UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer /x/ Accelerated filer / / Non-accelerated filer / /
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 May 1, 2006...... 129,300,537
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Cautionary Statement Concerning Forward-Looking Statements.............. 2
Definitions of Certain Terms and Conventions Used Herein................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005................................. 4
Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005.................. 6
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2006..................... 7
Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005.................. 8
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2006 and 2005.... 9
Notes to Consolidated Financial Statements............... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 45
Item 4. Controls and Procedures.................................. 46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 47
Item 1A. Risk Factors............................................. 47
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.......................................... 47
Item 6. Exhibits................................................. 48
Signatures ......................................................... 49
Exhibit Index ......................................................... 50
Cautionary Statement Concerning Forward-Looking Statements
The information in this quarterly report on Form 10-Q (the "Report")
contains forward-looking statements that involve risks and uncertainties. When
used in this document, the words "believes," "plans," "expects," "anticipates,"
"intends," "continue," "may," "will," "could," "should," "future," "potential,"
"estimate," or the negative of such terms and similar expressions as they relate
to Pioneer Natural Resources Company ("Pioneer" or the "Company") or its
management are intended to identify forward-looking statements. The
forward-looking statements are based on the Company's current expectations,
assumptions, estimates and projections about the Company and the industry in
which the Company operates. Although the Company believes that the expectations
and assumptions reflected in the forward-looking statements are reasonable, they
involve risks and uncertainties that are difficult to predict and, in many
cases, beyond the Company's control. Accordingly, no assurances can be given
that the actual events and results will not be materially different than the
anticipated results described in the forward-looking statements. See "Part I,
Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part
II, Item 1A. Risk Factors" in this Report and "Item 1. Business -- Competition,
Markets and Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and
Qualitative Disclosures About Market Risk" in the Company's Annual Report on
Form 10-K for a description of various factors that could materially affect the
ability of Pioneer to achieve the anticipated results described in the
forward-looking statements. The Company undertakes no duty to publicly update
these statements except as required by law.
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)
March 31, December 31,
2006 2005
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 42,982 $ 18,802
Accounts receivable:
Trade, net of allowance for doubtful accounts of $5,567
and $5,736 as of March 31, 2006 and December 31, 2005,
respectively................................................ 186,226 336,062
Due from affiliates........................................... 971 1,596
Inventories...................................................... 89,942 79,659
Prepaid expenses................................................. 28,550 18,091
Deferred income taxes............................................ 111,644 158,878
Discontinued operations held for sale............................ 733,409 -
Other current assets:
Derivatives................................................... 10,655 1,246
Other, net of allowance for doubtful accounts of $6,425
as of December 31, 2005..................................... 8,259 9,470
---------- ----------
Total current assets..................................... 1,212,638 623,804
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................. 6,900,087 8,499,253
Unproved properties........................................... 176,478 313,881
Accumulated depletion, depreciation and amortization............. (1,632,887) (2,577,946)
---------- ----------
Total property, plant and equipment...................... 5,443,678 6,235,188
---------- ----------
Goodwill........................................................... 311,603 311,651
Other property and equipment, net.................................. 86,058 90,010
Other assets:
Derivatives...................................................... 2,281 1,048
Other, net of allowance for doubtful accounts of $92 as of
March 31, 2006 and December 31, 2005.......................... 52,991 67,533
---------- ----------
$ 7,109,249 $ 7,329,234
========== ==========
The financial information included as of March 31, 2006 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)
March 31, December 31,
2006 2005
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................................... $ 233,066 $ 330,151
Due to affiliates............................................. 4,336 15,053
Interest payable................................................. 18,442 40,314
Income taxes payable............................................. 151,061 22,470
Discontinued operations held for sale............................ 66,322 -
Other current liabilities:
Derivatives................................................... 174,491 320,098
Deferred revenue.............................................. 187,412 190,327
Other......................................................... 159,951 114,942
---------- ----------
Total current liabilities................................ 995,081 1,033,355
---------- ----------
Long-term debt..................................................... 1,159,763 2,058,412
Derivatives........................................................ 262,844 431,543
Deferred income taxes.............................................. 989,564 767,329
Deferred revenue................................................... 619,477 664,511
Other liabilities and minority interests........................... 126,709 156,982
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
145,336,331 and 145,200,293 shares issued at March 31,
2006 and December 31, 2005, respectively...................... 1,476 1,470
Additional paid-in capital....................................... 3,738,509 3,775,794
Treasury stock, at cost; 18,311,846 and 18,368,109 shares at
March 31, 2006 and December 31, 2005, respectively............ (879,516) (882,382)
Deferred compensation............................................ - (45,827)
Retained earnings (accumulated deficit).......................... 340,452 (184,320)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax......................... (301,878) (506,636)
Cumulative translation adjustment............................. 56,768 59,003
---------- ----------
Total stockholders' equity............................... 2,955,811 2,217,102
Commitments and contingencies......................................
---------- ----------
$ 7,109,249 $ 7,329,234
========== ==========
The financial information included as of March 31, 2006 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
March 31,
---------------------------
2006 2005
---------- ----------
Revenues and other income:
Oil and gas............................................... $ 379,468 $ 323,115
Interest and other........................................ 17,111 2,306
Gain (loss) on disposition of assets, net................. (73) 2,141
--------- ---------
396,506 327,562
--------- ---------
Costs and expenses:
Oil and gas production.................................... 94,683 80,946
Depletion, depreciation and amortization.................. 82,406 73,308
Impairment of long-lived assets........................... - 152
Exploration and abandonments.............................. 124,642 53,829
General and administrative................................ 32,247 27,488
Accretion of discount on asset retirement obligations..... 1,148 1,499
Interest.................................................. 36,576 32,746
Other..................................................... 5,054 8,841
--------- ---------
376,756 278,809
--------- ---------
Income from continuing operations before income taxes......... 19,750 48,753
Income tax provision.......................................... (20,717) (21,762)
--------- ---------
Income (loss) from continuing operations...................... (967) 26,991
Income from discontinued operations, net of tax............... 544,174 57,666
--------- ---------
Net income.................................................... $ 543,207 $ 84,657
========= =========
Basic earnings per share:
Income (loss) from continuing operations.................. $ (.01) $ .19
Income from discontinued operations, net of tax........... 4.29 .40
--------- ---------
Net income................................................ $ 4.28 $ .59
========= =========
Diluted earnings per share:
Income (loss) from continuing operations.................. $ (.01) $ .19
Income from discontinued operations, net of tax........... 4.29 .39
--------- ---------
Net income................................................ $ 4.28 $ .58
========= =========
Weighted average shares outstanding:
Basic..................................................... 126,944 142,898
========= =========
Diluted................................................... 126,944 147,345
========= =========
Dividends declared per share.................................. $ .12 $ .10
========= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Retained Deferred
Additional Earnings 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, 2006.... $1,470 $3,775,794 $(882,382) $ (45,827) $(184,320) $(506,636) $ 59,003 $2,217,102
Dividends declared ($.12 per
common share)................ - - - - (15,510) - - (15,510)
Exercise of long-term incentive
plan stock options........... - - 4,847 - (2,925) - - 1,922
Purchase of treasury stock..... - - (1,981) - - - - (1,981)
Tax benefits related to
stock-based compensation..... - 1,062 - - - - - 1,062
Compensation costs:
Adoption of SFAS 123(R)...... - (45,827) - 45,827 - - - -
Compensation awards.......... 6 (6) - - - - - -
Compensation costs included
in net income.............. - 7,486 - - - - - 7,486
Net income..................... - - - - 543,207 - - 543,207
Other comprehensive income (loss):
Deferred hedging activity,
net of tax:
Net deferred hedge gains... - - - - - 41,902 - 41,902
Net hedge losses included
in continuing operations.. - - - - - 36,584 - 36,584
Net hedge losses included
in discontinued
operations................ - - - - - 126,272 - 126,272
Translation adjustment....... - - - - - - (2,235) (2,235)
----- --------- -------- --------- -------- -------- ------- ---------
Balance as of March 31, 2006..... $1,476 $3,738,509 $(879,516) $ - $ 340,452 $(301,878) $ 56,768 $2,955,811
===== ========= ======== ========= ======== ======== ======= =========
The financial information included herein has been prepared by management
without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
March 31,
----------------------------
2006 2005
----------- ----------
Cash flows from operating activities:
Net income....................................................... $ 543,207 $ 84,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization....................... 82,406 73,308
Impairment of long-lived assets................................ - 152
Exploration expenses, including dry holes...................... 94,582 16,676
Deferred income taxes.......................................... 16,961 15,197
Loss (gain) on disposition of assets, net...................... 73 (2,141)
Accretion of discount on asset retirement obligations.......... 1,148 1,499
Discontinued operations........................................ (539,653) 122,749
Interest expense............................................... 3,047 197
Commodity hedge related activity............................... 508 (3,061)
Stock-based compensation....................................... 7,486 5,152
Amortization of deferred revenue............................... (47,949) (11,625)
Other noncash items............................................ 3,714 4,146
Changes in operating assets and liabilities, net of effects
from acquisition:
Accounts receivable, net....................................... 126,115 (12,033)
Inventories.................................................... (20,131) (1,315)
Prepaid expenses............................................... (12,264) 2,449
Other current assets, net...................................... 9,429 (198)
Accounts payable............................................... (93,648) 17,593
Interest payable............................................... (19,100) (16,259)
Income taxes payable........................................... 134,051 2,775
Other current liabilities...................................... 13,365 3,736
---------- ---------
Net cash provided by operating activities................... 303,347 303,654
---------- ---------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired................... - (965)
Proceeds from disposition of assets.............................. 963,191 600,096
Additions to oil and gas properties.............................. (334,888) (194,940)
Other property additions, net.................................... (6,548) (11,062)
---------- ---------
Net cash provided by investing activities................... 621,755 393,129
---------- ---------
Cash flows from financing activities:
Borrowings under long-term debt.................................. 364,271 155,713
Principal payments on long-term debt............................. (1,264,271) (708,713)
Payment of other liabilities..................................... (524) (8,302)
Exercise of long-term incentive plan stock options............... 1,922 25,076
Purchase of treasury stock....................................... (1,981) (151,976)
---------- ---------
Net cash used in financing activities....................... (900,583) (688,202)
---------- ---------
Net increase in cash and cash equivalents............................ 24,519 8,581
Effect of exchange rate changes on cash and cash equivalents......... (339) 201
Cash and cash equivalents, beginning of period....................... 18,802 7,257
---------- ---------
Cash and cash equivalents, end of period............................. $ 42,982 $ 16,039
========== =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended
March 31,
--------------------------
2006 2005
---------- ---------
Net income......................................................... $ 543,207 $ 84,657
--------- --------
Other comprehensive income (loss):
Deferred hedging activity, net of tax:
Net deferred hedge gains (losses)............................ 41,902 (311,906)
Net hedge losses included in continuing operations........... 36,584 18,906
Net hedge losses included in discontinued operations......... 126,272 12,226
Translation adjustment......................................... (2,235) (1,623)
--------- --------
Other comprehensive income (loss)......................... 202,523 (282,397)
--------- --------
Comprehensive income (loss)........................................ $ 745,730 $(197,740)
========= ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(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, 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 March 31, 2006 and for the three-month
periods ended March 31, 2006 and 2005 include all adjustments and accruals,
consisting only of normal recurring accrual adjustments, which are necessary for
a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
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, 2005.
Discontinued operations. During 2005 and 2006, the Company sold its
interests in the following oil and gas assets and has reflected their results of
operations in discontinued operations:
Country Description of Assets Date Divested
------- --------------------- -------------
Canada Martin Creek, Conroy Black May 2005
and Lookout Butte fields
United States Two Gulf of Mexico August 2005
shelf fields
United States Deepwater Gulf of Mexico March 2006
fields
Argentina All Argentine properties April 2006
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), the Company has reflected (a) the Argentine assets and liabilities sold
during April 2006 as discontinued operations held for sale as of March 31, 2006
and (b) the results of operations of the above divestitures as discontinued
operations, rather than as a component of continuing operations. See Note N for
additional information regarding discontinued operations.
Inventories. Inventories were comprised of $88.0 million and $77.3 million
of materials and supplies and $1.9 million and $2.4 million of commodities as of
March 31, 2006 and December 31, 2005, 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
10
first-in, first-out basis. As of March 31, 2006 and December 31, 2005, the
Company's materials and supplies inventory was net of $1.5 million and $.2
million, respectively, of valuation reserve allowances.
Goodwill. 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 goodwill impairment and determined that there
was no impairment.
In accordance with GAAP, certain qualifying income tax benefits derived
from stock-based compensation are recorded as reductions in the carrying value
of goodwill.
Stock-based compensation. On January 1, 2006, the Company adopted SFAS No.
123 (revised 2004) "Share-Based Payment" ("SFAS 123(R)") to account for
stock-based compensation. Among other items, SFAS 123(R) eliminates the use of
the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") intrinsic value method of accounting and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant date fair value of those awards
in the financial statements. The Company elected to use the modified prospective
method for adoption, which requires compensation expense to be recorded for all
unvested stock options and other equity-based compensation beginning in the
first quarter of adoption. For all unvested stock options outstanding as of
January 1, 2006, the previously measured but unrecognized compensation expense,
based on the fair value on the date of grant, will be recognized in the
Company's financial statements over the remaining vesting period. For
equity-based compensation awards granted or modified subsequent to January 1,
2006, compensation expense, based on the fair value on the date of grant, will
be recognized in the Company's financial statements over the vesting period. The
Company utilizes the Black-Scholes option pricing model to measure fair value of
stock options and utilizes the stock price on the date of grant for the fair
value of restricted stock awards. Prior to the adoption of SFAS 123(R), the
Company followed the intrinsic value method in accordance with APB 25 to account
for stock options. Prior period financial statements have not been restated.
The modified prospective method requires the Company to estimate
forfeitures in calculating the expense related to stock-based compensation as
opposed to its prior policy of recognizing forfeitures as they occurred. The
Company recorded no cumulative effect as a result of adopting SFAS 123(R).
Additionally, under the provisions of SFAS 123(R), deferred compensation
recorded under APB 25 related to equity-based awards should be eliminated
against the appropriate equity accounts. As a result, upon adoption of SFAS
123(R), the Company eliminated $45.8 million of deferred compensation cost from
stockholders' equity and reduced by a like amount additional paid-in capital in
the accompanying Consolidated Balance Sheet.
For the three months ended March 31, 2006, the Company recorded $7.5
million of stock-based compensation costs for all plans. The impact to net
income of adopting SFAS 123(R) for this period was $634 thousand, or less than
$.01 per diluted share. The adoption impact is comprised of $492 thousand of
compensation expense associated with unvested stock options and $142 thousand of
compensation expense associated with the Company's Employee Stock Purchase Plan,
which is a compensatory plan under the provisions of SFAS 123(R).
Pursuant to the provisions of SFAS 123(R), the Company's issued shares, as
reflected in the accompanying Consolidated Balance Sheets, at March 31, 2006 and
December 31, 2005 do not include 2,230,117 shares and 1,756,180 shares,
respectively, related to unvested restricted stock awards. During the three
months ended March 31, 2006, the Company issued 658,381 shares of restricted
stock awards.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
As of March 31, 2006, there is approximately $67.5 million of total
unrecognized compensation expense related to unvested share-based compensation
plans. This compensation will be recognized over the remaining vesting period of
less than three years.
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 123(R) to stock-based compensation during the three months
ended March 31, 2005 (in thousands, except per share amounts):
Net income, as reported.......................................... $ 84,657
Plus: Stock-based compensation expense included
in net income for all awards, net of tax (a).................. 3,271
Deduct: Stock-based compensation expense determined
under fair value based method for all awards, net of tax (a).. (4,242)
--------
Pro forma net income............................................. $ 83,686
========
Net income per share:
Basic - as reported........................................... $ .59
========
Basic - pro forma............................................. $ .58
========
Diluted - as reported......................................... $ .58
========
Diluted - pro forma........................................... $ .57
========
<FN>
- -------------
(a) For the three months ended March 31, 2005, stock-based compensation expense
included in net income is net of tax benefits of $1.9 million. Similarly,
stock-based compensation expense determined under the fair value based
method for the three months ended March 31, 2005 is net of tax benefits of
$2.4 million. See Note D for additional information regarding the Company's
income taxes.
</FN>
NOTE C. 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. The
capitalized exploratory well costs are presented in proved properties in the
Consolidated Balance Sheets. 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 months ended March 31, 2006 (in thousands):
Beginning capitalized exploratory well costs .................... $ 198,291
Additions to exploratory well costs pending the
determination of proved reserves.............................. 100,534
Reclassifications due to determination of proved reserves........ (53,958)
Disposition of wells............................................. (50,671)
Exploratory well costs charged to expense........................ (36,745)
--------
Ending capitalized exploratory well costs ....................... $ 157,451
========
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The following table provides an aging as of March 31, 2006 and December 31,
2005 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:
March 31, December 31,
2006 2005
----------- ------------
(in thousands, except well counts)
Capitalized exploratory well costs that have been
capitalized for a period of one year or less............... $ 88,198 $ 84,042
Capitalized exploratory well costs that have been
capitalized for a period greater than one year............. 69,253 114,249
------- -------
$157,451 $198,291
======= =======
Number of wells with exploratory well costs that have been
capitalized for a period greater than one year............. 11 14
======= =======
The following table provides the capitalized costs of exploration projects
that have been suspended for more than one year as of March 31, 2006 and
December 31, 2005:
March 31, December 31,
2006 2005
----------- ------------
(in thousands)
United States:
Ozona Deep................................................. $ - $ 19,423
Thunder Hawk............................................... - 25,769
Oooguruk................................................... 52,205 52,205
Canada - other................................................ 844 805
South Africa.................................................. 7,227 7,227
Tunisia - Anaguid............................................. 8,977 8,820
------- -------
Total................................................ $ 69,253 $114,249
======= =======
The following discussion describes the history and status of each
significant suspended exploratory project:
Ozona Deep and Thunder Hawk. 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 was necessary to have a
signed production handling agreement 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 with a third-party platform to bring
future production from the discovery to the third-party's platform.
During 2004, the Company's initial Thunder Hawk well found quantities of
oil believed to be commercial. Additional appraisal wells were determined
necessary to confirm the commercialization of the discovery.
During March 2006, the Company sold its interests in the Ozona Deep and
Thunder Hawk properties as part of the Company's deepwater Gulf of Mexico
divestiture. See Note N for additional information regarding the Company's
divestiture of its deepwater Gulf of Mexico oil and gas properties.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
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, without having to drill additional wells, of the
potential of the discoveries. 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 was completed.
During the first quarter of 2006, the Company sanctioned the development of
the discovery and obtained the necessary regulatory approvals. The Company began
operations to install an offshore gravel drilling and production site and
completed gravel hauling activities during the 2006 winter construction season.
A subsea flowline and facilities will be installed during 2007 to carry produced
liquids to existing onshore processing facilities at the Kuparuk River Unit.
Pioneer plans to drill approximately 40 horizontal wells to develop the
discovery. Depending on weather conditions and facilities completion and
accessibility, drilling could begin as early as the fall of 2007. The Company
estimates first production to occur in 2008.
South Africa. 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 the operator of a
gas-to-liquids ("GTL") plant located in the area to purchase the condensate and
gas. During 2004, a FEED study was authorized for the gas development and
infrastructure design. The FEED study was completed in early 2005 and based on
that study, the GTL plant operator initiated purchase orders for long-lead time
infrastructure components. In December 2005, the Company received the final
approvals with its partner in the South Coast gas project. The project will
include subsea tie-back of gas from the Sable field and five to six additional
gas accumulations to the existing production facilities on the F-A platform for
transportation via existing pipelines to the GTL plant. Development drilling
related to the project commenced in the first quarter of 2006. Production is
expected to begin during the second half of 2007.
As of December 31, 2005, the remaining costs associated with this project
relate to the Boomslang discovery, which was not included in the initial
development of this project. Boomslang is both an oil and gas discovery.
Continued studies of the commercialization of the project are ongoing. Part of
the ongoing efforts is determining the commercialization of the discovery as an
oil project, gas project or both. If commercialized as an oil discovery,
earliest production would be 2009 and if commercialized as a gas discovery,
earliest production would be 2012.
Tunisia - Anaguid. During 2003, the Company drilled an exploration well on
its Anaguid Block in Tunisia which found quantities of gas and condensate
believed to be commercial. During 2004, the well was 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, drilled an
offset appraisal well to the exploration well.
The appraisal well offsetting the exploration well encountered gas and
condensate in a similar horizon to the initial well. The Company is currently
reviewing data from the appraisal well to determine whether development of the
area is economical.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE D. 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 ("NOLs") and other deferred tax
attributes in the United States and state, local and foreign tax jurisdictions
will be utilized prior to their expiration. During the three months ended March
31, 2006, the Company utilized all of its available United States NOLs, other
than those subject to limitations, primarily related to the sale of the
deepwater Gulf of Mexico assets; accordingly, this will accelerate the Company's
payment of cash taxes. As of March 31, 2006 and December 31, 2005, the Company's
valuation allowances (relating primarily to foreign tax jurisdictions) were
$116.1 million and $95.8 million, respectively.
Income tax provision. The Company recognized income tax provisions on
continuing operations of $20.7 million and $21.8 million during the three-month
periods ended March 31, 2006 and 2005, respectively. The Company's effective tax
rate on continuing operations of 104.9 percent differs from the combined United
States federal and state statutory rate of approximately 36.5 percent primarily
due to:
o foreign tax rates,
o statutes in foreign jurisdictions that differ from those in the
United States and
o expenses for unsuccessful well costs and associated acreage costs
in foreign locations where the Company does not expect to receive
income tax benefits; during the first quarter of 2006, this
primarily related to Nigerian expenses of approximately $35.5
million.
The Company's income tax provisions attributable to income from continuing
operations consisted of the following for the three-month periods ended March
31, 2006 and 2005:
Three months ended
March 31,
--------------------------
2006 2005
--------- ---------
(in thousands)
Current:
U.S. federal.............................. $ (2,513) $ -
U.S. state and local...................... (9) -
Foreign................................... 6,278 6,565
-------- --------
3,756 6,565
-------- --------
Deferred:
U.S. federal.............................. 9,937 14,728
U.S. state and local...................... (198) (1)
Foreign................................... 7,222 470
-------- --------
16,961 15,197
-------- --------
$ 20,717 $ 21,762
======== ========
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Discontinued operations. The Company's effective tax rate associated with
discontinued operations during the three-month periods ended March 31, 2006 and
2005 was 34.9 percent and 34.3 percent, respectively. The Company's income tax
provisions attributable to income from discontinued operations consisted of the
following for the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
--------------------------
2006 2005
--------- ---------
(in thousands)
Current:
U.S. federal.............................. $ 140,725 $ -
U.S. state and local...................... 2,140 -
Foreign................................... 1,165 2,325
-------- --------
144,030 2,325
-------- --------
Deferred:
U.S. federal.............................. 142,276 26,691
U.S. state and local...................... 6,215 1,149
Foreign................................... (1,004) (64)
-------- --------
147,487 27,776
-------- --------
$ 291,517 $ 30,101
======== ========
NOTE E. Long-term Debt
Lines of credit. The Company has an Amended and Restated 5-Year Revolving
Credit Agreement (the "Credit Agreement") that matures in September 2010 unless
extended in accordance with the terms of the Credit Agreement. The terms of the
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 Credit Agreement. As of March 31, 2006, the
Company had no outstanding borrowings under the Credit Agreement, however, if
the Company had outstanding borrowings, the Company's current additional margin
to LIBOR is .875 percent.
The Credit Agreement contains certain financial covenants, which include
the (i) 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 ("DD&A") expense, exploration and abandonments
expense and other noncash charges and expenses to consolidated interest expense
of at least 3.5 to 1.0; (ii) 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 (iii)
because the Company fell below an investment grade rating by both Moody's
Investor Services, Inc. ("Moody's") and Standard & Poor's Ratings Group, Inc.
("S&P") prior to attaining a mid-investment grade rating (as defined in the
Credit Agreement) by either of such rating agencies, then such covenants 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 Credit Agreement, and 1.75 to 1.0
thereafter. The lenders may declare any outstanding obligations under the Credit
Agreement immediately due and payable upon the occurrence, and during the
continuance of, an event of default, which includes a defined change in control
of the Company. As of March 31, 2006, the Company had unused borrowing capacity
of $1.4 billion under the Credit Agreement.
As of March 31, 2006, the Company had $121.3 million of undrawn letters of
credit, of which $119.6 million were undrawn commitments under the Credit
Agreement. The letters of credit outstanding under the Credit Agreement are
subject to a per annum fee, based on a grid of the Company's debt rating,
currently representing the Company's LIBOR margin (.875 percent at March 31,
2006) plus .125 percent.
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
As of March 31, 2006, the Company was in compliance with all of its debt
covenants.
Senior notes. During April 2006, the Company issued $450 million of 6.875%
senior notes due 2018 (the "6.875% Notes") for net proceeds of $446.6 million.
The proceeds from this borrowing will be used to fund a tender offer for the
Company's outstanding 6.50% senior notes due 2008 (the "6.50% Notes") and
general corporate purposes. See Note O for additional information regarding
these transactions and plans.
Rating agencies. In January 2006, Moody's downgraded the Company from Baa3
to Ba1. The downgrade triggered increases in the pricing grid under the Credit
Agreement.
NOTE F. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of reducing its costs of
capital. As of March 31, 2006 and December 31, 2005, the Company was not a party
to any open fair value hedges.
As of March 31, 2006, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included a $4.5 million reduction
in the carrying value attributable to net deferred hedge losses on terminated
fair value hedges that are being amortized as net increases to interest expense
over the original terms of the terminated agreements. During the three-month
periods ended March 31, 2006 and 2005, the Company's amortization of net
deferred hedge gains on terminated interest rate swaps reduced the Company's
reported interest expense by $.1 million and $2.2 million, respectively.
The following table sets forth, as of March 31, 2006, the scheduled
amortization of net deferred hedge losses on terminated interest rate hedges
(including terminated fair value and cash flow hedges) that will be recognized
as increases to the Company's future interest expense:
Nine months
ending Year Ending December 31,
December 31, ----------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter
----------- -------- -------- -------- -------- ----------
(in thousands)
Net deferred hedge losses...... $ (7) $ (1,573) $ (554) $ (528) $ (578) $ (4,355)
======= ======= ======= ======= ======= =======
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. As of March 31, 2006, all of the Company's open commodity
hedges are designated as hedges of Canadian and United States forecasted sales.
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.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Oil prices. All material physical sales contracts governing the Company's
oil production have been tied directly or indirectly to NYMEX prices. The
following table sets forth the volumes hedged in Bbls under outstanding oil
hedge contracts and the weighted average NYMEX prices per Bbl for those
contracts as of March 31, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- ------------- -------------
Average daily oil production hedged (a):
2006 - Swap Contracts
Volume (Bbl).................... 5,000 5,000 5,000 5,000
Price per Bbl................... $ 37.20 $ 37.20 $ 37.20 $ 37.20
2006 - Collar Contracts
Volume (Bbl).................... 7,000 6,500 6,500 6,665
Price per Bbl................... $42.50-$68.45 $41.92-$66.41 $41.92-$66.41 $42.12-$67.12
2007 - Swap Contracts
Volume (Bbl).................... 10,000 10,000 10,000 10,000 10,000
Price per Bbl................... $ 30.96 $ 30.96 $ 30.96 $ 30.96 $ 30.96
2007 - Collar Contracts
Volume (Bbl).................... 2,000 2,000 2,000 2,000 2,000
Price per Bbl................... $50.00-$89.50 $50.00-$89.50 $50.00-$89.50 $50.00-$89.50 $50.00-$89.50
2008 - Swap Contracts
Volume (Bbl).................... 10,000 10,000 10,000 10,000 10,000
Price per Bbl................... $ 30.62 $ 30.62 $ 30.62 $ 30.62 $ 30.62
<FN>
- ------------
(a) Subsequent to March 31, 2006, the Company entered into oil swap contracts,
with an average fixed price of $71.83 per Bbl, designated as hedges for
90,000 Bbls of forecasted June 2006 South African oil sales.
</FN>
The Company reports average oil prices per Bbl including the effects of oil
quality adjustments, amortization of deferred volumetric production payment
("VPP") revenue 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 amortization of deferred VPP revenue) and realized (excluding
hedge results and amortization of deferred VPP revenue), VPP amortization to oil
revenue and the net effect of settlements of oil price hedges on oil revenue for
the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
---------------------
2006 2005
------- -------
Average price reported per Bbl....................................... $ 60.01 $ 34.99
Average price realized per Bbl....................................... $ 60.10 $ 45.08
VPP increase to oil revenue (in millions)............................ $ 28.9 $ -
Reduction to oil revenue from hedging activity (in millions) (a)..... $ (29.1) $ (31.5)
<FN>
- -----------
(a) Excludes hedge losses of $12.3 million and $12.8 million attributable to
discontinued operations for the three-month periods ended March 31, 2006
and 2005, respectively.
</FN>
Natural gas liquids prices. During the three-month periods ended March 31,
2006 and 2005, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at March 31, 2006.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
price. The following table sets forth the volumes hedged in MMBtus under
outstanding gas hedge contracts and the weighted average index prices per MMBtu
for those contracts as of March 31, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ ------------
Average daily gas production hedged:
2006 - Swap Contracts
Volume (MMBtu)........................ 73,790 73,880 73,984 73,885
Index price per MMBtu................. $ 4.30 $ 4.31 $ 4.31 $ 4.31
2006 - Collar Contracts
Volume (MMBtu)........................ 105,000 105,000 115,000 108,345
Index price per MMBtu................. $6.55-$14.20 $6.55-$14.20 $6.54-$14.39 $6.55-$14.27
2007 - Swap Contracts
Volume (MMBtu)........................ 24,071 24,146 24,231 24,329 24,195
Index price per MMBtu................. $ 3.99 $ 4.00 $ 4.01 $ 4.02 $ 4.00
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
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments, amortization of deferred VPP
revenue 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 amortization of deferred VPP revenue) and realized (excluding hedge
results and amortization of deferred VPP revenue), VPP amortization to gas
revenue and the net effect of settlements of gas price hedges on gas revenue for
the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
---------------------
2006 2005
------- -------
Average price reported per Mcf...................................... $ 6.72 $ 6.01
Average price realized per Mcf...................................... $ 7.05 $ 5.61
VPP increase to gas revenue (in millions)........................... $ 19.0 $ 11.6
Reduction to gas revenue from hedging activity (in millions) (a).... $ (28.3) $ (.3)
<FN>
- --------------
(a) Excludes hedge losses of $3.4 million and $7.7 million attributable to
discontinued operations for the three-month periods ended March 31, 2006
and 2005, respectively.
</FN>
Hedge ineffectiveness. During the three-month periods ended March 31, 2006
and 2005, the Company recognized net ineffectiveness credits, or reductions, to
other expense from continuing operations of $8.2 million and net ineffectiveness
charges of $5.1 million, respectively, related to the ineffective portions of
changes in the fair values of its cash flow hedging instruments. These credits
and charges primarily result from changes in correlations and derivative fair
values associated with indexes of financial hedge derivatives and the indexes of
the hedged forecasted production for certain fields.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of March 31, 2006 and December 31, 2005, AOCI
- - Hedging represented net deferred losses of $301.9 million and $506.6 million,
respectively. The AOCI - Hedging balance as of March 31, 2006 was comprised of
$419.9 million of net deferred losses on the effective portions of open cash
flow hedges, $55.4 million of net deferred losses on terminated cash flow hedges
(including $3.1 million of net deferred losses on terminated cash flow interest
rate hedges) and $173.5 million of associated net deferred tax benefits. The
decrease in AOCI - Hedging during the three months ended March 31, 2006 was
primarily attributable to the termination and reclassification to discontinued
operations of the underlying balances related to hedges that were designated as
deepwater Gulf of Mexico hedges and 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 March 31, 2007, based on current estimates
of future commodity prices, the Company expects to reclassify $162.0 million of
net deferred losses associated with open commodity hedges and $3.6 million of
net deferred losses on terminated commodity hedges from AOCI - Hedging to oil
and gas revenues. The Company also expects to reclassify approximately $60.5
million of net deferred income tax benefits associated with commodity hedges
during the twelve months ending March 31, 2007 from AOCI - Hedging to income tax
benefit.
The following table sets forth, as of March 31, 2006, 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)
2006 net deferred hedge gains....... $ 1,164 $ 1,418 $ 581 $ 3,163
2007 net deferred hedge losses...... $ (6,768) $ (2,843) $ (2,553) $ (3,277) (15,441)
2008 net deferred hedge losses...... $ (8,718) $ (6,123) $ (6,008) $ (6,472) (27,321)
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) $ (902) $ (906) (3,570)
2012 net deferred hedge losses...... $ (810) $ (791) $ (784) $ (772) (3,157)
-------
$(52,344)
=======
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE G. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future
plugging and abandonment of proved properties and related facilities. The
Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 5,
"Accounting for Contingencies" during the three-month periods ended March 31,
2006 and 2005:
Three months ended
March 31,
-------------------------
2006 2005
--------- --------
(in thousands)
Beginning asset retirement obligations............................... $ 157,035 $120,879
New wells placed on production and changes in estimates (a)....... 42,000 1,445
Liabilities reclassed to discontinued operations held for sale.... (13,585) -
Disposition of wells.............................................. (30,085) -
Liabilities settled............................................... (1,068) (2,400)
Accretion of discount............................................. 1,880 2,140
Currency translation.............................................. (89) (127)
-------- -------
Ending asset retirement obligations ................................. $ 156,088 $121,937
======== =======
<FN>
- -----------
(a) For the three months ended March 31, 2006, reflects a $42 million increase
in the abandonment estimate of the East Cameron facilities that were
destroyed by Hurricane Rita, which is reflected in exploration and
abandonments expense in the accompanying Consolidated Statements of
Operations.
</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 H. Postretirement Benefit Obligations
As of March 31, 2006 and December 31, 2005, the Company had recorded $18.8
million and $18.6 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. These obligations
are comprised of five plans of which four relate to predecessor entities that
the Company acquired. These plans had no assets as of March 31, 2006 or December
31, 2005. Other than the Company's retirement plan, the participants of these
plans are not current employees of the Company.
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three-month periods
ended March 31, 2006 and 2005:
Three months ended
March 31,
------------------------
2006 2005
-------- --------
(in thousands)
Beginning accumulated postretirement benefit obligations........ $ 18,576 $ 15,534
Net benefit payments......................................... (285) (186)
Service costs................................................ 204 81
Accretion of discounts....................................... 259 225
------- -------
Ending accumulated postretirement benefit obligations........... $ 18,754 $ 15,654
======= =======
NOTE I. Commitments and Contingencies
Legal actions. The Company is party to the legal actions that are described
below. The Company is also party to other proceedings and claims incidental to
its business. While many of these matters involve inherent uncertainty, the
Company believes that the amount of the liability, if any, ultimately incurred
with respect to such other proceedings and claims will not have a material
adverse effect on the Company's consolidated financial position as a whole or on
its liquidity, capital resources or future annual results of operations. The
Company will continue to evaluate its litigation matters on a quarter-by-quarter
basis and will adjust its litigation reserves as appropriate to reflect its
assessment of the then current status of litigation.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings and the case now contains
two material claims. First, the plaintiffs assert that they were improperly
charged expenses (primarily field compression), which plaintiffs allege are a
"cost of production", and for which the plaintiffs claim they, as royalty
owners, are not responsible. Second, the plaintiffs claim they are entitled to
50 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 $72 million,
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 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. The Company has not established a provision for the
helium 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
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
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.
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 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.
Environmental Protection Agency Investigation. On November 4, 2005, the
Company learned from the U.S. Environmental Protection Agency 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 investigation is being conducted in conjunction with
the U.S. Attorney's Office for the District of 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 is fully cooperating
with the government's investigation.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE J. Income (Loss) Per Share From Continuing Operations
Basic income (loss) per share from continuing operations is computed by
dividing income (loss) 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. During periods that the Company realizes a loss from
continuing operations, securities or other contracts to issue common stock would
be dilutive to loss per share and conversion into common stock is assumed not to
occur.
The following table is a reconciliation of basic income (loss) from
continuing operations to diluted income (loss) from continuing operations for
the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
--------------------------
2006 2005
--------- ---------
(in thousands)
Basic income (loss) from continuing operations............ $ (967) $ 26,991
Interest expense on convertible notes, net of tax......... - 802
-------- --------
Diluted income (loss) from continuing operations.......... $ (967) $ 27,793
======== ========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
--------------------------
2006 2005
--------- ---------
(in thousands)
Weighted average common shares outstanding (a):
Basic.................................................. 126,944 142,898
Dilutive common stock options (b) (c).................. - 1,293
Restricted stock awards (c)............................ - 827
Convertible notes dilution (c)......................... - 2,327
-------- --------
Diluted................................................ 126,944 147,345
======== ========
<FN>
- ---------------
(a) During August 2005, the Company's board of directors (the "Board") approved
a share repurchase program authorizing the purchase of up to $1 billion of
the Company's common stock, $641 million of which was completed in 2005 and
$359 million of which is expected to be initiated in mid-May 2006.
(b) Common stock options to purchase 30,712 shares of common stock were
outstanding but not included in the computations of diluted income per
share from continuing operations for the three months ended March 31, 2005
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) Due to the loss from continuing operations during the three months ended
March 31, 2006, the potential dilutive effects of stock options, restricted
stock awards and convertible notes would be anti-dilutive.
</FN>
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE K. 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, Canada and Africa and
Other. Africa and Other is primarily comprised of current or past operations in
Equatorial Guinea, Gabon, Morocco, Nigeria, South Africa and Tunisia.
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. Also as previously
referred to in Note B, during 2006, the Company sold Argentine net assets and
United States oil and gas properties having carrying values, including net
deferred hedge losses, of approximately $667 million and $432 million,
respectively. The results of operations of those properties have been
reclassified as discontinued operations in accordance with SFAS 144 and are
excluded from the geographic operating segment information provided below. See
Note N for information regarding the Company's discontinued operations.
The following tables provide the Company's interim geographic operating
segment data for the three-month periods ended March 31, 2006 and 2005.
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.
25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
United Africa Consolidated
States Canada and Other Headquarters Total
-------- -------- --------- ----------- ------------
(in thousands)
Three months ended March 31, 2006:
Revenues and other income:
Oil and gas................................ $309,881 $ 28,362 $ 41,225 $ - $ 379,468
Interest and other......................... - - - 17,111 17,111
Loss on disposition of assets, net......... - - - (73) (73)
------- ------- ------- ------- --------
309,881 28,362 41,225 17,038 396,506
------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production..................... 77,901 10,914 5,868 - 94,683
Depletion, depreciation and amortization... 63,616 7,230 5,695 5,865 82,406
Exploration and abandonments............... 78,281 3,416 42,945 - 124,642
General and administrative................. - - - 32,247 32,247
Accretion of discount on asset retirement
obligations............................. - - - 1,148 1,148
Interest................................... - - - 36,576 36,576
Other...................................... - - - 5,054 5,054
------- ------- ------- ------- --------
219,798 21,560 54,508 80,890 376,756
------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes........................ 90,083 6,802 (13,283) (63,852) 19,750
Income tax benefit (provision)................ (32,880) (2,423) 8,698 5,888 (20,717)
------- ------- ------- ------- --------
Income (loss) from continuing operations...... $ 57,203 $ 4,379 $ (4,585) $(57,964) $ (967)
======= ======= ======= ======= ========
Three months ended March 31, 2005:
Revenues and other income:
Oil and gas................................ $254,936 $ 20,488 $ 47,691 $ - $ 323,115
Interest and other......................... - - - 2,306 2,306
Gain on disposition of assets, net......... 2,032 - - 109 2,141
------- ------- ------- ------- --------
256,968 20,488 47,691 2,415 327,562
------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production..................... 64,099 9,080 7,767 - 80,946
Depletion, depreciation and amortization... 52,353 7,039 9,377 4,539 73,308
Impairment of long-lived assets............ - - 152 - 152
Exploration and abandonments............... 28,803 3,741 21,285 - 53,829
General and administrative................. - - - 27,488 27,488
Accretion of discount on asset retirement
obligations.............................. - - - 1,499 1,499
Interest................................... - - - 32,746 32,746
Other...................................... - - - 8,841 8,841
------- ------- ------- ------- --------
145,255 19,860 38,581 75,113 278,809
------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes........................ 111,713 628 9,110 (72,698) 48,753
Income tax benefit (provision)................ (40,775) (229) (2,060) 21,302 (21,762)
------- ------- ------- ------- --------
Income (loss) from continuing operations...... $ 70,938 $ 399 $ 7,050 $(51,396) $ 26,991
======= ======= ======= ======= ========
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE L. Volumetric Production Payments
During 2005, the Company sold 27.8 MMBOE of proved reserves by means of
three VPP agreements for net proceeds of $892.6 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 VPP sold 58 Bcf of gas volumes over an expected
five-year term that began in February 2005. The second VPP sold 10.8 MMBbls of
oil volumes over an expected seven-year term that began in January 2006. The
third VPP sold 6.0 Bcf of gas volumes over an expected 32-month term that began
in May 2005 and 6.2 MMBbls of oil volumes over an expected five-year term that
began 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 No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies", a VPP is considered a sale of 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 provides information about the deferred revenue
carrying values of the Company's VPPs:
Gas Oil Total
--------- --------- ---------
(in thousands)
Deferred revenue at December 31, 2005....... $ 249,323 $ 605,515 $ 854,838
Less 2006 amortization...................... (19,028) (28,921) (47,949)
-------- -------- --------
Deferred revenue at March 31, 2006..... $ 230,295 $ 576,594 $ 806,889
======== ======== ========
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 2006................................ $ 142,378
2007.......................................... 181,232
2008.......................................... 158,138
2009.......................................... 147,906
2010.......................................... 90,215
2011.......................................... 44,951
2012.......................................... 42,069
---------
$ 806,889
=========
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE M. Insurance Claims
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 maintained
business interruption and physical damage insurance coverage for such
circumstances. The Company recognized a total of $17.9 million in business
interruption recoveries and $4.4 million in physical damage recoveries
associated with the Fain gas plant fire. The Company recognized $14.2 million of
the business interruption recoveries in 2005 and the remaining $3.7 million
during the three months ended March 31, 2006,which is included in other income
in the Company's accompanying Consolidated Statements of Operations.
Hurricanes Katrina and 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 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. The Company's
business interruption claim is expected to cover losses of revenues from
mid-October 2005 (the end of 45-day deductible waiting period) until the
third-party facilities could take the full production from the Devils Tower
field, which the Company determined to have occurred in early December 2005. At
March 31, 2006, the Company estimates that its business interruption recovery on
Devils Tower to be approximately $20 million. The Company has not recorded any
estimated recoveries due to certain pending issues that the Company expects to
have resolved in the near future.
As a result of Hurricane Rita, the Company's East Cameron facility was
destroyed and the Company does not plan to rebuild the facility based on the
current economics of the field. The Company continues to evaluate the magnitude
of the loss. Currently, the Company estimates that it will incur a minimum of
$86 million to reclaim and completely abandon the East Cameron facility; thus,
the Company recorded an additional abandonment obligation charge of $42 million
which is included in exploration and abandonments in the accompanying
Consolidated Statements of Operations for the three months ended March 31, 2006.
The Company's estimate to reclaim and abandon the facilities is based upon an
analysis and fee proposal prepared by a third-party engineering firm and assumes
that the Company will be able to "reef" a substantial portion of debris in
place. The Company has filed its application with the appropriate regulatory
agency to reef the debris in place.
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 had 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) up to $40 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.
In December 2005, the Company received the $14 million scheduled value for
the East Cameron assets and recognized a gain of $9.7 million during the fourth
quarter of 2005. The Company earned the $4.0 million of business interruption
recoveries during the three months ended March 31, 2006. The Company believes
that its debris removal and make well safe coverages, in combination, will
substantially cover costs to abandon 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.
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE N. Discontinued Operations
During 2005 and 2006, the Company sold its interests in the following oil
and gas assets and has reflected their results of operations in discontinued
operations:
Country Description of Assets Date Divested Net Proceeds Gain
------- --------------------- ------------- ------------ --------
(in millions)
Canada Martin Creek, Conroy Black May 2005 $ 197.2 $ 138.3
and Lookout Butte fields
United States Two Gulf of Mexico August 2005 59.1 27.7
shelf fields
United States Deepwater Gulf of Mexico March 2006 1,160.9(a) 728.4
fields
Argentina All Argentine properties April 2006 675.0 (b)
<FN>
- -----------
(a) Net proceeds do not reflect the cash payment of $193.2 million for
terminated hedges associated with the deepwater Gulf of Mexico assets.
(b) The Company estimates that it will recognize a nominal gain from the
Argentine divestiture in the second quarter of 2006.
</FN>
Pursuant to SFAS 144, the Company has reflected (a) the Argentine assets
and liabilities sold during April 2006 as discontinued operations held for sale
as of March 31, 2006 and (b) the results of operations of the above divestitures
as discontinued operations, rather than as a component of continuing operations.
The following table represents the components of the Company's discontinued
operations for the three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
--------- ---------
(in thousands)
Revenues and other income:
Oil and gas................................................. $ 181,569 $ 197,197
Interest and other.......................................... 1,847 26,027
Gain on disposition of assets............................... 728,502 80
-------- --------
911,918 223,304
Costs and expenses:
Oil and gas production...................................... 27,955 33,016
Depletion, depreciation and amortization.................... 37,327 82,843
Exploration and abandonments................................ 5,947 13,556
General and administrative.................................. 2,432 2,097
Accretion of discount on asset retirement obligations....... 732 641
Interest.................................................... 344 505
Other....................................................... 1,490 2,879
-------- --------
76,227 135,537
-------- --------
Income from discontinued operations before income taxes........ 835,691 87,767
Income tax provision:
Current..................................................... (144,030) (2,325)
Deferred.................................................... (147,487) (27,776)
-------- --------
Income from discontinued operations, net of tax................ $ 544,174 $ 57,666
======== ========
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
At March 31, 2006, the Argentine assets included in discontinued operations
held for sale and the Argentine liabilities included in discontinued operations
held for sale were comprised of the following components (in thousands):
Assets included in discontinued operations held for sale:
Current assets, including cash and cash equivalents of $7.0 million....... $ 46,980
Property, plant and equipment, net........................................ 677,591
Other assets, net......................................................... 8,838
--------
Total assets......................................................... $ 733,409
========
Liabilities included in discontinued operations held for sale:
Current liabilities....................................................... $ 36,142
Deferred tax liabilities.................................................. 13,943
Other liabilities......................................................... 16,237
--------
Total liabilities.................................................... $ 66,322
========
NOTE O. Subsequent Events
Argentine divestiture. As described in Note N, during April 2006, the
Company sold substantially all of its assets and liabilities in Argentina for
proceeds of approximately $675 million, before normal closing adjustments.
The Company has provided the purchaser of its Argentine assets and
liabilities certain indemnifications, subject to defined limitations. The
indemnifications primarily pertain to matters of litigation, environmental
contingencies, royalty obligations and income taxes, none of which the Company
believes to be probable of having a material impact on its future results of
operations, financial position or liquidity. Below is the Company's previously
disclosed litigation that was assumed by the purchasers, subject to the
indemnifications.
The Company's former 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 former subsidiary was cooperating with the proceedings,
although it from time to time challenged whether certain assessed fines were
appropriate. The Company estimated that fines assessed in these proceedings
would be immaterial, but in the aggregate could exceed $100,000. The Company's
former 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.
Senior notes. As previously discussed in Note E, during April 2006, the
Company issued $450 million of 6.875% Notes and received proceeds, net of
issuance discount and underwriting costs of $446.6 million. The Company will use
the net proceeds from the issuance of the 6.875% Notes to fund a tender offer to
purchase its outstanding $350 million of 6.50% Notes and for general corporate
purposes.
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
During April 2006, the Company commenced an offer to purchase for cash all
of its $350 million of 6.50% Notes. The Company is offering an early tender
payment of $20 per $1,000 principal amount of notes to holders who validly
tender their notes on or before May 10, 2006. The tender offer expires on
Wednesday, May 24, 2006. If all of the 6.50% Notes are validly tendered, the
Company will record a pretax charge of approximately $8.5 million in the second
quarter of 2006.
Long-term incentive plan. In May 2006, the Company's stockholders approved
a new long-term incentive plan (the "Long-Term Incentive Plan") which provides
for the granting of incentive awards in the form of stock options, stock
appreciation rights, performance units, restricted stock and restricted stock
units to directors, officers and employees of the Company. The Long-Term
Incentive Plan provides for the issuance of up to 4.6 million shares of the
Company's common stock. The Company will make no future awards under the 1997
Long-Term Incentive Plan.
31
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the first quarter of
2006 included the following highlights:
o Entered into separate agreements to sell certain of the Company's
deepwater Gulf of Mexico oil and gas properties and its Argentine
net assets that provided for cash proceeds, before normal closing
adjustments, of $1.3 billion and $675 million, respectively. The
Company completed the sale of its deepwater Gulf of Mexico properties
during March 2006, recognizing a first quarter pretax gain of $728.4
million. During April 2006, the Company completed the sale of its
Argentine net assets and expects to recognize a nominal second
quarter pretax gain.
o Approval and commencement of the development of the Pioneer-operated
Oooguruk field on the North Slope of Alaska.
o Approval of a $1.3 billion capital budget for 2006, 80 percent of
which represents capital directed towards onshore North American
activities, including development drilling in core areas and testing
of new coalbed methane ("CBM") resource projects. The budget
represents a reduction in higher-risk exploration capital from
approximately 30 percent of capital expenditures during 2005 to
approximately 10 percent of budgeted capital expenditures in 2006.
o Recognized a loss from continuing operations of $1.0 million ($.01
per diluted share) for the first quarter of 2006, as compared to
income from continuing operations of $27.0 million ($.19 per diluted
share) for the first quarter of 2005, primarily as a result of a $42
million increase in the abandonment estimate of the East Cameron
facilities that were destroyed by Hurricane Rita, which the Company
believes will substantially be covered by insurance, and a $33.1
million dry hole and acreage impairment on the Company's Block 256
permit in Nigeria.
o Recognition of income from discontinued operations of $544.2 million
($4.29 per diluted share) during the first quarter of 2006
attributable to the Company's deepwater Gulf of Mexico oil and gas
properties sold during March 2006, including the aforementioned
$728.4 million pretax gain, and the Company's Argentine net assets
that were held for sale as of March 31, 2006.
o Increase in net income to $543.2 million ($4.28 per diluted share)
for the first quarter of 2006, as compared to $84.7 million ($.58 per
diluted share) for the first quarter of 2005, primarily as a result
of the $728.4 million pretax gain realized from the sale of the
Company's deepwater Gulf of Mexico oil and gas properties, partially
offset by increases of $70.8 million in exploration and abandonments
expense and $260.4 million in worldwide income tax provisions.
o Net cash provided by operating activities remained constant at $303.3
million during the first quarter of 2006 as compared to $303.7
million during the first quarter of 2005.
o Reduction in outstanding debt of $898.6 million, or 44 percent, as of
March 31, 2006 as compared to debt outstanding as of December 31,
2005, resulting in a decrease in the Company's debt to book
capitalization to 28 percent at March 31, 2006 from 48 percent at
December 31, 2005.
Second Quarter 2006 Outlook
Based on current estimates, the Company expects that second quarter 2006
production will average 93,000 to 98,000 BOEPD. This range reflects the
Company's sale of its deepwater Gulf of Mexico properties, the sale of its
Argentine assets and the typical variability in the timing of oil cargo
shipments in South Africa and Tunisia.
Second quarter production costs (including production and ad valorem taxes)
are expected to average $11.00 to $12.00 per BOE based on current NYMEX strip
prices for oil and gas. DD&A expense is expected to average $9.25 to $10.25 per
BOE.
Total exploration and abandonment expense is expected to be $25 million to
$55 million and includes plans to drill in the resource plays in the Edwards
trend, Canada and Tunisia, carryover costs from the Alaskan winter drilling
32
PIONEER NATURAL RESOURCES COMPANY
season and the acquisition of additional 3-D seismic (which is required to be
expensed under the successful efforts method of accounting) and personnel costs.
General and administrative expense is expected to be $31 million to $34 million.
Interest expense is expected to be $24 million to $27 million, representing a
decrease from the prior quarter primarily as a result of the repayment of
outstanding borrowings under the Credit Agreement as a result of the asset
divestitures. Interest income, primarily from cash investments, is expected to
be $3 million to $4 million. Accretion of discount on asset retirement
obligations is expected to be $1 million to $2 million. The Company's second
quarter effective income tax rate is expected to range from 35 percent to 45
percent based on current capital spending plans. Cash income taxes are expected
to range from $5 million to $15 million.
Acquisitions, Divestments, Operations and Drilling Highlights
During the first quarter of 2006, the Company completed the divestiture of
certain of its deepwater Gulf of Mexico properties. Additionally, during 2005,
the Company sold its interests in certain oil and gas properties on the shelf of
the Gulf of Mexico and certain fields in Canada. Operating results and the
related gains on disposition of assets from these divestitures are reported as
discontinued operations.
During the first quarter of 2006, the Company announced an agreement to
sell its Argentine net assets for cash proceeds, before normal closing
adjustments, of $675 million. The Company completed this sale during April 2006
and estimates it will recognize a nominal gain in the second quarter of 2006.
The Company's Argentine net assets have been classified as discontinued
operations held for sale as of March 31, 2006 in the accompanying Consolidated
Balance Sheet and the Argentine results of operations for the three-month
periods ended March 31, 2006 and 2005 are included in income from discontinued
operations in the accompanying Consolidated Statements of Operations.
See Note N of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
discontinued operations.
During the first quarter of 2006, the Company incurred $377.8 million in
finding and development costs including $212.4 million for development
activities, $132.4 million for exploration activities and $33.0 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 table summarizes by geographic area the Company's finding and
development costs incurred, excluding asset retirement obligations, during the
first quarter of 2006 and the total wells planned to be drilled during the year
ending December 31, 2006:
Property
Acquisition Costs 2006
---------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
--------- ---------- ---------- ---------- ---------- -------
(in thousands)
United States:
Gulf of Mexico (a)....... $ - $ 2 $ 21,843 $ 7,554 $ 29,399 3
Onshore Gulf Coast....... 3 12,452 12,163 6,583 31,201 50
Permian Basin............ 1,867 3,606 1,533 56,870 63,876 360
Mid-Continent............ - - 3 7,495 7,498 40
Rocky Mountains.......... 605 1,979 8,206 43,856 54,646 390
Alaska................... - - 18,578 8,909 27,487 3
-------- --------- --------- --------- --------- ------
2,475 18,039 62,326 131,267 214,107 846
-------- --------- --------- --------- --------- ------
Argentina (a)................ - 2 6,873 17,607 24,482 -
Canada....................... (207) - 38,412 32,060 70,265 260
Nigeria...................... - 7,735 19,551 - 27,286 1
South Africa................. - - 83 31,255 31,338 5
Tunisia...................... - 5,000 1,609 200 6,809 11
Other........................ - - 3,540 - 3,540 -
-------- --------- --------- --------- --------- ------
(207) 12,737 70,068 81,122 163,720 277
-------- --------- --------- --------- --------- ------
Total Worldwide..... $ 2,268 $ 30,776 $ 132,394 $ 212,389 $ 377,827 1,123
======== ========= ========= ========= ========= ======
33
PIONEER NATURAL RESOURCES COMPANY
<FN>
- -----------
(a) Approximately $8.5 million of the finding and development costs incurred
are associated with the divested deepwater Gulf of Mexico assets and all
the Argentine finding and development costs incurred were not included in
the $1.3 billion 2006 capital budget as the Company was in the process of
selling those assets.
</FN>
The following tables summarize the Company's development and
exploration/extension drilling activities for the three months ended March 31,
2006:
Development Drilling
------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States................. 29 136 160 3 2
Argentina..................... 2 15 10 - 7
Canada........................ 3 - - - 3
Africa........................ - 2 1 - 1
------ ------ ------ ------ -----
Total Worldwide......... 34 153 171 3 13
====== ====== ====== ====== =====
Exploration/Extension Drilling
------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
United States................ 7 17 13 2 9
Argentina.................... 4 4 2 1 5
Canada....................... 109 88 151 6 40
Africa....................... 3 2 - 1 4
------ ------ ------ ------ ------
Total Worldwide......... 123 111 166 10 58
====== ====== ====== ====== ======
Gulf of Mexico area. The Company's East Cameron facilities were destroyed
by Hurricane Rita during the third quarter of 2005. 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. During the first quarter of 2006, the Company increased its estimate
to abandon the East Cameron facilities to $86 million by taking a charge of $42
million. The Company's estimate to reclaim and abandon the facilities is based
upon an analysis and fee proposal prepared by a third-party engineering firm and
assumes that the Company will be able to "reef" a substantial portion of debris
in place. The Company has filed its application with the appropriate regulatory
agency to reef the debris in place. The Company expects a substantial portion of
the loss to be covered by insurance.
During October 2005, the Company announced a discovery on its Clipper
prospect in the Green Canyon Blocks 299 and 300 in the deepwater Gulf of Mexico.
The Clipper discovery, which Pioneer operates with a 55 percent working
interest, was not included in the Company's deepwater Gulf of Mexico divestiture
package. The Company intends to develop the Clipper field and has a rig
contracted to drill appraisal and exploratory wells in the field during the
third quarter of 2006.
Gulf Coast area. In the Edwards Trend in South Texas, the Company has
discovered two new fields which are analogous to its Pawnee and Washburn fields.
Four successful wells have been drilled in the first new field discovery in the
Sinor area that tested at between 2.5 and 3.2 million cubic feet per day before
being stimulated. These four wells are expected to be on production by the end
of the second quarter of 2006, and the full field development plan is being
prepared. The second new field discovery was drilled on the Stingray prospect
northeast of the Pawnee field. Early results indicate the new field could have
significant resource potential. The discovery well is anticipated to be online
and producing by late second quarter of 2006.
34
PIONEER NATURAL RESOURCES COMPANY
Three additional new-field prospects are scheduled to be drilled during the
second quarter of 2006 to continue the Edwards Trend play expansion. Pioneer
holds more than 200,000 gross acres in the trend area, has four rigs currently
dedicated to the play and is adding two rigs to the program during 2006 and at
least one rig during 2007. The Company plans to drill at least 35 Edwards Trend
development and exploration wells during 2006.
Alaska area. The Company's 2005 - 2006 winter drilling season program in
Alaska included three exploratory wells in the Central North Slope area where
Pioneer and its partners tested multiple play types that were close to existing
infrastructure. The Company's Arctic Fox drilling rig was utilized for the
three-well program.
Pioneer announced in early March 2006 that the Hailstorm No. 1 well was
unsuccessful. It was drilled to test the first of multiple prospects in the
153,000-acre Pioneer-operated Storms area just south of the Prudhoe Bay field.
The Company owns a 50 percent working interest in the prospect. Additional
prospects have been identified in a variety of established play types and are
likely to be tested in future years.
The Cronus No. 1 well, in which the Company owns a 90 percent working
interest, was planned to test multiple objectives on a prospect just west of the
Meltwater field. A thick, oil-bearing sand section in the Torok and a thin, oil-
bearing sand in the Jurassic-aged Kuparuk C were penetrated by the well.
Wireline and core data are currently being analyzed and integrated with 3-D
seismic to determine if appraisal activities are warranted during the 2006 -
2007 winter drilling season in Alaska.
Drilling of the Antigua No. 1 well on the non-operated Antigua prospect was
unsuccessful. The Company owns a 32 percent working interest in this prospect,
which is adjacent to the Kuparuk River field.
During 2005, the Company acquired a ten percent interest in the
Cosmopolitan Unit in the Cook Inlet of Alaska through a disproportionate
spending arrangement for a 3-D seismic shoot that was undertaken in 2005 and
completed in the first quarter of 2006. The Company has the option to acquire an
additional 40 percent in the Cosmopolitan Unit and assume operatorship any time
prior to June 1, 2006. The Company is completing its evaluation of the 3-D
seismic and will make its determination on whether or not to exercise this
option during the second quarter of 2006.
Mid-Continent area. The Company's 2006 drilling plans are primarily
comprised of drilling wells in the Hugoton and West Panhandle fields.
Permian Basin area. During 2006, the Company plans to increase its drilling
activity by approximately 87 percent over the wells drilled in the area during
2005 and almost a 200 percent increase relative to average annual wells drilled
over the past five years.
Rocky Mountain area. In the Raton Basin, production is increasing as a
result of a pipeline expansion that was completed in October 2005 and additional
field and wellhead compression. Pioneer plans to increase its Raton drilling
during 2006 and to leverage its CBM expertise in the Raton area to drill
development wells. Additionally, the Company intends to continue efforts during
2006 to optimize gathering and compression facilities in the area.
In northwest Colorado, the Company's programs to evaluate the CBM resource
potential at Lay Creek and Columbine Springs are progressing. At Lay Creek, the
Company has drilled five pilot wells and completed workovers on two wells
drilled by the previous operator. Results to date indicate that the coals are
permeable and thicker than expected. During the second half of 2006, Pioneer
plans to drill 14 development wells and install the infrastructure to initiate
sales by the end of 2006. Drilling on two additional pilot wells is expected to
commence during the second quarter of 2006. At Columbine Springs, the Company
expects to complete its seven-well extension pilot program by the end of July
2006 and have these and 23 existing wells on production by the end of the third
quarter of 2006 to assess production potential and water-handling requirements.
Full-field development could begin in 2007. The Company also plans to drill five
wells to further evaluate its resource play at Castlegate and to test its
conventional Entrada gas play, both in the Uinta Basin in Utah.
35
PIONEER NATURAL RESOURCES COMPANY
Canada. The Company's operations continued to focus upon the Chinchaga
field, the Company's Horseshoe Canyon and Alberta Mannville CBM plays. In the
Chinchaga field, the Company drilled in 44 wells of which 90 percent were
successful, recompleted an additional 31 wells and upgraded field wide
compression and gathering facilities during the winter drilling season of 2006.
In the Horseshoe Canyon CBM trend, the Company drilled 18 wells of the planned
200 wells for 2006 and is planning to tie 300 wells into gathering and
compression facilities by the end of 2006. In the Alberta Mannville CBM play,
the Company plans to drill eight horizontal wells during 2006 to test three new
CBM pilots.
Nigeria. During the first quarter of 2006, the Company participated in the
drilling of the Pina 1-X well on Block 256 in the deepwater of Nigeria, which
was unsuccessful. As a result, the Company recorded a charge of $33.1 million
for the dry hole cost and related acreage impairment. The Company has a 25
percent working interest in the block. The well tested multiple objectives on a
large thrust structure located near the western edge of the block. The partners
plan to drill an additional well on Block 256 in 2007 to test a different play
type.
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 acquired 3-D seismic data of the block during the
fourth quarter of 2005 and is currently processing the seismic. The Company's
subsidiary plans to drill the first well on the block during 2007.
South Africa. During the first quarter of 2006, the Company and its partner
drilled two wells that are awaiting completion and plan to drill four additional
development wells in 2006 and early 2007 to develop the gas and condensate
fields discovered offshore South Africa. The Company also invested $22.3 million
in facilities infrastructure and design work, of which installation is expected
to commence at the end of 2006. First production from the project is expected in
the second half of 2007.
Tunisia. The Adam 4 well drilled during the first quarter of 2006 was
successful, extending the Company's 100 percent success rate in the concession
where a two-rig drilling program is underway. On the adjacent Jenein Nord block,
the Company acquired the remaining equity interest in February 2006, becoming
the operator of the block with 100 percent working interest and is currently
acquiring 3-D seismic on both the Jenein Nord block and Adam Concession. A well
is planned during the second quarter of 2006 on the Borj El Khadra block which
is adjacent to the Adam Concession.
Results of Operations
Oil and gas revenues. Oil and gas revenues from continuing operations
totaled $379.5 million and $323.1 million for the three-month periods ended
March 31, 2006 and 2005, respectively. The increase in oil and gas revenues from
continuing operations was due to a 72 percent increase in oil prices, a 30
percent increase in NGL prices and a 12 percent increase in gas prices,
including the effects of commodity price hedges and amortization of deferred VPP
revenues, partially offset by a ten percent decrease in average daily BOE sales
volumes.
36
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes from continuing
operations, by geographic area and in total, for the three-month periods ended
March 31, 2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
Oil (Bbls):
United States............................. 16,965 22,522
Canada.................................... 277 161
Africa.................................... 7,654 11,967
-------- --------
Worldwide................................. 24,896 34,650
======== ========
NGLs (Bbls):
United States............................. 18,176 17,489
Canada.................................... 419 417
-------- --------
Worldwide................................. 18,595 17,906
======== ========
Gas (Mcf):
United States............................. 274,773 283,080
Canada.................................... 35,782 34,171
-------- --------
Worldwide................................. 310,555 317,251
======== ========
Total (BOE):
United States............................. 80,937 87,191
Canada.................................... 6,659 6,273
Africa.................................... 7,654 11,967
-------- --------
Worldwide................................. 95,250 105,431
======== ========
On a quarter-to-quarter comparison, average daily sales volumes increased
by six percent in Canada, while average daily sales volumes decreased by seven
percent in the United States and by 36 percent in Africa. Canadian average daily
sales volumes from continuing operations increased due to new production from
wells drilled and connected to infrastructure during 2005. Average daily sales
volumes from continuing operations in the United States were lower principally
due to incremental volumes sold under VPPs during 2005 that were effective
beginning in January 2006. Production decreased in Africa due to normal
production declines and timing of oil shipments.
The following table provides average daily sales volumes from discontinued
operations, by geographic area and in total, during the three-month periods
ended March 31, 2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
Oil (Bbls):
United States............................ 9,732 6,201
Argentina................................ 7,184 8,191
Canada................................... - 69
-------- --------
Worldwide................................ 16,916 14,461
======== ========
NGLs (Bbls):
United States............................ - 55
Argentina................................ 1,296 1,572
Canada................................... - 184
-------- --------
Worldwide................................ 1,296 1,811
======== ========
Gas (Mcf):
United States............................ 145,002 255,205
Argentina................................ 135,047 130,351
Canada................................... - 15,375
-------- --------
Worldwide................................ 280,049 400,931
======== ========
Total (BOE):
United States............................ 33,899 48,790
Argentina................................ 30,987 31,488
Canada................................... - 2,816
-------- --------
Worldwide................................ 64,886 83,094
======== ========
37
PIONEER NATURAL RESOURCES COMPANY
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 and the amortization of deferred VPP revenue. The
following table provides average reported prices from continuing operations
(including the results of hedging activities and the amortization of deferred
VPP revenue), and average realized prices from continuing operations (excluding
the results of hedging activities and the amortization of deferred VPP revenue)
by geographic area and in total, for the three- month periods ended March 31,
2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
Average reported prices:
Oil (per Bbl):
United States......................... $ 59.97 $ 29.94
Canada................................ $ 67.11 $ 50.88
Africa................................ $ 59.84 $ 44.28
Worldwide............................. $ 60.01 $ 34.99
NGLs (per Bbl):
United States......................... $ 33.74 $ 26.12
Canada................................ $ 54.23 $ 37.97
Worldwide............................. $ 34.20 $ 26.39
Gas (per Mcf):
United States......................... $ 6.60 $ 6.01
Canada................................ $ 7.65 $ 5.96
Worldwide............................. $ 6.72 $ 6.01
Average realized prices:
Oil (per Bbl):
United States......................... $ 60.11 $ 45.46
Canada................................ $ 67.11 $ 50.88
Africa................................ $ 59.84 $ 44.28
Worldwide............................. $ 60.10 $ 45.08
NGLs (per Bbl):
United States......................... $ 33.74 $ 26.12
Canada................................ $ 54.23 $ 37.97
Worldwide............................. $ 34.20 $ 26.39
Gas (per Mcf):
United States......................... $ 7.00 $ 5.56
Canada................................ $ 7.44 $ 5.98
Worldwide............................. $ 7.05 $ 5.61
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-month periods ended
March 31, 2006 and 2005, the Company's commodity price hedges decreased oil and
gas revenues from continuing operations by $57.4 million and $31.8 million,
respectively. See Note F of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for specific information regarding the
Company's hedging activities during the three-month periods ended March 31, 2006
and 2005.
Deferred revenue. During the three-month periods ended March 31, 2006 and
2005, the Company's amortization of deferred VPP revenue increased oil and gas
revenues from continuing operations by $47.9 million and $11.6 million,
respectively. See Note L of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for specific information regarding the
Company's VPPs.
Interest and other income. Interest and other income from continuing
operations for the three-month periods ended March 31, 2006 and 2005 was $17.1
million and $2.3 million, respectively. The increase in interest and other
income was primarily due $7.6 million of business interruption insurance claims
related to the East Cameron facility and finalizing the Fain Plant claims, a
$2.9 million increase in minority interest reimbursements and a $2.1 million bad
38
PIONEER NATURAL RESOURCES COMPANY
debt recovery. See Note M 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 oil and gas production
costs from continuing operations of $94.7 million and $80.9 million during the
three-month periods ended March 31, 2006 and 2005, respectively. 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
and third-party transportation charges are related to volumes produced. Total
oil and gas production costs per BOE from continuing operations increased by 29
percent during the three months ended March 31, 2006, as compared to the same
period in 2005, primarily due to (i) $1.23 per BOE increase resulting from a 261
percent increase in VPP volume deliveries on a BOE basis, for which the Company
records no sales volumes but bears all associated production costs, (ii) general
inflation of field service costs, (iii) a 16 percent increase in per BOE
Canadian gas transportation costs and (iv) increases in ad valorem taxes,
production taxes and field utility costs due to increases in commodity prices.
The following tables provide the components of the Company's total oil and
gas production costs per BOE from continuing operations and total oil and gas
production costs per BOE from continuing operations by geographic area for the
three-month periods ended March 31, 2006 and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
Lease operating expenses.................. $ 6.15 $ 4.80
Third-party transportation charges........ 1.21 .88
Taxes:
Ad valorem............................. 1.20 1.02
Production............................. 1.76 1.21
Workover costs............................ .72 .62
------- -------
Total production costs................. $ 11.04 $ 8.53
======= =======
Three months ended
March 31,
----------------------
2006 2005
-------- --------
United States.......................... $ 10.69 $ 8.17
Canada................................. $ 18.21 $ 16.08
Africa ................................ $ 8.52 $ 7.21
Worldwide.............................. $ 11.04 $ 8.53
Depletion, depreciation and amortization expense. The Company's total DD&A
expense from continuing operations was $9.61 and $7.73 per BOE for the
three-month periods ended March 31, 2006 and 2005, respectively. Depletion
expense from continuing operations, the largest component of DD&A expense from
continuing operations, was $8.93 per BOE during the three months ended March 31,
2006, as compared to $7.25 per BOE during the same period in 2005. The increase
in per BOE depletion expense from continuing operations was primarily due to (i)
a generally increasing trend in the Company's oil and gas properties' cost bases
per BOE of proved and proved developed reserves, (ii) the fourth quarter 2005
downward revisions of proved reserves in the Raton field, (iii) the
aforementioned increase in VPP volume deliveries, for which the Company bears
all capital costs but records no production volumes and (iv) a $2.35 per BOE
increase in Tunisian depletion expense primarily associated with a 2005 and 2006
decrease in the Company's working interest in the Adam Concession, (v) partially
offset by a $.44 per BOE decrease in South African depletion due to 2005 reserve
revisions attributable to well performance.
39
PIONEER NATURAL RESOURCES COMPANY
The following table provides depletion expense per BOE from continuing
operations by geographic area for the three-month periods ended March 31, 2006
and 2005:
Three months ended
March 31,
----------------------
2006 2005
-------- --------
United States........................... $ 8.73 $ 6.67
Canada.................................. $ 12.06 $ 12.47
Africa ................................. $ 8.27 $ 8.71
Worldwide............................... $ 8.93 $ 7.25
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 from
continuing operations by geographic area for the three-month periods ended March
31, 2006 and 2005:
Africa
United and
States Canada Other Total
-------- -------- -------- ----------
(in thousands)
Three months ended March 31, 2006:
Geological and geophysical................... $ 20,660 $ 346 $ 10,449 $ 31,455
Exploratory dry holes........................ 15,635 2,504 14,673 32,812
Leasehold abandonments and other............. 41,986 566 17,823 60,375
------- ------- ------- --------
$ 78,281 $ 3,416 $ 42,945 $ 124,642
======= ======= ======= ========
Three months ended March 31, 2005:
Geological and geophysical................... $ 24,397 $ 986 $ 9,410 $ 34,793
Exploratory dry holes........................ 2,264 2,664 11,556 16,484
Leasehold abandonments and other............. 2,142 91 319 2,552
------- ------- ------- --------
$ 28,803 $ 3,741 $ 21,285 $ 53,829
======= ======= ======= ========
Significant components of the Company's exploration and abandonment expense
during the first quarter of 2006 included (i) $33.1 million attributable to an
unsuccessful well and related impairment of acreage on the Company's Block 256
permit in Nigeria, (ii) $6.7 million attributable to the write-off of the
Company's Platypus prospect on the shelf of the Gulf of Mexico, (iii) $8.5
million associated with two unsuccessful wells in the Company's winter Alaskan
drilling program and (iv) various other exploratory wells. The United States
leasehold abandonments and other costs includes a $42 million increase in East
Cameron abandonment obligations that resulted from Hurricane Rita damage. During
the three months ended March 31, 2006, the Company completed and evaluated 176
exploration/extension wells, 166 of which were successfully completed as
discoveries. During the same respective period in 2005, the Company completed
and evaluated 41 exploration/extension wells, 32 of which were successfully
completed as discoveries.
General and administrative expense. General and administrative expense from
continuing operations for the three-month periods ended March 31, 2006 and 2005
was $32.2 million and $27.5 million, respectively. The increase in general and
administrative expense was primarily due to increases in administrative staff
and performance-related compensation costs including the amortization of
restricted stock awarded to officers, directors and employees.
Interest expense. Interest expense from continuing operations was $36.6
million and $32.7 million for the three- month periods ended March 31, 2006 and
2005, respectively. The weighted average interest rates on the Company's
indebtedness for the three months ended March 31, 2006 was 6.2 percent, as
compared to 6.0 percent for the same period in 2005, including the effects of
interest rate derivatives. The increase in interest expense was primarily due to
increased average borrowings under the Company's lines of credit and a $3.1
million decrease in the amortization of interest rate hedge gains.
40
PIONEER NATURAL RESOURCES COMPANY
Other expenses. Other expenses from continuing operations for the
three-month periods ended March 31, 2006 and 2005 were $5.1 million and $8.8
million, respectively. The primary components of the decrease in other expenses
were a $13.4 million decrease in hedge ineffectiveness, offset by mark-to-market
losses of approximately $6.6 million recorded in the first quarter of 2006
associated with certain derivative instruments.
Income tax provision. The Company recognized income tax provisions on
continuing operations of $20.7 million and $21.8 million during the three-month
periods ended March 31, 2006 and 2005, respectively. The Company's first quarter
2006 effective tax rate on continuing operations of 104.9 percent differs from
the combined United States federal and state statutory rate of approximately
36.5 percent primarily due to:
o foreign tax rates,
o statutes in foreign jurisdictions that differ from those in the United
States and
o expenses for unsuccessful well costs and associated acreage costs in
foreign locations where the Company does not expect to receive income
tax benefits; during the first quarter of 2006, this primarily related
to Nigerian expenses of approximately $35.5 million.
See Note D of Notes to Consolidate Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
income taxes.
Discontinued operations. During 2005 and 2006, the Company sold its
interests in the following oil and gas assets and has reflected their results of
operations in discontinued operations:
Country Description of Assets Date Divested
------- --------------------- -------------
Canada Martin Creek, Conroy Black May 2005
and Lookout Butte fields
United States Two Gulf of Mexico August 2005
shelf fields
United States Deepwater Gulf of Mexico March 2006
fields
Argentina All Argentine properties April 2006
The Company recognized income from discontinued operations of $544.2
million and $57.7 million during the three-month periods ended March 31, 2006
and 2005, respectively. During the first quarter of 2006, the Company recognized
a gain on the disposition of its deepwater Gulf of Mexico assets of $728.4
million. The Company's effective tax rate associated with discontinued
operations during the three-month periods ended March 31, 2006 and 2005 was 34.9
percent and 34.3 percent, respectively.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
development, exploration and acquisition of oil and gas properties, repayment of
contractual obligations and working capital obligations. Funding for these cash
needs, as well as funding for any stock repurchases that the Company may
undertake, may be provided by any combination of internally-generated cash flow,
proceeds from the disposition of nonstrategic assets or alternative financing
sources as discussed in "Capital resources" below.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three- month periods ended March 31, 2006 and
2005 totaled $334.9 million and $194.9 million, respectively. During the three
months ended March 31, 2006, the Company's expenditures for additions to oil and
gas properties were funded by $303.3 million of net cash provided by operating
41
PIONEER NATURAL RESOURCES COMPANY
activities and a portion of the $1.0 billion of proceeds received in conjunction
with the sale of the Company's deepwater Gulf of Mexico assets (net of payments
to terminate derivative instruments associated with the deepwater Gulf of Mexico
assets). During the three months ended March 31, 2005, the Company's
expenditures for additions to oil and gas properties were internally funded by
$303.7 million of net cash provided by operating activities.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations, other liabilities, transportation
commitments 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 March 31, 2006, the material
off-balance sheet arrangements and transactions that the Company has entered
into included (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. Other than the
off-balance sheet arrangements described above, the Company has no transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are reasonably likely to materially affect the Company's liquidity
or availability of or requirements for capital resources. Since December 31,
2005, the material changes in the Company's contractual obligations included (i)
a $900 million reduction in outstanding borrowings under the Credit Agreement,
(ii) an increase of approximately $400 million in the Company's drilling rig
commitments, (iii) a $325 million decrease in derivative obligations and (iv) a
$52 million increase in outstanding undrawn letters of credit. 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 three months ended March 31, 2006.
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 Notes
I and O 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 nonstrategic assets. During the next twelve months, the
Company anticipates that net cash provided by operating activities will be
insufficient to fund its capital commitments; however, net cash provided by
operating activities combined with proceeds from financing activities and sales
of nonstrategic assets are expected to be sufficient to fund capital commitments
during the foreseeable future.
Asset divestitures. During March 2006, the Company sold all of its
interests in certain oil and gas properties in the deepwater Gulf of Mexico for
net proceeds of $1.2 billion, resulting in a gain of $728.4 million. Also, the
proceeds were reduced by $193.2 million of net payments to terminate derivative
instruments associated with the deepwater Gulf of Mexico assets. During April
2006, the Company sold all of its interests in its Argentine assets for net
proceeds of $675 million. The net cash proceeds from these divestitures were
used to reduce outstanding indebtedness under the Credit Agreement and for
general corporate purposes.
Operating activities. Net cash provided by operating activities during the
three-month periods ended March 31, 2006 and 2005 was $303.3 million and $303.7
million, respectively. As a result of the sale of the deepwater Gulf of Mexico
assets, the Company utilized all of its available United States NOLs, other than
those subject to limitations. The use of the available United States NOLs will
accelerate the Company's payment of cash taxes.
42
PIONEER NATURAL RESOURCES COMPANY
Investing activities. Net cash provided by investing activities during the
three-month periods ended March 31, 2006 and 2005 was $621.8 million and $393.1
million, respectively. The increase in net cash provided by investing activities
was primarily due to a $363.1 million increase in proceeds from disposition of
assets.
Financing activities. Net cash used in financing activities during the
three months ended March 31, 2006 was $900.6 million, as compared to $688.2
million during the same period in 2005.
During February 2006, the Board declared a semiannual dividend of $.12 per
common share, payable on April 12, 2006 to shareholders of record on March 29,
2006. Associated therewith, the Company paid $15.5 million of aggregate
dividends during April 2006. Future dividends are at the discretion of the
Board, and the Board may change the current dividend amount in the future if
warranted by future liquidity and capital resource attributes.
During August 2005, the Board approved a share repurchase program
authorizing the purchase of up to $1 billion of the Company's common stock, $641
million of which was completed in 2005. Purchase of the remaining $359 million
of the authorization is expected to be initiated in mid-May 2006. During the
three-month periods ended March 31, 2006 and 2005, the Company expended $2.0
million to acquire 45 thousand shares of treasury stock (these shares were not
repurchased under the Company's $1 billion repurchase program) and $152.0
million to acquire 3.7 million shares of treasury stock, respectively.
Subsequent to March 31, 2006, the Company issued $450 million of 6.875%
Notes for net proceeds of $446.6 million. The Company will use the net proceeds
from the issuance of the 6.875% Notes to fund the tender offer to purchase its
outstanding 6.50% Notes and for general corporate purposes.
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 Board.
Liquidity. The Company's principal source of short-term liquidity is cash
on hand and unused borrowing capacity on the Credit Agreement. There were no
outstanding borrowings under the Credit Agreement as of March 31, 2006. After
deducting $119.6 million of undrawn and outstanding letters of credit under the
Credit Agreement, the Company had $1.4 billion of unused borrowing capacity as
of March 31, 2006. In the future, to the extent that Pioneer's liquidity results
in cash in excess of immediate capital needs, the Company may invest in
short-term cash equivalent securities.
Debt ratings. The Company receives debt credit ratings from S&P and
Moody's, which are subject to regular reviews. During the fourth quarter of
2005, S&P cut the Company's corporate credit rating to BB+ with a stable outlook
from BBB-. During January 2006, Moody's cut the Company's corporate credit
rating to Ba1 with a negative outlook from Baa3. 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. As a result of
the downgrades, the interest rate and fees the Company pays on the Credit
Agreement have increased and additional debt covenant requirements under the
Credit Agreement were triggered. During January 2006, as a result of the
Company's downgrades by the rating agencies, the Company issued $52 million of
additional letters of credits and will issue approximately $33 million
additional letters of credits during the second quarter of 2006 pursuant to
agreements that contain provisions with rating triggers. The individual
downgrades are 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.
43
PIONEER NATURAL RESOURCES COMPANY
Book capitalization and current ratio. The Company's book capitalization at
March 31, 2006 was $4.1 billion, consisting of debt of $1.2 billion and
stockholders' equity of $3.0 billion. Consequently, the Company's debt to book
capitalization decreased to 28 percent at March 31, 2006 from 48 percent at
December 31, 2005. The Company's ratio of current assets to current liabilities
was 1.22 to 1.00 at March 31, 2006 as compared to .60 to 1.00 at December 31,
2005. The improvement in the Company's ratio of current assets to current
liabilities was primarily due to the classification of all of the Argentine
assets and liabilities to current pending its sale which closed in April 2006.
44
PIONEER NATURAL RESOURCES COMPANY
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, 2005.
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, 2005.
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 quarter of 2006:
Derivative Contract Net Liabilities
----------------------------------------
Foreign
Exchange
Commodities Rate Total
----------- --------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2005............... $ (748,477) $ - $ (748,477)
Changes in contract fair values (a)...... 72,621 148 72,769
Contract maturities...................... 63,218 (148) 63,070
Contract terminations.................... 188,889 - 188,889
--------- -------- ---------
Fair value of contracts outstanding
as of March 31, 2006.................. $ (423,749) $ - $ (423,749)
========= ======== =========
<FN>
- ---------------
(a) At inception, historically 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 March 31, 2006 or December
31, 2005.
Interest rate sensitivity. The following table provides information about
other financial instruments to which the Company was a party as of March 31,
2006 and that are sensitive to changes in interest rates. For debt obligations,
the table presents maturities by expected 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 March 31, 2006.
As of March 31, 2006, the Company was not a party to material derivatives that
would subject it to interest rate sensitivity.
Interest Rate Sensitivity
Debt Obligations as of March 31, 2006
Nine months Liability
ending Year ending December 31, Fair Value at
December 31, ----------------------------------------- March 31,
2006 2007 2008 2009 2010 Thereafter Total 2006
----------- -------- -------- -------- -------- ---------- ---------- -------------
(in thousands, except interest rates)
Total Debt:
Fixed rate principal
maturities (a)........... $ - $ 32,075 $350,000 $ - $ - $ 882,985 $1,265,060 $(1,326,852)
Weighted average
interest rate (%)...... 6.31 6.29 6.16 6.16 6.16 6.16
<FN>
- -------------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) deferred fair value hedge gains and losses.
Subsequent to March 31, 2006, the Company issued $450 million of 6.875%
Notes for net proceeds of $446.6 million. The Company will use a portion of
the net proceeds from the issuance of the 6.875% Notes to fund a tender
offer to purchase its outstanding 6.50% Notes.
</FN>
45
PIONEER NATURAL RESOURCES COMPANY
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 March 31, 2006. As of March 31, 2006, all
of the Company's oil and gas derivative financial instruments qualified as
hedges.
See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil and gas
prices as well as hedge volumes and weighted average prices by calendar quarter.
Oil and Gas Price Sensitivity
Derivative Financial Instruments as of March 31, 2006
Nine months Year ending Asset (Liability)
ending, December 31, Fair Value at
December 31, -------------------- March 31,
2006 2007 2008 2006
----------- -------- -------- -----------------
(in thousands)
Oil Hedge Derivatives:
Average daily notional Bbl volumes:
Swap contracts (a)........................ 5,000 10,000 10,000 $ (298,371)
Weighted average fixed price per Bbl..... $ 37.20 $ 30.96 $ 30.62
Collar contracts.......................... 6,665 2,000 - $ (25,147)
Weighted average ceiling price per Bbl... $ 67.12 $ 89.50 $ -
Weighted average floor price per Bbl..... $ 42.12 $ 50.00 $ -
Average forward NYMEX oil prices (b)...... $ 76.65 $ 76.79 $ 74.04
Gas Hedge Derivatives (c):
Average daily notional MMBtu volumes:
Swap contracts............................ 73,885 24,195 - $ (102,115)
Weighted average fixed price per MMBtu... $ 4.31 $ 4.00 $ -
Collar contracts.......................... 108,345 215,000 - $ 1,884
Weighted average ceiling price per MMBtu. $ 14.27 $ 11.84 $ -
Weighted average floor price per MMBtu... $ 6.55 $ 6.57 $ -
Average forward NYMEX gas prices (b)...... $ 8.03 $ 10.10 $ -
<FN>
- ---------------
(a) Subsequent to March 31, 2006, the Company entered into oil swap contracts,
with an average fixed price of $71.83 per Bbl, designated as hedges for
90,000 Bbls of forecasted June 2006 South African oil sales.
(b) The average forward NYMEX oil and gas prices are based on May 3, 2006
market quotes.
(c) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to convert 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.
</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.
46
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to the legal proceedings that are described under
"Legal actions" in Note I of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements". The Company is also party to other
proceedings and claims incidental to its business. While many of these matters
involve inherent uncertainty, the Company believes that the amount of the
liability, if any, ultimately incurred with respect to such other proceedings
and claims will not have a material adverse effect on the Company's consolidated
financial position as a whole or on its liquidity, capital resources or future
annual results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the risks discussed in the Company's Annual Report on Form
10-K under the headings "Item 1. Business - Competition, Markets and
Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk", which risks could materially affect the
Company's business, financial condition or future results. There has been no
material change in the Company's risk factors from those described in the Annual
Report on Form 10-K. These risks are not the only risks facing the Company.
Additional risks and uncertainties not currently known to the Company or that it
currently deems to be immaterial also may materially adversely affect the
Company's business, financial condition or future results.
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 March 31, 2006:
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
- ------ ----------------- -------------- ---------------------- ------------------
January 2006............. 3,632 $ 51.08 -
February 2006............ 39,652 $ 43.78 -
March 2006............... 1,349 $ 44.09 -
----------- ---------
Total............ 44,633 $ 44.38 - $ 359,294,950
=========== ========= ============
<FN>
- -----------
(a) Amounts include shares withheld to fund tax withholding on employees' stock
awards for which restrictions have lapsed.
</FN>
During August 2005, the Board approved a share repurchase program
authorizing the purchase of up to $1 billion of the Company's common stock, $641
million of which was completed in 2005 and $359 million of which is expected to
be initiated in mid-May 2006 since the Company has completed its divestiture of
the deepwater Gulf of Mexico assets and its Argentine assets.
47
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits
- ------- --------
Exhibits
2.1 Purchase and Sale Agreement by and between Pioneer as Seller and
Marubeni Offshore Production (USA) Inc. as Purchaser (incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on February 28, 2006).
4.1 Sixth Supplemental Indenture, dated as of May 1, 2006, among the
Company, Pioneer Natural Resources USA, Inc. and The Bank of New
York Trust Company, N.A., as Trustee, with respect to that
indenture, dated as of January 13, 1998, between the Company and
the 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 May 4, 2006).
4.2 Form of 6.875% Senior Notes due 2018 of the Company (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on May 4, 2006).
31.1 (a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 (a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 (b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 (b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
- ---------------
(a) Filed herewith.
(b) Furnished herewith.
48
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 thereunto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: May 10, 2006 By: /s/ Richard P. Dealy
----------------------------------
Richard P. Dealy
Executive Vice President and Chief
Financial Officer
Date: May 10, 2006 By: /s/ Darin G. Holderness
----------------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
49
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
- -------------
2.1 Purchase and Sale Agreement by and between Pioneer as Seller and
Marubeni Offshore Production (USA) Inc. as Purchaser (incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on February 28, 2006).
4.1 Sixth Supplemental Indenture, dated as of May 1, 2006, among the
Company, Pioneer Natural Resources USA, Inc. and The Bank of New
York Trust Company, N.A., as Trustee, with respect to that
indenture, dated as of January 13, 1998, between the Company and
the 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 May 4, 2006).
4.2 Form of 6.875% Senior Notes due 2018 of the Company (incorporated
by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K, File No. 1-13245, filed with the SEC on May 4, 2006).
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.
50