an income tax provision of $.4 million during the three months ended
March 31, 2001. Due to uncertainties regarding the Company's utilization of net
operating loss carryforwards and other credit carryforwards, 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 it is more likely than not that
deferred tax assets previously reserved will be used prior to their expiration.
27
PIONEER NATURAL RESOURCES COMPANY
During the second quarter of 2002, the Company estimates that its income
tax provision will be approximately $1 million to $2 million as the Company
benefits from its net operating loss carryforwards in the United States and
Canada.
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 contractual obligations and working capital obligations.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three months ended March 31, 2002 and 2001
totaled $88.3 million and $97.7 million, respectively. The Company's first
quarter 2002 expenditures were internally funded by $50.0 million of net cash
provided by operating activities and a portion of the Company's $51.6 million of
proceeds from disposition of assets. The Company's first quarter 2001 capital
expenditures were internally funded by net cash provided by operating
activities.
The Company strives to maintain its indebtedness at moderate levels in
order to provide sufficient financial flexibility to take advantage of future
opportunities. The Company's 2002 capital expenditures, excluding acquisitions,
are expected to exceed internally generated cash flows by a nominal amount. The
Company will use the $236.1 million of net proceeds from the Stock Offering to
fund the Falcon field and West Panhandle field acquisitions and to reduce
outstanding borrowings under its credit facility.
Contractual obligations. The Company's contractual obligations include
long-term debt, operating leases, Btu swap agreements, terminated commodity
hedges and other contracts. During the three months ended March 31, 2002, the
Company increased its long-term debt by $10.5 million, reduced its obligations
under the Btu swap agreements by $1.5 million and settled terminated commodity
hedge obligations for $22.9 million. Contractual obligations for which the
ultimate settlement amounts are not fixed and determinable include derivative
contracts that are sensitive to future changes in commodity prices, currency
exchange rates and interest rates. See "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for a table of changes in the fair value of the
Company's derivative contract assets and liabilities during the three months
ended March 31, 2002.
Working capital. 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 and the Company's capital expenditure
program may be provided by any combination of internally-generated cash flow,
proceeds from the disposition of non-strategic assets or alternative financing
sources as discussed in "Capital resources" below.
Capital resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of non-strategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments in 2002.
Operating activities. Net cash provided by operating activities during
the three months ended March 31, 2002 and 2001 were $50.0 million and $131.7
million, respectively. The decrease in net cash provided by operating activities
during the three months ended March 31, 2002, as compared to the same period in
2001, is primarily due to lower commodity prices.
Financing activities. During the three months ended March 31, 2002 and
2001, the Company used $8.1 million and $50.5 million, respectively, of net cash
in financing activities. During April 2002, the Company completed the Stock
Offering and Debt Offering for aggregate net proceeds of $382.7 million. The net
proceeds were utilized to fund the acquisition of the Falcon assets and
associated acreage in the deepwater Gulf of Mexico and to reduce outstanding
borrowings under the Company's $575 million corporate credit facility pending
the closing of the West Panhandle transactions.
During April 2002, the Company entered into interest rate swap contracts
to hedge the fair value of its 8-7/8 percent senior notes due in 2005. The terms
of these swap contracts obligate the Company to pay the counterparties a
28
PIONEER NATURAL RESOURCES COMPANY
variable annual rate equal to the six-month London Interbank Offered Rate plus
3.97 percent; obligate the counterparties to pay the Company a fixed rate of
8.875 percent; and, provide for a notional debt amount of $150 million. The
interest rate swap contracts mature on April 15, 2005.
Outstanding borrowings under the credit facility totaled $312 million as
of March 31, 2002. The weighted average interest rate on the Company's
indebtedness for the three months ended March 31, 2002 was 6.11 percent as
compared to 8.41 percent for the three months ended March 31, 2001, taking into
account the effect of lower market interest rates and the Company's interest
rate swaps.
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.
Sales of assets. During the three months ended March 31, 2002 and 2001,
proceeds from the sale of assets totaled $51.6 million and $11.9 million,
respectively. The Company's 2002 asset divestitures were primarily comprised of
hedge derivatives. During the three months ended March 31, 2001, the sale of
532,500 shares of a non-affiliated entity's common stock for $11.0 million was
the primary source of the Company's proceeds from asset dispositions.
Book capitalization and liquidity. Total debt remained constant at $1.6
billion as of March 31, 2002, as compared to total debt of $1.6 billion on
December 31, 2001. The Company's total book capitalization at March 31, 2002 was
$2.8 billion, consisting of total debt of $1.6 billion and stockholders' equity
of $1.2 billion. Consequently, the Company's debt to total capitalization
increased to 57 percent at March 31, 2002 from 55 percent at December 31, 2001.
The Company's ratio of current assets to current liabilities was .78 at March
31, 2002 and 1.12 at December 31, 2001. Including $27.9 million of undrawn and
outstanding letters of credit, the Company has $235.1 million of unused
borrowing capacity available under its credit facility as of March 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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,
2001. 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, 2001.
The following table reconciles the changes that occurred in the fair
values of the Company's open derivative contracts during the first quarter of
2002:
Derivative Contract Assets (Liabilities)
-----------------------------------------------
Foreign
Interest Exchange
Commodity Rate Rate Total
--------- -------- --------- ---------
in thousands)
Fair value of contracts outstanding
as of December 31, 2001............... $ 180,554 $(19,637) $ 61 $ 160,978
Changes in contract fair value........... (66,738) (1,618) (99) (68,455)
Contract realizations:
Maturities........................... (41,304) (2,872) 38 (44,138)
Termination - cash settlements....... (51,420) - - (51,420)
-------- ------- ---- --------
Fair value of contracts outstanding
as of March 31, 2002.................. $ 21,092 $(24,127) $ - $ (3,035)
======== ======= ==== ========
The following disclosures provide specific information about material
changes that have occurred since December 31, 2001 in the Company's portfolio of
financial instruments. The Company may recognize future earnings gains or losses
on these instruments from changes in market commodity prices, interest rates or
foreign exchange rates.
29
PIONEER NATURAL RESOURCES COMPANY
Commodity price sensitivity. During the first quarter of 2002, the
Company entered into certain oil and gas hedge derivatives and terminated other
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 March 31, 2002. The tables segregate hedge derivative contracts
from those that do not qualify as hedges.
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 gas
and oil commodity prices.
Pioneer Natural Resources Company
Oil Price Sensitivity
Derivative Financial Instruments as of March 31, 2002(3)
Asset
(Liability)
2002 2003 Fair Value
-------- -------- -----------
(in thousands, except volumes and prices)
Oil Hedge Derivatives:
Average daily notional Bbl volumes (1):
Swap contracts.............................. 18,127 2,975 $ (7,587)
Weighted average per Bbl fixed
price.................................. $ 24.27 $ 24.02
Collar contracts............................ 1,985 $ 106
Weighted average short call per Bbl
ceiling price.......................... $ 28.61
Weighted average long put per Bbl
floor price............................ $ 25.00
Average forward NYMEX oil
prices (2).................................. $ 25.49 $ 23.83
<FN>
- ---------------
(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 and gas prices are based on May 2, 2002
market quotes.
(3) During the second quarter of 2002, the Company entered into 12,000 Bbls
per day of 2003 swap contracts with average per Bbl fixed prices of $24.11
and 12,000 Bbls per day of 2004 swap contracts with average per Bbl fixed
prices of $22.97. These financial instruments are not included in the
table.
</FN>
30
PIONEER NATURAL RESOURCES COMPANY
Pioneer Natural Resources Company
Gas Price Sensitivity
Derivative Financial Instruments as of March 31, 2002(4)
Asset
(Liability)
2002 2003 2004 2005 Fair Value
-------- -------- -------- -------- -----------
(in thousands, except volumes and prices)
Gas Hedge Derivatives (1):
Average daily notional MMBtu volumes (2):
Swap contracts............................. 173,455 40,000 95,000 70,000 $ 32,930
Weighted average MMBtu fixed
price................................. $ 4.17 $ 3.55 $ 3.68 $ 3.73
Collar contracts........................... 97,818 $ (4,357)
Weighted average short call MMBtu
ceiling price......................... $ 3.73
Weighted average long put MMBtu
contingent floor price............... $ 2.86
Average forward NYMEX gas
prices (3)................................. $ 3.84 $ 3.93 $ 3.85 $ 3.81
<FN>
- ---------------
(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 May 2, 2002
market quotes.
(4) During the second quarter of 2002, the Company entered into 170,000 MMBtu
per day of 2003 swap contracts with average per MMBtu fixed prices of
$3.86, 75,000 MMBtu per day of 2004 swap contracts with average per MMBtu
fixed prices of $3.93 and 20,000 MMBtu per day of 2005, 2006 and 2007 swap
contracts with average per MMBtu fixed prices of $3.75. These financial
instruments are not included in the table.
</FN>
Interest rate sensitivity. As of March 31, 2002, the fair market value of
the Company's interest rate swap agreements was a liability of $24.1 million.
Foreign exchange rate sensitivity. As of March 31, 2002, the fair market
value of the Company's foreign exchange rate forward contracts was nominal.
31
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note D 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. Except for the specific legal actions
described in Note D, the Company believes that the probable damages from such
other legal actions will not be in excess of 10 percent of the Company's current
assets and that these actions are not material.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
10.1 Underwriting Agreement dated April 16, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc. and Credit Suisse
First Boston Corporation (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on April 17, 2002).
10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural Resources
Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston
Corporation, Banc of America Securities LLC, J.P. Morgan Securities Inc.
and Lehman Brothers Inc. as representatives of the underwriters
(incorporated by reference to Exhibit 99.2 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002).
10.3 Underwriting Agreement dated April 25, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse
First Boston Corporation and J.P. Morgan Securities Inc. as the
underwriters, and Raymond James & Associates, Inc. as the qualified
independent underwriter (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on April 29, 2002).
10.4* Third Supplemental Indenture dated as of April 30, 2002, among Pioneer
Natural Resources Company, Pioneer Natural Resources USA, Inc. as the
subsidiary guarantor and The Bank of New York, as Trustee.
10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural Resources Company
(incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002).
10.6* Guarantee dated April 30, 2002 of Pioneer Natural Resources USA, Inc.
- --------------
* filed herewith
Reports on Form 8-K
During the three months ended March 31, 2002, the Company filed with the
SEC current reports on Form 8-K on January 10 and on February 6.
The Company's January 10 Form 8-K provides, as an exhibit thereto, the
Company's news release dated January 9, 2002, which (i) updated the Company's
fourth quarter 2001 outlook, (ii) outlined recent developments in Argentina and
other areas of operation, and (iii) provided information on the status of the
Company's hedging program. The January 10 Form 8-K also included disclosures
pertaining to the Company's commodity hedge positions as of January 9, 2002.
The Company's February 6 Form 8-K provides, as exhibits thereto, two news
releases issued by the Company on February 5, reporting (i) the Company's
financial and operating results for the three and twelve month periods ended
December 31, 2001, (ii) the Company's proved reserves as of December 31, 2001
and related reserve replacement statistics for the one- and three-year periods
ended December 31, 2001 and (iii) the Company's first quarter 2002 outlook.
32
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
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 hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: May 13, 2002 By: /s/ Timothy L. Dove
---------------------------------
Timothy L. Dove
Executive Vice President and Chief
Financial Officer
Date: May 13, 2002 By: /s/ Richard P. Dealy
---------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
33
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
10.1 Underwriting Agreement dated April 16, 2002, among Pioneer
Natural Resources Company, Pioneer Natural Resources USA, Inc.
and Credit Suisse First Boston Corporation (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K, File No. 001-13245, filed with the SEC on April 17,
2002).
10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc., Credit
Suisse First Boston Corporation, Banc of America Securities
LLC, J.P. Morgan Securities Inc. and Lehman Brothers Inc. as
representatives of the underwriters (incorporated by reference
to Exhibit 99.2 to the Company's Current Report on Form 8-K,
File No. 001-13245, filed with the SEC on April 17, 2002).
10.3 Underwriting Agreement dated April 25, 2002, among Pioneer
Natural Resources Company, Pioneer Natural Resources USA,
Inc., Credit Suisse First Boston Corporation and J.P. Morgan
Securities Inc. as the underwriters, and Raymond James &
Associates, Inc. as the qualified independent underwriter
(incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on April 29, 2002).
10.4* Third Supplemental Indenture dated as of April 30, 2002,
among Pioneer Natural Resources Company, Pioneer Natural
Resources USA, Inc. as the subsidiary guarantor and The
Bank of New York, as Trustee.
10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural
Resources Company (incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on April 29, 2002).
10.6* Guarantee dated April 30, 2002 of Pioneer Natural Resources
USA, Inc.
- ---------------
* filed herewith
34