UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 / /
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes / / No / x /
Number of shares of Common Stock outstanding as of
November 4, 2005.................................................. 128,531,071
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 September 30, 2005
and December 31, 2004............................... 4
Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004... 6
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2005............ 7
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2005 and 2004... 8
Consolidated Statements of Comprehensive Loss for
the three and nine months ended September 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.................... 34
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 49
Item 4. Controls and Procedures................................ 51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 51
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds........................................ 52
Item 6. Exhibits............................................... 53
Signatures ....................................................... 54
Exhibit Index ....................................................... 55
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, the ability to obtain environmental and other permits and the
timing thereof, other government regulation or action, international operations
and associated international political and economic instability, legal actions,
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)
September 30, December 31,
2005 2004
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 64,508 $ 7,257
Accounts receivable:
Trade, net of allowance for doubtful accounts of $5,650
and $5,409 as of September 30, 2005 and December 31, 2004,
respectively................................................... 257,086 209,297
Due from affiliates.............................................. 871 639
Inventories......................................................... 65,094 40,332
Prepaid expenses.................................................... 18,504 10,822
Deferred income taxes............................................... 233,562 115,206
Other current assets:
Derivatives...................................................... 888 209
Other, net of allowance for doubtful accounts of $6,425 as
of September 30, 2005 and December 31, 2004.................... 9,123 9,663
---------- ----------
Total current assets........................................ 649,636 393,425
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties................................................ 8,096,569 7,654,181
Unproved properties.............................................. 502,984 470,435
Accumulated depletion, depreciation and amortization................ (2,478,043) (2,243,549)
---------- ----------
Total property, plant and equipment......................... 6,121,510 5,881,067
---------- ----------
Deferred income taxes................................................. - 2,963
Goodwill.............................................................. 306,666 315,880
Other property and equipment, net..................................... 89,617 78,696
Other assets:
Derivatives......................................................... 997 -
Other, net of allowance for doubtful accounts of $92 as of
September 30, 2005 and December 31, 2004......................... 59,187 56,436
---------- ----------
$ 7,227,613 $ 6,728,467
========== ==========
The financial information included as of September 30, 2005 has been prepared
by management without audit by independent registered 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)
September 30, December 31,
2005 2004
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................................ $ 262,698 $ 205,153
Due to affiliates................................................ 10,843 10,898
Interest payable.................................................... 21,493 45,735
Income taxes payable................................................ 19,125 13,520
Other current liabilities:
Derivatives...................................................... 575,060 224,612
Deferred revenue................................................. 165,063 -
Other............................................................ 77,894 44,541
---------- ----------
Total current liabilities................................... 1,132,176 544,459
---------- ----------
Long-term debt........................................................ 1,939,296 2,385,950
Derivatives........................................................... 520,324 182,803
Deferred income taxes................................................. 618,343 607,415
Deferred revenue...................................................... 711,669 -
Other liabilities and minority interests.............................. 181,555 176,060
Stockholders' equity:
Common stock, $.01 par value: 500,000,000 shares authorized;
146,955,674 and 145,644,828 shares issued as of
September 30, 2005 and December 31, 2004, respectively........... 1,470 1,456
Additional paid-in capital.......................................... 3,775,385 3,705,286
Treasury stock, at cost: 13,544,015 and 813,166 shares as of
September 30, 2005 and December 31, 2004, respectively........... (635,293) (27,793)
Deferred compensation............................................... (53,261) (22,558)
Accumulated deficit................................................. (323,978) (634,146)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax............................ (698,660) (241,350)
Cumulative translation adjustment................................ 58,587 50,885
---------- ----------
Total stockholders' equity.................................. 2,124,250 2,831,780
Commitments and contingencies
---------- ----------
$ 7,227,613 $ 6,728,467
========== ==========
The financial information included as of September 30, 2005 has been prepared
by management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
Revenues and other income:
Oil and gas...................................... $ 558,382 $ 425,575 $1,593,470 $1,265,744
Interest and other............................... 9,460 1,212 85,689 4,557
Gain (loss) on disposition of assets, net........ 394 215 2,763 (30)
-------- -------- --------- ---------
568,236 427,002 1,681,922 1,270,271
-------- -------- --------- ---------
Costs and expenses:
Oil and gas production........................... 118,422 75,095 330,871 222,707
Depletion, depreciation and amortization......... 136,367 135,459 431,760 405,758
Impairment of long-lived assets.................. 21 34,825 644 34,825
Exploration and abandonments..................... 64,198 32,882 183,671 152,233
General and administrative....................... 32,749 19,431 91,551 54,846
Accretion of discount on asset retirement
obligations.................................... 1,968 2,030 6,210 6,012
Interest......................................... 29,268 24,827 92,731 67,805
Other............................................ 38,173 2,486 67,475 10,982
-------- -------- --------- ---------
421,166 327,035 1,204,913 955,168
-------- -------- --------- ---------
Income from continuing operations before
income taxes..................................... 147,070 99,967 477,009 315,103
Income tax provision............................... (42,483) (22,893) (193,722) (113,688)
-------- -------- --------- ---------
Income from continuing operations.................. 104,587 77,074 283,287 201,415
Income from discontinued operations, net of tax.... 18,986 3,842 110,502 9,391
-------- -------- --------- ---------
Net income......................................... $ 123,573 $ 80,916 $ 393,789 $ 210,806
======== ======== ========= =========
Basic earnings per share:
Income from continuing operations................ $ .76 $ .65 $ 2.02 $ 1.70
Income from discontinued operations, net of tax.. .14 .03 .78 .08
-------- -------- --------- ---------
Net income....................................... $ .90 $ .68 $ 2.80 $ 1.78
======== ======== ========= =========
Diluted earnings per share:
Income from continuing operations................ $ .74 $ .64 $ 1.97 $ 1.67
Income from discontinued operations, net of tax.. .14 .03 .77 .08
-------- -------- --------- ---------
Net income....................................... $ .88 $ .67 $ 2.74 $ 1.75
======== ======== ========= =========
Weighted average shares outstanding:
Basic............................................ 137,655 118,663 140,436 118,745
======== ======== ========= =========
Diluted.......................................... 141,786 120,297 144,770 120,321
======== ======== ========= =========
Dividends declared per share....................... $ .12 $ .10 $ .22 $ .20
======== ======== ========= =========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
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 ($.22 per
common share).................. - - - - (31,176) - - (31,176)
Exercise of long-term incentive
plan stock options and
employee stock purchases....... 1 1,310 91,304 - (52,445) - - 40,170
Purchase of treasury stock....... - - (698,804) - - - - (698,804)
Tax benefits related to
stock-based compensation....... - 18,148 - - - - - 18,148
Deferred compensation:
Compensation deferred.......... 14 56,016 - (56,030) - - - -
Deferred compensation included
in net income................ - - - 19,619 - - - 19,619
Forfeitures of deferred
compensation................. (1) (5,375) - 5,708 - - - 332
Net income....................... - - - - 393,789 - - 393,789
Other comprehensive income (loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses.... - - - - - (1,017,308) - (1,017,308)
Net hedge losses included
in net income.............. - - - - - 253,508 - 253,508
Tax benefits related to net
hedge losses............... - - - - - 306,490 - 306,490
Translation adjustment......... - - - - - - 7,702 7,702
----- --------- -------- ------- -------- ---------- ------ ----------
Balance as of September 30, 2005.. $1,470 $3,775,385 $(635,293) $(53,261) $(323,978) $ (698,660) $58,587 $ 2,124,250
===== ========= ======== ======= ======== ========== ====== ==========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------------
2005 2004 2005 2004
--------- --------- ----------- -----------
Cash flows from operating activities:
Net income...................................... $ 123,573 $ 80,916 $ 393,789 $ 210,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization..... 136,367 135,459 431,760 405,758
Impairment of long-lived assets.............. 21 34,825 644 34,825
Exploration expenses, including dry holes.... 52,817 13,975 157,604 125,415
Deferred income taxes........................ 30,485 15,377 157,283 94,500
Loss (gain) on disposition of assets, net.... (394) (215) (2,763) 30
Loss on extinguishment of debt............... 18,633 - 25,975 -
Accretion of discount on asset retirement
obligations................................ 1,968 2,030 6,210 6,012
Discontinued operations...................... (15,256) 5,249 (84,118) 15,778
Interest expense............................. 1,898 (1,094) 4,270 (12,457)
Commodity hedge related activity............. 1,658 (11,311) (9,069) (33,844)
Amortization of stock-based compensation..... 6,449 2,928 19,619 7,794
Amortization of deferred revenue............. (21,882) - (53,956) -
Other noncash items.......................... 3,950 788 10,777 6,492
Changes in operating assets and liabilities,
net of effects from acquisition:
Accounts receivable, net..................... 9,044 13,450 (45,255) (45,090)
Inventories.................................. (8,964) (5,572) (21,667) (9,752)
Prepaid expenses............................. (13,513) (6,881) (7,705) (2,034)
Other current assets, net.................... 405 380 (124) 1,137
Accounts payable............................. 27,730 (23,019) 37,294 (27,773)
Interest payable............................. (21,593) (14,526) (25,957) (14,440)
Income taxes payable......................... (6,314) (1,460) 5,605 2,995
Other current liabilities.................... (9,350) (2,160) (15,039) (8,679)
-------- -------- ---------- ----------
Net cash provided by operating activities.. 317,732 239,139 985,177 757,473
-------- -------- ---------- ----------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired.. - (849,450) (965) (849,450)
Proceeds from disposition of assets............. 63,598 510 1,184,196 1,050
Additions to oil and gas properties............. (414,170) (116,922) (908,727) (467,753)
Other property additions, net................... (14,337) (9,894) (34,059) (24,137)
-------- -------- ---------- ----------
Net cash provided by (used in) investing
activities............................... (364,909) (975,756) 240,445 (1,340,290)
-------- -------- ---------- ----------
Cash flows from financing activities:
Borrowings under long-term debt................. 599,700 876,000 976,112 1,032,477
Principal payments on long-term debt............ (66,967) (109,002) (1,440,649) (401,479)
Payment of other liabilities.................... (18,462) (28,059) (32,437) (36,178)
Exercise of long-term incentive plan stock
options and employee stock purchases......... 12,736 6,273 40,170 20,281
Purchase of treasury stock...................... (472,580) (20,963) (698,804) (36,249)
Payment of financing fees....................... (1,811) (510) (1,811) (642)
Dividends paid.................................. - - (14,332) (12,005)
-------- -------- ---------- ----------
Net cash provided by (used in) financing
activities............................. 52,616 723,739 (1,171,751) 566,205
-------- -------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 5,439 (12,878) 53,871 (16,612)
Effect of exchange rate changes on cash and
cash equivalents................................ 618 615 3,380 262
Cash and cash equivalents, beginning of period.... 58,451 15,212 7,257 19,299
-------- -------- ---------- ----------
Cash and cash equivalents, end of period.......... $ 64,508 $ 2,949 $ 64,508 $ 2,949
======== ======== ========== ==========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ---------
Net income....................................... $ 123,573 $ 80,916 $ 393,789 $ 210,806
-------- -------- --------- --------
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses................... (476,023) (267,926) (1,017,308) (505,522)
Net hedge losses included in net income..... 122,484 55,850 253,508 142,735
Tax benefits related to net hedge losses.... 145,116 77,873 306,490 134,452
Translation adjustment......................... 12,561 12,005 7,702 6,185
-------- -------- --------- --------
Other comprehensive loss.................. (195,862) (122,198) (449,608) (222,150)
-------- -------- --------- --------
Comprehensive loss............................... $ (72,289) $ (41,282) $ (55,819) $ (11,344)
======== ======== ========= ========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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, 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 September 30, 2005 and for the three
and nine months ended September 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 bases 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 was 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. 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 ("GAAP") 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
Martin Creek, Conroy Black and Lookout Butte oil and gas properties in Canada.
During August 2005, the Company sold its interests in certain oil and gas
properties on the shelf of the Gulf of Mexico. 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 $62.9 million and $37.9 million
of materials and supplies and $2.2 million and $2.4 million of commodities as of
September 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 September 30, 2005 and December 31, 2004, the
Company's materials and supplies inventory was net of $.2 million and $.4
million, respectively, of valuation reserve allowances.
Goodwill. As described in Note C, the Company recorded $322.8 million of
goodwill associated with the Evergreen merger. The goodwill was recorded to the
Company's United States reporting unit. In accordance with Emerging Issues Task
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 $16.2
million since September 28, 2004, including $1.1 million and $7.2 million during
the three and nine months ended September 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. During the third quarter of
2005, the Company performed its annual assessment of impairment of goodwill and
determined that there was no impairment.
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 ("APB") 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 nine months
ended September 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 nine months ended September 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.
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 nine months ended
September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported........................ $ 123,573 $ 80,916 $ 393,789 $ 210,806
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a)............................... 4,095 1,859 12,458 4,949
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (a)............... (4,586) (3,273) (14,669) (9,809)
-------- -------- -------- --------
Pro forma net income........................... $ 123,082 $ 79,502 $ 391,578 $ 205,946
======== ======== ======== ========
Net income per share:
Basic - as reported.......................... $ .90 $ .68 $ 2.80 $ 1.78
======== ======== ======== ========
Basic - pro forma............................ $ .89 $ .67 $ 2.79 $ 1.73
======== ======== ======== ========
Diluted - as reported........................ $ .88 $ .67 $ 2.74 $ 1.75
======== ======== ======== ========
Diluted - pro forma.......................... $ .87 $ .66 $ 2.72 $ 1.71
======== ======== ======== ========
<FN>
- -----------
(a) For the three and nine months ended September 30, 2005, stock-based
compensation expense included in net income is net of tax benefits of $2.4
million and $7.2 million, respectively, as compared to $1.1 million and
$2.8 million for the same respective periods in 2004. Similarly,
stock-based compensation expense determined under the fair value based
method for the three and nine months ended September 30, 2005 is net of tax
</FN>
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
benefits of $2.6 million and $8.4 million, respectively, as compared to
$1.9 million and $5.6 million for the same respective periods in 2004. See
Note E for additional information regarding the Company's income taxes.
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 to accounting for stock-based compensation 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.
o A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits companies 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 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 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 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.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 FIN 47, if any, would be recognized as a change in
accounting principle; however, the Company does not believe that the adoption of
FIN 47 will impact 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 consolidated financial statements. The Company adopted the new
requirements during the second quarter of 2005. See Note D for additional
information regarding the Company's exploratory well costs. The adoption of FSP
FAS 19-1 did not impact the Company's consolidated financial position or results
of operations.
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 to the Evergreen
shareholders at closing, net of $12.1 million of acquired cash. The cash
consideration paid in the merger was financed through borrowings on a $900
million 364-day senior unsecured revolving credit facility (the "364-Day Credit
Agreement"). See Note F for additional information about the 364-Day Credit
Agreement.
The Company recorded $322.8 million of goodwill associated with the
Evergreen merger, which represented 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 nine months ended September 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, 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.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Three months Nine months
ended ended
September 30, 2004 September 30, 2004
------------------ ------------------
(in thousands, except per share amounts)
Revenues........................................... $ 492,557 $1,462,922
========= =========
Income from continuing operations.................. $ 76,148 $ 217,194
Income from discontinued operations, net of tax.... 3,842 9,391
-------- ---------
Net income......................................... $ 79,990 $ 226,585
========= =========
Basic earnings per share:
Income from continuing operations................ $ .53 $ 1.51
Income from discontinued operations, net of tax.. .03 .06
-------- ---------
Net income....................................... $ .56 $ 1.57
========= =========
Diluted earnings per share:
Income from continuing operations................ $ .51 $ 1.47
Income from discontinued operations, net of tax.. .03 .06
-------- ---------
Net income....................................... $ .54 $ 1.53
========= =========
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 nine months ended September 30, 2005 and the years
ended December 31, 2004 and 2003:
Year ended
Three months Nine months December 31,
ended ended ---------------------
September 30, 2005 September 30, 2005 2004 2003
------------------ ------------------ -------- ---------
(in thousands)
Beginning capitalized exploratory well costs.... $ 134,587 $ 126,472 $108,986 $ 71,500
Additions to exploratory well costs pending the
determination of proved reserves.............. 50,478 148,502 156,937 216,352
Reclassifications due to determination of
proved reserves............................... (9,362) (54,261) (56,639) (117,966)
Exploratory well costs charged to expense....... (10,452) (55,462) (82,812) (60,900)
-------- -------- ------- --------
Ending capitalized exploratory well costs ...... $ 165,251 $ 165,251 $126,472 $ 108,986
======== ======== ======= ========
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
The following table provides an aging as of September 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,
September 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.............. $ 74,084 $ 35,046 $ 75,120
Capitalized exploratory well costs that have been
capitalized for a period greater than one year............ 91,167 91,426 33,866
------- ------- -------
$165,251 $126,472 $108,986
======= ======= =======
Number of wells with exploratory well costs that
have been capitalized for a period greater than one year.. 7 10 3
======= ======= =======
The following table provides the capitalized costs of exploration projects
that have been suspended for more than one year as of September 30, 2005 and
December 31, 2004 and 2003:
December 31,
September 30, ---------------------
2005 2004 2003
------------ --------- --------
(in thousands)
United States:
Ozona Deep.............................................. $ 19,423 $ 19,462 $ 19,003
Oooguruk................................................ 50,507 47,083 -
Canada - Other............................................ - 1,214 -
South Africa - Gas Project................................ 15,520 14,895 14,863
Tunisia - Anaguid......................................... 5,717 8,772 -
------- ------- -------
Total................................................. $ 91,167 $ 91,426 $ 33,866
======= ======= =======
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 ensure the
economics associated with the discovery prior to doing further appraisal
drilling. During the third quarter of 2005, Pioneer and the operator of Ozona
Deep signed a Capacity Commitment Agreement ("CCA") with a third party platform
to bring future production from the discovery to the third party's platform. The
Company anticipates entering into a PHA based on the CCA 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
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 gas and condensate 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 ("GTL") plant located at Mossel Bay 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 GTL plant operator initiated purchase orders for long-lead time
infrastructure components.
During the third quarter of 2005, the Company and the GTL plant operator
announced that they had reached an agreement to develop the gas and condensate
fields discovered offshore South Africa. The companies signed a Memorandum of
Understanding finalizing the terms for jointly developing the gas fields to
provide feedstock for the GTL plant. The agreement is subject to approval by the
GTL plant operator's board of directors.
Tunisia - Anaguid. During 2003, the Company drilled two exploration wells
on its Anaguid Block in Tunisia which found quantities of gas and condensate
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 the third quarter of 2005, the project operator, along with the Company,
conducted an extended production test of one of the two existing exploration
wells and drilled an offset appraisal well to the other exploration well.
The results of the extended production test were unfavorable and the
Company has expensed the costs associated with this well in the third quarter of
2005, which were approximately $5.1 million. However, the appraisal well
offsetting the second discovery encountered gas and condensate in a similar
horizon to the initial well. The Company, along with the operator, is currently
reviewing data from the appraisal well to determine whether development of the
area is economical.
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 September 30, 2005, the Company's valuation
allowance was $91.3 million, 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 the 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
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 $164.3 million of the repatriated funds will qualify for the
dividend exclusion. The Company is obligated by the provisions of the AJCA to
invest the qualifying 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 $9.0 million for 2005. During the nine
months ended September 30, 2005, the Company recognized income tax expense of
$4.7 million related to continuing operations and $2.9 million related to
discontinued operations associated with qualifying dividends. If funds are
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
available, the Company may repatriate additional earnings during 2005. Further
repatriation under the AJCA will be dependent upon the Company's financial
results and activities for the remainder of 2005.
The Company's income tax provision attributable to income from continuing
operations consisted of the following for the three and nine months ended
September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Current:
U.S. federal................... $ 3,308 $ - $ 7,965 $ 2,500
U.S. state and local........... (474) 300 (343) 601
Foreign........................ 9,164 7,216 28,817 16,087
-------- -------- -------- --------
11,998 7,516 36,439 19,188
-------- -------- -------- --------
Deferred:
U.S. federal................... 25,828 14,692 147,147 94,058
U.S. state and local........... 782 599 5,369 3,662
Foreign........................ 3,875 86 4,767 (3,220)
-------- -------- -------- --------
30,485 15,377 157,283 94,500
-------- -------- -------- --------
$ 42,483 $ 22,893 $ 193,722 $ 113,688
======== ======== ======== ========
Included in the Company's income tax provision for the nine months ended
September 30, 2005 is the reversal of a $26.9 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. The
Company reversed the tax benefit as a 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 made it more likely than not that the
Company would not realize the originally recorded tax benefit. The sale of the
shares in the subsidiary that owns the interest in the Olowi block was completed
during October 2005 and the Company will recognize a gain during the fourth
quarter of approximately $47 million with no associated income tax effect in
either Gabon or the United States. See Note P for additional discussion
regarding the close of the Gabon sale. In accordance with FASB Interpretation
No. 18, "Accounting for Income Taxes in Interim Periods" ("FIN 18"), the
Company's income tax provision for the nine months ended September 30, 2005
includes a portion of the beneficial effect that this tax-free income will have
on the Company's year-end effective tax rate.
NOTE F. Long-term Debt
Lines of credit. During September 2005, the Company entered into an Amended
and Restated 5-Year Revolving Credit Agreement (the "Amended Credit Agreement")
that amended the Company's $700 million 5-Year Revolving Credit Agreement. The
Amended Credit Agreement matures in September 2010 unless extended in accordance
with the terms of the Amended Credit Agreement. The terms of the Amended Credit
Agreement provide for initial aggregate loan commitments of $1.5 billion, which
may be increased to a maximum aggregate amount of $1.8 billion if the lenders
increase their loan commitments or if loan commitments of new financial
institutions are added to the Amended Credit Agreement. In connection with the
funding of the Amended Credit Agreement on September 30, 2005, all amounts
outstanding under the 364-Day Credit Agreement were retired and the 364-Day
Credit Agreement was terminated.
Borrowings under the Amended Credit Agreement may be in the form of
revolving loans or swing line loans. Aggregate outstanding swing line loans may
not exceed $100 million. Revolving loans bear interest, at the option of the
Company, based on (a) a rate per annum equal to the higher of the prime rate
announced from time to time by JPMorgan Chase Bank or the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System during the last preceding business day plus .5 percent or (b) a
base Eurodollar rate, substantially equal to LIBOR, plus a margin (the
"Applicable Margin") that is determined by reference to a grid based on the
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Company's debt rating (currently .625 percent). The Applicable Margin is
increased by .10 percent to .125 percent per annum, depending on the Company's
debt rating if total borrowings under the Amended Credit Agreement exceed 50
percent of the aggregate loan commitments. Swing line loans bear interest at a
rate per annum equal to the "ASK" rate for Federal funds periodically published
by the Dow Jones Market Service plus the Applicable Margin. The Company pays
commitment fees on the undrawn amounts under the Amended Credit Agreement that
are determined by reference to a grid based on the Company's debt rating, which
commitment fees were .125 percent per annum at September 30, 2005.
As of September 30, 2005, the Company had $755.0 million borrowed under the
Amended Credit Agreement, bearing interest at an effective rate of 4.75 percent
per annum. Including $35.3 million of undrawn letters of credit, the Company had
$709.7 million of unused borrowing capacity under the Amended Credit Agreement
on September 30, 2005.
The Amended Credit Agreement contains certain financial covenants, which
include the maintenance of a ratio of the Company's earnings before gain or loss
on the disposition of assets, interest expense, income taxes, depreciation,
depletion and amortization expense, exploration and abandonments expense and
other noncash charges and expenses to consolidated interest expense of at least
3.5 to 1.0; maintenance of a ratio of total debt to book capitalization less
intangible assets, accumulated other comprehensive income and certain noncash
asset impairments not to exceed .60 to 1.0; and if the Company should fall below
an investment grade rating by both Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Ratings Group, Inc. ("S&P") prior to attaining a
mid-investment grade rating (as defined in the Amended Credit Agreement) by
either of such rating agencies, then such covenants would also include the
maintenance of an annual ratio of the net present value of the Company's oil and
gas properties to total debt of at least 1.50 to 1.0 for the first 18 months
following the date of the Amended Credit Agreement, and 1.75 to 1.0 thereafter.
As of September 30, 2005, the Company was in compliance with all of its debt
covenants.
Senior notes. During the three and nine months ended September 30, 2005,
the Company redeemed $19.0 million and $51.4 million, respectively, of principal
amount of its outstanding 9-5/8% senior notes due 2010 (the "9-5/8% Notes"). The
Company recognized a pretax charge in other expense in the accompanying
Consolidated Statements of Operations on the redemption of the 9-5/8% Notes of
$4.4 million and $11.7 million for the three and nine months ended September 30,
2005, respectively.
During September 2005, the Company accepted tenders to purchase for cash
$188.4 million in principal amount of its 5.875% Senior Notes due 2012 (the
"5.875% Notes"), which represented 97 percent of the outstanding principal
amount. In addition, the Company received sufficient consents from the holders
of the 5.875% Notes to permanently remove substantially all of the operating
restrictions contained in the indenture governing the 5.875% Notes. Associated
with the tenders to purchase the 5.875% Notes, the Company recorded a $6.9
million debt extinguishment charge during the third quarter of 2005, which is
included in other expense in the accompanying Consolidated Statements of
Operations.
During September 2005, the Company announced its intention to redeem under
the "make-whole" provision contained in the governing indentures the remaining
$12.6 million and $16.2 million of aggregate principal amount outstanding of its
9-5/8% Notes and its 7.50% Senior Notes due 2012 (the "7.50% Notes"),
respectively. During September 2005, the "make-whole" premium was established.
Consequently, the Company accrued the "make-whole" premium, which was paid
during October 2005, and recognized a pretax loss on the redemptions of $7.4
million, which is included in other expense in the accompanying Consolidated
Statements of Operations for the three and nine months ended September 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 or terminate
interest rate swap contracts with the objective of reducing its costs of
capital. During the nine months ended September 30, 2004, the Company entered
into interest rate swap contracts to hedge a portion of the fair value of its
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 nine months ended September 30, 2004, settlements of open fair value hedges
reduced the Company's interest expense by $.2 million and $2.2 million,
respectively. As of September 30, 2005 and December 31, 2004, the Company was
not a party to any open fair value hedges.
As of September 30, 2005, the carrying value of the Company's long-term
debt in the accompanying Consolidated Balance Sheets included a $5.7 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 $.5 million and $3.8 million during
the three and nine months ended September 30, 2005, respectively, as compared to
$3.4 and $16.7 million during the same respective periods of 2004.
The following table sets forth, as of September 30, 2005, the scheduled
amortization of net deferred hedge gains and 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:
Three months
ending Year ending December 31,
December 31, ------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter
------------ ------- ------- ------- ------- ----------
(in thousands)
Net deferred hedge gains (losses)... $ 306 $ 175 $(1,809) $ (980) $(1,066) $(5,573)
====== ====== ====== ====== ====== ======
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.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2005, all of the Company's oil hedges were
designated as hedges of United States forecasted sales. The following table sets
forth the Bbls hedged under outstanding oil hedge contracts and the weighted
average NYMEX prices per Bbl for those contracts as of September 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
Price per Bbl.......... $ 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)........... 8,500 9,000 9,500 9,500 9,129
Price per Bbl.......... $43.82-$73.43 $44.17-$74.63 $44.47-$75.70 $44.47-$75.70 $44.25-$74.92
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
2007 - Collar Contracts
Volume (Bbl)........... 4,500 4,500 4,500 4,500 4,500
Price per Bbl.......... $50.00-$90.43 $50.00-$90.43 $50.00-$90.43 $50.00-$90.43 $50.00-$90.43
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 from continuing operations, 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 nine
months ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Average price reported per Bbl................. $ 40.66 $ 33.29 $ 36.56 $ 30.46
Average price realized per Bbl................. $ 56.64 $ 39.50 $ 49.14 $ 35.59
Reduction to oil revenue (in millions) (a)..... $ (61.6) $ (25.3) $ (150.7) $ (61.2)
<FN>
- ---------
(a) Excludes hedge losses of $3.1 million and $2.3 million attributable to
discontinued operations for the three months ended September 30, 2005 and
2004, respectively, and $11.1 million and $7.4 million attributable to the
nine months ended September 30, 2005 and 2004, respectively.
</FN>
Natural gas liquids prices. During the three and nine months ended
September 30, 2005 and 2004, the Company did not enter into any NGL hedge
contracts. There were no outstanding NGL hedge contracts at September 30, 2005.
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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. As of September 30, 2005, all of the Company's gas hedges were designated
as hedges of United States and Canadian forecasted sales. The following table
sets forth the MMBtus hedged under outstanding gas hedge contracts and the
weighted average index prices per MMBtu for those contracts as of September 30,
2005:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ --------------
Average daily gas production hedged:
2005 - Swap Contracts
Volume (MMBtu)..................... 253,535 253,535
Index price per MMBtu.............. $ 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)..................... 200,000 175,000 175,000 185,000 183,685
Index price per MMBtu.............. $6.72-$13.17 $6.58-$13.90 $6.58-$13.90 $6.58-$14.11 $ 6.62-$13.76
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
2007 - Collar Contracts
Volume (MMBtu)..................... 215,000 215,000 215,000 215,000 215,000
Index price per MMBtu.............. $6.57-$11.84 $6.57-$11.84 $6.57-$11.84 $6.57-$11.84 $ 6.57-$11.84
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 from continuing
operations, 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 nine months ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Average price reported per Mcf................. $ 5.70 $ 4.11 $ 5.33 $ 4.27
Average price realized per Mcf................. $ 6.68 $ 4.55 $ 5.82 $ 4.65
Reduction to gas revenue (in millions) (a)..... $ (57.7) $ (25.7) $ (91.6) $ (67.2)
<FN>
- ---------
(a) Excludes hedge losses of $2.5 million and $6.9 million attributable to
discontinued operations for the three and nine months ended September 30,
2004.
</FN>
Hedge ineffectiveness. During the three and nine months ended September 30,
2005, the Company recognized hedge ineffectiveness charges to other expense of
$12.3 million and $23.8 million, respectively, as compared to a gain of $.3
million and a charge of $1.5 million during the same respective periods of 2004.
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of September 30, 2005 and December 31, 2004,
AOCI - Hedging represented net deferred losses of $698.7 million and $241.4
million, respectively. The AOCI - Hedging balance as of September 30, 2005 was
comprised of $1.1 billion of net deferred losses on the effective portions of
open cash flow hedges, $31.9 million of net deferred losses on terminated cash
flow hedges (including $3.2 million of net deferred losses on terminated cash
flow interest rate hedges) and $431.2 million of associated net deferred tax
benefits. The increase in AOCI - Hedging during the nine months ended September
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 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 September 30, 2006, based on current
estimates of future commodity prices, the Company expects to reclassify $538.3
million of net deferred losses associated with open commodity hedges and $7.3
million of net deferred losses on terminated commodity hedges from AOCI -
Hedging to oil and gas revenues. The Company also expects to reclassify
approximately $199.2 million of net deferred income tax benefits associated with
commodity hedges during the twelve months ending September 30, 2006 from AOCI -
Hedging to income tax benefit.
The following table sets forth, as of September 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......... $(1,873) $ (1,873)
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)
-------
$(28,716)
=======
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 143, "Accounting for Asset Retirement Obligations" during the three and
nine months ended September 30, 2005 and 2004:
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Beginning asset retirement obligations..... $ 117,753 $ 108,820 $ 120,879 $ 105,036
Liabilities assumed in acquisitions...... 3,013 14,541 3,013 14,541
New wells placed on production and
changes in estimates (a).............. 32,813 170 35,408 3,238
Disposition of wells..................... (17,863) - (23,101) -
Liabilities settled...................... (3,311) (1,082) (7,566) (4,060)
Accretion of discount.................... 1,968 2,030 6,210 6,012
Currency translation..................... 754 619 284 331
-------- -------- -------- --------
Ending asset retirement obligations ....... $ 135,127 $ 125,098 $ 135,127 $ 125,098
======== ======== ======== ========
<FN>
- -----------
(a) Includes, for the three and nine month periods ended September 30, 2005, a
$32.8 million increase in the abandonment estimate of the East Cameron
facilities that were destroyed by Hurricane Rita. See Note N for additional
information regarding this loss.
</FN>
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 September 30, 2005 and December 31, 2004, the Company had recorded
$15.4 million and $15.5 million, respectively, 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 nine months
ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 15,517 $ 15,611 $ 15,534 $ 15,556
Benefit payments............................ (413) (244) (1,042) (758)
Service costs............................... 81 59 243 176
Accretion of discounts...................... 225 226 675 678
------- ------- ------- -------
Ending accumulated postretirement benefit
obligations.................................. $ 15,410 $ 15,652 $ 15,410 $ 15,652
======= ======= ======= =======
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 legal actions 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.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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 $34 million
related to the cost of production claim and approximately $42 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.
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.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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. 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 involves
novel theories, the Company does not believe that the lawsuit will have a
material adverse effect on its business or financial condition.
Dorchester Refining Company Site. A subsidiary of the Company has been
notified by a letter from the Texas Commission on Environmental Quality ("TCEQ")
dated August 24, 2005 that the TCEQ considers the subsidiary to be a potentially
responsible party with respect to the Dorchester Refining Company State
Superfund Site located in Mount Pleasant, Texas. In connection with the
acquisition of oil and gas assets in 1991, the Company acquired a group of
companies, one of which was an entity that had owned a refinery located at the
Mount Pleasant site from 1977 until 1984. According to the TCEQ, this refinery
was responsible for releases of hazardous substances into the environment.
Pursuant to applicable Texas law, the Company's subsidiary, which does not own
any material assets or conduct any material operations, may be subject to
strict, joint and several liability for the costs of conducting a study to
evaluate potential remedial options and for the costs of performing any
remediation ultimately required by the TCEQ. The Company does not know the
nature and extent of the alleged contamination, the potential costs of
remediation, or the portion, if any, of such costs that may be allocable to the
Company's subsidiary; however, the Company has noted that there appear to be
other operators or owners who may share responsibility for these costs and does
not believe that this matter will have a material adverse effect on its business
or financial condition.
Environmental Protection Agency Investigation. On November 4, 2005, the
Company learned from the U.S. Environmental Protection Agency ("EPA") that the
agency was conducting a criminal investigation into a 2003 spill that occurred
at a Company-operated drilling rig located on an ice island offshore Kuparuk in
Harrison Bay, Alaska. The spill was previously investigated by the Alaska
Department of Environmental Conservation ("ADEC") and, following completion of a
clean up, the ADEC issued a letter stating its determination that, at that time,
the site did not pose a threat to human health, safety, or welfare or the
environment. The Company intends to cooperate with the EPA's investigation.
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.
25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
The following table is a reconciliation of basic income from continuing
operations to diluted income from continuing operations for the three and nine
months ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Basic income from continuing operations............ $ 104,587 $ 77,074 $ 283,287 $ 201,415
Interest expense on convertible notes, net of tax.. 802 - 2,405 -
-------- -------- -------- --------
Diluted income from continuing operations.......... $ 105,389 $ 77,074 $ 285,692 $ 201,415
======== ======== ======== ========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
three and nine months ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Weighted average common shares outstanding (a):
Basic........................................... 137,655 118,663 140,436 118,745
Dilutive common stock options (b)............... 1,106 1,067 1,169 1,108
Restricted stock awards......................... 698 567 838 468
Convertible notes dilution (c).................. 2,327 - 2,327 -
-------- ------- -------- --------
Diluted......................................... 141,786 120,297 144,770 120,321
======== ======= ======== ========
<FN>
- ---------------
(a) During August 2005, the Company's board of directors approved a new share
repurchase program authorizing the purchase of up to $1 billion of the
Company's common stock, $650 million of which was immediately initiated
through open market transactions. As of September 30, 2005, the Company had
repurchased 9.0 million shares at an aggregate cost of $390.7 million under
the $650 million program. During October 2005, the Company repurchased
another 4.9 million shares at an aggregate cost of $250.0 million pursuant
to a repurchase plan conforming to the requirements of Rule 10b5-1 of the
Securities Exchange Act of 1934. The $650 million program is expected to be
completed by the end of 2005. The remaining $350 million is subject to the
completion of the deepwater Gulf of Mexico and Argentine divestments.
(b) Common stock options to purchase 761,313 shares and 274,246 shares of
common stock were outstanding but not included in the computations of
diluted income per share from continuing operations for the three and nine
months ended September 30, 2004 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.
(c) 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, South Africa and Tunisia.
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
As previously referred to in Note B, during 2005, the Company sold Canadian
and United States oil and gas properties having carrying values of $58.9 million
and $31.4 million, respectively, on their dates of sale. The results of
operations of those properties have been reclassified as discontinued operations
in accordance with GAAP and are excluded from the geographic operating segment
information provided below. See Note O for information regarding the Company's
discontinued operations.
The following tables provide the Company's interim geographic operating
segment data for the three and nine months ended September 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.
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
-------- --------- -------- --------- ------------ ------------
(in thousands)
Three months ended September 30, 2005:
Revenues and other income:
Oil and gas........................ $429,789 $ 46,048 $ 29,571 $ 52,974 $ - $ 558,382
Interest and other................. - - - - 9,460 9,460
Gain on disposition of assets, net. 290 - - - 104 394
------- ------- ------- -------- ------- --------
430,079 46,048 29,571 52,974 9,564 568,236
------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production............. 90,082 10,125 9,766 8,449 - 118,422
Depletion, depreciation and
amortization.................... 91,872 23,232 8,988 6,796 5,479 136,367
Impairment of long-lived assets.... - - - 21 - 21
Exploration and abandonments....... 47,994 6,597 1,405 8,202 - 64,198
General and administrative......... - - - - 32,749 32,749
Accretion of discount on asset
retirement obligations.......... - - - - 1,968 1,968
Interest........................... - - - - 29,268 29,268
Other.............................. - - - - 38,173 38,173
------- ------- ------- -------- ------- --------
229,948 39,954 20,159 23,468 107,637 421,166
------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... 200,131 6,094 9,412 29,506 (98,073) 147,070
Income tax benefit (provision)...... (73,048) (2,134) (3,435) (10,905) 47,039 (42,483)
------- ------- ------- -------- ------- --------
Income (loss) from continuing
operations........................ $127,083 $ 3,960 $ 5,977 $ 18,601 $(51,034) $ 104,587
======= ======= ======= ======== ======= ========
Three months ended September 30, 2004:
Revenues and other income:
Oil and gas........................ $341,241 $ 40,288 $ 10,170 $ 33,876 $ - $ 425,575
Interest and other................. - - - - 1,212 1,212
Gain on disposition of assets, net. - - - - 215 215
------- ------- ------- -------- ------- --------
341,241 40,288 10,170 33,876 1,427 427,002
------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production............. 58,198 8,917 3,761 4,219 - 75,095
Depletion, depreciation and
amortization.................... 103,085 17,304 4,844 7,333 2,893 135,459
Impairment of long-lived assets.... - - - 34,825 - 34,825
Exploration and abandonments....... 18,543 2,898 4,135 7,306 - 32,882
General and administrative......... - - - - 19,431 19,431
Accretion of discount on asset
retirement obligations.......... - - - - 2,030 2,030
Interest........................... - - - - 24,827 24,827
Other.............................. - - - - 2,486 2,486
------- ------- ------- -------- ------- --------
179,826 29,119 12,740 53,683 51,667 327,035
------- ------- ------- -------- ------- --------
Income (loss) from continuing
operations before income taxes.... 161,415 11,169 (2,570) (19,807) (50,240) 99,967
Income tax benefit (provision)...... (58,916) (3,909) 970 7,876 31,086 (22,893)
------- ------- ------- -------- ------- --------
Income (loss) from continuing
operations........................ $102,499 $ 7,260 $ (1,600) $ (11,931) $(19,154) $ 77,074
======= ======= ======= ======== ======= ========
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
---------- --------- -------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2005:
Revenues and other income:
Oil and gas........................ $1,245,026 $124,857 $ 73,620 $ 149,967 $ - $1,593,470
Interest and other................. - - - - 85,689 85,689
Gain on disposition of assets, net. 2,322 - - - 441 2,763
--------- ------- ------- -------- -------- ---------
1,247,348 124,857 73,620 149,967 86,130 1,681,922
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oil and gas production............. 252,125 27,527 27,370 23,849 - 330,871
Depletion, depreciation and
amortization.................... 308,401 61,050 23,429 23,434 15,446 431,760
Impairment of long-lived assets.... - - - 644 - 644
Exploration and abandonments....... 119,933 15,031 7,828 40,879 - 183,671
General and administrative......... - - - - 91,551 91,551
Accretion of discount on asset
retirement obligations.......... - - - - 6,210 6,210
Interest........................... - - - - 92,731 92,731
Other.............................. - - - - 67,475 67,475
--------- ------- ------- -------- -------- ---------
680,459 103,608 58,627 88,806 273,413 1,204,913
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations before income taxes.... 566,889 21,249 14,993 61,161 (187,283) 477,009
Income tax benefit (provision)...... (206,915) (7,438) (5,472) (21,440) 47,543 (193,722)
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations........................ $ 359,974 $ 13,811 $ 9,521 $ 39,721 $(139,740) $ 283,287
========= ======= ======= ======== ======== =========
Nine months ended September 30, 2004:
Revenues and other income:
Oil and gas........................ $1,029,625 $ 97,785 $ 31,685 $ 106,649 $ - $1,265,744
Interest and other................. - - - - 4,557 4,557
Gain (loss) on disposition of
assets, net...................... 51 - (252) - 171 (30)
--------- ------- ------- -------- -------- ---------
1,029,676 97,785 31,433 106,649 4,728 1,270,271
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oil and gas production............. 165,146 24,092 12,417 21,052 - 222,707
Depletion, depreciation and
amortization.................... 302,127 44,666 15,177 35,466 8,322 405,758
Impairment of long-lived assets.... - - - 34,825 - 34,825
Exploration and abandonments....... 83,933 14,295 17,527 36,478 - 152,233
General and administrative......... - - - - 54,846 54,846
Accretion of discount on asset
retirement obligations.......... - - - - 6,012 6,012
Interest........................... - - - - 67,805 67,805
Other.............................. - - - - 10,982 10,982
--------- ------- ------- -------- -------- ---------
551,206 83,053 45,121 127,821 147,967 955,168
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations before income taxes.... 478,470 14,732 (13,688) (21,172) (143,239) 315,103
Income tax benefit (provision)...... (174,642) (5,156) 5,167 8,669 52,274 (113,688)
--------- ------- ------- -------- -------- ---------
Income (loss) from continuing
operations........................ $ 303,828 $ 9,576 $ (8,521) $ (12,503) $ (90,965) $ 201,415
========= ======= ======= ======== ======== =========
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 volumetric
production payment ("VPP") agreements 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 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 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 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)
removed the proved reserves associated with the VPPs; (ii) recognized the VPP
proceeds as deferred revenue which are being amortized on a unit-of-production
basis to oil and gas revenues over the terms of the VPPs; (iii) retained
responsibility for 100 percent of the production costs and capital costs related
to VPP interests and (iv) no longer recognizes production associated with the
VPP volumes.
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.................. (47,677) - (6,279) - (53,956)
---------- ---------- --------- ---------- ----------
Deferred revenue at
September 30, 2005................. $ 240,344 $ 353,879 $ 30,806 $ 251,703 $ 876,732
========== ========== ========= ========== ==========
<FN>
- -----------
(a) Represents the fair value of the derivative obligations conveyed as part of
the VPP transactions. The fair value is 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 is being
recognized as increases or decreases to oil and gas revenues. See Note G
for additional discussion regarding the Company's hedge positions.
</FN>
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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................................ $ 21,818
2006.......................................... 190,347
2007.......................................... 181,250
2008.......................................... 158,151
2009.......................................... 147,919
2010.......................................... 90,227
2011.......................................... 44,951
2012.......................................... 42,069
---------
$ 876,732
=========
NOTE N. Insurance Claims
Hurricane Ivan. 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 the
first half of 2005. The Company maintains business interruption insurance
coverage for such circumstances. During 2004, 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 recovered business interruption losses related to
Hurricane Ivan of $67 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.
Fain Plant. 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 and physical damage insurance coverage for such circumstances and
has filed claims with its insurance providers. The Company estimates its
aggregate Fain plant business interruption claims to be approximately $19
million to $20 million, of which amount approximately $14.2 million is
undisputed by the insurance provider. The Company is working to resolve the
disputed amounts with the insurance provider. The Company recorded $4.8 million
and $14.2 million of the claims, respectively, in interest and other income in
the Company's Consolidated Statements of Operations during the three and nine
months ended September 30, 2005.
Hurricane Katrina/Rita. During August and September 2005, the Company
sustained damages as a result of Hurricanes Katrina and Rita at various
facilities in the Gulf of Mexico. Other than the East Cameron facility discussed
further below, the Company believes the damages to the facilities are covered by
physical damage insurance. The Company also maintains business interruption
insurance related to specifically designated assets in the event there are
extended periods of revenue interruption.
The Company filed a business interruption claim with its insurance provider
related to its Devils Tower field resulting from its inability to sell
production as a result of damages to third party facilities. Currently, it is
expected that the third party facilities will be capable of taking the full
production of the Devils Tower field in November 2005. The Company's business
interruption claim is expected to cover losses of revenues from mid-October 2005
(end of 45-day deductible waiting period) until such point as the third party
facilities can take the full production from the Devils Tower field.
31
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
As a result of Hurricane Rita, the Company's East Cameron facility was
destroyed and the Company currently does not plan to rebuild the facility based
on the current economics of the field. The Company is in the process of
evaluating the magnitude of the loss. Currently, the Company estimates that it
will incur a minimum of $37 million to reclaim and completely abandon the East
Cameron facility; thus, the Company recorded an additional abandonment
obligation of approximately $32.8 million in the third quarter of 2005 which is
included in exploration and abandonments in the Consolidated Statements of
Operations for the three and nine month periods ended September 30, 2005.
The Company has filed a claim with its insurance provider regarding the
loss at East Cameron. Under the Company's insurance policy, the East Cameron
facility has the following coverages: (a) $14 million of scheduled property
value for the platform, (b) $4 million of scheduled business interruption
insurance after a deductible waiting period, (c) greater of (1) 25 percent of
the scheduled property value of the platform or (2) $5 million for debris
removal coverage, in total, for all assets per occurrence and (d) $100 million
of "make well safe" coverage, in total, for all assets per occurrence.
The Company has not recognized a loss on the value of its East Cameron
assets as the Company believes expected proceeds from its insurance coverage
will exceed the assets' underlying basis. The Company will not recognize any
recoveries from the business interruption coverage until after the 45-day
deductible waiting period, which is subsequent to mid-November 2005. The Company
believes that its debris removal and make well safe coverages, in combination,
will substantially cover the losses incurred with the abandonment of the East
Cameron facility. The Company has not recorded any estimated recoveries related
to insurance due to the early nature of the claim and the need to better
quantify the claim.
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 $138.6 million. During August 2005, the
Company sold its interests in certain oil and gas properties on the shelf of the
Gulf of Mexico for net proceeds of $58.9 million, resulting in a gain of $27.5
million.
During the three and nine months ended September 30, 2005, the Company
recognized income from discontinued operations of $19.0 million and $110.5
million, respectively, as compared to $3.8 million and $9.4 million for the same
respective periods of 2004. The following table represents the components of the
Company's discontinued operations for the three and nine months ended September
30, 2005 and 2004:
32
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands)
Revenues and other income:
Oil and gas................................... $ 6,446 $ 16,149 $ 43,868 $ 47,438
Gain on disposition of assets (a)............. 27,476 - 166,137 -
-------- -------- -------- --------
33,922 16,149 210,005 47,438
-------- -------- -------- --------
Costs and expenses:
Oil and gas production........................ 2,716 7,004 14,446 22,107
Depletion, depreciation and amortization (a).. 1,445 4,532 11,211 13,482
Exploration and abandonments (a).............. (92) 83 241 921
General and administrative.................... - 54 132 162
-------- -------- -------- --------
4,069 11,673 26,030 36,672
-------- -------- -------- --------
Income from discontinued operations
before income taxes........................... 29,853 4,476 183,975 10,766
Income tax provision:
Current....................................... - - (2,869) -
Deferred (a).................................. (10,867) (634) (70,604) (1,375)
-------- -------- -------- --------
Income from discontinued operations.............. $ 18,986 $ 3,842 $ 110,502 $ 9,391
======== ======== ======== ========
<FN>
- -------------
(a) Represents the noncash components of discontinued operations included in
the Company's Consolidated Statements of Cash Flows excluding $37 thousand
of cash payments for delay rentals included in exploration and abandonments
for the nine months ended September 30, 2005.
</FN>
NOTE P. Subsequent Event
In October 2005, the Company closed the sale of the shares in a Gabonese
subsidiary that owns the interest in the Olowi block to an unaffiliated buyer
for approximately $48 million of net proceeds. Pioneer will recognize a gain
during the fourth quarter of 2005 of approximately $47 million with no
associated income tax effect either in Gabon or the United States. In addition,
Pioneer retains the potential, under certain circumstances, to receive
additional payments for production from deeper reservoirs discovered on the
block.
33
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Strategic Initiatives
On September 1, 2005, the Company announced that its board of directors
approved the following strategic initiatives to enhance shareholder value and
returns:
o Approval of a $1 billion share repurchase program, $650 million of
which was immediately initiated through open market transactions. The
$650 million program is expected to be completed by the end of 2005.
The remaining $350 million is subject to the completion of the
deepwater Gulf of Mexico and Argentine divestments discussed below.
o Divestment of properties in the deepwater Gulf of Mexico and Tierra
del Fuego in southern Argentina as a result of high commodity prices
and an active asset market.
o Implementation of a plan to exit exploration in deepwater Gulf of
Mexico. Pioneer has expanded and balanced its exploration portfolio in
onshore North America, Alaska and Africa and believes these
opportunities are now better aligned with the Company's current
exploration objectives.
o Reduction of the exploration budget to between 15 percent and 20
percent of total capital from 30 percent.
o Reallocation of capital to North America onshore development and
extension drilling.
o Hedging eligible oil and gas production for 2006 and 2007 using
costless collars.
o Increasing the semiannual dividend on common shares by 20 percent to
$.12 per share.
Financial and Operating Performance
The Company's financial and operating performance for the third quarter of
2005 included the following highlights:
o Average daily sales volumes per BOE decreased one percent during the
third quarter of 2005 as compared to the third quarter of 2004.
o Oil and gas revenues increased 31 percent during the third quarter of
2005 as compared to the third quarter of 2004 primarily as a result of
increases in worldwide oil and Argentine and North American gas
prices.
o Interest and other income increased by $8.2 million during the third
quarter of 2005 as compared to the third quarter of 2004, primarily
due to $4.8 million of business interruption insurance claims related
to the Fain gas plant fire.
o Other expense increased by $35.7 million during the third quarter of
2005 as compared to the third quarter of 2004, primarily due to
increases of $18.6 million and $12.6 million in losses associated with
debt extinguishments and commodity hedge ineffectiveness,
respectively.
o Income from continuing operations before income taxes increased by 47
percent to $147.1 million during the third quarter of 2005 from $100.0
million during the third quarter of 2004.
o Net income increased to $123.6 million ($.88 per diluted share) for
the third quarter of 2005, as compared to $80.9 million ($.67 per
diluted share) for the third quarter of 2004.
o The Company recognized income from discontinued operations of $19.0
million ($.14 per diluted share) during the third quarter of 2005
attributable to certain Gulf of Mexico shelf properties sold during
the third quarter of 2005.
o Net cash provided by operating activities increased by 33 percent to
$317.7 million during the third quarter of 2005 from $239.1 million
during the third quarter of 2004.
o Outstanding debt decreased by $446.7 million, or 19 percent, as of
September 30, 2005 as compared to debt outstanding as of December 31,
2004.
Fourth Quarter 2005 Outlook
Based on current estimates, the Company expects that fourth quarter 2005
production will average 160,000 to 175,000 BOEPD. This range reflects the
Company's expectations on the resumption of production from the Devils Tower
field in November and the typical variability in the timing of oil cargo
shipments in South Africa, Argentina and Tunisia.
34
PIONEER NATURAL RESOURCES COMPANY
Fourth quarter production costs (including production and ad valorem taxes)
are expected to average $7.25 to $7.75 per BOE based on current NYMEX strip
prices for oil and gas. The increase over the prior quarter is primarily the
result of increasing service costs associated with field operations and higher
commodity prices. 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 $30 million to
$70 million and includes plans to drill in Alaska, the Gulf of Mexico shelf,
Argentina, Nigeria and Tunisia as well as the acquisition of additional 3-D
seismic. General and administrative expense is expected to be $31 million to $33
million. Interest expense is expected to be $31 million to $34 million,
representing an increase over the prior quarter primarily as a result of the
previously discussed share repurchase program. Accretion of discount on asset
retirement obligations is expected to be $2 million to $3 million.
The Company's fourth quarter effective income tax rate is expected to range
from 34 percent to 37 percent based on current capital spending plans. Cash
income taxes are expected to range from $10 million to $20 million, principally
related to Argentine, Canadian and Tunisian income taxes and nominal alternative
minimum tax in the United States. The Company continues to benefit from the
carryforward of net operating losses and other positive tax attributes in the
United States.
Acquisitions, Divestments, Operations and Drilling Highlights
During the first nine months of 2005, the Company incurred $957.7 million
in finding and development costs including $450.1 million for development
activities, $235.2 million for exploration activities and $272.4 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 nine months ended September 30, 2005:
Development Drilling
--------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States............... 32 383 403 2 10
Argentina................... 6 56 48 1 13
Canada...................... 2 28 26 - 4
---- ---- ---- ---- ----
Total Worldwide......... 40 467 477 3 27
==== ==== ==== ==== ====
Exploration/Extension Drilling
--------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States............... 9 18 15 5 7
Argentina................... 8 23 14 9 8
Canada...................... 21 88 43 7 59
Africa...................... 4 4 1 3 4
---- ---- ---- ---- ----
Total Worldwide........ 42 133 73 24 78
==== ==== ==== ==== ====
35
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 nine 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........ $ - $ 10,669 $ 103,066 $ 76,402 $ 190,137 8
Onshore Gulf Coast.... 21,430 20,691 8,366 32,197 82,684 23
Permian Basin......... 147,980 1,541 1,010 84,583 235,114 205
Mid-Continent......... 150 - 33 26,891 27,074 65
Rocky Mountain........ 578 14,931 4,290 97,871 117,670 300
Alaska................ - 16,375 23,674 3,728 43,777 4
--------- --------- --------- --------- --------- -----
170,138 64,207 140,439 321,672 696,456 605
--------- --------- --------- --------- --------- -----
Argentina................. 4 357 26,096 64,207 90,664 105
Canada.................... 1,528 6,259 25,257 61,093 94,137 200
Nigeria................... - 29,944 21,860 - 51,804 2
Tunisia................... - - 11,903 2,846 14,749 4
Other..................... - - 9,624 291 9,915 -
--------- --------- --------- --------- --------- -----
1,532 36,560 94,740 128,437 261,269 311
--------- --------- --------- --------- --------- -----
Total Worldwide...... $ 171,670 $ 100,767 $ 235,179 $ 450,109 $ 957,725 916
========= ========= ========= ========= ========= =====
Gulf of Mexico area. During the third quarter, the Company announced its
plans to pursue the divestment of its deepwater Gulf of Mexico properties to
reduce the exploration risk and production volatility that have been associated
with these properties. No assurance can be given that there will be purchasers
willing to purchase these properties on terms acceptable to the Company.
During August 2005, the Company sold its interests in certain oil and gas
properties on the shelf of the Gulf of Mexico for net proceeds of $58.9 million.
Prior to their divestiture in August 2005, the Company's net production from
these properties averaged approximately 3,100 BOEPD. See Note O of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information regarding the Company's discontinued operations.
The Company's East Cameron facilities were destroyed by Hurricane Rita. As
a result, the Company plans to abandon the East Cameron field because the
pre-hurricane production of approximately 600 BOEPD and future production
profile do not justify the cost of replacing the facilities.
Devils Tower production was shut-in for the month of September due to
damage to third party processing facilities from Hurricane Katrina. Devils Tower
production is expected to be restarted in early November, and production is
expected to return to pre-hurricane levels of approximately 5,000 net BOEPD
shortly after start up. The subsea wells at the Triton and Goldfinger satellite
fields have been tied back to the Devils Tower platform and are ready to flow.
Further increases in production from these subsea wells and Devils Tower well
recompletions will occur over the next few months as additional repairs are
completed on the third party processing facilities. Pioneer's remaining
operations in the Gulf of Mexico experienced limited disruptions from Hurricanes
Katrina and Rita. Deepwater facilities at Falcon, Canyon Express and Devils
Tower had little to no damage. By October 1, 2005, Falcon and Canyon Express
were fully operational and producing at pre-hurricane levels. See Note N of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information.
Subsequent to quarter end, the Company announced a discovery on its Clipper
prospect in the Green Canyon 299 Block in the deepwater Gulf of Mexico. Pioneer
operates the block with a 55 percent working interest. The block is included in
Pioneer's deepwater Gulf of Mexico divestment program.
36
PIONEER NATURAL RESOURCES COMPANY
In October 2005, the Company spudded the first well of its previously
announced five well shelf program. The first well was a dry hole and will result
in a charge to earnings of approximately $2.1 million in the fourth quarter of
2005.
The Company received a subsalt suspension of operations ("SOO") extension
from the Minerals Management Service related to its subsalt Paladin prospect in
the Garden Banks area of the deepwater Gulf of Mexico. The Company is
reprocessing seismic data and is evaluating alternatives to drill an exploratory
well on the prospect during the SOO period.
In the fourth quarter of 2005, the Company plans to spud the third well on
its 2004 Thunder Hawk discovery and complete the drilling of the previously
spudded second well which was temporarily suspended due to weather.
During the third quarter of 2005, recoverable reserves from the Harrier
field were fully produced. The Harrier field had cumulative production of 51 Bcf
on a total investment of $112.0 million.
The Company was 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 Hills recoverable reserves are fully produced during the first half of
2006 unless a rig becomes available to drill the Aconcagua sidetrack wells.
Alaska area. 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 an additional 40 percent working interest and potentially
assume operatorship after new 3-D seismic data has been acquired and
interpreted. The Company's initial 10 percent interest is being acquired through
its agreement to pay a disproportionate share of the 3-D seismic survey. The
Company also has three exploratory wells planned on the North Slope for the
winter drilling season.
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 filed a business interruption claim relating to the fire and
recognized an additional $4.8 million of recoveries in the third quarter of
2005. See Note N of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information.
Permian Basin and Gulf Coast areas. In July 2005, the Company completed the
purchase of approximately 70 million BOE 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 acquired were producing approximately
1,800 BOEPD at the date of acquisition and provide an estimated 800 undrilled
locations.
Rocky Mountain area. In the Raton Basin, production is increasing as a
result of a pipeline expansion that was completed in October 2005. Pioneer plans
to drill approximately 100 Raton wells in the fourth quarter of 2005, has
drilled 234 Raton wells during the first nine months of 2005 and expects
production growth from the field of 5 percent to 7 percent during 2005.
Canada. The Company had its first production, in the third quarter of 2005,
from the wells drilled in the Horseshoe Canyon coalbed methane project. The
Company expects fourth quarter Canadian production to increase as additional
Horseshoe Canyon wells are brought onto production. Pioneer has drilled 90 wells
of the planned 180 well program for 2005 in Horseshoe Canyon and expects to
complete the balance of the program by the end of the year. An additional 180
well program is planned for 2006. Also, the Company plans to drill approximately
50 wells in its Chinchaga field during the 2006 winter drilling season.
Argentina. During the third quarter, the Company announced it will pursue
the sale of its non-operated position in Tierra del Fuego, southern Argentina.
No assurance can be given that there will be purchasers willing to purchase
these properties on terms acceptable to the Company.
37
PIONEER NATURAL RESOURCES COMPANY
Gabon. In October 2005, the Company closed the sale of the shares in a
subsidiary that owns the interest in the Olowi block to an unaffiliated buyer
for approximately $48 million of net proceeds. Pioneer will recognize a gain
during the fourth quarter of 2005 of approximately $47 million with no
associated income tax effect either in Gabon or the United States. In addition,
Pioneer retains the potential, under certain circumstances, to receive
additional payments for production from deeper reservoirs discovered on the
block.
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 early 2007.
The Company expects to spud an exploratory well on its non-operated Block
256 in late 2005.
Sao Tome and Principe and Nigeria. Pioneer was awarded exploration rights
to acreage in Blocks 2 and 3 in the Joint Development Zone between Nigeria and
Sao Tome and Principe through a consortium with ERHC Energy Inc. The consortium
was awarded 65 percent interest in Block 2 and a 25 percent interest in Block 3
subject to negotiating acceptable joint operating and production sharing
agreements. The Company is currently negotiating joint operating and production
sharing agreements related to the acreage in Blocks 2 and 3.
South Africa. During the third quarter of 2005, the Company and the GTL
plant operator announced that they had reached an agreement to develop the gas
and condensate fields discovered offshore South Africa. The companies signed a
Memorandum of Understanding finalizing the terms for jointly developing the gas
fields to provide feedstock for the GTL plant, which is located at Mossel Bay.
The agreement is subject to approval by the GTL plant operator's board of
directors.
Tunisia - Anaguid. In the third quarter of 2005, the project operator of
the Company's Anaguid Block in Tunisia, along with the Company, conducted an
extended production test of one of the two existing exploration wells and
drilled an offset appraisal well to the other exploration well. The results of
the extended production test were unfavorable and the Company has expensed the
costs associated with this well in the third quarter of 2005, which was
approximately $5.1 million. However, the appraisal well offsetting the second
discovery encountered gas and condensate in a similar horizon to the initial
well. The Company, along with the operator, is currently reviewing data from the
appraisal well to determine whether development of the area is economical.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $558.4
million and $1.6 billion for the three and nine months ended September 30, 2005,
respectively, as compared to $425.6 million and $1.3 billion for the same
respective periods of 2004. The revenue increase during the three months ended
September 30, 2005, as compared to the same period of 2004, was due to a 22
percent increase in oil prices, a 28 percent increase in NGL prices and a 39
percent increase in gas prices, including the effects of commodity price hedges,
partially offset by a one percent decrease in average daily BOE sales volumes.
The revenue increase during the nine months ended September 30, 2005, as
compared to the same period of 2004, was due to a two percent increase in
average daily BOE sales volumes, a 20 percent increase in oil prices, a 27
percent increase in NGL prices and a 25 percent increase in gas prices,
including the effects of commodity price hedges.
38
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 nine months ended
September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Oil (Bbls):
United States................. 24,133 25,930 25,059 23,681
Argentina..................... 7,930 9,316 7,972 8,827
Canada........................ 209 25 194 27
Africa........................ 9,666 8,733 10,686 10,986
--------- --------- --------- ---------
Worldwide..................... 41,938 44,004 43,911 43,521
========= ========= ========= =========
NGLs (Bbls):
United States................. 18,176 18,825 16,835 19,790
Argentina..................... 1,917 1,727 1,814 1,549
Canada........................ 502 381 510 415
--------- --------- --------- ---------
Worldwide..................... 20,595 20,933 19,159 21,754
========= ========= ========= =========
Gas (Mcf):
United States................. 460,372 472,133 512,834 506,166
Argentina..................... 142,399 137,971 136,023 119,440
Canada........................ 37,562 22,058 36,160 23,627
--------- --------- --------- ---------
Worldwide..................... 640,333 632,162 685,017 649,233
========= ========= ========= =========
Total (BOE):
United States................. 119,036 123,444 127,367 127,831
Argentina..................... 33,581 34,039 32,456 30,283
Canada........................ 6,972 4,082 6,731 4,380
Africa........................ 9,666 8,733 10,686 10,986
--------- --------- --------- ---------
Worldwide..................... 169,255 170,298 177,240 173,480
========= ========= ========= =========
On a quarter-to-quarter comparison, average daily sales volumes increased
by 71 percent in Canada and by 11 percent in Africa, while average daily sales
volumes decreased by one percent in Argentina and by four percent in the United
States. On a year-to-date comparison, average daily sales volumes increased by
seven percent in Argentina and by 54 percent in Canada, while average daily
sales volumes decreased by three percent in Africa and remained constant in the
United States.
Average daily sales volumes from continuing operations 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 2005.
Argentine average daily sales volumes increased as a result of increased
wells drilled and market demand. The Company has maintained its level of 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 and timing of oil shipments, partially offset by continued growth in
Tunisia production.
39
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes recorded from
discontinued operations during the three and nine months ended September 30,
2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Oil (Bbls):
United States............... 1,066 1,850 1,709 2,587
Canada...................... - 70 38 70
--------- --------- --------- ---------
Worldwide................... 1,066 1,920 1,747 2,657
========= ========= ========= =========
NGLs (Bbls):
United States............... 131 49 87 80
Canada...................... 2 478 149 525
--------- --------- --------- ---------
Worldwide................... 133 527 236 605
========= ========= ========= =========
Gas (Mcf):
United States............... 3,447 5,245 5,529 7,407
Canada...................... 347 16,779 8,676 16,418
--------- --------- --------- ---------
Worldwide................... 3,794 22,024 14,205 23,825
========= ========= ========= =========
Total (BOE):
United States............... 1,771 2,773 2,718 3,902
Canada...................... 60 3,344 1,633 3,331
--------- --------- --------- ---------
Worldwide................... 1,831 6,117 4,351 7,233
========= ========= ========= =========
40
PIONEER NATURAL RESOURCES COMPANY
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 nine months ended September
30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Average reported prices:
Oil (per Bbl):
United States............ $ 32.87 $ 30.67 $ 30.41 $ 29.45
Argentina................ $ 40.59 $ 32.25 $ 35.62 $ 26.96
Canada................... $ 68.77 $ 36.57 $ 51.73 $ 42.76
Africa................... $ 59.57 $ 42.17 $ 51.40 $ 35.43
Worldwide................ $ 40.66 $ 33.29 $ 36.56 $ 30.46
NGLs (per Bbl):
United States............ $ 34.40 $ 26.50 $ 29.78 $ 23.37
Argentina................ $ 31.73 $ 29.62 $ 31.02 $ 28.71
Canada................... $ 49.93 $ 33.68 $ 43.22 $ 29.42
Worldwide................ $ 34.53 $ 26.89 $ 30.26 $ 23.87
Gas (per Mcf):
United States............ $ 7.07 $ 5.12 $ 6.43 $ 5.13
Argentina................ $ .83 $ .63 $ .86 $ .62
Canada................... $ 7.51 $ 4.39 $ 6.57 $ 4.33
Worldwide................ $ 5.70 $ 4.11 $ 5.33 $ 4.27
Average realized prices:
Oil (per Bbl):
United States............ $ 60.63 $ 40.96 $ 52.45 $ 37.74
Argentina................ $ 40.59 $ 32.25 $ 35.62 $ 29.22
Canada................... $ 68.77 $ 36.57 $ 51.73 $ 42.76
Africa................... $ 59.57 $ 42.94 $ 51.40 $ 36.06
Worldwide................ $ 56.64 $ 39.50 $ 49.14 $ 35.59
NGLs (per Bbl):
United States............ $ 34.40 $ 26.50 $ 29.78 $ 23.37
Argentina................ $ 31.73 $ 29.62 $ 31.02 $ 28.71
Canada................... $ 49.93 $ 33.68 $ 43.22 $ 29.42
Worldwide................ $ 34.53 $ 26.89 $ 30.26 $ 23.87
Gas (per Mcf):
United States............ $ 8.40 $ 5.68 $ 7.07 $ 5.59
Argentina................ $ .83 $ .63 $ .86 $ .62
Canada................... $ 7.82 $ 5.00 $ 6.68 $ 4.99
Worldwide................ $ 6.68 $ 4.55 $ 5.82 $ 4.65
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 nine months
ended September 30, 2005, the Company's commodity price hedges decreased oil and
gas revenues from continuing operations by $119.3 million and $242.3 million,
respectively, as compared to $51.0 million and $128.4 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 nine months
ended September 30, 2005 and 2004.
41
PIONEER NATURAL RESOURCES COMPANY
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 have risen
from a 2004 year-end range of $.61 to $.78 per Mcf to a range of $.87 to $1.04
per Mcf, depending on the region where the gas is produced. No further gas price
increases are 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 nine
months ended September 30, 2005 was $9.5 million and $85.7 million,
respectively, as compared to $1.2 million and $4.6 million for the same
respective periods of 2004. The increase in interest and other income during the
three months ended September 30, 2005, as compared to the same period in 2004,
is primarily attributable to the recognition of $4.8 million of business
interruption insurance claims related to the Fain plant fire. The increase in
interest and other income during the nine months ended September 30, 2005, as
compared to the same period in 2004, is primarily attributable to the
recognition of $73.6 million in business interruption insurance claims, of which
$59.4 million relates to Hurricane Ivan and $14.2 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
$118.4 million and $330.9 million during the three and nine months ended
September 30, 2005, respectively, as compared to $75.1 million and $222.7
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
and ad valorem taxes are directly related to commodity price changes. Total
production costs per BOE increased by 59 percent and 46 percent during the three
and nine months ended September 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 and $.18 per BOE, respectively, during the
three and nine months ended September 30, 2005, respectively), (iv) new
production added from the Evergreen merger which reflects relatively higher
operating costs and (v) increases in equipment and service costs associated with
rising commodity prices.
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 nine
months ended September 30, 2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Lease operating expenses.......... $ 5.58 $ 3.57 $ 5.04 $ 3.44
Taxes:
Ad valorem..................... .63 .50 .61 .49
Production..................... 1.05 .55 .85 .56
Workover costs.................... .35 .17 .34 .20
-------- -------- -------- --------
Total production costs...... $ 7.61 $ 4.79 $ 6.84 $ 4.69
======== ======== ======== ========
42
PIONEER NATURAL RESOURCES COMPANY
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Total production costs:
United States.................. $ 8.23 $ 5.12 $ 7.25 $ 4.71
Argentina...................... $ 3.28 $ 2.85 $ 3.11 $ 2.90
Canada......................... $ 15.23 $ 10.02 $ 14.90 $ 10.35
Africa......................... $ 9.50 $ 5.25 $ 8.19 $ 6.99
Worldwide...................... $ 7.61 $ 4.79 $ 6.84 $ 4.69
Depletion, depreciation and amortization expense. The Company's total DD&A
expense was $8.76 and $8.92 per BOE for the three and nine months ended
September 30, 2005, respectively, as compared to $8.65 and $8.54 per BOE during
the same respective periods of 2004. Depletion expense, the largest component of
DD&A expense, was $8.41 and $8.60 per BOE during the three and nine months ended
September 30, 2005, as compared to $8.46 and $8.36 per BOE during the same
respective periods in 2004. The changes in per BOE depletion expense during the
three and nine months ended September 30, 2005, as compared to the same
respective periods in 2004, are primarily due to lower production from higher
cost-basis Gulf of Mexico production, offset by 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 downward reserve revisions associated with
negative well performance and drilling results in its deep gas play in the
Neuquen basin, 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 attributable
to better well performance.
The following table provides depletion expense per BOE from continuing
operations by geographic area for the three and nine months ended September 30,
2005 and 2004:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Depletion expense:
United States................. $ 8.39 $ 9.08 $ 8.87 $ 8.63
Argentina..................... $ 7.52 $ 5.53 $ 6.89 $ 5.38
Canada........................ $ 14.01 $ 12.90 $ 12.75 $ 12.65
Africa........................ $ 7.64 $ 9.13 $ 8.03 $ 11.78
Worldwide..................... $ 8.41 $ 8.46 $ 8.60 $ 8.36
43
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, leasehold abandonments and other exploration expense by geographic
area from continuing operations for the three and nine months ended September
30, 2005 and 2004:
Africa
United and
States Argentina Canada Other Total
--------- --------- --------- --------- --------
(in thousands)
Three months ended September 30, 2005:
Geological and geophysical.................. $ 11,928 $ 1,483 $ 892 $ 3,214 $ 17,517
Exploratory dry holes....................... 375 4,904 184 4,988 10,451
Leasehold abandonments and other............ 35,691 210 329 - 36,230
-------- -------- -------- -------- -------
$ 47,994 $ 6,597 $ 1,405 $ 8,202 $ 64,198
======== ======== ======== ======== =======
Three months ended September 30, 2004:
Geological and geophysical.................. $ 15,144 $ 216 $ 783 $ 7,220 $ 23,363
Exploratory dry holes....................... 878 2,664 3,216 85 6,843
Leasehold abandonments and other............ 2,521 18 136 1 2,676
-------- -------- -------- -------- -------
$ 18,543 $ 2,898 $ 4,135 $ 7,306 $ 32,882
======== ======== ======== ======== =======
Nine months ended September 30, 2005:
Geological and geophysical.................. $ 51,285 $ 5,608 $ 3,756 $ 23,073 $ 83,722
Exploratory dry holes....................... 28,386 5,973 3,413 17,487 55,259
Leasehold abandonments and other............ 40,262 3,450 659 319 44,690
-------- -------- -------- -------- -------
$ 119,933 $ 15,031 $ 7,828 $ 40,879 $183,671
======== ======== ======== ======== =======
Nine months ended September 30, 2004:
Geological and geophysical.................. $ 40,251 $ 10,884 $ 2,618 $ 12,066 $ 65,819
Exploratory dry holes....................... 38,741 3,356 11,131 24,404 77,632
Leasehold abandonments and other............ 4,941 55 3,778 8 8,782
-------- -------- -------- -------- -------
$ 83,933 $ 14,295 $ 17,527 $ 36,478 $152,233
======== ======== ======== ======== =======
Significant components of the Company's dry hole expense during the third
quarter of 2005 included $5.1 million on an unsuccessful well in the Company's
Anaguid permit in Tunisia. Significant components of the Company's dry hole
expense during the nine months ended September 30, 2005 included $16.7 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, the aforementioned Anaguid
well and other various United States exploratory wells. The United States
leasehold abandonments and other costs during the three and nine month periods
ended September 30, 2005 include the aforementioned $32.8 million increase in
East Cameron abandonment obligations that resulted from hurricane damage. See
Note N of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information regarding this matter. During
the nine months ended September 30, 2005, the Company completed and evaluated 97
exploration/extension wells, 73 of which were successfully completed as
discoveries. During the same respective period in 2004, the Company completed
and evaluated 80 exploration/extension wells, 44 of which were successfully
completed as discoveries.
General and administrative expense. General and administrative expense for
the three and nine months ended September 30, 2005 was $32.7 million and $91.6
million, respectively, as compared to $19.4 million and $54.8 million during the
same respective periods in 2004. The increases in general and administrative
expense are primarily due to severance related charges, 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 nine months ended September 30, 2005, as compared to the same respective
periods of 2004.
Interest expense. Interest expense was $29.3 million and $92.7 million for
the three and nine months ended September 30, 2005, respectively, as compared to
$24.8 million and $67.8 million for the same respective periods in 2004. The
weighted average interest rates on the Company's indebtedness for the three and
nine months ended September 30, 2005 were 4.3 percent and 3.6 percent,
respectively, as compared to 6.0 percent and 5.5 percent for the same respective
44
PIONEER NATURAL RESOURCES COMPANY
periods in 2004, including the effects of interest rate derivatives. The
increase in interest expense during the three months ended September 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 $2.9 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 nine months
ended September 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 $12.9 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.
Other expenses. Other expenses for the three and nine months ended
September 30, 2005 were $38.2 million and $67.5 million, respectively, as
compared to $2.5 million and $11.0 million for the same respective periods in
2004. The increase in other expenses during the three months ended September 30,
2005, as compared to the same period of 2004, is primarily attributable to an
$18.6 million loss on the redemption of portions of the Company's senior notes,
a $12.6 million increase in hedge ineffectiveness and $1.8 million in
amortization of noncompete agreements issued in connection with the Evergreen
merger. The increase in other expenses during the nine months ended September
30, 2005, as compared to the same period of 2004, is primarily attributable to a
$26.0 million loss on the redemption of portions of the Company's senior notes,
a $22.3 million increase in hedge ineffectiveness, a $3.4 million increase in
legal and environmental accruals and $3.4 million in amortization of noncompete
agreements issued in connection with the Evergreen merger.
Income tax provision. During the three and nine months ended September 30,
2005, the Company recognized income tax provisions on continuing operations of
$42.5 million and $193.7 million, respectively, as compared to $22.9 million and
$113.7 million for the same respective periods in 2004. The Company's effective
tax rate on continuing operations of 28.9 percent and 40.6 percent during the
three and nine months ended September 30, 2005, respectively, differs from the
combined United States federal and state statutory rate of approximately 36.5
percent primarily due to:
o The second quarter reversal of the $26.9 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. The Company reversed the tax
benefit as a result of signing an agreement in June 2005 to sell its
shares in the subsidiary that owns the interest in the Olowi block
which made it more likely than not that the Company would not realize
the originally recorded tax benefit.
o The Company will recognize a gain of approximately $47 million in the
fourth quarter of 2005 relating the sale of shares in a subsidiary
that owns the interest in the Olowi Block located in Gabon. There is
no associated income tax effect either in Gabon or the United States
associated with the gain. In accordance with FIN 18, a portion of the
beneficial effect that this tax-free income will have on the
Company's year-end effective tax rate is being recognized in the
third quarter.
o Recording of approximately $4.7 million of cash taxes associated with
the repatriation of foreign earnings pursuant to the 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 nine months ended September
30, 2005, the Company recognized income from discontinued operations of $19.0
million and $110.5 million, respectively, as compared to $3.8 million and $9.4
million for the same respective periods of 2004. The amounts for the three and
nine months ended September 30, 2005 include a gain on disposition of assets of
$27.5 million and $166.1 million, respectively, and income tax provisions of
$10.9 million and $73.5 million, respectively.
45
PIONEER NATURAL RESOURCES COMPANY
The Company's high effective tax rate associated with discontinued
operations during the nine months ended September 30, 2005 (40 percent) 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.
o A decrease in the Canadian valuation allowance of $12.4 million, which
partially offset the above two items. 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 Canadian
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, management's expectation was that it was likely that
the Company would not realize its Canadian deferred tax assets. Therefore, in
accordance with GAAP, portions of the Canadian valuation allowance were released
only to the extent that Canadian income was recorded, thereby offsetting any tax
provisions. The Company's effective tax rate for United States discontinued
operations during 2005 and 2004 is approximately 36.5 percent.
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 nine months ended September 30, 2005
totaled $414.2 million and $908.7 million, respectively, as compared to $116.9
million and $467.8 million during the same respective periods of 2004. During
the three months ended September 30, 2005, the Company's additions to oil and
gas properties were funded by $317.7 million of net cash provided by operating
activities and borrowings on the Company's lines of credit, as compared to
funding from $239.1 million of net cash provided by operating activities during
the same period of 2004. During the nine months ended September 30, 2005, the
Company's additions to oil and gas properties were funded by $985.2 million of
net cash provided by operating activities, as compared to $757.5 million during
the same period 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 September 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. 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 nine months ended September 30, 2005.
46
PIONEER NATURAL RESOURCES COMPANY
Environmental contingency. A subsidiary of the Company has been notified by
a letter from the TCEQ dated August 24, 2005 that the TCEQ considers the
subsidiary to be a potentially responsible party with respect to the Dorchester
Refining Company State Superfund Site located in Mount Pleasant, Texas. The
subsidiary, which was acquired by the Company in 1991, owned a refinery located
at the Mount Pleasant site from 1977 until 1984. According to the TCEQ, this
refinery was responsible for releases of hazardous substances into the
environment. The Company does not know the nature and extent of the alleged
contamination, the potential costs of remediation, or the portion, if any, of
such costs that may be allocable to the Company's subsidiary. However, based on
the limited information currently available and assessed regarding this matter,
the Company has no reason to believe that it may have a material adverse effect
on its future financial condition, results of operations or liquidity. See Note
J of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information regarding this matter as well as other
environmental and legal contingencies involving the Company.
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 and for the foreseeable future.
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 reduce outstanding indebtedness.
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 reduce outstanding indebtedness.
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 April 2005, the Company sold all of its
interests in certain East Texas properties for approximately $25.2 million of
net cash proceeds. 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 $138.6 million.
During August 2005, the Company sold all of its interests in certain oil and gas
properties on the shelf of the Gulf of Mexico for net proceeds of $58.9 million,
resulting in a gain of $27.5 million. The net cash proceeds from these
divestitures were used to reduce outstanding indebtedness.
Operating activities. Net cash provided by operating activities during the
three and nine months ended September 30, 2005 was $317.7 million and $985.2
million, respectively, as compared to $239.1 million and $757.5 million for the
same respective periods in 2004. The increases in net cash provided by operating
activities were primarily due to higher commodity prices.
Investing activities. Net cash used in investing activities during the
three months ended September 30, 2005 was $364.9 million, as compared to $975.8
million for the same period in 2004. Net cash provided by investing activities
during the nine months ended September 30, 2005 was $240.4 million, as compared
to net cash used in investing activities of $1.3 billion for the same period in
2004. The decrease in net cash used in investing activities during the three
months ended September 30, 2005, as compared to the same period of 2004, was
primarily due to $849.5 million of cash consideration paid in the third quarter
of 2004 in connection with the Evergreen merger. The increase in net cash
provided by investing activities during the nine months ended September 30,
2005, as compared to the same period of 2004, was primarily due to (i) $892.7
million of net proceeds received from VPPs sold during the nine months ended
September 30, 2005, (ii) the aforementioned proceeds from asset divestitures of
$281.6 million and (iii) $849.5 million of cash consideration paid in the third
quarter of 2004 in connection with the Evergreen merger.
47
PIONEER NATURAL RESOURCES COMPANY
Financing activities. Net cash provided by financing activities during the
three months ended September 30, 2005 was $52.6 million, as compared to $723.7
million during the same period in 2004. Net cash used in financing activities
during the nine months ended September 30, 2005 was $1.2 billion, as compared to
net cash provided by financing activities of $566.2 million during the same
period in 2004. During the three months ended September 30, 2005, the Company
had net borrowings of long-term debt of $532.7 million, as compared to $767.0
million during the same period in 2004. During the nine months ended September
30, 2005, the Company had net repayments of long-term debt of $464.5 million, as
compared to net borrowings of long-term debt of $631.0 million during the same
period 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. During September 2005,
the Company's board of directors declared a semiannual dividend of $.12 per
common share, payable on October 14, 2005 to shareholders of record on September
30, 2005. Associated therewith, the Company paid $16.8 million of aggregate
dividends during October 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% senior notes due
2005 matured and were repaid. The Company also redeemed $19.0 million and $51.4
million principal amount of its 9-5/8% Notes during the three and nine months
ended September 30, 2005, respectively. During September 2005, the Company
accepted tenders to purchase $188.4 million in principal amount of the 5.875%
Notes for $199.9 million. During October 2005, the Company redeemed the
remaining $12.6 million and $16.2 million, respectively, of aggregate principal
amount outstanding of the 9-5/8% Notes and its 7.50% Notes. The Company utilized
unused borrowing capacity under its lines of credit to fund these financing
activities.
During August 2005, the Company's board of directors approved a new share
repurchase program authorizing the purchase of up to $1 billion of the Company's
common stock, $650 million of which was immediately initiated through open
market transactions. The $650 million program is expected to be completed by the
end of 2005. The remaining $350 million is subject to the completion of the
deepwater Gulf of Mexico and Argentine divestments. During the three and nine
months ended September 30, 2005, the Company expended $453.0 million to acquire
9.0 million shares of treasury stock and $690.3 million to acquire 14.9 million
shares of treasury stock, respectively. As of September 30, 2005, the Company
had expended $391 million towards the $650 million portion of the $1 billion
repurchase program and through October 31, 2005 spent an additional $250.0
million pursuant to a repurchase plan adopted by the Company conforming to the
requirements of Rule 10b5-1 of the Securities Exchange Act of 1934 ("the
Exchange Act"). The Company expects to complete the additional $9 million of the
$650 million portion of the repurchase program by the end of 2005.
During September 2005, the Company entered into the Amended Credit
Agreement that provides for initial aggregate loan commitments of $1.5 billion.
In connection with the funding of the Amended Credit Agreement on September 30,
2005, all amounts outstanding under the 364-Day Credit Agreement were retired
and the 364-Day Credit Agreement terminated.
As the Company pursues its strategy, it may utilize various financing
sources, including fixed and floating rate debt, convertible securities,
preferred stock or common stock. The Company may also issue securities in
exchange for oil and gas properties, stock or other interests in other oil and
gas companies or related assets. Additional securities may be of a class
preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Company's board of directors.
Liquidity. The Company's principal source of short-term liquidity is the
Amended Credit Agreement. There were $755.0 million of outstanding borrowings
under the Amended Credit Agreement as of September 30, 2005. Including $35.3
million of undrawn and outstanding letters of credit under the Amended Credit
Agreement, the Company had $709.7 million of unused borrowing capacity as of
September 30, 2005.
48
PIONEER NATURAL RESOURCES COMPANY
The Company's debt will increase as a result of the announced $1 billion
stock repurchase program. Including the expected completion of the $650 million
portion of the $1 billion stock repurchase program, the Company anticipates that
its debt to book capitalization will be less than 50 percent at the end of 2005
and will decline to below 35 percent by the end of 2006, before considering the
effects of any divestitures.
Debt ratings. The Company receives debt credit ratings from S&P and
Moody's, which are subject to regular reviews. Subsequent to quarter end, S&P
cut the Company's corporate credit rating to BB+ with a stable outlook from
BBB-. Moody's continues to hold the Company's corporate credit rating at Baa3,
which is an investment-grade rating, with a negative outlook. S&P and Moody's
consider many factors in determining the Company's ratings including: production
growth opportunities, liquidity, debt levels and asset and reserve mix. If the
Company were also to be downgraded by Moody's, it would increase the interest
rate and fees the Company pays on the Amended Credit Agreement and would trigger
additional debt covenant requirements under the Amended Credit Agreement. The
individual downgrade by S&P is not expected to materially affect the Company's
financial position or liquidity but could negatively impact the Company's
ability to obtain additional financing or the interest rate and fees associated
with such additional financing.
Book capitalization and current ratio. The Company's book capitalization at
September 30, 2005 was $4.1 billion, consisting of debt of $1.9 billion and
stockholders' equity of $2.1 billion. Consequently, the Company's debt to book
capitalization increased to 48 percent at September 30, 2005 from 46 percent at
December 31, 2004. The Company's ratio of current assets to current liabilities
was .57 to 1.00 at September 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 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 to which the Company has been a party
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 nine months of 2005:
Derivative Contract Net Liabilities
-----------------------------------
Foreign
Interest Exchange
Commodities Rate Rate Total
----------- -------- -------- -----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2004............... $ (406,546) $ - $ - $ (406,546)
Changes in contract fair value (a)....... (1,002,493) (4,614) 18 (1,007,089)
Contract maturities...................... 282,953 - (18) 282,935
Contract terminations.................... 33,403 4,614 - 38,017
---------- ------- ------ ----------
Fair value of contracts outstanding
as of September 30, 2005.............. $(1,092,683) $ - $ - $(1,092,683)
========== ======= ====== ==========
<FN>
- ---------------
(a) At inception, new derivative contracts entered into by the Company have no
intrinsic value.
</FN>
Foreign exchange rate sensitivity. From time to time, the Company's
Canadian subsidiary enters into short-term forward currency agreements to
purchase Canadian dollars with U.S. dollar gas sales proceeds. The Company does
not designate these derivatives as hedges due to their short-term nature. There
were no outstanding forward currency agreements at September 30, 2005 or
December 31, 2004.
49
PIONEER NATURAL RESOURCES COMPANY
Interest rate sensitivity. The following table provides information about
other financial instruments to which the Company was a party as of September 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 September 30, 2005.
For variable rate debt, the average interest rate represents the average rates
being paid on the debt projected forward proportionate to the forward yield
curve for LIBOR on November 7, 2005. As of September 30, 2005, the Company was
not a party to material derivatives that would subject it to interest rate
sensitivity.
Interest Rate Sensitivity
Debt Obligations as of September 30, 2005
Three months Liability
ending, Year ending December 31, Fair Value
December 31, ------------------------------------------------------ September 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 $ - $ 911,794 $1,293,869 $1,441,766
Weighted average
interest rate (%).......... 6.31 6.31 6.29 6.16 6.16 6.16
Variable rate maturities....... $ - $ - $ - $ - $ - $ 755,000 $ 755,000 $ 755,000
Average interest rate (%)... 4.63 4.95 4.99 5.09 5.18 5.25
<FN>
- ----------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) deferred fair value hedge gains and losses.
During October 2005 the Company redeemed $16.2 million principal amount of
7.50% Notes and $12.6 million principal amount of 9-5/8% Notes, which
amounts are included in "Thereafter" maturities in this table.
</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 prices as of September 30, 2005. As of September 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 September 30, 2005
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------ September 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 $ 552,190
Weighted average fixed price per Bbl.... $ 27.97 $ 31.69 $ 30.89 $ 29.21
Collar contracts......................... - 9,129 4,500 - $ 27,643
Weighted average ceiling price per Bbl.. $ - $ 74.92 $ 90.43 $ -
Weighted average floor price per Bbl.... $ - $ 44.25 $ 50.00 $ -
Average forward NYMEX oil prices (b)...... $ 59.40 $ 61.38 $ 60.55 $ 59.02
<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 November 7, 2005 market
quotes.
</FN>
50
PIONEER NATURAL RESOURCES COMPANY
Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2005
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------ September 30,
2005 2006 2007 2008 2005
----------- -------- -------- -------- -------------
(in thousands)
Gas Hedge Derivatives (a):
Average daily notional MMBtu volumes (b):
Swap contracts............................. 253,535 73,842 29,195 5,000 $ 414,081
Weighted average fixed price per MMBtu.... $ 5.17 $ 4.30 $ 4.28 $ 5.38
Collar contracts........................... - 183,685 215,000 - $ 98,769
Weighted average ceiling price per MMBtu.. $ - $ 13.76 $ 11.84 $ -
Weighted average floor price per MMBtu.... $ - $ 6.62 $ 6.57 $ -
Average forward NYMEX gas prices (c)........ $ 11.78 $ 10.70 $ 9.39 $ 8.33
<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 November 7, 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
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.
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. The Company believes that the damages
from such other legal actions will not be in excess of ten percent of the
Company's current assets.
51
PIONEER NATURAL RESOURCES COMPANY
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 September 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 (b)
------ ----------------- -------------- ---------------------- ---------------------
July 2005............. - $ - -
August 2005........... 1,669,933 $ 41.38 1,513,300
September 2005........ 7,512,226 $ 52.03 7,509,700
----------- ----------
Total......... 9,182,159 $ 50.09 9,023,000 $ 259,286,843
=========== ========== ============
<FN>
- -----------
(a) Amounts include shares withheld to fund tax withholding on employees' stock
awards for which restrictions have lapsed.
(b) Excludes the remaining $350 million plan to repurchase shares subject to
the successful completion of the deepwater Gulf of Mexico and Argentine
divestments. Subsequent to September 30, 2005, the Company purchased an
additional $250.0 million of stock pursuant to a repurchase plan adopted by
the Company conforming to the requirements of Rule 10b5-1 of the Exchange
Act.
</FN>
During August 2005, the Company's board of directors approved a new share
repurchase program authorizing the purchase of up to $1 billion of the Company's
common stock, $650 million of which was immediately initiated through open
market transactions. The $650 million program is expected to be completed by the
end of 2005. The remaining $350 million is subject to the completion of the
deepwater Gulf of Mexico and Argentine divestments.
52
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits
Exhibits
4.1 Fifth Supplemental Indenture, dated as of September 16, 2005, among
the Company, Pioneer Natural Resources USA, Inc., as Guarantor, and
Wachovia Bank, National Association, as Trustee, with respect to the
Company's indenture, dated as of March 10, 2004, between the Company
and Wachovia Bank, National Association, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K,
File No. 1-13245, filed with the SEC on September 21, 2005).
10.1 Indemnification Agreement dated August 16, 2005, between the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of
its directors and executive officers identified on the schedule
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on August
17, 2005).
10.2 Severance Agreement dated August 16, 2005, between the Company and
Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of
its executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Severance Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on August 17, 2005).
10.3 Change in Control Agreement, dated August 16, 2005, between the
Company and Scott D. Sheffield, together with a schedule identifying
other substantially identical agreements between the Company and each
of its executive officers identified on the schedule and identifying
the material differences between each of those agreements and the
filed Change in Control Agreement (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on August 17, 2005).
10.4 Amended and Restated 5-Year Revolving Credit Agreement dated as of
September 30, 2005 among the Company, as Borrower, JPMorgan Chase
Bank, N.A. as Administrative Agent and certain other lenders
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on October
4, 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.
53
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: November 8, 2005 By: /s/ Richard P. Dealy
--------------------------
Richard P. Dealy
Executive Vice President
and Chief Financial Officer
Date: November 8, 2005 By: /s/ Darin G. Holderness
--------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
54
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
4.1 Fifth Supplemental Indenture, dated as of September 16, 2005, among the
Company, Pioneer Natural Resources USA, Inc., as Guarantor, and
Wachovia Bank, National Association, as Trustee, with respect to the
Company's indenture, dated as of March 10, 2004, between the Company
and Wachovia Bank, National Association, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K,
File No. 1-13245, filed with the SEC on September 21, 2005).
10.1 Indemnification Agreement dated August 16, 2005, between the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
directors and executive officers identified on the schedule
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on August 17,
2005).
10.2 Severance Agreement dated August 16, 2005, between the Company and
Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Severance Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on August 17, 2005).
10.3 Change in Control Agreement, dated August 16, 2005, between the Company
and Scott D. Sheffield, together with a schedule identifying other
substantially identical agreements between the Company and each of its
executive officers identified on the schedule and identifying the
material differences between each of those agreements and the filed
Change in Control Agreement (incorporated by reference to Exhibit 10.3
to the Company's Current Report on Form 8-K, File No. 1-13245, filed
with the SEC on August 17, 2005).
10.4 Amended and Restated 5-Year Revolving Credit Agreement dated as of
September 30, 2005 among the Company, as Borrower, JPMorgan Chase Bank,
N.A. as Administrative Agent and certain other lenders (incorporated
by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on October 4, 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.
55