UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 200, 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 July 26, 2006.....124,720,168
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 June 30, 2006
and December 31, 2005............................... 4
Consolidated Statements of Operations for the
three and six months ended June 30, 2006 and 2005... 6
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2006..,............... 7
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2006 and 2005......... 8
Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 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............................................ 46
Item 4. Controls and Procedures................................ 48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 49
Item 1A. Risk Factors........................................... 49
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds............................................ 50
Item 4. Submission of Matters to a Vote of Security Holders.... 50
Item 6. Exhibits............................................... 51
Signatures ....................................................... 52
Exhibit Index ........................................................ 53
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") 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)
June 30, December 31,
2006 2005
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 457,042 $ 18,802
Accounts receivable:
Trade, net of allowance for doubtful accounts of $5,769
and $5,736 as of June 30, 2006 and December 31, 2005,
respectively............................................... 166,110 336,062
Due from affiliates.......................................... 872 1,596
Inventories..................................................... 115,917 79,659
Prepaid expenses................................................ 8,563 18,091
Deferred income taxes........................................... 115,963 158,878
Other current assets:
Derivatives.................................................. 20,855 1,246
Other, net of allowance for doubtful accounts of $6,425
as of December 31, 2005.................................... 9,749 9,470
---------- ----------
Total current assets.................................... 895,071 623,804
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................ 7,196,266 8,499,253
Unproved properties.......................................... 192,777 313,881
Accumulated depletion, depreciation and amortization............ (1,728,466) (2,577,946)
---------- ----------
Total property, plant and equipment..................... 5,660,577 6,235,188
---------- ----------
Goodwill.......................................................... 311,346 311,651
Other property and equipment, net................................. 91,992 90,010
Other assets:
Derivatives..................................................... 5,774 1,048
Other, net of allowance for doubtful accounts of $92 as of
June 30, 2006 and December 31, 2005.......................... 102,668 67,533
---------- ----------
$ 7,067,428 $ 7,329,234
========== ==========
The financial information included as of June 30, 2006 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
June 30, December 31,
2006 2005
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade........................................................... $ 229,720 $ 330,151
Due to affiliates............................................... 8,690 15,053
Interest payable................................................... 30,500 40,314
Income taxes payable............................................... 78,283 22,470
Other current liabilities:
Derivatives..................................................... 185,629 320,098
Deferred revenue................................................ 184,848 190,327
Other........................................................... 163,418 114,942
---------- ----------
Total current liabilities.................................. 881,088 1,033,355
---------- ----------
Long-term debt....................................................... 1,263,994 2,058,412
Derivatives.......................................................... 240,718 431,543
Deferred income taxes................................................ 1,050,236 767,329
Deferred revenue..................................................... 574,155 664,511
Other liabilities and minority interests............................. 142,310 156,982
Stockholders' equity:
Common stock, $.01 par value: 500,000,000 shares authorized;
145,510,197 and 145,200,293 shares issued as of
June 30, 2006 and December 31, 2005, respectively............... 1,455 1,452
Additional paid-in capital......................................... 3,748,774 3,775,812
Treasury stock, at cost: 22,455,678 and 18,368,109 shares as of
June 30, 2006 and December 31, 2005, respectively............... (1,040,775) (882,382)
Deferred compensation.............................................. - (45,827)
Retained earnings (accumulated deficit)............................ 424,186 (184,320)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax........................... (288,499) (506,636)
Cumulative translation adjustment............................... 69,786 59,003
---------- ----------
Total stockholders' equity................................. 2,914,927 2,217,102
Commitments and contingencies........................................
---------- ----------
$ 7,067,428 $ 7,329,234
========== ==========
The financial information included as of June 30, 2006 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues and other income:
Oil and gas....................................... $ 407,570 $ 320,337 $ 787,038 $ 644,163
Interest and other................................ 9,741 12,031 26,852 14,051
Gain (loss) on disposition of assets, net......... (3,403) 109 (3,476) 2,250
-------- -------- -------- --------
413,908 332,477 810,414 660,464
-------- -------- -------- --------
Costs and expenses:
Oil and gas production............................ 103,066 79,640 197,749 160,584
Depletion, depreciation and amortization.......... 87,984 65,999 170,390 139,307
Impairment of long-lived assets................... - 471 - 623
Exploration and abandonments...................... 41,618 37,498 166,260 91,327
General and administrative........................ 29,468 26,596 61,715 54,084
Accretion of discount on asset retirement
obligations..................................... 1,154 1,043 2,302 2,089
Interest.......................................... 22,766 29,403 59,342 62,149
Other............................................. 11,759 15,713 16,813 24,554
-------- -------- -------- --------
297,815 256,363 674,571 534,717
-------- -------- -------- --------
Income from continuing operations before
income taxes...................................... 116,093 76,114 135,843 125,747
Income tax provision................................ (50,207) (53,885) (70,924) (75,796)
-------- -------- -------- --------
Income from continuing operations................... 65,886 22,229 64,919 49,951
Income from discontinued operations, net of tax..... 22,153 163,330 566,327 220,265
-------- -------- -------- --------
Net income.......................................... $ 88,039 $ 185,559 $ 631,246 $ 270,216
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations................. $ .52 $ .16 $ .52 $ .35
Income from discontinued operations, net of tax... .18 1.16 4.48 1.55
-------- -------- -------- --------
Net income........................................ $ .70 $ 1.32 $ 5.00 $ 1.90
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations................. $ .52 $ .16 $ .52 $ .35
Income from discontinued operations, net of tax... .17 1.12 4.34 1.51
-------- -------- -------- --------
Net income........................................ $ .69 $ 1.28 $ 4.86 $ 1.86
======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................. 125,629 140,812 126,282 141,849
======== ======== ======== ========
Diluted........................................... 129,624 145,246 130,346 146,286
======== ======== ======== ========
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... $1,452 $3,775,812 $ (882,382) $ (45,827) $ (184,320) $ (506,636) $ 59,003 $ 2,217,102
Dividends declared ($.12
per common share)............ - - - - (15,510) - - (15,510)
Conversion of senior notes.... - (1,754) 2,156 - - - - 402
Exercise of long-term
incentive plan stock options. - - 11,896 - (7,230) - - 4,666
Purchase of treasury stock.... - - (172,445) - - - - (172,445)
Tax benefits related to
stock-based compensation..... - 2,236 - - - - - 2,236
Compensation costs:
Adoption of SFAS 123(R)..... - (45,827) - 45,827 - - - -
Compensation awards......... 3 (3) - - - - - -
Compensation costs included
in net income.............. - 18,310 - - - - - 18,310
Net income.................... - - - - 631,246 - - 631,246
Other comprehensive income (loss):
Deferred hedging activity,
net of tax:
Net deferred hedge gains.. - - - - - 36,948 - 36,948
Net hedge losses included
in continuing operations. - - - - - 54,917 - 54,917
Net hedge losses included
in discontinued
operations............... - - - - - 126,272 - 126,272
Translation adjustment...... - - - - - - 10,783 10,783
----- --------- ---------- --------- --------- --------- ------- ----------
Balance as of June 30, 2006..... $1,455 $3,748,774 $(1,040,775) $ - $ 424,186 $ (288,499) $ 69,786 $ 2,914,927
===== ========= ========== ========= ========= ========= ======= ==========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------------
2006 2005 2006 2005
--------- --------- ----------- -----------
Cash flows from operating activities:
Net income.......................................... $ 88,039 $ 185,559 $ 631,246 $ 270,216
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization.......... 87,984 65,999 170,390 139,307
Impairment of long-lived assets................... - 471 - 623
Exploration expenses, including dry holes......... 17,354 12,286 111,936 28,962
Deferred income taxes............................. 50,223 41,030 67,184 56,376
Loss (gain) loss on disposition of assets, net.... 3,403 (109) 3,476 (2,250)
Loss on extinguishment of debt.................... 8,076 7,342 8,076 7,342
Accretion of discount on asset retirement
obligations..................................... 1,154 1,043 2,302 2,089
Discontinued operations........................... (1,002) 61,019 (540,655) 184,072
Interest expense.................................. 2,118 865 5,165 1,062
Commodity hedge related activity.................. (6,061) (7,666) (5,553) (10,727)
Stock-based compensation.......................... 10,824 8,018 18,310 13,170
Amortization of deferred revenue.................. (47,886) (20,449) (95,835) (32,074)
Other noncash items............................... 5,810 1,553 9,524 5,699
Changes in operating assets and liabilities, net
of effects from acquisition:
Accounts receivable, net.......................... 37,050 (42,269) 163,165 (54,302)
Inventories....................................... (18,994) (11,388) (39,125) (12,703)
Prepaid expenses.................................. 14,228 3,359 1,964 5,808
Other current assets, net......................... (237) (331) 9,192 (529)
Accounts payable.................................. (19,993) (8,029) (113,641) 9,564
Interest payable.................................. 8,826 11,895 (10,274) (4,364)
Income taxes payable.............................. (78,236) 9,144 55,815 11,919
Other current liabilities......................... (4,438) (9,425) 8,927 (5,689)
-------- -------- ---------- ----------
Net cash provided by operating activities....... 158,242 309,917 461,589 613,571
-------- -------- ---------- ----------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired...... - - - (965)
Proceeds from disposition of assets................. 679,371 520,502 1,642,562 1,120,598
Additions to oil and gas properties................. (309,544) (245,743) (644,432) (440,683)
Additions to other assets and property, net......... (26,291) (8,660) (32,839) (19,722)
-------- -------- ---------- ----------
Net cash provided by investing activities....... 343,536 266,099 965,291 659,228
-------- -------- ---------- ----------
Cash flows from financing activities:
Borrowings under long-term debt..................... 534,219 220,699 898,490 376,412
Principal payments on long-term debt................ (438,571) (664,969) (1,702,842) (1,373,682)
Payment of other liabilities........................ (106) (5,673) (630) (13,975)
Exercise of long-term incentive plan stock options.. 2,744 2,358 4,666 27,434
Purchase of treasury stock.......................... (170,464) (74,248) (172,445) (226,224)
Payment of financing fees........................... (2,169) - (2,169) -
Dividends paid...................................... (15,510) (14,332) (15,510) (14,332)
-------- -------- ---------- ----------
Net cash used in financing activities........... (89,857) (536,165) (990,440) (1,224,367)
-------- -------- ---------- ----------
Net increase in cash and cash equivalents............. 411,921 39,851 436,440 48,432
Effect of exchange rate changes on cash and
cash equivalents.................................... 2,139 2,561 1,800 2,762
Cash and cash equivalents, beginning of period........ 42,982 16,039 18,802 7,257
-------- -------- ---------- ----------
Cash and cash equivalents, end of period.............. $ 457,042 $ 58,451 $ 457,042 $ 58,451
======== ======== ========== ==========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net income........................................... $ 88,039 $ 185,559 $ 631,246 $ 270,216
-------- -------- -------- --------
Other comprehensive income (loss):
Deferred hedging activity, net of tax:
Net deferred hedge gains (losses)................ (1,806) (18,089) 36,948 (342,800)
Net hedge losses included in continuing
operations..................................... 15,185 28,807 54,917 58,157
Net hedge losses included in discontinued
operations..................................... - 21,169 126,272 35,756
Translation adjustment............................. 13,018 (3,236) 10,783 (4,859)
-------- -------- -------- --------
Other comprehensive income (loss).............. 26,397 28,651 228,920 (253,746)
-------- -------- -------- --------
Comprehensive income................................. $ 114,436 $ 214,210 $ 860,166 $ 16,470
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2006 and for the three and
six months ended June 30, 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. To conform to
current period presentations, the Company reclassified the results of
discontinued operations, as disclosed in Note N, and $22.6 million and $53.9
million of cash used for geological expenses during the three and six month
periods ended June 30, 2005, respectively, from investing activities to
operating activities in the accompanying Consolidated Statements of Cash Flows.
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:
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 Argentine assets 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 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 $114.8 million and $77.3 million
of materials and supplies and $1.1 million and $2.4 million of commodities as of
June 30, 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
first-in, first- out basis. As of June 30, 2006 and December 31, 2005, the
Company's materials and supplies inventory was net of $5.5 million and $.2
million, respectively, of valuation reserve allowances.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
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 and six months ended June 30, 2006, the Company recorded
$10.8 million and $18.3 million, respectively, of stock-based compensation costs
for all plans. The impact to net income of adopting SFAS 123(R) was $531
thousand and $1.2 million for the three and six month periods ended June 30,
2006, respectively, or less than $.01 per diluted share. For the three and six
month periods ended June 30, 2006, the adoption impact is comprised of $314
thousand and $806 thousand, respectively, of compensation expense associated
with unvested stock options and $217 thousand and $359 thousand, respectively,
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 June 30, 2006 and
December 31, 2005 do not include 2,036,474 shares and 1,756,180 shares,
respectively, related to unvested restricted stock awards. During the six months
ended June 30, 2006, the Company issued 663,974 shares of restricted stock
awards.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
As of June 30, 2006, there is approximately $53.3 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 No. 123(R) to stock-based compensation during the three and
six months ended June 30, 2005:
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------- -------------
(in thousands, except per share data)
Net income, as reported ................................ $ 185,559 $ 270,216
Plus: Stock-based compensation expense included
in net income for all awards, net of tax (a).......... 5,092 8,363
Deduct: Stock-based compensation expense determined
under fair value based method for all awards,
net of tax (a)........................................ (5,841) (10,083)
-------- --------
Pro forma net income.................................... $ 184,810 $ 268,496
======== ========
Net income per share:
Basic - as reported................................... $ 1.32 $ 1.90
======== ========
Basic - pro forma..................................... $ 1.31 $ 1.89
======== ========
Diluted - as reported................................. $ 1.28 $ 1.86
======== ========
Diluted - pro forma................................... $ 1.28 $ 1.85
======== ========
<FN>
- -----------
(a) For the three and six months ended June 30, 2005, stock-based compensation
expense included in net income is net of tax benefits of $2.9 million and
$4.8 million, respectively. Similarly, stock-based compensation expense
determined under the fair value based method for the three and six months
ended June 30, 2005 is net of tax benefits of $3.4 million and $5.8
million, respectively. 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 and six months ended June 30, 2006:
Three months Six months
ended ended
June 30, 2006 June 30, 2006
------------- -------------
(in thousands)
Beginning capitalized exploratory well costs ........... $ 157,451 $ 198,291
Additions to exploratory well costs pending the
determination of proved reserves...................... 89,180 189,714
Reclassifications due to determination of
proved reserves....................................... (29,513) (83,471)
Disposition of wells.................................... (2,527) (53,198)
Exploratory well costs charged to expense............... (35,231) (71,976)
-------- --------
Ending capitalized exploratory well costs .............. $ 179,360 $ 179,360
======== ========
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The following table provides an aging as of June 30, 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:
June 30, 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.............. $ 110,200 $ 84,042
Capitalized exploratory well costs that have been
capitalized for a period greater than one year............ 69,160 114,249
-------- --------
$ 179,360 $ 198,291
======== ========
Number of wells with exploratory well costs that have
been capitalized for a period greater than one year....... 9 14
======== ========
The following table provides the capitalized costs of exploration projects
that have been suspended for more than one year as of June 30, 2006 and December
31, 2005:
June 30, December 31,
2006 2005
--------- ------------
(in thousands)
United States:
Ozona Deep................................................ $ - $ 19,423
Thunder Hawk.............................................. - 25,769
Oooguruk.................................................. 52,205 52,205
Canada - other.............................................. 751 805
South Africa................................................ 7,227 7,227
Tunisia..................................................... 8,977 8,820
-------- --------
Total............................................... $ 69,160 $ 114,249
======== ========
The following discussion describes the history and status of each
significant suspended exploratory project:
Ozona Deep and Thunder Hawk. 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
assets.
Oooguruk. During 2003, the Company's Alaskan Oooguruk discovery wells found
quantities of oil believed to be commercial. In 2003, the Company began farm-in
discussions with the owner of undeveloped discoveries in adjacent acreage given
its proximity and the potential cost benefits of a larger scale project. The
farm-in was completed during 2004. Along with completing the farm-in agreement,
Pioneer obtained access to exploration well and seismic data to improve the
Company's understanding of the potential of the discoveries, without having to
drill additional wells. In late 2004, the Company completed an extensive
technical and economic evaluation of the resource potential within this area and
authorized a front-end engineering design study ("FEED study") for the area
which 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.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 2002 to 2004, 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 entered into a
commercial agreement with its partner in the South Coast gas project for the
sale of gas and condensate. 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 phase of this project. Boomslang is an oil discovery with a
significant gas cap. Continued studies of the commercialization of the project
are ongoing. One of the objectives of these studies is to determine 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. Partner
meetings are scheduled for the latter part of 2006 to further discuss the
commercialization of the Boomslang discovery.
Tunisia. 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.
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 first quarter of 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 has accelerated the Company's payment of cash
taxes. As of June 30, 2006 and December 31, 2005, the Company's valuation
allowances (relating primarily to foreign tax jurisdictions) were $96.6 million
and $95.8 million, respectively.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Income tax provision. The Company's income tax provisions attributable to
income from continuing operations consisted of the following for the three and
six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands)
Current:
U.S. federal....................... $ (10,460) $ 4,657 $ (12,973) $ 4,657
U.S. state and local............... 12 131 3 131
Foreign............................ 10,432 8,067 16,710 14,632
-------- -------- -------- --------
(16) 12,855 3,740 19,420
-------- -------- -------- --------
Deferred:
U.S. federal....................... 38,703 38,072 48,640 52,959
U.S. state and local............... 14,297 1,653 14,099 1,658
Foreign............................ (2,777) 1,305 4,445 1,759
-------- -------- -------- --------
50,223 41,030 67,184 56,376
-------- -------- -------- --------
$ 50,207 $ 53,885 $ 70,924 $ 75,796
======== ======== ======== ========
The Company's effective tax rate on continuing operations of 43.2 percent
and 52.2 percent during the three and six months ended June 30, 2006,
respectively, differs from the combined United States federal and state
statutory rate of approximately 36.5 percent primarily due to:
o foreign tax rates,
o adjustments to the deferred tax liability for changes in enacted tax
laws and rates, as discussed below,
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 three and six month periods ended
June 30, 2006, this primarily related to Nigerian exploration
expenses of approximately $1.8 million and $39.2 million,
respectively.
On May 18, 2006, the State of Texas enacted legislation that changed the
existing Texas franchise tax from a tax based on net income or taxable capital
to an income tax based on a defined calculation of gross margin (the "Texas
margin tax"). Also, during the second quarter of 2006, the Canadian federal and
provincial governments enacted tax rate reductions that will be phased-in over
several years. SFAS 109 requires that deferred tax balances be adjusted to
reflect tax rate changes during the periods in which the tax rate changes are
enacted. The adjustment due to the enactment of the Texas margin tax and the
Canadian tax rate changes resulted in a $12.9 million United States tax expense
and a $9.6 million Canadian tax benefit during the three and six month periods
ended June 30, 2006.
Included in the Company's income tax provision from continuing operations
for the three and six months ended June 30, 2005 is the reversal of a $27.3
million tax benefit recorded principally in the third quarter of 2004 as a
result of the cancellation of the development of the Olowi block and the
Company's decision to exit Gabon. Reversal of the tax benefit was the result of
signing an agreement in June 2005 to sell the Company's shares in the subsidiary
that owns the interest in the Olowi block to an unaffiliated buyer, which made
it more likely than not that the Company would not realize the originally
recorded tax benefit. The Company completed the sale of the Gabonese subsidiary
during 2005.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Discontinued operations. The Company's income tax provisions attributable
to income from discontinued operations consisted of the following for the three
and six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(in thousands)
Current:
U.S. federal......................... $ 7,874 $ 2,751 $148,599 $ 2,751
U.S. state and local................. (290) 118 1,850 118
Foreign.............................. 961 2,694 2,126 5,020
------- ------- ------- -------
8,545 5,563 152,575 7,889
------- ------- ------- -------
Deferred:
U.S. federal......................... (1,374) 63,108 140,902 89,754
U.S. state and local................. 104 2,706 6,319 3,847
Foreign.............................. 881 36,720 (123) 36,559
------- ------- ------- -------
(389) 102,534 147,098 130,160
------- ------- ------- -------
$ 8,156 $108,097 $299,673 $138,049
======= ======= ======= =======
The Company's effective tax rate associated with discontinued operations
during the three and six months ended June 30, 2006 was 26.9 percent and 34.6
percent, respectively.
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 June 30, 2006, the Company
had no outstanding borrowings under the Credit Agreement. If the Company had
outstanding borrowings, the Company's annual interest rate incurred on such
borrowings would approximate LIBOR (5.3 percent per annum at June 30, 2006) plus
a current additional margin to LIBOR (.875 percent per annum as of June 30,
2006).
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) 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 until March 2007, 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 June 30, 2006, the Company had $124.6 million of undrawn letters of
credit, of which $119.6 million were undrawn commitments under the Credit
Agreement leaving the Company with $1.4 billion of unused borrowing capacity
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 June
30, 2006) plus .125 percent.
As of June 30, 2006, the Company was in compliance with all of its debt
covenants.
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Senior notes. During May 2006, the Company issued $450 million of 6.875%
senior notes due 2018 (the "6.875% Notes") and received proceeds, net of
issuance discount and underwriting costs, of $447.4 million. The Company used
the net proceeds from the issuance of the 6.875% Notes to repurchase $346.2
million of its outstanding $350 million of 6.50% senior notes due 2008 (the
"6.50% Notes") and for general corporate purposes. The Company recorded a charge
of $8.1 million in the second quarter of 2006 associated with the early
extinguishment of the 6.50% Notes.
Senior convertible notes. In connection with the Evergreen merger in
September 2004, the Company assumed $100 million of 4 3/4% senior convertible
notes due 2021 (the "Convertible Notes"). The Convertible Notes are due on
December 15, 2021, but are redeemable at either the Company's option or the
holder's option on other specified dates. As a result of the Evergreen merger,
the Convertible Notes are convertible at any time by the holders as discussed in
the following paragraph. Holders may also require the Company to purchase all or
part of the Convertible Notes on December 20, 2006, December 15, 2011 or
December 15, 2016 at a purchase price of 100 percent of the principal amount of
the Convertible Notes plus accrued and unpaid interest (including contingent
interest). On December 20, 2006, the Company may redeem the Convertible Notes,
in whole or in part, in cash, for shares of common stock, or in any combination
of cash and common stock. On December 15, 2011 or December 15, 2016, the Company
must pay the repurchase price in cash. The Company currently intends to exercise
its rights under the indenture and redeem the Convertible Notes on December 20,
2006, if the Convertible Notes have not been converted by the holders.
Each $25.00 principal balance outstanding under the Convertible Notes is
convertible into .58175 shares of the Company's common stock plus $19.98 per
share (as an example, each $1,000 of Convertible Notes principal would exchange
for 23.27 shares of the Company's common stock plus $799 of cash). The portion
of the Convertible Notes exchangeable into the Company's common stock is
included in the computation of the Company's average diluted shares outstanding.
During June 2006, holders of $2 million of the outstanding Convertible
Notes exercised their conversion rights. Associated therewith, the Company paid
$1.6 million in cash, issued 46,540 shares of common stock and recognized a net
increase to stockholders' equity of $.4 million. See Note O for information
regarding conversions subsequent to June 30, 2006.
Rating agencies. In January 2006, Moody's Investor Services, Inc.
("Moody's") downgraded the Company's debt ratings from Baa3 to Ba1. The
downgrade triggered increases in the pricing grid for borrowings 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 June 30, 2006 and December 31, 2005, the Company was not a party
to any open fair value hedges.
As of June 30, 2006, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included a $3.5 million reduction
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 and six months ended June 30,
2006, the Company's amortization of net deferred hedge gains on terminated
interest rate swaps reduced the Company's reported interest expense by $13
thousand and $127 thousand, respectively, as compared to $1.1 million and $3.3
million during the same respective periods in 2005.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The following table sets forth, as of June 30, 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:
Six months
ending Year ending December 31,
December 31, -------------------------------------
2006 2007 2008 2009 2010 Thereafter
------------ ------- ------- ------- ------- ----------
(in thousands)
Net deferred hedge losses....... $ (105) $ (325) $ (371) $ (416) $ (466) $ (3,530)
======= ====== ====== ====== ====== =======
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 June 30, 2006, virtually 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.
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 June 30, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- -------------- --------------
Average daily oil production hedged:
2006 - Swap Contracts
Volume (Bbl)........................ 5,000 5,000 5,000
Price per Bbl....................... $ 37.20 $ 37.20 $ 37.20
2006 - Collar Contracts
Volume (Bbl)........................ 6,500 6,500 6,500
Price per Bbl....................... $41.92-$66.41 $ 41.92-$66.41 $41.92-$66.41
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
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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
(i) 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), (ii)
amortization of deferred VPP revenue to oil revenue from continuing operations
and (iii) the net effect of settlements of oil price hedges on oil revenue from
continuing operations for the three and six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Average price reported per Bbl................. $ 69.71 $ 37.60 $ 64.86 $ 36.01
Average price realized per Bbl................. $ 67.15 $ 51.21 $ 63.63 $ 47.96
VPP increase to oil revenue (in millions)...... $ 29.1 $ - $ 58.0 $ -
Reduction to oil revenue from hedging
activity (in millions) (a).................. $ (23.4) $ (37.8) $ (52.5) $ (70.5)
<FN>
- ----------
(a) Excludes hedge losses of $12.3 million attributable to discontinued
operations for the six months ended June 30, 2006 and $15.0 million and
$26.6 million during the three and six months ended June 30, 2005,
respectively.
</FN>
Natural gas liquids prices. During the three and six months ended June 30,
2006 and 2005, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at June 30, 2006.
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 June 30, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ ------------
Average daily gas production hedged (a):
2006 - Swap Contracts
Volume (MMBtu)................... 73,880 73,984 73,932
Index price per MMBtu............ $ 4.31 $ 4.31 $ 4.31
2006 - Collar Contracts
Volume (MMBtu)................... 85,000 95,000 90,000
Index price per MMBtu............ $6.56-$14.27 $6.55-$14.49 $6.56-$14.38
2007 - Swap Contracts
Volume (MMBtu)................... 59,071 59,146 59,231 59,329 59,195
Index price per MMBtu............ $ 7.07 $ 7.06 $ 7.06 $ 7.06 $ 7.06
2007 - Collar Contracts
Volume (MMBtu)................... 30,000 30,000 30,000 30,000 30,000
Index price per MMBtu............ $6.50-$11.02 $6.50-$11.02 $6.50-$11.02 $6.50-$11.02 $6.50-$11.02
<FN>
- -------------
(a) Subsequent to June 30, 2006 through August 1, 2006, the Company (i) reduced
its gas hedge position by terminating gas collar contracts that are
included in the table above by 30,000 MMBtu per day of forecasted 2007 gas
sales at a weighted average ceiling price per MMBtu of $11.02 and a
weighted average floor price per MMBtu of $6.50 and (ii) increased its gas
hedge position by entering into gas swap contracts for 15,000 MMBtu per day
of forecasted 2008 gas sales at a weighted average price per MMBtu of $8.62
(Panhandle Eastern Pipeline Oklahoma (mainline) index price).
</FN>
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 (i) 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), (ii) amortization of deferred
VPP revenue to gas revenue from continuing operations and (iii) the net effect
of settlements of gas price hedges on gas revenue from continuing operations for
the three and six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Average price reported per Mcf.................. $ 6.25 $ 6.67 $ 6.48 $ 6.36
Average price realized per Mcf.................. $ 5.75 $ 6.20 $ 6.37 $ 5.90
VPP increase to gas revenue (in millions)....... $ 18.8 $ 20.4 $ 37.8 $ 32.1
Reduction to gas revenue from hedging activity
(in millions) (a)............................ $ (3.3) $ (8.0) $ (31.6) $ (6.4)
<FN>
- --------
(a) Excludes hedge losses of $3.4 million attributable to discontinued
operations for the six months ended June 30, 2006 and $17.9 million and
$27.5 million during the three and six months ended June 30, 2005,
respectively.
</FN>
Interest rate. During April 2006, the Company entered into costless collar
contracts and designated the contracts as cash flow hedges of the forecasted
interest rate risk associated with the coupon rate on the Company's 6.875%
Notes, which were issued on May 1, 2006. The Company terminated these costless
collar contracts for a gain of $1.3 million, which was recorded in accumulated
other comprehensive income (loss) - net deferred hedge losses, net of tax ("AOCI
- - Hedging"). The Company did not realize any ineffectiveness in connection with
the costless collar contracts during the three and six months ended June 30,
2006. See Note E for information regarding the 6.875% Notes.
Hedge ineffectiveness. During the three and six months ended June 30, 2006,
the Company recorded to other expense from continuing operations net
ineffectiveness credits of $2.8 million and $11.0 million, respectively, as
compared to $4.2 million and $9.3 million of net ineffectiveness charges during
the same respective periods in 2005, related to the ineffective portions of
changes in the fair values of its cash flow hedging instruments. These credits
and charges primarily resulted from changes in correlations and derivative fair
values associated with commodity price indexes of financial hedge derivatives
and the commodity price indexes of the hedged forecasted production for certain
fields.
AOCI - Hedging. As of June 30, 2006 and December 31, 2005, AOCI - Hedging
represented net deferred losses of $288.5 million and $506.6 million,
respectively. The AOCI - Hedging balance as of June 30, 2006 was comprised of
$400.2 million of net deferred losses on the effective portions of open cash
flow hedges, $54.2 million of net deferred losses on terminated cash flow hedges
(including $1.8 million of net deferred losses on terminated cash flow interest
rate hedges) and $165.8 million of associated net deferred tax benefits. The
decrease in AOCI - Hedging during the six months ended June 30, 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 June 30, 2007, based on current estimates
of future commodity prices, the Company expects to reclassify $168.6 million of
net deferred losses associated with open commodity hedges and $4.8 million of
net deferred losses on terminated commodity hedges from AOCI - Hedging to oil
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
and gas revenues. The Company also expects to reclassify approximately $63.3
million of net deferred income tax benefits associated with commodity hedges
during the twelve months ending June 30, 2007 from AOCI - Hedging to income tax
benefit.
The following table sets forth, as of June 30, 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....... $ 3,240 $ 2,402 $ 5,642
2007 net deferred hedge losses...... $ (5,642) $ (4,775) $ (4,293) $ (3,319) (18,029)
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)
--------
$ (52,453)
========
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 and six months ended June 30,
2006 and 2005:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands)
Beginning asset retirement obligations.......... $ 156,088 $ 121,937 $ 157,035 $ 120,879
New wells placed on production and
changes in estimates (a)................... 720 1,150 42,720 2,595
Disposition of wells.......................... (372) (5,238) (44,042) (5,238)
Liabilities settled........................... (2,802) (1,855) (3,870) (4,255)
Accretion of discount on continuing operations 1,154 1,043 2,302 2,089
Accretion of discount on discontinued operations 72 1,059 804 2,153
Currency translation.......................... 723 (343) 634 (470)
-------- -------- -------- --------
Ending asset retirement obligations ............ $ 155,583 $ 117,753 $ 155,583 $ 117,753
======== ======== ======== ========
<FN>
- -----------
(a) During the six months ended June 30, 2006, the Company recorded a $42
million increase in the abandonment estimate of the East Cameron facilities
that were destroyed by Hurricane Rita in 2005, which is reflected in
exploration and abandonments expense in the accompanying Consolidated
Statements of Operations.
</FN>
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities and minority
interests, respectively, in the accompanying Consolidated Balance Sheets. The
current portions of the Company's asset retirement obligations totaled $86.7
million and $58.0 million as of June 30, 2006 and December 31, 2005,
respectively.
NOTE H. Postretirement Benefit Obligations
As of June 30, 2006 and December 31, 2005, the Company had recorded $18.9
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 June 30, 2006 or December
31, 2005. Other than the Company's retirement plan, the participants of these
plans are not current employees of the Company.
The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three and six months
ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 18,754 $ 15,654 $ 18,576 $ 15,534
Net benefit payments........................ (303) (443) (588) (629)
Service costs............................... 204 81 408 162
Accretion of discounts...................... 260 225 519 450
-------- -------- -------- --------
Ending accumulated postretirement benefit
obligations.................................. $ 18,915 $ 15,517 $ 18,915 $ 15,517
======== ======== ======== ========
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 $74 million,
plus prejudgment interest. In addition to the plaintiffs' past damage claims, if
the plaintiffs were to prevail, it is possible that in future periods of time,
the Company would have to stop charging certain expenses and as a result, the
Company's production costs and royalty payments related to the area would
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
increase. 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
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
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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.
NOTE J. Income Per Share From Continuing Operations
Basic income per share from continuing operations is computed by dividing
income from continuing operations by the weighted average number of common
shares outstanding for the period. The computation of diluted income per share
from continuing operations reflects the potential dilution that could occur if
securities or other contracts to issue common stock that are dilutive to income
from continuing operations were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the Company.
The following table is a reconciliation of basic income from continuing
operations to diluted income from continuing operations for the three and six
months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands)
Basic income from continuing operations............ $ 65,886 $ 22,229 $ 64,919 $ 49,951
Interest expense on convertible notes, net of tax.. 801 801 1,603 1,603
-------- -------- -------- --------
Diluted income from continuing operations.......... $ 66,687 $ 23,030 $ 66,522 $ 51,554
======== ======== ======== ========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
three and six months ended June 30, 2005 and 2004:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands)
Weighted average common shares outstanding (a):
Basic........................................... 125,629 140,812 126,282 141,849
Dilutive common stock options (b)............... 818 1,108 875 1,201
Restricted stock awards......................... 853 999 863 909
Convertible notes dilution (c).................. 2,324 2,327 2,326 2,327
------- ------- ------- -------
Diluted......................................... 129,624 145,246 130,346 146,286
======= ======= ======= =======
<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
an additional $170 million of which has been completed through June 30,
2006.
(b) Common stock options to purchase 2,857 shares of common stock were
outstanding but not included in the computations of diluted income per
share from continuing operations for each of the three and six months ended
June 30, 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) The Company had $98 million and $100 million principal amounts of
Convertible Notes outstanding on June 30, 2006 and December 31, 2005,
respectively. During July 2006, holders converted $71 million principal
amount of the Convertible Notes. See Note O for additional information
regarding the July 2006 conversions.
</FN>
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 assets and United
States oil and gas properties having carrying values, including net deferred
hedge losses, of $658.9 million and $433.7 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 and six months ended June 30, 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
June 30, 2006
(Unaudited)
United Africa Consolidated
States Canada and Other Headquarters Total
--------- -------- --------- ------------ ------------
(in thousands)
Three months ended June 30, 2006:
Revenues and other income:
Oil and gas................................ $ 331,212 $ 34,154 $ 42,204 $ - $ 407,570
Interest and other......................... - - - 9,741 9,741
Gain (loss) on disposition of assets, net.. 150 77 - (3,630) (3,403)
-------- ------- ------- -------- --------
331,362 34,231 42,204 6,111 413,908
-------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production..................... 83,560 10,780 8,726 - 103,066
Depletion, depreciation and
amortization............................ 67,305 12,438 2,740 5,501 87,984
Exploration and abandonments............... 28,335 3,180 10,103 - 41,618
General and administrative................. - - - 29,468 29,468
Accretion of discount on asset
retirement obligations.................. - - - 1,154 1,154
Interest................................... - - - 22,766 22,766
Other...................................... - - - 11,759 11,759
-------- ------- ------- -------- --------
179,200 26,398 21,569 70,648 297,815
-------- ------- ------- -------- --------
Income (loss) from continuing operations
before income taxes....................... 152,162 7,833 20,635 (64,537) 116,093
Income tax benefit (provision)............... (55,539) (2,790) (7,565) 15,687 (50,207)
-------- ------- ------- -------- --------
Income (loss) from continuing
operations................................ $ 96,623 $ 5,043 $ 13,070 $ (48,850) $ 65,886
======== ======= ======= ======== ========
Three months ended June 30, 2005:
Revenues and other income:
Oil and gas................................ $ 247,474 $ 23,561 $ 49,302 $ - $ 320,337
Interest and other......................... - - - 12,031 12,031
Gain on disposition of assets, net......... - - - 109 109
-------- ------- ------- -------- --------
247,474 23,561 49,302 12,140 332,477
-------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production..................... 63,483 8,524 7,633 - 79,640
Depletion, depreciation and
amortization............................ 46,462 7,402 7,260 4,875 65,999
Impairment of long-lived assets............ - - 471 - 471
Exploration and abandonments............... 23,424 2,682 11,392 - 37,498
General and administrative................. - - - 26,596 26,596
Accretion of discount on asset
retirement obligations.................. - - - 1,043 1,043
Interest................................... - - - 29,403 29,403
Other...................................... - - - 15,713 15,713
-------- ------- ------- -------- --------
133,369 18,608 26,756 77,630 256,363
-------- ------- ------- -------- --------
Income (loss) from continuing operations
before income taxes....................... 114,105 4,953 22,546 (65,490) 76,114
Income tax provision......................... (41,648) (1,808) (8,475) (1,954) (53,885)
-------- ------- ------- -------- -------
Income (loss) from continuing
operations................................ $ 72,457 $ 3,145 $ 14,071 $ (67,444) $ 22,229
======== ======= ======= ======== ========
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
United Africa Consolidated
States Canada and Other Headquarters Total
--------- -------- --------- ------------ ------------
(in thousands)
Six months ended June 30, 2006:
Revenues and other income:
Oil and gas................................ $ 641,093 $ 62,516 $ 83,429 $ - $ 787,038
Interest and other......................... - - - 26,852 26,852
Gain (loss) on disposition of assets, net.. 150 77 - (3,703) (3,476)
-------- ------- ------- -------- --------
641,243 62,593 83,429 23,149 810,414
-------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production..................... 161,461 21,694 14,594 - 197,749
Depletion, depreciation and
amortization............................ 130,921 19,668 8,435 11,366 170,390
Exploration and abandonments............... 106,616 6,596 53,048 - 166,260
General and administrative................. - - - 61,715 61,715
Accretion of discount on asset
retirement obligations.................. - - - 2,302 2,302
Interest................................... - - - 59,342 59,342
Other...................................... - - - 16,813 16,813
-------- ------- ------- -------- -------
398,998 47,958 76,077 151,538 674,571
-------- ------- ------- -------- --------
Income (loss) from continuing operations
before income taxes....................... 242,245 14,635 7,352 (128,389) 135,843
Income tax benefit (provision)............... (88,419) (5,213) 1,653 21,055 (70,924)
-------- ------- ------- -------- --------
Income (loss) from continuing
operations................................ $ 153,826 $ 9,422 $ 9,005 $(107,334) $ 64,919
======== ======= ======= ======== ========
Six months ended June 30, 2005:
Revenues and other income:
Oil and gas................................ $ 503,121 $ 44,049 $ 96,993 $ - $ 644,163
Interest and other......................... - - - 14,051 14,051
Gain on disposition of assets, net......... 2,032 - - 218 2,250
-------- ------- ------- -------- --------
505,153 44,049 96,993 14,269 660,464
-------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production..................... 127,580 17,604 15,400 - 160,584
Depletion, depreciation and
amortization............................ 98,814 14,441 16,638 9,414 139,307
Impairment of long-lived assets............ - - 623 - 623
Exploration and abandonments............... 52,227 6,423 32,677 - 91,327
General and administrative................. - - - 54,084 54,084
Accretion of discount on asset
retirement obligations.................. - - - 2,089 2,089
Interest................................... - - - 62,149 62,149
Other...................................... - - - 24,554 24,554
-------- ------- ------- -------- -------
278,621 38,468 65,338 152,290 534,717
-------- ------- ------- -------- --------
Income (loss) from continuing operations
before income taxes....................... 226,532 5,581 31,655 (138,021) 125,747
Income tax benefit (provision)............... (82,684) (2,037) (10,535) 19,460 (75,796)
-------- ------- ------- -------- --------
Income (loss) from continuing
operations................................ $ 143,848 $ 3,544 $ 21,120 $(118,561) $ 49,951
======== ======= ======= ======== ========
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
----------- ----------- ---------- ---------- ------------ ------------
(in thousands)
Segment assets (as of June 30, 2006)...... $ 5,831,381 $ - $ 487,662 $ 216,865 $ 531,520 $7,067,428
========== ========== ========= ========= ========== =========
Segment assets (as of December 31, 2005).. $ 5,899,637 $ 735,191 $ 363,773 $ 170,484 $ 160,149 $7,329,234
========== ========== ========= ========= ========== =========
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........................ (37,852) (57,983) (95,835)
-------- -------- --------
Deferred revenue at June 30, 2006........ $ 211,471 $ 547,532 $ 759,003
======== ======== ========
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................................. $ 94,492
2007........................................... 181,232
2008........................................... 158,138
2009........................................... 147,906
2010........................................... 90,215
2011........................................... 44,951
2012........................................... 42,069
---------
$ 759,003
=========
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 first quarter of 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 damages to the facilities were 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. During the second
quarter of 2006, the Company settled its business interruption claim with its
insurance provider for $18.5 million, which is included in income from
discontinued operations in the Company's accompanying Consolidated Statements of
Operations.
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. The Company estimates that it will cost approximately $86 million
to reclaim and completely abandon the East Cameron facility. During the first
quarter of 2006, 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 to fully accrue the estimated
reclamation and abandonment charges. 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 is updating its
application to reef the debris in place and plans to file the modified
application with the appropriate regulatory agency during the third quarter of
2006.
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) in excess of a $100 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 received the $4.0 million of business interruption
recoveries during the first quarter of 2006. The Company believes that its
debris removal and make well safe coverages, in combination, will substantially
cover the 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.
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE N. Discontinued Operations
During 2005 and 2006, the Company sold its interests in the following oil
and gas assets:
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 $1,160.8(a) $ 727.1
fields
Argentina Argentine assets April 2006 $ 664.6 $ 5.7
<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.
</FN>
Pursuant to SFAS 144, the Company has reflected 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 and six months ended June 30,
2006 and 2005:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
-------- --------- --------- ---------
(in thousands)
Revenues and other income:
Oil and gas................................... $ 18,108 $ 231,871 $ 199,677 $ 428,357
Interest and other............................ 19,411 35,865 21,258 62,178
Gain on disposition of assets................. 4,282 138,700 732,784 138,780
------- -------- -------- --------
41,801 406,436 953,719 629,315
------- -------- -------- --------
Costs and expenses:
Oil and gas production........................ 3,287 30,586 31,242 63,604
Depletion, depreciation and amortization...... - 83,010 37,327 165,853
Exploration and abandonments.................. 1,258 14,923 7,205 28,479
General and administrative.................... 6,537 2,753 8,969 4,850
Accretion of discount on asset retirement
obligation................................. 72 1,059 804 2,153
Interest...................................... 116 809 460 1,314
Other......................................... 222 1,869 1,712 4,748
------- -------- -------- --------
11,492 135,009 87,719 271,001
------- -------- -------- --------
Income from discontinued operations
before income taxes........................... 30,309 271,427 866,000 358,314
Income tax benefit (provision):
Current....................................... (8,545) (5,563) (152,575) (7,889)
Deferred...................................... 389 (102,534) (147,098) (130,160)
------- -------- -------- --------
Income from discontinued operations, net of tax.. $ 22,153 $ 163,330 $ 566,327 $ 220,265
======= ======== ======== ========
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Company has provided the purchaser of its Argentine assets 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.
NOTE O. Subsequent Events
Senior convertible notes. During July 2006, holders of $71 million of the
outstanding Convertible Notes exercised their conversion rights. Associated
therewith, the Company paid $56.7 million in cash, issued 1.7 million shares of
common stock and recognized a net increase to stockholders' equity of $14.3
million.
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 second quarter of
2006 included the following highlights:
o The completion of the sale of Argentine assets for net proceeds of
$664.6 million during April 2006, recognizing a second quarter gain
of $5.7 million.
o The resumption of the Company's $1 billion share repurchase program,
the final $359 million of which was subject to the completion of the
deepwater Gulf of Mexico and Argentine divestitures. The Company
repurchased 4.3 million shares of its common stock during the second
quarter of 2006, completing $170 million of the remaining share
repurchase program.
o The May 2006 issuance of $450 million of 6.875% Notes for net
proceeds of $447.4 million. The Company used the net proceeds from
the 6.875% Notes to repurchase $346.2 million of its 6.50% Notes and
for general corporate purposes.
o The exercise by the Company of its option under an agreement with
ConocoPhillips to acquire an additional 40 percent working interest
in the Cosmopolitan Unit located offshore in the Cook Inlet,
increasing Pioneer's working interest to 50 percent. Pioneer was
elected operator of the Cosmopolitan Unit.
o The recognition of income from continuing operations of $65.9
million ($.52 per diluted share) for the second quarter of 2006, as
compared to $22.2 million ($.16 per diluted share) for the second
quarter of 2005.
o The recognition of income from discontinued operations of $22.2
million ($.17 per diluted share) during the second quarter of 2006
attributable to hurricane business interruption insurance recovery
gains related to the deepwater Gulf of M exico assets and the
Company's sale of Argentine assets during April 2006, including the
aforementioned $5.7 million gain, as compared to $163.3 million
($1.12 per diluted share) of income from discontinued operations for
the second quarter of 2005.
o The recognition of second quarter 2006 net income of $88.0 million
($.69 per diluted share), as compared to $185.6 million ($1.28 per
diluted share) for the second quarter of 2005. The decrease in net
income is primarily due to a $141.2 million decrease in income from
discontinued operations during 2005 and 2006, partially offset by an
$87.2 million increase in oil and gas revenues.
o A reduction in net cash provided by operating activities to $158.2
million for the second quarter of 2006 from $309.9 million during
the second quarter of 2005. The reduction in net cash provided by
operating activities was primarily due to operations discontinued
during 2005 and 2006, partially offset by increases in oil and gas
sales from continuing operations.
o A reduction in outstanding debt of $794.4 million, or 39 percent, as
of June 30, 2006 as compared to debt outstanding as of December 31,
2005, resulting in a decrease in the Company's debt to book
capitalization to 30 percent at June 30, 2006 from 48 percent at
December 31, 2005.
Third Quarter 2006 Outlook
Based on current estimates, the Company expects that third quarter 2006
production will average 95,000 to 100,000 BOEPD. The lower end of the range
reflects the typical variability in the timing of oil cargo shipments in South
Africa and Tunisia.
Third quarter production costs (including production and ad valorem taxes
and transportation costs) 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 $9.50 to $10.50 per BOE.
Total exploration and abandonment expense is expected to be $20 million to
$65 million and could include (i) up to $15 million of costs associated with the
high-impact drilling of a new prospect adjacent to the Company's Clipper
discovery (deepwater Gulf of Mexico) and an onshore Norphlet prospect
(Mississippi), (ii) $25 million associated with lower-risk resource plays in the
Edwards Trend in South Texas, Uinta/Piceance in the Rockies, Canada and Tunisia
and (iii) $20 million to $25 million for seismic investments and personnel,
primarily related to the onshore resource plays Pioneer is currently pursuing.
32
PIONEER NATURAL RESOURCES COMPANY
General and administrative expense is expected to be $29 million to $32 million.
Interest expense is expected to be $22 million to $25 million. Interest income,
primarily from cash investments, is expected to be $3 million to $5 million.
Accretion of discount on asset retirement obligations is expected to be $1
million to $2 million.
The Company's third 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, principally
related to Tunisian income taxes and nominal alternative minimum tax in the U.S.
Pioneer increased its 2006 capital budget by $100 million to $1.4 billion,
excluding discontinued operations, to accelerate successful Edwards Trend
activities and fund new shale gas acreage additions and core area bolt-on
acquisitions.
Acquisitions, Divestments, Operations and Drilling Highlights
During the first half of 2006, the Company completed the divestitures of
certain of its deepwater Gulf of Mexico assets and Argentine assets.
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. 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 half of 2006, the Company incurred $717.7 million in
finding and development costs including $417.5 million for development
activities, $203.5 million for exploration activities and $96.7 million for
acquisitions and land. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure associated with successful drilling activities.
The following table summarizes by geographic area the Company's finding and
development costs incurred, excluding asset retirement obligations, during the
first half of 2006 and the total wells planned to be drilled during the year
ending December 31, 2006:
Property
Acquisition Costs 2006
---------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
--------- --------- ----------- ----------- ----------- --------
($ in thousands)
United States:
Gulf of Mexico (a)....... $ - $ 3 $ 33,616 $ 10,626 $ 44,245 3
Onshore Gulf Coast....... 3 23,463 23,538 17,296 64,300 57
Permian Basin............ 36,668 13,513 4,001 116,941 171,123 340
Mid-Continent............ - - 55 13,651 13,706 40
Rocky Mountains.......... 36 5,256 16,094 88,532 109,918 387
Alaska................... - 2,001 24,671 36,786 63,458 3
-------- -------- ---------- ---------- ---------- ------
36,707 44,236 101,975 283,832 466,750 830
-------- -------- ---------- ---------- ---------- ------
Argentina (a)................ - 2 10,223 25,543 35,768 -
Canada....................... 21 2,730 59,338 50,576 112,665 271
Nigeria...................... - 7,995 21,907 - 29,902 1
South Africa................. - - 130 55,961 56,091 5
Tunisia...................... - 5,000 5,824 1,615 12,439 7
Other ...................... - - 4,056 - 4,056 -
-------- -------- ---------- ---------- ---------- ------
21 15,727 101,478 133,695 250,921 284
-------- -------- ---------- ---------- ---------- ------
Total Worldwide..... $ 36,728 $ 59,963 $ 203,453 $ 417,527 $ 717,671 1,114
======== ======== ========== ========== ========== ======
<FN>
- -----------
(a) Approximately $8.2 million of the finding and development costs incurred
are associated with the divested deepwater Gulf of Mexico assets. The
Company's $1.4 billion 2006 capital budget does not include the incurred
costs of the divested deepwater Gulf Mexico assets or any of the Argentine
finding and development costs incurred as the Company was in the process of
selling those assets when the budget was prepared.
</FN>
33
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes the Company's development and
exploration/extension drilling activities for the six months ended June 30,
2006:
Development Drilling
-------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Disposed Ending Wells
in Progress Spud Wells Wells Wells in Progress
--------------- ------ ---------- ------------ -------- ------------
United States............... 29 289 304 4 - 10
Argentina................... 2 21 14 1 8 -
Canada...................... 3 2 2 - - 3
Africa...................... - 3 1 - - 2
------ ------ ------ ------- ------- ------
Total Worldwide....... 34 315 321 5 8 15
====== ====== ====== ======= ======= ======
Exploration/Extension Drilling
-------------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Disposed Ending Wells
in Progress Spud Wells Wells Wells in Progress
--------------- ------ ---------- ------------ -------- ------------
United States............... 7 31 21 3 - 14
Argentina................... 4 6 4 2 4 -
Canada...................... 109 103 175 6 - 31
Africa...................... 3 2 1 1 - 3
------ ------ ------ ------- ------- ------
Total Worldwide....... 123 142 201 12 4 48
====== ====== ====== ======= ======= ======
Gulf of Mexico area. 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 Company intends to develop the Clipper discovery, which
Pioneer operates with a 55 percent working interest. The Company has
successfully drilled its first Clipper appraisal well, spudded the next
appraisal well and plans to drill an additional exploratory well in proximity to
the Clipper Prospect.
Pioneer intends to pursue the divestment of its remaining Gulf of Mexico
shelf properties. No assurance can be given that there will be purchasers
willing to purchase these properties on terms acceptable to Pioneer.
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 estimates that it will cost
approximately $86 million to reclaim and completely abandon the East Cameron
facility. During the first quarter of 2006, 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 to
fully accrue the estimated reclamation and abandonment charges. 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 is
updating its application to reef the debris in place and plans to file the
modified application with the appropriate regulatory agency during the third
quarter of 2006. The Company expects a substantial portion of the loss to be
covered by insurance.
Onshore Gulf Coast area. In the Edwards Trend in South Texas, the Company
has drilled five prospects to date in 2006 with 100 percent success. The
majority of these wells are on production or expected to be on production by the
end of the third quarter or early in the fourth quarter of 2006. On the
Company's Stingray discovery announced at the end of first quarter, drilling is
in progress on the first of three delineation wells. In the Sinor Area,
optimizing development well placement awaits the results of a 3-D seismic shoot
that is currently being permitted.
Pioneer currently holds more than 232,000 gross acres in the trend area,
has four rigs currently dedicated to the play and plans to add two rigs to the
program later in 2006 and at least one rig during 2007. The Company plans to
drill 35 to 40 Edwards Trend development and exploration wells, shoot 3-D
seismic and acquire additional acreage during 2006.
34
PIONEER NATURAL RESOURCES COMPANY
The Company has acquired and continues to acquire acreage positions in
Mississippi for its Norphlet and Cotton Valley plays. The Company is currently
drilling a Norphlet test well and plans to drill a Cotton Valley well in late
2006.
Permian Basin area. During 2006, the Company plans to increase its drilling
activity by approximately 70 percent over the wells drilled in the area during
2005 and by almost 200 percent relative to average annual wells drilled over the
past five years. The Company has been acquiring additional acreage positions in
the area and drilling to the deeper Wolfcamp formations in the Spraberry field.
Mid-Continent area. The Company's 2006 drilling plans are primarily
comprised of drilling development wells in the Hugoton and West Panhandle
fields. Pioneer is pursuing regulatory relief in the West Panhandle to allow for
additional future drilling locations.
Rocky Mountain area. In the Raton Basin, production is increasing as a
result of a pipeline expansion that was completed in October 2005 plus
additional field and wellhead compression. Pioneer plans to increase its Raton
drilling to approximately 330 wells in 2006. 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 coalbed
methane ("CBM") resource potential at Lay Creek and Columbine Springs are
progressing. At Lay Creek, the Company has drilled six pilot wells in two
separate pilot areas and completed workovers and recompletions on fourteen wells
drilled by the previous operator. Results to date indicate that the coals are
thicker than expected. During the second half of 2006, Pioneer plans to drill
additional pilot wells and development wells and install the infrastructure to
initiate sales by the end of 2006. At Columbine Springs, the Company expects to
complete its extension pilot program by the end of July 2006 and to have these
and the 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 both areas in 2007. The Company also plans to drill
additional wells to further evaluate its resource play at Castlegate and to test
its conventional Entrada gas play, both in the Uinta Basin in Utah.
Alaska area. The Company's 2005 - 2006 winter drilling season program in
Alaska included three exploratory wells (Hailstorm, Cronus and Antigua) 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. All three exploratory
wells were determined to be unsuccessful.
In June 2006, the Company exercised its option to acquire an additional 40
percent working interest, for a total current working interest of 50 percent, in
the Cosmopolitan Unit. Pioneer was also elected operator of the Cosmopolitan
Unit. The Company is currently in the process of developing an appraisal program
for the Cosmopolitan Unit.
On the Oooguruk project, the Company continues to procure equipment and
services, fabricate modules and modify a drilling rig needed for the development
of the project. The 2006-2007 winter drilling program, which could be two to
three wells, is being planned for the National Petroleum Reserve - Alaska area.
Canada. The Company's current operations are focused upon CBM projects in
the Horseshoe Canyon and Mannville coals. In the Horseshoe Canyon trend, the
Company drilled 19 wells during the first half of 2006 due to an extended winter
thaw and rains in June. Two rigs and an expected third rig will continue
drilling on this project during the third and fourth quarters of 2006 on the 181
wells remaining to be drilled of the 200 planned wells for 2006. The Company is
planning to tie 300 wells into gathering and compression facilities by the end
of 2006. In the Alberta Mannville CBM play, the Company drilled three of the six
planned 2006 horizontal wells in two pilot areas to test three new CBM pilot
areas. During the first half of 2006, the Company completed its 2006 Chinchaga
area drilling program.
West Africa. 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 $33.4
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.
35
PIONEER NATURAL RESOURCES COMPANY
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 to gain 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
party. The Company acquired 3-D seismic data of the block during the fourth
quarter of 2005 and the first quarter of 2006 and is currently processing the
data. The Company's subsidiary plans to drill the first well on the block during
2007.
In addition, the Company expects to drill a well on Block H offshore
Equatorial Guinea in 2007. The Company holds a 50 percent working interest in
the block.
As it relates to the West Africa assets, the Company is evaluating
alternatives to reduce the Company's future capital commitments for these
assets.
South Africa. During the first half of 2006, the Company and its partner
drilled three wells that are awaiting completion and plan to drill three
additional development wells in 2006 and early 2007 to develop the gas and
condensate fields discovered offshore South Africa. The Company also invested
$33 million in facilities infrastructure and design work, with installation
expected to commence at the end of 2006. First production from the project is
expected in the second half of 2007.
Tunisia. In the Adam Concession, the Adam 4 well drilled during the first
quarter of 2006 was successful, extending the Company's 100 percent success rate
in the concession. In 2006, the Company's interest in the Adam Concession was
reduced from 24 percent to 20 percent in accordance with the terms of the
concession. 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. The Company is currently completing a 3-D
seismic shoot on both the Jenein Nord block and Adam Concession. The Company
plans to drill two additional wells on the Adam Concession (of which the Adam 5
has been spudded) and two wells on the Jenein Nord block during the second half
of 2006. A drilling rig is expected to begin drilling operations on the Jenein
Nord block during the fourth quarter of 2006. A well is planned during the
fourth 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 $407.6 million and $787.0 million for the three and six month ended June
30, 2006, respectively, as compared to $320.3 million and $644.2 million for the
same respective periods of 2005.
The increase in oil and gas revenues from continuing operations during the
three months ended June 30, 2006, as compared to the same period of 2005,
resulted from increases in sales prices and volumes. In the quarter-to-quarter
comparison, the Company reported an 85 percent increase in oil prices, a 26
percent increase in NGL prices and a six percent decrease in gas prices. The
Company also realized a five percent increase in average daily BOE sales
volumes, which is reflective of increases in NGL and gas volumes sold, partially
offset by declines in oil volumes. The increase in oil and gas revenues from
continuing operations during the six months ended June 30, 2006, resulted from
increases in sales prices, partially offset by a decline in reported sales
volumes. In the year-to-date comparisons, the Company reported an 80 percent
increase in oil prices, a 30 percent increase in NGL prices and a two percent
increase in gas prices. The Company also realized year-to-date increases in NGL
and gas volumes sold, partially offset by a decline in oil sales volumes.
Contributing to the period-by-period increases in reported oil prices and
decreases in reported oil sales volumes were first deliveries of oil volumes
under the Company's VPP agreements during January 2006. In accordance with GAAP,
VPP deliveries result in VPP deferred revenue amortization being recognized with
no associated sales volumes being recorded.
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 and six months ended
June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
-------- --------- --------- ---------
(in thousands)
Oil (Bbls):
United States............................... 17,671 19,875 17,320 21,191
Canada...................................... 307 210 292 186
Africa...................................... 6,593 10,452 7,121 11,205
-------- --------- --------- ---------
Worldwide................................... 24,571 30,537 24,733 32,582
======== ========= ========= =========
NGLs (Bbls):
United States............................... 18,731 14,834 18,455 16,154
Canada...................................... 412 610 415 514
-------- --------- --------- ---------
Worldwide................................... 19,143 15,444 18,870 16,668
======== ========= ========= =========
Gas (Mcf):
United States............................... 286,270 252,047 280,553 267,477
Canada...................................... 44,801 36,710 40,317 35,448
-------- --------- --------- ---------
Worldwide................................... 331,071 288,757 320,870 302,925
======== ========= ========= =========
Total (BOE):
United States............................... 84,114 76,716 82,533 81,925
Canada...................................... 8,186 6,939 7,427 6,608
Africa...................................... 6,593 10,452 7,121 11,205
-------- --------- --------- ---------
Worldwide................................... 98,893 94,107 97,081 99,738
======== ========= ========= =========
On a quarter-to-quarter comparison, average daily sales volumes increased
by ten percent in the United States and by 18 percent in Canada, while average
daily sales volumes decreased by 37 percent in Africa. On a year-to-date
comparison, average daily sales volumes increased by one percent in the United
States and by 12 percent in Canada, while average daily sales volumes decreased
by 36 percent in Africa. Average daily sales volumes from continuing operations
in the United States were higher principally due to Permian Basin acquisitions,
enhanced gas gathering and compression facilities in the Rocky Mountain area,
and production results from the Company's development drilling programs.
Canadian average daily sales volumes from continuing operations increased due to
new production from wells drilled and connected to infrastructure during the
second half of 2005 and early 2006. Partially offsetting these production
increases were the aforementioned increases in volumes sold under VPPs and
production decreases 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 and six months
ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
-------- --------- --------- ---------
(in thousands)
Oil (Bbls):
United States............................... - 6,549 4,839 6,376
Argentina................................... 2,982 7,796 5,071 7,992
Canada...................................... - 45 - 57
-------- --------- --------- ---------
Worldwide................................... 2,982 14,390 9,910 14,425
======== ========= ========= =========
NGLs (Bbls):
United States............................... - 74 - 65
Argentina................................... 406 1,948 849 1,761
Canada...................................... - 264 - 224
-------- --------- --------- ---------
Worldwide................................... 406 2,286 849 2,050
======== ========= ========= =========
Gas (Mcf):
United States............................... 1,317 301,756 72,763 278,609
Argentina................................... 42,538 135,188 88,537 132,783
Canada...................................... 173 10,472 87 12,910
-------- --------- --------- ---------
Worldwide................................... 44,028 447,416 161,387 424,302
======== ========= ========= =========
Total (BOE):
United States............................... 219 56,916 16,966 52,875
Argentina................................... 10,477 32,275 20,676 31,884
Canada...................................... 29 2,054 15 2,433
-------- --------- --------- ---------
Worldwide................................... 10,725 91,245 37,657 87,192
======== ========= ========= =========
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 and six months ended June 30,
2006 and 2005:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
-------- --------- --------- ---------
(in thousands)
Average reported prices:
Oil (per Bbl):
United States............................. $ 69.43 $ 30.13 $ 64.82 $ 29.71
Canada.................................... $ 72.37 $ 35.22 $ 69.89 $ 41.97
Africa.................................... $ 70.34 $ 51.84 $ 64.73 $ 47.82
Worldwide................................. $ 69.71 $ 37.60 $ 64.86 $ 36.01
NGLs (per Bbl):
United States............................. $ 35.84 $ 28.34 $ 34.81 $ 27.14
Canada.................................... $ 57.97 $ 41.18 $ 56.10 $ 39.89
Worldwide................................. $ 36.32 $ 28.85 $ 35.28 $ 27.54
Gas (per Mcf):
United States............................. $ 6.08 $ 6.75 $ 6.33 $ 6.40
Canada.................................... $ 7.35 $ 6.17 $ 7.48 $ 6.07
Worldwide................................. $ 6.25 $ 6.67 $ 6.48 $ 6.36
Average realized prices:
Oil (per Bbl):
United States............................. $ 66.06 $ 51.04 $ 63.15 $ 48.09
Canada.................................... $ 72.37 $ 35.22 $ 69.89 $ 41.97
Africa.................................... $ 69.87 $ 51.84 $ 64.51 $ 47.82
Worldwide................................. $ 67.15 $ 51.21 $ 63.63 $ 47.96
NGLs (per Bbl):
United States............................. $ 35.84 $ 28.34 $ 34.81 $ 27.14
Canada.................................... $ 57.97 $ 41.18 $ 56.10 $ 39.89
Worldwide................................. $ 36.32 $ 28.85 $ 35.28 $ 27.54
Gas (per Mcf):
United States............................. $ 5.56 $ 6.20 $ 6.26 $ 5.87
Canada.................................... $ 6.90 $ 6.17 $ 7.14 $ 6.08
Worldwide................................. $ 5.75 $ 6.20 $ 6.37 $ 5.90
Hedging activities. The Company utilizes commodity swap and collar
contracts in order to (i) reduce the effect of price volatility on the
commodities the Company produces and sells, (ii) support the Company's annual
capital budgeting and expenditure plans and (iii) reduce commodity price risk
associated with certain capital projects. During the three and six months ended
June 30, 2006, the Company's commodity price hedges decreased oil and gas
revenues from continuing operations by $26.7 million and $84.1 million,
respectively, as compared to $45.8 million and $76.9 million during the same
respective periods in 2005. 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 and six months ended
June 30, 2006 and 2005.
Deferred revenue. During the three and six months ended June 30, 2006, the
Company's amortization of deferred VPP revenue increased oil and gas revenues
from continuing operations by $47.9 million and $95.8 million, respectively, as
compared to $20.4 million and $32.1 million during the same respective periods
in 2005. See Note L of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for specific information regarding the Company's
VPPs.
38
PIONEER NATURAL RESOURCES COMPANY
Interest and other income. Interest and other income from continuing
operations for the three and six months ended June 30, 2006 and 2005 was $9.7
million and $26.9 million, respectively, as compared to $12.0 million and $14.1
million for the same respective periods in 2005. The decrease in interest and
other income from continuing operations during the three months ended June 30,
2006, as compared to the same period in 2005, was primarily due to a $9.4
million decrease in business interruption insurance claims, partially offset by
a $5.6 million increase in interest income and a $.6 million increase in
minority interest reimbursements. The increase in interest and other income from
continuing operations during the six months ended June 30, 2006, as compared to
the same period in 2005, was primarily due to a $6.2 million increase in
interest income, a $3.4 million increase in minority interest reimbursements, a
$2.1 million bad debt recovery and a $1.8 million decrease in business
interruption insurance claims. 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 $103.1 million and $197.7 million during the
three and six months ended June 30, 2006, respectively, as compared to $79.6
million and $160.6 million for the same respective periods of 2005. 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 23
percent and 26 percent, respectively, during the three and six months ended June
30, 2006, as compared to the same respective periods in 2005, primarily due to
(i) increases of approximately $.88 and $1.06 per BOE, respectively, resulting
from 110 percent and 166 percent relative increases 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 and
(iii) 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 and six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(in thousands)
Lease operating expenses....................... $ 6.23 $ 5.00 $ 6.18 $ 4.90
Third-party transportation charges............. 1.20 1.19 1.21 1.03
Taxes:
Ad valorem.................................. 1.50 1.15 1.36 1.08
Production.................................. 1.78 1.39 1.77 1.29
Workover costs................................. .74 .57 .73 .60
------- ------- ------- -------
Total production costs................... $ 11.45 $ 9.30 $ 11.25 $ 8.90
======= ======= ======= =======
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(in thousands)
United States............................... $ 10.92 $ 9.09 $ 10.81 $ 8.60
Canada...................................... $ 14.47 $ 13.50 $ 16.14 $ 14.72
Africa...................................... $ 14.54 $ 8.02 $ 11.32 $ 7.59
Worldwide................................... $ 11.45 $ 9.30 $ 11.25 $ 8.90
Depletion, depreciation and amortization expense. The Company's total DD&A
expense from continuing operations was $9.78 and $9.70 per BOE for the three and
six months ended June 30, 2006, respectively, as compared to $7.71 and $7.72 per
BOE during the same respective periods of 2005. Depletion expense from
continuing operations, the largest component of DD&A expense from continuing
operations, was $9.17 and $9.05 per BOE during the three and six months ended
39
PIONEER NATURAL RESOURCES COMPANY
June 30, 2006, as compared to $7.14 and $7.20 per BOE during the same respective
periods in 2005. The increase in per BOE depletion expense from continuing
operations during the three and six months ended June 30, 2006, as compared to
the same respective periods in 2005, 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 sale
of proved reserves under VPP agreements, for which the Company removed proved
reserves with no corresponding decrease in cost basis, (iv) $1.24 and $1.70 per
BOE increases in Tunisian depletion expense primarily associated with a 2005 and
2006 decrease in the Company's working interest in the Adam Concession and (v)
in Canada, the Company has been limited on the amount of proved reserve
bookings, primarily from its 2006 winter drilling program in Chinchaga, until
certain well performance data is obtained, (vi) partially offset by $5.57 and
$2.81 per BOE decreases in South African depletion due to 2005 and year-to-date
2006 positive reserve revisions attributable to well performance.
The following table provides depletion expense per BOE from continuing
operations by geographic area for the three and six months ended June 30, 2006
and 2005:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(in thousands)
United States............................... $ 8.79 $ 6.66 $ 8.76 $ 6.66
Canada...................................... $ 16.70 $ 11.72 $ 14.63 $ 12.07
Africa...................................... $ 4.57 $ 7.63 $ 6.54 $ 8.20
Worldwide................................... $ 9.17 $ 7.14 $ 9.05 $ 7.20
Exploration, abandonments, geological and geophysical costs. The following
table provides the Company's geological and geophysical costs, exploratory dry
hole expense, lease abandonments and other exploration expense from continuing
operations by geographic area for the three and six months ended June 30, 2006
and 2005:
Africa
United and
States Canada Other Total
--------- --------- --------- ---------
(in thousands)
Three months ended June 30, 2006:
Geological and geophysical costs........... $ 11,962 $ 2,458 $ 9,564 $ 23,984
Exploratory dry holes...................... 15,723 533 539 16,795
Leasehold abandonments and other........... 650 189 - 839
-------- -------- -------- --------
$ 28,335 $ 3,180 $ 10,103 $ 41,618
======== ======== ======== ========
Three months ended June 30, 2005:
Geological and geophysical costs........... $ 12,929 $ 1,878 $ 10,449 $ 25,256
Exploratory dry holes...................... 9,178 565 943 10,686
Leasehold abandonments and other........... 1,317 239 - 1,556
-------- -------- -------- --------
$ 23,424 $ 2,682 $ 11,392 $ 37,498
======== ======== ======== ========
Six months ended June 30, 2006:
Geological and geophysical costs........... $ 32,622 $ 2,804 $ 20,013 $ 55,439
Exploratory dry holes...................... 31,358 3,037 15,212 49,607
Leasehold abandonments and other........... 42,636 755 17,823 61,214
-------- -------- -------- --------
$ 106,616 $ 6,596 $ 53,048 $ 166,260
======== ======== ======== ========
Six months ended June 30, 2005:
Geological and geophysical costs........... $ 37,326 $ 2,864 $ 19,859 $ 60,049
Exploratory dry holes...................... 11,442 3,229 12,499 27,170
Leasehold abandonments and other........... 3,459 330 319 4,108
-------- -------- -------- --------
$ 52,227 $ 6,423 $ 32,677 $ 91,327
======== ======== ======== ========
40
PIONEER NATURAL RESOURCES COMPANY
The Company's exploration and abandonment expense from continuing
operations during the second quarter of 2006 was primarily attributable to a
charge of $12.9 million associated with unsuccessful wells in the Company's
winter Alaskan drilling program. Significant components of the Company's
exploration and abandonment expense from continuing operations during the first
half of 2006 included (i) $33.4 million attributable to an unsuccessful well and
related impairment of acreage on the Company's Block 256 permit in Nigeria, (ii)
$21.6 million associated with three unsuccessful wells in the Company's winter
Alaskan drilling program, (iii) $6.7 million attributable to the write-off of
the Company's Platypus prospect on the shelf of the Gulf of Mexico and (iv)
various other exploratory wells. The United States leasehold abandonments and
other costs for the six months ended June 30, 2006 includes a $42 million
increase in East Cameron abandonment obligations that resulted from Hurricane
Rita damage. During the first half of 2006, the Company completed and evaluated
213 exploration/extension wells, 201 of which were successfully completed as
discoveries. During the same respective period in 2005, the Company completed
and evaluated 58 exploration/extension wells, 44 of which were successfully
completed as discoveries.
General and administrative expense. General and administrative expense from
continuing operations for the three and six months ended June 30, 2006 was $29.5
million and $61.7 million, respectively, as compared to $26.6 million and $54.1
million during the same respective periods in 2005. The increases in general and
administrative expense from continuing operations were 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 $22.8
million and $59.3 million for the three and six months ended June 30, 2006,
respectively, as compared to $29.4 million and $62.1 million for the same
respective periods in 2005. The weighted average interest rates on the Company's
indebtedness for the three and six months ended June 30, 2006, including the
effects of interest rate derivatives and capitalized interest, was 7.2 percent
and 6.7 percent, respectively, as compared to 6.4 percent and 6.2 percent for
each of the same respective periods in 2005. The decrease in interest expense
from continuing operations during the three months ended June 30, 2006, as
compared to the same period of 2005, was primarily due to a $2.1 million
increase in interest capitalized on the Company's Oooguruk development project
in Alaska and South Coast gas project in South Africa, reduced average
borrowings under the Company's Credit Agreement primarily as a result of
proceeds from disposition of assets, partially offset by a $1.1 million decrease
in the amortization of interest rate hedge gains. The decrease in interest
expense from continuing operations during the six months ended June 30, 2006, as
compared to the same period of 2005, was primarily due to a $10.2 million
decrease in interest incurred on senior notes, resulting from redemptions of
higher yielding senior notes during 2005 and 2006 with proceeds from the
issuance of lower yielding senior notes, and a $2.6 million increase in the
aforementioned capitalized interest. Partially offsetting these decreases were a
$6.1 million increase in interest incurred on Credit Agreement borrowings and a
$4.2 million decrease in the amortization of interest rate hedge gains.
Other expenses. Other expenses from continuing operations for the three and
six months ended June 30, 2006 were $11.8 million and $16.8 million,
respectively, as compared to $15.7 million and $24.6 million for the same
respective periods in 2005. The decrease in other expenses from continuing
operations for the three months ended June 30, 2006, as compared to the same
period of 2005, is primarily attributable to a $7.0 million decrease in hedge
ineffectiveness, partially offset by a $3.4 million increase in litigation
contingency accrual adjustments. The decrease in other expenses from continuing
operations during the six months ended June 30, 2006, as compared to ths same
period of 2005, is primarily attributable to a $20.3 million decrease in hedge
ineffectiveness, partially offset by $6.4 million of mark-to-market losses
associated with non-hedge financial instruments and a $3.8 million increase in
litigation contingency accrual adjustments.
Income tax provision. The Company recognized income tax provisions on
continuing operations of $50.2 million and $70.9 million during the three and
six months ended June 30, 2006, respectively, as compared to $53.9 million and
$75.8 million for the same respective periods in 2005. The Company's effective
tax rate on continuing operations of 43.2 percent and 52.2 percent during the
three and six months ended June 30, 2006, respectively, differs from the
combined United States federal and state statutory rate of approximately 36.5
percent primarily due to:
41
PIONEER NATURAL RESOURCES COMPANY
o foreign tax rates,
o adjustments to the deferred tax liability for changes in enacted tax
laws and rates; during the three and six month periods ended June 30,
2006, this primarily related to a $12.9 million increase associated
with the Texas margin tax and $9.6 million decrease due to reductions
in Canadian 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 three and six month periods ended June 30,
2006, this primarily related to Nigerian exploration expenses of
approximately $1.8 million and $39.2 million, respectively.
See Note D of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information regarding the Company's
income taxes, the Texas margin tax and changes in Canadian tax rates.
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 Argentine assets April 2006
The Company recognized income from discontinued operations of $22.2 million
and $566.3 million during the three and six months ended June 30, 2006,
respectively, as compared to $163.3 million and $220.3 million for the same
respective periods of 2005. During the second quarter of 2006, the Company
recognized a gain on the sale of Argentine assets of $5.7 million. The Company's
effective tax rate associated with discontinued operations during the three and
six months ended June 30, 2006 was 26.9 percent and 34.6 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 and six months ended June 30, 2006
totaled $309.5 million and $644.4 million, respectively, as compared to $245.7
million and $440.7 million for the same respective periods of 2005. During the
three and six months ended June 30, 2006, the Company's expenditures for
additions to oil and gas properties were funded by $158.2 million and $461.6
million, respectively, of net cash provided by operating activities and a
portion of the $1.6 billion of net proceeds received in conjunction with the
sale of the Company's deepwater Gulf of Mexico and Argentine assets (net of
payments to terminate derivative instruments associated with the deepwater Gulf
of Mexico assets). During the three and six months ended June 30, 2005, the
Company's expenditures for additions to oil and gas properties were internally
funded by $309.9 million and $613.6 million, respectively, 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
42
PIONEER NATURAL RESOURCES COMPANY
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 June 30, 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 $410 million in the Company's drilling rig
commitments, (iii) a $349 million decrease in derivative obligations and (iv) a
$36.8 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 six months ended June 30, 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 the matter will have a material
adverse effect on its future financial condition, results of operations or
liquidity. See Note I 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 pretax gain of $727.1 million. 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 its Argentine assets for net proceeds of $664.6 million,
resulting in a gain of $5.7 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 and six months ended June 30, 2006 was $158.2 million and $461.6 million,
respectively, as compared to $309.9 million and $613.6 million for the same
respective periods in 2005. The decreases were primarily due to operations
discontinued in 2005 and 2006, partially offset by increases in oil and gas
sales from continuing operations. 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 has accelerated the Company's payment of cash taxes.
Investing activities. Net cash provided by investing activities during the
three and six months ended June 30, 2006 was $343.5 million and $965.3 million,
respectively, as compared to $266.1 million and $659.2 million for the same
respective periods of 2005. The increases in net cash provided by investing
activities was primarily due to $158.9 million and $522.0 million increases in
proceeds from disposition of assets, respectively, partially offset by $63.8
million and $203.7 million increases in additions to oil and gas properties,
respectively.
43
PIONEER NATURAL RESOURCES COMPANY
Financing activities. Net cash used in financing activities during the
three and six months ended June 30, 2006 was $89.9 million and $990.4 million,
as compared to $536.2 million and $1.2 billion during the same respective
periods 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 was initiated in mid-May 2006. During the three and six
months ended June 30, 2006, the Company expended $170.5 million to acquire 4.3
million shares of treasury stock and $172.4 million to acquire 4.4 million
shares of treasury stock, respectively, of which $170 million in each period
were repurchased pursuant to the repurchase program.
During May 2006, the Company issued $450 million of 6.875% Notes for net
proceeds of $447.4 million. The Company used the net proceeds from the 6.875%
Notes to repurchase $346.2 million of its 6.50% Notes and for general corporate
purposes.
During June 2006, holders of $2 million of the Company's Convertible Notes
exercised their conversion rights. Associated therewith, the Company paid $1.6
million in cash, issued 46,540 shares and recorded a $.4 million increase to
stockholders' equity. During July 2006, holders converted an additional $71
million of the Convertible Notes. Associated therewith, the Company paid $56.7
million in cash, issued 1.7 million shares and recorded a $14.3 million increase
to stockholders' equity during the third quarter of 2006. During the remainder
of 2006, the Company expects that the remaining $27 million of Convertible Notes
will be converted by the holders or redeemed by the Company.
The Company's financing activities through June 30, 2006 had the effect of
extending the maturities of the Company's long-term debt and minimally
increasing the Company's future weighted average interest rate on fixed rate
debt.
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 June 30, 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 June 30, 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 Standard &
Poor's Ratings Group, Inc. ("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 the
first half of 2006, as a result of the Company's downgrades by the rating
agencies, the Company issued $52 million of additional letters of credits and
expects to issue approximately $74 million of additional letters of credit
pursuant to agreements that contain provisions with rating triggers. The
downgrades are not expected to materially affect the Company's financial
44
PIONEER NATURAL RESOURCES COMPANY
position or liquidity, but could negatively impact the Company's ability to
obtain additional financing or the interest rate and fees associated with such
additional financing.
Book capitalization and current ratio. The Company's book capitalization at
June 30, 2006 was $4.2 billion, consisting of debt of $1.3 billion and
stockholders' equity of $2.9 billion. Consequently, the Company's debt to book
capitalization decreased to 30 percent at June 30, 2006 from 48 percent at
December 31, 2005. The Company's ratio of current assets to current liabilities
was 1.02 to 1.00 at June 30, 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 an increase in cash and cash equivalents of
$438.2 million due to proceeds received from the deepwater Gulf of Mexico and
Argentine divestitures.
45
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 half of 2006:
Derivative Contract Net Liabilities
-------------------------------------------------
Foreign
Exchange Interest
Commodities Rate Rate Total
----------- -------- -------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2005............... $ (748,477) $ - $ - $ (748,477)
Changes in contract fair values (a)...... 61,807 161 1,349 63,317
Contract maturities...................... 91,138 (161) - 90,977
Contract terminations.................... 196,246 - (1,349) 194,897
--------- ------- ------- ---------
Fair value of contracts outstanding
as of June 30, 2006................... $ (399,286) $ - $ - $ (399,286)
========= ======= ======= =========
<FN>
- ---------------
(a) At inception, 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 June 30, 2006 or December 31,
2005.
Interest rate sensitivity. During April 2006, the Company entered into
costless collar contracts to hedge the coupon rate on the Company's 6.875%
Notes, which were issued on May 1, 2006. The Company terminated these costless
collar contracts for $1.3 million of deferred gains. See Note E of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" and
Capital Commitments, Capital Resources and Liquidity included in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding these debt transactions.
46
PIONEER NATURAL RESOURCES COMPANY
The following table provides information about other financial instruments
to which the Company was a party as of June 30, 2006 and that are sensitive to
changes in interest rates. For debt obligations, the table presents maturities
by expected maturity dates, the weighted average interest rates expected to be
paid on the debt given current contractual terms and market conditions and the
debt's estimated fair value. For fixed rate debt, the weighted average interest
rate represents the contractual fixed rates that the Company was obligated to
periodically pay on the debt as of June 30, 2006. As of June 30, 2006, the
Company was not a party to material derivatives that would subject it to
interest rate sensitivity.
Interest Rate Sensitivity
Debt Obligations as of June 30, 2006
Six months Liability
ending Year ending December 31, Fair Value at
December 31, ----------------------------------------- June 30,
2006 2007 2008 2009 2010 Thereafter Total 2006
------------ -------- -------- -------- -------- ---------- ---------- -------------
($ in thousands)
Total Debt:
Fixed rate principal
maturities (a)............ $ - $ 32,075 $ 3,777 $ - $ - $1,330,985 $1,366,837 $1,354,993
Weighted average
interest rate (%)...... 6.45 6.43 6.40 6.40 6.40 6.40
<FN>
- -------------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) net deferred fair value hedge losses.
</FN>
Commodity price sensitivity. The following table provides information about
the Company's oil and gas derivative financial instruments that were sensitive
to changes in oil or gas price as of June 30, 2006. As of June 30, 2006, the
Company was a party to one gas index basis swap that is not designated as a
hedge and which represented a $130 thousand asset. Otherwise, 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 or gas
prices as well as hedge volumes and weighted average prices by calendar quarter.
Oil and Gas Price Sensitivity
Derivative Financial Instruments as of June 30, 2006
Six months Year ending Asset (Liability)
ending December 31, Fair Value at
December 31, ------------------- June 30
2006 2007 2008 2006
------------ -------- -------- ----------------
(in thousands)
Oil Hedge Derivatives:
Average daily notional Bbl volumes:
Swap contracts............................. 5,000 10,000 10,000 $(332,208)
Weighted average fixed price per Bbl...... $ 37.20 $ 30.96 $ 30.62
Collar contracts........................... 6,500 2,000 - $ (22,424)
Weighted average ceiling price per Bbl.... $ 66.41 $ 89.50 $ -
Weighted average floor price per Bbl...... $ 41.92 $ 50.00 $ -
Average forward NYMEX oil prices (a)....... $ 74.67 $ 77.00 $ 75.54
Gas Hedge Derivatives (b):
Average daily notional MMBtu volumes (c):
Swap contracts............................. 73,932 59,195 - $ (61,802)
Weighted average fixed price per MMBtu.... $ 4.31 $ 7.06 $ -
Collar contracts........................... 90,000 30,000 - $ 17,148
Weighted average ceiling price per MMBtu.. $ 14.38 $ 11.02 $ -
Weighted average floor price per MMBtu.... $ 6.56 $ 6.50 $ -
Average forward NYMEX gas prices (a)....... $ 8.61 $ 9.64 $ -
47
PIONEER NATURAL RESOURCES COMPANY
<FN>
- ---------------
(a) The average forward NYMEX oil and gas prices are based on July 31, 2006
market quotes.
(b) 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.
(c) Subsequent to June 30, 2006 through August 1, 2006, the Company (i) reduced
its gas hedge position by terminating gas collar contracts that are
included in the table above by 30,000 MMBtu per day of forecasted 2007 gas
sales at a weighted average ceiling price per MMBtu of $11.02 and a
weighted average floor price per MMBtu of $6.50 and (ii) increased its gas
hedge position by entering into gas swap contracts for 15,000 MMBtu per day
of forecasted 2008 gas sales at a weighted average price per MMBtu of $8.62
(Panhandle Eastern Pipeline Oklahoma (mainline) index price).
</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 Report.
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.
48
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.
49
PIONEER NATURAL RESOURCES COMPANY
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company's purchases of treasury stock
during the three months ended June 30, 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
- ------ ----------------- -------------- ---------------------- ------------------
April 2006............... 12,797 $ 42.89 -
May 2006................. 2,335,603 $ 39.98 2,333,900
June 2006................ 1,991,182 $ 38.44 1,989,400
----------- -----------
Total............ 4,339,582 $ 39.28 4,323,300 $189,531,202
=========== =========== ===========
<FN>
- -----------
(a) Amounts include shares withheld to satisfy 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. An additional $170 million has been
completed through June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 3, 2006 in
Irving, Texas. At the meeting, three proposals were submitted for vote of
stockholders (as described in the Company's Proxy Statement dated April 3,
2006). The following is a brief description of each proposal and results of the
stockholders' votes.
Election of Directors. Prior to the meeting, the Board designated three
nominees as Class III directors with their terms to expire at the annual meeting
in 2009 when their successors are elected and qualified. Messrs. Lundquist,
Ramsey and Solberg were, at the time of such nomination and at the time of the
meeting, directors of the Company. Each nominee was elected as a director of the
Company, with the results of the stockholder voting being as follows:
Authority Broker
For Withheld Abstain Non-Votes
----------- --------- ------- ---------
Andrew D. Lundquist 107,016,784 6,611,899 - -
Charles E. Ramsey, Jr. 107,217,818 6,410,865 - -
Robert A. Solberg 107,654,834 5,973,849 - -
In addition, the term of office for the following directors continued after
May 3, 2006: James R. Baroffio, Edison C. Buchanan, R. Hartwell Gardner, Linda
K. Lawson, Frank A. Risch, Mark S. Sexton, Scott D. Sheffield and Jim A. Watson.
Ratification of selection of independent auditors. The engagement of Ernst
& Young LLP as the Company's independent auditors for 2006 was submitted to the
stockholders for ratification. Such election was ratified, with the results of
the stockholder voting being as follows:
For 111,291,255
Against 896,703
Abstain 1,440,725
Broker non-votes -
50
PIONEER NATURAL RESOURCES COMPANY
Adoption of the 2006 long-term incentive plan. The adoption of the 2006
long-term incentive plan was submitted to the stockholders for approval. Such
adoption was approved, with the results of the stockholder voting being as
follows:
For 81,363,336
Against 8,495,954
Abstain 1,933,759
Broker non-votes -
Item 6. Exhibits
Exhibits
4.1 Amendment No. 1 to Rights Agreement, dated as of May 22, 2006,
between the Company and Continental Stock Transfer & Trust 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 23,
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.
10.1 Pioneer Natural Resources Company 2006 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on May 9,
2006).
10.2 Form of restricted stock unit Award Agreement for non-employee
directors, together with a schedule identifying substantially
identical agreements between the Company and each of its non-
employee directors identified on the schedule and identifying the
material differences between each of those agreements and the filed
Award Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on May 9, 2006).
- ---------------
(a) Filed herewith.
(b) Furnished herewith.
51
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: August 7, 2006 By: /s/ Richard P. Dealy
----------------------------------
Richard P. Dealy
Executive Vice President and Chief
Financial Officer
Date: August 7, 2006 By: /s/ Darin G. Holderness
----------------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
52
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
4.1 Amendment No. 1 to Rights Agreement, dated as of May 22, 2006,
between the Company and Continental Stock Transfer & Trust 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 23,
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.
10.1 Pioneer Natural Resources Company 2006 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on May 9,
2006).
10.2 Form of restricted stock unit Award Agreement for non-employee
directors, together with a schedule identifying substantially
identical agreements between the Company and each of its non-
employee directors identified on the schedule and identifying the
material differences between each of those agreements and the filed
Award Agreement (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with
the SEC on May 9, 2006).
- ---------------
(a) Filed herewith.
(b) Furnished herewith.
53