-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7O3zTpt7zkFV/x87dTyOTrzJ8pOIPbZkQkgdwClh1H4uipzdf8tBqzct36E98o0 ayWi//L0SdyDdbGqLVH1MA== 0001038357-01-500008.txt : 20010515 0001038357-01-500008.hdr.sgml : 20010515 ACCESSION NUMBER: 0001038357-01-500008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER NATURAL RESOURCES CO CENTRAL INDEX KEY: 0001038357 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752702753 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13245 FILM NUMBER: 1632824 BUSINESS ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 9724449001 MAIL ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 10-Q 1 pnr0301.txt PNR MARCH 2001 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q / x / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 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 No. 1-13245 PIONEER NATURAL RESOURCES COMPANY (Exact name of Registrant as specified in its charter) Delaware 75-2702753 ------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039 - ------------------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's Telephone Number, including area code : (972) 444-9001 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 / / Number of shares of Common Stock outstanding as of April 30, 2001.... 98,235,873 PIONEER NATURAL RESOURCES COMPANY TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 ..................................... 3 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000................... 4 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2001...................... 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000................... 6 Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2001 and 2000..... 7 Notes to Consolidated Financial Statements................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................... 30 Item 6. Exhibits and Reports on Form 8-K.......................... 30 Signatures................................................ 31 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) March 31, December 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................... $ 18,305 $ 26,159 Accounts receivable: Trade, net........................................... 102,437 123,497 Affiliates........................................... 1,479 2,157 Inventories............................................. 12,965 14,842 Deferred income taxes................................... 4,800 4,800 Other current assets.................................... 18,242 19,936 ---------- ---------- Total current assets............................... 158,228 191,391 ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................................... 3,288,356 3,187,889 Unproved properties.................................. 216,322 229,205 Accumulated depletion, depreciation and amortization........................................... (947,580) (902,139) ---------- ---------- 2,557,098 2,514,955 ---------- ---------- Deferred income taxes..................................... 85,200 84,400 Other property and equipment, net......................... 22,497 25,624 Other assets, net......................................... 99,185 138,065 ---------- ---------- $ 2,922,208 $ 2,954,435 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade................................................ $ 110,795 $ 96,646 Affiliates........................................... 1,802 5,629 Interest payable........................................ 38,863 38,142 Other current liabilities: Derivative obligations............................... 109,118 24,957 Other................................................ 50,713 51,140 ---------- ---------- Total current liabilities.......................... 311,291 216,514 ---------- ---------- Long-term debt, less current maturities................... 1,550,230 1,578,776 Other noncurrent liabilities.............................. 194,615 225,740 Deferred income taxes..................................... 25,100 28,500 Stockholders' equity: Preferred stock, $.01 par value; 100,000,000 shares authorized; one share issued and outstanding......... - - Common stock, $.01 par value; 500,000,000 shares authorized; 101,493,569 and 101,268,754 shares issued as of March 31, 2001 and December 31, 2000, respectively................................... 1,015 1,013 Additional paid-in-capital.............................. 2,354,778 2,352,608 Treasury stock, at cost; 3,275,307 and 2,853,107 shares as of March 31, 2001 and December 31, 2000, respectively................................... (44,752) (37,682) Accumulated deficit..................................... (1,354,784) (1,422,703) Accumulated other comprehensive income (loss): Deferred hedge gains and losses...................... (110,507) - Unrealized gain on available for sale securities..... 1,054 8,154 Cumulative translation adjustment.................... (5,832) 3,515 ---------- ---------- Total stockholders' equity......................... 840,972 904,905 Commitments and contingencies ---------- ---------- $ 2,922,208 $ 2,954,435 ========== ========== The financial information included as of March 31, 2001 has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements.
3 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three months ended March 31, ------------------------- 2001 2000 ---------- ---------- Revenues: Oil and gas....................................... $ 257,986 $ 174,375 Interest and other................................ 5,167 3,755 Gain on disposition of assets, net................ 7,293 8,372 --------- --------- 270,446 186,502 --------- --------- Costs and expenses: Oil and gas production............................ 55,802 43,122 Depletion, depreciation and amortization.......... 52,161 51,908 Exploration and abandonments...................... 22,883 13,075 General and administrative........................ 10,448 9,759 Interest.......................................... 35,616 39,755 Other............................................. 25,217 14,413 --------- --------- 202,127 172,032 --------- --------- Income before income taxes............................ 68,319 14,470 Income tax (provision) benefit........................ (400) 300 --------- --------- Net income............................................ $ 67,919 $ 14,770 ========= ========= Net income per share: Basic............................................. $ .69 $ .15 ========= ========= Diluted........................................... $ .68 $ .15 ========= ========= Weighted average basic shares outstanding............. 98,379 100,163 ========= ========= The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements.
4 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) (Unaudited) Accumlated Other Comprehensive Income (Loss) Common ---------------------------------- Stock Additional Hedge Investment Shares Common Paid-in Treasury Accumulated Gains Gains Translation Stockholders' Outstanding Stock Capital Stock Deficit (Losses) (Losses) Adjustment Equity ----------- ------ ---------- -------- ----------- --------- ---------- ----------- ------------ Balance as of January 1, 2001....................... 98,416 $1,013 $2,352,608 $(37,682) $(1,422,703) $ - $ 8,154 $ 3,515 $ 904,905 Stock options exercised... 224 2 2,170 - - - - - 2,172 Treasury stock purchases.. (422) - - (7,070) - - - - (7,070) Net income................ - - - - 67,919 - - - 67,919 Other comprehensive income (loss): Deferred hedge gains and losses: Transition adjustment. - - - - - (197,444) - - (197,444) Unrealized hedge gains................ - - - - - 53,066 - - 53,066 Net losses included in net income........ - - - - - 33,871 - - 33,871 Unrealized gains (losses) on available for sale securities: Unrealized holding losses............... - - - - - - (58) - (58) Gains included in net income........... - - - - - - (7,042) - (7,042) Translation adjustment.. - - - - - - - (9,347) (9,347) ------ ----- --------- ------ ---------- -------- ------- ------- --------- Balance as of March 31, 2001....................... 98,218 $1,015 $2,354,778 $(44,752) $(1,354,784) $(110,507) $ 1,054 $ (5,832) $ 840,972 ====== ===== ========= ======= ========== ======== ======= ======= ========= The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements.
5 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Three months ended March 31, ----------------------- 2001 2000 --------- --------- Cash flows from operating activities: Net income................................................... $ 67,919 $ 14,770 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization................... 52,161 51,908 Exploration expenses, including dry holes.................. 21,847 9,732 Deferred income taxes...................................... (4,800) (1,500) Gain on disposition of assets, net......................... (7,293) (8,372) Other noncash items........................................ 13,557 17,664 Changes in operating assets and liabilities: Accounts receivable........................................ 26,449 (18,950) Inventory.................................................. 1,124 (190) Other current assets....................................... (5,954) (649) Accounts payable........................................... (25,607) (13,763) Interest payable........................................... 720 (8,512) Other current liabilities.................................. (8,389) 5,063 -------- -------- Net cash provided by operating activities............... 131,734 47,201 -------- -------- Cash flows from investing activities: Proceeds from disposition of assets.......................... 11,903 19,547 Additions to oil and gas properties.......................... (97,720) (60,034) Other property (additions) dispositions, net................. (2,984) 553 -------- -------- Net cash used in investing activities................... (88,801) (39,934) -------- -------- Cash flows from financing activities: Borrowings under long-term debt.............................. 60,175 30,839 Principal payments on long-term debt......................... (99,175) (31,707) Payment of noncurrent liabilities............................ (6,650) (3,909) Exercise of long-term incentive plan stock options........... 2,172 48 Purchase of treasury stock................................... (7,070) (4,112) Deferred loan fees/issuance costs............................ - (71) -------- -------- Net cash used in financing activities................... (50,548) (8,912) -------- -------- Net decrease in cash and cash equivalents........................ (7,615) (1,645) Effect of exchange rate changes on cash and cash equivalents..... (239) (7) Cash and cash equivalents, beginning of period................... 26,159 34,788 -------- -------- Cash and cash equivalents, end of period......................... $ 18,305 $ 33,136 ======== ======== The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements.
6 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (Unaudited) Three months ended March 31, ---------------------- 2001 2000 --------- --------- Net income............................................ $ 67,919 $ 14,770 -------- -------- Other comprehensive income (loss): Deferred hedge gains and losses: Transition adjustment............................. (197,444) - Unrealized hedge gains............................ 53,066 - Net losses included in net income................. 33,871 - Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses)................. (58) 31,742 Gains included in net income...................... (7,042) - Cumulative translation adjustment................... (9,347) (462) -------- -------- Other comprehensive income (loss).............. (126,954) 31,280 -------- -------- Comprehensive income (loss)........................... $ (59,035) $ 46,050 ======== ======== The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial
7 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE A. Organization and Nature of Operations Pioneer Natural Resources Company (the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located principally in the Mid Continent, Southwestern and onshore and offshore Gulf Coast regions of the United States and in Argentina, Canada, Gabon and South Africa. NOTE B. Basis of Presentation In the opinion of management, the unaudited consolidated financial statements of the Company as of March 31, 2001 and for the three month periods ended March 31, 2001 and 2000 include all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("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, 2000. NOTE C. Derivative Financial Instruments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended, the provisions of which the Company adopted on January 1, 2001. SFAS 133 requires the accounting recognition of all derivative instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges must be adjusted to fair value through net income (loss). Under the provisions of SFAS 133, changes in the fair value of derivative instruments that are fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income (loss). Changes in the fair value of derivative instruments that are cash flow hedges are recognized in other comprehensive income (loss) until such time as the hedged items are recognized in net income (loss). Ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income (loss). The adoption of SFAS 133 on January 1, 2001 resulted in a transition adjustment to (i) reclassify $57.8 million of deferred losses on terminated hedge positions from other assets (including $11.6 million of other current assets), (ii) increase other current assets, other assets and other current liabilities by $7.0 million, $6.2 million and $146.6 million, respectively, to record the fair value of open hedge derivatives, (iii) increase the carrying value of hedged long-term debt by $6.2 million and (iv) reduce stockholders' equity by $197.4 million for the net impact of items (i) through (iii) above. The $197.4 million reduction in stockholders' equity is reflected as a transition adjustment in other comprehensive income (loss) as of January 1, 2001. Under the provisions of SFAS 133, the Company may designate a derivative instrument as hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk (a "fair value hedge"); or, as hedging the exposure to variability in expected future cash flows that is attributable to a particular risk (a "cash 8 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) flow hedge"). Both at the inception of a hedge and on an ongoing basis, a fair value hedge must be expected to be highly effective in achieving offsetting changes in fair value attributable to the hedged risk during the periods that a hedge is designated. Similarly, both at inception of a hedge and on an ongoing basis, a cash flow hedge must be expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. The Company's policy is to assess actual hedge effectiveness at the end of each calendar quarter. Fair value hedging strategy. The Company has entered into interest rate swap agreements to hedge the fair value of certain of the Company's fixed rate debt. The terms of the interest rate swap agreements provide for an aggregate notional amount of $150 million of debt; commenced on April 19, 2000 and mature on April 15, 2005; require the counterparties to pay the Company a fixed annual rate of 8.875 percent on the notional amount; and, require the Company to pay the counterparties a variable annual rate on the notional amount equal to the periodic three month London Interbank Offered Rate ("LIBOR") plus a weighted average margin rate of 178.2 basis points. The terms of the above described fair value hedge perfectly match the terms of the hedged fixed rate debt and the Company does not exclude any components of the derivative's gain or loss from the measurement of hedge effectiveness. During the three month period ended March 31, 2001, the fair value of the interest rate swap agreements increased from $6.2 million to $9.9 million, with a corresponding offset in the fair value of the hedged fixed rate debt. Cash flow hedging strategy. 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. Oil. All material sales contracts governing the Company's oil production have been tied directly or indirectly to the New York Mercantile Exchange ("NYMEX") prices. The following table sets forth the Company's outstanding oil hedge contracts and the weighted average NYMEX prices for those contracts as of March 31, 2001: Yearly Second Third Fourth Outstanding Quarter Quarter Quarter Average ------------- -------------- ------------- ------------ Daily oil production: 2001 - Swap Contracts Volume (Bbl).................. 19,209 8,740 2,000 9,949 Price per Bbl................. $ 28.92 $ 29.28 $ 30.14 $ 29.11 2001 - Collar Contracts Volume (Bbl).................. 7,000 2,000 2,000 3,655 Price per Bbl................. $19.29-$23.33 $ 25.00-$31.43 $25.00-$31.43 $21.38-26.29
The Company reports average oil prices per Bbl including the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The following table sets forth the Company's oil prices, both realized (excluding hedge results) and reported, and the net effects of settlements of oil price hedges to revenue: Three months ended March 31, ------------------ 2001 2000 ------- ------- Average price reported per Bbl............... $ 25.03 $ 22.44 Average price realized per Bbl............... $ 26.70 $ 27.74 Reduction to revenue (in millions)........... $ (5.3) $ (16.8)
9 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) Natural gas liquids. During the three month periods ended March 31, 2001 and 2000, the Company did not enter into any NGL hedge contracts. Gas. The Company employs a policy of hedging a portion of its gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The following table sets forth the Company's outstanding gas hedge contracts and the weighted average index price for those contracts as of March 31, 2001: Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ----------- ----------- ----------- ----------- ----------- Daily gas production: 2001 - Swap Contracts Volume (Mcf)............. 114,223 124,233 120,908 119,805 Index price per MMBtu.... $ 4.10 $ 4.27 $ 4.31 $ 4.23 2001 - Collar Contracts Volume (Mcf)............. 54,482 54,482 54,482 54,482 Index price per MMBtu.... $2.11-$2.73 $2.11-$2.73 $2.11-$2.73 $2.11-$2.73 2002 - Swap Contracts Volume (Mcf)............. 80,000 80,000 80,000 80,000 80,000 Index price per MMBtu.... $ 4.73 $ 4.73 $ 4.73 $ 4.73 $ 4.73 2002 - Collar Contracts Volume (Mcf)............. 20,000 20,000 20,000 20,000 20,000 Index price per MMBtu.... $4.50-$6.00 $4.50-$6.00 $4.50-$6.00 $4.50-$6.00 $4.50-$6.00 2003 - Swap Contracts Volume (Mcf)............. 25,000 25,000 25,000 25,000 25,000 Index price per MMBtu.... $ 4.55 $ 4.55 $ 4.55 $ 4.55 $ 4.55 2004 - Swap Contracts Volume (Mcf)............. 25,000 25,000 25,000 25,000 25,000 Index price per MMBtu.... $ 4.58 $ 4.58 $ 4.58 $ 4.58 $ 4.58
The Company reports average gas prices per Mcf including the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of gas hedges. The following table sets forth the Company's gas prices, both realized (excluding hedge results) and reported, and the net effects of settlements of gas price hedges to revenue: Three months ended March 31, ------------------- 2001 2000 ------- ------- Average price reported per Mcf..................... $ 4.58 $ 1.97 Average price realized per Mcf..................... $ 5.17 $ 1.99 Reduction to revenue (in millions)................. $ (17.7) $ (.9)
Hedge ineffectiveness and excluded items. During the three month period ended March 31, 2001, the Company recognized net increases to other expense of $10.9 million related to the ineffective portion of its cash flow hedging instruments. The Company excludes changes in the time and volatility value components of collar contracts that are designated as cash flow hedges from the 10 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) measurement of hedge effectiveness. Associated therewith. the Company recorded a net increase to other expense of $2.4 million during the three month period ended March 31, 2001. Accumulated other comprehensive income (loss) - deferred hedge gains and losses. As described above, the Company recorded a transition adjustment associated with the January 1, 2001 adoption of the provisions of SFAS 133 which reduced stockholders' equity by $197.4 million. The adjustment to stockholders' equity was comprised of the fair value of the Company's derivative instruments that are designated as commodity cash flow hedges, which fair value amounted to a liability of $139.6 million as of January 1, 2001, and $57.8 million of deferred losses realized from the early termination of cash flow hedges. These adjustments to stockholders' equity are classified as Accumulated other comprehensive income (loss) ("AOCI") - deferred hedge gains and losses in the accompanying Consolidated Balance Sheet. As of March 31, 2001, AOCI - deferred hedge gains and losses amounts to a $110.5 million reduction in stockholders' equity, comprised of a $54.4 million fair value liability for the effective portions of commodity cash flow hedges that have not matured and $56.1 million of deferred losses from the early termination of cash flow hedges. Prior to the adoption of SFAS 133, deferred hedge losses realized from the early termination of cash flow hedges were recorded as other current assets or other assets based on their original maturity dates and were amortized to oil and gas revenues during their original maturity periods. The following table summarizes the Company's deferred hedge losses associated with the early termination of cash flow hedges as of March 31, 2001 and December 31, 2000: March 31, December 31, 2001 2000 --------- ----------- (in thousands) Current deferred hedge losses: Oil........................................ $ 7,809 $ 8,745 Gas........................................ 13,545 2,863 ------- ------- $ 21,354 $ 11,608 ======== ======== Noncurrent deferred gas hedge losses......... $ 34,802 $ 46,192 ======== ========
During the twelve month period ending March 31, 2002, the Company expects to reclassify $76.5 million of deferred losses from AOCI - deferred hedge losses to oil and gas revenue, including $21.4 million for terminated cash flow hedges. Non-hedge commodity derivatives. The Company is a party to certain BTU swap agreements that mature at the end of 2004. The BTU swap agreements do not qualify as hedges. Other expenses in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2001 include mark-to-market increases to the liabilities recognized for the BTU swap agreements of $6.6 million. During the three months ended March 31, 2000, the Company recorded a mark-to-market decrease of $.7 million to the liabilities recognized for the BTU swap agreements. The BTU swap agreements will continue to be marked-to-market at the end of each reporting period during their respective lives. The related effects on the Company's future results of operations could be significant. During 2000, the Company was a party to options that provided the counterparties the right to exercise call provisions on 10,000 barrels per day of oil, at a strike price of $20.00 per barrel, or to exercise call provisions over that same time period on 100,000 MMBtu per day of natural gas, at a weighted average price of $2.75 per MMBtu. These contracts did not qualify for hedge accounting treatment. For the three months ended March 31, 2000, other expenses include mark-to-market increases to the liabilities recognized on these contracts of $14.1 million. Non-hedge foreign currency agreements. The Company was a party to a series of forward foreign exchange rate swap agreements that exchanged Canadian dollars for United States dollars. These agreements matured during the fourth 11 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) quarter of 2000. As these contracts did not qualify as hedges, the Company recorded mark-to-market adjustments to increase the associated contract liabilities by $.1 million during the three months ended March 31, 2000. NOTE D. Investment Securities As of March 31, 2001 and December 31, 2000, the Company owned 80,715 shares and 613,215 shares, respectively, of Prize Energy Corp. ("Prize") common stock. The Company has classified its investment in the Prize common stock as available for sale securities and carries the investment at its market-quoted fair value in other assets in the accompanying Consolidated Balance Sheets. As of March 31, 2001 and December 31, 2000, the fair value of the Company's investment in Prize common stock was $1.6 million and $12.7 million, respectively. Associated therewith, the Company has recorded unrealized gains on available for sale securities of $1.1 million and $8.2 million as of March 31, 2001 and December 31, 2000, respectively, within AOCI in stockholders' equity in the accompanying Consolidated Balance Sheets. During the three month periods ended March 31, 2001 and 2000, the Company realized gains of $7.0 million and $8.3 million, respectively, from the divestitures of Prize common stock. Additionally, during the three month periods ended March 31, 2001 and 2000, the Company recognized, in other comprehensive income (loss) in the accompanying Consolidated Statements of Comprehensive Income (Loss), an unrealized loss of $.1 million and an unrealized gain of $31.7 million, respectively, from changes in the fair value of investments in Prize common stock. NOTE E. Commitments and Contingencies Legal actions. The Company is party to various legal actions incidental to its business, including, but not limited to, the proceeding described below. The majority of these lawsuits primarily involve claims for damages arising from oil and gas leases and ownership interest disputes. The Company believes that the ultimate disposition of these legal actions will not have a material adverse effect on the Company's consolidated financial position, liquidity, capital resources or future results of operations. The Company will continue to evaluate its litigation matters on a quarter-by- quarter basis and will adjust its litigation reserves as appropriate to reflect the then current status of litigation. Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on a Federal Energy Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa collected the Kansas ad valorem tax in addition to the otherwise maximum lawful price. The FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC failed to provide a reasoned basis for its findings and remanded the case to the FERC for further consideration. On December 1, 1993, the FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. The FERC clarified the effective date of its decision by an order dated May 18, 1994. The order clarified that the effective date applies to tax bills rendered after June 28, 1988, not sales made on or after that date. Numerous parties filed appeals on the FERC's action in the D.C. Circuit. Various natural gas producers challenged the FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in any event, have been applied prospectively. Other parties challenged the FERC's orders on the grounds that the FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. 12 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) The D.C. Circuit issued its decision on August 2, 1996, which holds that producers must make refunds of all Kansas ad valorem tax collected with respect to production since October 4, 1983, as opposed to June 28, 1988. Petitions for rehearing were denied on November 6, 1996. Various natural gas producers subsequently filed a petition for writ of certiori with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by the FERC). Williams Natural Gas Company filed a cross-petition for certiori seeking to impose refund liability back to December 1, 1978. Both petitions were denied on May 12, 1997. The Company and other producers filed petitions for adjustment with the FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with respect to that portion of the refund associated with (i) non- recoupable royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the higher prices collected, and (iii) interest for all periods. On September 10, 1997, FERC denied this request, and on October 10, 1997, the Company and other producers filed a request for rehearing. Pipelines were given until November 10, 1997 to file claims on refunds sought from producers and refunds totaling approximately $30 million were made against the Company. During the year ended December 31, 2000, the Company paid $3.9 million in partial settlement of original claims presented under this litigation. The Company is unable at this time to predict the final outcome of this matter or the amount, if any, that will ultimately be refunded. As of March 31, 2001 and December 31, 2000, the Company had on deposit $28.5 million and $28.1 million, respectively, including accrued interest, in an escrow account and had corresponding obligations for this litigation recorded in other current liabilities in the accompanying Consolidated Balance Sheets. NOTE F. Net Income Per Share Following is a reconciliation of the basic and diluted income per share computation for the three month periods ended March 31, 2001 and 2000: Weighted Average Common Shares Net Income Net Income Outstanding Per Share ----------- ---------------- ----------- (in thousands, except per share amounts) Three Months Ended March 31, 2001: Basic..................................... $ 67,919 98,379 $ .69 Effect of dilutive securities: Common stock options*................... - 1,329 ------- ------- Diluted................................... $ 67,919 99,708 $ .68 ======= ======= Three Months Ended March 31, 2000: Basic..................................... $ 14,770 100,163 $ .15 Effect of dilutive securities: Common stock options*................... - 141 ------- ------- Diluted................................... $ 14,770 100,304 $ .15 ======= ======= * Common stock options to purchase 3,205,578 and 4,995,092 shares of common stock were outstanding but not included in the computations of diluted EPS for the three month periods ended March 31, 2001 and 2000, respectively, because the exercise prices of the options were greater than the average market price of the common shares and would be anti-dilutive to the computations.
13 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE G. Geographic Operating Segment Information The Company has operations in only one industry segment, that being the oil and gas exploration and production industry; however, the Company is organizationally structured along geographic operating segments, or regions. The Company has reportable operations in the United States, Argentina and Canada. Other foreign is primarily comprised of operations in South Africa and Gabon. The following table provides the Company's interim geographic operating segment data. Geographic operating segment income tax benefits (provisions) have been determined based on statutory rates existing in the various tax jurisdictions where the Company has oil and gas producing activities. The "Headquarters and Other" table column includes revenues and expenses that are not routinely included in the earnings measures internally reported to management on a geographic operating segment basis. United Other Headquarters Consolidated States Argentina Canada Foreign and other Total -------- --------- -------- ------- ------------ ------------ (in thousands) Three months ended March 31, 2001: Oil and gas revenue............. $199,421 $ 31,602 $ 26,963 $ - $ - $ 257,986 Interest and other.............. - - - - 5,167 5,167 Gain on disposition of assets... 69 - - - 7,224 7,293 ------- ------- ------- ------ ------- -------- 199,490 31,602 26,963 - 12,391 270,446 ------- ------- ------- ------ ------- -------- Production costs................ 46,268 6,555 2,979 - - 55,802 Depletion, depreciation and amortization................. 29,228 12,135 6,682 - 4,116 52,161 Exploration and abandonments.... 5,215 6,610 6,613 4,445 - 22,883 General and administrative...... - - - - 10,448 10,448 Interest........................ - - - - 35,616 35,616 Other .......................... - - - - 25,217 25,217 ------- ------- ------- ------ ------- -------- 80,711 25,300 16,274 4,445 75,397 202,127 ------- ------- ------- ------ ------- -------- Income (loss) before income taxes 118,779 6,302 10,689 (4,445) (63,006) 68,319 Income tax benefit (provision).. (41,573) (2,206) (4,769) 1,556 46,592 (400) ------- ------- ------- ------ ------- -------- Net income (loss)............... $ 77,206 $ 4,096 $ 5,920 $(2,889) $(16,414) $ 67,919 ======= ======= ======= ====== ======= ========
United Other Headquarters Consolidated States Argentina Canada Foreign and other Total -------- --------- -------- ------- ------------ ------------ (in thousands) Three months ended March 31, 2000: Oil and gas revenue............. $132,442 $ 31,118 $ 10,815 $ - $ - $ 174,375 Interest and other.............. - - - - 3,755 3,755 Gain (loss) on disposition of asset...................... (10) - 6 - 8,376 8,372 ------- ------- ------- ------ ------- -------- 132,432 31,118 10,821 - 12,131 186,502 ------- ------- ------- ------ ------- -------- Production costs................ 34,413 5,400 3,309 - - 43,122 Depletion, depreciation and amortization................. 30,989 11,180 5,729 - 4,010 51,908 Exploration and abandonments.... 4,949 6,171 447 1,508 - 13,075 General and administrative...... - - - - 9,759 9,759 Interest........................ - - - - 39,755 39,755 Other .......................... - - - - 14,413 14,413 ------- ------- ------- ------ ------- -------- 70,351 22,751 9,485 1,508 67,937 172,032 ------- ------- ------- ------ ------- -------- Income (loss) before income taxes 62,081 8,367 1,336 (1,508) (55,806) 14,470 Income tax benefit (provision).. (21,728) (2,928) (596) 528 25,024 300 ------- ------- ------- ------ ------- -------- Net income (loss)............... $ 40,353 $ 5,439 $ 740 $ (980) $(30,782) $ 14,770 ======= ======= ======= ====== ======= ========
14 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE H. Pioneer USA Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned subsidiary of the Company that has fully and unconditionally guaranteed certain debt securities of the Company. In accordance with practices accepted by the SEC, the Company has prepared Consolidating Condensed Financial Statements in order to quantify the assets of Pioneer USA as a subsidiary guarantor. The following Consolidating Condensed Balance Sheets, Consolidating Condensed Statements of Operations and Comprehensive Income (Loss) and Consolidating Condensed Statements of Cash Flows present financial information for Pioneer Natural Resources Company as the Parent on a stand-alone basis (carrying any investments in subsidiaries under the equity method), financial information for Pioneer USA on a stand- alone basis (carrying any investment in non-guarantor subsidiaries under the equity method), the non-guarantor subsidiaries of the Company on a consolidated basis, the consolidation and elimination entries necessary to arrive at the information for the Company on a consolidated basis, and the financial information for the Company on a consolidated basis. Pioneer USA is not restricted from making distributions to the Company. 15 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) CONSOLIDATING CONDENSED BALANCE SHEET As of March 31, 2001 (in thousands) (Unaudited) ASSETS Non- Pioneer Guarantor The Parent USA Subsidiaries Eliminations Company ---------- ------------ ------------ ------------ --------- Current assets: Cash and cash equivalents............. $ 47 $ 8,666 $ 9,592 $ $ 18,305 Other current assets.................. 1,944,370 (1,204,653) (599,794) 139,923 --------- ---------- --------- --------- Total current assets............. 1,944,417 (1,195,987) (590,202) 158,228 --------- ---------- --------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 2,374,532 913,824 3,288,356 Unproved properties................ - 27,175 189,147 216,322 Accumulated depletion, depreciation and amortization........................ - (726,211) (221,369) (947,580) --------- --------- --------- --------- - 1,675,496 881,602 2,557,098 --------- --------- --------- --------- Deferred income taxes................... 85,200 - - 85,200 Other property and equipment, net....... - 18,076 4,421 22,497 Other assets, net....................... 28,185 37,661 33,339 99,185 Investment in subsidiaries.............. 442,228 100,936 - (543,164) - --------- --------- --------- --------- $2,500,030 $ 636,182 $ 329,160 $2,922,208 ========= ========== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 40,045 $ 222,466 $ 48,780 $ 311,291 Long-term debt, less current maturities. 1,550,230 - - 1,550,230 Other noncurrent liabilities............ - 162,003 32,612 194,615 Deferred income taxes................... - - 25,100 25,100 Stockholders' equity.................... 909,755 251,713 222,668 (543,164) 840,972 Commitments and contingencies --------- ---------- --------- --------- $2,500,030 $ 636,182 $ 329,160 $2,922,208 ========= ========== ========= =========
CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 2000 (in thousands) ASSETS Non- Pioneer Guarantor The Parent USA Subsidiaries Eliminations Company ---------- ------------ ------------ ------------ --------- Current assets: Cash and cash equivalents............. $ 15 $ 18,387 $ 7,757 $ $ 26,159 Other current assets.................. 2,006,496 (1,245,546) (595,718) 165,232 --------- ---------- --------- --------- Total current assets............. 2,006,511 (1,227,159) (587,961) 191,391 --------- ---------- --------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 2,291,872 896,017 3,187,889 Unproved properties................ - 28,103 201,102 229,205 Accumulated depletion, depreciation and amortization........................ - (692,250) (209,889) (902,139) --------- ---------- --------- --------- - 1,627,725 887,230 2,514,955 --------- ---------- --------- --------- Deferred income taxes................... 84,400 - - 84,400 Other property and equipment, net....... - 20,823 4,801 25,624 Other assets, net....................... 18,877 89,632 29,556 138,065 Investment in subsidiaries.............. 347,370 100,192 - (447,562) - -------- ---------- --------- --------- $2,457,158 $ 611,213 $ 333,626 $2,954,435 ========= ========== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 37,889 $ 140,415 $ 38,210 $ 216,514 Long-term debt, less current maturities. 1,578,776 - - 1,578,776 Other noncurrent liabilities............ - 190,476 35,264 225,740 Deferred income taxes................... - - 28,500 28,500 Stockholders' equity.................... 840,493 280,322 231,652 (447,562) 904,905 Commitments and contingencies -------- --------- -------- --------- $2,457,158 $ 611,213 $ 333,626 $2,954,435 ========= ========== ========= =========
16 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Three Months Ended March 31, 2001 (in thousands) (Unaudited) Non- Consolidated Pioneer Guarantor Income The Parent USA Subsidiaries Tax Benefit Eliminations Company -------- --------- ------------ ------------- ------------ ---------- Revenues: Oil and gas........................ $ - $ 192,794 $ 65,192 $ - $ $ 257,986 Interest and other................. - 3,022 2,145 - 5,167 Gain on disposition of assets, net. - 7,231 62 - 7,293 ------- -------- ------- ------- --------- - 203,047 67,399 - 270,446 ------- -------- ------- ------- --------- Costs and expenses: Oil and gas production............. - 45,782 10,020 - 55,802 Depletion, depreciation and amortization..................... - 31,495 20,666 - 52,161 Exploration and abandonments....... - 5,925 16,958 - 22,883 General and administrative......... 177 7,188 3,083 - 10,448 Interest........................... (10,396) 32,120 13,892 - 35,616 Equity income from subsidiaries.... (57,717) (571) - - 58,288 - Other.............................. - 7,067 18,150 - 25,217 ------- -------- ------- ------- --------- (67,936) 129,006 82,769 - 202,127 ------- -------- ------- ------- --------- Income (loss) before income taxes.... 67,936 74,041 (15,370) 68,319 Income tax (provision) benefit....... - 17 (400) (17) (400) ------- -------- ------- ------- --------- Net income (loss).................... 67,936 74,058 (15,770) (17) 67,919 Other comprehensive income (loss): Deferred hedge losses: Transition adjustment........... - (172,007) (25,437) - (197,444) Unrealized hedge gains.......... - 49,992 3,074 - 53,066 Net losses included in net income......................... - 22,455 11,416 - 33,871 Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses)....................... - (58) - - (58) Gains included in net income.... - (7,042) - - (7,042) Cumulative translation adjustment. - - (9,347) - (9,347) ------- -------- ------- ------- --------- Comprehensive income (loss).......... $ 67,936 $ (31,162) $(37,504) $ (17) $ (59,035) ======== ======== ======= ======= =========
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Three Months Ended March 31, 2000 (in thousands) (Unaudited) Non- Consolidated Pioneer Guarantor Income The Parent USA Subsidiaries Tax Benefit Eliminations Company -------- --------- ------------ ------------- ------------ ---------- Revenues: Oil and gas........... ............ $ - $ 125,477 $ 48,898 $ - $ $ 174,375 Interest and other..... ........... 18 2,060 1,677 - 3,755 Gain on disposition of assets, net. - 8,337 35 - 8,372 ------- -------- ------- ------- --------- 18 135,874 50,610 - 186,502 ------- -------- ------- ------- --------- Costs and expenses: Oil and gas production............. - 33,745 9,377 - 43,122 Depletion, depreciation and amortization..................... - 32,771 19,137 - 51,908 Exploration and abandonments....... - 5,664 7,411 - 13,075 General and administrative......... (196) 7,814 2,141 - 9,759 Interest........................... (11,621) 36,151 15,225 - 39,755 Equity income from subsidiaries.... (2,927) (2,709) - - 5,636 - Other.............................. - 14,071 342 - 14,413 ------- -------- ------- ------- --------- (14,744) 127,507 53,633 - 172,032 ------- -------- ------- ------- --------- Income (loss) before income taxes.... 14,762 8,367 (3,023) - 14,470 Income tax benefit................... - - 292 8 300 ------- -------- ------- ------- --------- Net income (loss).................... 14,762 8,367 (2,731) 8 14,770 Other comprehensive income (loss): Unrealized gain on available for sale securities.............. - 31,742 - - 31,742 Cumulative translation adjustment.. - - (462) - (462) ------- -------- ------- ------- --------- Comprehensive income (loss).......... $ 14,762 $ 40,109 $ (3,193) $ 8 $ 46,050 ======= ======== ======= ======= =========
17 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 2001 (in thousands) (Unaudited) Non- Pioneer Guarantor The Parent USA Subsidiaries Company -------- --------- ------------ --------- Cash flows from operating activities: Net cash provided by operating activities......... $ 43,930 $ 45,680 $ 42,124 $ 131,734 ------- ------- ------- -------- Cash flows from investing activities: Proceeds from disposition of assets............... - 11,725 178 11,903 Additions to oil and gas properties............... - (59,445) (38,275) (97,720) Other property (additions) dispositions, net...... - (1,541) (1,443) (2,984) ------- ------- ------- -------- Net cash used in investing activities.......... - (49,261) (39,540) (88,801) ------- ------- ------- -------- Cash flows from financing activities: Borrowings under long-term debt................... 60,175 - - 60,175 Principal payments on long-term debt.............. (99,175) - - (99,175) Payment of noncurrent liabilities................. - (6,140) (510) (6,650) Exercise of long-term incentive plan stock options.................................. 2,172 - - 2,172 Purchase of treasury stock........................ (7,070) - - (7,070) ------- ------- ------- -------- Net cash used in financing activities.......... (43,898) (6,140) (510) (50,548) ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents...................................... 32 (9,721) 2,074 (7,615) Effect of exchange rate changes on cash and cash equivalents........................ - - (239) (239) Cash and cash equivalents, beginning of period.............................. 15 18,387 7,757 26,159 ------- ------- ------- -------- Cash and cash equivalents, end of period........................................ $ 47 $ 8,666 $ 9,592 $ 18,305 ======= ======= ======= ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 2000 (in thousands) (Unaudited) Non- Pioneer Guarantor The Parent USA Subsidiaries Company -------- --------- ------------ --------- Cash flows from operating activities: Net cash provided by operating activities......... $ 5,316 $ 4,450 $ 37,435 $ 47,201 ------- ------- ------- -------- Cash flows from investing activities: Proceeds from disposition of assets............... - 18,885 662 19,547 Additions to oil and gas properties............... - (22,925) (37,109) (60,034) Other property (additions) dispositions, net...... - (1,767) 2,320 553 ------- ------- ------- -------- Net cash used in investing activities.......... - (5,807) (34,127) (39,934) ------- ------- ------- -------- Cash flows from financing activities: Borrowings under long-term debt................... 30,839 - - 30,839 Principal payments on long-term debt.............. (31,384) (323) - (31,707) Payment of noncurrent liabilities................. - (3,665) (244) (3,909) Exercise of long-term incentive plan stock options.................................. 48 - - 48 Purchase of treasury stock........................ (4,112) - - (4,112) Deferred loan fees/issuance costs................. (71) - - (71) ------- ------- ------- -------- Net cash used in financing activities.......... (4,680) (3,988) (244) (8,912) ------- ------- ------- -------- Net increase(decrease) in cash and cash equivalents...................................... 636 (5,345) 3,064 (1,645) Effect of exchange rate changes on cash and cash equivalents........................ - - (7) (7) Cash and cash equivalents, beginning of period.............................. 5 22,699 12,084 34,788 ------- ------- ------- -------- Cash and cash equivalents, end of period........................................ $ 641 $ 17,354 $ 15,141 $ 33,136 ======= ======= ======= ========
18 PIONEER NATURAL RESOURCES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(1) Financial and Operating Performance The financial and operating performance of Pioneer Natural Resources Company (the "Company" or "Pioneer") during the three months ended March 31, 2001 was highlighted by participation in a series of discoveries in the deepwater Gulf of Mexico, Gabon and South Africa (see "Drilling Highlights", below); significant increases in net income and operating cash flows; further reductions in outstanding borrowings; and additional common stock repurchases. The Company reported net income of $67.9 million ($.68 per diluted share) for the three months ended March 31, 2001, as compared to net income of $14.8 million ($.15 per share) for the same period in 2000. During the three months ended March 31, 2001, earnings were positively impacted by favorable commodity prices and a $7.3 million gain on the disposition of assets. These favorable results were partially offset by $8.8 million of derivative mark-to- market charges to other expenses. The Company's results for the three months ended March 31, 2000 were impacted by increases in commodity prices, an $8.4 million gain on the disposition of assets and $13.5 million of derivative mark- to-market charges to other expenses. The Company's net cash provided by operating activities grew to $131.7 million during the three months ended March 31, 2001, representing an increase of 179 percent, as compared to net cash provided by operating activities of $47.2 million for the same period in 2000. The increase in net cash provided by operating activities was primarily a result of favorable commodity prices. These positive results were partially offset by production declines primarily resulting from prior year asset divestitures, temporary supply, demand and infrastructure issues and increased production costs primarily resulting from increases in production and ad valorem taxes and field fuel costs associated with higher gas prices. During the three months ended March 31, 2001, the Company used its net cash provided by operating activities, together with proceeds from the dispositions of assets, to fund additions to oil and gas properties, to repay $39.0 million of outstanding indebtedness, to repurchase 422,200 shares of the Company's common stock for $7.1 million and for other general corporate needs. The Company strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility to fund future opportunities. The Company's total book capitalization at March 31, 2001 was $2.4 billion, consisting of total debt of $1.6 billion and stockholders' equity of $.8 billion. Debt as a percentage of total book capitalization was 65 percent at March 31, 2001 as compared to 64 percent at December 31, 2000. The increase in the Company's debt as a percentage of total book capitalization during the three months ended March 31, 2001 is primarily due to a $110.5 million reduction in stockholders' equity associated with the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended. Total outstanding indebtedness declined by $28.5 million during the three months ended March 31, 2001. The Company intends to continue reducing its outstanding indebtedness during the remainder of 2001 and 2002 through the use of funds generated by the individual or combined sources of operating activities and asset dispositions. See "Results of Operations" below for additional information regarding SFAS 133 and the Company's hedging activities. Drilling Highlights During the first quarter of 2001, the Company spent $97.7 million on capital projects including $50.7 million for development activities, $29.8 million for exploration activities and $17.2 million on acquisitions. During the three months ended March 31, 2001, the Company completed 103 development wells and 21 exploratory wells and plugged and abandoned two development wells and 11 exploratory wells. As of March 31, 2001, the Company had 46 development wells and 15 exploratory wells in progress. Domestic. The Company expended $38.0 million during the first quarter of 2001 on drilling activities in the Gulf Coast, Permian Basin and Mid Continent areas of the United States. 19 Gulf Coast area. In the Gulf Coast area, the Company expended $25.9 million of drilling capital during the first quarter of 2001 to successfully drill four exploratory wells and three development wells and begin drilling 11 exploratory and eight development wells that remained in progress on March 31, 2001. During April 2001, the Company announced Gulf Coast area discoveries including a successful appraisal well completed in the Company's Cyrus prospect and participation in two new deepwater Gulf of Mexico discoveries at the Turnberry and Falcon prospects. The Company owns a 5.5 percent working interest in the Cyrus prospect, where the Texaco-operated High Island Block A-582 #5 well confirmed over 230 feet of pay found in a discovery well drilled during the fourth quarter of 2000. The initial exploratory well drilled on the Dominion E&P-operated Turnberry prospect, where the Company owns a 40 percent working interest, was drilled to a total depth of 15,994 feet and encountered over 100 feet of hydrocarbon-bearing sands. Sidetrack operations on the Turnberry discovery are underway to test the extent of the underlying reservoir. At the Mariner Energy-operated Falcon prospect, where the Company owns a 45 percent working interest, an exploratory well was drilled to a total depth of 9,060 feet and found two hydrocarbon-bearing sands. The discovery well was also successfully sidetracked to a downdip location to test the extent of the underlying reservoir. As of March 31, 2001, the Company is also participating in three exploratory wells drilling on the Gulf of Mexico shelf that are targeting deep gas objectives. An exploratory well on the Pioneer-operated Cruiser prospect in West Cameron 296, in which the Company owns a 70 percent working interest, is being drilled to a target depth of 16,000 feet; an exploratory well on the Spinnaker-operated Stirrup prospect in Mustang Island 861-L, in which the Company owns a 25 percent working interest, is drilling towards two objectives located at depths of 14,500 feet and 15,300 feet; and, an exploratory well on the Hall Houston-operated Oneida prospect in East Cameron 76, in which the Company owns a 14 percent working interest, is drilling towards a target depth of 16,800 feet. All three of these deep gas tests are expected to reach their initial objectives during May 2001. Three additional Gulf of Mexico exploratory wells are planned for the remainder of 2001. Two deepwater wells are planned for the fourth quarter of 2001 to test the Ozona Deep prospect in Garden Banks 515, where the Company owns a 32 percent working interest and the Sanibel prospect in East Breaks 981, where the Company owns a 100 percent working interest. On the Gulf of Mexico shelf, the Company plans on testing its Malta prospect, where the Company has a 100 percent working interest, after the completion of the Cruiser prospect well. In the deepwater Gulf of Mexico area, the Company's development drilling and completion work remains on schedule in the Aconcagua and Camden Hills fields. The first development well at Aconcagua, one of three fields being jointly developed in the Canyon Express gas project, was successfully completed during the first quarter of 2001 and exceeded the Company's expectations. Additionally, facilities construction is underway for the Canyon Express gas project, in which the Company owns an 18 percent interest, with installation scheduled to commence during the third quarter of 2001. First sales from the installation are expected in June 2001. Two exploratory wells are in progress at the Devils Tower field in Mississippi Canyon 773, where the Company increased its working interest to 25 percent during the first quarter 2001, to explore for new reserves in previously undrilled reservoirs and to further develop previously tested zones. If successful, these wells will further support and expedite project sanctioning. In South Texas, the Company continues to aggressively develop the Edwards Reef in its Pawnee field, where the Company has a 100 percent working interest. The Company initiated drilling on the first of five scheduled vertical wells and two horizontal reentries. The Company currently has seven drilling rigs contracted and operating in the East Texas/Gulf Coast area, including four rigs in the East Texas Bossier field. In East Texas, the Company plans to drill 25 operated wells and participate in 12 outside operated wells in the Bossier play in 2001. Three wells have been drilled this year with a total of seven operated wells currently producing and awaiting completion or facilities. Pioneer holds approximately 134,000 gross acres in the play in East Texas and Louisiana with a 65 percent average working interest. Permian Basin area. In the Permian Basin area, the Company expended $10.1 million of drilling capital during the first quarter of 2001 to successfully complete 57 development wells and one exploratory well and to begin drilling 26 development wells that remain in progress as of March 31, 2001. In the Permian Basin area, the Company's discoveries in the Myway Clearfork field have provided 20 to 30 potential development locations. Additionally, in the Ozona gas field, Pioneer is drilling the sixth well of a 25 well 2001 development program in the Canyon and Strawn formations, where gross average well production is 600 Mcf per day. The Company currently has eight drilling rigs contracted and operating in the Permian Basin area. 20 Mid Continent area. In the Mid Continent area, the Company expended $2.0 million of drilling capital during the first quarter of 2001 to successfully complete 10 development wells and to begin drilling four development wells that remain in progress as of March 31, 2001. The Company's development drilling in the Mid Continent area is focused on West Panhandle and Hugoton gas prospects, where the Company currently has one drilling rig contracted and operating. Argentina. In Argentina, the Company expended $12.3 million of drilling capital during the first quarter of 2001 to successfully complete eight wells, one of which was an exploratory discovery and seven of which were development wells, and to drill one exploratory well that was plugged and abandoned and to begin drilling six development wells that remain in progress as of March 31, 2001. The Company has had significant success in the Bajo Barda Gonzalez drilling program in Argentina's Neuquen Basin, where seven wells have been drilled during the first quarter of 2001 and five wells are scheduled for the second quarter of 2001. In the Loma Negra Norte field, the Company has drilled five successful wells and has identified 10 to 20 additional drilling locations. The Company currently has four drilling rigs contracted and operating in Argentina. Canada. In Canada, the Company expended $19.2 million of drilling capital during the first quarter of 2001 to successfully complete 26 development wells and 14 extension/exploration wells, to drill 10 extension/exploration wells that were plugged and abandoned and to begin drilling two extension/exploration wells that remain in progress as of March 31, 2001. During the first quarter of 2001, the Company completed its annual winter drilling program in the Chinchaga, North Chinchaga and Martin Creek areas that are only accessible to drilling operations during the winter. During the just completed winter drilling program, the Company drilled 32 wells in the Chinchaga area and connected 26 wells to pipelines. In the North Chinchaga area, eight wells were drilled and connected to pipelines. In the Martin Creek and Conroy Black areas, four wells were drilled and 12 wells were connected to pipelines, including 11 wells that were drilled during the previous winter drilling program. Africa. In South Africa and Gabon, the Company expended $10.8 million of drilling capital during the first quarter of 2001 to successfully drill the Company's first exploratory well on its South African Boomslang prospect and to participate in one exploratory well in South Africa and one exploratory well in Gabon that remain in progress as of March 31, 2001. During February 2001, the Company announced that its E-DQ1 well in the Boomslang prospect, in which the Company has a 49 percent working interest, tested significant volumes of oil and natural gas. The well is located in the Bredasdorp Basin in the E-P Tract of Block 9, offshore South Africa and encountered 108 net feet of pay in shallow-marine sands consisting of an oil leg under a gas column at a depth of 6,600 feet. Additionally, during April 2001 the Company announced discoveries at the Pioneer-operated E-BB2 exploratory gas well offshore South Africa and at the Pioneer-operated Olowi Marin-1 exploratory oil well offshore Gabon. The E-BB2 gas well, in which the Company owns a 40 percent working interest, was drilled to a total depth of 10,184 feet and encountered over 325 feet of gas-productive sandstone in five primary zones. Additional tests of the E-BB2 well are scheduled during the second quarter of 2001, subsequent to which the Company intends to drill an appraisal well on the Boomslang discovery. The Olowi Marin-1 well in Gabon, in which the Company owns a 100 percent working interest, was drilled to a target depth of 3,720 feet. The well and a subsequent sidetrack established the presence of an oil column at least 75 feet thick and is presently being tested. At our Sable oil discovery in South Africa (35% Pioneer share), the partners are currently evaluating bids related to a floating production, storage and offloading facility and subsea production equipment. The Company is still targeting production beginning in the first quarter of 2003. An initial rate of approximately 30,000 Bbls per day is anticipated. Budgeted capital expenditures. The Company's successful drilling results during 2001 have led to revisions to the Company's capital commitment plans. Based on forecasted 2001 cash flows from operating activities and follow-on capital requirements associated with the Company's successful exploration programs, the Company has, subject to Board of Director approval, plans to increase its 2001 capital expenditures budget by approximately 10 percent to $480 million from the $430 million budget originally established. 21 Results of Operations Oil and gas revenues. Revenues from oil and gas operations totaled $258.0 million for the three months ended March 31, 2001, compared to $174.4 million for the same period in 2000. The increase in revenues is reflective of commodity price increases which more than offset decreased production volumes that primarily resulted from prior year asset divestitures and temporary supply, demand and infrastructure issues that are described in more detail, below. The following table provides the Company's volumes and average reported prices, including the results of hedging activities, for the three months ended March 31, 2001 and 2000: Three months ended March 31, --------------------- 2001 2000 -------- -------- Production: Oil (MBbls)............................ 3,163 3,163 NGLs (MBbls)........................... 1,838 2,063 Gas (MMcf)............................. 29,942 32,688 Total (MBOE)........................... 9,991 10,674 Average daily production: Oil (Bbls)............................. 35,140 34,759 NGLs (Bbls)............................ 20,426 22,667 Gas (Mcf).............................. 332,686 359,208 Total (BOE)............................ 111,014 117,294 Average reported prices: Oil (per Bbl): United States........................ $ 25.25 $ 20.02 Argentina............................ $ 24.59 $ 29.44 Canada............................... $ 23.83 $ 29.12 Worldwide............................ $ 25.03 $ 22.44 NGLs (per Bbl): United States........................ $ 22.51 $ 18.86 Argentina............................ $ 27.04 $ 19.41 Canada............................... $ 24.33 $ 22.52 Worldwide............................ $ 22.71 $ 19.00 Gas (per Mcf): United States........................ $ 5.61 $ 2.29 Argentina............................ $ 1.25 $ 1.11 Canada............................... $ 5.81 $ 1.92 Worldwide............................ $ 4.58 $ 1.97
As discussed above, oil and gas revenues for the quarter ended March 31, 2001 were positively impacted by commodity price increases. Comparing the first quarter of 2001 to the same period in 2000, the Company's average worldwide oil price increased 12 percent; the Company's average worldwide NGL price increased 20 percent; and the Company's average worldwide gas price increased 132 percent. On a BOE basis, average daily production decreased by five percent during the three month period ended March 31, 2001, as compared to the same period in 2000. Per BOE average daily production, on a first-quarter to first-quarter comparison, declined nine percent in the United States, where the Company completed asset dispositions during 2000, while production in Canada and Argentina increased by 10 and three percent, respectively. Additionally, production levels were also negatively impacted during the first quarter of 2001 by the Company's election not to recover ethane from United States Mid Continent area gas during January 2001 (this election effectively raised the Company's MMBtu content, price realizations per Mcf of natural gas and total revenue, but reduced production volumes by approximately 1,200 BOE per day during the election period); severe weather in the United States Mid Continent area during January 2001 which hampered field operations; increased hydroelectric power availability in Argentina which reduced the demand for natural gas power generation, unscheduled plant downtime at a large gas purchaser in the Tierra del Fuego area in Argentina; and, in the Neuquen Basin area in Argentina, unanticipated compressor maintenance. 22 Second quarter 2001 production volumes are expected to average 116,000 to 118,000 BOE per day. Gas production is expected to rise as a result of the successful winter drilling program in Canada and as Argentina enters its winter season with higher demand for natural gas. Oil production is also expected to increase in Argentina as a result of an active development drilling program. Hedging activities. The oil and gas prices that the Company reports are based on the market price received for the commodities adjusted by the results of the Company's cash flow hedging activities. The Company utilizes commodity derivative instruments (swaps and collar contracts) in order to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. On January 1, 2001, the Company adopted the provisions of SFAS 133. Although SFAS 133 does not change the economics associated with derivative instruments in general or hedging activities in particular, it has significantly changed the accounting for derivative instruments and hedging activities and the requirements that must be met in order for a derivative instrument to qualify for hedge accounting treatment. See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for specific information regarding the adoption of SFAS 133 and the Company's hedging activities. Gain on disposition of assets. During the three months ended March 31, 2001 and 2000, the Company recorded gains on the disposition of assets of $7.3 million and $8.4 million, respectively. The gain recognized during the first quarter of 2001 is primarily comprised of a $7.0 million gain from the sale of 532,500 shares of Prize Energy Corp. ("Prize") common stock. The gain recognized during the first quarter of 2000 is primarily comprised of an $8.3 million gain from the sale of 1,380,446 shares of Prize common stock. During the second quarter of 2001, the Company sold its remaining investment in 80,715 shares of Prize common stock for a gain of $1.1 million. See Note D of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's 2001 and 2000 investment in Prize common stock. Production costs. During the three month period ended March 31, 2001, total production costs per BOE averaged $5.59, representing an increase of $1.56 per BOE (39 percent), as compared to production costs per BOE of $4.03 during the same period in 2000. Lease operating expenses and workover expenses represent the components of production costs for which the Company has management control, while production and ad valorem taxes and field fuel expenses are directly related to commodity price changes. The increase in production costs per BOE during the first quarter of 2001 as compared to the first quarter of 2000 is primarily due to increases in commodity price driven production and ad valorem taxes and field fuel costs. Three months ended March 31, ------------------- 2001 2000 ------- ------- (per BOE) Lease operating expense.............. $ 2.36 $ 2.16 Taxes: Production........................ 1.08 .67 Ad valorem........................ .40 .35 Field fuel expenses.................. 1.54 .57 Workover costs....................... .21 .28 ------ ------ Total production costs............ $ 5.59 $ 4.03 ====== ======
Based on market-quoted commodity prices in mid-April 2001, the Company expects second quarter 2001 production costs to average $4.75 to $5.00 per BOE. Depletion expense. Depletion expense per BOE increased to $4.81 per BOE during the three month period ended March 31, 2001, as compared to $4.49 per BOE during the same period in 2000. The increase in depletion expense per BOE during 2001 is primarily due to an increase in the Company's Canadian and Argentine proved property bases and to a higher proportionate share of the Company's production being produced in Argentina and Canada. 23 The Company expects second quarter 2001 depletion expense to average $4.70 to $4.90 per BOE. Exploration and abandonments/geological and geophysical costs. Exploration and abandonments/geological and geophysical costs increased to $22.9 million during the three month period ended March 31, 2001, from $13.1 million during the same period in 2000. The increase is largely the result of dry hole costs in Canada; geological and geophysical costs that are supportive of future exploratory drilling in the United States and South Africa; and Argentine and Canadian unproved leasehold abandonments associated with certain exploratory dry holes. The following table provides the Company's geological and geophysical costs, exploratory dry hole expense, lease abandonments expense and other exploration expense for the three month periods ended March 31, 2001 and 2000: United Other States Argentina Canada Foreign Total ------- --------- -------- ------- -------- (in thousands) Three months ended March 31, 2001: Geological and geophysical costs...... $ 4,024 $ 653 $ 226 $ 3,616 $ 8,519 Exploratory dry holes................. 159 582 4,955 821 6,517 Leasehold abandonments and other...... 1,032 5,375 1,432 8 7,847 ----- ------ ------ ------ ------- $ 5,215 $ 6,610 $ 6,613 $ 4,445 $ 22,883 ====== ====== ====== ====== ======= Three months ended March 31, 2000: Geological and geophysical costs.... $ 3,659 $ 784 $ 265 $ 1,501 $ 6,209 Exploratory dry holes............... 291 1,510 (13) - 1,788 Leasehold abandonments and other.... 999 3,877 195 7 5,078 ----- ------ ------ ------ ------- $ 4,949 $ 6,171 $ 447 $ 1,508 $ 13,075 ====== ====== ====== ====== =======
The Company expects second quarter 2001 exploration and abandonment expense to be $20.0 million to $35.0 million dependent largely on exploratory drilling results. Interest expense. Interest expense for the quarter ended March 31, 2001 was $35.6 million as compared to $39.8 million for the same period in 2000. The $4.2 million decrease in interest expense during the first quarter of 2001, as compared to the first quarter of 2000, is reflective of a $176.3 million decrease in the Company's average debt outstanding and the capitalization of $1.3 million of interest during 2001, partially offset by a 14 basis point increase in the Company's weighted average interest rate on debt. The Company expects second quarter 2001 interest expense to be $34 million to $35 million. Other expenses. Other expenses for the three months ended March 31, 2001 and 2000 were $25.2 million and $14.4 million, respectively. The increase in other expense is primarily attributable to $13.3 million of hedge ineffectiveness and fair value components excluded from the measurement of hedge effectiveness under SFAS 133 (see Note C included in "Item 1. Financial Statements" for a discussion of the provisions of SFAS 133) and fluctuations in mark-to-market provisions of non-hedge financial instruments. During the quarter ended March 31, 2001, mark-to- market provisions included, in addition to SFAS 133 mark-to-market provisions, a $6.6 million increase in the liabilities associated with the Company's BTU swap agreements. Mark-to-market provisions during the first quarter of 2000 included a $14.1 million increase in the liabilities associated with non-hedge commodity call contracts and a $.1 million increase in the liabilities associated with forward foreign currency swap agreements, partially offset by a $.7 million decrease in the liabilities associated with the Company's BTU swap agreements. The Company's BTU swap agreements are marked-to-market at the end of each reporting period. The related effects on the Company's future results of operations and comprehensive income (loss) could be significant. During 2000, the Company terminated its 2001 BTU swap positions and locked in a loss of $6.1 million. Income tax provisions (benefits). During the three month periods ended March 31, 2001 and 2000, the Company recognized an income tax provision of $.4 million and an income tax benefit of $.3 million, respectively. Due to uncertainties regarding the Company's utilization of net operating loss 24 carryforwards and other credit carryforwards, the Company has established valuation reserves to reduce the carrying value of its deferred tax assets. The Company's deferred tax valuation reserves are reduced when the Company's financial results establish that it is more likely than not that deferred tax assets previously reserved will be used prior to their expiration. During the second quarter of 2001, the Company estimates that its effective tax rate will be approximately two percent of pretax income as the Company benefits from its net operating loss carryforwards in the United States and Canada. Capital Commitments, Capital Resources and Liquidity Capital commitments. The Company's primary needs for cash are for exploration, development and acquisitions of oil and gas properties, repayment of principal and interest on outstanding indebtedness and working capital obligations. The Company's cash expenditures for additions to oil and gas properties totaled $97.7 million during the first quarter of 2001. This amount includes $17.2 million for the acquisition of prospects and properties, including $10.0 million expended to acquire an additional five percent working interest in the Company's deepwater Gulf of Mexico Devils Tower discovery and $80.5 million for development and exploratory drilling. Drilling expenditures during the first quarter of 2001 included $38.3 million in the United States, $12.3 million in Argentina, $19.1 in Canada and $10.8 million in South Africa and Gabon. See "Drilling Highlights", above, for a specific discussion of capital investments made during the first quarter of 2001. Funding for the Company's working capital obligations is provided by internally-generated cash flow. Funding for the repayment of principal and interest on outstanding debt may be provided by any combination of internally- generated cash flows, proceeds from the disposition of assets or alternative financing sources as discussed in "Capital Resources" below. Capital resources. The Company's primary capital resources are net cash provided by operating activities, proceeds from financing activities and proceeds from asset dispositions. The Company expects that its capital resources will be sufficient to fund its remaining capital commitments in 2001. Operating activities. Net cash provided by operating activities was $131.7 million during the three months ended March 31, 2001, as compared to net cash provided by operating activities of $47.2 million for the same period in 2000. The increase in net cash provided by operating activities was primarily attributable to increases in commodity prices (see "Oil and gas revenues", above). Financing activities. The Company had an outstanding balance under its credit facility agreements at March 31, 2001 of $213.9 million (including outstanding, undrawn letters of credit of $27.9 million), leaving approximately $361.1 million of unused borrowing capacity immediately available. As the Company pursues its strategy, it may utilize various financing sources, including fixed and floating rate debt, convertible securities, preferred stock or common stock. The Company may also issue securities in exchange for oil and gas properties, stock or other interests in other oil and gas companies or related assets. Additional securities may be of a class preferred to common stock with respect to such matters as dividends and liquidation rights and may also have other rights and preferences as determined by the Company's Board of Directors. Asset dispositions. During the three months ended March 31, 2001 and 2000, proceeds from asset dispositions totaled $11.9 million and $19.5 million, respectively. During the three months ended March 31, 2001, the sale of 532,500 shares of Prize common stock for $11.0 million was the primary source of the Company's proceeds from asset dispositions. During the three months ended March 31, 2000, the sale of 1,380,446 shares of Prize common stock for $18.6 million was the primary source of the Company's proceeds from asset dispositions. The proceeds from these dispositions were used to reduce the Company's outstanding bank indebtedness and for general working capital purposes. 25 Proposal to acquire partnerships. On April 28, 2001, the Company announced the filing of a registration statement with the Securities and Exchange Commission ("SEC") proposing an agreement and plan of merger among the Company, Pioneer Natural Resources USA, Inc. ("Pioneer USA"), a wholly-owned subsidiary of Pioneer, and 46 Parker & Parsley limited partnerships. Each partnership that approves the proposals will merge with and into Pioneer USA, and the partnership interests of each such partnership will be converted into the right to receive cash and Pioneer common stock. If the limited partners of the partnerships approve the mergers, the Company will acquire additional working interests in wells predominantly located in the Spraberry field in the Permian Basin of West Texas, a significant core area for Pioneer. The mergers will allow the Company to further consolidate its Spraberry field operations and reduce production costs. If approved, the Company anticipates closing the mergers during the third quarter of 2001. The amount the Company will pay for the partnership interests will be based on the partnerships' reserves values and net working capital as of March 31, 2001. The Company estimates that its offer will be approximately $102 million to the unaffiliated limited partners. The amount of cash to be paid will equal 25 percent of the merger value, and the remaining 75 percent will be paid in shares of the Company's common stock. Liquidity. At March 31, 2001, the Company had $18.3 million of cash and cash equivalents on hand, compared to $26.2 million at December 31, 2000. The Company's ratio of current assets to current liabilities was .51 to 1 at March 31, 2001 and .88 to 1 at December 31, 2000. Item 3. Quantitative and Qualitative Disclosures About Market Risk (1) The following quantitative and qualitative disclosures about market risk are supplementary to the quantitative and qualitative disclosures provided in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. As such, the information contained herein should be read in conjunction with the related disclosures in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. The following disclosures provide specific information about material changes that have occurred since December 31, 2000 in the Company's portfolio of financial instruments. The Company may recognize future earnings gains or losses on these instruments from changes in market interest rates, foreign exchange rates, commodity prices or common stock prices. Interest rate sensitivity. During the quarter ended June 30, 2000, the Company entered into certain interest rate swap agreements to hedge the fair value of the Company's 8-7/8% Senior Notes due April 15, 2005. The interest rate swap agreements are for an aggregate notional amount of $150.0 million of debt; commenced on April 19, 2000; mature on April 15, 2005; require the counterparties to pay the Company a fixed annual rate of 8.875 percent on the notional amount; and, require the Company to pay the counterparties a variable annual rate on the notional amount equal to the three month LIBOR plus a weighted average margin of 178.2 basis points. As of March 31, 2001, the fair market value of the Company's interest rate swap agreements was an asset of $9.9 million. Commodity price sensitivity. During the first quarter of 2001, the Company entered into certain oil and gas hedge derivatives and terminated other oil and gas hedge derivatives. The following tables provide information about the Company's oil and gas derivative financial instruments that the Company was a party to as of March 31, 2001. The tables segregate hedge derivative contracts from those that do not qualify as hedges. See Note C of Notes to Consolidated Financial Statements included in"Item 1. Financial Statements" for information regarding the terms of the Company's derivative financial instruments that are sensitive to changes in gas and oil commodity prices. 26 Pioneer Natural Resources Company Oil Price Sensitivity Derivative Financial Instruments as of March 31, 2001 2001 2002 2003 2004 Fair Value ------- ------- ------- ------ ---------- (in thousands, except volumes and prices) Oil Hedge Derivatives: Average daily notional Bbl volumes (1): Swap contracts.............................. 9,949 $ 6,669 Weighted average per Bbl fixed price.................................. $ 29.11 Collar contracts............................ 3,655 $ (2,915) Weighted average short call per Bbl ceiling price.......................... $ 26.29 Weighted average long put per Bbl floor price............................ $ 21.38 Oil Non-Hedge Derivatives (2): Daily notional MMBtu volumes under swap of NYMEX gas price for 10 percent of NYMEX WTI price................ 13,036 13,036 13,036 13,036 $(27,969) Average forward NYMEX gas prices (3)............................. $ 4.05 $ 4.70 $ 4.37 $ 4.31 Average forward NYMEX oil prices (3)............................. $ 27.69 $ 25.61 $ 23.44 $ 22.63 - --------------- (1) See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (2) Since the oil non-hedge derivatives are sensitive to changes in both oil and gas market prices, they are presented in the Oil Price Sensitivity and the Gas Price Sensitivity tables. (3) The average forward NYMEX oil and gas prices are based on May 1, 2001 market quotes, except for the 2001 prices that represent locked-in prices associated with the Company's Btu swaps.
27 Pioneer Natural Resources Company Gas Price Sensitivity Derivative Financial Instruments as of March 31, 2001 2001 2002 2003 2004 Fair Value -------- -------- -------- -------- ---------- (in thousands, except volumes and prices) Gas Hedge Derivatives (1): Average daily notional MMBtu volumes (2): Swap contracts............................. 119,805 80,000 25,000 25,000 $(29,948) Weighted average MMBtu fixed price................................. $ 4.23 $ 4.73 $ 4.55 $ 4.58 Collar contracts........................... 54,482 20,000 $(30,285) Weighted average short call MMBtu ceiling price......................... $ 2.73 $ 6.00 Weighted average long put MMBtu contingent floor price............... $ 2.11 $ 4.50 Gas Non-hedge Derivatives (3): Daily notional MMBtu volumes under agreement to swap NYMEX gas price for 10 percent of NYMEX WTI price........ 13,036 13,036 13,036 13,036 $(27,969) Average forward NYMEX gas prices (4)............................ $ 4.05 $ 4.70 $ 4.37 $ 4.31 Average forward NYMEX oil prices (4)............................ $ 27.69 $ 25.61 $ 23.44 $ 22.63 - --------------- (1) To minimize basis risk, the Company enters into basis swaps for a portion of its gas hedges to connect the index price of the hedging instrument from a NYMEX index to an index which reflects the geographic area of production. The Company considers these basis swaps as part of the associated swap and option contracts and, accordingly, the effects of the basis swaps have been presented together with the associated contracts. (2) See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (3) Since the gas non-hedge derivatives are sensitive to changes in both gas and oil market prices, they are duplicated in the Gas Sensitivity and the Oil Price Sensitivity tables. (4) The average forward NYMEX oil and gas prices are based on May 1, 2001 market quotes, except for the 2001 prices that represent locked-in prices associated with the Company's Btu swaps.
28 Other price sensitivity. As of March 31, 2001, the Company owned 80,715 shares of Prize common stock. The fair market value of the Company's investment in 80,715 shares of Prize common stock was $1.6 million as of March 31, 2001, representing a $1.1 million unrealized gain on the Company's remaining investment in the Prize common stock. The remaining 80,715 shares were sold in April 2001 for $1.7 million. - --------------- (1) The information in this document includes forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, and the business prospects of Pioneer Natural Resources Company, are subject to a number of risks and uncertainties which may cause the Company's actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties include, among other things, volatility of oil and gas prices, product supply and demand, competition, government regulation or action, litigation, the costs and results of drilling and operations, the Company's ability to replace reserves or implement its business plans, access to and cost of capital, uncertainties about estimates of reserves, quality of technical data and environmental risks. These and other risks are described in the Company's 2000 Annual Report on Form 10-K which is available from the United States Securities and Exchange Commission. 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings As discussed in Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements", the Company is a party to various legal actions incidental to its business. Except as described in Note E, the Company believes that the probable damages from such legal actions will not be in excess of 10 percent of the Company's current assets and that these actions are not material. Item 6. Exhibits and Reports on Form 8-K Exhibits None. Reports on Form 8-K During the three months ended March 31, 2001, the Company filed and furnished current reports on Form 8-K on January 12, 2001, January 25, 2001, February 2, 2001 and March 12, 2001, respectively. The Form 8-K filed on January 12 updated, under Item 7 and Item 9, information regarding the Company's 2001 capital budget and hedging activities. The Form 8-K filed on January 25 reported, under Item 7 and Item 9, the Company's proved oil and gas reserves as of December 31, 2000; and, for the year then ended, the Company's reserve replacement percentage, finding costs per equivalent barrel of added reserves and costs incurred for oil and gas producing activities. The Form 8-K filed on February 2 reported, under Item 5 and Item 7, the Company's financial and operating results for the three and twelve month periods ended December 31, 2000. The Form 8-K furnished on March 12 updated, under Item 9, the Company's first quarter 2001 outlook and hedging activities. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. PIONEER NATURAL RESOURCES COMPANY Date: May 14, 2001 By: /s/ Timothy L. Dove --------------------------------- Timothy L. Dove Executive Vice President and Chief Financial Officer Date: May 14, 2001 By: /s/ Rich Dealy --------------------------------- Rich Dealy Vice President and Chief Accounting Officer 31 -----END PRIVACY-ENHANCED MESSAGE-----