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 June 30, 2005
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 1-13245
PIONEER NATURAL RESOURCES COMPANY
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(972) 444-9001
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / x / No / /
Number of shares of Common Stock outstanding as of August 2, 2005... 141,917,573
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
----
Definitions of Certain Terms and Conventions Used Herein.............. 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004................................... 4
Consolidated Statements of Operations for the three
and six months ended June 30, 2005 and 2004......... 6
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2005.................. 7
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2005 and 2004......... 8
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2005
and 2004............................................ 9
Notes to Consolidated Financial Statements............. 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 42
Item 4. Controls and Procedures................................ 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 45
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds............................................ 45
Item 4. Submission of Matters to a Vote of Security Holders.... 45
Item 6. Exhibits............................................... 46
Signatures ....................................................... 47
Exhibit Index ....................................................... 48
Cautionary Statement Concerning Forward-Looking Statements
The information included in this document includes forward-looking
statements that are made pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements and the
business prospects of Pioneer Natural Resources Company ("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, government regulation or action, international operations and
associated international political and economic instability, litigation, the
costs and results of drilling and operations, availability of drilling
equipment, the Company's ability to replace reserves, implement its business
plans, or complete its development projects as scheduled, access to and cost of
capital, uncertainties about estimates of reserves, quality of technical data,
environmental and weather risks, acts of war or terrorism. These and other risks
are described in the Company's 2004 Annual Report on Form 10-K and other filings
with the SEC.
2
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific
meanings:
o "Bbl" means a standard barrel containing 42 United States gallons.
o "Bcf" means billion cubic feet.
o "BOE" means a barrel of oil equivalent and is a standard convention used to
express oil and gas volumes on a comparable oil equivalent basis. Gas
equivalents are determined under the relative energy content method by
using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or natural gas liquid.
o "BOEPD" means BOE per day.
o "Btu" means British thermal unit, which is a measure of the amount of
energy required to raise the temperature of one pound of water one degree
Fahrenheit.
o "LIBOR" means London Interbank Offered Rate, which is a market rate of
interest.
o "Mcf" means one thousand cubic feet and is a measure of natural gas volume.
o "MMBbl" means one million Bbls.
o "MMBOE" means one million BOEs.
o "MMBtu" means one million Btus.
o "NGL" means natural gas liquid.
o "NYMEX" means the New York Mercantile Exchange.
o "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.
o "SEC" means the United States Securities and Exchange Commission.
o With respect to information on the working interest in wells, drilling
locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by
the Company's working interest in such wells, drilling locations or acres.
Unless otherwise specified, wells, drilling locations and acreage
statistics quoted herein represent gross wells, drilling locations or
acres.
o Unless otherwise indicated, all currency 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)
June 30, December 31,
2005 2004
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 58,451 $ 7,257
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,394 and
$7,348 as of June 30, 2005 and December 31, 2004, respectively... 262,189 207,696
Due from affiliates................................................ 3,002 2,583
Inventories........................................................... 56,282 40,332
Prepaid expenses...................................................... 5,015 10,822
Deferred income taxes................................................. 151,316 115,206
Other current assets:
Derivatives........................................................ 105 209
Other, net of allowance for doubtful accounts of $4,486 as of
June 30, 2005 and December 31, 2004.............................. 8,516 9,320
---------- ----------
Total current assets.......................................... 544,876 393,425
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of
accounting:
Proved properties.................................................. 7,829,121 7,654,181
Unproved properties................................................ 488,059 470,435
Accumulated depletion, depreciation and amortization.................. (2,399,542) (2,243,549)
---------- ----------
Total property, plant and equipment........................... 5,917,638 5,881,067
---------- ----------
Deferred income taxes................................................... - 2,963
Goodwill................................................................ 307,068 315,880
Other property and equipment, net....................................... 85,212 78,696
Other assets:
Derivatives........................................................... 2,032 -
Other, net of allowance for doubtful accounts of $92 as of
June 30, 2005 and December 31, 2004................................ 57,751 56,436
---------- ----------
$ 6,914,577 $ 6,728,467
========== ==========
The financial information included as of June 30, 2005 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 BALANCE SHEETS (Continued)
(in thousands, except share data)
June 30, December 31,
2005 2004
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................... $ 266,877 $ 205,153
Due to affiliates.............................................. 6,607 10,898
Interest payable.................................................. 42,682 45,735
Income taxes payable.............................................. 25,439 13,520
Other current liabilities:
Derivatives.................................................... 345,940 224,612
Deferred revenue............................................... 139,544 -
Other.......................................................... 57,992 44,541
--------- ---------
Total current liabilities................................. 885,081 544,459
--------- ---------
Long-term debt...................................................... 1,394,739 2,385,950
Derivatives......................................................... 412,662 182,803
Deferred income taxes............................................... 653,593 607,415
Deferred revenue.................................................... 759,070 -
Other liabilities and minority interests............................ 163,799 176,060
Stockholders' equity:
Common stock, $.01 par value: 500,000,000 shares authorized;
146,840,189 and 145,644,828 shares issued as of
June 30, 2005 and December 31, 2004, respectively.............. 1,468 1,456
Additional paid-in capital........................................ 3,762,773 3,705,286
Treasury stock, at cost: 4,943,056 and 813,166 shares as of
June 30, 2005 and December 31, 2004, respectively.............. (200,327) (27,793)
Deferred compensation............................................. (56,776) (22,558)
Accumulated deficit............................................... (417,294) (634,146)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax.......................... (490,237) (241,350)
Cumulative translation adjustment.............................. 46,026 50,885
--------- ---------
Total stockholders' equity................................ 2,645,633 2,831,780
Commitments and contingencies
--------- ---------
$6,914,577 $6,728,467
========= =========
The financial information included as of June 30, 2005 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 STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
Revenues and other income:
Oil and gas....................................... $ 544,600 $ 424,757 $1,054,642 $ 850,427
Interest and other................................ 47,896 1,610 76,229 3,345
Gain (loss) on disposition of assets, net......... 148 (232) 2,369 (245)
-------- -------- --------- --------
592,644 426,135 1,133,240 853,527
-------- -------- --------- --------
Costs and expenses:
Oil and gas production............................ 107,996 81,177 219,494 155,878
Depletion, depreciation and amortization.......... 147,161 140,528 300,758 274,717
Impairment of long-lived assets................... 471 - 623 -
Exploration and abandonments...................... 52,384 39,605 119,473 119,351
General and administrative........................ 29,217 17,140 58,802 35,415
Accretion of discount on asset retirement
obligations.................................... 2,102 2,016 4,242 3,982
Interest.......................................... 30,212 21,402 63,463 42,978
Other............................................. 17,582 8,300 29,302 8,496
-------- -------- --------- --------
387,125 310,168 796,157 640,817
-------- -------- --------- --------
Income from continuing operations before
income taxes...................................... 205,519 115,967 337,083 212,710
Income tax provision................................ (101,983) (51,759) (153,846) (91,536)
-------- -------- --------- --------
Income from continuing operations................... 103,536 64,208 183,237 121,174
Income from discontinued operations, net of tax..... 82,023 5,494 86,979 8,716
-------- -------- --------- --------
Net income.......................................... $ 185,559 $ 69,702 $ 270,216 $ 129,890
======== ======== ========= ========
Basic earnings per share:
Income from continuing operations................. $ .74 $ .54 $ 1.29 $ 1.02
Income from discontinued operations, net of tax... .58 .05 .61 .07
-------- -------- --------- --------
Net income........................................ $ 1.32 $ .59 $ 1.90 $ 1.09
======== ======== ========= ========
Diluted earnings per share:
Income from continuing operations................. $ .72 $ .53 $ 1.26 $ 1.01
Income from discontinued operations, net of tax... .56 .05 .60 .07
-------- -------- --------- --------
Net income........................................ $ 1.28 $ .58 $ 1.86 $ 1.08
======== ======== ========= ========
Weighted average shares outstanding:
Basic............................................. 140,812 118,855 141,849 118,787
======== ======== ========= ========
Diluted........................................... 145,246 120,402 146,286 120,333
======== ======== ========= ========
Dividends declared per share........................ $ - $ - $ .10 $ .10
======== ======== ========= ========
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 STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Deferred
Additional Hedge Cumulative Total
Common Paid-in Treasury Deferred Accumulated Losses, Translation Stockholders'
Stock Capital Stock Compensation Deficit Net of Tax Adjustment Equity
------ ---------- -------- ------------ ----------- ----------- ----------- ------------
Balance as of January 1, 2005..... $1,456 $3,705,286 $ (27,793) $(22,558) $ (634,146) $(241,350) $ 50,885 $2,831,780
Dividends declared ($.10 per
common share).................. - - - - (14,332) - - (14,332)
Exercise of long-term incentive
plan stock options............. - - 66,466 - (39,032) - - 27,434
Purchase of treasury stock...... - - (239,000) - - - - (239,000)
Tax benefits related to
stock-based compensation....... - 9,780 - - - - - 9,780
Deferred compensation:
Compensation deferred......... 12 50,389 - (50,401) - - - -
Deferred compensation included
in net income................ - - - 13,170 - - - 13,170
Forfeitures of deferred
compensation................. - (2,682) - 3,013 - - - 331
Net income...................... - - - - 270,216 - - 270,216
Other comprehensive income (loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses... - - - - - (541,285) - (541,285)
Net hedge losses included
in net income.............. - - - - - 131,024 - 131,024
Tax benefits related to
net hedge losses........... - - - - - 161,374 - 161,374
Translation adjustment........ - - - - - - (4,859) (4,859)
----- --------- -------- ------- --------- -------- ------- ---------
Balance as of June 30, 2005....... $1,468 $3,762,773 $(200,327) $(56,776) $ (417,294) $(490,237) $ 46,026 $2,645,633
===== ========= ======== ======= ========= ======== ======= =========
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 CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ----------- -----------
Cash flows from operating activities:
Net income.......................................... $ 185,559 $ 69,702 $ 270,216 $ 129,890
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization.......... 147,161 140,528 300,758 274,717
Impairment of long-lived assets................... 471 - 623 -
Exploration expenses, including dry holes......... 44,007 33,380 102,156 111,440
Deferred income taxes............................. 86,434 47,144 129,406 79,864
Loss (gain) loss on disposition of assets, net.... (148) 232 (2,369) 245
Accretion of discount on asset retirement
obligations..................................... 2,102 2,016 4,242 3,982
Discontinued operations........................... (79,646) 2,300 (76,796) 5,370
Interest expense.................................. 1,676 (4,993) 2,372 (11,363)
Commodity hedge related activity.................. (7,666) (11,242) (10,727) (22,533)
Amortization of stock-based compensation.......... 8,018 2,887 13,170 4,866
Amortization of deferred revenue.................. (20,449) - (32,074) -
Other noncash items............................... 12,086 6,463 16,764 5,704
Changes in operating assets and liabilities,
net of effects from acquisition:
Accounts receivable, net.......................... (42,269) (24,803) (54,302) (58,540)
Inventories....................................... (11,388) (4,161) (12,703) (4,180)
Prepaid expenses.................................. 3,359 3,930 5,808 4,847
Other current assets, net......................... (331) - (529) 757
Accounts payable.................................. (8,029) 1,248 9,564 (4,754)
Interest payable.................................. 11,895 (607) (4,364) 86
Income taxes payable.............................. 9,144 1,397 11,919 4,455
Other current liabilities......................... (9,425) (717) (5,689) (6,519)
--------- --------- ---------- ---------
Net cash provided by operating activities....... 332,561 264,704 667,445 518,334
--------- --------- ---------- ---------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired...... - - (965) -
Proceeds from disposition of assets................. 520,502 255 1,120,598 540
Additions to oil and gas properties................. (268,387) (183,605) (494,557) (350,831)
Other property additions, net....................... (8,660) (8,883) (19,722) (14,243)
--------- --------- ---------- ---------
Net cash provided by (used in) investing
activities.................................... 243,455 (192,233) 605,354 (364,534)
--------- --------- ---------- ---------
Cash flows from financing activities:
Borrowings under long-term debt..................... 220,699 100,394 376,412 156,477
Principal payments on long-term debt................ (664,969) (146,394) (1,373,682) (292,477)
Payment of other liabilities........................ (5,673) (3,764) (13,975) (8,119)
Exercise of long-term incentive plan stock options.. 2,448 5,513 27,434 14,008
Purchase of treasury stock.......................... (74,338) (9,720) (226,224) (15,286)
Payment of financing fees........................... - (132) - (132)
Dividends paid...................................... (14,332) (12,005) (14,332) (12,005)
--------- --------- ---------- ---------
Net cash used in financing activities........... (536,165) (66,108) (1,224,367) (157,534)
--------- --------- ---------- ---------
Net increase (decrease) in cash and cash equivalents.. 39,851 6,363 48,432 (3,734)
Effect of exchange rate changes on cash and
cash equivalents.................................... 2,561 (173) 2,762 (353)
Cash and cash equivalents, beginning of period........ 16,039 9,022 7,257 19,299
--------- --------- ---------- ---------
Cash and cash equivalents, end of period.............. $ 58,451 $ 15,212 $ 58,451 $ 15,212
========= ========= ========== =========
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
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income.......................................... $ 185,559 $ 69,702 $ 270,216 $ 129,890
--------- --------- --------- ---------
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses...................... (16,689) (120,204) (541,285) (237,596)
Net hedge losses included in net income........ 78,702 56,129 131,024 86,885
Tax benefits (provisions) related to net
hedge losses................................. (30,126) 24,692 161,374 56,579
Translation adjustment............................ (3,236) (3,579) (4,859) (5,820)
-------- --------- --------- ---------
Other comprehensive income (loss)............ 28,651 (42,962) (253,746) (99,952)
-------- --------- --------- ---------
Comprehensive income................................ $ 214,210 $ 26,740 $ 16,470 $ 29,938
========= ========= ========= =========
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.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is a large independent oil and gas
exploration and production company with operations in the United States,
Argentina, Canada, Equatorial Guinea, Nigeria, Sao Tome and Principe, South
Africa and Tunisia.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of June 30, 2005 and for the three and
six months ended June 30, 2005 and 2004 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.
On September 28, 2004, the Company completed a merger with Evergreen
Resources, Inc. ("Evergreen") that added to the Company's United States and
Canadian asset base and expanded its portfolio of development and exploration
opportunities in North America. Evergreen's operations were primarily focused on
developing and expanding its coal bed methane production from the Raton Basin in
southern Colorado.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations", the merger has been
accounted for as a purchase of Evergreen by Pioneer. As a result, the historical
financial statements for the Company are those of Pioneer prior to September 28,
2004. The accompanying Consolidated Statements of Operations and Cash Flows for
the three and six months ended June 30, 2005 include the financial results of
the net assets acquired in the Evergreen merger. See Note C for additional
information regarding the Evergreen merger.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the SEC. These consolidated financial statements
should be read in connection with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
Discontinued operations. During May 2005, the Company sold its interest in
the Martin Creek, Conroy Black and Lookout Butte oil and gas properties in
Canada. In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company has reflected the results of
operations of the disposed properties as discontinued operations, rather than as
a component of continuing operations. See Note O for additional information
regarding discontinued operations.
Inventories. Inventories were comprised of $53.7 million and $37.9 million
of materials and supplies and $2.6 million and $2.4 million of commodities as of
June 30, 2005 and December 31, 2004, respectively. The Company's materials and
supplies inventory is primarily comprised of oil and gas drilling or repair
items such as tubing, casing, chemicals, operating supplies and ordinary
maintenance materials and parts. The materials and supplies inventory is
primarily acquired for use in future drilling operations or repair operations
and is carried at the lower of cost or market, on a first-in, first-out basis.
Commodities inventory is carried at the lower of average cost or market, on a
first-in, first- out basis. As of June 30, 2005 and December 31, 2004, the
Company's materials and supplies inventory was net of $.4 million of valuation
reserve allowances.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Goodwill. As is described in Note C, the Company recorded $322.1 million of
goodwill associated with the Evergreen merger. The goodwill was recorded to the
Company's United States reporting unit and is subject to change during the
three-month period ending September 30, 2005 if the settlement values of
monetary assets acquired and liabilities assumed in the merger differ from their
estimated values as of the merger date. In accordance with Emerging Issues Task
Force Abstract Issue No. 00-23, "Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and Financial Accounting Standards Board
("FASB") Interpretation No. 44", the Company has reduced goodwill by $15.0
million since September 28, 2004, including $43 thousand and $6.1 million during
the three and six months ended June 30, 2005, respectively, for tax benefits
associated with the exercise of fully-vested stock options assumed in
conjunction with the Evergreen merger. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill is not amortized to earnings,
but is assessed for impairment whenever events or circumstances indicate that
impairment of the carrying value of goodwill is likely, but no less often than
annually. If the carrying value of goodwill is determined to be impaired, it is
reduced for the impaired value with a corresponding charge to pretax earnings in
the period in which it is determined to be impaired.
Stock-based compensation. The Company has a long-term incentive plan (the
"Long-Term Incentive Plan") under which the Company grants stock-based
compensation. The Company accounts for stock-based compensation granted under
the Long-Term Incentive Plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. The Company did not grant any
stock options under the Long-Term Incentive Plan during the six months ended
June 30, 2005. Stock- based compensation expense associated with option grants
was not recognized in the determination of the Company's net income during the
three and six months ended June 30, 2005 and 2004, as all options granted under
the Long-Term Incentive Plan had exercise prices equal to the market value of
the underlying common stock on the dates of grant. Stock-based compensation
expense associated with restricted stock awards is deferred and amortized to
earnings ratably over the vesting periods of the awards.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The following table illustrates the pro forma effect on net income and net
income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to stock-based compensation during the three and six months ended June 30,
2005 and 2004:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported.......................... $ 185,559 $ 69,702 $ 270,216 $ 129,890
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a)................................. 5,092 1,833 8,363 3,090
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (a)................. (5,841) (3,421) (10,083) (6,536)
-------- -------- -------- --------
Pro forma net income............................. $ 184,810 $ 68,114 $ 268,496 $ 126,444
======== ======== ======== ========
Net income per share:
Basic - as reported............................ $ 1.32 $ .59 $ 1.90 $ 1.09
======== ======== ======== ========
Basic - pro forma.............................. $ 1.31 $ .57 $ 1.89 $ 1.06
======== ======== ======== ========
Diluted - as reported.......................... $ 1.28 $ .58 $ 1.86 $ 1.08
======== ======== ======== ========
Diluted - pro forma............................ $ 1.28 $ .57 $ 1.85 $ 1.05
======== ======== ======== ========
<FN>
- -----------
(a) For the three and six months ended June 30, 2005, stock-based compensation
expense included in net income is net of tax benefits of $2.9 million and
$4.8 million, respectively, as compared to $1.1 million and $1.8 million
for the same respective periods in 2004. Similarly, stock-based
compensation expense determined under the fair value based method for the
three and six months ended June 30, 2005 is net of tax benefits of $3.4
million and $5.8 million, respectively, as compared to $2.0 million and
$3.8 million for the same respective periods in 2004. See Note E for
additional information regarding the Company's income taxes.
</FN>
New accounting pronouncements. The following discussions provide
information about new accounting pronouncements that have been issued by the
FASB:
SFAS 123(R). In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), which is a revision of SFAS 123. SFAS
123(R) also supersedes APB 25 and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) will require all share-based payments to
employees, including grants of employee stock options, to be recognized as
stock-based compensation expense in the Company's Consolidated Statements of
Operations based on their fair values. Pro forma disclosure is no longer an
alternative.
SFAS 123(R) must be adopted no later than January 1, 2006 and permits
public companies to adopt its requirements using one of two methods:
o A "modified prospective" method in which compensation expense is recognized
beginning with the effective date based on the requirements of SFAS 123(R)
for all share-based payments granted after the adoption date and based on
the requirements of SFAS 123 for all awards granted to employees prior to
the effective date of SFAS 123(R) that remain unvested on the adoption
date.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
o A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate either all prior periods presented or prior interim periods of the
year of adoption based on the amounts previously recognized under SFAS 123
for purposes of pro forma disclosures.
The Company has elected to adopt the provisions of SFAS 123(R) on January
1, 2006 using the modified prospective method.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using the intrinsic value method prescribed by APB 25 and
related interpretations. As such, the Company generally does not recognize
compensation expense associated with employee stock option grants. The Company
has not issued stock options to employees since the year ended December 31,
2003. Consequently, the adoption of SFAS 123(R)'s fair value method will not
have a significant impact on the Company's future results of operations or
financial position. Had the Company adopted SFAS 123(R) in prior periods, the
impact would have approximated the impact of SFAS 123 as described in the pro
forma net income and net income per share disclosures above. The adoption of
SFAS 123(R) will have no effect on future results of operations related to the
Company's unvested outstanding restricted stock awards. The Company estimates
that the adoption of SFAS 123(R), based on estimated outstanding unvested stock
options, will result in compensation charges to general and administrative
expenses of approximately $1.1 million during 2006.
The Company has an Employee Stock Purchase Plan (the "ESPP") that allows
eligible employees to annually purchase the Company's common stock at a
discount. The provisions of SFAS 123(R) will cause the ESPP to be a compensatory
plan. However, the change in accounting for the ESPP is not expected to have a
material impact on the Company's financial position, future results of
operations or liquidity. Historically, the ESPP compensatory amounts have been
nominal.
SFAS 123(R) also requires the tax benefits in excess of recognized
compensation expenses to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement may
serve to reduce the Company's future cash flows from operating activities and
increase future cash flows from financing activities, to the extent of
associated tax benefits that may be realized in the future.
FIN 47. In March 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143" ("FIN 47"). FIN 47 clarifies that conditional asset
retirement obligations meet the definition of liabilities and should be
recognized when incurred if their fair values can be reasonably estimated. The
interpretation is effective no later than December 31, 2005. The cumulative
effect of initially applying the interpretation will be recognized as a change
in accounting principle. The Company is in the process of evaluating the
expected effect of FIN 47 on its Consolidated Financial Statements.
FSP FAS 19-1. In April 2005, the FASB issued Staff Position No. FAS 19-1,
"Accounting for Suspended Well Costs ("FSP FAS 19-1"). FSP FAS 19-1 amends SFAS
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies"
("SFAS 19"), to allow continued capitalization of exploratory well costs beyond
one year from the completion of drilling under circumstances where the well has
found a sufficient quantity of reserves to justify its completion as a producing
well and the enterprise is making sufficient progress assessing the reserves and
the economic and operating viability of the project. FSP FAS 19-1 also amends
SFAS 19 to require enhanced disclosures of suspended exploratory well costs in
the notes to the financial statements for annual and interim periods when there
has been a significant change from the previous disclosure. The guidance in FSP
FAS 19-1 is effective for the first reporting period beginning after April 4,
2005. Accordingly, the Company adopted the new requirements on April 1, 2005 and
has included the required disclosures in Note D. The adoption of FSP FAS 19-1
did not impact the Company's consolidated financial position or results of
operations.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE C. Evergreen Merger
On September 28, 2004, Pioneer completed its merger with Evergreen, with
Pioneer being the surviving corporation for accounting purposes. The transaction
was accounted for as a purchase of Evergreen by Pioneer. The merger with
Evergreen was accomplished through the issuance of 25.4 million shares of
Pioneer common stock and $851.1 million of cash paid, net of $12.1 million of
acquired cash, to the Evergreen shareholders at closing. The cash consideration
paid in the merger was financed through borrowings on the Company's $900 million
364-day senior unsecured revolving credit facility (the "364-Day Credit
Agreement"). See Note F for additional information on the 364- Day Credit
Agreement.
Evergreen was a publicly-traded independent oil and gas company primarily
engaged in the production, development, exploration and acquisition of North
American unconventional gas and was one of the leading developers of coal bed
methane reserves in the United States. Evergreen's operations were principally
focused on developing and expanding its coal bed methane field located in the
Raton Basin in southern Colorado. Evergreen also had operations in the Piceance
Basin in western Colorado, the Uinta Basin in eastern Utah and the Western
Canada Sedimentary Basin.
The Company recorded $322.1 million of goodwill associated with the
Evergreen merger, which represents the excess of the purchase consideration over
the net fair value of the identifiable net assets acquired.
The following unaudited pro forma combined condensed financial data for the
three and six months ended June 30, 2004 was derived from the historical
financial statements of Pioneer and Evergreen giving effect to the Evergreen
merger as if it had occurred on January 1, 2004. The unaudited pro forma
combined condensed financial data have been included for comparative purposes
only and are not necessarily indicative of the results that might have occurred
had the merger taken place on January 1, 2004 and are not intended to be a
projection of future results.
Three months ended Six months ended
June 30, 2004 June 30, 2004
------------------ ----------------
(in thousands, except per share amounts)
Revenues $ 491,054 $ 980,623
======== ========
Income from continuing operations........................ $ 73,178 $ 136,953
Income from discontinued operations, net of tax......... 5,494 8,716
-------- --------
Net income............................................... $ 78,672 $ 145,669
======== ========
Basic earnings per share:
Income from continuing operations..................... $ .51 $ .95
Income from discontinued operations, net of tax....... .04 .06
-------- --------
Net income............................................ $ .55 $ 1.01
======== ========
Diluted earnings per share:
Income from continuing operations..................... $ .49 $ .92
Income from discontinued operations, net of tax....... .04 .06
-------- --------
Net income............................................ $ .53 $ .98
======== ========
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE D. Exploratory Well Costs
The Company capitalizes exploratory well costs until a determination is
made that the well has either found proved reserves or that it is impaired. If
the exploratory well is determined to be impaired, the well costs are charged to
expense.
The following table reflects the Company's capitalized exploratory well
activity during the three and six months ended June 30, 2005 and the years ended
December 31, 2004 and 2003:
Year ended
Three months Six months December 31,
ended ended ----------------------
June 30, 2005 June 30, 2005 2004 2003
------------- ------------- --------- ---------
(in thousands)
Beginning capitalized exploratory well costs .... $ 136,002 $ 126,472 $ 108,986 $ 71,500
Additions to exploratory well costs pending the
determination of proved reserves............... 33,521 98,023 156,937 216,352
Reclassifications due to determination of
proved reserves................................ (16,753) (44,899) (56,639) (117,966)
Exploratory well costs charged to expense........ (18,183) (45,009) (82,812) (60,900)
-------- -------- -------- --------
Ending capitalized exploratory well costs ....... $ 134,587 $ 134,587 $ 126,472 $ 108,986
======== ======== ======== ========
The following table provides an aging as of June 30, 2005 and December 31,
2004 and 2003 of capitalized exploratory well costs based on the date the
drilling was completed and the number of wells for which exploratory well costs
have been capitalized for a period greater than one year since the date the
drilling was completed:
December 31,
June 30, -----------------------
2005 2004 2003
--------- --------- ---------
(in thousands, except well counts)
Capitalized exploratory well costs that have been
capitalized for a period of one year or less.............. $ 40,879 $ 35,046 $ 75,120
Capitalized exploratory well costs that have been
capitalized for a period greater than one year............ 93,708 91,426 33,866
-------- -------- --------
$ 134,587 $ 126,472 $ 108,986
======== ======== ========
Number of wells with exploratory well costs that
have been capitalized for a period greater than one year.. 8 10 3
======== ======== ========
The following table provides the capitalized exploratory well costs of
significant discrete exploration projects that have been suspended for more than
one year as of June 30, 2005 and December 31, 2004 and 2003:
December 31,
June 30, -----------------------
2005 2004 2003
-------- --------- ---------
(in thousands)
United States:
Ozona Deep................................................. $ 19,422 $ 19,462 $ 19,003
Oooguruk................................................... 49,199 47,083 -
Canada - Other............................................... - 1,214 -
South Africa - Gas Project................................... 15,278 14,895 14,863
Tunisia - Anaguid............................................ 9,809 8,772 -
-------- -------- -------
Total.................................................... $ 93,708 $ 91,426 $ 33,866
======== ======== =======
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The following discussion describes the history and status of each
significant suspended exploratory project:
Ozona Deep. The Company's Ozona Deep exploration well was drilled during
2002 and found quantities of oil believed to be commercial; however, given its
location in the Gulf of Mexico, it is necessary to have a signed production
handling agreement ("PHA") with infrastructure in the area to insure the
economics associated with the discovery prior to doing further appraisal
drilling. Pioneer and the operator of Ozona Deep have been diligently engaging
potential counterparties to enter into a PHA to bring future production from the
discovery to their platform. The Company anticipates entering into a PHA in 2005
and drilling an appraisal well during 2006.
Oooguruk. During 2003, the Company's Alaskan Oooguruk discovery wells found
quantities of oil believed to be commercial. In 2003, the Company began farm-in
discussions with the owner of undeveloped discoveries in adjacent acreage given
its proximity and the potential cost benefits of a larger scale project. The
farm-in was completed during 2004. Along with completing the farm-in agreement,
Pioneer obtained access to exploration well and seismic data to improve the
Company's understanding of the potential of the discoveries without having to
drill additional wells. In late 2004, the Company completed an extensive
technical and economic evaluation of the resource potential within this area and
authorized a front-end engineering design study ("FEED study") for the area
which is expected to be completed by the end of 2005. If the FEED study and
commercial arrangements confirm favorable development economics, the Company
plans to begin development operations during 2006, subject to regulatory
approvals, with first oil sales targeted in 2008. Simultaneously, the Company is
working to secure throughput agreements to process the associated potential oil
production at a nearby facility should the project be sanctioned.
South Africa - Gas Project. During 2001, the Company drilled two South
African discovery wells that found quantities of condensate and gas believed to
be commercial. During 2004, 2003 and 2002, the Company actively reviewed the gas
supply and demand fundamentals in South Africa and had discussions with a
gas-to-liquids plant in the area to purchase the condensate and gas. During
2004, a FEED study was authorized for the gas development and infrastructure
design. The FEED study was completed in early 2005 and based on that study, the
plant operator has initiated purchase orders for long-lead time infrastructure
components. Currently, negotiations are underway to secure a gas sales contract
and related production agreements and it is the Company's expectation that the
project will be sanctioned in 2005.
Tunisia - Anaguid. During 2003, the Company drilled two exploration wells
on its Anaguid Block in Tunisia which found quantities of condensate and gas
believed to be commercial. During 2004, the wells were scheduled and approved
for extended production tests. However, the project operator delayed the
extended production tests due to issues unrelated to the Company or the project.
In 2005, the project operator, along with the Company, has approved an extended
production test of one of the existing wells in 2005 and has commenced drilling
an appraisal well.
NOTE E. Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that
the Company continually assess both positive and negative evidence to determine
whether it is more likely than not that deferred tax assets can be realized
prior to their expiration. Pioneer monitors Company-specific, oil and gas
industry and worldwide economic factors and assesses the likelihood that the
Company's net operating loss carryforwards and other deferred tax attributes in
the United States, state, local and foreign tax jurisdictions will be utilized
prior to their expiration. As of June 30, 2005, the Company's valuation
allowance was $97.7 million and was primarily related to foreign tax
jurisdictions.
In October 2004, the American Jobs Creation Act ("AJCA") was signed into
law. The AJCA includes a dividend deduction of 85 percent of qualified foreign
earnings that are repatriated, as defined in AJCA. During June 2005, the Company
determined that it was advantageous to apply the provisions of the AJCA to
qualified foreign earnings that could be repatriated. The Company formalized a
repatriation plan in June 2005 and repatriated $313 million from Canada, South
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Africa and Tunisia. Based on the current understanding of the provisions of the
AJCA and projections of future foreign earnings, the Company estimates that
approximately $168.8 million of the repatriated funds will qualify for the
dividend exclusion. The Company is obligated by the provisions of the AJCA to
invest the qualified excluded dividends in the United States within a reasonable
period of time. The Company estimated the cash tax liability associated with the
qualifying dividends to be approximately $9.2 million for 2005. During the three
and six months ended June 30, 2005, the Company recognized income tax expense of
$3.2 million related to continuing operations and $2.9 million related to
discontinued operations associated with qualifying dividends. The Company may
repatriate additional earnings during 2005, if available, under the AJCA
depending upon (a) the Company's financial results and activities for the
remainder of 2005 and (b) further clarifications of certain elements of the
AJCA.
The Company's income tax provision attributable to income from continuing
operations consisted of the following for the three and six months ended June
30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Current:
U.S. federal................... $ 4,657 $ 1,500 $ 4,657 $ 2,500
U.S. state and local........... 131 301 131 301
Foreign........................ 10,761 2,814 19,652 8,871
-------- -------- -------- --------
15,549 4,615 24,440 11,672
-------- -------- -------- --------
Deferred:
U.S. federal................... 82,287 45,998 123,819 80,078
U.S. state and local........... 3,548 1,663 4,695 3,092
Foreign........................ 599 (517) 892 (3,306)
-------- -------- -------- --------
86,434 47,144 129,406 79,864
-------- -------- -------- --------
$ 101,983 $ 51,759 $ 153,846 $ 91,536
======== ======== ======== ========
Included in the Company's income tax provision for the three and six months
ended June 30, 2005 is the reversal of a $27.3 million tax benefit recorded
principally in the third quarter of 2004 as a result of the cancellation of the
development of the Olowi block and the Company's decision to exit Gabon.
Reversal of the tax benefit is the result of signing an agreement in June 2005
to sell its shares in the subsidiary that owns the interest in the Olowi block
to an unaffiliated buyer, which makes it more likely than not that the Company
will not realize the originally recorded tax benefit.
NOTE F. Long-term Debt
Lines of credit. During January 2005, the Company entered into a second
amendment (the "Second Amendment") to the Company's $700 million 5-Year
Revolving Credit Agreement (the "Revolving Credit Agreement") and a first
amendment (the "First Amendment") to the 364-Day Credit Agreement. The Second
Amendment and the First Amendment amended certain sections of the Revolving
Credit Agreement and the 364-Day Credit Agreement, respectively, to (i) provide
for the Company's ability to enter into volumetric production payment ("VPP")
agreements and (ii) clarify certain definitional matters. See Note M for
additional discussion regarding the Company's VPP agreements.
During 2005, the Company reduced the loan commitments under the 364-Day
Credit Agreement by $500 million leaving a remaining commitment of $400 million.
As of June 30, 2005, the Company had no outstanding borrowings under its
lines of credit and it was in compliance with all of its debt covenants.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Senior notes. During April 2005, $131.0 million of the Company's 8-7/8%
senior notes due 2005 (the "8-7/8% Notes") matured. The Company utilized unused
borrowing capacity under its 364-Day Credit Agreement to repay the 8-7/8% Notes.
During April 2005, the Company redeemed $32.4 million principal amount of
its outstanding 9-5/8% senior notes due 2010 (the "9-5/8" Notes"). The Company
recognized a pretax loss on the redemption of the 9-5/8% Notes of $7.3 million
which is included in other expense for the three and six month periods ended
June 30, 2005.
NOTE G. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of reducing costs of capital.
During the six months ended June 30, 2004, the Company entered into interest
rate swap contracts to hedge a portion of the fair value of its senior notes.
The terms of the interest rate swap contracts were for notional amounts that
matched the scheduled maturity of the hedged senior notes, required the
counterparties to pay the Company a fixed annual interest rate equal to the
stated bond coupon rates on the notional amounts and required the Company to pay
the counterparties variable annual interest rates on the notional amounts equal
to the periodic LIBOR plus a weighted average annual margin. During the three
and six months ended June 30, 2004, settlements of open fair value hedges
reduced the Company's interest expense by $1.8 million and $2.0 million,
respectively. As of June 30, 2005 and December 31, 2004, the Company was not a
party to any open fair value hedges.
As of June 30, 2005, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included a $5.9 million reduction
in the carrying value attributable to net deferred hedge losses on terminated
fair value hedges that are being amortized as increases or decreases to interest
expense over the original terms of the terminated agreements. The amortization
of deferred hedge gains on terminated interest rate swaps reduced the Company's
reported interest expense by $1.1 million and $3.3 million during the three and
six months ended June 30, 2005, respectively, as compared to $6.1 million and
$13.4 million during the same respective periods in 2004.
The following table sets forth, as of June 30, 2005, the scheduled
amortization of net deferred hedge gains (losses) on terminated interest rate
hedges (including terminated fair value and cash flow hedges) that will be
recognized as increases in the case of losses, and decreases in the case of
gains, to the Company's future interest expense:
Six months
ending Year ending December 31,
December 31, -----------------------------------------
2005 2006 2007 2008 2009 Thereafter
----------- -------- -------- -------- -------- ---------
(in thousands)
Net deferred hedge gains (losses)..... $ 1,006 $ 342 $ (1,962) $ (1,333) $ (1,541) $ (5,700)
======= ======= ======= ======= ======= =======
Cash flow hedges. The Company utilizes commodity swap and collar contracts
to (i) reduce the effect of price volatility on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) reduce commodity price risk associated with certain
capital projects. The Company also, from time to time, utilizes interest rate
contracts to reduce the effect of interest rate volatility on the Company's
indebtedness and forward currency exchange agreements to reduce the effect of
U.S. dollar to Canadian dollar exchange rate volatility.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Oil prices. All material physical sales contracts governing the Company's
United States oil production have been tied directly or indirectly to NYMEX
prices. As of June 30, 2005, all of the Company's commodity hedges are
designated as hedges of United States forecasted sales. The following table sets
forth the volumes hedged in Bbls underlying the Company's outstanding oil hedge
contracts and the weighted average NYMEX prices per Bbl for those contracts as
of June 30, 2005:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- -------------- --------------
Average daily oil production hedged:
2005 - Swap Contracts
Volume (Bbl)........................ 27,000 27,000 27,000
Price per Bbl....................... $ 27.97 $ 27.97 $ 27.97
2006 - Swap Contracts
Volume (Bbl)........................ 10,000 10,000 10,000 10,000 10,000
Price per Bbl....................... $ 31.69 $ 31.69 $ 31.69 $ 31.69 $ 31.69
2006 - Collar Contracts
Volume (Bbl)........................ 3,500 3,500 3,500 3,500 3,500
Price per Bbl....................... $35.00-$41.95 $35.00-$41.95 $35.00-$41.95 $ 35.00-$41.95 $35.00-$41.95
2007 - Swap Contracts
Volume (Bbl)........................ 13,000 13,000 13,000 13,000 13,000
Price per Bbl....................... $ 30.89 $ 30.89 $ 30.89 $ 30.89 $ 30.89
2008 - Swap Contracts
Volume (Bbl)........................ 17,000 17,000 17,000 17,000 17,000
Price per Bbl....................... $ 29.21 $ 29.21 $ 29.21 $ 29.21 $ 29.21
The Company reports average oil prices per Bbl including the effects of
oil quality adjustments and the net effect of 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 on oil revenue for the three and six months ended June 30, 2005 and
2004:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Average price reported per Bbl................. $ 35.52 $ 27.92 $ 34.33 $ 28.12
Average price realized per Bbl................. $ 48.45 $ 33.93 $ 45.76 $ 33.00
Reduction to oil revenue (in millions)......... $ (52.8) $ (24.5) $ (97.1) $ (41.0)
Natural gas liquids prices. During the three and six months ended June 30,
2005 and 2004, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at June 30, 2005.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
price. The following table sets forth the volumes hedged in MMBtus underlying
the Company's outstanding gas hedge contracts and the weighted average index
prices per MMBtu for those contracts as of June 30, 2005:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- ------------
Average daily gas production hedged:
2005 - Swap Contracts
Volume (MMBtu)........................ 283,422 253,535 268,478
Index price per MMBtu................. $ 5.18 $ 5.17 $ 5.17
2006 - Swap Contracts
Volume (MMBtu)........................ 73,710 73,790 73,880 73,984 73,842
Index price per MMBtu................. $ 4.30 $ 4.30 $ 4.31 $ 4.31 $ 4.30
2006 - Collar Contracts
Volume (MMBtu)........................ 55,000 5,000 5,000 5,000 17,329
Index price per MMBtu................. $7.07-$9.70 $5.25-$7.15 $5.25-$7.15 $5.25-$7.15 $6.67-$9.14
2007 - Swap Contracts
Volume (MMBtu)........................ 29,071 29,146 29,231 29,329 29,195
Index price per MMBtu................. $ 4.27 $ 4.28 $ 4.29 $ 4.29 $ 4.28
2008 - Swap Contracts
Volume (MMBtu)........................ 5,000 5,000 5,000 5,000 5,000
Index price per MMBtu................. $ 5.38 $ 5.38 $ 5.38 $ 5.38 $ 5.38
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments and the net effect of 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 on gas revenue for the three and six
months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Average price reported per Mcf.............. $ 5.35 $ 4.28 $ 5.18 $ 4.31
Average price realized per Mcf.............. $ 5.74 $ 4.79 $ 5.44 $ 4.69
Reduction to gas revenue (in millions)...... $ (25.9) $ (31.6) $ (33.9) $ (45.9)
Hedge ineffectiveness. During the three and six months ended June 30, 2005,
the Company recognized hedge ineffectiveness charges to other expense of $4.7
million and $11.5 million, respectively, as compared to $1.8 million and $1.9
million during the same respective periods of 2004.
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of June 30, 2005 and December 31, 2004, AOCI -
Hedging represented net deferred losses of $490.2 million and $241.4 million,
respectively. The AOCI - Hedging balance as of June 30, 2005 was comprised of
$743.7 million of net deferred losses on the effective portions of open cash
flow hedges, $32.6 million of net deferred losses on terminated cash flow hedges
(including $3.3 million of net deferred losses on terminated cash flow interest
rate hedges) and $286.1 million of associated net deferred tax benefits. The
increase in AOCI - Hedging during the six months ended June 30, 2005 was
primarily attributable to increases in future commodity prices relative to the
commodity prices stipulated in the hedge contracts, partially offset by the
reclassification of net deferred hedge losses to net income as derivatives
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
matured by their terms. The net deferred losses associated with open cash flow
hedges remain subject to market price fluctuations until the positions are
either settled under the terms of the hedge contracts or terminated prior to
settlement. The net deferred losses on terminated cash flow hedges are fixed.
During the twelve months ending June 30, 2006, based on current estimates
of future commodity prices, the Company expects to reclassify $342.5 million of
net deferred losses associated with open commodity hedges and $7.9 million of
net deferred losses on terminated commodity hedges from AOCI - Hedging to oil
and gas revenues. The Company also expects to reclassify approximately $128.0
million of net deferred income tax benefits associated with commodity hedges
during the twelve months ending June 30, 2006 from AOCI - Hedging to income tax
benefit.
The following table sets forth, as of June 30, 2005, the scheduled
amortization of net deferred gains (losses) on terminated commodity hedges that
will be recognized as decreases in the case of losses, and increases in the case
of gains, to the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
(in thousands)
2005 net deferred hedge losses.......... $ (610) $ (1,873) $ (2,483)
2006 net deferred hedge losses.......... $ (5,098) $ (302) $ (59) $ (727) (6,186)
2007 net deferred hedge gains (losses).. $ (3,764) $ 148 $ 424 $ (347) (3,539)
2008 net deferred hedge losses.......... $ (2,877) $ (372) $ (284) $ (839) (4,372)
2009 net deferred hedge losses.......... $ (2,330) $ (232) $ (230) $ (822) (3,614)
2010 net deferred hedge losses.......... $ (667) $ (620) $ (578) $ (539) (2,404)
2011 net deferred hedge losses.......... $ (873) $ (889) $ (903) $ (906) (3,571)
2012 net deferred hedge losses.......... $ (810) $ (791) $ (784) $ (772) (3,157)
--------
$ (29,326)
========
NOTE H. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future
plugging and abandonment of proved properties and related facilities. The
Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS No. 143, "Accounting for Asset Retirement Obligations" during the three and
six months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Beginning asset retirement obligations......... $ 121,937 $ 107,034 $ 120,879 $ 105,036
New wells placed on production and
changes in estimates...................... 1,150 336 2,595 3,068
Disposition of wells......................... (5,238) - (5,238) -
Liabilities settled.......................... (1,855) (381) (4,255) (2,978)
Accretion of discount........................ 2,102 2,016 4,242 3,982
Currency translation......................... (343) (185) (470) (288)
-------- -------- -------- --------
Ending asset retirement obligations ........... $ 117,753 $ 108,820 $ 117,753 $ 108,820
======== ======== ======== ========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities and minority
interests, respectively, in the accompanying Consolidated Balance Sheets.
NOTE I. Postretirement Benefit Obligations
As of June 30, 2005 and December 31, 2004, the Company had recorded $15.5
million of unfunded accumulated postretirement benefit obligations, the current
and noncurrent portions of which are included in other current liabilities and
other liabilities and minority interests, respectively, in the accompanying
Consolidated Balance Sheets.
The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three and six months
ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 15,654 $ 15,501 $ 15,534 $ 15,556
Benefit payments............................ (443) (175) (629) (514)
Service costs............................... 81 59 162 117
Accretion of discounts...................... 225 226 450 452
-------- -------- -------- --------
Ending accumulated postretirement benefit
obligations.................................. $ 15,517 $ 15,611 $ 15,517 $ 15,611
======== ======== ======== ========
NOTE J. 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 its assessment of 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 and the case now contains
two material claims. First, the plaintiffs assert that they were improperly
charged expenses (primarily field compression), which plaintiffs allege are a
"cost of production", and for which the plaintiffs claim they, as royalty
owners, are not responsible. 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 (both for periods covered
by the lawsuit and from the last date covered by the lawsuit to the present -
because the deductions continue to be taken and the plaintiffs continue to be
paid for a royalty share of the helium) could reach approximately $33 million
related to the cost of production claim and approximately $41 million related to
the helium claim, plus prejudgment interest. However, the Company believes it
has valid defenses to the plaintiffs' claims and has paid the plaintiffs
properly under their respective oil and gas leases and other agreements, and
intends to vigorously defend itself.
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The Company does not believe the costs it has deducted are a "cost of
production". The costs being deducted are post production costs incurred to
transport the gas to the Company's Satanta gas plant for processing, where the
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 and with the parties'
agreements.
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. The Company has not established a provision
for the helium claim.
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 the plaintiffs and believes it presented strong
evidence at trial to support its positions. However, either through a negotiated
settlement or court ruling, the Company could have to pay some part of the cost
of production claim and, accordingly, the Company has established a partial
reserve for this claim. Although the amount of any resulting liability, to the
extent that it exceeds the Company's provision, could have a material adverse
effect on the Company's results of operations for the quarterly reporting period
in which such liability is recorded, the Company does not expect that any such
additional liability will have a material adverse effect on its consolidated
financial position as a whole or on its liquidity, capital resources or future
annual results of operations.
MOSH Holding. The Company and its principal United States subsidiary,
Pioneer Natural Resources USA, Inc., were named as defendants in MOSH Holding,
L.P. v Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc.;
Woodside Energy (USA) Inc.; and JPMorgan Chase Bank, NA, as Trustee of the Mesa
Offshore Trust, which was filed on April 11, 2005, in the District Court of
Travis County, Texas (250th Judicial District). The plaintiff is a unitholder in
the Mesa Offshore Trust, which was created in 1982 as the sole limited partner
in a partnership that holds an overriding royalty interest in certain oil and
gas leases offshore Louisiana and Texas. The plaintiff alleges that the Company,
together with Woodside Energy (USA) Inc. ("Woodside"), concealed the value of
the royalty interest and worked to terminate the Mesa Offshore Trust prematurely
and to capture for itself and Woodside profits that belong to the Mesa Offshore
Trust. The plaintiff also alleges breaches of fiduciary duty, misapplication of
trust property, common law fraud, gross negligence, and breach of the conveyance
agreement for the overriding royalty interest. The claims appear to relate
principally to farmout arrangements established in 2003 for two offshore
properties, the Brazos Area Block A-7 and Brazos Area Block A-39. The relief
sought by the plaintiff includes monetary and punitive damages and certain
equitable relief, including an accounting of expenses, a setting aside of
certain farmouts, and a temporary and permanent injunction. The Company believes
the claims are without merit and intends to defend the lawsuit vigorously.
Argentine Environmental. The Company's subsidiary in Argentina is involved
in various administrative proceedings with environmental authorities in the
Neuquen Province relating to permits for and discharges from operations in that
province. In general, the Company's subsidiary is cooperating with the
proceedings, although it from time to time challenges whether certain assessed
fines are appropriate. The Company estimates that fines assessed in these
proceedings will be immaterial, but in the aggregate could exceed $100,000. The
Company's subsidiary in Argentina has also been named in a suit against various
oil companies operating in the Neuquen basin entitled Asociacion de
Superficiarios de la Patagonia v. YPF S.A., et. al., originally filed on August
21, 2003, in the Argentine National Supreme Court of Justice. The plaintiffs, a
private group of landowners, have also named the national government and several
provinces as third parties. The lawsuit alleges injury to the environment
generally by the oil and gas industry without specifically alleging how any of
the defendants caused this injury. The plaintiffs principally seek creation of
an insured fund to remediate the environment. The Company's subsidiary intends
to defend itself in the case. Although the suit is at an early procedural stage
and appears to involve novel theories, the Company does not believe that the
lawsuit will have a material adverse effect on its business or financial
condition.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE K. Income Per Share From Continuing Operations
Basic income per share from continuing operations is computed by dividing
income from continuing operations by the weighted average number of common
shares outstanding for the period. The computation of diluted income per share
from continuing operations reflects the potential dilution that could occur if
securities or other contracts to issue common stock that are dilutive to income
from continuing operations were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the Company.
The following table is a reconciliation of basic income from continuing
operations to diluted income from continuing operations for the three and six
months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Basic income from continuing operations............ $ 103,536 $ 64,208 $ 183,237 $ 121,174
Interest expense on convertible notes, net of tax.. 801 - 1,603 -
-------- -------- -------- --------
Diluted income from continuing operations.......... $ 104,337 $ 64,208 $ 184,840 $ 121,174
======== ======== ======== ========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
three and six months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Weighted average common shares outstanding:
Basic....................................... 140,812 118,855 141,849 118,787
Dilutive common stock options (a)........... 1,108 1,080 1,201 1,128
Restricted stock awards..................... 999 467 909 418
Convertible notes dilution (b).............. 2,327 - 2,327 -
-------- -------- -------- -------
Diluted..................................... 145,246 120,402 146,286 120,333
======== ======== ======= =======
<FN>
- ---------------
(a) Common stock options to purchase 2,857 and 30,712 shares of common stock
were outstanding but not included in the computations of diluted income per
share from continuing operations for the three and six months ended June
30, 2005 and 2004, 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.
(b) Associated with the Evergreen merger, the Company assumed convertible notes
eligible for 2.3 million shares of the Company's common stock upon
conversion.
</FN>
NOTE L. 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, Canada and
Africa and Other. Africa and Other is primarily comprised of operations in
Equatorial Guinea, Gabon, Nigeria, Sao Tome and Principe, South Africa and
Tunisia.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The following tables provide the Company's interim geographic operating
segment data for the three and six months ended June 30, 2005 and 2004.
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" table
column includes income and expenses that are not routinely included in the
earnings measures internally reported to management on a geographic operating
segment basis.
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
-------- --------- -------- --------- ------------ ------------
(in thousands)
Three months ended June 30, 2005:
Revenues and other income:
Oil and gas...................... $430,958 $ 40,779 $ 23,561 $ 49,302 $ - $ 544,600
Interest and other............... - - - - 47,896 47,896
Gain on disposition of
assets, net.................... - - - - 148 148
------- ------- ------- ------- ------- --------
430,958 40,779 23,561 49,302 48,044 592,644
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production........... 82,944 8,895 8,524 7,633 - 107,996
Depletion, depreciation and
amortization.................. 107,447 19,886 7,402 7,260 5,166 147,161
Impairment of long-lived assets - - - 471 - 471
Exploration and abandonments..... 32,460 5,850 2,682 11,392 - 52,384
General and administrative....... - - - - 29,217 29,217
Accretion of discount on asset
retirement obligations........ - - - - 2,102 2,102
Interest......................... - - - - 30,212 30,212
Other............................ - - - - 17,582 17,582
------- ------- ------- ------- ------- --------
222,851 34,631 18,608 26,756 84,279 387,125
------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes... 208,107 6,148 4,953 22,546 (36,235) 205,519
Income tax provision................ (75,958) (2,152) (1,808) (8,475) (13,590) (101,983)
------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations....................... $132,149 $ 3,996 $ 3,145 $ 14,071 $(49,825) $ 103,536
======= ======= ======= ======= ======= ========
Three months ended June 30, 2004:
Revenues and other income:
Oil and gas...................... $356,780 $ 26,614 $ 8,706 $ 32,657 $ - $ 424,757
Interest and other............... - - - - 1,610 1,610
Gain (loss) on disposition of
assets, net.................... - - (252) - 20 (232)
------- ------- ------- ------- ------- --------
356,780 26,614 8,454 32,657 1,630 426,135
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production........... 60,185 8,416 4,227 8,349 - 81,177
Depletion, depreciation and
amortization.................. 106,087 14,820 5,170 11,737 2,714 140,528
Exploration and abandonments..... 11,834 7,847 1,176 18,748 - 39,605
General and administrative....... - - - - 17,140 17,140
Accretion of discount on asset
retirement obligations........ - - - - 2,016 2,016
Interest......................... - - - - 21,402 21,402
Other............................ - - - - 8,300 8,300
------- ------- ------- ------- ------- --------
178,106 31,083 10,573 38,834 51,572 310,168
------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes... 178,674 (4,469) (2,119) (6,177) (49,942) 115,967
Income tax benefit (provision)...... (65,216) 1,564 800 1,955 9,138 (51,759)
------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations....................... $113,458 $ (2,905) $ (1,319) $ (4,222) $(40,804) $ 64,208
======= ======= ======= ======= ======= ========
25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
-------- --------- -------- --------- ------------ ------------
(in thousands)
Six months ended June 30, 2005:
Revenues and other income:
Oil and gas...................... $ 834,791 $ 78,809 $ 44,049 $ 96,993 $ - $1,054,642
Interest and other............... - - - - 76,229 76,229
Gain on disposition of
assets, net.................... 2,032 - - - 337 2,369
-------- ------- ------ ------- ------- ---------
836,823 78,809 44,049 96,993 76,566 1,133,240
-------- ------- ------ ------- ------- ---------
Costs and expenses:
Oil and gas production........... 169,088 17,402 17,604 15,400 - 219,494
Depletion, depreciation and
amortization.................. 221,893 37,818 14,441 16,638 9,968 300,758
Impairment of long-lived assets.. - - - 623 - 623
Exploration and abandonments..... 71,939 8,434 6,423 32,677 - 119,473
General and administrative....... - - - - 58,802 58,802
Accretion of discount on asset
retirement obligations........ - - - - 4,242 4,242
Interest......................... - - - - 63,463 63,463
Other............................ - - - - 29,302 29,302
-------- ------- ------ ------- ------- ---------
462,920 63,654 38,468 65,338 165,777 796,157
-------- ------- ------ ------- ------- ---------
Income (loss) from continuing
operations before income taxes... 373,903 15,155 5,581 31,655 (89,211) 337,083
Income tax benefit (provision)...... (136,474) (5,304) (2,037) (10,535) 504 (153,846)
-------- ------- ------ ------- ------- ---------
Income (loss) from continuing
operations....................... $ 237,429 $ 9,851 $ 3,544 $ 21,120 $(88,707) $ 183,237
======== ======= ======= ======= ======= =========
Six months ended June 30, 2004:
Revenues and other income:
Oil and gas...................... $ 703,089 $ 57,497 $ 17,068 $ 72,773 $ - $ 850,427
Interest and other............... - - - - 3,345 3,345
Gain (loss) on disposition of
assets, net.................... 51 - (252) - (44) (245)
-------- ------- ------ ------- ------- ---------
703,140 57,497 16,816 72,773 3,301 853,527
-------- ------- ------ ------- ------- ---------
Costs and expenses:
Oil and gas production........... 115,205 15,175 8,665 16,833 - 155,878
Depletion, depreciation and
amortization.................. 203,458 27,362 10,335 28,133 5,429 274,717
Exploration and abandonments..... 65,390 11,397 13,392 29,172 - 119,351
General and administrative....... - - - - 35,415 35,415
Accretion of discount on asset
retirement obligations........ - - - - 3,982 3,982
Interest......................... - - - - 42,978 42,978
Other............................ - - - - 8,496 8,496
-------- ------- ------ ------- ------- ---------
384,053 53,934 32,392 74,138 96,300 640,817
-------- ------- ------ ------- ------- ---------
Income (loss) from continuing
operations before income taxes... 319,087 3,563 (15,576) (1,365) (92,999) 212,710
Income tax benefit (provision)...... (116,467) (1,247) 5,880 793 19,505 (91,536)
-------- ------- ------ ------- ------- ---------
Income (loss) from continuing
operations....................... $ 202,620 $ 2,316 $ (9,696) $ (572) $(73,494) $ 121,174
======== ======= ======= ======= ======= =========
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE M. Volumetric Production Payments
During January 2005, the Company sold two percent of its total proved
reserves, or 20.5 MMBOE of proved reserves, by means of two VPPs for net
proceeds of $592.3 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the January
VPPs were initially used to reduce outstanding indebtedness. The first January
VPP sold 58 Bcf of Hugoton field gas volumes over an expected five-year term
that began in February 2005 for $275.2 million. The second January VPP sold 10.8
MMBbls of Spraberry field oil volumes over an expected seven-year term beginning
in January 2006 for $317.1 million.
During April 2005, the Company sold less than one percent of its total
proved reserves, or 7.3 MMBOE of proved reserves, by means of a new VPP for net
proceeds of $300.4 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the April
VPP were initially used to reduce outstanding indebtedness. The April VPP sold
6.0 Bcf of Spraberry field gas volumes over an expected 32-month term that began
in May 2005 and 6.2 MMBbls of Spraberry field oil volumes over an expected
five-year term beginning in January 2006.
The Company's VPPs represent limited-term overriding royalty interests in
oil and gas reserves which: (i) entitle the purchaser to receive production
volumes over a period of time from specific lease interests; (ii) are free and
clear of all associated future production costs and capital expenditures; (iii)
are nonrecourse to the Company (i.e., the purchaser's only recourse is to the
assets acquired); (iv) transfer title to the purchaser and (v) allow the Company
to retain the assets after the VPPs volumetric quantities have been delivered.
Under SFAS 19, a VPP is considered a sale of proved reserves and the
related future production of those proved reserves. As a result, the Company (i)
removes the proved reserves associated with the VPPs; (ii) recognizes the VPP
proceeds as deferred revenue which will be amortized on a unit-of-production
basis to future oil and gas revenues over the terms of the VPPs; (iii) retains
responsibility for 100 percent of the production costs and capital costs related
to VPP interests and (iv) no longer recognizes production associated with the
VPP volumes.
The following table represents the breakdown of the components of the
Company's VPPs:
January VPPs April VPP
------------------------- -------------------------
Hugoton Spraberry Spraberry Spraberry
Field (Gas) Field (Oil) Field (Gas) Field (Oil) Total
----------- ----------- ----------- ----------- -----------
(in thousands)
VPP proceeds, net of transaction costs.. $ 275,161 $ 317,120 $ 37,611 $ 262,779 $ 892,671
Fair value of derivatives conveyed (a).. 12,860 36,759 (526) (11,076) 38,017
--------- --------- -------- --------- ----------
Deferred revenue........................ 288,021 353,879 37,085 251,703 930,688
Less 2005 amortization.................. (29,552) - (2,522) - (32,074)
--------- --------- -------- --------- ----------
Deferred revenue at June 30, 2005..... $ 258,469 $ 353,879 $ 34,563 $ 251,703 $ 898,614
========= ========= ======== ========= ==========
<FN>
- -----------
(a) Represents the fair value of the derivative obligations conveyed as part of
the VPP transactions. The fair value was deferred in AOCI-Hedging until the
delivery of the VPP volumes occurs at which time the fair value of the
derivative obligations attributable to the delivered volumes will be
recognized as increases or decreases to oil and gas revenues. See Note G
for additional discussion regarding the Company's hedge positions.
</FN>
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
The above deferred revenue amounts will be recognized in oil and gas
revenues in the Consolidated Statements of Operations as noted below, assuming
the related VPP production volumes are delivered as scheduled (in thousands):
Remaining 2005......................... $ 43,700
2006................................... 190,347
2007................................... 181,250
2008................................... 158,151
2009................................... 147,919
2010................................... 90,227
2011................................... 44,951
2012................................... 42,069
---------
$ 898,614
=========
NOTE N. Business Interruption Insurance Claims
Hurricane Ivan Claim. During September 2004, the Company sustained damages
as a result of Hurricane Ivan at its Devils Tower and Canyon Express platform
facilities in the deepwater Gulf of Mexico. The damages delayed scheduled well
completions and interrupted production during the second half of 2004 and during
the first half of 2005. The Company maintains business interruption insurance
coverage for such circumstances. During 2004 and 2005, the Company filed claims
with its insurance providers for its estimated losses associated with Hurricane
Ivan.
Based on a settlement agreement between the Company and the insurance
providers, the Company's recoverable business interruption loss related to
Hurricane Ivan through June 30, 2005 is $67.0 million. The Company recorded $7.6
million and $59.4 million of the claims in the fourth quarter of 2004 and in the
first half of 2005, respectively, in interest and other income in the Company's
Consolidated Statements of Operations. Through June 30, 2005, the Company had
received $14.7 million of partial payments from its insurance providers related
to its Devils Tower claim. The Company expects to receive the remaining payments
from the insurance providers related to the Hurricane Ivan claims in the third
quarter of 2005.
Fain Plant Claim. During May 2005, the Company sustained damages as a
result of a fire at its Fain gas plant in the West Panhandle field. The damages
interrupted production from mid-May through mid-July of 2005. The Company
maintains business interruption insurance coverage for such circumstances and
has filed claims with its insurance providers. Based on the terms of the
insurance coverage, the Company estimates its recoverable losses since the
occurrence of the fire and through June 30, 2005 to be approximately $9.4
million, which was recorded in interest and other income in the Company's
Consolidated Statements of Operations during the second quarter of 2005.
NOTE O. Discontinued Operations
During May 2005, the Company sold its interests in the Martin Creek, Conroy
Black and Lookout Butte oil and gas properties in Canada for net proceeds of
$197.5 million, resulting in a gain of $138.7 million.
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
During the three and six months ended June 30, 2005, the Company recognized
income from discontinued operations of $82.0 million and $87.0 million,
respectively, as compared to $5.5 million and $8.7 million for the same
respective periods of 2004. The following table represents the components of the
Company's discontinued operations for the three and six months ended June 30,
2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ---------------------
2005 2004 2005 2004
---------- --------- --------- ---------
(in thousands)
Revenues and other income:
Oil and gas.................................. $ 7,608 $ 11,173 $ 17,878 $ 21,030
Gain on disposition of assets (a)............ 138,661 - 138,661 -
-------- -------- -------- --------
146,269 11,173 156,539 21,030
-------- -------- -------- --------
Costs and expenses:
Oil and gas production....................... 2,230 3,325 4,694 6,836
Depletion, depreciation and amortization (a). 1,848 2,222 4,402 4,532
Exploration and abandonments (a)............. 37 78 333 838
General and administrative................... 132 54 132 108
-------- -------- -------- --------
4,247 5,679 9,561 12,314
-------- -------- -------- --------
Income from discontinued operations
before income taxes.......................... 142,022 5,494 146,978 8,716
Income tax provision:
Current...................................... (2,869) - (2,869) -
Deferred (a)................................. (57,130) - (57,130) -
-------- -------- -------- --------
Income from discontinued operations............. $ 82,023 $ 5,494 $ 86,979 $ 8,716
======== ======== ======== ========
<FN>
- -------------
(a) Represents the noncash components of discontinued operations included in
the Company's Consolidated Statements of Cash Flows.
</FN>
NOTE P. Subsequent Events
Gulf of Mexico - Shelf Properties. The Company has entered into agreements
to sell certain properties on the shelf of the Gulf of Mexico for proceeds of
approximately $80 million. The sales are expected to close in the third quarter
of 2005. The Company expects that upon closing of these sales, the results of
operations from these assets will be reflected as discontinued operations in its
future financial statements.
Cosmopolitan Unit. The Company announced that it acquired a 10 percent
working interest in the Cosmopolitan Unit, located in the Cook Inlet of Alaska,
with the option to acquire up to an additional 40 percent working interest and
potentially assume operatorship after new 3-D seismic data has been acquired and
interpreted. The Company's interest is being acquired through its agreement to
pay a disproportionate share of future costs. The Company can elect to acquire
up to an additional 40 percent working interest by paying cash or a
disproportionate share of additional future costs.
29
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the second quarter of
2005 included the following highlights:
o Excluding production from the Company's Canadian Martin Creek,
Conroy Black and Lookout Butte fields, which were sold and are
reflected as discontinued operations, average daily sales volumes
per BOE increased two percent during the second quarter of 2005 as
compared to the second quarter of 2004.
o Oil and gas revenues increased 28 percent during the second quarter
of 2005 as compared to the second quarter of 2004 as a result of the
increased production volumes and increases in worldwide oil and
Argentine and North American gas prices.
o Interest and other income increased by $46.3 million during the
second quarter of 2005 as compared to the second quarter of 2004,
primarily due to business interruption insurance claims related to
Hurricane Ivan and the Fain gas plant fire of $44.1 million.
o Income from continuing operations before income taxes increased by
77 percent to $205.5 million during the second quarter of 2005 from
$116.0 million during the second quarter of 2004.
o Net income increased to $185.6 million ($1.28 per diluted share) for
the second quarter of 2005, as compared to $69.7 million ($.58 per
diluted share) for the second quarter of 2004.
o The Company recognized income from discontinued operations of $82.0
million ($.56 per diluted share) during the second quarter of 2005
as a result of the Canadian disposition.
o Net cash provided by operating activities increased by 26 percent to
$332.6 million during the second quarter of 2005 from $264.7 million
during the second quarter of 2004.
o Outstanding debt decreased by $991.2 million, or 42 percent, as of
June 30, 2005 as compared to debt outstanding as of December 31,
2004.
o The Company sold a volumetric production payment during April 2005
for net proceeds of $300.4 million.
o The Company's board of directors declared a semiannual cash dividend
of $.10 per share to common stockholders of record at the close of
business on March 31, 2005. The dividend was paid on April 15, 2005.
2005 Outlook
Third quarter. Based on current estimates, the Company expects that third
quarter 2005 production will average 160,000 to 175,000 BOEPD. This range is
lower than the second quarter average and reflects the Harrier field having been
fully produced, the resumption of production from the West Panhandle field in
mid-July and the typical variability in the timing of oil cargo shipments in
South Africa, Argentina and Tunisia.
Third quarter production costs (including production and ad valorem taxes)
are expected to average $6.75 to $7.25 per BOE based on current NYMEX strip
prices for oil and gas. The increase over the prior quarter is primarily the
result of lower anticipated third quarter production from lower per unit cost
Gulf of Mexico fields, higher commodity prices, and, to a lesser extent, the
retention of a full quarter of operating costs associated with the third VPP
volumes sold in April. Depreciation, depletion and amortization ("DD&A") expense
is expected to average $8.75 to $9.25 per BOE.
Total exploration and abandonment expense is expected to be $40 million to
$70 million and includes plans to drill two deepwater Gulf of Mexico exploration
wells (Clipper and Paladin) and one well in the Anaguid Block in Tunisia and the
acquisition of additional 3-D seismic data. General and administrative expense
is expected to be $28 million to $30 million. Interest expense is expected to be
$26 million to $29 million, and accretion of discount on asset retirement
obligations is expected to be $2 million to $3 million.
The Company's third quarter effective income tax rate is expected to range
from 36 percent to 39 percent based on current capital spending plans, including
cash income taxes of $10 million to $20 million that are principally related to
Argentine, Canadian and Tunisian income taxes and nominal alternative minimum
tax in the U.S. Other than in Argentina, Canada and Tunisia, the Company
30
PIONEER NATURAL RESOURCES COMPANY
continues to benefit from the carryforward of net operating losses and other
positive tax attributes.
2005 update. Based on current estimates, the Company expects that total
2005 production will be 63 MMBOE to 65 MMBOE, excluding production from
discontinued operations. The new range reflects the production impact of closed
and pending asset sales in Canada, East Texas and the shelf of the Gulf of
Mexico, the Company's third VPP transaction, production lost from the Devils
Tower and West Panhandle fields which were covered by business interruption
insurance, pipeline capacity limitations delaying the ramp up of production from
the Raton Basin and the impact of weather and rig shortages in the deepwater
Gulf of Mexico. The new range also reflects the impact of directives from the
Minerals Management Service which required that uphole recompletions scheduled
for Devils Tower wells be postponed to maximize the recovery of oil and gas from
less prolific deeper zones.
Pioneer has increased its 2005 capital budget for development and
exploratory activities and land additions by approximately $150 million to $1.1
billion. The increase encompasses expenditures related to Pioneer's success in
extending its acreage positions in West Africa, the U.S. onshore Gulf Coast, the
Rocky Mountains, Alaska and Canada, adding a five-well Gulf of Mexico shallow
shelf exploration program and an increase in drilling in the Spraberry field and
the Horseshoe Canyon coal bed methane play in Canada. The increased budget also
reflects the rising costs associated with drilling and completion activities
given higher commodity prices. The increased capital budget excludes costs
associated with recent acquisitions.
Acquisitions, Operations and Drilling Highlights
During the first six months of 2005, the Company incurred $551.6 million in
finding and development costs including $302.0 million for development
activities, $165.3 million for exploration activities and $84.3 million for
acquisitions. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure associated with successful drilling activities. The
following tables summarize the Company's development and exploration/extension
drilling activities for the six months ended June 30, 2005:
Development Drilling
-------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- -------- ---------- ------------ ------------
United States............... 32 240 256 1 15
Argentina................... 6 43 35 1 13
Canada...................... 2 28 26 - 4
------ ------ ------ ------ ------
Total Worldwide....... 40 311 317 2 32
====== ====== ====== ====== ======
Exploration/Extension Drilling
-------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- -------- ---------- ------------ ------------
United States............... 9 10 8 3 8
Argentina................... 8 6 10 2 2
Canada...................... 21 27 25 7 16
Africa...................... 4 3 1 2 4
------ ------ ------ ------ ------
Total Worldwide........ 42 46 44 14 30
====== ====== ====== ====== ======
31
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes by geographic area the Company's finding and
development costs incurred, excluding asset retirement obligations, during the
first six months of 2005 and the total wells planned to be drilled during the
year ending December 31, 2005:
Property
Acquisition Costs
----------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
---------- ---------- ----------- ----------- ---------- -------
(in thousands)
United States:
Gulf of Mexico........... $ - $ 9,789 $ 68,043 $ 51,143 $ 128,975 8
Onshore Gulf Coast....... 3,293 7,042 6,706 23,923 40,964 16
Permian Basin............ 14,650 625 629 53,468 69,372 210
Mid-Continent............ 115 - 32 17,665 17,812 60
Rocky Mountain........... 62 646 1,782 57,060 59,550 300
Alaska................... - 17,220 23,522 2,393 43,135 3
-------- -------- --------- --------- --------- -----
18,120 35,322 100,714 205,652 359,808 597
Argentina.................... - 5 14,518 45,380 59,903 90
Canada....................... (145) 1,067 14,759 47,864 63,545 110
Nigeria...................... - 29,944 20,823 - 50,767 2
Tunisia...................... - - 9,529 2,843 12,372 5
Other........................ - - 4,959 270 5,229 -
-------- -------- --------- --------- --------- -----
Total Worldwide..... $ 17,975 $ 66,338 $ 165,302 $ 302,009 $ 551,624 804
======== ======== ========= ========= ========= =====
The following are significant events that occurred during the second
quarter of 2005:
Gulf of Mexico area. Sidetrack operations for the Raptor field were
successfully completed during the second quarter of 2005 with the well testing
at approximately 30 million cubic feet per day. The Company owns a 100 percent
interest in the Raptor field. Subsequent to June 30, 2005, recoverable reserves
from the Harrier field were fully produced, having produced 51 Bcf of cumulative
production on an investment of $112.0 million.
The Company recognized additional business interruption recoveries from
Devils Tower and Canyon Express of $15.4 million and $19.3 million,
respectively, in the second quarter of 2005. See Note N of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" for additional
information.
The Company has been advised by the operator of the Canyon Express system
that sidetrack operations planned for the Aconcagua field later this year will
be postponed pending rig availability. The existing Aconcagua wells are expected
to reach the end of their productive lives by the end of 2005 or early 2006;
therefore, the Company now anticipates that the system will be shut-in once the
Camden Hill recoverable reserves are fully produced during the first half of
2006 unless a rig becomes available to drill the Aconcagua sidetrack wells.
The Company has entered into agreements to sell certain properties on the
shelf of the Gulf of Mexico for proceeds of approximately $80 million. The sales
are expected to close in the third quarter of 2005. The Company's net production
from these properties averages approximately 3,200 BOEPD.
Mid-Continent area. The Company's Fain gas plant was shut in due to a fire
on May 15, 2005. The Company completed repairs and resumed operations in
mid-July 2005. The shut-in resulted in a production loss of approximately 17,000
BOEPD. The Company has filed a business interruption claim relating to the fire
and recognized $9.4 million of estimated recoveries in the second quarter of
2005. The Company expects additional business interruption recoveries in the
third quarter of 2005 of $9 million to $10 million. See Note N of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information.
32
PIONEER NATURAL RESOURCES COMPANY
Permian Basin and Gulf Coast areas. In July 2005, the Company completed the
purchase of approximately 70 MMBOE of substantially undeveloped proved oil
reserves in the United States core areas of the Permian Basin and South Texas
for approximately $177 million. The assets being acquired currently produce
approximately 1,800 BOEPD and provide an estimated 800 undrilled locations.
During April 2005, the Company completed the sale of certain East Texas
properties for net proceeds of approximately $25.2 million. The Company's net
production from these properties averaged approximately 400 BOEPD.
Canada. During May 2005, the Company sold all of its interests in three
non-strategic Canadian properties in Martin Creek, Conroy Black and Lookout
Butte for net proceeds of $197.5 million. The Company's net production from
these properties averaged approximately 3,000 BOEPD. See Note O of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements".
Gabon. In 2004, the Company canceled the development of the Olowi block due
to a substantial increase in projected development costs which resulted in the
project not offering competitive returns. In the second quarter of 2005, the
Company announced an agreement to sell its shares in its subsidiary that owns
the interest in the Olowi block offshore Gabon for net proceeds of approximately
$49 million. As a result of this agreement, the Company reversed its previously
recorded tax benefit of $27.3 million associated with the decision to exit
Gabon. Among the conditions to completing this transaction is the approval by
the government to an amendment to the production sharing contract for the Olowi
block. The transaction is expected to close by the end of 2005.
Nigeria. A partially-owned subsidiary of the Company joined Oranto
Petroleum and Orandi Petroleum in an existing production sharing contract on
Block 320 in deepwater Nigeria gaining exploration rights from the Nigerian
National Petroleum Corporation. The subsidiary, which holds a 51 percent
interest in Block 320, is owned 59 percent by the Company and 41 percent by an
unaffiliated third party. The Company plans to acquire 3-D seismic data during
the fourth quarter of 2005 and drill the first well in 2006.
Sao Tome and Principe and Nigeria. The Company was a successful bidder to
conduct exploration activities with a consortium of energy companies in Block 2
and in Block 3 of the Joint Development Zone in offshore Sao Tome and Principe
and Nigeria pending completion of a production sharing contract and joint
operating agreement. The consortium was granted a 65 percent interest in Block 2
and a 25 percent interest in Block 3. The Company expects to be the operator of
Block 2.
Tunisia. The Company announced the June completion of a successful Nour
discovery well onshore southern Tunisia in the Adam concession. The well
initially produced approximately 7,000 gross BOEPD.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $544.6
million and $1.1 billion for the three and six months ended June 30, 2005,
respectively, as compared to $424.8 million and $850.4 million for the same
respective periods of 2004. The revenue increase during the three months ended
June 30, 2005, as compared to the same period of 2004, was due to a two percent
increase in average daily BOE sales volumes, a 27 percent increase in oil
prices, a 28 percent increase in NGL prices and a 25 percent increase in gas
prices, including the effects of commodity price hedges. The revenue increase
during the six months ended June 30, 2005, as compared to the same period of
2004, was due to a three percent increase in average daily BOE sales volumes, a
22 percent increase in oil prices, a 24 percent increase in NGL prices and a 20
percent increase in gas prices, including the effects of commodity price hedges.
33
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes from continuing
operations, by geographic area and in total, for the three and six months ended
June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Oil (Bbls):
United States................ 26,424 26,039 27,567 25,505
Argentina.................... 7,796 8,531 7,992 8,579
Canada....................... 210 26 186 28
Africa....................... 10,452 10,215 11,205 12,125
--------- --------- --------- ---------
Worldwide.................... 44,882 44,811 46,950 46,237
========= ========= ========= =========
NGLs (Bbls):
United States................ 14,908 19,809 16,219 20,373
Argentina.................... 1,948 1,494 1,761 1,459
Canada....................... 610 405 514 432
--------- --------- --------- ---------
Worldwide.................... 17,466 21,708 18,494 22,264
========= ========= ========= =========
Gas (Mcf):
United States................ 553,803 536,109 546,086 531,870
Argentina.................... 135,188 122,326 132,783 110,072
Canada....................... 36,710 24,868 35,448 24,420
--------- --------- --------- ---------
Worldwide.................... 725,701 683,303 714,317 666,362
========= ========= ========= =========
Total (BOE):
United States................ 133,632 135,199 134,800 134,522
Argentina.................... 32,275 30,414 31,884 28,384
Canada....................... 6,939 4,576 6,608 4,530
Africa....................... 10,452 10,215 11,205 12,125
--------- --------- --------- ---------
Worldwide.................... 183,298 180,404 184,497 179,561
========= ========= ========= =========
On a quarter-to-quarter comparison, average daily sales volumes increased
by six percent in Argentina, by 52 percent in Canada and by two percent in
Africa, while average daily sales volumes decreased by one percent in the United
States. On a year-to-date comparison, average daily sales volumes increased by
12 percent in Argentina and by 46 percent in Canada, while average daily sales
volumes decreased by eight percent in Africa and remained constant in the United
States.
Average daily sales volumes in the United States was flat principally due
to new production from the properties acquired in the Evergreen merger, offset
by declining production in the Gulf of Mexico and downtime at the Fain gas
plant.
Canadian average daily sales volumes from continuing operations increased
due to new production from Canadian properties acquired in the Evergreen merger
and production from new wells drilled during the winter drilling season.
Argentine average daily sales volumes increased as a result of increased
wells drilled and market demand. The Company has continued to increase capital
expenditures in Argentina as the stability of the Argentine peso and the general
economic outlook for Argentina has improved and gas prices have increased.
In Africa, production is down in South Africa due to normal production
declines, but is partially offset by continued growth in Tunisia production.
34
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes recorded from
discontinued operations during the three and six month periods ended June 30,
2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Canada:
Oil (Bbls)............... 45 69 57 69
NGLs (Bbls).............. 264 511 224 549
Gas (Mcf)................ 10,472 16,425 12,910 16,236
Total (BOE).............. 2,054 3,318 2,433 3,324
The following table provides average reported prices from continuing
operations, including the results of hedging activities, and average realized
prices from continuing operations, excluding the results of hedging activities,
by geographic area and in total, for the three and six months ended June 30,
2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Average reported prices:
Oil (per Bbl):
United States............... $ 29.36 $ 27.63 $ 29.15 $ 27.16
Argentina................... $ 34.54 $ 20.13 $ 33.12 $ 24.05
Canada...................... $ 35.22 $ 45.79 $ 41.97 $ 45.54
Africa...................... $ 51.84 $ 35.13 $ 47.82 $ 32.98
Worldwide................... $ 35.52 $ 27.92 $ 34.33 $ 28.12
NGLs (per Bbl):
United States............... $ 28.39 $ 22.29 $ 27.18 $ 21.90
Argentina................... $ 30.84 $ 27.22 $ 30.62 $ 28.17
Canada...................... $ 41.18 $ 27.31 $ 39.89 $ 27.53
Worldwide................... $ 29.11 $ 22.73 $ 27.86 $ 22.42
Gas (per Mcf):
United States............... $ 6.39 $ 5.15 $ 6.17 $ 5.13
Argentina................... $ .88 $ .65 $ .88 $ .62
Canada...................... $ 6.17 $ 3.35 $ 6.07 $ 3.30
Worldwide................... $ 5.35 $ 4.28 $ 5.18 $ 4.31
Average realized prices:
Oil (per Bbl):
United States............... $ 51.32 $ 36.30 $ 48.61 $ 34.55
Argentina................... $ 34.54 $ 24.41 $ 33.12 $ 27.56
Canada...................... $ 35.22 $ 45.79 $ 41.97 $ 45.54
Africa...................... $ 51.84 $ 35.80 $ 47.82 $ 33.55
Worldwide................... $ 48.45 $ 33.93 $ 45.76 $ 33.00
NGLs (per Bbl):
United States............... $ 28.39 $ 22.29 $ 27.18 $ 21.90
Argentina................... $ 30.84 $ 27.22 $ 30.62 $ 28.17
Canada...................... $ 41.18 $ 27.31 $ 39.89 $ 27.53
Worldwide................... $ 29.11 $ 22.73 $ 27.86 $ 22.42
Gas (per Mcf):
United States............... $ 6.90 $ 5.72 $ 6.51 $ 5.52
Argentina................... $ .88 $ .65 $ .88 $ .62
Canada...................... $ 6.17 $ 5.07 $ 6.08 $ 4.99
Worldwide................... $ 5.74 $ 4.79 $ 5.44 $ 4.69
35
PIONEER NATURAL RESOURCES COMPANY
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
swap and collar contracts in order to (i) reduce the effect of price volatility
on the commodities the Company produces and sells, (ii) support the Company's
annual capital budgeting and expenditure plans and (iii) reduce commodity price
risk associated with certain capital projects. During the three and six months
ended June 30, 2005, the Company's commodity price hedges decreased oil and gas
revenues by $78.7 million and $131.0 million, respectively, as compared to $56.1
million and $86.9 million during the same respective periods in 2004. See Note G
of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for specific information regarding the Company's hedging activities
during the three and six months ended June 30, 2005 and 2004.
Argentina commodity prices. Argentine commodity prices have been
significantly below those in the world markets for a period of time. In May
2004, pursuant to a decree, the Argentine government approved measures to permit
producers to renegotiate gas sales contracts, excluding those that could affect
small residential customers. Pursuant to that decree, wellhead prices are
scheduled to rise from a 2004 year end range of $.61 to $.78 per Mcf to a range
of $.87 to $1.04 per Mcf in July 2005, depending on the region where the gas is
produced. No further gas price increases beyond July 2005 were allowed for in
the decree. Also, due to the Argentine export tax (expires in February 2007) and
price caps required by the Argentine government on oil prices paid by Argentine
refiners, the price of Argentine oil has been below that realized in world
markets. For additional information regarding the suppressed Argentine commodity
prices see the Company's Annual Report on Form 10-K for the year ended December
31, 2004. At the present time, no specific predictions can be made about future
commodity prices in Argentina. The Company has seen recent improvements in spot
oil and gas prices in certain areas of Argentina; however, the Company expects
Argentine commodity price realizations to be less than those in the United
States.
Interest and other income. Interest and other income for the three and six
months ended June 30, 2005 was $47.9 million and $76.2 million, respectively, as
compared to $1.6 million and $3.3 million for the same respective periods of
2004. The increase in interest and other income during the three months ended
June 30, 2005, as compared to the same period in 2004, is attributable to the
recognition of $44.1 million of business interruption insurance claims, of which
$34.7 million related to Hurricane Ivan and $9.4 million to the Fain plant fire.
The increase in interest and other income during the six months ended June 30,
2005, as compared to the same period in 2004, is attributable to the recognition
of $68.8 million in business interruption insurance claims, of which $59.4
million relates to Hurricane Ivan and $9.4 million to the Fain plant fire. See
Note N of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information regarding the Company's
business interruption insurance claims.
Oil and gas production costs. The Company recorded production costs of
$108.0 million and $219.5 million during the three and six months ended June 30,
2005, respectively, as compared to $81.2 million and $155.9 million for the same
respective periods of 2004. In general, lease operating expenses and workover
expenses represent the components of oil and gas production costs over which the
Company has management control, while production taxes and ad valorem taxes are
directly related to commodity price changes. Total production costs per BOE
increased by 31 percent and 38 percent during the three and six months ended
June 30, 2005, respectively, as compared to the same respective periods in 2004
primarily due to (i) an increase in production and ad valorem taxes as a result
of higher commodity prices, (ii) higher Canadian gas transportation fees, (iii)
the retention of operating costs related to VPP volumes sold (approximately $.25
per BOE and $.20 per BOE during the three and six months ended June 30, 2005,
respectively), (iv) new production added from the Evergreen merger which
represent relatively higher operating cost properties and (v) increases in
equipment and service costs associated with rising commodity prices.
36
PIONEER NATURAL RESOURCES COMPANY
The following tables provide the components of the Company's total
production costs per BOE from continuing operations and total production costs
per BOE by geographic area from continuing operations for the three and six
months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Lease operating expenses......... $ 4.75 $ 3.62 $ 4.84 $ 3.46
Taxes:
Ad valorem.................... .59 .48 .59 .48
Production.................... .83 .60 .81 .60
Workover costs................... .30 .24 .33 .23
-------- -------- -------- --------
Total production costs..... $ 6.47 $ 4.94 $ 6.57 $ 4.77
======== ======== ======== ========
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Total production costs:
United States................. $ 6.82 $ 4.89 $ 6.93 $ 4.71
Argentina..................... $ 3.03 $ 3.04 $ 3.02 $ 2.94
Canada........................ $ 13.50 $ 10.15 $ 14.72 $ 10.51
Africa........................ $ 8.02 $ 8.98 $ 7.59 $ 7.63
Worldwide..................... $ 6.47 $ 4.94 $ 6.57 $ 4.77
Depletion, depreciation and amortization expense. The Company's total DD&A
expense was $8.82 and $9.01 per BOE for the three and six months ended June 30,
2005, respectively, as compared to $8.56 and $8.41 during the same respective
periods of 2004. Depletion expense, the largest component of DD&A expense, was
$8.51 and $8.71 per BOE during the three and six months ended June 30, 2005, as
compared to $8.39 and $8.24 during the same respective periods in 2004. The
increase in per BOE depletion expense during the three and six months ended June
30, 2005, as compared to the same respective periods in 2004, is primarily due
to relatively higher per BOE cost basis Rocky Mountain area production acquired
in the Evergreen merger and a higher depletion rate for the Hugoton and
Spraberry fields as a result of the VPP volumes sold. Additionally, the
Company's depletion expense per BOE increased in Argentina due to net year-end
downward reserve revisions associated with negative well performance in the
Portezuelo Oeste gas field, increased in Tunisia due to the Company's proved
reserves being reduced as a result of the Company's interest in the Adam block
being reduced to 24 percent from 28 percent in accordance with the terms of the
concession and decreased in South Africa as a result of upward reserve
revisions.
The following table provides depletion expense per BOE from continuing
operations by geographic area for the three and six months ended June 30, 2005
and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Depletion expense:
United States.................. $ 8.84 $ 8.62 $ 9.09 $ 8.31
Argentina...................... $ 6.77 $ 5.35 $ 6.55 $ 5.30
Canada......................... $ 11.72 $ 12.41 $ 12.07 $ 12.53
Africa......................... $ 7.63 $ 12.64 $ 8.20 $ 12.75
Worldwide...................... $ 8.51 $ 8.39 $ 8.71 $ 8.24
37
PIONEER NATURAL RESOURCES COMPANY
Exploration, abandonments, geological and geophysical costs. The following
table provides the Company's geological and geophysical costs, exploratory dry
hole expense, lease abandonments and other exploration expense by geographic
area from continuing operations for the three and six months ended June 30, 2005
and 2004:
Africa
United and
States Argentina Canada Other Total
------- --------- ------- ------- --------
(in thousands)
Three months ended June 30, 2005:
Geological and geophysical costs...... $13,635 $ 2,450 $ 1,878 $10,449 $ 28,412
Exploratory dry holes................. 16,495 180 565 943 18,183
Leasehold abandonments and other...... 2,330 3,220 239 - 5,789
------ ------ ------ ------ -------
$32,460 $ 5,850 $ 2,682 $11,392 $ 52,384
====== ====== ====== ====== =======
Three months ended June 30, 2004:
Geological and geophysical costs...... $ 9,338 $ 7,538 $ 688 $ 3,113 $ 20,677
Exploratory dry holes................. 895 287 386 15,635 17,203
Leasehold abandonments and other...... 1,601 22 102 - 1,725
------ ------ ------ ------ -------
$11,834 $ 7,847 $ 1,176 $18,748 $ 39,605
====== ====== ====== ====== =======
Six months ended June 30, 2005:
Geological and geophysical costs...... $39,357 $ 4,125 $ 2,864 $19,859 $ 66,205
Exploratory dry holes................. 28,011 1,069 3,229 12,499 44,808
Leasehold abandonments and other...... 4,571 3,240 330 319 8,460
------ ------ ------ ------ -------
$71,939 $ 8,434 $ 6,423 $32,677 $119,473
====== ====== ====== ====== =======
Six months ended June 30, 2004:
Geological and geophysical costs...... $25,107 $10,668 $ 1,835 $ 4,846 $ 42,456
Exploratory dry holes................. 37,863 692 7,915 24,319 70,789
Leasehold abandonments and other...... 2,420 37 3,642 7 6,106
------ ------ ------ ------ -------
$65,390 $11,397 $13,392 $29,172 $119,351
====== ====== ====== ====== =======
Significant components of the Company's dry hole expense during the second
quarter of 2005 included $7.3 million of carryover costs from the previous
quarter associated with an unsuccessful well in the Falcon Corridor and the
write-off of previously suspended United States exploratory wells. Significant
components of the Company's dry hole expense during the first half of 2005
included $16.3 million associated with an unsuccessful well in the Falcon
Corridor, $9.5 million associated with an unsuccessful Nigerian well, $3.5
million on an unsuccessful well on the Company's El Hamra permit in Tunisia and
other various United States exploratory wells. During the first half of 2005,
the Company completed and evaluated 58 exploration/extension wells, 44 of which
were successfully completed as discoveries. During the same period in 2004, the
Company completed and evaluated 66 exploration/extension wells, 37 of which were
successfully completed as discoveries.
General and administrative expense. General and administrative expense for
the three and six months ended June 30, 2005 was $29.2 million and $58.8
million, respectively, as compared to $17.1 million and $35.4 million during the
same respective periods in 2004. The increases in general and administrative
expense are primarily due to increases in administrative staff, including staff
increases associated with the Evergreen merger, and performance-related
compensation costs including the amortization of restricted stock awarded to
officers, directors and employees during the three and six months ended June 30,
2005, as compared to the same respective periods of 2004.
Interest expense. Interest expense was $30.2 million and $63.5 million for
the three and six months ended June 30, 2005, as compared to $21.4 million and
$43.0 million for the same respective periods in 2004. The weighted average
interest rates on the Company's indebtedness for the three and six months ended
June 30, 2005 was 6.4 percent and 6.2 percent, respectively, as compared to 5.2
percent for each of the same respective periods in 2004, including the effects
of interest rate derivatives. The increase in interest expense during the three
months ended June 30, 2005, as compared to the same period of 2004, was
primarily due to increased average borrowings under the Company's lines of
credit, primarily as a result of the cash portion of the consideration paid in
the Evergreen merger, a $4.9 million decrease in the amortization of interest
rate hedge gains, the assumption of $300 million of notes in connection with the
Evergreen merger and higher interest rates in 2005. The increase in interest
expense during the six months ended June 30, 2005, as compared to the same
38
PIONEER NATURAL RESOURCES COMPANY
period of 2004, was primarily due to increased average borrowings under the
Company's lines of credit, primarily as a result of the cash portion of the
consideration paid in the Evergreen merger, a $9.9 million decrease in the
amortization of interest rate hedge gains, a $1.2 million decrease in
capitalized interest as the Company completed its major development projects in
the Gulf of Mexico, the assumption of $300 million of notes in connection with
the Evergreen merger and higher interest rates in 2005.
Other expenses. Other expenses for the three and six months ended June 30,
2005 were $17.6 million and $29.3 million, respectively, as compared to $8.3
million and $8.5 million for the same respective periods in 2004. The increase
in other expenses during the three months ended June 30, 2005, as compared to
the same period of 2004, is primarily attributable to a $7.3 million loss on the
redemption of $32.4 million principal amount of the Company's 9-5/8% Notes, a
$2.9 million increase in hedge ineffectiveness and a $2.1 million increase in
legal and environmental accruals. The increase in other expenses during the six
months ended June 30, 2005, as compared to the same period of 2004, is primarily
attributable to the aforementioned $7.3 million loss on bond redemptions, a $9.6
million increase in hedge ineffectiveness and a $4.9 million increase in legal
and environmental accruals.
Income tax provision. During the three and six months ended June 30, 2005,
the Company recognized income tax provisions of $102.0 million and $153.8
million, respectively, as compared to $51.8 million and $91.5 million for the
same respective periods in 2004. The Company's effective tax rate of 49.6
percent and 45.6 percent during the three and six months ended June 30, 2005,
respectively, is higher than the combined United States federal and state
statutory rate of approximately 36.5 percent primarily due to:
o Reversal of the $27.3 million tax benefit recorded principally in the
third quarter of 2004 as a result of the cancellation of the
development of the Olowi block and the Company's decision to exit
Gabon. Reversal of the tax benefit is the result of signing an
agreement in June 2005 to sell its shares in the subsidiary that
owns the interest in the Olowi block which makes it more likely than
not that the Company will not realize the originally recorded tax
benefit.
o Recording of approximately $3.2 million of taxes associated with the
repatriation of foreign earnings pursuant to the American Jobs
Creation Act of 2004 ("AJCA").
o Expenses for unsuccessful well costs in foreign locations where the
Company receives no expected income tax benefits.
o Foreign tax rates.
o Statutes that differ from those in the United States.
See Note E of Notes to Consolidate Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
income taxes.
Discontinued operations. During the three and six months ended June 30,
2005, the Company recognized income from discontinued operations of $82.0
million and $87.0 million, respectively, as compared to $5.5 million and $8.7
million for the same respective periods of 2004. The amounts for the three and
six months ended June 30, 2005 include a gain on disposition of assets of $138.7
million and income tax provisions of $60.0 million.
The Company's high effective tax rate associated with discontinued
operations during the three and six months ended June 30, 2005 was primarily due
to:
o Approximately $17.1 million of United States deferred tax provision
triggered by the gain recorded on the Canadian divestiture. The
Canadian gain caused the recharacterization of Argentine dividend
income from prior years that was previously sheltered by historical
Canadian losses.
o Cash taxes of $2.9 million associated with the repatriation of foreign
earnings under the provisions of the AJCA.
39
PIONEER NATURAL RESOURCES COMPANY
o Offset in part by a decrease in the Canadian valuation allowance of
$12.4 million. The Canadian divestiture utilized a substantial portion
of the Company's Canadian tax pools. Consequently, the Company has
reassessed the likelihood that the remaining Canadian tax attributes
will be utilized and has determined it is now more likely than not
that it will be able to utilize more of its tax pools than previously
expected.
For periods prior to the Canadian divestiture, the Company's discontinued
operations reflect no tax provisions due to the Company having maintained a
valuation allowance related to its Canadian deferred tax assets. During those
prior periods, managements' expectation was that it was likely that the Company
would not realize its Canadian deferred tax assets. Therefore, in accordance
with generally accepted accounting principles, portions of the Canadian
valuation allowance were released only to the extent that Canadian income was
recorded, thereby offsetting any tax provisions.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
exploration, development and acquisition of oil and gas properties, repayment of
contractual obligations and working capital obligations. Funding for
exploration, development and acquisition of oil and gas properties and repayment
of contractual obligations 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. Generally, funding for the Company's working capital obligations is
provided by internally-generated cash flow.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three and six months ended June 30, 2005
totaled $268.4 million and $494.6 million, respectively, as compared to $183.6
million and $350.8 million during the same respective periods of 2004. During
the three and six month periods ended June 30, 2005, the Company's additions to
oil and gas properties were funded by $332.6 million and $667.4 million of net
cash provided by operating activities, respectively, as compared to $264.7
million and $518.3 million during the same respective periods of 2004.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations, other liabilities and VPP
obligations. From time-to-time, the Company enters into off-balance sheet
arrangements and transactions that can give rise to material off-balance sheet
obligations of the Company. As of June 30, 2005, the material off-balance sheet
arrangements and transactions that the Company has entered into include (i)
undrawn letters of credit, (ii) operating lease agreements, (iii) drilling
commitments, (iv) VPP obligations (to physically deliver volumes and pay related
lease operating expenses in the future) and (v) contractual obligations for
which the ultimate settlement amounts are not fixed and determinable such as
derivative contracts that are sensitive to future changes in commodity prices
and gas transportation commitments. Since December 31, 2004, the material
changes in the Company's contractual obligations were changes in the Company's
derivative obligations and the aforementioned sale of VPPs. There have been no
other material changes in the Company's contractual obligations since December
31, 2004. See "Item 3. Quantitative and Qualitative Disclosures About Market
Risk" for a table of changes in the fair value of the Company's open derivative
contract liabilities during the six months ended June 30, 2005.
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 during the
remainder of 2005.
VPPs. During January 2005, the Company sold two percent of its total proved
reserves, or 20.5 MMBOE of proved reserves, by means of two VPPs for net
proceeds of $592.3 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the VPPs
were initially used to pay down indebtedness. The first VPP sold 58 Bcf of
Hugoton field gas volumes over an expected five-year term that began in February
2005 for $275.2 million. The second VPP sold 10.8 MMBbls of Spraberry field oil
volumes over an expected seven-year term beginning in January 2006 for $317.1
million.
During April 2005, the Company sold less than one percent of its total
proved reserves, or 7.3 MMBOE of proved reserves, by means of another VPP for
net proceeds of $300.4 million, including the assignment of the Company's
obligations under certain derivative hedge agreements. Proceeds from the VPP
were initially used to pay down indebtedness. The VPP sold 6.0 Bcf of Spraberry
40
PIONEER NATURAL RESOURCES COMPANY
field gas volumes over an expected 32-month term that began in May 2005 and 6.2
MMBbls of Spraberry field oil volumes over an expected five-year term beginning
in January 2006.
See Note M of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
VPPs.
Asset divestitures. During May 2005, the Company sold all of its interests
in the Martin Creek, Conroy Black and Lookout Butte oil and gas properties in
Canada for net proceeds of $197.5 million resulting in a gain of $138.7 million.
During April 2005, the Company sold all of its interests in certain East Texas
properties for approximately $25.2 million of net cash proceeds. The net cash
proceeds from these divestitures were used to reduce outstanding indebtedness.
The Company has entered into an agreement to sell its shares in the
subsidiary that owns the interest in the Olowi block offshore Gabon for $49
million. Among the conditions to completing this transaction is the approval by
the government to an amendment to the production sharing contract for the Olowi
block. The transaction is expected to close by the end of 2005. The Company has
entered into agreements to sell certain properties on the shelf of the Gulf of
Mexico for proceeds of approximately $80 million. The sales are expected to
close in the third quarter of 2005. The net cash proceeds from these
divestitures, if consummated, will be used to fund future projects and/or reduce
outstanding indebtedness.
Operating activities. Net cash provided by operating activities during the
three and six months ended June 30, 2005 was $332.6 million and $667.4 million,
respectively, as compared to $264.7 million and $518.3 million for the same
respective periods in 2004. The increases in net cash provided by operating
activities were primarily due to increased production volumes and higher
commodity prices.
Investing activities. Net cash provided by investing activities during the
three and six months ended June 30, 2005 was $243.5 million and $605.4 million,
respectively, as compared to net cash used in investing activities of $192.2
million and $364.5 million for the same respective periods in 2004. The
increases in net cash provided by investing activities were primarily due to (a)
$300.4 million and $892.7 million of net proceeds received from VPPs sold during
the three and six months ended June 30, 2005, respectively, and (b) the sale of
the Canadian and East Texas assets in the second quarter of 2005 for net
proceeds of $222.7 million.
Financing activities. Net cash used in financing activities during the
three and six months ended June 30, 2005 was $536.2 million and $1.2 billion,
respectively, as compared to $66.1 million and $157.5 million during the same
respective periods in 2004. During the three and six months ended June 30, 2005,
the Company had net repayments on long-term debt of $444.3 million and $997.3
million, respectively, as compared to $46.0 million and $136.0 million during
the same respective periods in 2004.
During February 2005, the Company's board of directors declared a
semiannual dividend of $.10 per common share, payable on April 15, 2005 to
shareholders of record on March 31, 2005. Associated therewith, the Company paid
$14.3 million of aggregate dividends during April 2005. Future dividends are at
the discretion of the Company's board of directors, and the board of directors
may change the current dividend amount in the future if warranted by future
liquidity and capital resource attributes.
During April 2005, $131.0 million of the Company's 8-7/8% Notes matured and
were repaid. The Company also redeemed $32.4 million principal amount of its
9-5/8% Notes. The Company utilized unused borrowing capacity under its 364-Day
Credit Agreement to fund these financing activities.
During January 2005, the Company's board of directors approved a share
repurchase program authorizing the purchase of up to $300 million of the
Company's common stock. During the three and six months ended June 30, 2005, the
Company expended $85.4 million to acquire 2.1 million shares of treasury stock
and $237.3 million to acquire 5.9 million shares of treasury stock,
respectively. Based on current expectations, the Company intends to expend the
remaining $62.7 million authorized under the share repurchase program during the
third quarter of 2005.
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
41
PIONEER NATURAL RESOURCES COMPANY
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.
Liquidity. The Company's principal source of short-term liquidity is its
revolving lines of credit. There were no outstanding borrowings under the lines
of credit as of June 30, 2005. Including $49.3 million of undrawn and
outstanding letters of credit under the lines of credit, the Company had $1.1
billion of unused borrowing capacity as of June 30, 2005.
Book capitalization and current ratio. The Company's book capitalization at
June 30, 2005 was $4.0 billion, consisting of debt of $1.4 billion and
stockholders' equity of $2.6 billion. Consequently, the Company's debt to book
capitalization decreased to 35 percent at June 30, 2005 from 46 percent at
December 31, 2004. The Company's ratio of current assets to current liabilities
was .62 to 1.00 at June 30, 2005 as compared to .72 to 1.00 at December 31,
2004. The decline in the Company's ratio of current assets to current
liabilities was primarily due to increases in its current derivative liabilities
as a result of higher commodity prices and in current deferred revenue as a
result of the VPPs.
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 year ended December 31, 2004.
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 year
ended December 31, 2004.
Although certain derivative contracts that the Company has been a party to
did not qualify as hedges, the Company does not enter into derivative or other
financial instruments for trading purposes.
The following table reconciles the changes that occurred in the fair values
of the Company's open derivative contracts during the first half of 2005:
Derivative Contract Net Liabilities
---------------------------------------
Interest
Commodities Rate Total
----------- -------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2004............... $ (406,546) $ - $ (406,546)
Changes in contract fair value (a)....... (547,916) (4,614) (552,530)
Contract maturities...................... 165,358 - 165,358
Contract terminations.................... 33,403 4,614 38,017
--------- ------- ---------
Fair value of contracts outstanding
as of June 30, 2005................... $ (755,701) $ - $ (755,701)
========= ======= =========
<FN>
- ---------------
(a) At inception, new derivative contracts entered into by the Company have no
intrinsic value.
</FN>
42
PIONEER NATURAL RESOURCES COMPANY
Interest rate sensitivity. The following table provides information about
other financial instruments the Company was a party to as of June 30, 2005 and
that are sensitive to changes in interest rates. For debt obligations, the table
presents maturities by maturity dates, the weighted average interest rates
expected to be paid on the debt given current contractual terms and market
conditions and the debt's estimated fair value. For fixed rate debt, the
weighted average interest rate represents the contractual fixed rates that the
Company was obligated to periodically pay on the debt as of June 30, 2005. As of
June 30, 2005, the Company had no outstanding balances due under its variable
rate credit facilities, nor was the Company a party to material derivatives that
would subject it to interest rate sensitivity.
Interest Rate Sensitivity
Debt Obligations as of June 30, 2005
Six months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------------------------------ June 30,
2005 2006 2007 2008 2009 Thereafter Total 2005
------------ -------- -------- -------- -------- ---------- ---------- -------------
(in thousands, except interest rates)
Total Debt:
Fixed rate principal
maturities (a)........... $ - $ - $ 32,075 $350,000 $ - $1,119,169 $1,501,244 $1,637,935
Weighted average
interest rate (%)...... 6.8 6.9 6.9 8.0 8.0 8.0
<FN>
- -------------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) deferred fair value hedge gains and losses.
</FN>
Commodity price sensitivity. The following tables provide information about
the Company's oil and gas derivative financial instruments that were sensitive
to changes in oil or gas price as of June 30, 2005. As of June 30, 2005, all of
the Company's oil and gas derivative financial instruments qualified as hedges.
See Note G of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil or gas
prices.
Oil Price Sensitivity
Derivative Financial Instruments as of June 30, 2005
Six months Liability
ending Year ending December 31, Fair Value at
December 31, -------------------------------- June 30,
2005 2006 2007 2008 2005
----------- --------- --------- --------- -------------
(in thousands)
Oil Hedge Derivatives:
Average daily notional Bbl volumes (a):
Swap contracts.......................... 27,000 10,000 13,000 17,000 $ (515,323)
Weighted average fixed price
per Bbl............................. $ 27.97 $ 31.69 $ 30.89 $ 29.21
Collar contracts........................ - 3,500 - - $ (21,894)
Weighted average ceiling price
per Bbl.............................. $ - $ 41.95 $ - $ -
Weighted average floor price
per Bbl.............................. $ - $ 35.00 $ - $ -
Average forward NYMEX oil
prices (b)........................... $ 60.58 $ 62.60 $ 61.10 $ 59.79
<FN>
- ---------------
(a) See Note G of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(b) The average forward NYMEX oil prices are based on July 29, 2005 market
quotes.
</FN>
43
PIONEER NATURAL RESOURCES COMPANY
Gas Price Sensitivity
Derivative Financial Instruments as of June 30, 2005
Six months Liability
ending Year ending December 31, Fair Value at
December 31, -------------------------------- June 30,
2005 2006 2007 2008 2005
----------- -------- -------- -------- -------------
(in thousands)
Gas Hedge Derivatives (a):
Average daily notional MMBtu volumes (b):
Swap contracts.......................... 268,478 73,842 29,195 5,000 $ (215,082)
Weighted average fixed price per MMBtu. $ 5.17 $ 4.30 $ 4.28 $ 5.38
Collar contracts........................ - 17,329 - - $ (3,402)
Weighted average ceiling price
per MMBtu............................ $ - $ 9.14 $ - $ -
Weighted average floor price
per MMBtu............................ $ - $ 6.67 $ - $ -
Average forward NYMEX gas prices (c)..... $ 8.07 $ 8.23 $ 7.80 $ 7.42
<FN>
- ---------------
(a) 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
collar contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(b) See Note G of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(c) The average forward NYMEX gas prices are based on July 29, 2005 market
quotes.
</FN>
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's management,
with the participation of its principal executive officer and principal
financial officer, have evaluated, as required by Rule 13a-15(b) under the
Securities Exchange Act of 1934 (the "Exchange Act"), the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this quarterly report on Form 10-Q. Based on that
evaluation, the principal executive officer and principal financial officer
concluded that the design and operation of the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
Changes in internal control over financial reporting. There have been no
changes in the Company's internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's
last fiscal quarter that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
44
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings, which are described
under "Legal actions" in Note J of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements". The Company is also party to other
litigation incidental to its business. Except for the specific legal actions
described in Note J of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements", the Company believes that the probable damages
from such other legal actions will not be in excess of ten percent of the
Company's current assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company's purchases of treasury stock
during the three months ended June 30, 2005:
Total Number of Shares Approximate Dollar
(or Units) Purchased Amount of Shares
Total Number of Average Price as Part of Publicly that May Yet Be
Shares (or Units) Paid per Share Announced Plans Purchased under
Period Purchased (a) (or Unit) or Programs Plans or Programs
------ ----------------- -------------- ---------------------- -------------------
April 2005............... 3,375 $ 44.16 -
May 2005................. 1,313,688 $ 38.42 1,300,000
June 2005................ 845,820 $ 42.79 829,000
----------- -----------
Total............ 2,162,883 $ 40.14 2,129,000 $ 62,719,000
=========== =========== ===========
<FN>
- -----------
(a) Amounts include shares withheld to fund tax withholding on employees' stock
awards for which restrictions have lapsed.
</FN>
During January 2005, the Company's board of directors approved a share
repurchase program authorizing the purchase of up to $300 million of the
Company's common stock.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 11, 2005 in
Irving, Texas. At the meeting, two proposals were submitted for vote of
stockholders (as described in the Company's Proxy Statement dated April 5,
2005). The following is a brief description of each proposal and results of the
stockholders' votes.
Election of Directors. Prior to the meeting, the Company's board of
directors designated four nominees as Class II directors with their terms to
expire at the annual meeting in 2008 when their successors are elected and
qualified. Messrs. Baroffio, Buchanan, Sheffield and Watson were, at the time of
such nomination and at the time of the meeting, directors of the Company. Each
nominee was elected as a director of the Company, with the results of the
stockholder voting being as follows:
Authority Broker
For Withheld Abstain Non-Votes
----------- ---------- ------- ---------
James R. Baroffio 130,909,156 358,641 - -
Edison C. Buchanan 130,894,076 373,721 - -
Scott D. Sheffield 129,146,540 1,149,467 - -
Jim A. Watson 129,985,315 310,692 - -
In addition, the term of office for the following directors continued after
May 11, 2005: R. Hartwell Gardner, James L. Houghton, Jerry P. Jones, Linda K.
Lawson, Andrew D. Lundquist, Charles E. Ramsey, Jr., Mark S. Sexton and Robert
A. Solberg.
45
PIONEER NATURAL RESOURCES COMPANY
Ratification of selection of auditors. The engagement of Ernst & Young LLP
as the Company's independent auditors for 2005 was submitted to the stockholders
for ratification. Such election was ratified, with the results of the
stockholder voting being as follows:
For 129,715,384
Against 527,932
Abstain 52,691
Broker non-votes -
Item 6. Exhibits
Exhibits
10.1 Production Payment Purchase and Sale Agreement dated as of April 19, 2005
among the Company, as the Seller, and Wolfcamp Oil and Gas Trust, as the
Buyer (incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on April 21,
2005).
10.2 Purchase and Sale Agreement dated as of April 28, 2005 among Pioneer
Natural Resources Canada Inc., as the Vendor, and Ketch Resources Ltd., as
the Purchaser (incorporated by reference to Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q, File No. 1-13245, filed with the SEC on May
6, 2005).
31.1 Chief Executive Officer certification under Section 302 of Sarbanes-Oxley
Act of 2002.
31.2 Chief Financial Officer certification under Section 302 of Sarbanes-Oxley
Act of 2002.
32.1 Chief Executive Officer certification under Section 906 of Sarbanes-Oxley
Act of 2002.
32.2 Chief Financial Officer certification under Section 906 of Sarbanes-Oxley
Act of 2002.
46
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: August 4, 2005 By: /s/ Richard P. Dealy
-------------------------------------
Richard P. Dealy
Executive Vice President and Chief
Financial Officer
Date: August 4, 2005 By: /s/ Darin G. Holderness
-------------------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
47
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
- -------------
10.1 Production Payment Purchase and Sale Agreement dated as of April 19,
2005 among the Company, as the Seller, and Wolfcamp Oil and Gas Trust,
as the Buyer (incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on April 21, 2005).
10.2 Purchase and Sale Agreement dated as of April 28, 2005 among Pioneer
Natural Resources Canada Inc., as the Vendor, and Ketch Resources
Ltd., as the Purchaser (incorporated by reference to Exhibit 10.18 to
the Company's Quarterly Report on Form 10-Q, File No. 1-13245, filed
with the SEC on May 6, 2005).
31.1(a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2(a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1(b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2(b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
- -------------------
(a) Filed herewith.
(b) Furnished herewith.
48