UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

 

or

 

o 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

5205 N. O'Connor Blvd., Suite 200, Irving, Texas

 

75039

(Address of principal executive offices)

 

(Zip Code)

 

(972) 444-9001

(Registrant's telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

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

o

 

Non-accelerated filer

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

 

Number of shares of Common Stock outstanding as of August 7, 2007

123,161,645

 

 

 


 

PIONEER NATURAL RESOURCES COMPANY

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

Cautionary Statement Concerning Forward-Looking Statements

 

2

 

 

 

Definitions of Certain Terms and Conventions Used Herein

 

3

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.      Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

 

4

 

 

 

Consolidated Statements of Operations for the three and six months ended

June 30, 2007 and 2006

 

 

6

 

 

 

Consolidated Statement of Stockholders' Equity for the six months ended

June 30, 2007

 

 

7

 

 

 

Consolidated Statements of Cash Flows for the three and six months ended

June 30, 2007 and 2006

 

 

8

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months

ended June 30, 2007 and 2006

 

 

9

 

 

 

Notes to Consolidated Financial Statements

 

10

 

 

 

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations

 

32

 

 

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

 

49

 

 

 

Item 4.      Controls and Procedures

 

52

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.      Legal Proceedings

 

53

 

 

 

Item 1A.   Risk Factors

 

53

 

 

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

Item 4.      Submission of Matters to a Vote of Security Holders

 

54

 

 

 

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 the year ended December 31, 2006 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:

 

"Bbl" means a standard barrel containing 42 United States gallons.

"Bcf" means one billion cubic feet and is a measure of natural gas volume.

"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.

"BOEPD" means BOE per day.

"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.

"CBM" means coal bed methane.

"IPO" means initial public offering.

"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.

"MBbl" means one thousand Bbls.

"MBOE" means one thousand BOEs.

"Mcf" means one thousand cubic feet and is a measure of natural gas volume.

"MMBbl" means one million Bbls.

"MMBOE" means one million BOEs.

"MMBtu" means one million Btus.

"MMcfpd" means one million cubic feet per day.

"NGL" means natural gas liquid.

"NYMEX" means the New York Mercantile Exchange.

"Pioneer" or "the Company" means Pioneer Natural Resources Company and its subsidiaries.

"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.

"SEC" means the United States Securities and Exchange Commission.

"VPP" means volumetric production payment.

"U.S." means United States.

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.

Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

 

3

 


PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

PIONEER NATURAL RESOURCES COMPANY

 

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,318

 

$

7,033

 

Accounts receivable:

 

 

 

 

 

 

 

Trade, net of allowance for doubtful accounts of $7,119 and $6,999 as of June 30, 2007 and December 31, 2006, respectively

 

 

198,725

 

 

195,534

 

Due from affiliates

 

 

653

 

 

3,837

 

Income taxes receivable

 

 

61,291

 

 

24,693

 

Inventories

 

 

108,483

 

 

95,131

 

Prepaid expenses

 

 

5,999

 

 

11,509

 

Deferred income taxes

 

 

90,549

 

 

82,927

 

Other current assets:

 

 

 

 

 

 

 

Derivatives

 

 

56,812

 

 

63,665

 

Other

 

 

49,392

 

 

52,229

 

Total current assets

 

 

597,222

 

 

536,558

 

Property, plant and equipment, at cost:

 

 

 

 

 

 

 

Oil and gas properties, using the successful efforts method of accounting:

 

 

 

 

 

 

 

Proved properties

 

 

8,894,449

 

 

7,967,708

 

Unproved properties

 

 

215,196

 

 

210,344

 

Accumulated depletion, depreciation and amortization

 

 

(2,099,722

)

 

(1,895,408

)

Total property, plant and equipment

 

 

7,009,923

 

 

6,282,644

 

Deferred income taxes

 

 

478

 

 

345

 

Goodwill

 

 

309,830

 

 

309,908

 

Other property and equipment, net

 

 

131,381

 

 

131,840

 

Other assets:

 

 

 

 

 

 

 

Derivatives

 

 

4,703

 

 

4,333

 

Other, net of allowance for doubtful accounts of $4,039 and $4,045 as of June 30, 2007 and December 31, 2006, respectively

 

 

84,326

 

 

89,771

 

 

 

$

8,137,863

 

$

7,355,399

 

 

 

 

 

The financial information included as of June 30, 2007 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)

 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

 

 

Trade

 

$

312,825

 

$

332,795

 

Due to affiliates

 

 

10,777

 

 

17,025

 

Interest payable

 

 

41,274

 

 

31,008

 

Income taxes payable

 

 

15,765

 

 

12,865

 

Other current liabilities:

 

 

 

 

 

 

 

Derivatives

 

 

137,343

 

 

141,898

 

Deferred revenue

 

 

169,812

 

 

181,232

 

Other

 

 

192,395

 

 

170,156

 

Total current liabilities

 

 

880,191

 

 

886,979

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,229,988

 

 

1,497,162

 

Derivatives

 

 

71,468

 

 

125,459

 

Deferred income taxes

 

 

1,264,590

 

 

1,172,507

 

Deferred revenue

 

 

404,343

 

 

483,279

 

Other liabilities and minority interests

 

 

197,061

 

 

205,342

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $.01 par value: 500,000,000 shares authorized; 123,228,975 and 122,686,073 shares issued at June 30, 2007 and December 31, 2006, respectively

 

 

1,232

 

 

1,227

 

Additional paid-in capital

 

 

2,674,749

 

 

2,654,047

 

Treasury stock, at cost: 2,093,392 and 1,183,090 shares at June 30, 2007 and December 31, 2006, respectively

 

 

(91,454

)

 

(53,274

)

Retained earnings

 

 

538,542

 

 

497,488

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

Net deferred hedge losses, net of tax

 

 

(126,142

)

 

(167,220

)

Cumulative translation adjustment

 

 

93,295

 

 

52,403

 

Total stockholders' equity

 

 

3,090,222

 

 

2,984,671

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

$

8,137,863

 

$

7,355,399

 

 

 

 

 

 

 

The financial information included as of June 30, 2007 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

458,032

 

$

407,570

 

$

849,950

 

$

787,038

 

Interest and other

 

 

27,690

 

 

9,741

 

 

41,606

 

 

22,852

 

Loss on disposition of assets, net

 

 

(1,802

)

 

(3,403

)

 

(1,542

)

 

(3,476

)

 

 

 

483,920

 

 

413,908

 

 

890,014

 

 

806,414

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

120,417

 

 

103,066

 

 

224,830

 

 

197,749

 

Depletion, depreciation and amortization

 

 

103,979

 

 

87,984

 

 

196,117

 

 

170,390

 

Impairment of long-lived assets

 

 

17,891

 

 

 

 

17,891

 

 

 

Exploration and abandonments

 

 

69,790

 

 

41,618

 

 

146,162

 

 

124,260

 

General and administrative

 

 

30,811

 

 

29,468

 

 

65,255

 

 

61,715

 

Accretion of discount on asset retirement obligations

 

 

2,146

 

 

1,154

 

 

4,204

 

 

2,302

 

Interest

 

 

30,502

 

 

22,766

 

 

58,996

 

 

59,342

 

Hurricane activity, net

 

 

47,000

 

 

 

 

60,548

 

 

38,000

 

Other

 

 

10,195

 

 

11,759

 

 

18,608

 

 

16,813

 

 

 

 

432,731

 

 

297,815

 

 

792,611

 

 

670,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

51,189

 

 

116,093

 

 

97,403

 

 

135,843

 

Income tax provision

 

 

(16,284

)

 

(50,207

)

 

(32,203

)

 

(70,924

)

Income from continuing operations

 

 

34,905

 

 

65,886

 

 

65,200

 

 

64,919

 

Income from discontinued operations, net of tax

 

 

1,575

 

 

22,153

 

 

873

 

 

566,327

 

Net income

 

$

36,480

 

$

88,039

 

$

66,073

 

$

631,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.29

 

$

0.52

 

$

0.53

 

$

0.52

 

Income from discontinued operations, net of tax

 

 

0.01

 

 

0.18

 

 

0.01

 

 

4.48

 

Net income

 

$

0.30

 

$

0.70

 

$

0.54

 

$

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.29

 

$

0.52

 

$

0.53

 

$

0.52

 

Income from discontinued operations, net of tax

 

 

0.01

 

 

0.17

 

 

0.01

 

 

4.34

 

Net income

 

$

0.30

 

$

0.69

 

$

0.54

 

$

4.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

121,226

 

 

125,629

 

 

121,374

 

 

126,282

 

Diluted

 

 

122,776

 

 

129,624

 

 

122,847

 

 

130,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

 

$

 

$

0.13

 

$

0.12

 

 

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, except dividends per share)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive
Income (Loss)

 

 

 

 

 

Shares
Outstanding

 

Common
Stock

 

Additional
Paid-in
Capital

 

Treasury
Stock

 

Retained
Earnings

 

Net Deferred
Hedge Losses,
Net of Tax

 

Cumulative
Translation
Adjustment

 

Total
Stockholders'
Equity

 

Balance as of January 1, 2007

 

121,502

 

$

1,227

 

$

2,654,047

 

$

(53,274

)

$

497,488

 

$

(167,220

)

$

52,403

 

$

2,984,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared ($.13 per share)

 

 

 

 

 

 

 

 

 

(16,035

)

 

 

 

 

 

(16,035

)

Exercise of long-term incentive plan stock options

 

372

 

 

 

 

 

 

16,069

 

 

(8,984

)

 

 

 

 

 

7,085

 

Purchase of treasury stock

 

(1,281

)

 

 

 

 

 

(54,249

)

 

 

 

 

 

 

 

(54,249

)

Tax benefits related to stock-based compensation

 

 

 

 

 

4,352

 

 

 

 

 

 

 

 

 

 

4,352

 

Compensation costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation awards

 

543

 

 

5

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

Compensation costs included in net income

 

 

 

 

 

16,355

 

 

 

 

 

 

 

 

 

 

16,355

 

Net income

 

 

 

 

 

 

 

 

 

66,073

 

 

 

 

 

 

66,073

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net hedging activity, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred hedge gains

 

 

 

 

 

 

 

 

 

 

 

17,292

 

 

 

 

17,292

 

Net hedge losses included in
continuing operations

 

 

 

 

 

 

 

 

 

 

 

23,786

 

 

 

 

23,786

 

Translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

40,892

 

 

40,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2007

 

121,136

 

$

1,232

 

$

2,674,749

 

$

(91,454

)

$

538,542

 

$

(126,142

)

$

93,295

 

$

3,090,222

 

 

 

 

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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,480

 

$

88,039

 

$

66,073

 

$

631,246

 

Adjustments to reconcile net income to net cash provided by operating
activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

103,979

 

 

87,984

 

 

196,117

 

 

170,390

 

Impairment of long-lived assets

 

 

17,891

 

 

 

 

17,891

 

 

 

Exploration expenses, including dry holes

 

 

42,921

 

 

17,354

 

 

89,886

 

 

69,936

 

Hurricane activity

 

 

47,000

 

 

 

 

66,000

 

 

42,000

 

Deferred income taxes

 

 

52,628

 

 

50,223

 

 

63,394

 

 

67,184

 

Loss on disposition of assets, net

 

 

1,802

 

 

3,403

 

 

1,542

 

 

3,476

 

Loss on extinguishment of debt

 

 

 

 

8,076

 

 

 

 

8,076

 

Accretion of discount on asset retirement obligations

 

 

2,146

 

 

1,154

 

 

4,204

 

 

2,302

 

Discontinued operations

 

 

(61

)

 

(1,002

)

 

(2,167

)

 

(540,655

)

Interest expense

 

 

4,487

 

 

2,118

 

 

9,213

 

 

5,165

 

Commodity hedge related activity

 

 

4,734

 

 

(6,061

)

 

10,633

 

 

(5,553

)

Amortization of stock-based compensation

 

 

8,617

 

 

10,824

 

 

16,355

 

 

18,310

 

Amortization of deferred revenue

 

 

(45,322

)

 

(47,886

)

 

(90,356

)

 

(95,835

)

Other noncash items

 

 

3,125

 

 

4,892

 

 

(3,152

)

 

7,591

 

Change in operating assets and liabilities, net of effects from acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

15,789

 

 

37,137

 

 

562

 

 

163,165

 

Income taxes receivable

 

 

(49,156

)

 

104

 

 

(36,598

)

 

(15

)

Inventories

 

 

(11,393

)

 

(18,994

)

 

(9,404

)

 

(39,125

)

Prepaid expenses

 

 

4,064

 

 

14,228

 

 

5,219

 

 

1,964

 

Other current assets, net

 

 

(399

)

 

(341

)

 

(187

)

 

9,207

 

Accounts payable

 

 

(7,996

)

 

(18,758

)

 

(32,586

)

 

(96,413

)

Interest payable

 

 

13,736

 

 

8,826

 

 

10,266

 

 

(10,274

)

Income taxes payable

 

 

(3,915

)

 

(78,236

)

 

2,900

 

 

55,815

 

Other current liabilities

 

 

(23,795

)

 

(4,438

)

 

(38,446

)

 

8,927

 

Net cash provided by operating activities

 

 

217,362

 

 

158,646

 

 

347,359

 

 

476,884

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from disposition of assets, net of cash sold

 

 

13,272

 

 

679,371

 

 

18,037

 

 

1,642,562

 

Additions to oil and gas properties

 

 

(536,152

)

 

(309,544

)

 

(974,799

)

 

(644,432

)

Additions to other assets and other property and equipment, net

 

 

(16,102

)

 

(26,291

)

 

(29,675

)

 

(32,839

)

Net cash provided by (used in) investing activities

 

 

(538,982

)

 

343,536

 

 

(986,437

)

 

965,291

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under long-term debt

 

 

369,000

 

 

534,219

 

 

1,091,000

 

 

898,490

 

Principal payments on long-term debt

 

 

 

 

(438,571

)

 

(361,555

)

 

(1,702,842

)

Payments of other liabilities

 

 

(3,805

)

 

(1,428

)

 

(9,560

)

 

(17,858

)

Exercise of long-term incentive plan stock options

 

 

4,716

 

 

2,744

 

 

7,085

 

 

4,666

 

Purchase of treasury stock

 

 

(22,812

)

 

(170,464

)

 

(54,249

)

 

(172,445

)

Excess tax benefits from share-based payment arrangements

 

 

2,781

 

 

918

 

 

4,321

 

 

1,933

 

Payment of financing fees

 

 

(776

)

 

(2,169

)

 

(4,295

)

 

(2,169

)

Dividends paid

 

 

(16,035

)

 

(15,510

)

 

(16,035

)

 

(15,510

)

Net cash provided by (used in) financing activities

 

 

333,069

 

 

(90,261

)

 

656,712

 

 

(1,005,735

)

Net increase in cash and cash equivalents

 

 

11,449

 

 

411,921

 

 

17,634

 

 

436,440

 

Effect of exchange rate changes on cash and cash equivalents

 

 

519

 

 

2,139

 

 

651

 

 

1,800

 

Cash and cash equivalents, beginning of period

 

 

13,350

 

 

42,982

 

 

7,033

 

 

18,802

 

Cash and cash equivalents, end of period

 

$

25,318

 

$

457,042

 

$

25,318

 

$

457,042

 

 

 

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

(in thousands)

(Unaudited)

 

 

 

 

 

Three Months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,480

 

$

88,039

 

$

66,073

 

$

631,246

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net hedge activity, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred hedge gains (losses)

 

 

28,367

 

 

(1,806

)

 

17,292

 

 

36,948

 

Net hedge gains included in continuing operations

 

 

11,441

 

 

15,185

 

 

23,786

 

 

54,917

 

Net hedge losses included in discontinued operations

 

 

 

 

 

 

 

 

126,272

 

Translation adjustment

 

 

37,731

 

 

13,018

 

 

40,892

 

 

10,783

 

Other comprehensive income

 

 

77,539

 

 

26,397

 

 

81,970

 

 

228,920

 

Comprehensive income

 

$

114,019

 

$

114,436

 

$

148,043

 

$

860,166

 

 

 

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

June 30, 2007

(Unaudited)

 

NOTE A.

Organization and Nature of Operations

 

Pioneer is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company with operations in the United States, Canada, Equatorial Guinea, Nigeria, South Africa and Tunisia.

 

NOTE B.

Basis of Presentation

 

Presentation. In the opinion of management, the unaudited consolidated financial statements of the Company as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

 

Certain 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, 2006.

 

Discontinued operations. During 2006, the Company sold its interests in the following oil and gas asset groups:

 

Country

 

Description of Assets

 

Date Divested

 

 

 

 

 

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 P for additional information regarding discontinued operations.

 

Inventories. Inventories consisted of $107.1 million and $93.7 million of materials and supplies and $1.4 million of commodities as of June 30, 2007 and December 31, 2006, respectively. The Company's materials and supplies inventory primarily comprises 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 weighted average cost basis. Commodities inventory is carried at the lower of weighted average cost or market, on a first-in, first-out basis. Any valuation reductions to inventory are reflected as a loss on disposition of assets in the Consolidated Statements of Operations. As of June 30, 2007 and December 31, 2006, the Company's materials and supplies inventory was net of $2.6 million and $4.2 million, respectively, of valuation reserve allowances.

 

Goodwill. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is not amortized to earnings, but is assessed for impairment whenever events or circumstances indicate that impairment of the carrying value of goodwill is likely, but no less often than annually. If the carrying value of goodwill is determined to be impaired, it is reduced for the impaired value with a corresponding charge to pretax earnings in the period in which it is determined to be impaired. During the third quarter of 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.

 

10

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

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 $10.9 million and $14.4 million in other liabilities and minority interests in the Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006, respectively.

 

Minority interests in the net losses of the Company's consolidated Nigerian subsidiary amounting to $.4 million and $2.5 million for the three and six months ended June 30, 2007, respectively, as compared to $.7 million and $3.6 million for the same respective periods of 2006, are included in interest and other income in the Consolidated Statements of Operations. Minority interests in the net income of the Company's consolidated United States subsidiaries amounting to $.6 million and $1.3 million for the three and six months ended June 30, 2007, respectively, as compared to $.6 million and $1.5 million for the same respective periods in 2006, are included in other expense in the 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. 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 (a) the Black-Scholes option pricing model to measure the fair value of stock options, (b) the stock price on the date of grant for the fair value of restricted stock awards and (c) the Monte Carlo simulation method for the fair value of performance unit awards. Prior to the adoption of SFAS 123(R), the Company followed the intrinsic value method in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to account for stock options. Prior period financial statements have not been restated. The Company recorded no cumulative effect as a result of adopting SFAS 123(R).

 

For the three and six months ended June 30, 2007, the Company recorded $8.6 million and $16.4 million of stock-based compensation costs for all plans, respectively, as compared to $10.8 million and $18.3 million for the same respective periods of 2006.

 

Pursuant to the provisions of SFAS 123(R), the Company's issued shares, as reflected in the Consolidated Balance Sheets at June 30, 2007 and December 31, 2006, do not include 2,024,882 shares and 1,946,211 shares, respectively, related to unvested restricted stock awards. During the six months ended June 30, 2007, the Company issued 777,476 shares of restricted stock, net of associated forfeitures, for which restrictions will lapse in future periods.

 

As of June 30, 2007, there was approximately $54.2 million of unrecognized compensation expense related to unvested share-based compensation plan awards, primarily related to restricted stock and performance unit awards. This compensation will be recognized over the remaining vesting periods, which on a weighted average basis is approximately twenty-one months.

 

Reclassifications. Certain reclassifications have been made to the 2006 amounts in order to conform with the 2007 presentation. Specifically, (a) the Company reduced its exploration and abandonments expense by $42.0 million and interest and other income by $4.0 million for the six months ended June 30, 2006, which represents reclassification of abandonment costs and insurance recoveries for the Company's East Cameron facility destroyed by Hurricane Rita to hurricane activity, net expense in the Consolidated Statements of Operations, (b) the Company reclassified the aforementioned $42.0 million of East Cameron abandonment charge from exploration and abandonments to hurricane activity within net cash flows from operating activities in the Consolidated Statements of Cash Flows, (c) $1.3 million and $17.2 million for the three and six months ended June 30, 2006, respectively, of unfunded check issuances were reclassified from changes in accounts payable in net cash flows from operating activities to payment of other liabilities in net cash flows from financing activities within the Consolidated Statements of Cash Flows, (d) $0.9 million and $1.9 million for the three and six months ended June 30, 2006, respectively, of excess tax benefits from share-based payment arrangements were reclassified from other noncash items in net cash flows from operating activities to financing activities within the Consolidated Statements of Cash Flows and (e) $104 thousand and $(15) thousand for the three and six months ended June 30, 2006, respectively, of

 

11

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

income taxes receivable were reclassified from changes in other current assets, net to changes in income taxes receivable in net cash flows from operating activities within the Consolidated Statements of Cash Flows.

 

New accounting pronouncements. In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 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 48 also provides guidance on measurement, classification, interim accounting and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note D for additional information regarding the Company’s adoption of FIN 48.

 

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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The implementation of SFAS 159 is not expected to have a material effect on the financial condition or results of operations of the Company.

 

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.

 

The following table reflects the Company's capitalized exploratory well activity during the three and six months ended June 30, 2007:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 2007

 

June 30, 2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Beginning capitalized exploratory well costs

 

$

294,877

 

$

265,053

 

Additions to exploratory well costs pending the determination of proved reserves

 

 

106,058

 

 

218,898

 

Reclassification due to determination of proved reserves

 

 

(57,821

)

 

(96,726

)

Impairment of properties

 

 

(3,377

)

 

(3,377

)

Exploratory well costs charged to exploration expense

 

 

(24,138

)

 

(68,249

)

 

 

 

 

 

 

 

 

Ending capitalized exploratory well costs

 

$

315,599

 

$

315,599

 

 

 

12

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

         The following table provides an aging as of June 30, 2007 and December 31, 2006 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:

 

 

 

June 30,

 

December  31,

 

 

 

2007

 

2006

 

 

 

(in thousands, except well counts)

 

 

 

 

 

 

 

 

 

Capitalized exploratory well costs that have been capitalized:

 

 

 

 

 

 

 

One year or less

 

$

111,866

 

$

126,749

 

Greater than one year

 

 

203,733

 

 

138,304

 

 

 

 

 

 

 

 

 

 

 

$

315,599

 

$

265,053

 

 

 

 

 

 

 

 

 

Number of projects with exploratory well costs that have been capitalized for a period greater than one year

 

 

14

 

 

14

 

 

The following table provides an aging of capitalized costs of exploration projects that have been suspended for more than one year as of June 30, 2007:

 

 

 

Total

 

2007

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

United States:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clipper

 

$

75,910

 

$

668

 

$

37,027

 

$

38,215

 

$

 

$

 

$

 

Lay Creek

 

 

44,815

 

 

13,555

 

 

31,260

 

 

 

 

 

 

 

 

 

Oooguruk

 

 

52,205

 

 

 

 

 

 

5,122

 

 

1,014

 

 

45,565

 

 

504

 

Other

 

 

14,368

 

 

2,364

 

 

9,031

 

 

2,973

 

 

 

 

 

 

 

Canada

 

 

15,809

 

 

112

 

 

13,655

 

 

2,042

 

 

 

 

 

 

 

Equatorial Guinea

 

 

626

 

 

178

 

 

183

 

 

265

 

 

 

 

 

 

 

Total

 

$

203,733

 

$

16,877

 

$

91,156

 

$

48,617

 

$

1,014

 

$

45,565

 

$

504

 

 

 

The following discussion describes the history and status of each individually 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, including options for subsea tie-back to third-party production and handling facilities in the area.

 

Lay Creek. The Company’s Lay Creek project is a coal bed methane pilot program located in northwestern Colorado. The Company has drilled 17 wells in six separate pilot areas and completed workovers and recompletions on 14 wells drilled by a previous operator. The Company completed the water treatment facilities and plans to initiate sales of production in the second half of 2007. Determination of success of the pilot project is dependent on the ability to dewater the formation and determine if commercial quantities of gas can be produced. The pilot project is currently in the dewatering phase and if the pilot project is successful then full field development could begin in 2008.

 

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

 

13

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

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 2006, the Company sanctioned the development of the discovery and obtained the necessary regulatory approvals. The Company completed the installation and armoring of the offshore gravel drilling and production site during 2006. During the first half of 2007, the flowline and facilities to carry produced liquids to existing onshore processing facilities at the Kuparuk River Unit were installed. Operations are underway to connect and commission the flowline and facilities. Pioneer is currently assembling the drilling rig on location and plans to commence drilling approximately 40 horizontal wells to develop the discovery in the second half of 2007. The Company estimates first production will occur during the first half of 2008.

 

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 to assess 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. As of June 30, 2007 and December 31, 2006, the Company's valuation allowances (relating primarily to foreign tax jurisdictions) were $73.1 million and $94.7 million, respectively.

 

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company has analyzed its filing positions for open tax years in all of the foreign, federal and state jurisdictions where it has material tax attributes and is required to file income tax returns. The Company believes that its income tax filing positions and deductions will be substantially sustained on audit and does not anticipate any significant adjustments. Consequently, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

 

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company believes that it is no longer subject to examinations by tax authorities for years before 2002. In the fourth quarter of 2006, the Internal Revenue Service commenced an examination of the Company’s 2004 U.S. income tax return that is anticipated to be completed by the end of 2007. In addition, the Company’s 2003 through 2005 state income tax returns in Colorado and Louisiana are currently under audit, the Tunisian government is concluding an audit of the Company’s 2002 through 2005 income tax returns for the Adam Concession, and the Canada Revenue Agency is currently auditing the Company’s 2003 and 2004 Canadian income tax returns. As of June 30, 2007, no significant adjustments have been proposed in any jurisdiction.

 

In February 2007, the Republic of South Africa passed legislation that included significant new tax benefits for oil and gas activities. Effective January 1, 2007, the Company is allowed a deduction from oil and gas income equal to 200 percent of exploration expenditures and 150 percent of development expenditures. Pursuant to the new tax legislation, the Company recorded a $5.2 million tax benefit for the six months ended June 30, 2007 associated with capital expenditures incurred after the effective date, primarily related to the South Coast Gas project.

 

Pursuant to Accounting Principles Board (“APB”) Opinion No. 23 “Accounting for Income Taxes – Special Areas”, the Company historically treated the undistributed earnings in South Africa as permanently reinvested and did not provide for a U.S. tax on such earnings. As of June 30, 2007, the Company made the determination that it no longer had identifiable plans to reinvest these earnings in South Africa and accordingly recorded $13.0 million of U.S. deferred tax expense in the second quarter of 2007. Prospectively, the Company will record U.S. taxes on the earnings of its South African subsidiaries.

 

14

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

During the second quarter of 2007, the Company commenced plans to relinquish its interest in Block 256 and entered into an agreement to divest its interest in a subsidiary that held an interest in Block 320 in deepwater Nigeria. The agreement was terminated and the Company intends to withdraw from Block 320. Relinquishing of Block 256 is a result of unsuccessful drilling efforts while the withdrawal from Block 320 is a result of the terminated attempt to dispose of its interest and legal compliance matters, which are more fully discussed in Note O. With the plan to relinquish Block 256 and withdraw from Block 320, the Company plans to exit Nigeria. This exit allows the Company to deduct in the U.S. the cumulative expenditures associated with its past Nigerian activities and accordingly, during the second quarter of 2007, the Company recognized a $40.0 million tax benefit.

 

Income tax (provisions) benefits. The Company's income tax (provisions) benefits attributable to income from continuing operations consisted of the following for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

48,842

 

$

10,460

 

$

53,619

 

$

12,973

 

U.S. state and local

 

 

 

 

(12

)

 

 

 

(3

)

Foreign

 

 

(12,498

)

 

(10,432

)

 

(22,428

)

 

(16,710

)

 

 

 

36,344

 

 

16

 

 

31,191

 

 

(3,740

)

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

(46,554

)

 

(38,703

)

 

(58,717

)

 

(48,640

)

U.S. state and local

 

 

(1,458

)

 

(14,297

)

 

(1,948

)

 

(14,099

)

Foreign

 

 

(4,616

)

 

2,777

 

 

(2,729

)

 

(4,445

)

 

 

 

(52,628

)

 

(50,223

)

 

(63,394

)

 

(67,184

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(16,284

)

$

(50,207

)

$

(32,203

)

$

(70,924

)

 

Discontinued operations. The Company's income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

 

$

(7,874

)

$

 

$

(148,599

)

U.S. state and local

 

 

 

 

290

 

 

 

 

(1,850

)

Foreign

 

 

(202

)

 

(961

)

 

(4,698

)

 

(2,126

)

 

 

 

(202

)

 

(8,545

)

 

(4,698

)

 

(152,575

)

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

(40

)

 

1,374

 

 

(40

)

 

(140,902

)

U.S. state and local

 

 

 

 

(104

)

 

 

 

(6,319

)

Foreign

 

 

116

 

 

(881

)

 

2,371

 

 

123

 

 

 

 

76

 

 

389

 

 

2,331

 

 

(147,098

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(126

)

$

(8,156

)

$

(2,367

)

$

(299,673

)

 

 

15

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

NOTE E.

Long-term Debt

 

Lines of credit. During April 2007, the Company entered into an Amended and Restated 5-Year Revolving Credit Agreement (the "Credit Facility") that matures in April 2012 unless extended in accordance with the terms of the Credit Facility. The Credit Facility also provides for initial aggregate loan commitments of $1.5 billion, which may be increased to a maximum aggregate amount of $2.0 billion if the lenders increase their loan commitments or if loan commitments of new financial institutions are added. As of June 30, 2007, the Company had $559.0 million of outstanding borrowings under the Credit Facility and had $119.0 million of undrawn letters of credit, of which $115.4 million were undrawn commitments under the Credit Facility, leaving the Company with $825.6 million of unused borrowing capacity under the Credit Facility.

 

Borrowings under the Credit Facility may be in the form of revolving loans or swing line loans. Aggregate outstanding swing line loans may not exceed $150 million. Revolving loans bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by JPMorgan Chase Bank or the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System during the last preceding business day plus .5 percent or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the "Applicable Margin") that is determined by a reference grid based on the Company’s debt rating (currently .75 percent). Swing line loans bear interest at a rate per annum equal to the "ASK" rate for Federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus .125 percent.

The Credit Facility contains certain financial covenants, which include the 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. The covenants also include the maintenance of a ratio of the net present value of the Company’s oil and gas properties to total debt of at least 1.75 to 1.0 until the Company achieves an investment grade rating by Moody’s Investors Service, Inc. or Standard & Poors Ratings Group, Inc.

Senior notes. During March 2007, the Company issued $500 million of 6.65% senior notes due 2017 (the "6.65% Notes") and received proceeds, net of issuance discount and underwriting costs, of $494.9 million. The Company used the net proceeds from the issuance of the 6.65% Notes to reduce indebtedness under its Credit Facility.

On August 15, 2007, $32.1 million principal amount of the Company’s 8.25% senior notes mature and on January 15, 2008, $3.8 million principal amount of the Company’s 6.50% senior notes mature. The Company has both the intent and ability to fund the maturities of these senior notes with borrowings under the Credit Facility. Accordingly, the Company has classified these notes as noncurrent in its accompanying Consolidated Balance Sheets.

NOTE F.

Derivative Financial Instruments

The Company uses financial derivative contracts to manage exposures to commodity price, interest rate and foreign currency fluctuations. The Company generally does not enter into derivative financial instruments for speculative or trading purposes. The Company also may enter into physical delivery contracts that effectively provide commodity price hedges. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, these contracts are not recorded in the financial statements.

All derivatives are recorded in the balance sheet at estimated fair value. Fair value is generally determined based on the difference between the fixed contract price and the underlying market price at the determination date. Changes in the fair value of effective cash flow hedges are recorded as a component of accumulated other comprehensive income (loss), which is later transferred to earnings when the hedged transaction occurs. Changes in the fair value of derivatives that are not designated as hedges, as well as the ineffective portion of the hedge derivatives, are recorded in earnings. The ineffective portion is calculated as the difference between the change in fair value of the derivative and the estimated change in cash flows from the item hedged.

 

16

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

Fair value hedges. The Company monitors the debt capital markets and interest rate trends to identify opportunities to enter into and terminate interest rate derivative contracts with the objective of reducing its costs of capital. As of June 30, 2007 and December 31, 2006, the Company was not a party to any open fair value hedges.

 

As of June 30, 2007, the carrying value of the Company's long-term debt in the Consolidated Balance Sheets included a $3.3 million reduction attributable to net deferred hedge losses on terminated fair value hedges that are being amortized as increases to interest expense over the original terms of the terminated agreements. During the three and six months ended June 30, 2007, the Company's amortization of deferred hedge losses and gains on terminated interest rate swaps increased the Company's reported interest expense by $123 thousand and $196 thousand, respectively. The Company’s amortization of deferred hedge losses and gains on terminated interest rate swaps decreased reported interest expense for the three and six months ended June 30, 2006 by $4 thousand and $109 thousand, respectively.

 

The following table sets forth, as of June 30, 2007, 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:

 

 

 

Net deferred interest rate hedge losses

 

 

 

Fair Value

 

Cash  Flow

 

Total

 

 

 

(in thousands)

 

2007 (remaining six months)

 

$

131

 

$

105

 

$

236

 

2008

 

$

257

 

$

231

 

$

488

 

2009

 

$

281

 

$

260

 

$

541

 

2010

 

$

307

 

$

293

 

$

600

 

2011

 

$

337

 

$

328

 

$

665

 

Thereafter

 

$

1,978

 

$

1,960

 

$

3,938

 

 

 

Cash flow hedges. The Company utilizes commodity swap and collar contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. As of June 30, 2007, all of the Company's open commodity hedges are designated as hedges of Canadian or United States forecasted sales. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness and forward currency exchange agreements to reduce the effect of U.S. dollar to Canadian dollar exchange rate volatility.

 

17

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(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 June 30, 2007:

 

 

First

 

Second

 

Third

 

Fourth

 

Outstanding

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily oil production
hedged (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007 – Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

 

 

 

 

 

 

5,000

 

 

5,000

 

 

5,000

 

Price per Bbl

 

 

 

 

 

 

$

63.00 - $76.04

 

$

63.00 - $76.04

 

$

63.00 - $76.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

 

 

 

 

 

 

5,000

 

 

5,000

 

 

5,000

 

Price per Bbl

 

 

 

 

 

 

$

69.55

 

$

69.55

 

$

69.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

13,500

 

 

13,500

 

 

13,500

 

 

13,500

 

 

13,500

 

Price per Bbl

$

59.04

 

$

59.04

 

$

59.04

 

$

59.04

 

$

59.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 – Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

2,000

 

 

2,000

 

 

2,000

 

 

2,000

 

 

2,000

 

Price per Bbl

$

65.00 - $76.50

 

$

65.00 - $76.50

 

$

65.00 - $76.50

 

$

65.00 - $76.50

 

$

65.00 - $76.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

6,000

 

 

6,000

 

 

6,000

 

 

6,000

 

 

6,000

 

Price per Bbl

$

70.47

 

$

70.47

 

$

70.47

 

$

70.47

 

$

70.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Bbl)

 

4,000

 

 

4,000

 

 

4,000

 

 

4,000

 

 

4,000

 

Price per Bbl

$

71.46

 

$

71.46

 

$

71.46

 

$

71.46

 

$

71.46

 

 

_____________

 

(a)

Subsequent to June 30, 2007, the Company entered into additional oil swap contracts for 1,500 Bbls per day of the Company’s August through December 2007 production at an average price of $73.00 per Bbl and 250 Bbls per day of the Company’s 2008 production at an average price of $73.43 per Bbl. The Company also entered into oil collar contracts for 3,000 Bbls per day of the Company’s 2008 production at an average floor price of $65.00 per Bbl and an average ceiling price of $80.80 per Bbl.

 

18

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

         The Company reports average oil prices per Bbl including the effects of oil quality adjustments, amortization of deferred volumetric production payment ("VPP") revenue and the net effect of oil hedges. The following table sets forth (i) the Company's oil prices from continuing operations, both reported (including hedge results and amortization of deferred VPP revenue) and realized (excluding hedge results and amortization of deferred VPP revenue), (ii) amortization of deferred VPP revenue to oil revenue from continuing operations and (iii) the net effect of settlements of oil price hedges on oil revenue from continuing operations for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Average price reported per Bbl

 

$

60.38

 

$

69.71

 

$

57.25

 

$

64.86

 

Average price realized per Bbl

 

$

62.48

 

$

67.15

 

$

59.55

 

$

63.63

 

VPP increase to oil revenue (in millions)

 

$

27.5

 

$

29.1

 

$

54.8

 

$

58.0

 

Reduction to oil revenue from hedging
activity (in millions) (a)

 

$

(32.4

)

$

(23.4

)

$

(65.5

)

$

(52.5

)

 

_____________

(a)

Excludes hedge losses of $12.3 million attributable to discontinued operations for the three and six months ended June 30, 2006.

 

Natural gas liquids prices. During the three and six months ended June 30, 2007 and 2006, the Company did not enter into any NGL hedge contracts. There were no outstanding NGL hedge contracts at June 30, 2007. Subsequent to June 30, 2007, the Company entered into natural gas liquids swap contracts for 500 Bbls per day of the Company’s 2008 production at an average price of $44.33 per Bbl and 500 Bbls per day of the Company’s 2009 production at an average price of $41.75 per Bbl.

 

Gas prices. The Company employs a policy of hedging a portion of its gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices, or based on NYMEX prices if NYMEX prices are highly correlated with the index price. The following table sets forth the volumes hedged in MMBtus under outstanding gas hedge contracts and the weighted average index prices per MMBtu for those contracts as of June 30, 2007:

 

 

First

 

Second

 

Third

 

Fourth

 

Outstanding

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Average daily gas production
hedged (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMbtu)

 

 

 

 

 

 

 

225,000

 

 

225,000

 

 

225,000

 

Price per MMBtu

 

 

 

 

 

 

$

7.71

 

$

7.71

 

$

7.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 – Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMbtu)

 

60,000

 

 

40,000

 

 

40,000

 

 

40,000

 

 

44,973

 

Price per MMBtu

$

9.00

 

$

8.78

 

$

8.78

 

$

8.78

 

$

8.85

 

 

_____________

 

(a)

Subsequent to June 30, 2007, the Company entered into additional gas swap contracts for 2,500 MMBtu per day of the Company’s 2008, 2009, and 2010 production at average prices of $7.35, $7.55 and $7.33 per MMBtu, respectively.

 

19

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

         The Company reports average gas prices per Mcf including the effects of Btu content, gas processing, shrinkage adjustments, amortization of deferred VPP revenue and the net effect of gas hedges. The following table sets forth (i) the Company's gas prices from continuing operations, both reported (including hedge results and amortization of deferred VPP revenue) and realized (excluding hedge results and amortization of deferred VPP revenue), (ii) amortization of deferred VPP revenue to gas revenue from continuing operations and (iii) the net effect of settlements of gas price hedges on gas revenue from continuing operations for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Average price reported per Mcf

 

$

7.45

 

$

6.25

 

$

7.39

 

$

6.48

 

Average price realized per Mcf

 

$

6.49

 

$

5.75

 

$

6.39

 

$

6.37

 

VPP increase to gas revenue (in millions)

 

$

17.8

 

$

18.8

 

$

35.6

 

$

37.8

 

Increase (reduction) to gas revenue from hedging
activity (in millions) (a)

 

$

14.3

 

$

(3.3

)

$

27.3

 

$

(31.6

)

 

_____________

(a)

Excludes hedge losses of $3.4 million attributable to discontinued operations for the three and six months ended June 30, 2006.

Interest rate. During March 2007, the Company entered into treasury lock contracts and designated the contracts as cash flow hedges of the forecasted interest rate risk associated with the coupon rate on the Company’s 6.65% Notes, which were issued in March 2007. The Company terminated these contracts for a loss of $1.5 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 treasury lock contracts. See Note E for information regarding the 6.65% Notes.

Hedge ineffectiveness. During the six months ended June 30, 2007, the Company recorded net ineffectiveness charges of $.9 million, as compared to net ineffectiveness credits of $2.8 million and $11.0 million, respectively, during the three and six months ended June 30, 2006. Hedge ineffectiveness represents the ineffective portions of changes in fair values of the Company’s cash flow hedging instruments.  The primary causes of changes in ineffectiveness are changes in correlations and derivative fair values associated with commodity price indexes of financial hedge derivatives and the commodity price indexes of the hedged forecasted production for certain fields.

AOCI - Hedging. As of June 30, 2007 and December 31, 2006, AOCI - Hedging represented net deferred losses of $126.1 million and $167.2 million, respectively. The AOCI - Hedging balance as of June 30, 2007 was comprised of $10.2 million of net deferred losses on the effective portions of open cash flow hedges, $189.5 million of net deferred losses on terminated cash flow hedges (including $3.2 million of net deferred losses on terminated cash flow interest rate hedges) and $73.6 million of associated net deferred tax benefits. The decrease in AOCI - Hedging during the six months ended June 30, 2007 was primarily attributable to the reclassification of net deferred hedge losses to net income as derivatives matured, partially offset by increases in future commodity prices relative to the commodity prices stipulated in the hedge contracts. The net deferred losses associated with open cash flow hedges remain subject to market price fluctuations until the positions are either settled under the terms of the hedge contracts or terminated prior to settlement. The net deferred losses on terminated cash flow hedges are fixed.

During the twelve months ending June 30, 2008, based on current estimates of future commodity prices and interest rates, the Company expects to reclassify $21.0 million of net deferred gains associated with open commodity hedges, $125.6 million of net deferred losses on terminated commodity and interest rate hedges from AOCI - Hedging to oil and gas revenues and interest expense. The Company also expects to reclassify approximately $39.4 million of net deferred income tax benefits associated with commodity and interest rate hedges during the twelve months ending June 30, 2008 from AOCI - Hedging to income tax benefit.

Terminated commodity hedges. At times, the Company terminates open commodity hedge positions when the underlying commodity prices reach a point that the Company believes will be the high or low price of the

 

20

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

commodity prior to the scheduled settlement of the open commodity hedge position. This allows the Company to maximize gains or minimize losses associated with the open hedge positions. At the time of termination of the hedges, the amounts are recorded in AOCI – Hedging and amortized to earnings over the periods the production was scheduled to occur.

The following table sets forth, as of June 30, 2007, the scheduled amortization of net deferred losses on terminated commodity hedges that will be recognized as decreases to the Company's future oil and gas revenues:

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

2007 net deferred hedge losses

 

 

 

 

 

 

 

$

37,986

 

$

36,567

 

$

74,553

 

2008 net deferred hedge losses

 

$

26,899

 

$

24,069

 

$

23,914

 

$

24,142

 

$

99,024

 

2009 net deferred hedge losses

 

$

2,330

 

$

232

 

$

230

 

$

822

 

$

3,614

 

2010 net deferred hedge losses

 

$

667

 

$

620

 

$

578

 

$

539

 

$

2,404

 

2011 net deferred hedge losses

 

$

873

 

$

889

 

$

902

 

$

906

 

$

3,570

 

2012 net deferred hedge losses

 

$

810

 

$

791

 

$

783

 

$

772

 

$

3,156

 

 

NOTE G.

Asset Retirement Obligations

 

The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells 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 during the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning asset retirement obligations

 

$

233,107

 

$

156,088

 

$

225,913

 

$

157,035

 

Liabilities assumed in acquisitions

 

 

19

 

 

 

 

19

 

 

 

New wells placed on production and changes in estimates (a)

 

 

48,665

 

 

720

 

 

71,347

 

 

42,720

 

Liabilities reclassed to discontinued operations held for sale

 

 

 

 

 

 

 

 

 

Disposition of wells

 

 

 

 

(372

)

 

 

 

(44,042

)

Liabilities settled

 

 

(24,754

)

 

(2,802

)

 

(42,557

)

 

(3,870

)

Accretion of discount on continuing operations

 

 

2,146

 

 

1,154

 

 

4,204

 

 

2,302

 

Accretion of discount on discontinued operations

 

 

 

 

72

 

 

 

 

804

 

Currency translation

 

 

2,071

 

 

723

 

 

2,328

 

 

634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending asset retirement obligation

 

$

261,254

 

$

155,583

 

$

261,254

 

$

155,583

 

 

____________

(a)

During the three and six months ended June 30, 2007 and the six months ended June 30, 2006, the Company recorded an increase of $47.0 million, $66.0 million and $42.0 million, respectively, to the abandonment estimates for the East Cameron facility that was destroyed by Hurricane Rita in 2005, which is reflected in hurricane activity, net in the Consolidated Statements of Operations. For additional information, see Note N.

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 Consolidated Balance Sheets. As of June 30, 2007 and December 31, 2006, the current portion of the Company's asset retirement obligations amounted to $145.4 million and $111.2 million, respectively.

 

21

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

NOTE H.

Postretirement Benefit Obligations

As of June 30, 2007 and December 31, 2006, the Company had recorded $20.5 million and $19.8 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 Consolidated Balance Sheets. These obligations are comprised of five plans of which four relate to predecessor entities that the Company acquired in prior years. These plans had no assets as of June 30, 2007 or December 31, 2006. Other than the Company's retirement plan, the participants of these plans are not current employees of the Company.

The following table reconciles changes in the Company's unfunded accumulated postretirement benefit obligations during the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning accumulated postretirement benefit obligations

 

$

20,158

 

$

18,754

 

$

19,837

 

$

18,576

 

Net benefit payments

 

 

(175

)

 

(303

)

 

(400

)

 

(588

)

Service costs

 

 

259

 

 

204

 

 

518

 

 

408

 

Accretion of discounts

 

 

288

 

 

260

 

 

575

 

 

519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending accumulated postretirement benefit obligations

 

$

20,530

 

$

18,915

 

$

20,530

 

$

18,915

 

 

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.

MOSH Holding. On April 11, 2005, 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 is before the Judicial District Court of Harris County, Texas (334th Judicial District). Subsequently, Dagger-Spine Hedgehog Corporation ("Dagger-Spine") and a group of approximately fifty other unitholders (“Wiegand”) each filed a Petition in Intervention in the lawsuit to assert the same claims as MOSH Holding, L.P. ("MHLP"). MHLP, Dagger-Spine and Wiegand (collectively, "Plaintiffs") are unitholders in the 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 Company owns the managing general partner interest in the partnership. Plaintiffs allege that the Company, together with Woodside Energy (USA) Inc. ("Woodside"), concealed the value of the royalty interest and worked to terminate the Mesa Offshore Trust ("MOT") prematurely and to capture for itself and Woodside profits that belong to the MOT. Plaintiffs also allege 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 relief sought by the Plaintiffs 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.

In January 2007, the Company announced that they had reached a conditional settlement in the lawsuit. The settlement was subject to certain conditions, including an order by the Court approving the settlement. On June 19, 2007, the Court denied a motion to approve the settlement and as a result, the settlement is void and not effective. A

 

22

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

trial on the merits is currently set for December 2007. The Company believes the claims made in the lawsuit are without merit and intends to defend the lawsuit vigorously.

Equatorial Guinea Block H Arbitration. On June 14, 2007, a subsidiary of the Company ("Pioneer EG") commenced arbitration in London, England against Roc Oil (Equatorial Guinea) Company ("ROC EG"), Atlas Petroleum International Limited (“Atlas”) and Osborne Resources Limited (“Osborne”) to determine the parties' relative rights under a joint operating agreement relating to well operations in Block H in deepwater Equatorial Guinea. ROC, Atlas and Osborne have, in turn, notified Pioneer EG of various claims arising under farm-in agreements relating to Block H. In late 2006, the Republic of Equatorial Guinea ratified a new hydrocarbons law, which effectively increases the obligations of the parties subject to the underlying production sharing contract in various respects. Pursuant to the new law, Equatorial Guinea is entitled to participate in any contract area either directly or through the National Oil Company by way of a substantial additional carried interest. In addition, drilling costs for the well have increased significantly beyond those originally anticipated.

Pioneer EG and the other parties in Block H have been evaluating the effect of the new hydrocarbons law and the increased well costs, but have been unable to reach an agreement as to the parties' obligations. Pioneer EG has asserted that it does not have an obligation under the circumstances to fund its share of the costs or its carried share of the other parties' costs of drilling a well on the block. The view of the other parties is that Pioneer EG does not have the right to prevent the drilling of the well or refuse to pay its share of the costs thereof. ROC EG has also notified Pioneer EG that it reserves the right to claim damages if the underlying production sharing contract is terminated by Equatorial Guinea.

The parties have agreed in principle to consolidate their respective claims under the joint operating agreement and the farm-in agreements into a single arbitration to be conducted in London, England. Pioneer EG intends vigorously to assert its position in the arbitration. The Company cannot predict whether the outcome of this proceeding will negatively impact the Company's liquidity, financial position or future results of operations.

Dorchester Refining Company Site. A subsidiary of the Company was notified by the Texas Commission on Environmental Quality ("TCEQ") in August 2005 that the TCEQ considered 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. The TCEQ recently informed the Company that other previous owners and operators applied for acceptance into the Texas Voluntary Cleanup Program to clean up the site. As a result, the TCEQ deleted the site from the state Superfund registry and no longer considers the Company’s subsidiary a potentially responsible party with respect to the site.

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 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. The Company cannot predict whether this investigation will negatively impact the Company's liquidity, financial position or future results of operations.

Argentine obligations. In April 2006, the Company provided the purchaser of its Argentine assets certain indemnifications. The Company remains responsible for certain contingent liabilities related to such indemnifications, subject to defined limitations. The Company does not 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.

 

23

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

NOTE J.   Income Per Share From Continuing Operations

Basic income per share from continuing operations is computed by dividing income from continuing operations by the weighted average number of common shares outstanding for the period. The computation of diluted income per share from continuing operations reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to income from continuing operations were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company.

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Weighted average common shares outstanding (a):

 

 

 

 

 

 

 

 

 

Basic

 

121,226

 

125,629

 

121,374

 

126,282

 

Dilutive common stock options (b)

 

486

 

818

 

476

 

875

 

Restricted stock awards

 

972

 

853

 

951

 

863

 

Contingently issuable - performance shares (c)

 

92

 

 

46

 

 

Convertible notes dilution (d)

 

 

2,324

 

 

2,326

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

122,776

 

129,624

 

122,847

 

130,346

 

 

_______________

(a)

In 2007, the Company’s board of directors ("Board") approved a $750 million share repurchase program. During the first half of 2007, the Company purchased $47.7 million of common stock pursuant to the 2007 program.

(b)

Common stock options to purchase 2,976 shares were outstanding but not included in the computations of diluted income per share from continuing operations for the six months ended June 30, 2007 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)

A target amount of 145,820 performance units were awarded in 2007. At June 30, 2007, based on the performance criteria met, the Company included 91,518 and 45,759 of performance units in weighted average shares outstanding for the three and six months ended June 30, 2007, respectively.

(d)

The Company had $98 million principal amounts of convertible notes outstanding on June 30, 2006, which were converted during the second half of 2006.

 

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, South Africa, Tunisia and Other. Other is primarily comprised of operations in Equatorial Guinea and Nigeria.

As previously referred to in Note B, during 2006, the Company sold its Argentine assets and certain United States oil and gas properties having carrying values, including net deferred hedge losses, of $658.7 million and $430.8 million, respectively. The results of operations of those assets have been reclassified as discontinued operations in accordance with SFAS 144 and are excluded from the geographic operating segment information provided below. See Note P for information regarding the Company's discontinued operations.

The following tables provide the Company's interim geographic operating segment data for the three and six months ended June 30, 2007 and 2006. Geographic operating segment income tax (provisions) benefits 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.

 

24

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

 

 

United
States

 

Canada

 

South
Africa

 

Tunisia

 

Other

 

Headquarters

 

Consolidated
Total

 

 

 

(in thousands)

 

Three months ended June 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

372,976

 

$

38,240

 

$

19,546

 

$

27,270

 

$

 

$

 

$

458,032

 

Interest and other

 

 

 

 

 

 

 

 

 

 

 

 

27,690

 

 

27,690

 

Loss on disposition of assets, net

 

 

(179

)

 

 

 

 

 

 

 

 

 

(1,623

)

 

(1,802

)

 

 

 

372,797

 

 

38,240

 

 

19,546

 

 

27,270

 

 

 

 

26,067

 

 

483,920

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

95,681

 

 

15,039

 

 

7,266

 

 

2,431

 

 

 

 

 

 

 

120,417

 

Depletion, depreciation and amortization

 

 

77,176

 

 

15,675

 

 

1,504

 

 

2,509

 

 

 

 

7,115

 

 

103,979

 

Impairment of long-lived assets

 

 

5,686

 

 

 

 

 

 

 

 

12,205

 

 

 

 

17,891

 

Exploration and abandonments

 

 

33,730

 

 

5,914

 

 

47

 

 

5,355

 

 

24,744

 

 

 

 

69,790

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

30,811

 

 

30,811

 

Accretion of discount on asset retirement obligations

 

 

 

 

 

 

 

 

 

 

 

 

2,146

 

 

2,146

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

30,502

 

 

30,502

 

Hurricane activity, net

 

 

47,000

 

 

 

 

 

 

 

 

 

 

 

 

47,000

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

10,195

 

 

10,195

 

 

 

 

259,273

 

 

36,628

 

 

8,817

 

 

10,295

 

 

36,949

 

 

80,769

 

 

432,731

 

Income (loss) from continuing operations before income taxes

 

 

113,524

 

 

1,612

 

 

10,729

 

 

16,975

 

 

(36,949

)

 

(54,702

)

 

51,189

 

Income tax benefit (provision)

 

 

(42,004

)

 

(501

)

 

(3,111

)

 

(10,702

)

 

 

 

40,034

 

 

(16,284

)

Income (loss) from continuing operations

 

$

71,520

 

$

1,111

 

$

7,618

 

$

6,273

 

$

(36,949

)

$

(14,668

)

$

34,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

331,212

 

$

34,154

 

$

28,061

 

$

14,143

 

$

 

$

 

$

407,570

 

Interest and other

 

 

 

 

 

 

 

 

 

 

 

 

9,741

 

 

9,741

 

Gain (loss) on disposition of assets, net

 

 

150

 

 

77

 

 

 

 

 

 

 

 

(3,630

)

 

(3,403

)

 

 

 

331,362

 

 

34,231

 

 

28,061

 

 

14,143

 

 

 

 

6,111

 

 

413,908

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

83,560

 

 

10,780

 

 

8,577

 

 

149

 

 

 

 

 

$

103,066

 

Depletion, depreciation and amortization

 

 

67,305

 

 

12,438

 

 

1,734

 

 

1,006

 

 

 

 

5,501

 

 

87,984

 

Exploration and abandonments

 

 

28,335

 

 

3,180

 

 

47

 

 

5,112

 

 

4,944

 

 

 

 

41,618

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

29,468

 

 

29,468

 

Accretion of discount on asset retirement obligations

 

 

 

 

 

 

 

 

 

 

 

 

1,154

 

 

1,154

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

22,766

 

 

22,766

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

11,759

 

 

11,759

 

 

 

 

179,200

 

 

26,398

 

 

10,358

 

 

6,267

 

 

4,944

 

 

70,648

 

 

297,815

 

Income (loss) from continuing operations before income taxes

 

 

152,162

 

 

7,833

 

 

17,703

 

 

7,876

 

 

(4,944

)

 

(64,537

)

 

116,093

 

Income tax benefit (provision)

 

 

(55,539

)

 

(2,790

)

 

(5,311

)

 

(5,119

)

 

2,472

 

 

16,080

 

 

(50,207

)

Income (loss) from continuing operations

 

$

96,623

 

$

5,043

 

$

12,392

 

$

2,757

 

$

(2,472

)

$

(48,457

)

$

65,886

 

 

 

25

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

 

 

United
States

 

Canada

 

South
Africa

 

Tunisia

 

Other

 

Headquarters

 

Consolidated
Total

 

 

 

(in thousands)

 

Six months ended June 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

691,446

 

$

76,576

 

$

32,734

 

$

49,194

 

$

 

$

 

$

849,950

 

Interest and other

 

 

 

 

 

 

 

 

 

 

 

 

41,606

 

 

41,606

 

Loss on disposition of assets, net

 

 

904

 

 

 

 

 

 

 

 

 

 

(2,446

)

 

(1,542

)

 

 

 

692,350

 

 

76,576

 

 

32,734

 

 

49,194

 

 

 

 

39,160

 

 

890,014

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

179,194

 

 

30,004

 

 

11,312

 

 

4,320

 

 

 

 

 

 

 

224,830

 

Depletion, depreciation and amortization

 

 

146,560

 

 

28,832

 

 

2,575

 

 

4,064

 

 

 

 

14,086

 

 

196,117

 

Impairment of long-lived assets

 

 

5,686

 

 

 

 

 

 

 

 

12,205

 

 

 

 

17,891

 

Exploration and abandonments

 

 

97,382

 

 

10,516

 

 

91

 

 

8,184

 

 

29,989

 

 

 

 

146,162

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

65,255

 

 

65,255

 

Accretion of discount on asset retirement obligations

 

 

 

 

 

 

 

 

 

 

 

 

4,204

 

 

4,204

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

58,996

 

 

58,996

 

Hurricane activity, net

 

 

60,548

 

 

 

 

 

 

 

 

 

 

 

 

60,548

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

18,608

 

 

18,608

 

 

 

 

489,370

 

 

69,352

 

 

13,978

 

 

16,568

 

 

42,194

 

 

161,149

 

 

792,611

 

Income (loss) from continuing operations before income taxes

 

 

202,980

 

 

7,224

 

 

18,756

 

 

32,626

 

 

(42,194

)

 

(121,989

)

 

97,403

 

Income tax benefit (provision)

 

 

(75,103

)

 

(2,243

)

 

(5,439

)

 

(20,349

)

 

 

 

70,931

 

 

(32,203

)

Income (loss) from continuing operations

 

$

127,877

 

$

4,981

 

$

13,317

 

$

12,277

 

$

(42,194

)

$

(51,058

)

$

65,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

641,093

 

$

62,516

 

$

55,857

 

$

27,572

 

$

 

$

 

$

787,038

 

Interest and other

 

 

 

 

 

 

 

 

 

 

 

 

22,852

 

 

22,852

 

Gain (loss) on disposition of assets, net

 

 

150

 

 

77

 

 

 

 

 

 

 

 

(3,703

)

 

(3,476

)

 

 

 

641,243

 

 

62,593

 

 

55,857

 

 

27,572

 

 

 

 

19,149

 

 

806,414

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

161,461

 

 

21,694

 

 

13,679

 

 

915

 

 

 

 

 

 

197,749

 

Depletion, depreciation and amortization

 

 

130,921

 

 

19,668

 

 

6,284

 

 

2,151

 

 

 

 

11,366

 

 

170,390

 

Exploration and abandonments

 

 

64,616

 

 

6,596

 

 

130

 

 

6,254

 

 

46,664

 

 

 

 

124,260

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

61,715

 

 

61,715

 

Accretion of discount on asset retirement obligations

 

 

 

 

 

 

 

 

 

 

 

 

2,302

 

 

2,302

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

59,342

 

 

59,342

 

Hurricane activity, net

 

 

38,000

 

 

 

 

 

 

 

 

 

 

 

 

38,000

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

16,813

 

 

16,813

 

 

 

 

394,998

 

 

47,958

 

 

20,093

 

 

9,320

 

 

46,664

 

 

151,538

 

 

670,571

 

Income (loss) from continuing operations before income taxes

 

 

246,245

 

 

14,635

 

 

35,764

 

 

18,252

 

 

(46,664

)

 

(132,389

)

 

135,843

 

Income tax benefit (provision)

 

 

(89,879

)

 

(5,213

)

 

(10,729

)

 

(11,334

)

 

23,332

 

 

22,899

 

 

(70,924

)

Income (loss) from continuing operations

 

$

156,366

 

$

9,422

 

$

25,035

 

$

6,918

 

$

(23,332

)

$

(109,490

)

$

64,919

 

 

 

26

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

 

 

June 30, 2007

 

December  31,  2006

 

Segment Assets:

 

(in thousands)

 

 

 

 

 

 

 

 

 

United States

 

$

7,061,938

 

$

6,395,046

 

Argentina

 

 

2,336

 

 

2,444

 

Canada

 

 

578,884

 

 

547,012

 

South Africa

 

 

176,471

 

 

176,789

 

Tunisia

 

 

133,055

 

 

72,142

 

West Africa

 

 

17,576

 

 

41,238

 

Headquarters

 

 

167,603

 

 

120,728

 

Total consolidated assets

 

$

8,137,863

 

$

7,355,399

 

 

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 that: (i) entitle the purchaser to receive production volumes over a period of time from specific lease interests; (ii) do not bear future production costs and capital expenditures associated with the reserves; (iii) are nonrecourse to the Company (i.e., the purchaser's only recourse is to the assets acquired); (iv) transfer title of the reserves to the purchaser; and (v) allow the Company to retain the remaining reserves 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, 2006

 

$

175,088

 

$

489,423

 

$

664,511

 

Less: 2007 amortization

 

 

(35,590

)

 

(54,766

)

 

(90,356

)

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue at June 30, 2007

 

$

139,498

 

$

434,657

 

$

574,155

 

 

 

27

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

         The above deferred revenue amounts will be recognized in oil and gas revenues in the Consolidated Statements of Operations as noted below, assuming the related VPP production volumes are delivered as scheduled (in thousands):

 

Remaining 2007

 

$

90,876

 

2008

 

 

158,139

 

2009

 

 

147,905

 

2010

 

 

90,215

 

2011

 

 

44,951

 

2012

 

 

42,069

 

 

 

$

574,155

 

 

NOTE M. Interest and Other Income

 

 

The following table provides the components of the Company's interest and other income:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alaskan Petroleum Production Tax credits (a)

 

$

25,000

 

$

 

$

25,000

 

$

 

Interest income

 

 

771

 

 

6,116

 

 

1,567

 

 

7,139

 

Royalty obligation credit

 

 

 

 

 

 

4,816

 

 

 

Business interruption insurance claim

 

 

 

 

 

 

 

 

3,647

 

Minority interest in subsidiary net loss (see Note B)

 

 

368

 

 

722

 

 

2,452

 

 

3,627

 

Canadian Alliance marketing gain

 

 

1,041

 

 

697

 

 

1,306

 

 

2,426

 

Bad debt recoveries

 

 

 

 

 

 

 

 

2,130

 

Sales and other tax refunds

 

 

 

 

25

 

 

3,704

 

 

25

 

Foreign currency remeasurement and exchange gains (b)

 

 

76

 

 

1,155

 

 

770

 

 

1,461

 

Other income

 

 

434

 

 

1,026

 

 

1,991

 

 

2,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest and other income

 

$

27,690

 

$

9,741

 

$

41,606

 

$

22,852

 

 

___________

(a)

The Company earns Alaskan Petroleum Production Tax (“PPT”) credits on qualifying capital expenditures. During June 2007, the Company received a $25.0 million refund from the State of Alaska for a portion of its PPT credits. The Company does not record income from PPT credits until they are realized through a cash refund or sale.

(b)

The Company's operations in Argentina, Canada and Africa periodically recognize monetary assets and liabilities in currencies other than their functional currencies. Associated therewith, the Company realizes foreign currency remeasurement and transaction gains and losses.

 

NOTE N.

Insurance Claims

 

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 2006, the Company settled its business interruption claim with its insurance provider for $18.5 million, of which none was recognized in the first half of 2006.

 

28

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

As a result of Hurricane Rita, the Company's East Cameron facility, located on the Gulf of Mexico shelf, was destroyed and the Company does not plan to rebuild the facility based on the economics of the field. In January 2007, the operations to reclaim and abandon the East Cameron facility began and the Company expects to incur a substantial portion of the reclamation and abandonment costs in 2007. The Company currently estimates that it will cost approximately $185 million to reclaim and abandon the East Cameron facility. The estimate to reclaim and abandon the East Cameron facility is based upon an analysis prepared by a third-party engineering firm for the majority of the work, an estimate by the Company for the remaining work that was not covered by the third-party analysis and actual abandonment activity to date. During 2007 and 2006, the Company recorded additional abandonment obligation charges of $66.0 million ($47.0 million recorded during the second quarter of 2007) and $75.0 million ($42.0 million recorded during the first six months of 2006), respectively.

 

The estimate to reclaim and abandon the East Cameron facility contains a number of assumptions that could cause the ultimate cost to be higher or lower as there are many uncertainties when working offshore and underwater with damaged equipment and well bores. The Company currently believes costs could range from $185 million to $217 million; however, at this point no better estimate than any other amount within the range can be determined, thus the Company has recorded the estimated provision of $185 million.

 

The Company has filed a claim with its insurance providers regarding the loss at East Cameron. Under the Company’s insurance policies, 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) $100 million of well restoration and safety, in total, for all assets per occurrence and (d) $400 million for debris removal coverage for all assets per occurrence.

 

In December 2005, the Company received the $14 million of scheduled property value for the East Cameron assets and recognized a gain of $9.7 million associated therewith. The Company received the $4 million of business interruption recoveries in the first quarter of 2006, which is reflected in hurricane activity, net, in the Consolidated Statements of Operations. During the fourth quarter of 2006, the Company recorded estimated insurance recoveries of $43 million, which is reflected in other current assets in the accompanying Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006, related to the estimated costs for the known debris removal portion of the claim as the Company believes that it is probable that it will be successful in asserting coverage under the debris removal part of its insurance coverage. During the first half of 2007, the Company recognized $5.5 million of insurance recoveries for debris removal that were not related to the previously discussed recovery, which is reflected in hurricane activity, net, in the Consolidated Statement of Operations. No recoveries have been reflected related to the well restoration and safety coverages as the Company is working to resolve certain issues regarding coverage under this section of the insurance policies. The Company recently commenced legal actions against certain of its insurance carriers regarding policy coverage issues. The Company continues to expect that a substantial portion of the loss will be recoverable from insurance.

 

NOTE O.

Impairment of Long-Lived Assets

 

Nigerian impairment. In June 2007, the Company entered into an agreement to divest its interest in a subsidiary (owned 59 percent by the Company) that held the interest in the deepwater Nigerian Block 320. The agreement was subject to governmental approval. The governmental approval was not obtained by the deadline and as a result, Pioneer terminated the agreement. Based on the terms of the agreement, which established the Company’s estimate of fair value, the Company recorded a $12.2 million impairment charge during the second quarter of 2007 to reduce the net basis to the estimated fair value.

 

Also, as a result of on-going due diligence efforts that emerged as part of the Company’s compliance efforts, the Board of Directors of the Company with assistance from outside counsel determined that the Company cannot, consistent with its legal obligations, fund or approve future operations in connection with Block 320. In particular, the Board of Directors of the Company determined that based on recently obtained information, the Company could not continue its efforts with respect to Block 320 in a manner that is consistent with the U.S. Foreign Corrupt Practices Act. As a result, the Company is undertaking a process of withdrawal from the production sharing contract relating to Block 320 and related agreements. Although the Company believes that its actions are

 

29

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

compliant with its contractual obligations, other parties may dispute the Company's right to withdraw from (or its position that it is not obligated to perform under) the production sharing contract and related agreements and may bring legal actions against the Company to enjoin the actions or recover damages they allege have been caused thereby.

 

United States impairment. During the second quarter of 2007, the Company recorded a $5.7 million impairment provision to reduce the carrying values of certain proved oil and gas properties located in the Company's onshore Gulf Coast area. The impairment provision was determined in accordance with SFAS 144, and reduced the carrying values of the assets to their estimated fair value.

 

NOTE P.

Discontinued Operations

 

 

During 2006, the Company sold its interests in the following oil and gas assets:

 

Country

 

Description of Assets

 

Date Divested

 

Net Proceeds

 

Gain

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

United States

 

Deepwater Gulf of Mexico fields

 

March 2006

 

$ 1,156.9 (a)

 

$      726.1

 

 

 

 

 

 

 

 

 

Argentina

 

Argentine assets

 

April 2006

 

$    669.6

 

$        10.9

 

_____________

(a)

Net proceeds do not reflect the cash payment by the Company of $164.3 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 six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six  months  ended

 

 

 

June 30,

 

June  30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

308

 

$

18,108

 

$

311

 

$

199,677

 

Interest and other

 

 

1,534

 

 

19,411

 

 

3,787

 

 

21,258

 

Gain (loss) on disposition of assets (a)

 

 

(15

)

 

4,282

 

 

(164

)

 

732,784

 

 

 

 

1,827

 

 

41,801

 

 

3,934

 

 

953,719

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas production

 

 

2

 

 

3,287

 

 

103

 

 

31,242

 

Depletion, depreciation and amortization (a)

 

 

 

 

 

 

 

 

37,327

 

Exploration and abandonments (a)

 

 

 

 

1,258

 

 

 

 

7,205

 

General and administrative

 

 

114

 

 

6,537

 

 

553

 

 

8,969

 

Accretion of discount on asset retirement obligations (a)

 

 

 

 

72

 

 

 

 

804

 

Interest

 

 

 

 

116

 

 

 

 

460

 

Other

 

 

10

 

 

222

 

 

37

 

 

1,712

 

 

 

 

126

 

 

11,492

 

 

693

 

 

87,719

 

Income from discontinued operations before income taxes

 

 

1,701

 

 

30,309

 

 

3,241

 

 

866,000

 

Income tax benefit (provision):

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

(202

)

 

(8,545

)

 

(4,699

)

 

(152,575

)

Deferred (a)

 

 

76

 

 

389

 

 

2,331

 

 

(147,098

)

Income from discontinued operations

 

$

1,575

 

$

22,153

 

$

873

 

$

566,327

 

 

_____________

(a)

Represents the significant noncash components of discontinued operations included in the Company’s Consolidated Statements of Cash Flows.

 

30

 


PIONEER NATURAL RESOURCES COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

 

NOTE Q.        Subsequent Event

 

In July 2007, Pioneer Southwest Energy Partners L.P. (“Pioneer Southwest”), a subsidiary of the Company, filed a preliminary registration statement with the SEC to sell limited partner interests, which is subject to completion. Pioneer Southwest will own interests in certain oil and gas properties, which are currently owned by the Company, in the Spraberry field in the Permian Basin of West Texas. Pioneer Southwest expects to sell 44.4 percent (before underwriters’ over-allotment option) of its limited partner interests to the public.

 

31

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Financial and Operating Performance

 

The Company's financial and operating performance for the second quarter of 2007 included the following highlights:

 

The recognition of second quarter 2007 net income of $36.5 million ($.30 per diluted share), as compared to $88.0 million ($0.69 per diluted share) for the second quarter of 2006. Net income for the second quarter of 2006 included income from discontinued operations of $22.2 million ($.17 per diluted share), principally reflecting a gain of $10.9 million on the divestiture of the Argentine assets in April 2006.

A $25.0 million refund from the State of Alaska associated with Alaskan Petroleum Production Tax (“PPT”).

A charge of $47.0 million related to incremental estimated costs to reclaim and abandon the East Cameron 322 facility and wells. The Company expects a substantial portion of this incremental cost to be recoverable from insurance.

Charges totaling $35.4 million related to Nigerian activities ($12.2 million associated with impairment of Block 320 and $23.2 million associated with an unsuccessful well and acreage impairment on Block 256).

Tax benefit in the U.S. of $40.0 million related to the Company’s plan to exit Nigeria.

Net cash provided by operating activities was $217.4 million in the second quarter of 2007 as compared to $158.6 million in the comparable quarter of 2006. The increase in 2007, as compared to 2006, is primarily due to increased sales volumes along with increased NGL and gas prices realized from continuing operations.

Repurchase of 469 thousand shares of common stock at an aggregate cost of $22.8 million under the Company’s share repurchase program.

 

Recent Events

 

Master Limited Partnership IPO. In July 2007, Pioneer Southwest Energy Partners L.P. (“Pioneer Southwest”), a subsidiary of the Company, filed a preliminary registration statement with the SEC to sell limited partner interests, which is subject to completion. Pioneer Southwest will own interests in certain oil and gas properties, which are currently owned by the Company, in the Spraberry field in the Permian Basin of West Texas. Pioneer Southwest expects to sell 44.4 percent (before underwriters’ over-allotment option) of its limited partner interests to the public.

 

This Report on Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities will only be made in accordance with the registration requirements of the Securities Act of 1933 or an exemption therefrom.

 

Share Repurchase Program. The Company announced in April 2007 that its Board approved a $450 million increase in its previously approved share repurchase program, which, after this increase, authorizes the purchase of up to $750 million of its common stock. Through June 30, 2007, the Company expended approximately $47.7 million of the amounts available under this program.

 

Amended Credit Agreement. In April 2007, the Company amended its credit facility and extended its maturity until April 2012. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the terms of the amended credit facility and other long-term debt of the Company.

 

32

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Capital Budget for 2007.In August 2007, the Company announced the expansion of its 2007 capital budget by $150 million to $1.45 billion, excluding acquisitions, effects of asset retirement obligations, capitalized interest and geological and geophysical administrative costs. The expansion is in response to (a) the continued drilling success in Tunisia, the Raton field in Colorado, the Bolton field in Mississippi, (b) drilling associated with the recent Fort Worth Barnett shale acquisition and planned Raton Basin acquisition and (c) the increase in facilities costs related to the Alaskan Oooguruk project. The 2007 capital budget is allocated (i) 46 percent to low-risk development drilling in onshore North American core areas, (ii) 22 percent to the development of the South African South Coast Gas and Alaskan Oooguruk projects, (iii) 28 percent to test and develop lower-risk resource plays in onshore North America and Tunisia and (iv) 4 percent to high-impact exploration activities in the United States and West Africa.

 

The Company believes that its cash flow from operating activities, based on current commodity prices, will not be sufficient to fund the 2007 capital budget. However, the Company believes that borrowings under its credit facility, proceeds from the IPO of Pioneer Southwest, cash flows from operating activities and proceeds from asset dispositions, if any, will be sufficient to fund the 2007 capital program.

 

Third Quarter 2007 Outlook

 

Based on current estimates, the Company expects that third quarter 2007 production will average 105,000 to 110,000 BOEPD. The lower end of the range primarily reflects the typical variability in the timing of oil cargo shipments in South Africa and Tunisia.

 

Third quarter production costs (including production and ad valorem taxes and transportation costs) are expected to average $11.50 to $12.50 per BOE based on current NYMEX strip prices for oil and gas. Depletion, depreciation and amortization ("DD&A") expense is expected to average $10.50 to $11.50 per BOE.

 

Total exploration and abandonment expense is expected to be $30 million to $60 million and could include up to $32 million from activities in the Company’s resource plays, primarily in the Edwards Trend in South Texas, Unita/Piceance in the Rockies area and Tunisia and $28 million in seismic investments, personnel costs and acreage and other costs.

 

General and administrative expense is expected to be $30 million to $34 million. Interest expense is expected to be $34 million to $37 million as a result of increased borrowings during the first half of 2007 to fund the front-end loaded 2007 capital program and a reduction in capitalized interest associated with the start-up of the South Coast Gas project. Accretion of discount on asset retirement obligations is expected to be $2 million to $3 million.

 

The Company's third quarter 2007 effective income tax rate is expected to range from 40 percent to 45 percent based on current capital spending plans.

 

Acquisitions, Divestments, Operations and Drilling Highlights

 

During the first half of 2007, the Company spent over $907.6 million of its $1.45 billion capital budget. The 2007 capital budget was front-end loaded with expenditures to progress the Company’s large development projects (the South Coast Gas project in South Africa and the Oooguruk field development on the North Slope of Alaska), drill high-impact exploration projects in Alaska and Nigeria and to drill winter-access areas in Canada.

 

During March 2006, the Company sold its interests in certain oil and gas properties in the deepwater Gulf of Mexico for net proceeds of $1.2 billion, resulting in a gain of $726.1 million. 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 historic results of these properties and the related gains on disposition are reported as discontinued operations.

 

33

 


PIONEER NATURAL RESOURCES COMPANY

 

 

The following table summarizes by geographic area the Company's finding and development costs incurred during the first half of 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset

 

 

 

 

 

 

Acquisition Costs

 

Exploration

 

Development

 

Retirement

 

 

 

 

 

 

Proved

 

Unproved

 

Costs

 

Costs

 

Obligations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States:     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Permian Basin      

 

$

3,000

 

$

15,429

 

$

17,116

 

$

187,105

 

$

122

 

$

222,772

 

Mid-Continent      

 

 

245

 

 

 

 

5

 

 

6,344

 

 

 

 

6,594

 

Rocky Mountains      

 

 

561

 

 

910

 

 

29,823

 

 

103,911

 

 

381

 

 

135,586

 

Gulf of Mexico     

 

 

 

 

13

 

 

1,657

 

 

549

 

 

2,340

 

 

4,559

 

Onshore Gulf Coast      

 

 

4,726

 

 

4,977

 

 

64,402

 

 

70,341

 

 

153

 

 

144,599

 

Fort Worth Barnett Shale     

 

 

5,598

 

 

34,381

 

 

1,875

 

 

 

 

21

 

 

41,875

 

Alaska      

 

 

 

 

1,555

 

 

31,686

 

 

162,087

 

 

 

 

195,328

 

 

 

 

14,130

 

 

57,265

 

 

146,564

 

 

530,337

 

 

3,017

 

 

751,313

 

Canada      

 

 

82

 

 

3,620

 

 

26,359

 

 

57,081

 

 

1,057

 

 

88,199

 

South Africa      

 

 

 

 

 

 

91

 

 

101,749

 

 

 

 

101,840

 

Tunisia      

 

 

40

 

 

1,000

 

 

57,886

 

 

4,032

 

 

992

 

 

63,950

 

Other Foreign     

 

 

 

 

 

 

4,317

 

 

 

 

 

 

4,317

 

West Africa:     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equatorial Guinea     

 

 

 

 

 

 

541

 

 

 

 

 

 

541

 

Nigeria     

 

 

 

 

 

 

18,289

 

 

 

 

 

 

18,289

 

 

 

 

122

 

 

4,620

 

 

107,483

 

 

162,862

 

 

2,049

 

 

277,136

 

Total Worldwide      

 

$

14,252

 

$

61,885

 

$

254,047

 

$

693,199

 

$

5,066

 

$

1,028,449

 

 

The following table summarizes the Company's development and exploration/extension drilling activities for the six months ended June 30, 2007:

 

 

 

Development Drilling

 

 

 

Beginning Wells

 

Wells

 

Successful

 

Unsuccessful

 

Ending Wells

 

 

 

in Progress

 

Spud

 

Wells

 

Wells

 

In Progress

 

 

 

 

 

 

 

 

 

 

 

 

 

United States      

 

18

 

301

 

295

 

 

24

 

Canada      

 

3

 

 

1

 

1

 

1

 

South Africa      

 

2

 

1

 

3

 

 

 

Total Worldwide      

 

23

 

302

 

299

 

1

 

25

 

 

 

 

 

Exploration/Extension Drilling

 

 

 

Beginning Wells

 

Wells

 

Successful

 

Unsuccessful

 

Ending Wells

 

 

 

in Progress

 

Spud

 

Wells

 

Wells

 

In Progress

 

 

 

 

 

 

 

 

 

 

 

 

 

United States      

 

21

 

22

 

13

 

3

 

27

 

Canada      

 

16

 

17

 

7

 

6

 

20

 

Tunisia     

 

5

 

5

 

3

 

1

 

6

 

West Africa – Nigeria

 

 

1

 

 

1

 

 

Total Worldwide      

 

42

 

45

 

23

 

11

 

53

 

 

 

34

 


PIONEER NATURAL RESOURCES COMPANY

 

 

          Permian Basin area. The Company expects to drill approximately 360 wells in 2007 compared to the 300 wells drilled in 2006. The increase is due to the attractive returns on the Spraberry wells and the success of drilling to the deeper Wolfcamp formations in the majority of the newly drilled wells in the Spraberry field, resulting in incremental production and proved reserves. The Company is continuing to pursue acreage expansion opportunities and bolt-on acquisitions in the area.

 

In July 2007, the Company entered into an agreement under which the Company has the option to purchase an additional 22 percent interest in the Spraberry Midkiff-Benedum gas processing system for $230 million, subject to normal closing adjustments. The additional 22% can be purchased in increments in 2008 and 2009 and, if exercised, will increase the Company’s interest in the system to 49 percent. In conjunction with this transaction, the Company extended its percent of proceeds (“POP”) contract with the plant ten years to 2022 and allowed for incremental increases in the Company’s POP beginning in 2009.

 

Mid-Continent area. The Company continues to pursue field enhancement alternatives to optimize production in the area. In the Hugoton field, the Company has received regulatory approval and plans to commence commingling of production from the Panoma and Council Grove formations. Pioneer is pursuing regulatory relief in the West Panhandle field to allow for additional future drilling locations.

 

Rocky Mountains area. Pioneer expects to drill approximately 250 to 300 wells in the Raton field during 2007. Production is increasing as a result of a successful drilling program plus additional field and wellhead compression. Additionally, the Company intends to further enhance its gathering and compression facilities in the area during 2007.

 

In July 2007, the Company entered into an agreement to acquire an interest in approximately 30,000 net acres in the Raton Basin for $205 million, subject to normal closing adjustments. The acquired interest has approximately 95 Bcf of proved reserves and has current production of approximately 10 MMcfpd. The acquisition is expected to close in the fourth quarter of 2007.

 

In northwest Colorado, the Company's programs to evaluate the CBM resource potential at Lay Creek and Columbine Springs are progressing. If the pilot projects are successful in producing commercial quantities of gas, full field development could begin in 2008.

 

Gulf of Mexico area. During March 2006, the Company sold its interests in certain oil and gas properties in the deepwater Gulf of Mexico for net proceeds of $1.2 billion, resulting in a gain of $726.1 million.

 

During 2006, the Company drilled two successful Clipper appraisal wells. The Company expects to develop the Clipper discovery and is currently evaluating subsea tie-back options to third-party production handling facilities in the area. Pioneer operates the Clipper discovery with a 55 percent working interest.

 

As a result of Hurricane Rita, the Company’s East Cameron facility, located on the Gulf of Mexico shelf, was destroyed and the Company does not plan to rebuild the facility based on the economics of the field. In January 2007, the operations to reclaim and abandon the East Cameron facility began and the Company expects to incur a substantial portion of the reclamation and abandonment costs in 2007. During the second quarter of 2007, the Company increased the estimated cost to reclaim and abandon the East Cameron facility by $47.0 million to an aggregate estimated cost of $185 million. The estimate to reclaim and abandon the East Cameron facility is based upon an analysis prepared by a third-party engineering firm for the majority of the work, an estimate by the Company for the remaining work that was not covered by the third-party analysis and actual abandonment activity to date. The Company recently commenced legal actions against certain of its insurance carriers regarding policy coverage issues. The Company continues to expect that a substantial portion of the loss will be recoverable from insurance.

 

Onshore Gulf Coast area. The Company expects to drill approximately 45 wells (including wells on two to three new prospects) in the Edwards Trend during 2007. The Company continues to add the necessary infrastructure, primarily gas treating capacity and pipeline systems, related to its discoveries and development activity in the trend.

 

35

 


PIONEER NATURAL RESOURCES COMPANY

 

 

In the Edwards Trend, the Company also continues its shooting and interpretation of approximately 900 square miles of 3-D seismic data over its 2006 discoveries. The seismic data will allow the Company to more accurately locate and orient the horizontal wells for optimal results.

 

In the Pawnee field in South Texas, the Company is continuing its new fracture stimulation procedures on the existing wells. The results to date have shown increased production rates and the Company believes the procedure is increasing the recoverable reserves from the wells.

 

In Mississippi, the Company drilled two successful Cotton Valley wells in the Bolton field and installed a gas treating facility, with a current capacity of 10 MMcfpd, to process the gas. Production from the field is currently limited to the gas treating facility capacity. The Company is planning a 3-D seismic shoot in 2008 for the Bolton field to better define the resource potential and 2008 drilling plans.

 

Fort Worth Barnett Shale. During the second quarter of 2007, the Company acquired approximately 13,000 gross acres in the Fort Worth Barnett Shale play. The Company has commenced seismic activities and expects to drill up to 10 wells in 2007 on its acreage. The Company plans to pursue additional acquisitions in the area.

 

Alaska area. On the Oooguruk project, the subsea flowline and facilities to carry produced liquids to existing onshore processing facilities at the Kuparuk River Unit have been installed. Pioneer is currently assembling the drilling rig on location and plans to commence drilling approximately 40 horizontal wells to develop the discovery in the second half of 2007. The Company estimates first production will occur during the first half of 2008.

 

The Company has a 100 percent working interest in the Cosmopolitan Unit. The Company expects to drill an appraisal well to test an additional zone in the previous Cosmopolitan discovery during the second half of 2007.

 

During the 2006-2007 winter drilling season, the Company participated in drilling two exploratory wells in the National Petroleum Reserve - Alaska area, both of which were noncommercial.

 

Canada. During the second quarter of 2007, the Company announced that a new gas field discovered in northern Alberta had begun producing at 18 MMcfpd.  Subsequently, the field was shut-in due to the need for increased water handling capabilities, which the Company plans to address during the 2008 winter drilling season.

 

South Africa. First production from the Company’s South Coast Gas project is expected late in the third quarter of 2007.

 

Tunisia. As a result of recent drilling success, the Company is increasing its 2007 capital budget. The Company is currently planning to drill at least 6 additional wells in 2007.

 

In the Adam Concession, the Company has a new discovery and two successful appraisal wells. All three of the wells are currently on production and the Company plans to drill two additional wells in the second half of 2007.

 

On the Jenein Nord exploration permit, the Company has drilled five discoveries and plans to drill three additional exploration wells during the second half of 2007. The Company is constructing the production facilities and is in the process of applying for a production concession. Production is expected to commence in the fourth quarter of 2007.

 

The Company’s Anaguid exploration permit is located immediately north of the Jenein Nord exploration permit. The Company has acquired an additional 15 percent interest in the Anaguid permit, subject to certain conditions, including governmental approval. The acquisition will increase the Company’s Anaguid interest to 60 percent and result in the transfer of operations to Pioneer. The Company expects that in connection with the governmental approval, the permit will be extended for eighteen months and the Company will commit to drill a well during the extension period. Following governmental approval of the acquisition, the Company intends to acquire additional 3-D seismic data over portions of the Anaguid and Jenein Nord permits, and expects to drill an Anaguid exploration well in 2008.

 

 

36

 


PIONEER NATURAL RESOURCES COMPANY

 

 

During 2007, the Company also had a discovery on the Borj El Khadra exploration permit. The Company expects to drill an appraisal well in the second half of 2007.

 

Nigeria. During the second quarter of 2007, the Company participated in the drilling of the Ofuruma 1X well on the Devon Energy-operated Block 256 in deepwater Nigeria. The Ofuruma 1X well found only non-commercial oil and gas accumulations and fulfills the Company's drilling commitments on Block 256. The Company is in the process of relinquishing its interest in Block 256.

 

A subsidiary of the Company joined other companies in a production sharing contract covering the oil prospecting license for Block 320 in deepwater Nigeria, gaining exploration rights from the Nigerian National Petroleum Corporation. The subsidiary, which holds a 51 percent interest in Block 320, is indirectly owned 59 percent by the Company and 41 percent by an unaffiliated third party. In July 2007, the Company announced that it had reached an agreement to divest its interest with respect to Block 320, subject to governmental approvals and certain other conditions. The purchaser was unable to obtain the requisite governmental approvals prior to the deadline set forth in the agreement (as extended) and as a result, the Company terminated the agreement.

 

As a result of on-going due diligence efforts that emerged as part of the Company’s compliance efforts, the Board of Directors of the Company with assistance from outside counsel determined that the Company cannot, consistent with its legal obligations, fund or approve future operations in connection with Block 320. In particular, the Board of Directors of the Company determined that based on recently obtained information, the Company could not continue its efforts with respect to Block 320 in a manner that is consistent with the U.S. Foreign Corrupt Practices Act. As a result, the Company is undertaking a process of withdrawal from the production sharing contract relating to Block 320 and related agreements. Although the Company believes that its actions are compliant with its contractual obligations, other parties may dispute the Company's right to withdraw from (or its position that it is not obligated to perform under) the production sharing contract and related agreements and may bring legal actions against the Company to enjoin the actions or recover damages they allege have been caused thereby.

 

Equatorial Guinea. The Company owns a 50 percent interest in Block H in deepwater Equatorial Guinea, which covers over 240,000 acres. In late 2006, the Republic of Equatorial Guinea ratified a new hydrocarbons law, which effectively increases the obligations of the parties subject to the underlying production sharing contract in various respects. In addition, drilling costs have increased significantly beyond those originally anticipated. The Company and the other parties in Block H have been evaluating the effect of the new hydrocarbons law and the increased well costs, but have been unable to reach an agreement as to the parties' obligations. As a result, the parties have commenced arbitration to determine the parties' relative rights under a joint operating agreement relating to well operations in Block H. See Note I of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for specific information regarding the Company's arbitration associated with Block H.

 

Results of Operations

 

Oil and gas revenues. Oil and gas revenues from continuing operations totaled $458.0 million and $850.0 million for the three and six months ended June 30, 2007, respectively, as compared to $407.6 million and $787.0 million for the same respective periods of 2006.

 

The increase in oil and gas revenues from continuing operations during the three and six months ended June 30, 2007, as compared to the same periods of 2006, is reflective of increases in United States, Canadian and Tunisian revenues, partially offset by a decline in South African revenues. The increase in revenues in the United States was primarily due to volume increases resulting from successful drilling activity and reductions in scheduled volumetric production payment (“VPP”) deliveries, combined with an increase in reported natural gas liquids (“NGL”) and gas prices. Revenues in Canada and Tunisia increased primarily due to new volumes attributable to successful drilling programs, partially offset by decreases in commodity prices. South African revenues declined due to normal production decline rates in the Sable field and the timing of oil cargo liftings combined with a decline in reported oil prices.

 

37

 


PIONEER NATURAL RESOURCES COMPANY

 

 

         The following table provides average daily sales volumes from continuing operations, by geographic area and in total, for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Oil (Bbls):

 

 

 

 

 

 

 

 

 

United States

 

18,753

 

17,671

 

18,779

 

17,320

 

Canada

 

292

 

307

 

326

 

292

 

South Africa

 

3,080

 

4,284

 

2,716

 

4,680

 

Tunisia

 

3,763

 

2,309

 

3,927

 

2,441

 

Worldwide

 

25,888

 

24,571

 

25,748

 

24,733

 

NGLs (Bbls):

 

 

 

 

 

 

 

 

 

United States

 

17,685

 

18,731

 

17,272

 

18,455

 

Canada

 

455

 

412

 

397

 

415

 

Worldwide

 

18,140

 

19,143

 

17,669

 

18,870

 

Gas (Mcf):

 

 

 

 

 

 

 

 

 

United States

 

308,342

 

286,270

 

295,540

 

280,553

 

Canada

 

54,176

 

44,801

 

50,962

 

40,317

 

Tunisia

 

7,250

 

 

3,645

 

 

Worldwide

 

369,768

 

331,071

 

350,147

 

320,870

 

Total (BOE):

 

 

 

 

 

 

 

 

 

United States

 

87,828

 

84,114

 

85,307

 

82,533

 

Canada

 

9,777

 

8,186

 

9,217

 

7,427

 

South Africa

 

3,080

 

4,284

 

2,716

 

4,680

 

Tunisia

 

4,971

 

2,309

 

4,535

 

2,441

 

Worldwide

 

105,656

 

98,893

 

101,775

 

97,081

 

 

On a quarter-to-quarter BOE comparison, average daily sales volumes increased by 4 percent in the United States, 19 percent in Canada and 115 percent in Tunisia, while average daily sales volumes decreased by 28 percent in South Africa. In Tunisia, the Company recorded gas sales volumes and revenue under a gas sales arrangement that was completed during the second quarter of 2007.

 

During the three and six month periods ended June 30, 2007, as compared to the three and six month periods ended June 30, 2006, oil and gas volumes delivered under the Company’s VPPs decreased by five percent (825 BOE per day) and five percent (736 BOE per day), respectively.

 

38

 


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 six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Average reported prices:

 

 

 

 

 

 

 

 

 

Oil (per Bbl):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

57.93

 

$

69.43

 

$

54.97

 

$

64.82

 

Canada

 

$

60.79

 

$

72.37

 

$

51.94

 

$

69.89

 

South Africa

 

$

69.73

 

$

71.98

 

$

66.59

 

$

65.94

 

Tunisia

 

$

64.89

 

$

67.30

 

$

62.11

 

$

62.41

 

Worldwide

 

$

60.38

 

$

69.71

 

$

57.25

 

$

64.86

 

NGL (per Bbl):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

39.11

 

$

35.84

 

$

35.51

 

$

34.81

 

Canada

 

$

55.17

 

$

57.97

 

$

56.87

 

$

56.10

 

Worldwide

 

$

39.52

 

$

36.32

 

$

35.99

 

$

35.28

 

Gas (per Mcf):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

7.53

 

$

6.08

 

$

7.36

 

$

6.33

 

Canada

 

$

6.96

 

$

7.35

 

$

7.53

 

$

7.48

 

Tunisia

 

$

7.65

 

$

 

$

7.65

 

$

 

Worldwide

 

$

7.45

 

$

6.25

 

$

7.39

 

$

6.48

 

Average realized prices:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (per Bbl):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

60.82

 

$

66.06

 

$

58.13

 

$

63.15

 

Canada

 

$

60.79

 

$

72.37

 

$

51.94

 

$

69.89

 

South Africa

 

$

69.73

 

$

71.26

 

$

66.59

 

$

65.61

 

Tunisia

 

$

64.89

 

$

67.30

 

$

62.11

 

$

62.41

 

Worldwide

 

$

62.48

 

$

67.15

 

$

59.55

 

$

63.63

 

NGL (per Bbl):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

39.11

 

$

35.84

 

$

35.51

 

$

34.81

 

Canada

 

$

55.17

 

$

57.97

 

$

56.87

 

$

56.10

 

Worldwide

 

$

39.52

 

$

36.32

 

$

35.99

 

$

35.28

 

Gas (per Mcf):

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

6.49

 

$

5.56

 

$

6.37

 

$

6.26

 

Canada

 

$

6.32

 

$

6.90

 

$

6.43

 

$

7.14

 

Tunisia

 

$

7.65

 

$

 

$

7.65

 

$

 

Worldwide

 

$

6.49

 

$

5.75

 

$

6.39

 

$

6.37

 

 

Hedging activities. The Company, from time to time, utilizes commodity swap and collar contracts in order to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. During the three and six months ended June 30, 2007, the Company's commodity price hedges decreased oil and gas revenues from continuing operations by $18.1 million and $38.2 million, respectively, as compared to $26.7 million and $84.1 million during the same respective periods in 2006. The effective portions of changes in the fair values of the Company's commodity price hedges are deferred as increases or decreases to stockholders’ equity until the underlying hedged transaction occurs. Consequently, changes in the effective portions of commodity price hedges add volatility to the Company's reported stockholders' equity until the hedge derivative matures or is terminated.

 

39

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Deferred revenue. During the three and six months ended June 30, 2007, the Company's amortization of deferred VPP revenue increased oil and gas revenues from continuing operations by $45.4 million and $90.4 million, respectively, as compared to increases of $47.9 and $95.8 million during the same respective periods in 2006. 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 six months ended June 30, 2007 was $27.7 million and $41.6 million, respectively, as compared to $9.7 million and $22.9 million for the same respective periods in 2006. The $18.0 million increase in interest and other income from continuing operations during the three months ended June 30, 2007, as compared to the same period in 2006, was primarily due to the $25.0 million Alaskan PPT credit realized during the second quarter of 2007, partially offset by a $5.4 million decrease in interest income. The $18.7 million increase in interest and other income from continuing operations during the six months ended June 30, 2007, as compared to the same period in 2006, was primarily due to the aforementioned PPT credit, partially offset by a $3.6 million decrease in business interruption insurance recoveries and a $5.6 million decrease in interest income.

 

Oil and gas production costs. The Company recorded oil and gas production costs from continuing operations of $120.4 million and $224.8 million during the three and six months ended June 30, 2007, respectively, as compared to $103.1 million and $197.7 million for the same respective periods of 2006. 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 9 percent during the three and six months ended June 30, 2007, as compared to the same respective periods in 2006, primarily due to continuing inflation of oilfield service costs and third-party transportation charges, as well as increases in United States ad valorem taxes due to overall commodity price increases. Also impacting the production costs for the three and six months ended June 30, 2007 are the (i) repair and clean-up costs, and associated production downtime, from severe weather conditions that affected certain areas of the Company’s United States operations during the first quarter of 2007 and (ii) costs of maintenance activities related to the compression facilities in the Raton field in Colorado.

 

The following tables provide the components of the Company's total oil and gas production costs per BOE from continuing operations and total oil and gas production costs per BOE from continuing operations by geographic area for the three and six months ended June 30, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

$

7.09

 

$

6.23

 

$

6.90

 

$

6.18

 

Third-party transportation charges

 

 

1.42

 

 

1.20

 

 

1.40

 

 

1.21

 

Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ad valorem

 

 

1.38

 

 

1.50

 

 

1.34

 

 

1.36

 

Production

 

 

1.63

 

 

1.78

 

 

1.64

 

 

1.77

 

Workover costs

 

 

1.01

 

 

0.74

 

 

0.93

 

 

0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total production costs

 

$

12.53

 

$

11.45

 

$

12.21

 

$

11.25

 

 

 

40

 


PIONEER NATURAL RESOURCES COMPANY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

11.97

 

$

10.92

 

$

11.61

 

$

10.81

 

Canada

 

$

16.90

 

$

14.47

 

$

17.99

 

$

16.14

 

South Africa

 

$

25.92

 

$

22.00

 

$

23.01

 

$

16.15

 

Tunisia

 

$

5.38

 

$

0.71

 

$

5.26

 

$

2.07

 

Worldwide

 

$

12.53

 

$

11.45

 

$

12.21

 

$

11.25

 

 

 

Depletion, depreciation and amortization expense. The Company's total DD&A expense from continuing operations was $10.81 and $10.65 per BOE for the three and six months ended June 30, 2007, respectively, as compared to $9.78 and $9.70 per BOE during the same respective periods of 2006. Depletion expense from continuing operations, the largest component of DD&A expense from continuing operations, was $10.07 and $9.88 per BOE during the three and six months ended June 30, 2007, respectively, as compared to $9.17 and $9.05 per BOE during the same respective periods in 2006. The increases in per BOE depletion expense from continuing operations of 10 percent and nine percent during the three and six months ended June 30, 2007, respectively, as compared to the same respective periods in 2006, were primarily due to finding cost inflation. Per BOE depletion expense in South Africa during the six months ended June 30, 2007, as compared to the first six months ended June 30, 2006, decreased primarily due to positive proved reserve revisions.

 

The following table provides depletion expense per BOE from continuing operations by geographic area for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended

June 30,

 

Six months ended

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

9.66

 

$

8.79

 

$

9.49

 

$

8.76

 

Canada

 

$

17.62

 

$

16.70

 

$

17.28

 

$

14.63

 

South Africa

 

$

5.37

 

$

4.45

 

$

5.24

 

$

7.42

 

Tunisia

 

$

5.55

 

$

4.79

 

$

4.95

 

$

4.87

 

Worldwide

 

$

10.07

 

$

9.17

 

$

9.88

 

$

9.05

 

 

 

Impairment of long-lived assets. During the three and six months ended June 30, 2007, the Company recognized an impairment charge of $17.9 million. Approximately $12.2 million of the impairment relates to the attempted divestiture of the Company's subsidiary that holds the interest in Block 320 in deepwater Nigeria. Additionally, $5.7 million relates to impairment of certain oil and gas properties located in the Company’s onshore Gulf Coast area, as a result of poor well performance. See Note O of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information on the impairment charges.

 

41

 


PIONEER NATURAL RESOURCES COMPANY

 

 

          Exploration and abandonments expense. The following tables provide the Company's geological and geophysical costs, exploratory dry hole expense, lease abandonments and other exploration expense from continuing operations by geographic area for the three and six months ended June 30, 2007 and 2006 (in thousands):

 

 

 

United

 

 

 

South

 

 

 

 

 

 

 

 

 

States

 

Canada

 

Africa

 

Tunisia

 

Other

 

Total

 

Three months ended June 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Geological and geophysical

 

$

21,349

 

$

2,894

 

$

47

 

$

298

 

$

1,551

 

$

26,139

 

Exploratory dry holes

 

 

2,373

 

 

1,154

 

 

 

 

5,057

 

 

15,554

 

 

24,138

 

Leasehold abandonments and other

 

 

10,008

 

 

1,866

 

 

 

 

 

 

7,639

 

 

19,513

 

 

 

$

33,730

 

$

5,914

 

$

47

 

$

5,355

 

$

24,744

 

$

69,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geological and geophysical

 

$

11,962

 

$

2,458

 

$

47

 

$

5,112

 

$

4,404

 

$

23,983

 

Exploratory dry holes

 

 

15,723

 

 

533

 

 

 

 

 

 

540

 

 

16,796

 

Leasehold abandonments and other

 

 

650

 

 

189

 

 

 

 

 

 

 

 

839

 

 

 

$

28,335

 

$

3,180

 

$

47

 

$

5,112

 

$

4,944

 

$

41,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geological and geophysical

 

$

43,350

 

$

3,948

 

$

91

 

$

576

 

$

6,788

 

$

54,753

 

Exploratory dry holes

 

 

41,387

 

 

3,692

 

 

 

 

7,608

 

 

15,562

 

 

68,249

 

Leasehold abandonments and other

 

 

12,645

 

 

2,876

 

 

 

 

 

 

7,639

 

 

23,160

 

 

 

$

97,382

 

$

10,516

 

$

91

 

$

8,184

 

$

29,989

 

$

146,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geological and geophysical

 

$

32,622

 

$

2,804

 

$

130

 

$

6,196

 

$

13,687

 

$

55,439

 

Exploratory dry holes

 

 

31,358

 

 

3,037

 

 

 

 

58

 

 

15,155

 

 

49,608

 

Leasehold abandonments and other

 

 

636

 

 

755

 

 

 

 

 

 

17,822

 

 

19,213

 

 

 

$

64,616

 

$

6,596

 

$

130

 

$

6,254

 

$

46,664

 

$

124,260

 

 

The Company's exploration and abandonment expense from continuing operations during the second quarter of 2007 is primarily attributable to (i) continued seismic activity in the Company’s South Texas and Rocky Mountains plays, (ii) the $23.2 million dry hole and abandonment charge for the unsuccessful Ofuruma 1X well on the Devon Energy-operated Block 256 in deepwater Nigeria, (iii) $11.7 million of dry hole and abandonment charges associated with the Company’s exploration activities in the National Petroleum Reserve – Alaska (“NPRA”) on the North Slope of Alaska, (iv) a $5.1 million write off of previously suspended costs associated with an exploration well drilled during 2003 in the Tunisian Anaguid permit and (v) $2.6 million of Canadian dry hole and abandonment charges. During the first half of 2007, the Company drilled and evaluated 34 exploration/extension wells, 23 of which were successfully completed as discoveries. During the same respective period in 2006, the Company drilled and evaluated 213 exploration/extension wells, 201 of which were successfully completed as discoveries. The decline in the number of exploration/extension wells drilled by the Company is reflective of the Company’s significant reduction in its drilling in Canada, primarily in the Horseshoe Canyon area.

 

General and administrative expense. General and administrative expense from continuing operations for the three and six months ended June 30, 2007 were $30.8 million and $65.3 million, respectively, as compared to $29.5 million and $61.7 million during the same respective periods in 2006. The increase in general and administrative expense from continuing operations during the first six months of 2007, as compared to the first six months of 2006, was primarily due to increases in administrative staff and performance-related compensation costs, including the amortization of restricted stock awarded to officers, directors and employees. As of June 30, 2007, the Company has $54.2 million of deferred compensation expense related to unvested restricted stock awards that will be charged to earnings over a weighted average period of approximately one year and nine months. The Company continues to monitor its general and administrative expense and is focused on administrative cost control. However, the Company anticipates that the formation of Pioneer Southwest will necessitate future growth in the Company’s general and administrative expenses.

 

42

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Interest expense. Interest expense from continuing operations was $30.5 million and $59.0 million for the three and six months ended June 30, 2007, respectively, as compared to $22.8 million and $59.3 million for the same respective periods in 2006. The weighted average interest rate on the Company's indebtedness for the three and six months ended June 30, 2007, including the effects of interest rate derivatives and capitalized interest, was 6.5 percent and 6.6 percent, respectively, as compared to 7.2 percent and 6.7 percent for the same respective periods in 2006. The increase in interest expense from continuing operations during the three months ended June 30, 2007, as compared to the same period of 2006, was primarily due to (i) a $12.6 million increase in interest incurred on senior note and credit agreement borrowings due to increased debt funding of additions to oil and gas properties and (ii) a $2.4 million increase in noncash interest expense attributable to certain discounted liabilities and deferred hedge losses, partially offset by (iii) a $7.3 million increase in capitalized interest on the Company’s Oooguruk and South Coast Gas development projects in Alaska and South Africa, respectively. The Company expects interest expense to increase in future periods due to its large development projects nearing completion. The Company will cease its capitalization of interest costs incurred on the projects when they are completed, with the South Coast Gas project expected to be completed during the third quarter of 2007.

 

Hurricane activity, net. The Company recorded net hurricane related activity expenses of $47.0 million and $60.5 million during the three and six months ended June 30, 2007, respectively, and $38.0 million for the six months ended June 30, 2006, which are associated with the Company's East Cameron platform facility, located on the Gulf of Mexico shelf that was destroyed during 2005 by Hurricane Rita. The primary reason for the incremental increase in the reclamation and abandonment obligation in the second quarter of 2007 is the result of increases in the amount of time expected to complete certain aspects of the project based on the recent project work experience.

 

The Company does not plan to rebuild the facility based on the economics of the field. In January 2007, the operations to reclaim and abandon the East Cameron facility began and the Company expects to incur a substantial portion of the reclamation and abandonment costs in 2007. The Company recently commenced legal actions against certain of its insurance carriers regarding policy coverage issues. The Company continues to expect that a substantial portion of the loss will be recoverable from insurance. See Note N of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for specific information regarding the Company's East Cameron facility reclamation and abandonment.

 

Other expenses. Other expenses from continuing operations for the three and six months ended June 30, 2007 were $10.2 million and $18.6 million, respectively, as compared to $11.8 million and $16.8 million for the same respective periods in 2006. The Company’s other expenses include legal and environmental contingency accruals, minority interests in earnings of subsidiaries, foreign exchange losses and other nonrecurring expenses.

 

Income tax provision. The Company recognized income tax provisions on continuing operations of $16.3 million and $32.2 million during the three and six months ended June 30, 2007, respectively, as compared to $50.2 million and $70.9 million for the same respective periods in 2006. The Company's effective tax rate on continuing operations of 31.8 percent and 33.1 percent during the three and six months ended June 30, 2007, respectively, differs from the combined United States federal and state statutory rate of approximately 37.0 percent primarily due to:

 

 

foreign tax rates,

 

statutes in foreign jurisdictions that differ from those in the United States, including a newly-enacted South African tax law allowing for the deduction of 150 percent of development expenditures resulting in a $5.2 million tax benefit recognized for the six months ended June 30, 2007,

 

a $40.0 million tax benefit in the second quarter of 2007 related to the Company’s plan to exit from Nigeria, as previously discussed,

 

a $13.0 million U.S. tax provision in the second quarter of 2007 related to the Company no longer having identifiable plans to reinvest the South Africa earnings in South Africa, and

 

changes in deferred tax asset valuation allowances.

 

See Note D of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's income taxes.

 

43

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Discontinued operations. During 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

 

 

 

 

 

United States

 

Deepwater Gulf of Mexico fields

 

March 2006

 

 

 

 

 

Argentina

 

Argentine assets

 

April 2006

 

 

The Company recognized income from discontinued operations of $1.6 million and $.9 million during the three and six months ended June 30, 2007, respectively, as compared to $22.2 million and $566.3 million for the same respective periods of 2006. The income from discontinued operation for the first half of 2006 includes the gains on the March 2006 disposition of the Company’s deepwater Gulf of Mexico assets and the April 2006 disposition of the Company’s Argentine assets. See Note P of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding discontinued operations.

 

Capital Commitments, Capital Resources and Liquidity

 

Capital commitments. The Company's primary needs for cash are for development, exploration and acquisition of oil and gas properties, repayment of contractual obligations and working capital obligations. Funding for these cash needs, as well as funding for any stock repurchases that the Company may undertake, may be provided by any combination of internally-generated cash flow, proceeds from the disposition of nonstrategic assets or alternative financing sources as discussed in "Capital resources" below.

 

Oil and gas properties. The Company's cash expenditures for additions to oil and gas properties during the three and six months ended June 30, 2007, totaled $536.2 million and $974.8 million, respectively, as compared to $309.5 million and $644.4 million for the same respective periods of 2006. During the three and six months ended June 30, 2007, the Company's expenditures for additions to oil and gas properties were funded by $217.4 million and $347.4 million, respectively, of net cash provided by operating activities and borrowings on the Company’s credit facility. During the three and six months ended June 30, 2006, the Company's additions to oil and gas properties were funded by $158.6 million and $476.9 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 March 2006 disposition of the Company's deepwater Gulf of Mexico assets (net of payments to terminate derivative instruments associated with the deepwater Gulf of Mexico assets) and the April 2006 disposition of the Company’s Argentine assets.

 

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 June 30, 2007, 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, 2006, the material changes in the Company's contractual obligations included a $732.8 million increase in outstanding long-term borrowings, a $90.4 million decrease in the Company’s VPP obligations and a $52.1 million decrease in the Company's net derivative obligations. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's long-term debt and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for a table of changes in the fair value of the Company's open derivative obligations during the six months ended June 30, 2007.

 

44

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Environmental contingency. A subsidiary of the Company was notified by the Texas Commission on Environmental Quality ("TCEQ") in August 2005 that the TCEQ considered 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. The TCEQ recently informed the Company that other previous owners and operators applied for acceptance into the Texas Voluntary Cleanup Program to clean up the site. As a result, the TCEQ deleted the site from the state Superfund registry and no longer considers the Company’s subsidiary a potentially responsible party with respect to the site. 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. The Company expects that these resources will be sufficient to fund its capital commitments during the foreseeable future. For 2007, the Company expects its capital commitments to exceed estimated cash flows from operations, resulting in additional borrowings under the Company's credit facility.

 

Asset divestitures. During the three and six months ended June 30, 2007, the Company received $13.3 million and $18.0 million of net proceeds from disposition of assets, the substantial portions of which included $12.0 million of proceeds from the sale of two drilling rigs during the second quarter of 2007 and the sale of an unproved domestic prospect during the first quarter of 2007. During March 2006, the Company sold all of its interests in certain oil and gas properties in the deepwater Gulf of Mexico for net proceeds of $1.2 billion, resulting in a gain of $726.1 million. The proceeds were reduced by $164.3 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. The net proceeds from these 2006 divestitures were used to reduce outstanding indebtedness, to fund a portion of the Company’s 2006 additions to oil and gas properties, for stock repurchases and for general corporate purposes.

 

Operating activities. Net cash provided by operating activities during the three and six months ended June 30, 2007 was $217.4 million and $347.4 million, respectively, as compared to $158.6 million and $476.9 million for the same respective periods in 2006. The increase in net cash provided by operating activities during the second quarter of 2007, as compared to the second quarter of 2006, is primarily due to (i) increased sales volumes and increased NGL and gas prices realized from continuing operations, partially offset by increased production costs and (ii) the $25.0 million of income realized from Alaskan PPT credits. The decrease in net cash provided by operating activities during the first six months of 2007, as compared to the comparable period during 2006, was primarily due to 2006 net cash provided by operating activities associated with the divested deepwater Gulf of Mexico and Argentine assets.

 

Investing activities. Investing activities used $539.0 million and $986.4 million of cash during the three and six months ended June 30, 2007, respectively, and provided $343.5 million and $965.3 million of net cash for the same respective periods of 2006. The decrease in net cash provided by investing activities during the second quarter of 2007, as compared to the second quarter of 2006, is primarily due to the $679.4 million of net proceeds received from the divestiture of assets during the second quarter of 2006, a substantial portion of which resulted from the sale of the Company’s Argentine assets, and offset by a $226.6 million increase in additions to oil and gas properties. The decrease in net cash provided by investing activities during the first half of 2007, as compared to the first half of 2006, is primarily due to the $1.6 billion of net proceeds received from the divestiture of assets during the second quarter of 2006, a substantial portion of which resulted from the sale of the Company’s deepwater Gulf of Mexico and Argentine assets, and offset by a $330.4 million increase in additions to oil and gas properties during the comparable periods. The increase in additions to oil and gas properties is due to the timing of expenditures of the Company’s 2007 capital budget being heavily weighted to the first half of the year.

 

Financing activities. Net cash provided by financing activities during the three and six months ended June 30, 2007 was $333.1 million and $656.7 million, respectively, as compared to net cash used in financing activities of $90.3 million and $1.0 billion during the same respective periods in 2006. The increases in net cash provided by

 

45

 


PIONEER NATURAL RESOURCES COMPANY

 

 

financing activities during the three and six months ended June 30, 2007, as compared to the same periods of 2006, were due to net borrowings of long-term debt during the 2007 periods to fund portions of the Company’s additions to oil and gas properties, as compared to significant repayments of long-term debt during the 2006 periods from net proceeds from the divestitures of deepwater Gulf of Mexico and Argentine assets.

 

During February 2007, the Board declared a semiannual dividend of $.13 per common share payable to shareholders of record on March 30, 2007. Associated therewith, the Company paid $16.0 million of aggregate dividends during April 2007. Future dividends are at the discretion of the Board, and, if declared, the Board may change the current dividend amount in the future if warranted by future liquidity and capital resource attributes.

 

During February 2007, the Board also approved a share repurchase program authorizing the purchase of up to $300 million of the Company's common stock, which authorization the Board subsequently increased by $450 million during April 2007, for a total program of $750 million. During the three and six months ended June 30, 2007, the Company expended $22.8 million to acquire 469 thousand shares of treasury stock and $54.2 million to acquire 1.3 million shares of treasury stock, respectively. During the three and six months ended June 30, 2006, the Company expended $170.5 million to acquire 4.3 million shares of treasury stock and $172.4 million to acquire 4.4 million shares of treasury stock, respectively. As of June 30, 2007, approximately $702.2 million of treasury stock may be purchased in the future under the $750 million Board authorization.

 

During March 2007, the Company issued $500 million of 6.65% Notes for net proceeds of $494.2 million. The Company used the net proceeds from the 6.65% Notes to reduce indebtedness under its credit facility. During April 2007, the Company entered into the amended credit facility that extended the maturity of its credit facility to April 11, 2012. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the significant terms of the amended credit facility.

 

On August 15, 2007, $32.1 million principal amount of the Company’s 8.25% senior notes mature and on January 15, 2008, $3.8 million principal amount of the Company’s 6.50% senior notes mature. The Company intends to fund the maturities of these senior notes with borrowings under its credit facility.

 

In July 2007, Pioneer Southwest filed a preliminary registration statement with the SEC to sell limited partner interests, which is subject to completion. Pioneer Southwest will own interests in certain oil and gas properties, which are currently owned by the Company, in the Spraberry field in the Permian Basin of West Texas. Pioneer Southwest expects to sell 44.4 percent (before underwriters’ over-allotment option) of its limited partner interests to the public (the “Offering”). Completion of the Offering is subject to market conditions and numerous other risks beyond the control of Pioneer Southwest, and therefore it is possible that the Offering will not be completed, will not raise the planned amount of capital even if the Offering is completed, or will not be completed when planned. If completed as planned, the Offering is estimated to result in the Company’s receipt of approximately $232 million of net cash proceeds during the second half of 2007.

 

46

 


PIONEER NATURAL RESOURCES COMPANY

 

 

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.

 

Alaskan Petroleum Production Tax. In 2006, the State of Alaska replaced its severance tax with a new tax called the PPT, beginning in periods after March 31, 2006. The major components of the new PPT are:

 

 

The "basic tax", which begins at 22.5 percent (this rate can increase based on factors tied to commodity prices) of property income for designated pools of assets in Alaska. Property income is basically defined as oil and gas revenue less lease operating expenses, qualified capital expenditures, property taxes and certain other costs. If property income is a loss then it converts to a PPT loss carryforward at a rate of 20 percent of the property income. PPT loss carryforwards can be used to reduce future PPT liabilities or transferred to a third party. For both the period in 2006 and the six months ended June 30, 2007, the Company estimates its PPT loss carryforwards to be approximately $21.0 million and $26.0 million, respectively.

 

A capital expenditure credit of 20 percent of qualified capital expenditures within Alaska. The credit can be (a) used to reduce a company’s current PPT liability, (b) carried forward and used to reduce future PPT liabilities or (c) transferred to a third party. Certain qualified exploration capital expenditures can receive up to an additional 20 percent capital expenditure credit on the expenditures previously discussed. For 2006 and the six months ended June 30, 2007, the Company estimates its capital expenditure credits to be approximately $20.4 million and $33.6 million, respectively.

 

Companies with production of less than 50,000 BOEPD within Alaska may also claim an annual non-transferable and non-refundable credit against PPT of $12 million per year for ten consecutive years, once the election is made to receive this credit.

 

Companies that incurred qualified capital expenditures within Alaska in the five years preceding the PPT effective date can earn non-transferable transitional capital credits of 20 percent of such expenditures. These credits can be used to reduce a company’s present and future PPT liabilities. The Company estimates it has approximately $20 million of these credits to offset future PPT liabilities.

 

The Company currently has no production in Alaska and accordingly has no PPT liabilities. The Company anticipates that it will recognize benefits from the carryforwards and credits as they are used to reduce future PPT liabilities, sold to third parties or refunded by the State of Alaska. During the second quarter of 2007, the Company received $25.0 million of PPT credits through a refund from the State of Alaska, which amount has been recognized in interest and other income in the Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2007. The Company may sell additional certificates in the future. Currently, the State of Alaska budgets annual amounts to provide for refunds of PPT credits; however, no assurances can be made that the State of Alaska will budget for future refunds. The Company cannot predict the price that a third-party would pay for the certificates, but anticipates that it will be at a discount to the face amount of the certificates.

 

Liquidity. The Company's principal source of short-term liquidity is cash on hand and unused borrowing capacity under the credit facility. There were $559.0 million of borrowings under the credit facility as of June 30, 2007. After deducting $115.4 million of undrawn and outstanding letters of credit under the credit facility, the Company had $825.6 million of unused borrowing capacity as of June 30, 2007. In the future, to the extent that Pioneer's liquidity results in cash in excess of immediate capital needs, the Company may repay indebtedness or invest the excess funds.

 

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. S&P’s rating for the Company is BB+ with a stable outlook. Moody's rating for the Company is Ba1 with a negative outlook. S&P and Moody's consider many factors in determining the Company's ratings including: production growth opportunities, liquidity, debt levels and asset and reserve mix. A reduction in the Company’s debt ratings could negatively impact the Company's ability to obtain additional financing or the interest rate, fees and other terms associated with such additional financing. As of June 30, 2007, the Company was in compliance with all of its debt covenants.

 

47

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Book capitalization and current ratio. The Company's book capitalization at June 30, 2007 was $5.3 billion, consisting of debt of $2.2 billion and stockholders' equity of $3.1 billion. The Company's debt to book capitalization increased to 42 percent at June 30, 2007 from 33 percent at December 31, 2006, primarily due to indebtedness which was used to fund the Company's additions to oil and gas properties. The Company’s debt to book capitalization at December 31, 2005 was 48 percent and decreased to 33 percent at December 31, 2006. The decrease is principally due to the reduction of debt from the application of the proceeds received from the divestiture of the deepwater Gulf of Mexico assets and Argentine assets in 2006. The Company's ratio of current assets to current liabilities was .68 to 1.00 at June 30, 2007 as compared to .60 to 1.00 at December 31, 2006.

 

New accounting pronouncement. In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 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 48 also provides guidance on measurement, classification, interim accounting and disclosure. The Company adopted FIN 48 on January 1, 2007 and recorded no adjustment related to the adoption. See Note D of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information.

 

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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The implementation of SFAS 159 is not expected to have a material effect on the financial condition or results of operations of the Company.

 

48

 


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, 2006. 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, 2006.

 

Although certain derivative contracts to which the Company has been a party did not qualify as hedges, the Company does not enter into derivative or other financial instruments for trading purposes.

 

The following table reconciles the changes that occurred in the fair values of the Company's open derivative contracts during the first half of 2007:

 

 

 

Derivative Contract Net Liabilities (a)

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Interest

 

Exchange

 

 

 

 

 

Commodities

 

Rate

 

Rate

 

Total

 

 

 

(in thousands)

 

Fair value of contracts outstanding as of

December 31, 2006

 

$

(68,228

)

$

 

$

 

$

(68,228

)

Changes in contract fair value (b)

 

 

28,139

 

 

(1,537

)

 

(64

)

 

26,538

 

Contract maturities

 

 

(40,300

)

 

 

 

64

 

 

(40,236

)

Contract terminations

 

 

70,197

 

 

1,537

 

 

 

 

71,734

 

Fair value of contracts outstanding as of
June 30, 2007

 

$

(10,192

)

$

 

$

 

$

(10,192

)

 

_____________

(a)

Represents the fair values of open derivative contracts subject to market risk. The Company also had $137.1 million and $131.1million of obligations under terminated derivatives as of June 30, 2007 and December 31, 2006, respectively, for which no market risk exists.

(b)

At inception, derivative contracts entered into by the Company had 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 June 30, 2007 or December 31, 2006.

 

Interest rate sensitivity. 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 information regarding debt transactions.

 

49

 


PIONEER NATURAL RESOURCES COMPANY

 

 

         The following table provides information about other financial instruments to which the Company was a party as of June 30, 2007 and that are sensitive to changes in interest rates. For debt obligations, the table presents maturities by expected maturity dates, the weighted average interest rates expected to be paid on the debt given current contractual terms and market conditions and the debt's estimated fair value. For fixed rate debt, the weighted average interest rate represents the contractual fixed rates that the Company was obligated to periodically pay on the debt as of June 30, 2007. For variable rate debt, the average interest rate represents the average rates being paid on the debt projected forward proportionate to the forward yield curve for LIBOR on August 8, 2007. As of June 30, 2007, the Company was not a party to material derivatives that would subject it to interest rate sensitivity.

 

Interest Rate Sensitivity

Debt Obligations as of June 30, 2007

 

 

Six months

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability

 

 

ending

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

December 31,

 

Year ending December 31,

 

at June 30,

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Total

 

2007

 

 

 

 

($ in thousands)

 

 

 

 

 

Total Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate principal
maturities (a)

$

32,075

 

$

3,777

 

$

 

$

 

$

 

$

1,732,985

 

$

1,768,837

 

$

1,701,641

 

 

Weighted average interest rate

 

6.64%

 

 

6.56%

 

 

6.56%

 

 

6.56%

 

 

6.56%

 

 

7.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate principal
maturities

$

 

$

 

$

 

$

 

$

 

$

559,000

 

$

559,000

 

$

559,000

 

 

Weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate

 

6.34%

 

 

5.94%

 

 

6.08%

 

 

6.28%

 

 

6.44%

 

 

6.60%

 

 

 

 

 

 

 

 

 

_____________

(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 June 30, 2007. As of June 30, 2007, 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.

 

50

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Oil and Gas Price Sensitivity

Derivative Financial Instruments as of June 30, 2007

 

 

 

Six months

 

 

 

 

 

 

 

Asset (Liability)

 

 

 

ending

 

 

 

 

 

 

 

Fair Value at

 

 

 

December 31,

 

Year ending December 31,

 

June 30,

 

 

 

2007

 

2008

 

2009

 

2010

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Oil Hedge Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily notional Bbl volumes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts (a)

 

 

5,000

 

 

13,500

 

 

6,000

 

 

4,000

 

$

(67,692

)

Weighted average fixed price per Bbl

 

$

69.55

 

$

59.04

 

$

70.47

 

$

71.46

 

 

 

 

Collar contracts (b)

 

 

5,000

 

 

 

 

2,000

 

 

 

$

(1,278

)

Weighted average ceiling price per Bbl

 

$

76.04

 

$

 

$

76.50

 

$

 

 

 

 

Weighted average floor price per Bbl

 

$

63.00

 

$

 

$

65.00

 

$

 

 

 

 

Average forward NYMEX oil prices (c)

 

$

71.91

 

$

70.93

 

$

70.53

 

$

70.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Hedge Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily notional MMBtu volumes (d):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts (a)

 

 

225,000

 

 

44,973

 

 

 

 

 

$

58,778

 

Weighted average fixed price per MMbtu

 

$

7.71

 

$

8.85

 

$

 

$

 

 

 

 

Average forward NYMEX gas prices (c)

 

$

7.05

 

$

8.24

 

$

8.58

 

$

8.37

 

 

 

 

 

_____________

(a)

Subsequent to June 30, 2007, the Company (i) entered into additional oil swap contracts for 1,500 Bbls per day of the Company’s August through December 2007 production at an average price of $73.00 per Bbl and 250 Bbls per day of the Company’s 2008 production at an average price of $73.43 per Bbl and (ii) entered into additional gas swap contracts for 2,500 MMBtu per day of the Company’s 2008, 2009, and 2010 production at average prices of $7.35, $7.55 and $7.33 per MMBtu, respectively.

(b)

Subsequent to June 30, 2007, the Company entered into additional oil collar contracts for 3,000 Bbls per day of the Company’s 2008 production at an average floor price of $65.00 per Bbl and an average ceiling price of $80.80 per Bbl.

(c)

The average forward NYMEX oil and gas prices are based on August 8, 2007 market quotes.

(d)

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.

 

Natural gas liquids prices. There were no outstanding NGL hedge contracts at June 30, 2007. Subsequent to June 30, 2007, the Company entered into natural gas liquids swap contracts for 500 Bbls per day of the Company’s 2008 production at an average price of $44.33 per Bbl and 500 Bbls per day of the Company’s 2009 production at an average price of $41.75 per Bbl.

 

51

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Item 4.     Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company's management, with the participation of its principal executive officer and principal financial officer, have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 ("the Exchange Act"), the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this 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.

 

52

 


PIONEER NATURAL RESOURCES COMPANY

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

The Company is party to the legal proceedings that are described under "Legal actions" in Note I of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements". The Company is also party to other proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such other proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations.

 

Item 1A.

Risk Factors

 

In addition to the other information set forth in this Report, you should carefully consider the risks discussed in the Company's Annual Report on Form 10-K under the headings "Item 1. Business – Competition, Markets and Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk", which risks could materially affect the Company's business, financial condition or future results. Except as stated below, there has been no material change in the Company's risk factors from those described in the Annual Report on Form 10-K.

 

Formation of Master Limited Partnerships. In April 2007, the Company announced that it intended to form two new master limited partnerships, which will own interests in long-lived, low-decline oil and gas assets. Completion of this plan is subject to market conditions and numerous other risks beyond the control of the Company, and therefore it is possible that one or both of the master limited partnerships will not be formed, will not complete an offering of securities, will not raise the planned amount of capital even if an offering of securities is completed, and will not be able to complete its proposed actions on the timetable indicated. Furthermore, the structure, nature, purpose, proposed assets and liabilities, and proposed manner of offering of the master limited partnerships may change materially from those anticipated. In addition, the master limited partnerships, and therefore the Company’s retained investment in those partnerships, will be subject to the risks normally attendant to businesses in the oil and gas exploration and production industry, including most of the same risks to which the Company is subject. The Company’s announcement of its plans did not, and this risk factor does not, constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities of either master limited partnership will be made only in accordance with the registration requirements of the Securities Act of 1933 or an exemption therefrom.

 

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.

 

53

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table summarizes the Company's purchases of treasury stock during the three months ended June 30, 2007:

 

 

 

 

 

 

 

Total Number of

 

Approximate Dollar

 

 

 

 

 

 

 

Shares (or Units)

 

Amount of Shares that

 

 

 

Total Number of

 

Average Price

 

Purchased As Part of

 

May Yet Be Purchased

 

 

 

Shares (or Units)

 

Paid per Share

 

Publicly Announced

 

Under Plans or

 

Period

 

Purchased (a)

 

(or Unit)

 

Plans or Programs

 

Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

April 2007

 

587

 

$

49.54

 

 

 

 

 

May 2007

 

469,405

 

$

48.53

 

469,200

 

 

 

 

June 2007

 

91

 

$

53.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

470,083

 

$

48.53

 

469,200

 

$

702,271,808

 

 

_____________

(a)

Amounts include shares withheld to satisfy tax withholding on employees' share-based awards.

 

During February 2007, the Board approved a share repurchase program authorizing the purchase of up to $300 million of the Company's common stock. In April 2007, the Board approved an increase of $450 million to the existing share repurchase program bringing the aggregate authorized share repurchase program to $750 million. During the first half of 2007, the Company purchased $47.7 million of common stock pursuant to the 2007 program.

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

The Company's annual meeting of stockholders was held on May 16, 2007 in Irving, Texas. At the meeting, three proposals were submitted for a vote of stockholders (as described in the Company's Proxy Statement dated April 4, 2007). The following is a brief description of each proposal and results of the stockholders' votes.

 

Election of Directors. Prior to the meeting, the Board designated four nominees as Class I directors with their terms to expire at the annual meeting in 2009 when their successors are elected and qualified. R. Hartwell Gardner, Linda K. Lawson, Frank A. Risch and Mark S. Sexton were, at the time of such nomination and at the time of the meeting, directors of the Company. Each nominee was re-elected as a director of the Company, with the results of the stockholder voting being as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authority

 

 

 

Broker

 

 

 

For

 

Withheld

 

Abstain

 

Non-Votes

 

R. Hartwell Gardner

 

107,390,272

 

901,877

 

 

 

Linda K. Lawson

 

107,406,657

 

885,492

 

 

 

Frank A. Risch

 

107,376,739

 

915,410

 

 

 

Mark S. Sexton

 

74,834,143

 

33,458,006

 

 

 

 

 

In addition, the term of office for the following directors continued after the annual meeting: James R. Baroffio, Edison C. Buchanan, Andrew D. Lundquist, Charles E. Ramsey, Jr., Robert A. Solberg and Jim A. Watson.

 

54

 


PIONEER NATURAL RESOURCES COMPANY

 

 

          Ratification of selection of independent auditors. The engagement of Ernst & Young LLP as the Company's independent auditors for 2007 was submitted to the stockholders for ratification. Such engagement was ratified, with the results of the stockholder voting being as follows:

 

 

 

 

 

For

 

106,142,290

 

Against

 

1,989,304

 

Abstain

 

160,555

 

Broker non-votes

 

 

 

 

Approval of Amended and Restated Employee Stock Purchase Plan. The Amended and Restated Employee Stock Purchase Plan was submitted to the stockholders for approval. The plan was approved, with the results of the stockholder voting being as follows:

 

 

 

 

 

For

 

87,577,012

 

Against

 

2,640,589

 

Abstain

 

231,034

 

Broker non-votes

 

 

 

 

Item 6.

Exhibits

 

Exhibits

 

 

10.1 (a)

Pioneer Natural Resources Company Employee Stock Purchase Plan (Amended and Restated Effective as of September 1, 2007).

 

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:    August 9, 2007

By:

/s/ Richard P. Dealy

 

 

Richard P. Dealy

 

 

Executive Vice President and Chief

 

 

Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

Date:    August 9, 2007

By:

/s/ Darin G. Holderness

 

 

Darin G. Holderness

 

 

Vice President and Chief

 

 

Accounting Officer

 

56

 


PIONEER NATURAL RESOURCES COMPANY

 

 

Exhibit Index

 

 

10.1 (a)

Pioneer Natural Resources Company Employee Stock Purchase Plan (Amended and Restated Effective as of September 1, 2007).

 

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