UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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(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
October 30, 2006................................................. 122,617,054
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 September 30, 2006
and December 31, 2005...................................... 4
Consolidated Statements of Operations for the three and
nine months ended September 30, 2006 and 2005.............. 6
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 2006....................... 7
Consolidated Statements of Cash Flows for the three and
nine months ended September 30, 2006 and 2005.............. 8
Consolidated Statements of Comprehensive Income for the
three and nine months ended September 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.......................... 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 51
Item 4. Controls and Procedures...................................... 53
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 54
Item 1A. Risk Factors................................................. 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 55
Item 6. Exhibits..................................................... 55
Signatures............................................................. 56
Exhibit Index.......................................................... 57
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 "MMcfpd" means one million cubic feet per day.
o "NGL" means natural gas liquid.
o "NYMEX" means the New York Mercantile Exchange.
o "proved reserves" mean the estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include consideration
of changes in existing prices provided only by contractual arrangements,
but not on escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.
(iii) Estimates of proved reserves do not include the following:
(A) oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics or
economic factors; (C) crude oil, natural gas and natural gas liquids, that
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids, that may be recovered from oil shales, coal, gilsonite
and other such sources.
o "SEC" means the United States Securities and Exchange Commission.
o With respect to information on the working interest in wells, drilling
locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by
the Company's working interest in such wells, drilling locations or acres.
Unless otherwise specified, wells, drilling locations and acreage
statistics quoted herein represent gross wells, drilling locations or
acres.
o Unless otherwise indicated, all currency amounts are expressed in U.S.
dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2006 2005
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 100,072 $ 18,802
Accounts receivable:
Trade, net of allowance for doubtful accounts of $8,905 and
$5,736 as of September 30, 2006 and December 31,
2005, respectively.......................................... 160,031 336,062
Due from affiliates........................................... 1,445 1,596
Inventories..................................................... 109,509 79,659
Prepaid expenses................................................ 16,497 18,091
Deferred income taxes........................................... 82,638 158,878
Other current assets:
Derivatives................................................... 38,286 1,246
Other, net of allowance for doubtful accounts of none as of
September 30, 2006 and $6,425 as of December 31, 2005....... 9,677 9,470
----------- -----------
Total current assets..................................... 518,155 623,804
----------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................. 7,570,614 8,499,253
Unproved properties........................................... 201,740 313,881
Accumulated depletion, depreciation and amortization (1,816,875) (2,577,946)
----------- -----------
Total property, plant and equipment...................... 5,955,479 6,235,188
----------- -----------
Goodwill........................................................... 310,626 311,651
Other property and equipment, net.................................. 107,456 90,010
Other assets:
Derivatives..................................................... 12,954 1,048
Other, net of allowance for doubtful accounts of $92 as of
September 30, 2006 and December 31, 2005...................... 93,615 67,533
----------- -----------
$ 6,998,285 $ 7,329,234
=========== ===========
The financial information included as of September 30, 2006 has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
September 30, December 31,
2006 2005
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................................... $ 320,612 $ 330,151
Due to affiliates............................................. 12,863 15,053
Interest payable................................................ 26,032 40,314
Income taxes payable............................................ 34,397 22,470
Other current liabilities:
Derivatives................................................... 147,617 320,098
Deferred revenue.............................................. 183,031 190,327
Other......................................................... 153,935 114,942
---------- -----------
Total current liabilities................................ 878,487 1,033,355
---------- -----------
Long-term debt..................................................... 1,194,556 2,058,412
Derivatives........................................................ 166,757 431,543
Deferred income taxes.............................................. 1,105,118 767,329
Deferred revenue................................................... 528,576 664,511
Other liabilities and minority interests........................... 155,457 156,982
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
145,572,290 and 145,200,293 share issued as of
September 30, 2006 and December 31, 2005, respectively........ 1,456 1,452
Additional paid-in capital...................................... 3,698,204 3,775,812
Treasury stock, at cost: 23,644,151 and 18,368,109 shares as
of September 30, 2006 and December 31, 2005, respectively..... (1,074,577) (882,382)
Deferred compensation........................................... - (45,827)
Retained earnings (accumulated deficit)......................... 478,345 (184,320)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax......................... (203,373) (506,636)
Cumulative translation adjustment............................. 69,279 59,003
---------- -----------
Total stockholders' equity................................ 2,969,334 2,217,102
Commitments and contingencies......................................
---------- -----------
$ 6,998,285 $ 7,329,234
========== ===========
The financial information included as of September 30, 2006 has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- ---------------------------
2006 2005 2006 2005
--------- --------- ----------- -----------
Revenues and other income:
Oil and gas........................................ $ 418,106 $ 389,679 $ 1,205,144 $ 1,033,842
Interest and other................................. 15,229 7,885 42,081 21,936
Gain (loss) on disposition of assets, net.......... (708) 375 (4,184) 2,625
--------- --------- ----------- -----------
432,627 397,939 1,243,041 1,058,403
--------- --------- ----------- -----------
Costs and expenses:
Oil and gas production............................. 102,969 92,809 300,718 253,393
Depletion, depreciation and amortization........... 95,288 75,836 265,678 215,143
Impairment of long-lived assets.................... - 21 - 644
Exploration and abandonments....................... 43,820 56,364 210,080 147,691
General and administrative......................... 30,421 29,817 92,136 83,901
Accretion of discount on asset retirement
obligations..................................... 1,168 1,094 3,470 3,183
Interest........................................... 23,586 28,862 82,928 91,011
Other.............................................. 14,779 34,185 31,592 58,739
--------- --------- ----------- -----------
312,031 318,988 986,602 853,705
--------- --------- ----------- -----------
Income from continuing operations before
income taxes....................................... 120,596 78,951 256,439 204,698
Income tax provision................................. (40,270) (17,438) (111,194) (93,234)
--------- --------- ----------- -----------
Income from continuing operations.................... 80,326 61,513 145,245 111,464
Income from discontinued operations, net of tax...... 473 62,060 566,800 282,325
--------- --------- ----------- -----------
Net income........................................... $ 80,799 $ 123,573 $ 712,045 $ 393,789
========= ========= =========== ===========
Basic earnings per share:
Income from continuing operations.................. $ .65 .45 $ 1.15 $ .79
Income from discontinued operations, net of tax.... - .45 4.52 2.01
--------- --------- ---------- -----------
Net income......................................... $ .65 $ .90 $ 5.67 $ 2.80
========= ========= ========== ===========
Diluted earnings per share:
Income from continuing operations.................. $ .64 $ .44 $ 1.14 $ .79
Income from discontinued operations, net of tax.... - .44 4.39 1.95
--------- --------- ---------- -----------
Net income $ .64 $ .88 $ 5.53 $ 2.74
========= ========= ========== ===========
Weighted average shares outstanding:
Basic.............................................. 124,021 137,655 125,520 140,436
========= ========= =========== ===========
Diluted............................................ 126,734 141,786 129,134 144,770
========= ========= =========== ===========
Dividends declared per share......................... $ .13 $ .12 $ .25 $ .22
========= ========== =========== ===========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
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 ($.25 per
share)....................... - - - - (31,899) - - (31,899)
Conversion of senior notes..... - (62,672) 78,731 - - - - 16,059
Exercise of long-term incentive
plan stock options........... - 2,651 26,723 - (17,481) - - 11,893
Purchase of treasury stock....... - - (297,649) - - - - (297,649)
Tax benefits related to
stock-based compensation....... - 2,887 - - - - - 2,887
Compensation costs:
Adoption of SFAS 123(R)........ - (45,827) - 45,827 - - - -
Compensation awards............ 4 (4) - - - - - -
Compensation costs included in
net income................... - 25,357 - - - - - 25,357
Net income....................... - - - - 712,045 - - 712,045
Other comprehensive income:
Deferred hedging activity,
net of tax:
Net deferred hedge gains..... - - - - - 105,315 - 105,315
Net hedge losses included in
continuing operations....... - - - - - 71,676 - 71,676
Net hedge losses included in
discontinued operations..... - - - - - 126,272 - 126,272
Translation adjustment......... - - - - - - 10,276 10,276
------ ---------- ----------- ---------- --------- ---------- -------- -----------
Balance as of September 30, 2006. $1,456 $3,698,204 $(1,074,577) $ - $ 478,345 $ (203,373) $ 69,279 $ 2,969,334
====== ========== =========== ========== ========= ========== ======== ===========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
2006 2005 2006 2005
---------- ---------- ----------- -----------
Cash flows from operating activities:
Net income............................................... $ 80,799 $ 123,573 $ 712,045 $ 393,789
Adjustments to reconcile net income to net cash provided
by operating activities:
Depletion, depreciation and amortization.............. 95,288 75,836 265,678 215,143
Impairment of long-lived assets....................... - 21 - 644
Exploration expenses, including dry holes............. 15,981 38,609 127,917 67,571
Deferred income taxes................................. 43,336 4,383 110,520 60,759
Loss (gain) on disposition of assts, net.............. 708 (375) 4,184 (2,625)
Loss on extinguishment of debt........................ - 18,633 8,076 25,975
Accretion of discount on asset retirement obligations. 1,168 1,094 3,470 3,183
Discontinued operations............................... (3,248) 78,804 (543,903) 262,876
Interest expense...................................... 2,357 1,493 7,522 2,555
Commodity hedge related activity...................... (3,867) 1,658 (9,420) (9,069)
Stock-based compensation.............................. 7,047 6,449 25,357 19,619
Amortization of deferred revenue...................... (47,396) (21,882) (143,231) (53,956)
Other noncash items................................... 4,494 4,059 14,018 9,758
Changes in operating assets and liabilities, net of
effects from acquisition:
Accounts receivable, net.............................. (1,351) 9,047 161,814 (45,255)
Inventories........................................... (12,988) (8,964) (52,113) (21,667)
Prepaid expenses...................................... (1,673) (13,513) 291 (7,705)
Other current assets, net............................. (7,214) 405 1,978 (124)
Accounts payable...................................... 80,005 27,730 (33,636) 37,294
Interest payable...................................... (1,202) (21,593) (11,476) (25,957)
Income taxes payable.................................. (37,995) (6,314) 17,820 5,605
Other current liabilities............................. (31,551) (9,350) (22,624) (15,039)
---------- ---------- ----------- -----------
Net cash provided by operating activities........... 182,698 309,803 644,287 923,374
---------- ---------- ----------- -----------
Cash flows from investing activities:
Payments for acquisition, net of cash acquired........... - - - (965)
Proceeds from disposition of assets...................... (354) 63,598 1,642,208 1,184,196
Additions to oil and gas properties...................... (342,236) (406,241) (986,668) (846,924)
Additions to other assets and other property and
equipment, net......................................... (24,589) (14,337) (57,428) (34,059)
---------- ---------- ----------- -----------
Net cash provided by (used in) investing activities. (367,179) (356,980) 598,112 302,248
---------- ---------- ----------- -----------
Cash flows from financing activities:
Borrowings under long-term debt.......................... 200,000 599,700 1,098,490 976,112
Principal payments on long-term debt..................... (256,744) (66,967) (1,959,586) (1,440,649)
Payment of other liabilities............................. (560) (18,462) (1,190) (32,437)
Exercise of long-term incentive plan stock options....... 7,227 12,736 11,893 40,170
Purchase of treasury stock............................... (125,204) (472,580) (297,649) (698,804)
Tax benefits related to stock-based compensation......... 2,887 - 2,887 -
Payment of financing fees................................ (9) (1,811) (2,178) (1,811)
Dividends paid........................................... - - (15,510) (14,332)
---------- ---------- ----------- -----------
Net cash provided by (used in) financing activities. (172,403) 52,616 (1,162,843) (1,171,751)
---------- ---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....... (356,884) 5,439 79,556 53,871
Effect of exchange rate changes on cash and cash
equivalents.............................................. (86) 618 1,714 3,380
Cash and cash equivalents, beginning of period............. 457,042 58,451 18,802 7,257
---------- ---------- ----------- -----------
Cash and cash equivalents, end of period................... $ 100,072 $ 64,508 $ 100,072 $ 64,508
========== ========== =========== ===========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ----------- ----------
Net income......................................... $ 80,799 $ 123,573 $ 712,045 $ 393,789
---------- ---------- ----------- ----------
Other comprehensive income (loss):
Deferred hedging activity, net of tax:
Net deferred hedge gains (losses)............. 68,367 (286,200) 105,315 (629,000)
Net hedge losses included in continuing
operations.................................. 16,759 50,513 71,676 108,670
Net hedge losses included in discontinued
operations.................................. - 27,264 126,272 63,020
Translation adjustment........................... (507) 12,561 10,276 7,702
---------- ---------- ----------- ----------
Other comprehensive income (loss)............. 84,619 (195,862) 313,539 (449,608)
---------- ---------- ----------- ----------
Comprehensive income (loss)........................ $ 165,418 $ (72,289) $ 1,025,584 $ (55,819)
========== ========== =========== ==========
The financial information included herein has been prepared by
management without audit by independent registered public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2006 and for the three
and nine months ended September 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 $7.9 million and $61.8
million of cash used for geological expenses during the three and nine month
periods ended September 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 asset groups:
Country Description of Asset Groups Date Divested
------- --------------------------- -------------
Canada Martin Creek, Conroy Black and
Lookout Butte fields May 2005
United States Two Gulf of Mexico shelf fields August 2005
United States Deepwater Gulf of Mexico fields March 2006
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 $107.5 million and $77.3 million
of materials and supplies and $2.0 million and $2.4 million of commodities as of
September 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 September 30, 2006 and December 31, 2005, the
Company's materials and supplies inventory was net of $7.9 million and $.2
million, respectively, of valuation reserve allowances.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 2006, 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.
Minority interests in consolidated subsidiaries. The Company owns the
majority interests in certain subsidiaries with operations in the United States
and Nigeria. Associated therewith, the Company has recognized minority interests
in consolidated subsidiaries of $14.1 million and $9.3 million in other
liabilities and minority interests in the accompanying Consolidated Balance
Sheets as of September 30, 2006 and December 31, 2005, respectively.
Minority interests in the net losses of the Company's consolidated Nigerian
subsidiary amounting to $742 thousand and $4.4 million for the three and nine
month periods ended September 30, 2006, respectively, and $234 thousand and $389
thousand for the three and nine month periods ended September 30, 2005,
respectively, are included in interest and other income in the accompanying
Consolidated Statements of Operations. Minority interests in the net income of
the Company's consolidated United States subsidiaries amounting to $589 thousand
and $2.1 million for the three and nine month periods ended September 30, 2006,
respectively, and $826 thousand and $2.2 million for the three and nine month
periods ended September 30, 2005, respectively, are included in other expense in
the accompanying Consolidated Statements of Operations.
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 of SFAS 123(R), 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, was
recognized in the Company's financial statements over their remaining vesting
periods, which ended in August 2006. 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, is being recognized in the Company's
financial statements over the vesting period. The Company utilizes the
Black-Scholes option pricing model to measure the 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 in
stockholders' equity and reduced by a like amount additional paid-in capital in
the accompanying Consolidated Balance Sheet.
For the three and nine months ended September 30, 2006, the Company
recorded $7.1 million and $25.4 million, respectively, of stock-based
compensation costs for all plans. The impact to net income of adopting SFAS
123(R) was $359 thousand and $1.5 million for the three and nine month periods
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
ended September 30, 2006, respectively, or less than $.01 per diluted share. For
the three and nine month periods ended September 30, 2006, the adoption impact
is comprised of $153 thousand and $1.0 million, respectively, of compensation
expense associated with stock options and $206 thousand and $565 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 September 30, 2006
and December 31, 2005, do not include 1,992,264 shares and 1,756,180 shares,
respectively, related to unvested restricted stock awards. During the nine
months ended September 30, 2006, the Company issued 625,098 shares of restricted
stock awards, net of associated forfeitures.
As of September 30, 2006, there was approximately $48.1 million of
unrecognized compensation expense related to unvested share-based compensation
plan awards, primarily related to restricted stock awards. This compensation
will be recognized over the remaining vesting periods of the awards, which is a
remaining 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
nine months ended September 30, 2005:
Three months Nine months
ended ended
September 30, 2005 September 30, 2005
------------------ ------------------
(in thousands, except per share data)
Net income, as reported.......................... $ 123,573 $ 393,789
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a)................................. 4,095 12,458
Deduct: Stock-based compensation
determined under fair value based
method for all awards, net of tax (a).......... (4,586) (14,669)
------------ ------------
Pro forma net income............................. $ 123,082 $ 391,578
============ ============
Net income per share:
Basic - as reported............................ $ .90 $ 2.80
============ ============
Basic - pro forma.............................. $ .89 $ 2.79
============ ============
Diluted - as reported.......................... $ .88 $ 2.74
============ ============
Diluted - pro forma............................ $ .87 $ 2.72
============ ============
-----------
(a) For the three and nine months ended September 30, 2005, stock-based
compensation expense included in net income is net of tax benefits of $2.4
million and $7.2 million, respectively. Similarly, stock-based compensation
expense determined under the fair value method for the three and nine
months ended September 30, 2005 is net of tax benefits of $2.6 million and
$8.4 million, respectively. See Note D for additional information regarding
the Company's income taxes.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
New accounting pronouncements. In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN No. 48"). The Interpretation clarifies the
accounting for income taxes by prescribing a minimum recognition threshold that
a tax position is required to meet before being recognized in the financial
statements. FIN No. 48 also provides guidance on measurement, classification,
interim accounting and disclosure. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. The Company is continuing to assess potential
impacts of this Interpretation.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company is continuing to
assess the impact of SFAS 157.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for
Defined Benefit Pension and other Postretirement Plans" ("SFAS 158"), which
amends SFAS Nos. 87, 88, 106 and 132(R). Under SFAS 158, a business entity that
sponsors one or more single-employer defined benefit plans is required to:
o recognize the funded status of a benefit plan--measured as the
difference between plan assets at fair value (with limited exceptions)
and the benefit obligation--in its statement of financial position,
o recognize as a component of other comprehensive income, net of tax, the
gains or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic benefit
cost,
o measure defined benefit plan assets and obligations as of the date of
the employer's fiscal year-end statement of financial position and
o disclose in the notes to financial statements additional information
about certain effects on net periodic benefit cost for the next fiscal
year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition asset or obligation.
An employer with publicly traded securities is required to initially
recognize the funded status of its defined benefit postretirement plans and to
provide the required disclosures as of the end of the first fiscal year ending
after December 15, 2006. The Company will adopt the provisions of SFAS 158
effective on December 31, 2006. The Company's presently recognizes the funded
status of its defined benefit postretirement plans. Consequently, the adoption
of SFAS 158 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
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 exploration and abandonments expense.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The following table reflects the Company's capitalized exploratory well
activity during the three and nine months ended September 30, 2006:
Three months Nine months
ended ended
September 30, 2006 September 30, 2006
------------------ ------------------
(in thousands)
Beginning capitalized exploratory well
costs................................................ $ 179,360 $ 198,291
Additions to exploratory well costs
pending the determination of
proved reserves...................................... 120,519 310,233
Reclassification due to determination of
proved reserves...................................... (53,801) (137,272)
Disposition of wells................................... 342 (52,856)
Exploratory well costs charged to exploration expense.. (13,201) (85,177)
------------ ------------
Ending capitalized exploratory well costs.............. $ 233,219 $ 233,219
============ ============
The following table provides an aging as of September 30, 2006 and December
31, 2005 of capitalized exploratory well costs based on the date the drilling
was completed and the number of projects for which exploratory well costs have
been capitalized for a period greater than one year since the date the drilling
was completed:
September 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........ $ 93,892 $ 84,042
Capitalized exploratory well costs that have been
capitalized for a period greater than one year...... 139,327 114,249
------------ ------------
$ 233,219 $ 198,291
============ ============
Number of projects with exploratory well costs that
have been capitalized for a period greater
than one year.................................... 7 10
============ ============
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The following table provides the capitalized costs of exploration projects
that have been suspended for more than one year as of September 30, 2006 and
December 31, 2005:
September 30, December 31,
2006 2005
------------- ------------
(in thousands)
United States:
Clipper.......................................... $ 70,707 $ -
Ozona Deep....................................... - 19,423
Thunder Hawk..................................... - 25,769
Oooguruk......................................... 52,205 52,205
Canada - Other...................................... 211 805
South Africa........................................ 7,227 7,227
Tunisia............................................. 8,977 8,820
------------ ------------
Total.......................................... $ 139,327 $ 114,249
============ ============
The following discussion describes the history and status of each
significant suspended exploratory project:
Clipper. During 2005, the Company drilled its first exploratory well on the
Clipper prospect, which was a discovery. During 2006, the Company drilled
additional wells to determine the magnitude of the discovery, which were
successful. The Company is currently evaluating the plans for development of the
discovery.
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 and a front-end
engineering design study ("FEED study") for the area.
During the first quarter of 2006, the Company sanctioned the development of
the discovery and obtained the necessary regulatory approvals. The Company
installed an offshore gravel drilling and production site during the 2006 winter
construction season and completed armoring activities during the third quarter.
A subsea flowline and facilities will be installed during 2007 to carry produced
liquids to existing onshore processing facilities at the Kuparuk River Unit.
Pioneer plans to drill approximately 40 horizontal wells to develop the
discovery. Depending on weather conditions and facilities completion and
accessibility, drilling could begin as early as the fall of 2007. The Company
estimates first production will occur in 2008.
South Africa. During 2000, the Company drilled two South African
exploratory wells in the Company's Boomslang prospect. One well was unsuccessful
but the other well found quantities of hydrocarbons believed to be commercial.
The Boomslang discovery was not included in the initial development phase of the
South Coast Gas 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.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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 September 30, 2006 and December 31, 2005, the Company's valuation
allowances (relating primarily to foreign tax jurisdictions) were $96.2 million
and $95.8 million, respectively.
Income tax provision. The Company's income tax provisions attributable to
income from continuing operations consisted of the following for the three and
nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(in thousands)
Current:
U.S. federal..................... $ (10,681) $ 3,308 $ (23,654) $ 7,965
U.S. state and local............. (55) (474) (52) (343)
Foreign.......................... 7,670 10,221 24,380 24,853
---------- ---------- ---------- ----------
(3,066) 13,055 674 32,475
---------- ---------- ---------- ----------
Deferred:
U.S. federal..................... 34,721 2,853 83,361 55,812
U.S. state and local............. 2,204 (203) 16,303 1,455
Foreign.......................... 6,411 1,733 10,856 3,492
---------- ---------- ---------- ----------
43,336 4,383 110,520 60,759
---------- ---------- ---------- ----------
$ 40,270 $ 17,438 $ 111,194 $ 93,234
========== ========== ========== ==========
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The Company's effective tax rate on continuing operations of 33.4 percent
and 43.4 percent during the three and nine months ended September 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
o recognition of $6.2 million of deferred tax benefit, in the third
quarter of 2006, as a result of conversion of senior convertible
notes prior to the Company's repayment of the debt principal (see
Note E) 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 nine month periods ended September
30, 2006, this primarily related to Nigerian exploration expenses of
approximately $2.6 million and $41.8 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 $13.5 million United States tax expense
and a $9.8 million Canadian tax benefit during the nine months ended September
30, 2006.
Included in the Company's income tax provision from continuing operations
for the three and nine months ended September 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.
Discontinued operations. The Company's income tax provisions attributable
to income from discontinued operations consisted of the following for the three
and nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ---------- -----------
(in thousands)
Current:
U.S. federal.................. $ 385 $ - $ 148,984 $ 2,751
U.S. state and local.......... 27 - 1,877 118
Foreign....................... - (1,056) 2,126 3,964
---------- ---------- ----------- ----------
412 (1,056) 152,987 6,833
---------- ---------- ----------- ----------
Deferred:
U.S. federal.................. (877) 28,257 140,025 112,324
U.S. state and local.......... 169 1,431 6,488 5,171
Foreign....................... (2) 7,280 (125) 49,633
---------- ---------- ----------- ----------
(710) 36,968 146,388 167,128
---------- ---------- ----------- ----------
$ (298) $ 35,912 $ 299,375 $ 173,961
========== ========== =========== ==========
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE E. Long-term Debt
Lines of credit. The Company has an Amended and Restated 5-Year Revolving
Credit Agreement (the "Credit Agreement") that had an original maturity date 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 September 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
(approximately 5.4 percent per annum at September 30, 2006) plus a current
additional margin to LIBOR (.875 percent per annum as of September 30, 2006).
Effective September 29, 2006, participating lenders extended the maturity
date on $1.395 billion of aggregate loan commitments under the Credit Agreement
to September 30, 2011.
As of September 30, 2006, the Company had $157.2 million of undrawn letters
of credit, of which $153.6 million were undrawn commitments under the Credit
Agreement, leaving the Company with $1.3 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
September 30, 2006) plus .125 percent.
The Credit Agreement contains certain financial covenants, which include
the (i) maintenance of a ratio of the Company's earnings before gain or loss on
the disposition of assets, interest expense, income taxes, depreciation,
depletion and amortization ("DD&A") expense, exploration and abandonments
expense and other noncash charges and expenses to consolidated interest expense
of at least 3.5 to 1.0; (ii) maintenance of a ratio of total debt to book
capitalization less intangible assets, accumulated other comprehensive income
and certain noncash asset impairments not to exceed .60 to 1.0; and (iii) 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 September 30, 2006, the Company was in compliance with all
of its debt covenants.
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 in cash at par value, if the Convertible Notes have not been converted by
the holders.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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 the second and third quarters of 2006, holders of $73 million of
Convertible Notes exercised their conversion rights. Associated therewith, the
Company paid $58.3 million in cash, issued 1.7 million shares of common stock
and recognized a net increase to stockholders' equity of $16.1 million.
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 September 30, 2006 and December 31, 2005, the Company was not a
party to any open fair value hedges.
As of September 30, 2006, the carrying value of the Company's long-term
debt in the accompanying Consolidated Balance Sheets included a $3.4 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 nine months
ended September 30, 2006, the Company's amortization of deferred hedge losses
and gains on terminated interest rate swaps increased the Company's reported
interest expense by $56 thousand and decreased the reported interest expense by
$153 thousand, respectively, as compared to deferred gains amortization which
reduced the Company's reported interest expense by $487 thousand and $3.8
million during the same respective periods in 2005.
The following table sets forth, as of September 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:
Three months
ending Year ending December 31,
December 31, -------------------------------------------------
2006 2007 2008 2009 2010 Thereafter
-------------- --------- --------- --------- --------- ----------
(in thousands)
Net deferred hedge
losses............. $ 57 $ 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 September 30, 2006, all of the Company's open commodity
hedges are designated as hedges of Canadian and United States forecasted sales.
The Company also, from time to time, utilizes interest rate contracts to reduce
the effect of interest rate volatility on the Company's indebtedness and forward
currency exchange agreements to reduce the effect of U.S. dollar to Canadian
dollar exchange rate volatility.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Oil prices. All material physical sales contracts governing the Company's
oil production have been tied directly or indirectly to NYMEX prices. The
following table sets forth the volumes hedged in Bbls under outstanding oil
hedge contracts and the weighted average NYMEX prices per Bbl for those
contracts as of September 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
Price per Bbl......... $ 37.20 $ 37.20
2006 - Collar Contracts
Volume (Bbl)......... 6,500 6,500
Price per Bbl........ $ 41.92-$66.41 $ 41.92-$66.41
2007 - Swap Contracts (a)
Volume (Bbl)......... 6,000 6,000 6,000 6,000 6,000
Price per Bbl........ $ 31.26 $ 31.26 $ 31.26 $ 31.26 $ 31.26
2007 - Collar Contracts (a)
Volume (Bbl)......... 1,000 1,000 1,000 1,000 1,000
Price per Bbl........ $ 50.00-89.00 $ 50.00-$89.00 $ 50.00-$89.00 $ 50.00-$89.00 $ 50.00-$89.00
2008 - Swap Contracts
Volume (Bbl)......... 6,500 6,500 6,500 6,500 6,500
Price per Bbl........ $ 31.19$ 31.19 $ 31.19 $ 31.19 $ 31.19
---------
(a) Subsequent to September 30, 2006, the Company reduced its oil hedge
positions by terminating (i) 1,000 Bbls per day of 2007 oil swap contracts
with an average per Bbl fixed price of $30.80 and (ii) the 2007 oil collar
contracts included in the table above.
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 nine months ended September 30, 2006 and
2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Average price reported per Bbl......... $ 70.89 $ 42.51 $ 66.83 $ 38.15
Average price realized per Bbl......... $ 69.87 $ 60.35 $ 65.67 $ 52.03
VPP increase to oil revenue
(in millions)........................ $ 29.2 $ - $ 87.2 $ -
Reduction to oil revenue from hedging
activity (in millions) (a)........... $ (26.9) $ (51.5) $ (79.4) $ (122.0)
------------
(a) Excludes hedge losses of $12.3 million attributable to discontinued
operations for the nine months ended September 30, 2006 and $13.2 million
and $39.8 million during the three and nine months ended September 30,
2005, respectively.
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Natural gas liquids prices. During the three and nine months ended
September 30, 2006 and 2005, the Company did not enter into any NGL hedge
contracts. There were no outstanding NGL hedge contracts at September 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 September 30, 2006:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- -------------- -------------- -------------- --------------
Average daily gas
production hedged:
2006 - Swap Contracts
Volume (MMBtu).......... 63,875 63,875
Price per MMBtu......... $ 4.32 $ 4.32
2006 - Collar Contracts
Volume (MMBtu)......... 95,000 95,000
Price per MMBtu........ $ 6.55-$14.49 $ 6.55-$14.49
2007 - Swap Contracts (a)
Volume (MMBtu)......... 59,071 59,146 59,231 59,329 59,195
Price per MMBtu........ $ 7.07 $ 7.06 $ 7.06 $ 7.06 $ 7.06
2007 - Collar Contracts
Volume (MMBtu)......... 25,000 - - - 6,164
Price per MMBtu........ $ 9.00-$11.52 - - - $ 9.00-$11.52
2008 - Swap Contracts
Volume (MMBtu)......... 15,000 15,000 15,000 15,000 15,000
Price per MMBtu........ $ 8.62 $ 8.62 $ 8.62 $ 8.62 $ 8.62
-------------
(a) Subsequent to September 30, 2006, the Company increased its gas hedge
position by entering into gas swap contracts for (i) 40,000 MMBtu per day
of forecasted 2007 gas sales at a weighted average price per MMBtu of $7.40
(Panhandle Eastern Pipeline Oklahoma (mainline) index price) and (ii)
10,000 MMBtu per day of forecasted 2007 gas sales at a weighted average
price per MMBtu of $7.80 (Houston Ship Channel index price).
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
2006 2005 2006 2005
---------- --------- --------- ---------
Average price reported per Mcf........ $ 6.33 $ 7.22 $ 6.43 $ 6.66
Average price realized per Mcf........ $ 5.77 $ 7.51 $ 6.17 $ 6.53
VPP increase to gas revenue
(in millions)....................... $ 18.2 $ 21.9 $ 56.0 $ 54.0
Reduction to gas revenue from hedging
activity (in millions) (a).......... $ (1.3) $ (31.1) (32.9) $ (37.4)
------------
(a) Excludes hedge losses of $3.4 million attributable to discontinued
operations for the nine months ended September 30, 2006 and $26.6 million
and $54.1 million during the three and nine months ended September 30,
2005, respectively.
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 nine months ended September
30, 2006. See Note E for information regarding the 6.875% Notes.
Hedge ineffectiveness. During the three months ended September 30, 2006,
the Company recorded $1.4 million of net hedge ineffectiveness charges to other
expense from continuing operations and during the nine months ended September
30, 2006, the Company recorded $9.6 million of net hedge ineffectiveness credits
to other expense from continuing operations, as compared to $9.2 million and
$18.5 million of net ineffectiveness charges during the same respective periods
in 2005. Hedge ineffectiveness credits and charges represent the ineffective
portions of changes in the fair values of the Company's cash flow hedging
instruments. These credits and charges primarily result 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 September 30, 2006 and December 31, 2005, AOCI -
Hedging represented net deferred losses of $203.4 million and $506.6 million,
respectively. The AOCI - Hedging balance as of September 30, 2006 was comprised
of $165.0 million of net deferred losses on the effective portions of open cash
flow hedges, $156.5 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 $118.1 million of associated net deferred tax
benefits. The decrease in AOCI - Hedging during the nine months ended September
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, declines in market-quoted forward
commodity prices 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.
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
During the twelve months ending September 30, 2007, based on current
estimates of future commodity prices, the Company expects to reclassify $49.4
million of net deferred losses associated with open commodity hedges and $52.7
million of net deferred losses on terminated commodity hedges from AOCI -
Hedging to oil and gas revenues. The Company also expects to reclassify
approximately $37.3 million of net deferred income tax benefits associated with
commodity hedges during the twelve months ending September 30, 2007 from AOCI -
Hedging to income tax benefit.
The following table sets forth, as of September 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 gain........... $ 1,438 $ 1,438
2007 net deferred hedge losses (a)..... $ (18,819) $ (17,928) $ (17,416) $ (16,272) $ (70,435)
2008 net deferred hedge losses......... $ (20,285) $ (17,541) $ (17,403) $ (17,718) $ (72,947)
2009 net deferred hedge losses......... $ (2,329) $ (232) $ (230) $ (822) $ (3,613)
2010 net deferred hedge losses......... $ (666) $ (620) $ (578) $ (539) $ (2,403)
2011 net deferred hedge losses......... $ (873) $ (889) $ (903) $ (906) $ (3,571)
2012 net deferred hedge losses......... $ (810) $ (791) $ (784) $ (772) $ (3,157)
----------
$ (154,688)
==========
---------
(a) Does not include approximately $12 million of 2007 net deferred hedge
losses attributable to commodity hedges terminated after September 30, 2006
that are included in the Company's derivative obligations as of September
30, 2006.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE G. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future
plugging and abandonment of proved properties and related facilities. The
Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 5,
"Accounting for Contingencies" during the three and nine months ended September
30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(in thousands)
Beginning asset retirement obligations $ 155,583 $ 117,753 $ 157,035 $ 120,879
Liabilities assumed in acquisitions.... 226 3,013 909 3,013
New wells placed on production and
changes in estimates (a)............ 8,597 32,813 51,634 35,408
Disposition of wells................... - (17,863) (44,042) (23,101)
Liabilities settled.................... (9,913) (3,311) (13,783) (7,566)
Accretion of discount on continuing
operations.......................... 1,168 1,094 3,470 3,183
Accretion of discount on discontinued
operations.......................... - 874 804 3,027
Currency translation................... (23) 754 611 284
---------- ---------- ---------- ----------
Ending asset retirement obligation....... $ 155,638 $ 135,127 $ 155,638 $ 135,127
========== ========== ========== ==========
-----------
(a) During the nine months ended September 30, 2006 and each of the three and
nine month periods ended September 30, 2005, the Company recorded increases
of $42.0 million and $32.8 million, respectively, to the abandonment
estimates of the respective periods for the East Cameron facilities that
were destroyed by Hurricane Rita in 2005, which amounts are reflected in
exploration and abandonments expense in the accompanying Consolidated
Statements of Operations.
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 $79.4
million and $58.0 million as of September 30, 2006 and December 31, 2005,
respectively.
NOTE H. Postretirement Benefit Obligations
As of September 30, 2006 and December 31, 2005, the Company had recorded
$19.0 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 September
30, 2006 or December 31, 2005. The participants of these plans, other than the
Company's retirement plan, are not current employees of the Company.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three and six months
ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- --------
(in thousands)
Beginning accumulated postretirement
benefit obligations...................... $ 18,915 $ 15,517 $ 18,576 $ 15,534
Net benefit payments..................... (376) (413) (964) (1,042)
Service costs............................ 204 81 612 243
Accretion of discounts................... 259 225 778 675
--------- --------- --------- ---------
Ending accumulated postretirement
benefit obligations...................... $ 19,002 $ 15,410 $ 19,002 $ 15,410
========= ========= ========= =========
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 plaintiffs in the case 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. Plaintiffs also claim that they are
entitled to 50 percent of the value of the helium extracted at the Company's
Satanta gas plant.
During the third quarter of 2006, the Company reached an agreement to
settle the claims made in the lawsuit. Under the terms of the agreement, the
Company agreed to make cash payments to settle the plaintiffs' claims with
respect to production occurring on and before December 31, 2005. The Company's
portion of the cash payments is expected to be approximately $32.7 million (all
of which has been previously accrued), of which approximately $17.0 million was
paid during the third quarter of 2006 and the remaining approximately $15.7
million will be paid in the third quarter of 2007. The Company also agreed to
adjust the manner in which royalty payments to the class members will be
calculated for production occurring on and after January 1, 2006, which change
is not expected to have a material effect on the Company's liquidity, financial
position or future results of operations.
The settlement is not final until approved by the court and any appeals
filed within 60 days of final approval are resolved. A final approval hearing is
scheduled for December 15, 2006, and if court approval is obtained and appeals
are not taken, it is expected that the settlements will be final in the first
quarter of 2007.
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 unit holder
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
25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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,
financial position or future annual results of operations.
Environmental Protection Agency Investigation. On November 4, 2005, the
Company learned from the U.S. Environmental Protection Agency that the agency
was conducting a criminal investigation into a 2003 spill that occurred at a
Company-operated drilling rig located on an ice island offshore Kuparuk in
Harrison Bay, Alaska. The investigation is being conducted in conjunction with
the U.S. Attorney's Office for the District of Alaska. The spill was previously
investigated by the Alaska Department of Environmental Conservation ("ADEC")
and, following completion of a clean up, the ADEC issued a letter stating its
determination that, at that time, the site did not pose a threat to human
health, safety or welfare, or the environment. The Company is fully cooperating
with the government's investigation.
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.
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The following table is a reconciliation of basic income from continuing
operations to diluted income from continuing operations for the three and nine
months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(in thousands)
Basic income from continuing
operations........................... $ 80,326 $ 61,513 $ 145,245 $ 111,464
Interest expense on convertible notes,
net of tax........................... 311 802 1,914 2,405
---------- ---------- ---------- ----------
Diluted income from continuing
operations........................... $ 81,637 $ 62,315 $ 147,159 $ 113,869
========== ========== ========== ==========
The following table is a reconciliation of basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for the
three and nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ---------
(in thousands)
Weighted average common shares
outstanding (a):
Basic............................. 124,021 137,655 125,520 140,436
Dilutive common stock options (b). 697 1,106 816 1,169
Restricted stock awards........... 1,135 698 954 838
Convertible notes dilution (c).... 881 2,327 1,844 2,327
---------- ---------- ---------- ---------
Diluted .......................... 126,734 141,786 129,134 144,770
========== ========== ========== =========
---------------
(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 $294.2 million of which has been completed through September
30, 2006.
(b) Common stock options to purchase 2,857 shares of common stock were
outstanding but not included in the computation of diluted income per share
from continuing operations for the three months ended September 30, 2006,
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 $27 million and $100 million principal amounts of
Convertible Notes outstanding on September 30, 2006 and December 31, 2005,
respectively. During 2006, holders converted $73 million principal amount
of the Convertible Notes. See Note E for additional information regarding
the 2006 conversions.
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 $658.7 million and $431.6 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.
27
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The following tables provide the Company's interim geographic operating
segment data for the three and nine months ended September 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.
28
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
United Africa Consolidated
States Canada and Other Headquarters Total
---------- ---------- ---------- ------------ ------------
(in thousands)
Three months ended
September 30, 2006:
Revenues and other income:
Oil and gas $ 346,295 $ 33,993 $ 37,818 $ - $ 418,106
Interest and other.............. - - - 15,229 15,229
Loss on disposition of assets,
net........................... (601) - - (107) (708)
---------- --------- ---------- ---------- ----------
345,694 33,993 37,818 15,122 432,627
---------- --------- ---------- ---------- ----------
Costs and expenses:
Oil and gas production.......... 83,905 14,283 4,781 - 102,969
Depletion, depreciation
and amortization............. 74,269 12,488 2,245 6,286 95,288
Exploration and abandonments.... 32,456 2,814 8,550 - 43,820
General and administrative...... - - - 30,421 30,421
Accretion of discount of asset
retirement obligations....... - - - 1,168 1,168
Interest........................ - - - 23,586 23,586
Other........................... - - - 14,779 14,779
---------- --------- ---------- ---------- ----------
190,630 29,585 15,576 76,240 312,031
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before income
taxes........................ 155,064 4,408 22,242 (61,118) 120,596
Income tax benefit (provisions). (56,599) (1,066) (15,742) 33,137 (40,270)
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations................... $ 98,465 $ 3,342 $ 6,500 $ (27,981) $ 80,326
========== ========== ========== ========= ==========
Three months ended
September 30, 2005:
Revenues and other income:
Oil and gas..................... $ 307,134 $ 29,571 $ 52,974 $ - $ 389,679
Interest and other.............. - - - 7,885 7,885
Gain on disposition of assets,
net.......................... 290 - - 85 375
---------- --------- ---------- ---------- ----------
307,424 29,571 52,974 7,970 397,939
---------- --------- ---------- ---------- ----------
Costs and expenses:
Oil and gas production.......... 74,594 9,766 8,449 - 92,809
Depletion, depreciation
and amortization............. 54,874 8,988 6,796 5,178 75,836
Impairment of long-lived assets. - - 21 - 21
Exploration and abandonments.... 46,757 1,405 8,202 - 56,364
General and administrative...... - - - 29,817 29,817
Accretion of discount of asset
retirement obligations....... - - - 1,094 1,094
Interest........................ - - - 28,862 28,862
Other........................... - - - 34,185 34,185
---------- --------- ---------- ---------- ----------
176,225 20,159 23,468 99,136 318,988
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before income
taxes........................ 131,199 9,412 29,506 (91,166) 78,951
Income tax benefit (provisions). (47,887) (3,435) (10,905) 44,789 (17,438)
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations................... $ 83,312 $ 5,977 $ 18,601 $ (46,377) $ 61,513
========== ========== ========== ========== ==========
29
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
United Africa Consolidated
States Canada and Other Headquarters Total
---------- ---------- ---------- ------------ ------------
(in thousands)
Nine months ended
September 30, 2006:
Revenues and other income:
Oil and gas..................... $ 987,388 $ 96,509 $ 121,247 $ - $ 1,205,144
Interest and other.............. - - - 42,081 42,081
Gain (loss) on disposition of
assets, net.................. (451) 77 - (3,810) (4,184)
---------- ---------- ---------- ---------- -----------
986,937 96,586 121,247 38,271 1,243,041
---------- ---------- ---------- ---------- -----------
Costs and expenses:
Oil and gas production.......... 245,366 35,977 19,375 - 300,718
Depletion, depreciation
and amortization.............. 205,190 32,156 10,680 17,652 265,678
Exploration and abandonments.... 139,072 9,410 61,598 - 210,080
General and administrative...... - - - 92,136 92,136
Accretion of discount of asset
retirement obligations........ - - - 3,470 3,470
Interest........................ - - - 82,928 82,928
Other........................... - - - 31,592 31,592
---------- ---------- ---------- ---------- -----------
589,628 77,543 91,653 227,778 986,602
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations before income
taxes......................... 397,309 19,043 29,594 (189,507) 256,439
Income tax benefit (provisions). (145,018) (6,279) (14,089) 54,192 (111,194)
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations.................... $ 252,291 $ 12,764 $ 15,505 $ (135,315) $ 145,245
========== ========== ========== ========== ===========
Nine months ended
September 30, 2005:
Revenues and other income:
Oil and gas..................... $ 810,255 $ 73,620 $ 149,967 $ - $ 1,033,842
Interest and other.............. - - - 21,936 21,936
Gain on disposition of assets,
net.......................... 2,322 - - 303 2,625
---------- ---------- --------- ---------- -----------
812,577 73,620 149,967 22,239 1,058,403
---------- ---------- --------- ---------- -----------
Costs and expenses:
Oil and gas production.......... 202,174 27,370 23,849 - 253,393
Depletion, depreciation
and amortization.............. 153,688 23,429 23,434 14,592 215,143
Impairment of long-lived assets - - 644 - 644
Exploration and abandonments.... 98,984 7,828 40,879 - 147,691
General and administrative...... - - - 83,901 83,901
Accretion of discount of asset
retirement obligations........ - - - 3,183 3,183
Interest........................ - - - 91,011 91,011
Other........................... - - - 58,739 58,739
---------- ---------- --------- ---------- -----------
454,846 58,627 88,806 251,426 853,705
---------- ---------- --------- ---------- -----------
Income (loss) from continuing
operations before income
taxes......................... 357,731 14,993 61,161 (229,187) 204,698
Income tax benefit (provisions). (130,571) (5,472) (21,440) 64,249 (93,234)
---------- ---------- --------- ---------- -----------
Income (loss) from continuing
operations.................... $ 227,160 $ 9,521 $ 39,721 $ (164,938) $ 111,464
========== ========== ========= ========== ===========
30
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
United Africa Consolidated
States Argentina Canada and Other Headquarters Total
----------- --------- --------- --------- ------------ ------------
(in thousands)
Segment assets (as of
September 30, 2006)... $ 6,080,674 $ - $ 541,695 $ 251,926 $ 123,990 $ 6,998,285
=========== ========= ========= ========= ========== ===========
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.................... (56,074) (87,157) (143,231)
----------- ------------ -----------
Deferred revenue at September 30, 2006.. $ 193,249 $ 518,358 $ 711,607
=========== ============ ===========
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........................ $ 47,096
2007.................................. 181,232
2008.................................. 158,138
2009.................................. 147,906
2010.................................. 90,215
2011.................................. 44,951
2012.................................. 42,069
-----------
$ 711,607
===========
31
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
economics of the field. Assuming that the Company will be able to "reef" a
substantial portion of East Cameron debris in place, the Company estimates that
it will cost approximately $86 million to reclaim and abandon the East Cameron
facility, based upon an analysis and fee proposal prepared by a third-party
engineering firm. 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. If
the Company is unable to reef a substantial portion of debris in place, the
total costs to reclaim and abandon the East Cameron facility may be
substantially more than the $86 million estimate that has been accrued as of
September 30, 2006. The Company believes that any additional costs incurred due
to an inability to reef the debris would be covered by insurance. The Company
updated its application to reef the debris in place and filed the modified
application with the appropriate regulatory agency during the third quarter of
2006. The Company expects to have more clarity around its reefing application by
the end of the fourth 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 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 uncertainties
around the final amount of the deductible related to the claim.
32
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
and Lookout Butte fields May 2005 $ 197.2 $ 138.3
United States Two Gulf of Mexico shelf August 2005 $ 59.2 $ 27.9
fields
United States Deepwater Gulf of Mexico March 2006 $ 1,156.3 (a) $ 724.7
fields
Argentina Argentine assets April 2006 $ 669.6 $ 10.9
-----------
(a) Net proceeds do not reflect the cash payment of $193.2 million for
terminated hedges associated with the deepwater Gulf of Mexico assets.
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 nine months ended September
30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(in thousands)
Revenues and other income:
Oil and gas................................ $ (312) $ 175,140 $ 199,365 $ 603,497
Interest and other......................... 1,959 1,575 23,217 63,753
Gain on disposition of assets.............. 2,989 27,494 735,773 166,274
---------- ---------- ---------- ----------
4,636 204,209 958,355 833,524
---------- ---------- ---------- ----------
Costs and expenses:
Oil and gas production..................... 22 28,319 31,264 91,923
Depletion, depreciation and
amortization............................ - 61,975 37,327 227,828
Exploration and abandonments............... 122 7,742 7,327 36,221
General and administrative................. 78 2,933 9,047 7,783
Accretion of discount on asset
retirement obligation.................... - 874 804 3,027
Interest................................... - 406 460 1,720
Other...................................... 4,239 3,988 5,951 8,736
---------- ---------- ---------- ----------
4,461 106,237 92,180 377,238
---------- ---------- ---------- ----------
Income from discontinued operations
before income taxes........................ 175 97,972 866,175 456,286
Income tax benefit (provision):
Current.................................... (412) 1,056 (152,987) (6,833)
Deferred................................... 710 (36,968) (146,388) (167,128)
---------- ---------- ---------- ----------
Income from discontinued operations,
net of tax ................................ $ 473 $ 62,060 $ 566,800 $ 282,325
========== ========== ========== ==========
33
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The Company has provided the purchaser of its Argentine assets certain
indemnifications and remains responsible for certain contingent liabilities,
subject to defined limitations. The Company does not currently believe that
these obligations, which primarily pertain to matters of litigation,
environmental contingencies, royalty obligations and income taxes, are probable
of having a material impact on its liquidity, financial position or future
results of operations.
34
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 third quarter of
2006 included the following highlights:
o The recognition of income from continuing operations of $80.3 million ($.64
per diluted share) for the third quarter of 2006, as compared to $61.5
million ($.44 per diluted share) for the third quarter of 2005.
o The recognition of third quarter 2006 net income of $80.8 million ($.64 per
diluted share), as compared to $123.6 million ($.88 per diluted share) for
the third quarter of 2005. The decrease in net income is reflective of a
$61.6 million ($.44 per diluted share) decrease in income from discontinued
operations, which is due to the sale of two of the Company's Gulf of Mexico
shelf fields during August 2005 and substantially all of the Company's
deepwater Gulf of Mexico and Argentine assets during March and April 2006,
respectively.
o A reduction in net cash provided by operating activities to $182.7 million
for the third quarter of 2006 from $309.8 million during the third 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 During the third quarter of 2006, the Company extended the maturity on $1.4
billion of its $1.5 billion loan commitments under the Credit Agreement by
one year.
o A reduction in outstanding debt of $863.9 million, or 42 percent, as of
September 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 29
percent at September 30, 2006 from 48 percent at December 31, 2005.
o During the third quarter of 2006, the Company repurchased 3.1 million
shares of its common stock at an aggregate cost of $124.4 million. Through
the nine months ended September 30, 2006, the Company has repurchased 7.5
million shares of its common stock at an aggregate cost of $294.2 million.
The Company had approximately $65 million of remaining purchases to
complete under its $1 billion share repurchase program as of September 30,
2006.
o The August 25 declaration of a $.13 per common share dividend payable
October 12, 2006 to shareholders of record on September 28, 2006. This
declaration represented the second consecutive year during which the
Company has increased its dividends on common stock.
Fourth Quarter 2006 Outlook
Based on current estimates, the Company expects that fourth quarter 2006
production will average 98,000 to 103,000 BOEPD. The lower end of the range
reflects the typical variability in the timing of oil cargo shipments in South
Africa and Tunisia.
Fourth 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 $10.00 to $11.00 per BOE.
Total exploration and abandonment expense is expected to be $45 million to
$110 million and could include (i) $15 million to $30 million attributable to
the unsuccessful Flying Cloud exploration well (deepwater Gulf of Mexico) and a
well currently drilling to test the Mississippi Norphlet play, (ii) $45 million
related to activities in the Edwards Trend, Uinta/Piceance basins, Canada and
Tunisia resource plays, and associated acreage abandonments, and (iii) $30
million to $35 million for seismic investments and personnel, primarily related
to the onshore resource plays Pioneer is currently pursuing. General and
administrative expense is expected to be $29 million to $33 million. Interest
expense is expected to be $24 million to $28 million. Interest income, primarily
from cash investments, is expected to be $1 million to $3 million. Accretion of
discount on asset retirement obligations is expected to be $1 million to $2
million.
35
PIONEER NATURAL RESOURCES COMPANY
The Company's fourth 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.
Acquisitions, Divestments, Operations and Drilling Highlights
During the first nine months 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 nine months of 2006, the Company incurred $1.1 billion in
finding and development costs including $646.4 million for development
activities, $334.8 million for exploration activities and $155.9 million for
acquisitions and land. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure associated with successful drilling activities.
The following table summarizes by geographic area the Company's finding
and development costs incurred, excluding asset retirement obligations, during
the first nine months of 2006 and the total wells planned to be drilled during
the year ending December 31, 2006:
Acquisition Costs 2006
-------------------- Exploration Development Wells
Proved Unproved Costs Costs Total Planned
-------- -------- ----------- ----------- ---------- -------
($ in thousands)
United States:
Gulf of Mexico (a).. $ - $ 10 $ 76,144 $ 8,621 $ 84,775 3
Onshore Gulf Coast.. 11,914 28,116 50,449 31,441 121,920 57
Permian Basin....... 38,476 23,681 6,740 190,541 259,438 335
Mid-Continent....... 103 - 140 21,159 21,402 16
Rocky Mountains..... 61 6,797 32,861 130,473 170,192 387
Alaska.............. 6,000 7,918 26,656 78,042 118,616 3
-------- -------- ---------- --------- ---------- ------
56,554 66,522 192,990 460,277 776,343 801
-------- -------- ---------- --------- ---------- ------
Argentina (a).......... - 2 10,223 25,543 35,768 -
Canada................. 27 19,801 80,790 75,817 176,435 271
Nigeria................ - 8,034 25,055 - 33,089 1
South Africa........... - - 163 84,977 85,140 5
Tunisia................ - 5,000 18,601 (233) 23,368 7
Other.................. - - 6,998 - 6,998 -
-------- -------- ---------- --------- ---------- ------
27 32,837 141,830 186,104 360,798 284
-------- -------- ---------- --------- ---------- ------
Total Worldwide..... $ 56,581 $ 99,359 $ 334,820 $ 646,381 $1,137,141 1,085
======== ======== ========== ========= ========== ======
-----------
(a) Approximately $8.2 million of the finding and development costs incurred
are associated with the divested deepwater Gulf of Mexico assets; and,
$35.8 million are associated with the divested Argentine assets. The
Company's $1.4 billion 2006 capital budget does not include (i) the costs
incurred on the divested deepwater Gulf Mexico assets or any of the
Argentine assets, because the Company was in the process of selling those
assets when the budget was prepared; (ii) capitalized interest, which
totaled $6.6 million to date in 2006; and (iii) geological and geophysical
personnel costs, which totaled $31.6 million to date in 2006.
36
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes the Company's development and
exploration/extension drilling activities for the nine months ended September
30, 2006:
Development Drilling
--------------------------------------------------------------------------------
Beginning Ending
Wells Wells Successful Unsuccessful Disposed Wells
in Progress Spud Wells Wells Wells in Progress
----------- ------- ---------- ------------ -------- -----------
United States........ 29 468 474 6 - 17
Argentina............ 2 21 14 1 8 -
Canada............... 3 2 2 - - 3
Africa............... - 4 1 - - 3
----- ------- ------- ------ ------ -----
Total Worldwide..... 34 495 491 7 8 23
===== ======= ======= ====== ====== =====
Exploration/Extension Drilling
--------------------------------------------------------------------------------
Beginning Ending
Wells Wells Successful Unsuccessful Disposed Wells
in Progress Spud Wells Wells Wells in Progress
----------- ------- ---------- ------------ -------- -----------
United States........ 7 50 32 5 - 20
Argentina............ 4 6 4 2 4 -
Canada............... 109 179 243 8 - 37
Africa............... 3 5 1 2 - 5
----- ------- ------- ------ ------ -----
Total Worldwide..... 123 240 280 17 4 62
===== ======= ======= ====== ====== =====
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 expects to develop the Clipper discovery and is
currently evaluating sub-sea tie-back options to third party production handling
facilities in the area. Pioneer operates the Clipper discovery with a 55 percent
working interest. During 2006, the Company drilled two successful Clipper
appraisal wells, but drilled an unsuccessful exploratory well at the Flying
Cloud prospect, a prospect near the Clipper discovery.
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
economics of the field. Assuming that the Company will be able to "reef" a
substantial portion of East Cameron debris in place, the Company estimates that
it will cost approximately $86 million to reclaim and abandon the East Cameron
facility, based upon an analysis and fee proposal prepared by a third-party
engineering firm. During the first quarter of 2006 and the third quarter of
2005, the Company recorded additional abandonment obligation charges of $42.0
million and $32.8 million, respectively, which amounts are included in
exploration and abandonments in the accompanying Consolidated Statements of
Operations. If the Company is unable to reef a substantial portion of debris in
place, the total costs to reclaim and abandon the East Cameron facility may be
substantially more than the $86 million estimate that has been accrued as of
September 30, 2006. The Company updated its application to reef the debris in
place and filed the modified application with the appropriate regulatory agency
during the third quarter of 2006. The Company expects to have more clarity
around its reefing application by the end of the fourth quarter of 2006. The
Company expects a substantial portion of the loss and any incremental cost if
the Company is unable to reef the debris in place to be covered by insurance.
Pioneer is currently pursuing the divestment of its Gulf of Mexico shelf
properties. No assurance can be given that Pioneer and any potential purchaser
will reach an agreement on final terms or that a sale will be consummated.
37
PIONEER NATURAL RESOURCES COMPANY
Onshore Gulf Coast area. In South Texas, the Company has five rigs working
in the Edwards Trend and expects to add another rig in early 2007. The Company
has 245,000 gross acres under lease and continues to develop its Pawnee field
while expanding the potential of the trend by drilling exploration and appraisal
wells on new field prospects. The Company drilled a new discovery during the
third quarter of 2006 and has drilled six discoveries to date in 2006. Two new
processing facilities were also added during the third quarter of 2006. The
Company has tied in five new discovery wells which are currently producing
approximately 6 MMcfpd, and has twelve Edwards expansion wells currently
drilling or waiting to be tied in to pipelines, including two wells that are
expected to begin producing in early November, which tested at approximately 3.5
MMcfpd each.
During the fourth quarter of 2006, the Company plans to test one new
prospect and drill five appraisal wells and four development wells. In addition,
approximately 850 square miles of 3-D seismic data will be acquired on new
discoveries in South Texas through 2007 to support new field development
drilling which is expected to be initiated mid-2007.
The Company has acquired and continues to acquire acreage positions in
Mississippi for its Norphlet and Cotton Valley resource plays. The Company is
currently drilling Norphlet and Cotton Valley test wells and expects to know the
well results by the end of 2006.
Permian Basin area. During 2006, the Company expects to drill approximately
335 wells, which is an increase of approximately 78 percent over the number of
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 acquired
over 90,000 additional gross acres in the area during 2006 and is drilling to
the deeper Wolfcamp formations in the majority of wells in the Spraberry field,
resulting in incremental production and proved reserves.
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 expects to drill
approximately 330 wells in the Raton field during 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 fourth quarter 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 completed
its extension pilot program and put these wells and existing wells to production
during third quarter of 2006 to assess production potential and water-handling
requirements. If the CBM projects are determined to have commercial quantities
of gas, 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 expects to drill an appraisal well to test the previous
Cosmopolitan discovery during 2007.
38
PIONEER NATURAL RESOURCES COMPANY
On the Oooguruk project, the Company continues to procure equipment and
services, fabricate equipment and modify a drilling rig for installation in
2007. Development drilling on the project is expected to begin in late 2007 and
first production is expected in 2008. In addition, during the 2006-2007 winter
drilling season the Company plans to drill two exploratory wells in the National
Petroleum Reserve - Alaska area.
Canada. The Company's current operations are focused upon CBM projects in
the Horseshoe Canyon area. In the Horseshoe Canyon area, the Company has drilled
85 wells through October 2006 and expects to complete and commence production on
approximately 120 wells by the end of the fourth quarter of 2006 and to place
approximately 55 additional wells on production in early 2007. The Company has
completed its 2006 Chinchaga area drilling program. The Company has completed
drilling its three Mannville CBM pilot projects and is currently production
testing the projects to determine if commercial quantities of gas can be
produced.
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 $34.0
million for the dry hole cost and related acreage impairment. The Company has a
25 percent working interest in the block. The partners plan to drill an
additional well on Block 256 in 2007 to test a different play type.
In 2005, 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 covering the block
during the fourth quarter of 2005 and the first quarter of 2006 and is currently
evaluating the data. The Company's subsidiary plans to drill the first
exploration well on the block during late 2007 or early 2008.
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.
The Company has been evaluating alternatives to reduce its future capital
commitments for its West Africa assets, including the possible divestment of
such assets. In that regard, the Company has retained a third party adviser to
assist it in marketing the assets and has opened a data room, which has been
visited by a number of potential purchasers. The Company expects that any offers
to purchase the properties will be received during the fourth quarter. Any
purchase would likely be subject to the approvals of the relevant governmental
authorities. No assurance can be given that any potential purchaser will be
willing to purchase the properties on terms acceptable to Pioneer or, if an
agreement is reached, that governmental approval will be obtained.
South Africa. During the first nine months of 2006, the Company and its
partner drilled three wells and plans to continue drilling the additional
development wells to develop the gas and condensate fields discovered offshore
South Africa. The Company also invested $51.7 million in facilities
infrastructure and design work, with installation expected to commence at the
end of 2006. First production from the South Coast Gas project is expected in
the second half of 2007.
Tunisia. In the Adam Concession, the Company spudded three appraisal wells
during 2006, of which the Adam 4 and Hawa 3 wells were successful and the Adam 5
was unsuccessful and expensed as a dry hole during the third quarter. An
additional exploration well is planned in the Adam Concession during the fourth
quarter of 2006. 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 it did not already own in February 2006, becoming the
operator of the block with 100 percent working interest. During 2006, the
Company completed a 3-D seismic survey on both the Jenein Nord block and Adam
Concession. The Company began drilling the Waha 1 well on the Jenein Nord block
during the third quarter of 2006 and expects to drill one additional well on the
Jenein Nord block during the fourth quarter of 2006. Also, a well is planned
during the fourth quarter of 2006 on the Borj El Khadra block, which is adjacent
to the Adam Concession.
39
PIONEER NATURAL RESOURCES COMPANY
Results of Operations
Oil and gas revenues. Oil and gas revenues from continuing operations
totaled $418.1 million and $1.2 billion for the three and nine month periods
ended September 30, 2006, respectively, as compared to $389.7 million and $1.0
billion for the same respective periods of 2005.
The increase in oil and gas revenues from continuing operations during the
three months ended September 30, 2006, as compared to the same period of 2005,
resulted from increases in sales prices, partially offset by decreases in sales
volumes. During the three months ended September 30, 2006, as compared to the
three months ended September 30, 2005, the Company reported a 67 percent
increase in oil prices, a 12 percent increase in NGL prices and a 12 percent
decrease in gas prices. The Company also realized a three percent decrease in
average daily BOE sales volumes, which is reflective of a decrease in oil
volumes sold, partially offset by increases in NGL and gas volumes. The increase
in oil and gas revenues from continuing operations during the nine months ended
September 30, 2006, resulted from increases in oil and NGL sales prices,
partially offset by a decline in reported sales volumes. In the year-to-date
comparisons, the Company reported a 75 percent increase in oil prices, a 21
percent increase in NGL prices and a three percent decrease in gas prices. The
Company also realized a decrease in oil volumes sold, partially offset by
increases in NGL and gas volumes sold.
The primary factors in the quarterly and nine-month relative 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.
The following table provides average daily sales volumes from continuing
operations, by geographic area and in total, for the three and nine months ended
September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Oil (Bbls):
United States................. 17,575 21,484 17,406 21,290
Canada........................ 312 209 299 194
Africa........................ 5,812 9,666 6,680 10,686
--------- --------- --------- ---------
Worldwide..................... 23,699 31,359 24,385 32,170
========= ========= ========= =========
NGLs (Bbls):
United States................. 18,884 18,176 18,599 16,835
Canada........................ 468 502 433 510
--------- --------- --------- ---------
Worldwide..................... 19,352 18,678 19,032 17,345
========= ========= ========= =========
Gas (Mcf):
United States................. 286,182 274,390 282,450 269,807
Canada........................ 46,664 37,562 42,456 36,160
--------- --------- --------- ---------
Worldwide..................... 332,846 311,952 324,906 305,967
========= ========= ========= =========
Total (BOE):
United States................. 84,155 85,391 83,080 83,093
Canada........................ 8,558 6,972 7,808 6,731
Africa........................ 5,812 9,666 6,680 10,686
--------- --------- --------- ---------
Worldwide..................... 98,525 102,029 97,568 100,510
========= ========= ========= =========
During the three months ended September 30, 2006, as compared to the three
months ended September 30, 2005, average daily sales volumes increased by 23
percent in Canada, while average daily sales volumes decreased by 40 percent in
Africa and one percent in the United States. During the nine months ended
September 30, 2006, as compared to the nine months ended September 30, 2005,
average daily sales volumes increased by 16 percent in Canada, while average
daily sales volumes decreased by 37 percent in Africa and remained essentially
40
PIONEER NATURAL RESOURCES COMPANY
unchanged in the United States. Canadian average daily sales volumes from
continuing operations increased due to new production from wells drilled and
connected to infrastructure during the fourth quarter of 2005 and the first nine
months of 2006. Partially offsetting these production increases were the
aforementioned increases in volumes sold under VPPs and production decreases in
Africa which were primarily attributed to normal production declines in the
Company's Sable oil field in South Africa and timing of oil shipments for both
South Africa and Tunisia.
During the three months ended September 30, 2006, as compared to the three
months ended September 30, 2005, average daily oil volumes delivered under the
Company's VPPs increased by 8,803 Bbls, while average daily gas volumes
delivered decreased by 7,957 Mcf (1,326 BOE). On a year-to-date comparison,
average daily oil volumes delivered under the Company's VPPs increased by 8,857
Bbls and average daily gas volumes delivered increased by 927 Mcf (154 BOE).
The following table provides average daily sales volumes from discontinued
operations, by geographic area and in total, during the three and nine months
ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Oil (Bbls):
United States................. - 3,715 3,208 5,478
Argentina..................... - 7,930 3,362 7,972
Canada........................ - - - 38
-------- --------- --------- ---------
Worldwide..................... - 11,645 6,570 13,488
======== ========= ========= =========
NGLs (Bbls):
United States................. - 131 - 87
Argentina..................... - 1,917 563 1,814
Canada........................ - 2 - 149
-------- --------- --------- ---------
Worldwide..................... - 2,050 563 2,050
======== ========= ========= =========
Gas (Mcf):
United States................. (140) 189,429 48,195 248,556
Argentina..................... - 142,399 58,700 136,023
Canada........................ - 347 58 8,676
-------- --------- --------- ---------
Worldwide..................... (140) 332,175 106,953 393,255
======== ========= ========= =========
Total (BOE):
United States................. (23) 35,416 11,241 46,992
Argentina..................... - 33,581 13,708 32,456
Canada........................ - 60 10 1,633
-------- --------- --------- ---------
Worldwide..................... (23) 69,057 24,959 81,081
======== ========= ========= =========
41
PIONEER NATURAL RESOURCES COMPANY
The oil, NGL 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 nine months
ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Average reported prices:
Oil (per Bbl):
United States.............. $ 70.96 $ 34.57 $ 66.91 $ 31.37
Canada..................... $ 70.44 $ 68.77 $ 70.09 $ 51.73
Africa..................... $ 70.73 $ 59.57 $ 66.49 $ 51.40
Worldwide.................. $ 70.89 $ 42.51 $ 66.83 $ 38.15
NGLs (per Bbl):
United States.............. $ 38.73 $ 34.40 $ 36.15 $ 29.78
Canada..................... $ 53.11 $ 49.93 $ 55.01 $ 43.22
Worldwide.................. $ 39.08 $ 34.82 $ 36.58 $ 30.18
Gas (per Mcf):
United States.............. $ 6.24 $ 7.18 $ 6.30 $ 6.67
Canada..................... $ 6.91 $ 7.51 $ 7.27 $ 6.57
Worldwide.................. $ 6.33 $ 7.22 $ 6.43 $ 6.66
Average realized prices:
Oil (per Bbl):
United States.............. $ 69.58 $ 60.61 $ 65.34 $ 52.35
Canada..................... $ 70.44 $ 68.77 $ 70.09 $ 51.73
Africa..................... $ 70.73 $ 59.57 $ 66.34 $ 51.40
Worldwide.................. $ 69.87 $ 60.35 $ 65.67 $ 52.03
NGLs (per Bbl):
United States.............. $ 38.73 $ 34.40 $ 36.15 $ 29.78
Canada..................... $ 53.11 $ 49.93 $ 55.01 $ 43.22
Worldwide.................. $ 39.08 $ 34.82 $ 36.58 $ 30.18
Gas (per Mcf):
United States.............. $ 5.70 $ 7.50 $ 6.07 $ 6.51
Canada..................... $ 6.28 $ 7.82 $ 6.82 $ 6.68
Worldwide.................. $ 5.77 $ 7.51 $ 6.17 $ 6.53
Hedging activities. The Company utilizes commodity swap and collar
contracts in order to (i) reduce the effect of price volatility on the
commodities the Company produces and sells, (ii) support the Company's annual
capital budgeting and expenditure plans and (iii) reduce commodity price risk
associated with certain capital projects. During the three and nine months ended
September 30, 2006, the Company's commodity price hedges decreased oil and gas
revenues from continuing operations by $28.2 million and $112.3 million,
respectively, as compared to $82.6 million and $159.4 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 nine months
ended September 30, 2006 and 2005.
Deferred revenue. During the three and nine months ended September 30,
2006, the Company's amortization of deferred VPP revenue increased oil and gas
revenues from continuing operations by $47.4 million and $143.2 million,
respectively, as compared to $21.9 million and $54.0 million during the same
respective periods in 2005. See Notes F and L of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for specific information
regarding the Company's VPPs.
Interest and other income. Interest and other income from continuing
operations for the three and nine months ended September 30, 2006 was $15.2
million and $42.1 million, respectively, as compared to $7.9 million and $21.9
million for the same respective periods in 2005. The $7.3 million increase in
42
PIONEER NATURAL RESOURCES COMPANY
interest and other income from continuing operations during the three months
ended September 30, 2006, as compared to the same period in 2005, was primarily
due to the Company's receipt of $5.6 million for Alaskan exploration incentive
tax credits during the third quarter of 2006, and a $5.2 million increase in
interest income primarily from the investment of Argentine divestiture proceeds,
partially offset by a $4.8 million decrease in business interruption insurance
recoveries associated with the 2005 Fain plant fire. Significant factors in the
$20.2 million increase in interest and other income from continuing operations
during the nine months ended September 30, 2006, as compared to the same period
in 2005, included an $11.4 million increase in interest income primarily from
the investment of Argentine and deepwater Gulf of Mexico divestiture proceeds,
the aforementioned Alaskan exploration incentive credits and a $4.0 million
increase in minority interest reimbursements, partially offset by an $10.6
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 $103.0 million and $300.7 million during the
three and nine months ended September 30, 2006, respectively, as compared to
$92.8 million and $253.4 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 15 percent and 22 percent, respectively, during the three and nine months
ended September 30, 2006, as compared to the same respective periods in 2005,
primarily due to (i) increases of approximately $.82 and $.99 per BOE,
respectively, resulting from 96 percent and 138 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 nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Lease operating expenses............ $ 5.98 $ 5.63 $ 6.12 $ 5.14
Third-party transportation charges.. 1.25 1.00 1.22 1.02
Taxes:
Ad valorem........................ 1.34 1.05 1.35 1.07
Production........................ 1.86 1.67 1.80 1.42
Workover costs...................... .93 .54 .80 .58
-------- -------- -------- --------
Total production costs............ $ 11.36 $ 9.89 $ 11.29 $ 9.23
======== ======== ======== ========
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
United States..................... $ 10.84 $ 9.50 $ 10.82 $ 8.91
Canada............................ $ 18.14 $ 15.23 $ 16.88 $ 14.90
Africa............................ $ 8.94 $ 9.50 $ 10.62 $ 8.19
Worldwide......................... $ 11.36 $ 9.89 $ 11.29 $ 9.23
Depletion, depreciation and amortization expense. The Company's total DD&A
expense from continuing operations was $10.51 and $9.97 per BOE for the three
and nine months ended September 30, 2006, respectively, as compared to $8.08 and
$7.84 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 $9.82 and $9.31 per BOE during the three and nine months ended
September 30, 2006, as compared to $7.53 and $7.31 per BOE during the same
respective periods in 2005. The increase in per BOE depletion expense from
43
PIONEER NATURAL RESOURCES COMPANY
continuing operations during the three and nine months ended September 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) downward revisions of
proved reserves during 2006 as compared to 2005, primarily due to the period end
commodity price declines, (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) $.03 and $1.30 per BOE increases in
respective Tunisian depletion expense primarily associated with a 2005 and 2006
decrease in the Company's working interest in the Adam Concession and (v) the
Company being limited in the amount of proved reserves that could be recorded in
Canada associated with its 2006 winter drilling program in Chinchaga until
certain well performance data is obtained. The increases were partially offset
by $5.78 and $3.64 per BOE respective 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 nine months ended September 30,
2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
United States.................. $ 9.59 $ 6.98 $ 9.05 $ 6.78
Canada......................... $ 15.86 $ 14.01 $ 15.09 $ 12.75
Africa......................... $ 4.20 $ 7.64 $ 5.86 $ 8.03
Worldwide...................... $ 9.82 $ 7.53 $ 9.31 $ 7.31
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 nine months ended September 30,
2006 and 2005:
United Africa
States Canada and Other Total
---------- --------- ------------ ----------
(in thousands)
Three months ended September 30, 2006:
Geological and geophysical.............. $ 19,390 $ 1,510 $ 6,092 $ 26,992
Exploratory dry holes................... 9,718 904 2,458 13,080
Leasehold abandonments and other........ 3,348 400 - 3,748
---------- --------- ---------- ----------
$ 32,456 $ 2,814 $ 8,550 $ 43,820
========== ========= ========== ==========
Three months ended September 30, 2005:
Geological and geophysical.............. $ 11,875 $ 892 $ 3,214 $ 15,981
Exploratory dry holes................... (19) 184 4,988 5,153
Leasehold abandonments and other........ 34,901 329 - 35,230
---------- --------- ---------- ----------
$ 46,757 $ 1,405 $ 8,202 $ 56,364
========== ========= ========== ==========
Nine months ended September 30, 2006:
Geological and geophysical.............. $ 52,012 $ 4,314 $ 26,105 $ 82,431
Exploratory dry holes................... 41,076 3,941 17,670 62,687
Leasehold abandonments and other........ 45,984 1,155 17,823 64,962
---------- --------- ---------- ----------
$ 139,072 $ 9,410 $ 61,598 $ 210,080
========== ========= ========== ==========
Nine months ended September 30, 2005:
Geological and geophysical.............. $ 49,201 $ 3,756 $ 23,073 $ 76,030
Exploratory dry holes................... 11,423 3,413 17,487 32,323
Leasehold abandonments and other........ 38,360 659 319 39,338
---------- --------- ---------- ----------
$ 98,984 $ 7,828 $ 40,879 $ 147,691
========== ========= ========== ==========
44
PIONEER NATURAL RESOURCES COMPANY
The Company's exploration and abandonment expense from continuing
operations during the third quarter of 2006 was primarily attributable to dry
hole provisions of $7.5 million and $1.8 million associated with the Company's
unsuccessful Gulf of Mexico shelf Antigua prospect and the Adam 5 well in
Tunisia, respectively, and property abandonment provisions. Significant
components of the Company's exploration and abandonment expense from continuing
operations during the nine months ended September 30, 2006 included (i) $34.0
million attributable to an unsuccessful well and related impairment of acreage
on the Company's Block 256 permit in Nigeria, (ii) $16.7 million associated with
three unsuccessful wells in the Company's winter drilling program in Alaska,
(iii) $20.0 million attributable to the write-off of the Company's Platypus and
Antigua prospects on the shelf of the Gulf of Mexico and (iv) various other
exploratory wells. The United States leasehold abandonments and other costs for
the nine months ended September 30, 2006 includes a $42.0 million increase in
East Cameron abandonment obligations that resulted from Hurricane Rita damage.
During the nine months ended September 30, 2006, the Company drilled and
evaluated 297 exploration/extension wells, 280 of which were successfully
completed as discoveries. During the same respective period in 2005, the Company
drilled and evaluated 97 exploration/extension wells, 73 of which were
successfully completed as discoveries.
General and administrative expense. General and administrative expense from
continuing operations for the three and nine months ended September 30, 2006 was
$30.4 million and $92.1 million, respectively, as compared to $29.8 million and
$83.9 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. The Company continues to monitor its general and administrative
expenses and is focused on a number of cost control initiatives to limit its
expenditures.
Interest expense. Interest expense from continuing operations was $23.6
million and $82.9 million for the three and nine months ended September 30,
2006, respectively, as compared to $28.9 million and $91.0 million for the same
respective periods in 2005. The weighted average interest rate on the Company's
indebtedness for the three and nine months ended September 30, 2006, including
the effects of interest rate derivatives and capitalized interest, was 6.1
percent and 6.5 percent, respectively, as compared to 6.6 percent and 6.5
percent for each of the same respective periods in 2005. The decrease in
interest expense from continuing operations during the three months ended
September 30, 2006, as compared to the same period of 2005, was primarily due to
a $2.9 million increase in interest capitalized on the Company's Oooguruk
development project in Alaska and South Coast Gas project in South Africa, a
$2.1 million decrease in interest incurred on senior notes, primarily resulting
from redemptions of higher yielding senior notes with proceeds from the issuance
of lower yielding senior notes, and reduced average borrowings under the
Company's Credit Agreement primarily as a result of the application of the
proceeds from the disposition of assets. The decrease in interest expense from
continuing operations during the nine months ended September 30, 2006, as
compared to the same period of 2005, was primarily due to a $12.3 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 $5.6 million increase in the
aforementioned capitalized interest. Partially offsetting these decreases were a
$5.0 million increase in interest incurred on Credit Agreement borrowings as a
result of higher average borrowings and Credit Agreement borrowing rates and a
$3.9 million decrease in the amortization of interest rate hedge gains.
Other expenses. Other expenses from continuing operations for the three and
nine months ended September 30, 2006 were $14.8 million and $31.6 million,
respectively, as compared to $34.2 million and $58.7 million for the same
respective periods in 2005. The decrease in other expenses from continuing
operations for the three months ended September 30, 2006, as compared to the
same period of 2005, is primarily attributable to $18.6 million of 2005 losses
on bond redemptions and a $7.8 million decrease in hedge ineffectiveness. The
decrease in other expenses from continuing operations during the nine months
ended September 30, 2006, as compared to the same period of 2005, is primarily
attributable to a $28.1 million decrease in hedge ineffectiveness and a $17.6
million decrease in losses on bond redemptions and conversions, partially offset
by a $6.3 million increase in litigation contingency accrual.
45
PIONEER NATURAL RESOURCES COMPANY
Income tax provision. The Company recognized income tax provisions on
continuing operations of $40.3 million and $111.2 million during the three and
nine months ended September 30, 2006, respectively, as compared to $17.4 million
and $93.2 million for the same respective periods in 2005. The Company's
effective tax rate on continuing operations of 33.4 percent and 43.4 percent
during the three and nine months ended September 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; during the nine months ended September 30, 2006, this primarily
related to a $13.5 million increase associated with the Texas margin tax
and $9.8 million decrease due to reductions in Canadian tax rates,
o statutes in foreign jurisdictions that differ from those in the United
States,
o recognition of $6.2 million of deferred tax benefit, in the third quarter
of 2006, as a result of conversion of senior convertible notes prior to the
Company's repayment of the debt principal (see Note E of Notes to
Consolidated Financial Statements) 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 nine month periods ended September 30, 2006,
this primarily related to Nigerian exploration expenses of approximately
$2.6 million and $41.8 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, changes in Canadian tax rates and the
effects of the 2005 Gabon divestment.
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 $0.5 million
and $566.8 million during the three and nine months ended September 30, 2006,
respectively, as compared to $62.1 million and $282.3 million for the same
respective periods of 2005. The income from discontinued operations for the
third quarter of 2006 is attributable to post-closing settlements on the
deepwater Gulf of Mexico and Argentine divestitures.
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.
46
PIONEER NATURAL RESOURCES COMPANY
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three and nine months ended September 30, 2006
totaled $342.2 million and $986.7 million, respectively, as compared to $406.2
million and $846.9 million for the same respective periods of 2005. During the
three and nine months ended September 30, 2006, the Company's expenditures for
additions to oil and gas properties were funded by $182.7 million and $644.3
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 months ended September 30, 2005, the
Company's additions to oil and gas properties were funded by $309.8 million of
net cash provided by operating activities and borrowings on the Company's lines
of credit. During the nine months ended September 30, 2005, the Company's
additions to oil and gas properties were internally funded by $923.4 million of
net cash provided by operating activities.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations, other liabilities, transportation
commitments and VPP obligations. From time-to-time, the Company enters into
off-balance sheet arrangements and transactions that can give rise to material
off-balance sheet obligations of the Company. As of September 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. 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 $332 million in the Company's drilling commitments, (iii) a
$437.3 million decrease in derivative obligations and (iv) a $69.4 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 nine
months ended September 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 may 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 $724.7 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 $669.6 million,
resulting in a gain of $10.9 million. The net cash proceeds from these
divestitures were used to reduce outstanding indebtedness under the Credit
Agreement and for general corporate purposes.
47
PIONEER NATURAL RESOURCES COMPANY
Operating activities. Net cash provided by operating activities during the
three and nine months ended September 30, 2006 was $182.7 million and $644.3
million, respectively, as compared to $309.8 million and $923.4 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. Investing activities used $367.2 million and $357.0
million of net cash during the three month periods ended September 30, 2006 and
2005, respectively, and provided $598.1 million and $302.2 million of net cash
during the nine month periods ended September 30, 2006 and 2005, respectively.
The increase in net cash provided by investing activities during the nine months
ended September 30, 2006 as compared to the nine months ended September 30, 2005
was primarily due to a $458.0 million increase in proceeds from disposition of
assets, partially offset by a $139.7 million increase in additions to oil and
gas properties.
Financing activities. Net cash used in financing activities during the
three months ended September 30, 2006 was $172.4 million, as compared to net
cash provided by financing activities of $52.6 million during the same period in
2005. Net cash used in financing activities during the nine months ended
September 30, 2006 and 2005 was $1.2 billion.
During February 2006, the Board declared a semiannual dividend of $.12 per
common share, payable 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. During August 2006, the Board declared a semiannual
dividend of $.13 per common share, payable on October 12, 2006 to shareholders
of record on September 28, 2006. Associated therewith, the Company paid $16.4
million of aggregate dividends during October 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 nine
months ended September 30, 2006, the Company expended $125.2 million to acquire
3.2 million shares of treasury stock and $297.6 million to acquire 7.5 million
shares of treasury stock, respectively, of which $124.4 million and $294.2
million, respectively, 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 2006, holders of $73 million of the Company's Convertible Notes
exercised their conversion rights. Associated therewith, the Company paid $58.3
million in cash, issued 1.7 million shares and recorded a $16.1 million increase
to stockholders' equity. 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 for cash at par value.
The Company's financing activities through September 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. Effective September 29, 2006, the participating lenders extended the
maturity on $1.395 billion of aggregate loan commitments under the Credit
Agreement to September 30, 2011.
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.
48
PIONEER NATURAL RESOURCES COMPANY
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 September 30, 2006.
After deducting $153.6 million of undrawn and outstanding letters of credit
under the Credit Agreement, the Company had $1.3 billion of unused borrowing
capacity as of September 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 nine months of 2006, primarily as a result of the Company's downgrades by
the rating agencies, the Company increased its outstanding letters of credits by
approximately $69 million pursuant to agreements that contain provisions with
rating triggers. The downgrades are not expected to materially affect the
Company's financial position or liquidity, but could negatively impact the
Company's ability to obtain additional financing or the interest rate and fees
associated with such additional financing.
Book capitalization and current ratio. The Company's book capitalization at
September 30, 2006 was $4.2 billion, consisting of debt of $1.2 billion and
stockholders' equity of $3.0 billion. The Company's debt to book capitalization
decreased to 29 percent at September 30, 2006 from 48 percent at December 31,
2005, primarily due to the recording of gains and the application of proceeds
from the aforementioned asset dispositions. The Company's ratio of current
assets to current liabilities was .59 to 1.00 at September 30, 2006 as compared
to .60 to 1.00 at December 31, 2005.
New accounting pronouncement. In July 2006, the FASB issued Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48"). The
Interpretation clarifies the accounting for income taxes by prescribing a
minimum recognition threshold that a tax position is required to meet before
being recognized in the financial statements. FIN No. 48 also provides guidance
on measurement, classification, interim accounting and disclosure. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. The Company is
continuing to assess potential impacts of this Interpretation.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. SFAS is effective for
fiscal years beginning after November 15, 2007. The Company is continuing to
assess the impact of SFAS 157.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for
Defined Benefit Pension and other Postretirement Plans" ("SFAS 158"). Under SFAS
158, a business entity that sponsors one or more single-employer defined benefit
plans is required to:
o recognize the funded status of a benefit plan--measured as the difference
between plan assets at fair value (with limited exceptions) and the benefit
obligation--in its statement of financial position,
o recognize as a component of other comprehensive income, net of tax, the
gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost,
o measure defined benefit plan assets and obligations as of the date of the
employer's fiscal year-end statement of financial position and
o disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses, prior service costs
or credits, and transition asset or obligation.
49
PIONEER NATURAL RESOURCES COMPANY
An employer with publicly traded securities is required to initially
recognize the funded status of its defined benefit postretirement plans and to
provide the required disclosures as of the end of the first fiscal year ending
after December 15, 2006. The Company will adopt the provisions of SFAS 158
effective on December 31, 2006. The Company's presently recognizes the funded
status of its defined benefit postretirement plans. Consequently, the adoption
of SFAS 158 is not expected to have a material impact on the Company's
liquidity, financial position or future results of operations.
50
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 nine months of 2006:
Derivative Contract Net Liabilities (a)
----------------------------------------------------
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 value (b)........ 168,493 78 1,349 169,920
Contract maturities....................... 122,767 (78) - 122,689
Contract terminations..................... 293,467 - (1,349) 292,118
----------- -------- -------- ----------
Fair value of contracts outstanding
as of September 30, 2006............... $ (163,750) $ - $ - $ (163,750)
=========== ======== ======== ==========
---------------
(a) Represents the fair values of open derivative contracts subject to market
risk. The Company also had $99.4 million and $870 thousand of obligations
under terminated derivatives as of September 30, 2006 and December 31,
2005, respectively, for which no market risk exists.
(b) At inception, derivative contracts entered into by the Company have no
intrinsic value.
Foreign exchange rate sensitivity. From time to time, the Company's
Canadian subsidiary enters into short-term forward currency agreements to
purchase Canadian dollars with U.S. dollar gas sales proceeds. The Company does
not designate these derivatives as hedges due to their short-term nature. There
were no outstanding forward currency agreements at September 30, 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 $1.3 million of deferred gains. See Note E of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" and
Capital Commitments, Capital Resources and Liquidity included in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding these debt transactions.
51
PIONEER NATURAL RESOURCES COMPANY
The following table provides information about other financial instruments
to which the Company was a party as of September 30, 2006 and that are sensitive
to changes in interest rates. For debt obligations, the table presents
maturities by expected maturity dates, the weighted average interest rates
expected to be paid on the debt given current contractual terms and market
conditions and the debt's estimated fair value. For fixed rate debt, the
weighted average interest rate represents the contractual fixed rates that the
Company was obligated to periodically pay on the debt as of September 30, 2006.
As of September 30, 2006, the Company was not a party to material derivatives
that would subject it to interest rate sensitivity.
Interest Rate Sensitivity
Debt Obligations as of September 30, 2006
Three Months Liability
ending Year ending December 31, Fair Value at
December 31, -------------------------------------------------------------------- September 30,
2006 2007 2008 2009 2010 Thereafter Total 2006
------------ ------- ------- ------- ------- ---------- ---------- -------------
($ in thousands)
Total Debt:
Fixed rate principal
maturities (a)..... $ - $32,075 $ 3,777 $ - $ - $1,259,985 $1,295,837 $1,299,742
Weighted average
interest rate...... 6.52 6.51 6.48 6.48 6.48 6.48
-------------
(a) Represents maturities of principal amounts excluding (i) debt issuance
discounts and premiums and (ii) net deferred fair value hedge losses.
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 September 30, 2006. As of September 30,
2006, the Company was a party to one gas index basis swap that is not designated
as a hedge and which represented a $9 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.
52
PIONEER NATURAL RESOURCES COMPANY
Oil and Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2006
Asset
Three months Year ending (Liability)
Ending December 31, Fair Value at
December 31, --------------------- September 30,
2006 2007 2008 2006
------------ -------- --------- -------------
(in thousands)
Oil Hedge Derivatives:
Average daily notional Bbl volumes:
Swap contracts............................ 5,000 6,000 6,500 $(171,573)
Weighted average fixed price per Bbl.... $ 37.20 $ 31.26 $ 31.19
Collar contracts (a)...................... 6,500 1,000 - $ (7,322)
Weighted average ceiling price
per Bbl.............................. $ 66.41 $ 89.00 $ -
Weighted average floor price per Bbl.... $ 41.92 $ 50.00 $ -
Average forward NYMEX oil prices (b)........ $ 57.82 $ 65.15 $ 68.72
Gas Hedge Derivatives:
Average daily notional MMBtu volumes (c):
Swap contracts (a)........................ 63,875 59,195 15,000 $ (5,503)
Weighted average fixed price per MMbtu.. $ 4.32 $ 7.06 8.62
Collar contracts.......................... 95,000 6,164 $ 20,648
Weighted average ceiling price
per MMbtu............................ $ 14.49 $ 11.52 $ -
Weighted average floor price per MMbtu.. $ 6.55 $ 9.00 $ -
Average forward NYMEX gas prices (b)........ $ 7.32 $ 8.06 $ 7.68
-------------
(a) Subsequent to September 30, 2006, the Company (i) reduced its oil hedge
position by terminating 2007 oil swap contracts for 1,000 Bbls per day with
a fixed price of $30.80 per Bbl and terminating the 2007 oil collar
contracts that are included in the table above and (ii) increased its gas
hedge position by entering into gas swap contracts for 40,000 MMBtu per day
of forecasted 2007 gas sales at a weighted average price per MMBtu of $7.40
(Panhandle Eastern Pipeline Oklahoma (mainline) index price) and 10,000
MMBtu per day of forecasted 2007 gas sales at a weighted average price per
MMBtu of $7.80 (Houston Ship Channel index price).
(b) The average forward NYMEX oil and gas prices are based on October 30, 2006
market quotes.
(c) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to convert the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap and
collar contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
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.
53
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 Notes I and N 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.
54
PIONEER NATURAL RESOURCES COMPANY
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company's purchases of treasury stock
during the three months ended September 30, 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 (b)
------ ----------------- -------------- ---------------------- ---------------------
July 2006........... - $ - -
August 2006......... 812,711 $ 42.03 795,100
September 2006...... 2,352,494 $ 38.70 2,351,700
----------- ------------
Total.......... 3,165,205 $ 39.56 3,146,800 $ 65,100,421
=========== ============ =============
-----------
(a) Amounts include shares withheld to satisfy tax withholding on employees'
stock awards for which restrictions have lapsed.
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 $294 million has been
completed through September 30, 2006.
Item 6. Exhibits
Exhibits
31.1 (a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 (a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 (b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 (b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
---------------
(a) Filed herewith.
(b) Furnished herewith.
55
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: November 6, 2006 By: /s/ Richard P. Dealy
--------------------------------
Richard P. Dealy
Executive Vice President and Chief
Financial Officer
Date: November 6, 2006 By: /s/ Darin G. Holderness
--------------------------------
Darin G. Holderness
Vice President and Chief
Accounting Officer
56
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
-------------
31.1 (a) Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 (a) Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 (b) Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 (b) Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
---------------
(a) Filed herewith.
(b) Furnished herewith.
57