Form 10-Q
Table of Contents

 

 

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, 2009

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 1-13245

 

 

PIONEER NATURAL RESOURCES COMPANY

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   75-2702753

(State or other jurisdiction of

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of Common Stock outstanding as of August 6, 2022 115,064,128

 

 

 


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

 

         Page

Cautionary Statement Concerning Forward-Looking Statements

   3

Definitions of Certain Terms and Conventions Used Herein

   4
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

   5
 

Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

   7
 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009

   8
 

Consolidated Statements of Cash Flows for the three and six months ended June 30, 2009 and 2008

   9
 

Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2009 and 2008

   10
 

Notes to Consolidated Financial Statements

   11

Item 2.

 

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

   43

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   61

Item 4.

 

Controls and Procedures

   64
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

   65

Item 1A.

 

Risk Factors

   65

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   66

Item 4.

 

Submission of Matters to a Vote of Security Holders

   66

Item 6.

 

Exhibits

   68

Signatures

   69

Exhibit Index

   70

 

2


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

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.

These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, international operations and associated international political and economic instability, litigation, the costs and results of drilling and operations, access to and availability of drilling equipment and transportation, processing and refining facilities, Pioneer’s ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer’s credit facility and derivative contracts and the purchasers of Pioneer’s oil, NGL and gas production, uncertainties about estimates of reserves and resource potential and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, and acts of war or terrorism. These and other risks are described in the Company’s Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse impact on it. 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, 2008 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.

 

3


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

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.

 

 

“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.

 

 

“DD&A” means depletion, depreciation and amortization.

 

 

“field fuel” means gas consumed to operate field equipment (primarily compressors) prior to the gas being delivered to a sales point.

 

 

“GAAP” means accounting principles that are generally accepted in the United States of America.

 

 

“IPO” means initial public offering.

 

 

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

 

 

“LNG” means liquefied natural gas.

 

 

“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.

 

 

“MMcf” means one million cubic feet.

 

 

“MMcfpd” means one million cubic feet per day.

 

 

“Mont Belvieu–posted-price” means the daily average natural gas liquids components as priced in Oil Price Information Service (“OPIS”) in the table “U.S. and Canada LP – Gas Weekly Averages” at Mont Belvieu, Texas.

 

 

“NGL” means natural gas liquid.

 

 

“NYMEX” means the New York Mercantile Exchange.

 

 

“NYSE” means the New York Stock Exchange.

 

 

“Pioneer” or the “Company” means Pioneer Natural Resources Company and its subsidiaries.

 

 

“Pioneer Southwest” means Pioneer Southwest Energy Partners L.P. 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.

 

 

“Standardized Measure” means the after-tax present value of estimated future net cash flows of proved reserves, determined in accordance with the rules and regulations of the SEC, using prices and costs in effect at the specified date and a ten percent discount rate.

 

 

“U.S.” means United States.

 

 

“VPP” means volumetric production payment.

 

 

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.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

 

     June 30,
2009
    December 31,
2008 (a)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 64,323     $ 48,337  

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $1,472 and $22,464 as of June 30, 2009 and December 31, 2008, respectively

     152,231       206,794  

Due from affiliates

     700       759  

Income taxes receivable

     28,777       60,573  

Inventories

     119,077       76,901  

Prepaid expenses

     19,870       12,464  

Deferred income taxes

     9,239       6,510  

Discontinued operations held for sale

     16,874       —     

Other current assets:

    

Derivatives

     63,830       59,622  

Other, net of allowance for doubtful accounts of $5,566 and $5,491 as of June 30, 2009 and December 31, 2008, respectively

     6,929       14,951  
                

Total current assets

     481,850       486,911  
                

Property, plant and equipment, at cost:

    

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

    

Proved properties

     10,105,381       10,167,220  

Unproved properties

     197,986       204,183  

Accumulated depletion, depreciation and amortization

     (2,671,508     (2,511,401
                

Total property, plant and equipment

     7,631,859       7,860,002  
                

Deferred income taxes

     1,134       553  

Goodwill

     310,551       310,563  

Other property and equipment, net

     158,775       161,266  

Other assets:

    

Derivatives

     40,337       72,594  

Other, net of allowance for doubtful accounts of $5,167 and $4,410 as of June 30, 2009 and December 31, 2008, respectively

     248,336       269,896  
                
   $ 8,872,842     $ 9,161,785  
                

 

(a)

Retrospectively adjusted as described in Note B.

The financial information included as of June 30, 2022 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


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

(Unaudited)

 

     June 30,
2009
    December 31,
2008 (a)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable:

    

Trade

   $ 192,542     $ 322,688  

Due to affiliates

     13,262       34,284  

Interest payable

     43,348       43,247  

Income taxes payable

     17,713       3,618  

Deferred income taxes

     370       —     

Discontinued operations held for sale

     16,706       —     

Other current liabilities:

    

Derivatives

     108,360       49,561  

Deferred revenue

     119,281       147,905  

Other

     68,177       93,694  
                

Total current liabilities

     579,759       694,997  
                

Long-term debt

     2,978,819       2,899,241  

Derivatives

     47,645       20,584  

Deferred income taxes

     1,424,769       1,501,459  

Deferred revenue

     132,166       177,236  

Other liabilities

     168,598       187,409  

Stockholders’ equity:

    

Common stock, $.01 par value; 500,000,000 shares authorized; 125,135,994 and 124,566,963 shares issued at June 30, 2009 and December 31, 2008, respectively

     1,251       1,246  

Additional paid-in capital

     2,924,939       2,909,735  

Treasury stock, at cost: 11,113,561 and 10,020,502 shares at June 30, 2009 and December 31, 2008, respectively

     (426,598     (411,659

Retained earnings

     875,226       988,786  

Accumulated other comprehensive income - deferred hedge gains, net of tax

     76,637       88,788  
                

Total stockholders’ equity attributable to common stockholders

     3,451,455       3,576,896  

Noncontrolling interest in consolidating subsidiaries

     89,631       103,963  
                

Total stockholders’ equity

     3,541,086       3,680,859  

Commitments and contingencies

    
                
   $ 8,872,842     $ 9,161,785  
                

 

(a)

Retrospectively adjusted as described in Note B.

The financial information included as of June 30, 2022 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


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008 (a)     2009     2008 (a)  

Revenues and other income:

        

Oil and gas

   $ 370,692     $ 635,123     $ 738,543     $ 1,177,166  

Derivative gains, net

     —          881       —          1,908  

Interest and other

     88,598       6,887       99,258       31,911  

Gain (loss) on disposition of assets, net

     53       3,901       (62     4,578  
                                
     459,343       646,792       837,739       1,215,563  
                                

Costs and expenses:

        

Oil and gas production

     84,793       97,327       195,223       190,140  

Production and ad valorem taxes

     23,715       45,658       51,414       83,546  

Depletion, depreciation and amortization

     165,943       112,251       354,087       216,888  

Impairment of oil and gas properties

     —          —          21,091       —     

Exploration and abandonments

     21,618       26,108       52,788       63,293  

General and administrative

     33,275       35,596       67,929       72,117  

Accretion of discount on asset retirement obligations

     2,753       1,961       5,505       3,904  

Interest

     43,475       41,670       84,613       81,948  

Hurricane activity, net

     16,075       1,401       16,450       1,859  

Derivative losses, net

     170,224       —          70,361       —     

Other

     36,715       8,275       68,104       20,190  
                                
     598,586       370,247       987,565       733,885  
                                

Income (loss) from continuing operations before income taxes

     (139,243     276,545       (149,826     481,678  

Income tax benefit (provision)

     44,398       (120,975     45,139       (204,451
                                

Income (loss) from continuing operations

     (94,845     155,570       (104,687     277,227  

Income from discontinued operations, net of tax

     2,731       7,351       1,761       14,391  
                                

Net income (loss)

     (92,114     162,921       (102,926     291,618  

Net (income) loss attributable to the noncontrolling interest

     522       (6,227     (3,271     (6,965
                                

Net income (loss) attributable to common stockholders

   $ (91,592   $ 156,694     $ (106,197   $ 284,653  
                                

Basic earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ (0.82   $ 1.24     $ (0.95   $ 2.26  

Income from discontinued operations, net of tax, attributable to common stockholders

     0.02       0.06       0.02       0.12  
                                

Net income (loss) attributable to common stockholders

   $ (0.80   $ 1.30     $ (0.93   $ 2.38  
                                

Diluted earnings per share:

        

Income (loss) from continuing operations attributable to common stockholders

   $ (0.82   $ 1.23     $ (0.95   $ 2.25  

Income from discontinued operations, net of tax, attributable to common stockholders

     0.02       0.06       0.02       0.12  
                                

Net income (loss) attributable to common stockholders

   $ (0.80   $ 1.29     $ (0.93   $ 2.37  
                                

Weighted average shares outstanding:

        

Basic

     113,979       118,363       114,116       118,149  
                                

Diluted

     113,979       119,370       114,116       118,816  
                                

Dividends declared per share

   $ —        $ —        $ 0.04     $ 0.14  
                                

Amounts attributable to common stockholders:

        

Income (loss) from continuing operations

   $ (94,323   $ 149,343     $ (107,958   $ 270,262  

Discontinued operations, net of tax

     2,731       7,351       1,761       14,391  
                                

Net income (loss)

   $ (91,592   $ 156,694     $ (106,197   $ 284,653  
                                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except dividends per share)

(Unaudited)

 

     Shares
Outstanding
    Common
Stock
   Additional
Paid-in
Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Noncontrolling
Interest
    Total
Stockholders’
Equity
 

Balance as of December 31, 2008 (a)

   114,546     $ 1,246    $ 2,909,735     $ (411,659   $ 988,786     $ 88,788     $ 103,963     $ 3,680,859  

Dividends declared ($0.04 per share)

   —          —        —          —          (4,696     —          —          (4,696

Exercise of long-term incentive plan stock options

   132       —        —          5,202       (2,667     —          —          2,535  

Purchase of treasury stock

   (1,225     —        —          (20,141     —          —          (258     (20,399

Tax benefits related to stock-based compensation

   —          —        (3,918     —          —          —          —          (3,918

Compensation costs:

                 

Vested compensation awards, net

   569       5      (5     —          —          —          —          —     

Compensation costs included in net income

   —          —        19,127       —          —          —          96       19,223  

Cash contributions of noncontrolling interest partners

   —          —        —          —          —          —          150       150  

Cash distributions to noncontrolling interest partners

                  (10,050     (10,050

Net income (loss)

   —          —        —          —          (106,197     —          3,271       (102,926

Other comprehensive loss:

                 

Deferred hedging activity, net of tax:

                 

Hedge fair value changes, net

   —          —        —          —          —          10,477       3,692       14,169  

Net hedge gains included in continuing operations

   —          —        —          —          —          (22,628     (11,233     (33,861
                                                             

Balance as of June 30, 2009

   114,022     $ 1,251    $ 2,924,939     $ (426,598   $ 875,226     $ 76,637     $ 89,631     $ 3,541,086  
                                                             

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008 (a)     2009     2008 (a)  

Cash flows from operating activities:

        

Net income (loss)

   $ (92,114   $ 162,921     $ (102,926   $ 291,618  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depletion, depreciation and amortization

     165,943       112,251       354,087       216,888  

Impairment of oil and gas properties

     —          —          21,091       —     

Exploration expenses, including dry holes

     9,705       1,034       27,954       4,582  

Hurricane activity, net

     15,000       —          15,000       —     

Deferred income taxes

     (41,761     108,937       (52,793     171,310  

(Gain) loss on disposition of assets, net

     (53     (3,901     62       (4,578

Accretion of discount on asset retirement obligations

     2,753       1,961       5,505       3,904  

Discontinued operations

     312       6,181       5,208       14,464  

Interest expense

     6,921       7,797       13,529       14,094  

Derivative related activity

     159,520       7,851       48,235       15,516  

Amortization of stock-based compensation

     9,926       8,268       19,223       17,248  

Amortization of deferred revenue

     (36,975     (39,457     (73,695     (78,936

Other noncash items

     14,146       8,427       24,840       3,788  

Change in operating assets and liabilities

        

Accounts receivable, net

     11,720       (84,474     53,941       (98,535

Income taxes receivable

     (13,140     (9,326     31,796       (9,402

Inventories

     (23,219     (14,471     (57,689     (40,643

Prepaid expenses

     (16,147     166       (14,187     1,103  

Other current assets

     40,863       5,191       66,920       7,186  

Accounts payable

     4,062       32,744       (107,388     (1,169

Interest payable

     15,677       16,489       101       3,154  

Income taxes payable

     5,554       18,922       14,095       28,112  

Other current liabilities

     (14,786     (14,461     (44,581     (48,972
                                

Net cash provided by operating activities

     223,907       333,050       248,328       510,732  
                                

Cash flows from investing activities:

        

Proceeds from disposition of assets, net of cash sold

     3,542       13,640       3,742       145,773  

Additions to oil and gas properties

     (77,623     (319,341     (242,150     (616,608

Additions to other assets and other property and equipment, net

     (14,663     (8,240     (21,399     (20,646
                                

Net cash used in investing activities

     (88,744     (313,941     (259,807     (491,481
                                

Cash flows from financing activities:

        

Borrowings under long-term debt

     —          23,998       172,000       615,998  

Principal payments on long-term debt

     (102,000     (186,998     (103,000     (732,775

Distributions to noncontrolling interest partners

     (5,060       (9,900     —     

Proceeds from issuance of partnership common units, net of issuance costs

     —          165,978       —          165,978  

Borrowings (payments) of other liabilities

     (364     19,145       (699     13,255  

Exercise of long-term incentive plan stock options

     1,581       4,905       2,535       5,782  

Purchase of treasury stock

     (280     (562     (20,399     (27,512

Excess tax (costs) benefits from share-based payment arrangements

     (39     (1,741     (3,918     404  

Payment of financing fees

     (4,475     (1,031     (4,475     (12,377

Dividends paid

     (4,679     (16,841     (4,679     (16,893
                                

Net cash provided by (used in) financing activities

     (115,316     6,853       27,465       11,860  
                                

Net increase in cash and cash equivalents

     19,847       25,962       15,986       31,111  

Cash and cash equivalents, beginning of period

     44,476       17,320       48,337       12,171  
                                

Cash and cash equivalents, end of period

   $ 64,323     $ 43,282     $ 64,323     $ 43,282  
                                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008 (a)     2009     2008 (a)  

Net income (loss)

   $ (92,114   $ 162,921     $ (102,926   $ 291,618  
                                

Other comprehensive loss:

        

Hedge activity, net of tax:

        

Hedge fair value changes, net

     —          (331,325     14,169       (471,592

Net hedge (gains) losses included in continuing operations

     (3,032     103,354       (33,861     153,785  
                                

Other comprehensive loss

     (3,032     (227,971     (19,692     (317,807
                                

Comprehensive loss

     (95,146     (65,050     (122,618     (26,189
                                

Comprehensive loss attributable to noncontrolling interest

     6,057       12,804       4,270       12,066  
                                

Comprehensive loss attributable to common stockholders

   $ (89,089   $ (52,246   $ (118,348   $ (14,123
                                

 

(a)

Retrospectively adjusted as described in Note B.

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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(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 continuing operations in the United States, South Africa and Tunisia.

 

NOTE B. Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 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, 2008.

Discontinued operations. During the three months ended June 30, 2009, the Company committed to a plan to sell its shelf properties in the Gulf of Mexico and sold its Mississippi assets. The Company completed the sale of its shelf properties in the Gulf of Mexico on August 6, 2009. 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 classified the assets and liabilities of its shelf properties in the Gulf of Mexico as discontinued operations held for sale in the accompanying consolidated balance sheet as of June 30, 2009, and reflected the results of operations of both the planned and completed divestitures as discontinued operations, rather than as a component of continuing operations. In April 2006 and November 2007, the Company completed the sale of its Argentine assets and Canadian subsidiaries. During the three and six months ended June 30, 2008, the Company continued to realize certain revenues and costs and expense increments associated with these divestitures. See Note R for additional information regarding discontinued operations.

Allowances for doubtful accounts. As of June 30, 2009 and December 31, 2008, the Company’s allowances for doubtful accounts totaled $12.2 million and $32.4 million, respectively. In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company establishes allowances for bad debts equal to the estimable portions of accounts and notes receivables for which failure to collect is considered probable. The Company estimates the portions of joint interest receivables for which failure to collect is probable based on percentages of joint interest receivables that are past due. The Company estimates the portions of other receivables for which failure to collect is probable based on the relevant facts and circumstances surrounding the receivable. Allowances for doubtful accounts are recorded as reductions to the carrying values of the receivables included in the Company’s consolidated balance sheets and as charges to other expense in the consolidated statements of operations in the accounting periods during which failure to collect an estimable portion is determined to be probable.

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 
     (in thousands)  

Beginning allowance for doubtful accounts balance

   $ 31,600     $ 32,365  

Amount recorded in other expense for bad debt expense (recoveries)

     (58     (744

Write-offs of uncollectible accounts

     (19,337     (19,416
                

Ending allowance for doubtful accounts balance

   $ 12,205     $ 12,205  
                

Inventories. Inventories consisted of $219.0 million and $158.7 million of materials and supplies and $3.8 million and $8.7 million of commodities as of June 30, 2009 and December 31, 2008, respectively. The Company’s materials and supplies inventory is primarily comprised of oil and gas drilling or repair items such as tubing, casing, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market, on a first-in, first-out cost basis. “Market,” in the context of inventory valuation, represents net realizable value, which is the amount that the Company is allowed to charge to the joint accounts when the inventory is used in joint operations under joint operating agreements to which the Company is a party. Any valuation reserve allowances of materials and supplies inventory are recorded as reductions to the carrying values of the materials and supply inventories in the Company’s consolidated balance sheets and as charges to other expense in the accompanying consolidated statements of operations. As of June 30, 2009 and December 31, 2008, the Company’s materials and supplies inventory was net of $6.1 million and $4.7 million, respectively, of valuation reserve allowances. The Company estimated that approximately $103.7 million and $90.2 million of its June 30, 2009 and December 31, 2008 materials and supplies inventories, respectively, would not be utilized within one year based on current drilling plans. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

Commodities inventories are carried at the lower of average cost or market, on a first-in, first-out basis. The Company’s commodities inventories consist of oil and natural gas liquids (“NGLs”) held in storage. Any valuation allowances of commodities inventories are recorded as reductions to the carrying values of the commodities inventories included in the Company’s consolidated balance sheets and as charges to other expense in the consolidated statements of operations. As of December 31, 2008, the Company’s commodities inventories were net of $159 thousand of valuation allowances.

Derivatives and hedging. Prior to December 2008, the Company had elected to designate the majority of its commodity derivative instruments as cash flow hedges. During December 2008, the Company began entering into commodity derivative contracts that were not designated as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Changes in the fair values of non-hedge derivative instruments are recognized as gains or losses in the earnings of the period in which they occur. Effective February 1, 2009, the Company discontinued hedge accounting on all existing hedge contracts. The effective portions of the discontinued deferred hedges as of January 31, 2009 are included in accumulated other comprehensive income – deferred hedge gains, net of tax (“AOCI – Hedging”), in the stockholders’ equity section of the accompanying consolidated balance sheets, and are being reclassified to earnings during the same periods in which the hedged transactions are recognized in the Company’s earnings. For the period from February 1, 2009 through June 30, 2009, the Company recognized, and in the future will recognize, all changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts” (“FIN 39”), the Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities by commodity, whichever the case may be. Net derivative asset values are determined, in part, by utilization of the derivative counterparties’ credit-adjusted risk-free rate curves and net derivative liabilities are determined, in part, by utilization of the Company’s credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates are based on an independent market-quoted credit default swap rate curve for the Company’s or the counterparties’ debt plus the United States Treasury Bill yield curve as of June 30, 2009.

Goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill 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 2008, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment. However, as a result of commodity prices and the market capitalization of the Company declining significantly during the second half of 2008, which the Company considered an event that might indicate impairment to the carrying value of goodwill, the Company reassessed goodwill for impairment at December 31, 2008 and quarterly thereafter and determined that there was no impairment. See Note M for additional information regarding the Company’s impairment assessments.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 68.3 percent limited partner interest in Pioneer Southwest. Pioneer Southwest owns interests in certain oil and gas properties previously owned by the Company in the Spraberry field in the Permian Basin of West Texas. The financial position, results of operations, and cash flows of Pioneer Southwest are consolidated with those of the Company.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

In addition to Pioneer Southwest, the Company owns the majority interests in certain other subsidiaries with operations in the United States. Noncontrolling interest in the net assets of consolidated subsidiaries totaled $89.6 million and $104.0 million as of June 30, 2009 and December 31, 2008, respectively. The Company recorded a net loss attributable to the noncontrolling interests (principally related to Pioneer Southwest) for the three months ended June 30, 2009 of $522 thousand, net income of $3.3 million for the six months ended June 30, 2009, and net income of $6.2 million and $7.0 million for the three and six months ended June 30, 2008, respectively. See “New accounting pronouncements” and “Reclassifications and retrospective adjustments” for information regarding the Company’s adoption of SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51” (“SFAS 160”).

Stock-based compensation. For stock-based compensation awards, compensation expense is being recognized in the Company’s financial statements on a straight line basis over the awards’ vesting periods based on their fair values on the dates of grant. The Company utilizes (i) the Black-Scholes option pricing model to measure the fair value of stock options, (ii) the stock price on the date of grant for the fair value of restricted stock awards and (iii) the Monte Carlo simulation method for the fair value of performance unit awards.

For the three and six month periods ended June 30, 2009, the Company recorded $9.9 million and $19.2 million of stock-based compensation costs for all plans, respectively, as compared to $8.3 million and $17.2 million for the same respective periods of 2008.

In accordance with GAAP, the Company’s issued shares, as reflected in the consolidated balance sheets at June 30, 2009 and December 31, 2008, do not include 1,021,413 and 1,078,267, respectively, of issued but unvested shares awarded under stock-based compensation plans which have voting rights.

The following table summarizes all stock-based awards, lapses and forfeitures that occurred during the six months ended June 30, 2009:

 

     Restricted Stock
Shares
   Restricted
Stock Units
   Performance
Units
   Stock Options

Awards

   378,497    1,622,152    189,247    361,021

Lapsed restrictions

   424,453    144,578    —      —  

Exercises

   —      —      —      131,911

Forfeitures

   10,898    26,511    —      99,118

As of June 30, 2009, there was approximately $65.0 million of unrecognized compensation expense related to unvested share-based compensation plan awards, related to restricted stock, restricted stock units, performance unit awards and stock options. This compensation will be recognized over the remaining vesting periods of the awards, which on a weighted average basis is a period of less than three years.

New accounting pronouncements. In September 2006, the Financial Accounting Standards Board (“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. During February 2008, the FASB issued FASB Staff Position No. 157-2, “FSP FAS 157-2” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. On January 1, 2009, the Company adopted the remaining provisions of SFAS 157, for which delayed adoption was provided under FSP FAS 157-2.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS 141 and provides greater consistency in the accounting and financial reporting of business

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

combinations. SFAS 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of the date that the acquirer achieves control over the business acquired. This includes the measurement of the acquirer’s shares issued in consideration for a business combination, the recognition of contingent consideration, the recognition of pre-acquisition contractual and certain non-contractual gain and loss contingencies, the recognition of capitalized research and development costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. The provisions of SFAS 141(R) also require that restructuring costs resulting from the business combination that the acquirer expects but is not required to incur and costs incurred to effect the acquisition be recognized separate from the business combination. SFAS 141(R) is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. The Company became subject to the provisions of SFAS 141(R) on January 1, 2009.

In December 2007, the FASB issued SFAS 160. SFAS 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated earnings to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The Company adopted the provisions of SFAS 160 on January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring entities to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 was adopted by the Company on January 1, 2009. See Note G for disclosures about the Company’s derivative instruments and hedging activities.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted the provisions of FSP APB 14-1 on January 1, 2009. The adoption of FSP APB 14-1 increases the annual interest expense that the Company recognizes on its $480 million of 2.875% convertible senior notes due 2038 (“2.875% Convertible Senior Notes”) from an annual yield of 2.875 percent to 6.75 percent, the annual yield equivalent to a nonconvertible debt borrowing at the time of issuance. The adoption of FSP APB 14-1 also resulted in the reclassification of the estimated issuance date fair value of the 2.875% Convertible Senior Notes conversion privilege from long-term debt to shareholders’ equity in the accompanying consolidated balance sheets. See “Reclassifications and retrospective adjustments” and Note F for additional information regarding the Company’s adoption of FSP APB 14-1.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the net income (loss) allocation in computing basic and diluted earnings per share under the two class method prescribed under SFAS 128, “Earnings per Share”. The Company adopted the provisions of FSP EITF 03-6-1 on January 1, 2009 and, in accordance with FSP EITF 03-6-1, applied its provisions retrospectively to prior-period earnings per share computations. See Note K for additional information regarding the Company’s basic and diluted earnings per share computations for the three and six months ended June 30, 2009 and 2008.

In December 2008, the SEC released Final Rule, “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”). The Reserve Ruling revises oil and gas reporting disclosures. The Reserve Ruling also permits the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The Reserve Ruling will also allow companies to disclose their probable

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

and possible reserves to investors. In addition, the new disclosure requirements require companies to: (i) report the independence and qualifications of its reserves preparer or auditor, (ii) file reports when a third party is relied upon to prepare reserves estimates or conduct a reserves audit and (iii) report oil and gas reserves using an average price based upon the prior 12-month period rather than a year-end price. The Reserve Ruling becomes effective for annual reports on Forms 10-K for fiscal years ending on or after December 31, 2009. During February 2009, the FASB announced a project to amend SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” (“SFAS 19”) to conform to the Reserve Ruling. The Company is currently assessing the impact that adoption of the provisions of the Reserve Ruling will have on its financial position, results of operations and disclosures.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”. FSP FAS 107-1 requires fair value disclosures by publicly traded companies of financial instruments for interim reporting purposes. FSP FAS 107-1 was adopted by the Company during the second quarter of 2009. See Note D for disclosures about the fair values of the Company’s financial instruments.

Reclassifications and retrospective adjustments. Certain reclassifications have been made to the 2008 amounts in order to conform to the 2009 presentation and for the retrospective application of the adoption of SFAS 160. The retrospective application of SFAS 160 resulted in the reclassification of $59.2 million from minority interest in consolidated subsidiaries and $44.8 million from AOCI – Hedging to Noncontrolling interest in consolidated subsidiaries at December 31, 2008. In addition, the adoption of FSP APB 14-1 and FSP EITF 03-6-1 required retrospective adjustments to the Company’s financial statements as of December 31, 2008 and the three and six months ended June 30, 2008. The retrospective adjustments related to the adoption of FSP APB 14-1 decreased the Company’s net income attributable to common stockholders by $2.1 million (approximately $.02 per diluted share) and $3.9 million (approximately $.03 per diluted share), respectively, for the three and six months ended June 30, 2008. The retrospective application of FSP APB 14-1 also increased additional paid-in capital by $49.5 million and decreased retained earnings by $10.0 million as of December 31, 2008. The retrospective application of the provisions of FSP EITF 03-6-1 to the reported per-share amounts of the three and six months ended June 30, 2008 reduced the Company’s diluted earnings of each period by approximately $.01 per share, exclusive of the effects from the adoption of FSP APB 14-1.

 

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, 2009:

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 
   (in thousands)  

Beginning capitalized exploratory well costs

   $ 123,839     $ 124,014  

Additions to exploratory well costs pending the determination of proved reserves

     12,196       26,338  

Reclassification due to determination of proved reserves

     (17,811     (27,201

Exploratory well costs charged to exploration expense

     (4,227     (9,154
                

Ending capitalized exploratory well costs

   $ 113,997     $ 113,997  
                

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

The following table provides an aging, as of June 30, 2009 and December 31, 2008, of capitalized exploratory well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:

 

         June 30, 2009        December 31, 2008
   (in thousands, except project counts)

Capitalized exploratory well costs that have been suspended:

     

One year or less

   $ 20,471    $ 54,423

More than one year

     93,526      69,591
             
   $ 113,997    $ 124,014
             

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

     6      4
             

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, 2009:

 

     Total    2009     2008    2007    2006
   (in thousands)

United States:

             

Cosmopolitan Unit

   $ 60,495    $ 1,834     $ 6,344    $ 51,488    $ 829

Other

     2,525      (282     2,807      —        —  

Tunisia

     30,506      1,261       20,866      4,434      3,945
                                   

Total

   $ 93,526    $ 2,813     $ 30,017    $ 55,922    $ 4,774
                                   

Cosmopolitan Unit. The Company owns a 100 percent working interest in, and is the operator of, the Cosmopolitan Unit in the Cook Inlet of Alaska. During 2007, the Company drilled the Hansen #1A L1 well, a lateral sidetrack from an existing wellbore, to appraise the resource potential of the unit. The initial unstimulated production test results were encouraging. As a result, the Company began permitting and facilities planning during 2008 to further evaluate the unit’s resource potential. During 2009, the Company plans to continue with permitting, progress engineering studies and develop plans for a second well to be drilled in 2010 to further delineate the extent of the unit’s resource potential.

Tunisia – Cherouq. The Company has $17.6 million and $5.0 million of suspended well costs recorded for the Hayaat #1 and Hilal #1 wells, respectively, in the Company’s Cherouq production concession area, which is operated by the Company. The Hayaat #1 well began drilling in April 2008 to test several targeted formations. Mechanical failures were encountered during the testing of the well that did not allow completion of the formation assessments. The Company is analyzing seismic and other data to determine the optimal plan forward for completing the well, which may utilize the existing wellbore or a new wellbore adjacent to the existing well. The Company expects to finalize its Hayaat #1 plans and complete its assessment activities during 2010 or 2011.

The Hilal #1 well was originally drilled as an exploration well during 2007. The well was unsuccessful; however, the well is being re-completed to a formation that will be used for water disposal in support of other Cherouq operations. The Company recorded a $1.5 million dry hole charge for the Hilal #1 during 2007, representing the portion of the well costs that will not be used in disposal operations. Installation of the surface equipment is underway and disposal operations are planned to start during the second half of 2009.

Tunisia – Borj El Khadra prospects. The Company has $7.9 million of suspended well costs attributable to the Nahkil #1 and Abir #1 wells in the Borj El Khadra exploration permit area, which is operated by a third-party. The Nahkil #1 well encountered oil-bearing sands and the Abir #1 well encountered gas-bearing sands. The Company does not record proved reserves associated with discoveries in exploration permit areas until a production concession is granted. Infrastructure planning is underway and further exploration of the permit area is planned to occur in 2009 or 2010.

 

16


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

NOTE D. Disclosures About Fair Value Measurements

The valuation framework of SFAS 157 is based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:

 

   

Level 1 – quoted prices for identical assets or liabilities in active markets.

 

   

Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.

 

   

Level 3 – unobservable inputs for the asset or liability.

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2009, for each of the fair value hierarchy levels:

 

     Fair Value Measurements at Reporting Date Using    Fair Value at
June 30, 2009
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
  
   (in thousands)

Assets:

           

Trading securities

   $ 53    $ 188    $ —      $ 241

Commodity derivatives

     —        96,939      7,228      104,167

Deferred compensation plan assets

     23,445      —        —        23,445
                           

Total assets

   $ 23,498    $ 97,127    $ 7,228    $ 127,853
                           

Liabilities:

           

Commodity derivatives

   $ —      $ 144,701    $ 1,762    $ 146,463

Interest rate derivatives

     —        9,542      —        9,542
                           

Total liabilities

   $ —      $ 154,243    $ 1,762    $ 156,005
                           

 

17


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

The following tables present the changes in the fair values of the Company’s net commodity derivative assets classified as Level 3 in the fair value hierarchy:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Three Months Ended June 30, 2009  
     NGL Swap
Contracts
    Gas
Three-Way
Collars
    Oil
Three-Way
Collars
    Total  
     (in thousands)  

Beginning balance

   $ 16,470     $ (1,697   $ 3,364     $ 18,137  

Total gains (losses) (a):

        

Net unrealized losses included in earnings

     (8,666     —          —          (8,666

Net realized losses included in earnings

     (780     —          —          (780

Settlements

     (1,558         (1,558

Transfers into/out of Level 3

     —          1,697       (3,364     (1,667
                                

Ending balance

   $ 5,466     $ —        $ —        $ 5,466  
                                

 

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives in AOCI – Hedging are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Six Months Ended June 30, 2009  
     NGL Swap
Contracts
    Gas
Three-Way
Collars
    Oil
Three-Way
Collars
    Total  
     (in thousands)  

Beginning balance

   $ 18,560     $ —        $ —        $ 18,560  

Total gains (losses):

        

Net unrealized gains (losses) included in earnings (a)

     (6,565     (1,697     3,364       (4,898

Net derivative losses included in other comprehensive income

     (1,855     —          —          (1,855

Net realized losses included in earnings (a)

     (371     —          —          (371

Settlements

     (4,303         (4,303

Transfers into/out of Level 3

     —          1,697       (3,364     (1,667
                                

Ending balance

   $ 5,466     $ —        $ —        $ 5,466  
                                

 

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives in AOCI – Hedging are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.

 

18


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of June 30, 2009 and December 31, 2008:

 

     June 30, 2009    December 31, 2008
   Carrying
Value
   Fair Value    Carrying
Value
   Fair Value
   (in thousands)

Assets:

           

Commodity price derivatives

   $ 104,167    $ 104,167    $ 132,216    $ 132,216

Trading securities

   $ 241    $ 241    $ 356    $ 356

Deferred compensation plan assets

   $ 23,445    $ 23,445    $ 18,276    $ 18,276

Notes receivable due 2008 to 2011

   $ 10,447    $ 10,447    $ 11,258    $ 11,258

Liabilities:

           

Commodity price derivatives

   $ 146,463    $ 146,463    $ 60,242    $ 60,242

Interest rate derivatives

   $ 9,542    $ 9,542    $ 9,903    $ 9,903

Credit facility

   $ 982,000    $ 937,032    $ 913,000    $ 868,597

2.875% senior convertible notes due 2038

   $ 422,239    $ 399,120    $ 415,194    $ 345,600

5.875 % senior notes due 2012

   $ 6,180    $ 6,007    $ 6,191    $ 5,233

5.875 % senior notes due 2016

   $ 385,479    $ 374,554    $ 382,010    $ 301,583

6.65 % senior notes due 2017

   $ 483,852    $ 429,071    $ 483,792    $ 339,570

6.875 % senior notes due 2018

   $ 449,146    $ 388,143    $ 449,132    $ 292,175

7.20 % senior notes due 2028

   $ 249,923    $ 197,179    $ 249,922    $ 145,000

Trading securities and deferred compensation plan assets. The Company’s trading securities represent equity securities that are not actively traded on major exchanges and, to a lesser extent, trading securities that are actively traded on major exchanges. The Company’s deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges plus unallocated contributions as of the measurement date. As of June 30, 2009, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for trading securities that are not actively traded on major exchanges, which were provided by broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company’s interest rate derivative liabilities represent swap contracts for $400 million notional amount of debt, whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate. The net derivative liability values attributable to the Company’s interest rate derivative contracts as of June 30, 2009 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company’s interest rate derivative asset measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company’s commodity derivatives represent oil, NGL and gas swap and collar contracts. The Company’s oil and gas swap, collar and three-way collar derivative contract asset and liability measurements represent Level 2 inputs in the hierarchy priority while NGL derivative contract asset and liability measurements represent Level 3 inputs in the hierarchy priority.

Oil derivatives. The Company’s oil derivatives are swap, collar and three-way collar contracts for notional Bbls of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) NYMEX West Texas Intermediate (“WTI”) oil prices. The asset and liability values attributable to the Company’s oil derivatives as of June 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

NGL derivatives. The Company’s NGL derivatives are swap contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs. The asset and liability values attributable to the Company’s NGL derivatives as of June 30, 2009 are based on (i) the contracted notional volumes, (ii) independent broker-supplied forward Mont Belvieu-posted-price quotes and (iii) the applicable credit-adjusted risk-free rate yield curve.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Gas derivatives. The Company’s gas derivatives are swap, collar and three-way collar contracts for notional MMBtus of gas contracted at various posted price indexes, including NYMEX Henry Hub (“HH”) swap contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company’s gas derivative contracts as of June 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) averages of forward posted price quotes supplied by independent brokers who are active in buying and selling gas derivatives at the indexes other than HH (iv) the applicable credit-adjusted risk-free rate yield curve and (v) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

The Company corroborated independent broker-supplied forward price quotes by comparing price quote samples to alternate observable market data.

Credit facility. The fair value of the Company’s credit facility is based on (i) contractual interest and fees, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company’s credit facility measurements represent Level 2 inputs in the hierarchy priority.

Senior notes. The Company’s senior notes represent debt securities that are actively traded on major exchanges.

 

NOTE E. Income Taxes

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires that the Company continually assess both positive and negative evidence to determine whether it is more likely than not that deferred tax assets can be realized prior to their expiration. Pioneer monitors Company-specific, oil and gas industry and worldwide economic factors to assess the likelihood that the Company’s net operating loss carryforwards (“NOLs”) and other deferred tax attributes in the U.S. federal, state and foreign tax jurisdictions will be utilized prior to their expiration. As of June 30, 2009 and December 31, 2008, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $42.0 million and $37.5 million, respectively.

The Company also accounts for income taxes in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized and prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of June 30, 2009, the Company had no unrecognized tax benefits (as defined in FIN 48). In connection with the adoption of FIN 48, the Company established a policy to account for interest charges with respect to income taxes as interest expense and any penalties, with respect to income taxes, as other expense in the consolidated statements of operations. The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. With few exceptions, the Company believes that it is no longer subject to examinations by tax authorities for years before 2003. As of June 30, 2009, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company’s future results of operations or financial position.

On June 30, 2009, pursuant to Tunisian law, the Company established an investment reserve equal to 20 percent of 2008 taxable profits on the Adam and Cherouq concessions and thereby reduced current taxes payable by $13.1 million with a corresponding offset to deferred income taxes in the Company’s accompanying consolidated balance sheets. The investment reserve will be used to fund future drilling activity or pipeline infrastructure projects in Tunisia.

 

20


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

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, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Current:

        

U.S. federal

   $ (777   $ 14,328     $ 294     $ 8,908  

U.S. state

     (6,329     (686     (7,006     (1,597

Foreign

     9,220       (25,680     (942     (40,451
                                
     2,114       (12,038     (7,654     (33,140
                                

Deferred:

        

U.S. federal

     52,576       (84,481     56,104       (142,866

U.S. state

     6,312       (5,422     6,033       (2,993

Foreign

     (16,604     (19,034     (9,344     (25,452
                                
     42,284       (108,937     52,793       (171,311
                                

Income tax (provision) benefit

   $ 44,398     $ (120,975   $ 45,139     $ (204,451
                                

Discontinued operations. The Company’s income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for three and six months ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Current:

        

Foreign

   $ —        $ 348     $ —        $ (171
                                
     —          348       —          (171
                                

Deferred:

        

U.S. federal

     (1,472     (3,529     (949     (6,307

Foreign

     —          47       —          870  
                                
     (1,472     (3,482     (949     (5,437
                                

Income tax provision

   $ (1,472   $ (3,134   $ (949   $ (5,608
                                

 

NOTE F. 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 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, 2009, the Company had $982.0 million of outstanding borrowings under the Credit Facility and $46.0 million of undrawn letters of credit, all of which were commitments under the Credit Facility, leaving the Company with $472.0 million of unused borrowing capacity under the Credit Facility.

 

21


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Effective April 29, 2009, the Company and the lenders under the Company’s Credit Facility amended the Credit Facility to provide the Company additional financial flexibility. The Credit Facility contains certain financial covenants, one of which required the Company to maintain 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. The amendment changed that ratio to 1.5 to 1.0 through the period ending March 31, 2011, after which time the ratio would revert to 1.75 to 1.0, and provides that the Company may include in the calculation of the present value of its oil and gas properties 75 percent of the market value of its ownership of limited partner units of Pioneer Southwest. The covenant requiring the Company to maintain a ratio of total debt to total capitalization of no more than 0.60 to 1.0 was not changed.

The amendment also adjusted certain borrowing rates and commitment fees, and changed certain provisions relating to the consequences if a lender under the Credit Facility defaults in its obligations under the agreement. After taking into account the amendment, revolving loans under the Credit Facility 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 plus a defined alternate base rate spread margin (“ABR Margin”), which is currently one percent based on the Company’s debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the “Applicable Margin”), which is currently two percent and is also determined by the Company’s debt rating. Swing line loans under the Credit Facility 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 Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company’s debt rating (currently 0.375 percent).

As of June 30, 2009, the Company was in compliance with all of its debt covenants.

Senior convertible notes. During January 2008, the Company issued $500 million principal amount of 2.875% Convertible Senior Notes, of which $480 million remains outstanding at June 30, 2009. Effective January 1, 2009, the Company adopted the provisions of FSP APB 14-1 and, in accordance therewith, the Company applied the provisions of FSP APB 14-1 on a retrospective basis. The initial adoption of FSP APB 14-1 decreased the carrying value of the 2.875% Convertible Senior Notes by $63.5 million, increased stockholders’ equity by $39.5 million and increased deferred tax liabilities by $24.0 million. For the three and six months ended June 30, 2009, the adoption of FSP APB 14-1 increased interest expense by $3.5 million and $7.0 million and increased the Company’s net loss by approximately $2.2 million ($.02 per diluted share) and $4.4 million ($.04 per diluted share).

 

NOTE G. 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 physical delivery contracts to effectively provide commodity price protection. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, physical delivery contracts are not accounted for as derivative financial instruments in the financial statements.

All derivatives are recorded on the balance sheet at estimated fair value. Fair value is determined in accordance with SFAS 157 and is generally determined based on the credit-adjusted present value difference between the fixed contract price and the underlying market price at the determination date. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments and since that date has accounted for derivative instruments using the mark-to-market accounting method. Therefore, the Company will recognize all future changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Changes in the fair value of effective cash flow hedges prior to the Company’s discontinuance of hedge accounting on February 1, 2009 were recorded as a component of AOCI – Hedging, which has been or will be transferred to earnings when the hedged transaction is recognized in earnings. Any ineffective portion of changes in the fair value of hedge derivatives prior to February 1, 2009 was recorded in the earnings of the period of change. The ineffective portion was calculated as the difference between the change in fair value of the hedge derivative and the estimated change in cash flows from the item hedged.

Fair value derivatives. 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 the Company’s costs of capital. As of June 30, 2009 and December 31, 2008, the Company was not a party to any fair value hedges.

Cash flow derivatives. The Company utilizes commodity swap and collar contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company’s annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company’s indebtedness and forward currency exchange agreements to reduce the effect of exchange rate volatility.

Oil prices. All material physical sales contracts governing the Company’s oil production have been tied directly or indirectly to the NYMEX prices. The following table sets forth the volumes in Bbls underlying the Company’s outstanding oil derivative contracts and the weighted average NYMEX prices per Bbl for those contracts as of June 30, 2009:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily oil production non-hedge derivatives (a):

              

2009 – Swap Contracts

              

Volume (Bbl)

           5,500      10,500      8,000

Price per Bbl

         $ 74.72    $ 62.99    $ 67.02

2009 – Collar Contracts

              

Volume (Bbl)

           2,000      2,000      2,000

Price per Bbl:

              

Ceiling

         $ 70.38    $ 70.38    $ 70.38

Floor

         $ 52.00    $ 52.00    $ 52.00

2009 – Collar Contracts with Short Puts

              

Volume (Bbl)

           20,000      15,000      17,500

Price per Bbl:

              

Ceiling

         $ 62.38    $ 69.72    $ 65.52

Floor

         $ 51.40    $ 51.47    $ 51.43

Short Put

         $ 44.70    $ 41.47    $ 43.31

2010 – Swap Contracts

              

Volume (Bbl)

     2,000      2,000      2,000      2,000      2,000

Price per Bbl

   $ 98.32    $ 98.32    $ 98.32    $ 98.32    $ 98.32

2010 – Collar Contracts with Short Puts

              

Volume (Bbl)

     24,000      24,000      24,000      24,000      24,000

Price per Bbl:

              

Ceiling

   $ 83.46    $ 83.46    $ 83.46    $ 83.46    $ 83.46

Floor

   $ 66.08    $ 66.08    $ 66.08    $ 66.08    $ 66.08

Short

   $ 53.42    $ 53.42    $ 53.42    $ 53.42    $ 53.42

2011 – Collar Contracts

              

Volume (Bbl)

     2,000      2,000      2,000      2,000      2,000

Price per Bbl:

              

Ceiling

   $ 170.00    $ 170.00    $ 170.00    $ 170.00    $ 170.00

Floor

   $ 115.00    $ 115.00    $ 115.00    $ 115.00    $ 115.00

2011 – Collar Contracts with Short Puts

              

Volume (Bbl)

     19,000      19,000      19,000      19,000      19,000

Price per Bbl:

              

Ceiling

   $ 93.31    $ 93.31    $ 93.31    $ 93.31    $ 93.31

Floor

   $ 72.37    $ 72.37    $ 72.37    $ 72.37    $ 72.37

Short Put

   $ 58.32    $ 58.32    $ 58.32    $ 58.32    $ 58.32

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

 

(a)

Subsequent to June 30, 2009, the Company entered into additional swap contracts for (i) 750 Bbls per day of the Company’s fourth quarter 2009 production at an average price of $69.35 per Bbl, (ii) 500 Bbls per day of the Company’s 2010 production at an average price of $73.45 per Bbl, (iii) 750 Bbls per day of the Company’s 2011 production at an average price of $77.25 per Bbl and (iv) 3,000 Bbls per day of the Company’s 2012 and 2013 production at an average price of $79.32 and $81.02, respectively. Additionally, the Company entered into collar contracts with short puts for (i) 1,000 Bbls per day of the Company’s 2010 production with a ceiling price of $87.75 per Bbl, a floor price of $70.00 Bbl and a short put price of $55.00 per Bbl, (ii) 6,000 Bbls per day of the Company’s 2011 production with a ceiling price of $98.70 per Bbl, a floor price of $74.17 per Bbl and a short put price of $59.17 per Bbl and (iii) 1,000 Bbls of the Company’s 2012 and 2013 production with a ceiling price of $103.50 per Bbl and $111.50 per Bbl, respectively, a floor price of $80.00 per Bbl and $83.00 per Bbl, respectively, and a short put price of $65.00 per Bbl and $68.00 per Bbl, respectively.

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 month periods ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009    2008     2009    2008  

Average price reported per Bbl

   $ 70.89    $ 88.27     $ 61.83    $ 82.55  

Average price realized per Bbl

   $ 53.91    $ 123.80     $ 45.44    $ 111.52  

VPP increase to oil revenue (in millions)

   $ 24.7    $ 26.0     $ 49.2    $ 52.0  

Increase (decrease) to oil revenue from hedging activity (in millions)

   $ 23.9    $ (119.9   $ 46.3    $ (199.3

 

24


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production have been tied directly or indirectly to Mont Belvieu prices. The following table sets forth the volumes in Bbls under outstanding NGL derivative contracts and the weighted average Mont Belvieu-posted-prices per Bbl for those contracts as of June 30, 2009:

 

     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Outstanding
Average

Average daily NGL production non-hedge derivatives (a):

              

2009 – Swap Contracts

              

Volume (Bbl)

           3,750      3,750      3,750

Price per Bbl

         $ 34.28    $ 34.28    $ 34.28

2010 – Swap Contracts

              

Volume (Bbl)

     1,250      1,250      1,250      1,250      1,250

Price per Bbl

   $ 47.36    $ 47.37    $ 47.38    $ 47.38    $ 47.38

 

(a)

Subsequent to June 30, 2009, the Company entered into additional swap contracts for 750 Bbls per day of the Company’s 2011 and 2012 production at an average price of $34.65 per Bbl and $35.03 per Bbl, respectively.

The Company reports average NGL prices per Bbl including the effects of NGL quality adjustments and the net effect of NGL derivatives. The following table sets forth (i) the Company’s NGL prices from continuing operations, both reported (including hedge results) and realized (excluding hedge results) and (ii) the net effect of NGL price hedges on NGL revenue from continuing operations for the three- and six-month periods ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009    2008     2009    2008  

Average price reported per Bbl

   $ 26.78    $ 56.28     $ 24.69    $ 55.10  

Average price realized per Bbl

   $ 25.42    $ 57.10     $ 23.45    $ 55.71  

Increase (decrease) to NGL revenue from hedging activity (in millions)

   $ 2.4    $ (1.5   $ 4.7    $ (2.2

 

25


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Gas prices. All material physical sales contracts governing the Company’s gas production have been tied directly or indirectly to regional index prices where the gas is produced. The Company uses derivative contracts to mitigate gas price volatility and reduce basis risk between NYMEX prices and actual index prices upon which the gas is sold. The following table sets forth the volumes in MMBtus under outstanding gas derivative contracts and the weighted average index prices per MMBtu for those contracts as of June 30, 2009:

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Outstanding
Average
 

Average daily gas production non-hedge derivatives (a):

          

2009 – Swap Contracts

          

Volume (MMBtu)

         135,000       135,000       135,000  

Price per MMBtu

       $ 6.25     $ 6.16     $ 6.21  

2009 – Collar Contracts

          

Volume (MMBtu)

         20,000       20,000       20,000  

Price per MMBtu:

          

Ceiling

       $ 5.90     $ 5.90     $ 5.90  

Floor

       $ 4.00     $ 4.00     $ 4.00  

2009 – Collar Contracts with Short Puts

          

Volume (MMBtu)

         150,000       150,000       150,000  

Price per MMBtu:

          

Ceiling

       $ 5.35     $ 5.35     $ 5.35  

Floor

       $ 4.18     $ 4.18     $ 4.18  

Short Put

       $ 3.18     $ 3.18     $ 3.18  

2009 – Basis Swap Contracts

          

Volume (MMBtu)

         285,000       285,000       285,000  

Price per MMBtu

       $ (0.96   $ (0.96   $ (0.96

2010 – Swap Contracts

          

Volume (MMBtu)

     125,000       125,000       125,000       125,000       125,000  

Price per MMBtu

   $ 6.60     $ 6.60     $ 6.60     $ 6.60     $ 6.60  

2010 – Collar Contracts

          

Volume (MMBtu)

     30,000       30,000       30,000       30,000       30,000  

Price per MMBtu:

          

Ceiling

   $ 7.52     $ 7.52     $ 7.52     $ 7.52     $ 7.52  

Floor

   $ 6.00     $ 6.00     $ 6.00     $ 6.00     $ 6.00  

2010 – Collar Contracts with Short Puts

          

Volume (MMBtu)

     95,000       95,000       95,000       95,000       95,000  

Price per MMBtu:

          

Ceiling

   $ 7.94     $ 7.94     $ 7.94     $ 7.94     $ 7.94  

Floor

   $ 6.00     $ 6.00     $ 6.00     $ 6.00     $ 6.00  

Short Put

   $ 5.00     $ 5.00     $ 5.00     $ 5.00     $ 5.00  

2010 – Basis Swap Contracts

          

Volume (MMBtu)

     205,000       205,000       205,000       205,000       205,000  

Price per MMBtu

   $ (0.80   $ (0.80   $ (0.80   $ (0.80   $ (0.80

2011 – Collar Contracts with Short Puts

          

Volume (MMBtu)

     50,000       50,000       50,000       50,000       50,000  

Price per MMBtu:

          

Ceiling

   $ 9.36     $ 9.36     $ 9.36     $ 9.36     $ 9.36  

Floor

   $ 7.00     $ 7.00     $ 7.00     $ 7.00     $ 7.00  

Short Put

   $ 6.00     $ 6.00     $ 6.00     $ 6.00     $ 6.00  

2011 – Basis Swap Contracts

          

Volume (MMBtu)

     60,000       60,000       60,000       60,000       60,000  

Price per MMBtu

   $ (0.82   $ (0.82   $ (0.82   $ (0.82   $ (0.82

2012 – Basis Swap Contracts

          

Volume (MMBtu)

     20,000       20,000       20,000       20,000       20,000  

Price per MMBtu

   $ (0.78   $ (0.78   $ (0.78   $ (0.78   $ (0.78

2013 – Basis Swap Contracts

          

Volume (MMBtu)

     10,000       10,000       10,000       10,000       10,000  

Price per MMBtu

   $ (0.71   $ (0.71   $ (0.71   $ (0.71   $ (0.71

 

26


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

 

(a)

Subsequent to June 30, 2009, the Company entered into additional swap contracts for (i) 815 MMBtu per day and 2,500 MMBtu per day of the Company’s third and fourth quarter production, respectively, at an average price of $4.48 per MMBtu, (ii) 27,295 MMBtu per day of the Company’s 2010 production at an average price of $5.59 per MMBtu and (iii) 2,500 MMBtu per day of the Company’s 2011, 2012 and 2013 production at an average price of $6.65 per MMBtu, $6.77 per MMBtu and $6.89 per MMBtu, respectively. Subsequent to June 30, 2009 the Company also entered into additional collar contracts with short puts for 50,000 MMBtu per day at a ceiling price of $8.55 per MMBtu, a floor price of $6.00 per MMBtu and a short put price of $4.50 per MMBtu. Subsequent to June 30, 2009, the Company also entered into additional basis swap contracts for (i) 10,000 MMBtu per day of the Company’s 2010 production at an average price differential of $0.26 per MMBtu and (ii) 40,000 MMBtu per day of the Company’s 2011 production at an average price differential of $0.54 per MMBtu.

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-month periods ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009    2008     2009    2008  

Average price reported per Mcf

   $ 3.43    $ 8.70     $ 3.90    $ 8.21  

Average price realized per Mcf

   $ 3.02    $ 9.54     $ 3.31    $ 8.44  

VPP increase to gas revenue (in millions)

   $ 12.3    $ 13.5     $ 24.5    $ 26.9  

Increase (decrease) to gas revenue from hedging activity (in millions)

   $ 2.3    $ (42.2   $ 19.0    $ (42.7

Interest rate. During January 2008, the Company entered into interest rate swap contracts and designated the contracts as cash flow hedges of the forecasted interest rate risk associated with a portion of the Company’s Credit Facility indebtedness. The interest rate swap contracts are variable-for-fixed-rate swaps on $400 million notional amount of debt at a weighted average fixed annual rate of 2.87 percent, excluding any applicable margins. The interest rate swaps had an effective start date of February 2008, with $200 million terminating during February 2010 and $200 million during February 2011.

Hedge ineffectiveness. On February 1, 2009, the Company discontinued hedge accounting. As a result, the Company only recorded ineffectiveness during January 2009, which was nominal. During the three and six months ended June 30, 2008, the Company recorded net ineffectiveness income of $.9 million and $1.9 million, respectively. Hedge ineffectiveness represents the ineffective portions of changes in the fair values of the Company’s cash flow hedging instruments. The primary causes of hedge ineffectiveness were changes in forecasted hedged sales volumes and commodity price correlations.

Tabular disclosure of derivative fair value. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments, and since that date forward has accounted for derivative instruments

 

27


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

using the mark-to-market accounting method. All of the Company’s derivatives were made up of non-hedge derivatives as of June 30, 2009 and both hedge derivatives and non-hedge derivatives as of December 31, 2008. The following tables provide disclosure of the Company’s derivative instruments:

 

Fair Value of Derivative Instruments as of June 30, 2009

    

Asset Derivatives (a)

  

Liability Derivatives (a)

Type

  

Balance Sheet

Location

   Fair
Value
  

Balance Sheet

Location

   Fair
Value
          (in thousands)         (in thousands)

Derivatives not designated as hedging instruments under SFAS 133

           

Commodity price derivatives

  

Derivatives - current

   $ 90,654   

Derivatives - current

   $ 127,382

Interest rate derivatives

  

Derivatives - current

     —     

Derivatives - current

     7,803

Commodity price derivatives

  

Derivatives - noncurrent

     56,663   

Derivatives - noncurrent

     62,231

Interest rate derivatives

  

Derivatives - noncurrent

     —     

Derivatives - noncurrent

     1,739
                   

Total derivatives not designated as hedging instruments under SFAS 133

        147,317         199,155
                   

Total derivatives

      $ 147,317       $ 199,155
                   

 

Fair Value of Derivative Instruments as of December 31, 2008

    

Asset Derivatives (a)

  

Liability Derivatives (a)

Type

  

Balance Sheet

Location

   Fair
Value
  

Balance Sheet

Location

   Fair
Value
          (in thousands)         (in thousands)

Derivatives not designated as hedging instruments under SFAS 133

           

Commodity price derivatives

  

Derivatives - current

   $ 3,606   

Derivatives - current

   $ 20,233

Commodity price derivatives

  

Derivatives - noncurrent

     3,972   

Derivatives - noncurrent

     —  
                   

Total derivatives not designated as hedging instruments under SFAS 133

        7,578         20,233
                   

Derivatives designated as hedging instruments under SFAS 133

           

Commodity price derivatives

  

Derivatives - current

     57,367   

Derivatives - current

     24,195

Interest rate derivatives

  

Derivatives - current

     —     

Derivatives - current

     6,484

Commodity price derivatives

  

Derivatives - noncurrent

     68,622   

Derivatives - noncurrent

     17,165

Interest rate derivatives

  

Derivatives - noncurrent

     —     

Derivatives - noncurrent

     3,419
                   

Total derivatives designated as hedging instruments under SFAS 133

        125,989         51,263
                   

Total derivatives

      $ 133,567       $ 71,496
                   

 

(a)

Derivative assets and liabilities shown in the tables above are presented as gross assets and liabilities, without regard to master netting arrangements which are considered in the presentations of derivative assets and liabilities in the accompanying consolidated balance sheets.

(b)

Represent derivative obligations under terminated hedge arrangements.

 

28


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Derivatives in SFAS 133 Cash Flow Hedging Relationships

       Amount of Gain/(Loss) Recognized in
AOCI on Effective Portion
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  
         (in thousands)  

Interest rate derivatives

     $ —        $ 8,420     $ (433   $ 5,101  

Commodity price derivatives

       —          (565,927     4,968       (789,799
                                  

Total

     $ —        $ (557,507   $ 4,535     $ (784,698
                                  

Derivatives in SFAS 133 Cash Flow Hedging Relationships

  Location of Gain/(Loss)
Reclassified from AOCI
into Earnings
   Amount of Gain/(Loss) Reclassified
from AOCI into Earnings
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  
         (in thousands)  

Interest rate derivatives

 

Interest expense

   $ (2,017   $ (332   $ (4,272   $ (305

Commodity price derivatives

 

Oil and gas revenue

     28,490       (163,527     69,912       (244,214
                                  

Total

     $ 26,473     $ (163,859   $ 65,640     $ (244,519
                                  

Derivatives in SFAS 133 Cash Flow Hedging Relationships

  Location of Gain/(Loss)
Recognized in Earnings
on Ineffective Portion
   Amount of Gain/(Loss) Recognized in
Earnings on Ineffective Portion
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  
         (in thousands)  

Commodity price derivatives

 

Derivative gains, net

   $ —        $ 881     $ —        $ 1,908  

Derivatives Not Designated as Hedging Instruments under SFAS 133

  Location of Gain (Loss)
Recognized in Earnings
on Derivative
   Amount of Gain (Loss) Recognized in
Earnings on Derivative
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  
         (in thousands)  

Interest rate derivatives

 

Derivative losses, net

   $ (2,319   $ —        $ (3,251   $ —     

Commodity price derivatives

 

Derivative losses, net

     (167,905     —          (67,110     —     
                                  

Total

     $ (170,224   $ —        $ (70,361   $ —     
                                  

AOCI - Hedging. The fair value of the effective portion of the derivative contracts on January 31, 2009 is reflected in AOCI-Hedging and is being transferred to oil and gas revenue (for commodity derivatives) and interest expense (for interest rate derivatives) over the remaining term of the contracts. In accordance with the mark-to-market method of accounting, the Company will recognize all future changes in fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

As of June 30, 2009 and December 31, 2008, AOCI - Hedging represented net deferred gains of $76.6 million and $88.8 million, respectively. The AOCI - Hedging balance as of June 30, 2009 was comprised of $168.5 million of net deferred gains on the effective portions of discontinued commodity hedges, $9.3 million of net deferred losses on the effective portions of discontinued interest rate hedges, $45.4 million of associated net deferred tax provisions and a charge for $37.2 million of AOCI – Hedging attributable to noncontrolling interests. The $12.2 million decrease in net deferred hedge gains comprising AOCI—Hedging during the six months ended June 30, 2009 was primarily attributable to the transfer of net deferred hedge gains to earnings, partially offset by deferred fair value gains during January 2009 and a decrease in AOCI – Hedging attributable to noncontrolling interests. AOCI - Hedging attributable to noncontrolling interests represented $44.7 million of deferred gains, net of taxes as of December 31, 2008.

 

29


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

During the twelve months ending June 30, 2010, the Company expects to reclassify approximately $95.0 million of AOCI – Hedging net deferred gains to oil and gas revenues and $5.2 million of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify approximately $12.1 million of net deferred income tax provisions associated with hedge derivatives during the year ending June 30, 2010 from AOCI - Hedging to income tax expense.

Discontinued commodity hedges. Effective on February 1, 2009, the Company discontinued all of its commodity and interest rates hedges and began accounting for the associated derivatives using the mark-to-market accounting method. Prior to February 1, 2009, the Company periodically discontinued commodity hedges by terminating the derivative positions when the underlying commodity prices reached a point that the Company believed would be the high or low price of the commodity prior to the scheduled settlement of the open commodity position. This allowed the Company to lock in gains or minimize losses associated with the open hedge positions. At the time of hedge discontinuation, the amounts recorded in AOCI—Hedging are maintained and amortized to earnings over the periods the production was scheduled to occur.

The following table sets forth, as of June 30, 2009, the scheduled amortization of net deferred gains and (losses) on discontinued commodity hedges that will be recognized as increases or (decreases) to the Company’s future oil and gas revenues:

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Total  
   (in thousands)  

2009 net deferred hedge gains

       $ 26,125     $ 24,757     $ 50,882  

2010 net deferred hedge gains

   $ 21,700     $ 22,029     $ 22,353     $ 22,417     $ 88,499  

2011 net deferred hedge gains

   $ 7,989     $ 8,072     $ 8,159     $ 8,020     $ 32,240  

2012 net deferred hedge losses

   $ (810   $ (791   $ (783   $ (772   $ (3,156

 

NOTE H. 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, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Beginning asset retirement obligations

   $ 173,516     $ 200,371     $ 172,433     $ 208,183  

Liabilities assumed in acquisitions

     —          21       —          21  

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

     15,327       630       15,366       (7,791

Liabilities reclassified to discontinued operations held for sale

     (14,353     —          (14,353     —     

Disposition of wells

     (246     —          (246     —     

Liabilities settled

     (23,046     (17,271     (24,976     (18,804

Accretion of discount on continuing operations

     2,753       1,961       5,505       3,904  

Accretion of discount on discontinued operations

     220       199       442       398  
                                

Ending asset retirement obligations

   $ 154,171     $ 185,911     $ 154,171     $ 185,911  
                                

 

(a)

During the six months ended June 30, 2008, the Company recorded a $9.0 million decrease in the abandonment estimates and associated insurance recovery estimates for the East Cameron facility that was destroyed by Hurricane Rita in 2005.

 

30


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of June 30, 2009 and December 31, 2008, the current portions of the Company’s asset retirement obligations were $22.7 million and $29.9 million, respectively.

 

NOTE I. Postretirement Benefit Obligations

As of June 30, 2009 and December 31, 2008, the Company had $9.4 million and $9.6 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities, 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, 2009 or December 31, 2008. Other than participants in 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, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Beginning accumulated postretirement benefit obligations

   $ 9,504     $ 10,401     $ 9,612     $ 10,494  

Net benefit payments

     (362     (265     (691     (563

Service costs

     57       47       114       95  

Accretion of interest

     165       158       329       315  
                                

Ending accumulated postretirement benefit obligations

   $ 9,364     $ 10,341     $ 9,364     $ 10,341  
                                

 

NOTE J. Commitments and Contingencies

Legal actions. The Company is party to the legal actions that are described below. The Company is also a 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 on a quarter-by-quarter basis and will establish and adjust any 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, N.A., as Trustee of the Mesa Offshore Trust (the “Trust”), which is before the Judicial District Court of Harris County, Texas (334th Judicial District) (the “Court”).

On April 27, 2009, the Company and all parties in the lawsuit reached an agreement to settle the lawsuit. Under the terms of the settlement agreement, the Company will pay to the Trust the sum of $13 million in exchange for a full and final release of all claims made or that could have been made in the lawsuit. The Company will also contribute to the Trust proceeds obtained from the Company’s sale of its complete interest, including its working interest, in the Brazos Block A-39 tract, which will be sold in conjunction with the Trust’s sale of its assets.

The settlement agreement is subject to customary conditions, including a condition that the settlement is not final until it is approved by the Court and the Court issues a final, non-appealable judgment disposing of all claims. On August 6, 2009, the Court issued an Interlocutory Judgment approving the settlement agreement. The Interlocutory Judgment, together with the settlement agreement and Findings of Fact and Conclusions of Law, disposes of all claims and claimants except five individuals who intervened in this lawsuit. Pioneer intends to file a motion seeking dismissal of the intervenors’ claims. Assuming Pioneer’s motion is granted, the intervenors’ claims will be dismissed, and a final judgment will be entered. Once such final judgment becomes non-appealable (or any timely appeals are resolved), then the settlement agreement will become final. Assuming that the intervenors’ claims are dismissed and no appeals are filed, it is expected that the settlement agreement will become final in the third or fourth quarter of 2009.

Colorado Notice of Violation. On May 13, 2008, the Company was served with a Notice of Violation/Cease and Desist Order by the State of Colorado Department of Public Health and Environmental Water Quality Control Division. The Notice alleges violations of stormwater discharge permits in the Company’s Raton Basin and Lay Creek

 

31


Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

operations, specifically deficiencies in the Company’s stormwater management plans, failure to implement and maintain best management practices to protect stormwater runoff and failure to conduct inspections of the stormwater management system. The Company has filed an answer to the Notice asserting defenses to the allegations. The Company does not believe that the outcome of this proceeding will materially impact the Company’s liquidity, financial position or future results of operations.

SemGroup accounts receivable. The Company is a creditor in the bankruptcy of SemGroup, L.P. and certain of its subsidiaries (collectively, “SemGroup”), which filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on July 22, 2008 in the U.S. Bankruptcy Court for the District of Delaware. In total, the Company had delinquent receivables from SemGroup of $29.6 million, representing claims for condensate sold pre-petition to SemGroup.

The Company determined that it was probable that the collection of the pre-petition claims would not occur for a protracted period of time and that some of its claims may have been uncollectible. Consequently, the Company recorded a bad debt expense of approximately $19.6 million during the third quarter 2008, which reduced the carrying value of the claims to approximately $10.0 million.

In April 2009, the Company sold all of its pre-petition claims against SemGroup to a third party for approximately $10.1 million, pursuant to a purchase agreement that contains customary representations, warranties and other provisions. If a portion of the claims become impaired due to circumstances arising from a breach of such representations and warranties, then the Company may be required to repurchase such impaired portion of the claims.

Obligations following divestitures. 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.

The Company has also retained certain liabilities and indemnified buyers for certain matters in connection with other divestitures, including the sale in 2007 of its Canadian assets.

 

NOTE K. Earnings Per Share From Continuing Operations

Basic earnings per share from continuing operations is computed by dividing earnings from continuing operations attributable to common stockholders by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share from continuing operations reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to income from continuing operations were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company. During periods that the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would not be dilutive to loss per share and conversion into common stock is assumed not to occur.

The Company’s earnings from continuing operations attributable to common stockholders is computed as income (loss) from continuing operations less participating share-based earnings. The following table is a reconciliation of the Company’s income (loss) from continuing operations to income (loss) from continuing operations attributable to common stockholders for the three- and six-month periods ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Income (loss) from continuing operations

   $ (94,845   $ 155,570     $ (104,687   $ 277,227  

Participating share-based earnings

     (122     (2,247     (98     (3,498
                                

Income (loss) from continuing operations attributable to common stockholders

   $ (94,967   $ 153,323     $ (104,785   $ 273,729  
                                

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

 

(a)

In accordance with FSP EITF 03-6-1, unvested restricted stock share awards and restricted stock unit awards represent participating securities because they participate in nonforfeitable dividends with the Company’s common stock. Participating share-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and restricted stock unit awards do not participate in undistributed net losses as they are not contractually obligated to do so.

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-month periods ended June 30, 2009 and 2008:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   2009    2008    2009    2008
   (in thousands)

Weighted average common shares outstanding (a):

           

Basic

   113,979    118,363    114,116    118,149

Dilutive common stock options (b)

   —      332    —      329

Contingently issuable - performance shares (b)

   —      83    —      42

Convertible notes dilution (c)

   —      592    —      296
                   

Diluted

   113,979    119,370    114,116    118,816
                   

 

(a)

In 2007, the Company’s board of directors (“Board”) approved a $750 million share repurchase program of which $355.8 million remained available for purchase as of June 30, 2009. During the first half of 2009 and 2008, the Company purchased $16.3 million and $12.8 million of common stock pursuant to the program, respectively.

(b)

Diluted earnings per share were calculated using the two-class method for the three- and six-month periods ended June 30, 2009 and June 30, 2008. The following common stock equivalents were excluded from the diluted loss per share calculations for the three and six month periods ended June 30, 2009 because they would have been anti-dilutive to the calculations: 770,531 and 554,816 unvested restricted shares or restricted stock units, respectively; 124,057 and 142,358 outstanding options to purchase the Company’s common stock, respectively; and 174,438 and 87,219 performance units, respectively.

(c)

During January 2008, the Company issued $500 million of 2.875% Convertible Senior Notes. Weighted average common shares outstanding have been increased to reflect the dilutive effect that would have resulted if the 2.875% Convertible Senior Notes had qualified for and been converted during the three- and six-month periods ended June 30, 2008. The 2.875% Convertible Senior Notes were not dilutive to the per share calculations of 2009.

 

NOTE L. Geographic Operating Segment Information

The Company’s only operations are oil and gas exploration and producing activities; however, the Company is organizationally structured along geographic operating segments or regions. The Company has reportable operations in the United States, South Africa and Tunisia.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

The following tables provide the Company’s geographic operating segment data for the three and six months ended June 30, 2009 and 2008. 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 and operations in Equatorial Guinea and Nigeria, where the Company concluded exploration activities during 2007.

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
   (in thousands)  

Three Months Ended June 30, 2009

          

Revenues and other income:

          

Oil and gas

   $ 314,031     $ 18,160     $ 38,501     $ —        $ 370,692  

Interest and other

     —          —          —          88,598       88,598  

Gain on disposition of assets, net

     7       —          —          46       53  
                                        
     314,038       18,160       38,501       88,644       459,343  
                                        

Costs and expenses:

          

Oil and gas production

     75,389       445       8,959       —          84,793  

Production and ad valorem taxes

     23,715       —          —          —          23,715  

Depletion, depreciation and amortization

     132,482       20,446       5,750       7,265       165,943  

Exploration and abandonments

     17,978       195       3,244       201       21,618  

General and administrative

     —          —          —          33,275       33,275  

Accretion of discount on asset retirement obligations

     —          —          —          2,753       2,753  

Interest

     —          —          —          43,475       43,475  

Hurricane activity, net

     16,075       —          —          —          16,075  

Derivative losses, net

     —          —          —          170,224       170,224  

Other

     18,864       —          3,768       14,083       36,715  
                                        
     284,503       21,086       21,721       271,276       598,586  
                                        

Income (loss) from continuing operations before income taxes

     29,535       (2,926     16,780       (182,632     (139,243

Income tax benefit (provision)

     (10,928     849       (9,638     64,115       44,398  
                                        

Income (loss) from continuing operations

   $ 18,607     $ (2,077   $ 7,142     $ (118,517   $ (94,845
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Three Months Ended June 30, 2008

  

Revenues and other income:

          

Oil and gas

   $ 521,380     $ 37,985     $ 75,758     $ —        $ 635,123  

Derivative gains, net

     —          —          —          881       881  

Interest and other

     —          —          —          6,887       6,887  

Gain on disposition of assets, net

     515       —          —          3,386       3,901  
                                        
     521,895       37,985       75,758       11,154       646,792  
                                        

Costs and expenses:

          

Oil and gas production

     82,936       8,369       6,022       —          97,327  

Production and ad valorem taxes

     45,658       —          —          —          45,658  

Depletion, depreciation and amortization

     96,710       4,651       3,656       7,234       112,251  

Exploration and abandonments

     20,302       3       2,887       2,916       26,108  

General and administrative

     —          —          —          35,596       35,596  

Accretion of discount on asset retirement obligations

     —          —          —          1,961       1,961  

Interest

     —          —          —          41,670       41,670  

Hurricane activity, net

     1,401       —          —          —          1,401  

Other

     6,975       —          —          1,300       8,275  
                                        
     253,982       13,023       12,565       90,677       370,247  
                                        

Income (loss) from continuing operations before income taxes

     267,913       24,962       63,193       (79,523     276,545  

Income tax benefit (provision)

     (99,128     (7,239     (37,092     22,484       (120,975
                                        

Income (loss) from continuing operations

   $ 168,785     $ 17,723     $ 26,101     $ (57,039   $ 155,570  
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
     (in thousands)  

Six Months Ended June 30, 2009

          

Revenues and other income:

          

Oil and gas

   $ 641,815     $ 29,965     $ 66,763     $ —        $ 738,543  

Interest and other

     —          —          —          99,258       99,258  

Gain (loss) on disposition of assets, net

     7       —          —          (69     (62
                                        
     641,822       29,965       66,763       99,189       837,739  
                                        

Costs and expenses:

          

Oil and gas production

     173,498       3,941       17,784       —          195,223  

Production and ad valorem taxes

     51,414       —          —          —          51,414  

Depletion, depreciation and amortization

     292,451       37,000       10,066       14,570       354,087  

Impairment of oil and gas properties

     21,091       —          —          —          21,091  

Exploration and abandonments

     41,369       289       10,549       581       52,788  

General and administrative

     —          —          —          67,929       67,929  

Accretion of discount on asset retirement obligations

     —          —          —          5,505       5,505  

Interest

     —          —          —          84,613       84,613  

Hurricane activity, net

     16,450       —          —          —          16,450  

Derivative losses, net

     —          —          —          70,361       70,361  

Other

     39,150       —          3,768       25,186       68,104  
                                        
     635,423       41,230       42,167       268,745       987,565  
                                        

Income (loss) from continuing operations before income taxes

     6,399       (11,265     24,596       (169,556     (149,826

Income tax benefit (provision)

     (2,368     3,267       (14,684     58,924       45,139  
                                        

Income (loss) from continuing operations

   $ 4,031     $ (7,998   $ 9,912     $ (110,632   $ (104,687
                                        

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

     United
States
    South Africa     Tunisia     Headquarters     Consolidated
Total
 
   (in thousands)  

Six Months Ended June 30, 2008

  

Revenues and other income:

          

Oil and gas

   $ 996,984     $ 67,565     $ 112,617     $ —        $ 1,177,166  

Derivative gains, net

           1,908       1,908  

Interest and other

     —          —          —          31,911       31,911  

Gain on disposition of assets, net

     513       —          —          4,065       4,578  
                                        
     997,497       67,565       112,617       37,884       1,215,563  
                                        

Costs and expenses:

          

Oil and gas production

     162,530       18,349       9,261       —          190,140  

Production and ad valorem taxes

     83,546       —          —          —          83,546  

Depletion, depreciation and amortization

     187,924       9,043       5,377       14,544       216,888  

Exploration and abandonments

     44,634       52       13,001       5,606       63,293  

General and administrative

     —          —          —          72,117       72,117  

Accretion of discount on asset retirement obligations

     —          —          —          3,904       3,904  

Interest

     —          —          —          81,948       81,948  

Hurricane activity, net

     1,859       —          —          —          1,859  

Other

     14,836       —          —          5,354       20,190  
                                        
     495,329       27,444       27,639       183,473       733,885  
                                        

Income (loss) from continuing operations before income taxes

     502,168       40,121       84,978       (145,589     481,678  

Income tax benefit (provision)

     (185,802     (11,635     (51,249     44,235       (204,451
                                        

Income (loss) from continuing operations

   $ 316,366     $ 28,486     $ 33,729     $ (101,354   $ 277,227  
                                        
     June 30,
2009
    December 31,
2008
       
     (in thousands)    

Segment Assets:

    

United States

   $ 8,320,069     $ 8,524,622    

South Africa

     207,418       241,619    

Tunisia

     289,212       299,168    

Headquarters

     56,143       96,376    
                  

Total consolidated assets

   $ 8,872,842     $ 9,161,785    
                  

 

NOTE M. Impairment of Oil and Gas Properties

Oil and gas properties assessments. During the first quarter of 2009, the downward adjustments to economically recoverable resource potential in the Company’s Uinta/Piceance area associated with declines in commodity prices and well performance led to the impairment of the net assets in the Company’s Uinta/Piceance area. The Company’s estimates of the undiscounted future cash flows attributed to the assets indicated that their carrying amounts were not expected to be recovered. Consequently, the Company recorded a $21.1 million noncash charge during the first quarter of 2009 to reduce the carrying value of the Uinta/Piceance area oil and gas properties. The impairment charge reduced the oil and gas properties’ carrying values to their estimated fair values, represented by the estimated discounted future cash flows attributable to the assets, which were derived from Level 2 fair value inputs.

The Company’s primary assumptions of the estimated future cash flows attributable to oil and gas properties are based on (i) proved reserves and risk-adjusted probable and possible reserves and (ii) management’s commodity price outlook.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

Goodwill assessments. In accordance with SFAS 142, the Company assesses its goodwill for impairment annually during the third quarter using a July 1 assessment date. The Company’s assessment of goodwill during the third quarter of 2008 indicated that it was not impaired. As a result of declines in commodity prices and a significant decline in the Company’s market capitalization during the second half of 2008, which the Company considered an event that might indicate impairment to the carrying value of goodwill, the Company has reassessed whether the fair value of its net assets supported the carrying value of the Company’s goodwill at its United States reporting unit at December 31, 2008 and quarterly thereafter. The Company’s quarterly reassessments have indicated that its goodwill was not impaired.

The Company’s assessments of goodwill for impairment include estimates of the fair value of its United States reporting unit and comparisons of those fair value estimates with the United States reporting unit’s carrying value. The Company’s estimates of the fair value of its United States reporting unit entailed estimating the fair values of the reporting unit’s assets and liabilities. The primary component of those assets and liabilities is comprised of the reporting unit’s oil and gas properties, whose estimated values were based on the estimated discounted future net cash flows expected to be recovered from the properties. The Company’s primary assumptions in preparing the estimated discounted future net cash flows expected to be recovered from the properties are based on (i) proved reserves and risk-adjusted probable reserves, (ii) management’s price outlook, including assumptions as to inflation of costs and expenses, (iii) the Company’s weighted average cost of capital and (iv) future income tax expense attributable to the net cash flows.

Due to the significant decline in the Company’s market capitalization, the Company expanded its assessment of goodwill impairment to consider the fair value of the United States reporting unit as determined using both the previously described discounted future net cash flow approach and a market approach. The Company assessed market capitalization over the 30-day and 60-day periods prior to June 30, 2009, March 31, 2009 and December 31, 2008 and performed sensitivity valuations of the United States reporting unit’s net assets based on varying valuation combinations of future discounted cash flow assumptions (including assessing future cash flows from proved properties only), market capitalization, control premiums, price inflation assumptions and discount rate assumptions. Those assessments indicated that the United States goodwill was not impaired as of June 30, 2009, March 31, 2009 and December 31, 2008. The Company will continue to assess its goodwill for impairment and such assessments may be affected by (i) additional United States reserve adjustments, both positive and negative, (ii) results of drilling activities, (iii) changes in management’s outlook on commodity prices and costs and expenses, (iv) changes in the Company’s market capitalization, (v) changes in the Company’s weighted average cost of capital and (vi) changes in income taxes.

 

NOTE N. 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 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 from May 2005 through December 2007, 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) are free and clear of all associated 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 reserves 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 VPP proceeds as deferred revenue which are being amortized on a unit-of-production basis to oil and gas revenues over the term of each VPP, (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.

 

38


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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

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, 2008

   $ 49,435     $ 275,706     $ 325,141  

Less: 2009 amortization

     (24,514     (49,180     (73,694
                        

Deferred revenue at June 30, 2009

   $ 24,921     $ 226,526     $ 251,447  
                        

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 2009

   $ 74,212

2010

     90,215

2011

     44,951

2012

     42,069
      
   $ 251,447
      

 

NOTE O. Interest and Other Income

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
   2009     2008     2009    2008
   (in thousands)

Alaskan Petroleum Production Tax credits (a)

   $ 87,511     $ 6,605     $ 94,989    $ 17,770

Interest income

     749       376       1,379      860

Other income

     795       437       959      1,769

Deferred compensation plan income

     74       174       861      1,546

Foreign currency remeasurement and exchange gains (b)

     (735     (988     617      2,526

Credit card rebate

     204       285       453      554

Change in asset retirement estimate

     —          —          —        4,391

Legal settlements

     —          (2     —        2,495
                             

Total interest and other income

   $ 88,598     $ 6,887     $ 99,258    $ 31,911
                             

 

(a)

The Company earns Alaskan Petroleum Production Tax (“PPT”) credits on qualifying capital expenditures. The Company recognizes income from PPT credits at the time they are realized through a cash refund or sale.

(b)

The Company’s operations in 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.

 

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

 

NOTE P. Other Expense

The following table provides the components of the Company’s other expense:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2009     2008     2009     2008  
   (in thousands)  

Idle rig related costs (a)

   $ 22,632     $ 6,975     $ 42,918     $ 14,836  

Transportation commitment loss (b)

     6,781       —          6,781       —     

Contingency and environmental accrual adjustments

     262       63       6,086       507  

Well servicing operations (c)

     2,391       895       5,382       1,638  

Foreign currency remeasurement and exchange losses (d)

     3,408       (35     4,733       338  

Inventory impairment (e)

     433       —          1,603       —     

Other

     866       (882     1,345       (357

Bad debt expense

     (58