-----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, F6tFq2S0oOqqNIAm//VJEeMi5CNdUnbhEyEpIL9hs2kunk3yGMs1/kiTfkej/AdR 2I8Ytl0Eigkzt8D/hvG7aA== 0001038357-03-000037.txt : 20031031 0001038357-03-000037.hdr.sgml : 20031031 20031031170711 ACCESSION NUMBER: 0001038357-03-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031031 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: 1934 Act SEC FILE NUMBER: 001-13245 FILM NUMBER: 03970516 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 sepq03.txt PIONEER 09/30/2003 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 September 30, 2003 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 900, 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 / / Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / x / No / / Number of shares of Common Stock outstanding as of October 30, 2003................................................ 118,027,311 PIONEER NATURAL RESOURCES COMPANY TABLE OF CONTENTS Page Definitions of Oil and Gas Terms and Conventions Used Herein............ 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002........................................... 4 Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002............... 5 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2003........................ 6 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2003 and 2002............... 7 Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2003 and 2002............................................... 8 Notes to Consolidated Financial Statements.................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 36 Item 4. Controls and Procedures....................................... 38 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................. 39 Item 6. Exhibits and Reports on Form 8-K.............................. 39 Signatures.................................................... 40 Exhibit Index................................................. 41 2 Definitions of Oil and Gas Terms and Conventions Used Herein Within this Report, the following oil and gas terms and conventions have specific meanings: "Bbl" means a standard barrel containing 42 United States gallons; "BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis; "Btu" means British thermal unit and is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit; "LIBOR" means London Interbank Offered Rate, which is a market rate of interest; "MMBtu" means one million Btus; "MBbl" means one thousand Bbls; "MBOE" means one thousand BOE; "Mcf" means one thousand cubic feet and is a measure of natural gas volume; "MMcf" means one million cubic feet; "NGL" means natural gas liquid; "NYMEX" means The New York Mercantile Exchange; "proved reserves" mean the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL. With espect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by Pioneer Natural Resources Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres; and, all currency amounts are expressed in U.S. dollars. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30, December 31, 2003 2002 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents......................................... $ 12,651 $ 8,490 Accounts receivable: Trade, net of reserves for doubtful accounts of $4,641 and $4,744 as of September 30, 2003 and December 31, 2002, respectively........................................... 97,388 97,774 Due from affiliates............................................ 239 448 Inventories....................................................... 19,054 10,648 Prepaid expenses.................................................. 13,889 5,485 Deferred income taxes............................................. 39,500 13,900 Other current assets: Derivatives.................................................... 1,856 2,508 Other, net of reserves for doubtful accounts of $4,207 and $3,351 as of September 30, 2003 and December 31, 2002, respectively........................................... 11,161 7,840 ---------- ---------- Total current assets......................................... 195,738 147,093 ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.............................................. 4,767,281 4,252,897 Unproved properties............................................ 182,429 219,073 Accumulated depletion, depreciation and amortization.............. (1,555,709) (1,303,541) ---------- ---------- 3,394,001 3,168,429 ---------- ---------- Noncurrent deferred income taxes.................................... 188,712 76,840 Other property and equipment, net................................... 25,733 22,784 Other assets: Derivatives....................................................... 349 643 Other, net of reserves for doubtful accounts of $371 and $1,227 as of September 30, 2003 and December 31, 2002, respectively... 37,077 39,327 ---------- ---------- $ 3,841,610 $ 3,455,116 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade.......................................................... $ 135,411 $ 117,582 Due to affiliates.............................................. 6,263 7,192 Interest payable.................................................. 38,039 37,458 Income taxes payable.............................................. 3,916 - Other current liabilities: Derivatives.................................................... 109,200 83,638 Other.......................................................... 30,002 28,722 ---------- ---------- Total current liabilities.................................... 322,831 274,592 ---------- ---------- Long-term debt...................................................... 1,621,364 1,668,536 Noncurrent derivatives.............................................. 44,999 42,490 Noncurrent deferred income taxes.................................... 12,713 8,760 Other noncurrent liabilities........................................ 123,798 85,841 Stockholders' equity: Common stock, $.01 par value; 500,000,000 shares authorized; 119,672,784 and 119,592,344 shares issued as of September 30, 2003 and December 31, 2002, respectively......... 1,197 1,196 Additional paid-in capital........................................ 2,726,969 2,714,567 Treasury stock, at cost; 1,674,819 and 2,339,806 shares as of September 30, 2003 and December 31, 2002, respectively......... (23,857) (32,219) Deferred compensation............................................. (11,477) (14,292) Accumulated deficit............................................... (945,222) (1,298,440) Accumulated other comprehensive income (loss): Net deferred hedge gains (losses), net of tax.................. (55,043) 9,555 Cumulative translation adjustment.............................. 23,338 (5,470) ---------- ---------- Total stockholders' equity................................... 1,715,905 1,374,897 Commitments and contingencies....................................... ---------- ---------- $ 3,841,610 $ 3,455,116 ========== ==========
The financial information included as of September 30, 2003 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 STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- ----------------------- 2003 2002 2003 2002 --------- --------- --------- ----------- Revenues and other income: Oil and gas...................................... $ 332,515 $ 168,317 $ 953,625 $ 506,286 Interest and other............................... 348 7,083 4,321 9,089 Gain on disposition of assets, net............... 46 3,353 1,576 4,374 -------- -------- -------- --------- 332,909 178,753 959,522 519,749 -------- -------- -------- --------- Costs and expenses: Oil and gas production........................... 71,806 49,970 205,387 150,705 Depletion, depreciation and amortization......... 103,534 54,748 274,142 156,081 Exploration and abandonments..................... 24,516 18,324 107,430 57,304 General and administrative....................... 15,207 12,466 44,332 35,142 Accretion of discount on asset retirement obligations.................................... 1,327 - 3,656 - Interest......................................... 23,212 20,347 69,526 71,405 Other............................................ 1,389 21,599 12,205 37,603 -------- -------- -------- --------- 240,991 177,454 716,678 508,240 -------- -------- -------- --------- Income before income taxes and cumulative effect of change in accounting principle................ 91,918 1,299 242,844 11,509 Income tax benefit (provision)..................... 99,895 (2,189) 94,961 (3,216) -------- -------- -------- --------- Income (loss) before cumulative effect of change in accounting principle.......................... 191,813 (890) 337,805 8,293 Cumulative effect of change in accounting principle, net of tax............................ - - 15,413 - -------- -------- -------- --------- Net income (loss).................................. $ 191,813 $ (890) $ 353,218 $ 8,293 ======== ======== ======== ========== Net income (loss) per share: Basic: Income (loss) before cumulative effect of change in accounting principle.............. $ 1.64 $ (.01) $ 2.89 $ .07 Cumulative effect of change in accounting principle, net of tax....................... - - .13 - -------- -------- -------- --------- Net income (loss)........................... $ 1.64 $ (.01) $ 3.02 $ .07 ======== ======== ======== ========== Diluted: Income (loss) before cumulative effect of change in accounting principle.............. $ 1.62 $ (.01) $ 2.86 $ .07 Cumulative effect of change in accounting principle, net of tax....................... - - .13 - -------- -------- -------- --------- Net income (loss)........................... $ 1.62 $ (.01) $ 2.99 $ .07 ======== ======== ======== ========== Weighted average shares outstanding: Basic......................................... 117,216 116,193 116,990 111,227 ======== ======== ======== ========= Diluted....................................... 118,457 116,193 118,283 112,889 ======== ======== ======== =========
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 STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) (Unaudited)
Accumulated Other Comprehensive Income (Loss) --------------------- Net Deferred Hedge Common Gains Stock Additional (Losses), Cumulative Total Shares Common Paid-in Treasury Deferred Accumulated Net Translation Stockholders' Outstanding Stock Capital Stock Compensation Deficit of Tax Adjustment Equity ----------- ------ ---------- -------- ------------ ----------- --------- ----------- ------------ Balance as of January 1, 2003................... 117,253 $1,196 $2,714,567 $(32,219) $(14,292) $(1,298,440) $ 9,555 $ (5,470) $1,374,897 Stock options exercised and employee stock purchased.............. 797 1 1,630 10,711 - - - - 12,342 Purchase of treasury stock.................. (100) - - (2,349) - - - - (2,349) Deferred income tax valuation reserve adjustment related to stock-based compensation........... - - 9,266 - - - - - 9,266 Deferred compensation: Compensation deferred.. 48 - 1,242 - (1,242) - - - - Deferred compensation included in net income................ - - 264 - 4,057 - - - 4,321 Net income.............. - - - - - 353,218 - - 353,218 Other comprehensive income (loss): Net deferred hedge gains (losses), net of tax: Net deferred hedge losses............. - - - - - - (188,758) - (188,758) Deferred income tax valuation reserve adjustment related to hedging......... - - - - - - 23,288 - 23,288 Net hedge losses included in net income......... - - - - - - 100,872 - 100,872 Translation adjustment........... - - - - - - - 28,808 28,808 ------- ----- --------- ------- ------- ---------- -------- ------- --------- Balance as of September 30, 2003..... 117,998 $1,197 $2,726,969 $(23,857) $(11,477) $ (945,222) $ (55,043) $ 23,338 $1,715,905 ======= ===== ========= ======= ======= ========== ======== ======= =========
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 CASH FLOWS (in thousands) (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Cash flows from operating activities: Net income (loss)............................... $ 191,813 $ (890) $ 353,218 $ 8,293 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization..... 103,534 54,748 274,142 156,081 Exploration expenses, including dry holes.... 15,677 12,589 83,204 43,437 Deferred income taxes........................ (103,691) 1,512 (103,938) 1,617 Gain on disposition of assets, net........... (46) (3,353) (1,576) (4,374) Accretion of discount on asset retirement obligations................................ 1,327 - 3,656 - Interest related amortization................ (4,781) (19) (13,960) (1,660) Commodity hedge related amortization......... (18,132) 6,184 (54,119) 20,307 Cumulative effect of change in accounting principle, net of tax...................... - - (15,413) - Other noncash items.......................... 1,598 16,093 8,580 28,337 Changes in operating assets and liabilities: Accounts receivable, net..................... 17,932 6,153 3,287 (4,715) Inventories.................................. (4,678) 69 (8,895) 4,052 Prepaid expenses............................. 1,102 951 (8,404) 1,011 Other current assets, net.................... (2,712) (1,802) (3,276) (1,939) Accounts payable............................. 23,281 (3,907) 28,951 (18,056) Interest payable............................. 850 (384) 581 183 Income taxes payable......................... 1,740 - 3,916 - Other current liabilities.................... (2,349) (290) (3,278) (4,320) -------- -------- -------- -------- Net cash provided by operating activities.. 222,465 87,654 546,676 228,254 -------- -------- -------- -------- Cash flows from investing activities: Proceeds from disposition of assets............. 9,294 59,895 35,006 118,831 Additions to oil and gas properties............. (134,889) (226,440) (521,985) (489,733) Other property additions, net................... (1,814) (2,675) (8,170) (8,535) -------- -------- -------- -------- Net cash used in investing activities...... (127,409) (169,220) (495,149) (379,437) -------- -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt................. 50,913 210,792 222,725 466,668 Principal payments on long-term debt............ (142,913) (56,257) (270,262) (442,583) Common stock issuance proceeds, net of issuance costs............................... - (4) - 236,000 Payment of other noncurrent liabilities......... (4,869) (67,142) (11,097) (103,704) Exercise of stock options and employee stock purchases.............................. 2,481 3,149 12,342 10,756 Purchase of treasury stock...................... - - (2,349) - Deferred debt issuance costs.................... - (135) - (3,293) -------- -------- -------- -------- Net cash provided by (used in) financing activities..................... (94,388) 90,403 (48,641) 163,844 -------- -------- -------- -------- Net increase in cash and cash equivalents......... 668 8,837 2,886 12,661 Effect of exchange rate changes on cash and cash equivalents................................ (173) (63) 1,275 (1,493) Cash and cash equivalents, beginning of period.... 12,156 16,728 8,490 14,334 -------- -------- -------- -------- Cash and cash equivalents, end of period.......... $ 12,651 $ 25,502 $ 12,651 $ 25,502 ======== ======== ======== ========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 7 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Net income (loss)................................. $ 191,813 $ (890) $ 353,218 $ 8,293 -------- -------- -------- -------- Other comprehensive income (loss): Net deferred hedge gains (losses), net of tax: Net deferred hedge gains (losses)............ 46,568 (24,269) (188,758) (113,360) Deferred income tax valuation reserve adjustment related to hedging............. 23,288 - 23,288 - Net hedge (gains) losses included in net income (loss).............................. 27,911 1,651 100,872 (34,147) Translation adjustment.......................... (1,017) (6,915) 28,808 1,827 -------- -------- -------- -------- Other comprehensive income (loss).......... 96,750 (29,533) (35,790) (145,680) -------- -------- -------- -------- Comprehensive income (loss)....................... $ 288,563 $ (30,423) $ 317,428 $(137,387) ======== ======== ======== ========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 8 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) NOTE A. Organization and Nature of Operations Pioneer Natural Resources Company (the "Company" or "Pioneer") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located in the United States, Argentina, Canada, Gabon, South Africa and Tunisia. NOTE B. Basis of Presentation Presentation. In the opinion of management, the unaudited consolidated financial statements of the Company as of September 30, 2003 and for the three and nine month periods ended September 30, 2003 and 2002 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 United States 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, 2002. Adoption of SFAS 143. On January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of Financial Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Under the provisions of SFAS 143, asset retirement obligations are capitalized as part of the carrying value of the long-lived asset. Under the provisions of SFAS 19, asset retirement obligations were recognized using a cost-accumulation approach. Prior to the adoption of SFAS 143, the Company recorded significant asset retirement obligations through the unit-of-production method, except for asset retirement obligations that were assumed in business combinations, which were recorded at their estimated fair values on their dates of acquisition. The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect adjustment to record (i) a $13.8 million increase in the carrying values of proved properties, (ii) a $26.3 million decrease in accumulated depreciation, depletion and amortization of property, plant and equipment, (iii) a $1.0 million increase in current abandonment liabilities, (iv) a $22.4 million increase in noncurrent abandonment liabilities and (v) a $1.3 million increase in Argentine deferred income tax liabilities. The net impact of items (i) through (v) was to record a gain of $15.4 million, net of tax, as a cumulative effect adjustment of a change in accounting principle in the Company's Consolidated Statements of Operations upon adoption on January 1, 2003. See Notes C and F for additional information regarding the Company's income taxes and asset retirement obligations. The following pro forma data summarizes the Company's net income (loss) and net income (loss) per share for the three and nine month periods ended September 30, 2003 and 2002 as if the Company had adopted the provisions of SFAS 143 on January 1, 2002, including aggregate pro forma asset retirement obligations on that date of $60.2 million: 9 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share amounts) Net income (loss), as reported................. $ 191,813 $ (890) $ 353,218 $ 8,293 Pro forma adjustments to reflect retroactive adoption of SFAS 143........................ - 1,270 (15,413) 2,594 -------- -------- -------- -------- Pro forma net income........................... $ 191,813 $ 380 $ 337,805 $ 10,887 ======== ======== ======== ======== Net income (loss) per share: Basic - as reported......................... $ 1.64 $ (.01) $ 3.02 $ .07 ======== ======== ======== ======== Basic - pro forma........................... $ 1.64 $ - $ 2.89 $ .10 ======== ======== ======== ======== Diluted - as reported....................... $ 1.62 $ (.01) $ 2.99 $ .07 ======== ======== ======== ======== Diluted - pro forma......................... $ 1.62 $ - $ 2.86 $ .10 ======== ======== ======== ========
Adoption of SFAS 145. On January 1, 2003, the Company a dopted the provisions of Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" ("SFAS 145"). Prior to SFAS 145, gains or losses on the early extinguishment of debt were required to be classified in a company's periodic consolidated statements of operations as extraordinary gains or losses, net of associated income taxes, after the determination of income or loss from continuing operations. SFAS 145 requires, except in the case of events or transactions of a highly unusual and infrequent nature, that gains or losses from the early extinguishment of debt be classified, on both a prospective and retrospective basis, as components of a company's income or loss from continuing operations. The adoption of SFAS 145 did not affect the Company's financial position or liquidity. Under the provisions of SFAS 145, gains or losses from the early extinguishment of debt are recognized in the Company's Consolidated Statements of Operations, except in the case of events or transactions of a highly unusual and infrequent nature, as components of other income or other expense and are included in the determination of income (loss) from continuing operations. Accordingly, extraordinary losses from the early extinguishment of debt of $2.8 million and $19.5 million recorded during the three month periods ended June 30 and September 30, 2002, respectively, have been reclassified to other expense. Stock-based compensation. The Company accounts for stock-based compensation granted under its long-term incentive plan using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Stock-based compensation expenses associated with option grants were not recognized in the Company's net income (loss) for the three and nine month periods ended September 30, 2003 and 2002, as all options granted had exercise prices equal to the market value of the underlying common stock on the dates of grant. Stock-based compensation expense associated with restricted stock awards is deferred and amortized to earnings ratably over the vesting periods of the awards. The following table illustrates the pro forma effect on net income (loss) and net income (loss) per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to stock-based compensation during the three and nine month periods ended September 30, 2003 and 2002: 10 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share amounts) Net income (loss), as reported................... $ 191,813 $ (890) $ 353,218 $ 8,293 Plus: Total stock-based employee compensation expense included in net income (loss) for all awards, net of tax (1)................. 1,022 483 2,744 517 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (1).......... (3,027) (3,462) (8,700) (8,819) -------- -------- -------- -------- Pro forma net income (loss)...................... $ 189,808 $ (3,869) $ 347,262 $ (9) ======== ======== ======== ======== Net income (loss) per share: Basic - as reported............................ $ 1.64 $ (.01) $ 3.02 $ .07 ======== ======== ======== ======== Basic - pro forma.............................. $ 1.62 $ (.03) $ 2.97 $ - ======== ======== ======== ======== Diluted - as reported.......................... $ 1.62 $ (.01) $ 2.99 $ .07 ======== ======== ======== ======== Diluted - pro forma............................ $ 1.60 $ (.03) $ 2.94 $ - ======== ======== ======== ======== - ----------- (1) Total stock-based employee compensation expense included in net income (loss) is net of tax benefits of $587 thousand and $1.6 million during the three and nine month periods ended September 30, 2003, respectively. Total stock-based employee compensation expense determined under the fair value based method for the three and nine month periods ended September 30, 2003 are net of $1.7 million and $5.0 million of tax benefits, respectively. No tax benefits were recognized for the 2002 compensation expense. See Note C for additional information regarding the Company's income taxes in the United States.
NOTE C. Income Tax Assets Since 1998, the Company has maintained a valuation allowance against a portion of its deferred tax asset position in the United States. As of December 31, 2002, the Company's deferred tax valuation allowances totaled $247.0 million, comprised of $204.3 million of United States deferred tax valuation allowances and $42.7 million of international deferred tax valuation allowances. Statement of Financial Accounting Standards No. 109 requires that the Company continually assess both positive and negative evidence to determine whether it is more likely than not that the deferred tax assets can be realized prior to their expiration. In the third quarter of 2003, the Company concluded that it is now more likely than not that it will realize its gross deferred tax asset position in the United States after giving consideration to the following specific facts: o Over the past several years, the Company has been steadily improving its portfolio of assets, including significant proved reserve discoveries and follow-up development projects that have recently started to produce. Specifically, Pioneer completed development activities and began production operations on its Canyon Express gas project in September 2002 and on its Company-operated Falcon field gas project in March 2003. The production performance to-date and the reservoir data that has been accumulated through September 30, 2003 on these projects provide assurance that these projects will recover the reserves as predicted. o During the three months ended September 30, 2003, the Company announced additional Falcon area discoveries in the Tomahawk and Raptor fields and expects first production from these fields in the second half of 2004. The Company also expects to complete its other significant United States Gulf of Mexico development projects, Harrier and Devils Tower, in early and mid-2004, respectively. 11 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) o Commodity market supply and demand fundamentals have continued to stabilize during the quarter as evidenced by quoted futures prices that suggest that North American gas prices will remain relatively flat over the next five years and that worldwide oil prices may decline modestly over that time span compared to relatively high current levels for each commodity. o The Company's future revenues are further protected against price declines through its significant hedging program. The Company has hedged portions of its oil price risk through 2005 and portions of its gas price risk through 2007. See Note E for information regarding the Company's hedge positions. o The Company has generated record pretax income for the third quarter of 2003, significant net income for the nine months ended September 30, 2003 and net income in each of the years ended December 31, 2002, 2001 and 2000. The Company has also generated significant taxable income for the third consecutive quarter, including the deduction of 100 percent of its intangible drilling costs for those periods. The Company believes that these trends will continue for the foreseeable future. o The Company performed various economic evaluations in the third quarter to determine if the Company would be able to realize all of its deferred tax assets, including its net operating loss carryforwards, prior to any expiration. These evaluations were based on the Company's reserve projections of existing producing properties and recent discoveries being developed. These evaluations employed varying price assumptions, some of which included a significant reduction in commodity prices, and factored in limitations on the use of the Company's net operating loss carryforwards. The evaluations did not include assumptions of increases in proved reserves through future exploration or acquisitions. The evaluations indicated that the deferred tax assets are realizable in the future. Accordingly, during the third quarter of 2003, the Company reversed its valuation allowance in the United States, resulting in the recognition of a deferred tax benefit of $104.7 million ($.88 per diluted share). Further, the reversal of the allowance increased stockholders' equity by $32.6 million as the Company recognized the tax effects of previous stock option exercises and deferred hedging gains and losses in other comprehensive income. Pioneer will continue to monitor Company-specific, oil and gas industry and worldwide economic factors and will reassess the likelihood that the Company's net operating loss carryforwards and other deferred tax attributes will be utilized prior to their expiration. There can be no assurances that facts and circumstances will not materially change and require the Company to reestablish a United States deferred tax asset valuation allowance in a future period. As of September 30, 2003, the Company does not believe there is sufficient positive evidence to reverse its valuation allowances related to certain foreign tax jurisdictions. The Company's valuation allowances related to foreign tax jurisdictions are $53.4 million as of September 30, 2003. Income tax (provision) benefit attributable to income (loss) before cumulative effect of change in accounting principle consists of the following for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands) Current: U.S. state and local........... $ (201) $ (52) $ (839) $ (321) Foreign........................ (3,595) (626) (8,138) (1,278) -------- -------- -------- -------- (3,796) (678) (8,977) (1,599) -------- -------- -------- -------- Deferred: U.S. state and local........... 104,670 - 104,670 - Foreign........................ (979) (1,511) (732) (1,617) -------- -------- -------- -------- 103,691 (1,511) 103,938 (1,617) -------- -------- -------- -------- Total $ 99,895 $ (2,189) $ 94,961 $ (3,216) ======== ======== ======== ========
12 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) NOTE D. Asset Acquisition On March 28, 2003, the Company purchased the remaining 25 percent working interest that it did not already own in the Falcon field, the Harrier field and surrounding satellite prospects in the deepwater Gulf of Mexico for $119.4 million, including $113.1 million of cash paid upon closing, $1.7 million of asset retirement obligations assumed and $4.6 million of closing adjustments. NOTE E. Derivative Financial Instruments Fair value hedges. The Company monitors the debt capital markets and interest rate trends to identify opportunities to enter into and terminate interest rate swap contracts with the objective of minimizing costs of capital. During August and February 2003, the Company entered into interest rate swap contracts to hedge a portion of the fair value of its 9-5/8 percent senior notes. Under the terms of the interest rate swap contracts entered into during August 2003 (the "August Contracts"), the Company contracted to receive a fixed annual rate of 9-5/8 percent on $300.0 million notional amount and agreed to pay the counterparties a variable rate on the notional amount equal to the six-month LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of 521.0 basis points. The terms of the interest rate swap contracts entered into during February 2003 (the "February Contracts") differed from those of the August Contracts only in notional amount and LIBOR Margin, which terms were $250.0 million and 566.4 basis points, respectively. During September 2003, the Company terminated the August Contracts for $10.1 million of cash proceeds. The cash proceeds were comprised of $1.2 million of settlement gains attributable to the period from August 2003 through the date of termination and $8.9 million attributable to the fair value, on the date of termination, of the remaining term of the August Contracts. During May 2003, the Company terminated the February Contracts for $11.4 million of cash proceeds. The cash proceeds were comprised of $2.0 million of settlement gains attributable to the period from February 2003 through the date of termination and $9.4 million attributable to the fair value, on the date of termination, of the remaining term of the February Contracts. The $8.9 million and $9.4 million of proceeds attributable to the fair value of the remaining term of the August Contracts and February Contracts are included in "Proceeds from disposition of assets" in the accompanying Consolidated Statements of Cash Flows during the periods that the hedges were terminated. As of September 30, 2003, the carrying value of the Company's long-term debt in the accompanying Consolidated Balance Sheets included $34.7 million of incremental carrying value attributable to unamortized net deferred hedge gains realized from terminated fair value hedge interest rate swap contracts. The amortization of net deferred hedge gains reduced the Company's reported interest expense by $6.3 million and $2.3 million during the three month periods ended September 30, 2003 and 2002, respectively, and by $18.1 million and $7.9 million during the nine month periods ended September 30, 2003 and 2002, respectively. The following table sets forth the scheduled amortization of net deferred hedge gains and losses on terminated fair value hedges as of September 30, 2003 that will be recognized as increases, in the case of losses, or decreases, in the case of gains, to the Company's future interest expense:
First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----------- (in thousands) 2003 net hedge gain amortization....... $ 7,948 $ 7,948 2004 net hedge gain amortization....... $ 7,266 $ 6,074 $ 5,447 $ 4,512 23,299 2005 net hedge gain amortization....... $ 4,222 $ 2,773 $ 2,271 $ 1,533 10,799 Remaining net losses to be amortized through 2010......................... (7,329) ------ $34,717 ======
13 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) The terms of the fair value hedges described above perfectly matched the terms of the underlying senior notes. The Company did not exclude any component of the derivatives' gains or losses from the measurement of hedge effectiveness. Cash flow hedges. The Company utilizes commodity swap and collar contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company has also utilized interest rate swap agreements to reduce the effect of interest rate volatility on the Company's variable rate line of credit indebtedness and forward currency exchange agreements to reduce the effect of U.S. dollar to Canadian dollar exchange rate volatility. Oil. All material sales contracts governing the Company's oil production have been tied directly or indirectly to 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 September 30, 2003:
Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ------- ------- ------- ------- ----------- Daily oil production: 2003 - Swap Contracts Volume (Bbl)................ 14,000 14,000 Price per Bbl............... $ 24.35 $ 24.35 2004 - Swap Contracts Volume (Bbl)................ 14,000 14,000 14,000 14,000 14,000 Price per Bbl............... $ 24.65 $ 24.65 $ 24.65 $ 24.65 $ 24.65 2005 - Swap Contracts Volume (Bbl)................ 12,000 12,000 12,000 12,000 12,000 Price per Bbl............... $ 24.44 $ 24.44 $ 24.44 $ 24.44 $ 24.44
The Company reports average oil prices per Bbl including the effects of oil quality adjustments and the net effect of oil hedges. The following table sets forth the Company's oil prices, both reported (including hedge results) and realized (excluding hedge results), and the net effect of settlements of oil price hedges on oil revenue for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Average price reported per Bbl..................... $ 25.35 $ 21.77 $ 25.14 $ 22.86 Average price realized per Bbl..................... $ 28.27 $ 24.43 $ 28.84 $ 21.91 Addition (reduction) to oil revenue (in millions).. $ (9.1) $ (7.2) $ (32.9) $ 8.2
Natural gas liquids prices. During the three and nine month periods ended September 30, 2003 and 2002, the Company did not enter into any NGL hedge contracts. Gas prices. The Company employs a policy of hedging a portion of its gas production based on the index price upon which the gas is actually sold, or based on NYMEX prices if NYMEX prices are highly correlated with the index prices, 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 prices for those contracts as of September 30, 2003: 14 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited)
Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ----------- ----------- ----------- ----------- ----------- Daily gas production: 2003 - Swap Contracts Volume (Mcf)................... 310,000 310,000 Index price per MMBtu.......... $ 4.39 $ 4.39 2004 - Swap Contracts Volume (Mcf)................... 260,000 260,000 260,000 260,000 260,000 Index price per MMBtu.......... $ 4.05 $ 4.05 $ 4.05 $ 4.05 $ 4.05 2004 - Collar Contracts Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000 Index price per MMBtu.......... $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 2005 - Swap Contracts Volume (Mcf)................... 60,000 60,000 60,000 60,000 60,000 Index price per MMBtu.......... $ 4.28 $ 4.28 $ 4.28 $ 4.28 $ 4.28 2006 - Swap Contracts Volume (Mcf)................... 70,000 70,000 70,000 70,000 70,000 Index price per MMBtu.......... $ 4.23 $ 4.23 $ 4.23 $ 4.23 $ 4.23 2007 - Swap Contracts Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000 Index price per MMBtu.......... $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75
The Company reports average gas prices per Mcf including the effects of Btu content, gas processing and shrinkage adjustments and the net effect of gas hedges. The following table sets forth the Company's gas prices, both reported and realized, and the net effect of settlements of gas price hedges on gas revenue for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Average price reported per Mcf........... $ 3.64 $ 2.25 $ 3.91 $ 2.39 Average price realized per Mcf........... $ 3.96 $ 2.09 $ 4.35 $ 2.12 Addition (reduction) to gas revenue (in millions)........................... $ (18.9) $ 5.8 $ (68.0) $ 26.3
Hedge ineffectiveness and excluded items. During the three month periods ended September 30, 2003 and 2002, the Company recognized other expense of $.3 million and $1.4 million, respectively, related to the ineffective portions of its cash flow hedging instruments. During the nine month periods ended September 30, 2003 and 2002, the Company recognized other expense of $2.6 million and $1.7 million, respectively, related to the ineffective portion of its cash flow hedging instruments. Accumulated other comprehensive income (loss) ("AOCI") - net deferred hedge gains (losses), net of tax. As of September 30, 2003 and December 31, 2002, "AOCI - net deferred hedge gains (losses), net of tax" represented net deferred losses of $55.0 million and net deferred gains of $9.6 million, respectively. The "AOCI - net deferred hedge gains (losses), net of tax" balance as of September 30, 2003 was comprised of $118.3 million of unrealized deferred hedge losses on the effective portions of open commodity cash flow hedges, $40.0 million of net deferred gains on terminated cash flow hedges and $23.3 million of associated net deferred tax benefits. The decrease in "AOCI - net deferred hedge gains (losses), net of tax" during the nine months ended September 30, 2003 was primarily attributable to increases in future commodity prices relative to the commodity prices stipulated in the hedge agreements, offset by the reclassification of net deferred hedge losses to net income as derivatives matured by their terms and the reversal of associated United States deferred tax valuation allowances. The unrealized net deferred hedge losses associated with 15 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) open cash flow hedges remain subject to market price fluctuations until the positions are either settled under the terms of the hedge agreements or terminated prior to settlement. The net deferred gains on terminated cash flow hedges are fixed. During the twelve months ending September 30, 2004, the Company expects to reclassify $75.1 million of net deferred losses associated with open cash flow hedges, $27.8 million of net deferred gains on terminated cash flow hedges and approximately $16.6 million of net deferred tax benefits from "AOCI - net deferred hedge gains (losses), net of tax" to oil and gas revenue and income tax (provision) benefit. The following table sets forth the scheduled reclassifications of pretax net deferred hedge gains and losses on terminated cash flow hedges as of September 30, 2003 that will be recognized in the Company's future oil and gas revenue:
First Second Third Fourth Yearly Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- --------- (in thousands) 2003 net deferred hedge losses.... $(5,141) $(5,141) 2004 net deferred hedge gains..... $10,978 $10,932 $11,001 $10,954 43,865 2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249 ------ $39,973 ======
The net deferred commodity hedge gains and losses shown in the table above include the following gains and losses for which cash settlements have been deferred until the indicated future periods: (i) $22.8 million of net deferred losses due during the fourth quarter of 2003, (ii) $1.2 million of net deferred losses due during 2004 and (iii) $209 thousand of net deferred gains to be received during 2005. NOTE F. Asset Retirement Obligations As referred to in Note B, the Company adopted the provisions of SFAS 143 on January 1, 2003. The Company's asset retirement obligations primarily relate to the future plugging and abandonment of proved properties and related facilities. The Company has no assets that are legally restricted for purposes of settling asset retirement obligations. The following table summarizes the Company's asset retirement obligation transactions recorded in accordance with the provisions of SFAS 143 during the three and nine month periods ended September 30, 2003 and in accordance with the provisions of SFAS 19 during the three and nine month periods ended September 30, 2002:
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands) Beginning asset retirement obligations..... $ 65,223 $ 37,294 $ 34,692 $ 39,461 Cumulative effect adjustment............... - - 23,393 - Liabilities incurred during period......... 7,740 - 14,755 - Liabilities settled during period.......... (907) (3,028) (4,283) (5,836) Accretion expense.......................... 1,327 622 3,656 1,905 Currency translation....................... (36) 104 1,134 (538) ------- ------- ------- ------- Ending asset retirement obligations ....... $ 73,347 $ 34,992 $ 73,347 $ 34,992 ======= ======= ======= =======
NOTE G. Commitments and Contingencies Legal actions. The Company is party to various legal actions incidental to its business, including, but not limited to, the proceedings 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 16 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) 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. Alford. The Company is party to a 1993 class action lawsuit filed in the 26th Judicial District Court of Stevens County, Kansas by two classes of royalty owners, one for each of the Company's gathering systems connected to the Company's Satanta gas plant. The case was relatively inactive for several years. In early 2000, the plaintiffs amended their pleadings to add claims regarding the field compression installed by the Company in the 1990's. The lawsuit now has two material claims. First, the plaintiffs assert that the expenses related to the field compression are a "cost of production" for which plaintiffs cannot be charged their proportionate share under the applicable oil and gas leases. Second, the plaintiffs claim they are entitled to 100 percent of the value of the helium extracted at the Company's Satanta gas plant. If the plaintiffs were to prevail on the above two claims in their entirety, it is possible that the Company's liability could reach $33.8 million, plus prejudgment interest. However, the Company believes it has valid defenses to the plaintiffs' claims, has paid the plaintiffs properly under their respective oil and gas leases, and intends to vigorously defend itself. The Company believes the cost of the field compression is not a "cost of production", but is rather an expense of transporting the gas to the Company's Satanta gas plant for processing, where valuable hydrocarbon liquids and helium are extracted from the gas. The plaintiffs benefit from such extractions and the Company believes that charging the plaintiffs with their proportionate share of such transportation and processing expenses is consistent with Kansas law. The Company has also vigorously defended against plaintiffs' claims to 100 percent of the value of the helium extracted, and believes that in accordance with applicable law, it has properly accounted to the plaintiffs for their fractional royalty share of the helium under the specified royalty clauses of the respective oil and gas leases. The factual evidence in the case was presented to the 26th Judicial District Court without a jury in December 2001. Oral arguments were heard by the court in April 2002, and although the court has not yet entered a judgment or findings, it could do so at any time. The Company strongly denies the existence of any material underpayment to the plaintiffs and believes it presented strong evidence at trial to support its positions. The Company has not yet determined the amount of damages, if any, that would be payable if the Court were to render an adverse judgement against the Company. Although the amount of any resulting liability could have a material adverse effect on the Company's results of operations for the quarterly reporting period in which such liability is recorded, the Company does not expect that any such liability will have a material adverse effect on its consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. 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 gas. Based on a Federal Energy Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, one of the Company's predecessor entities 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 reasonable 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 limited 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 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. 17 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (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 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 a 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 refund claims totaling approximately $30.2 million were made against the Company. Through September 30, 2003, the Company has settled $21.7 million of the original claim amounts. As of September 30, 2003 and December 31, 2002, the Company had on deposit $10.5 million and $10.6 million, respectively, including accrued interest, in an escrow account and had corresponding obligations for the remaining claim recorded in other current liabilities in the accompanying Consolidated Balance Sheets. The Company believes that the escrowed amounts, plus accrued interest, will be sufficient to settle the remaining claims. NOTE H. Income (Loss) Per Share Before Cumulative Effect of Change in Accounting Principle Basic income (loss) per share before cumulative effect of change in accounting principle is computed by dividing income (loss) before cumulative effect of change in accounting principle by the weighted average number of common shares outstanding for the period. The computation of diluted income per share before cumulative effect of change in accounting principle reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to income before cumulative effect of change in accounting principle were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company. The following table is a reconciliation of the basic and diluted weighted average common shares outstanding during the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- (in thousands) Weighted average common shares outstanding: Basic ..................................... 117,216 116,193 116,990 111,227 Dilutive common stock options (a)........... 1,006 - 1,106 1,662 Restricted stock awards..................... 235 - 187 - ------- ------- ------- ------- Diluted..................................... 118,457 116,193 118,283 112,889 ======= ======= ======= ======= - --------- (a) Common stock options to purchase 1,179,766 shares and 1,868,588 shares of common stock were outstanding but not included in the computations of diluted income (loss) before cumulative effect of change in accounting principle per share for the three month periods ended September 30, 2003 and 2002, respectively, and common stock options to purchase 1,308,582 shares and 2,024,455 shares of common stock were outstanding but not included in the computations of diluted income before cumulative effect of change in accounting principle per share for the nine month periods ended September 30, 2003 and 2002, respectively, because the exercise prices of the options were greater than the average market price of the common shares and would have been anti-dilutive to the computations. In-the-money options representing 1,932,385 weighted average equivalent shares of common stock and 395 weighted average equivalent shares of unvested restricted stock were not included in the computation of diluted net loss before cumulative effect of change in accounting principle for the three month period ended September 30, 2002, since they have a dilutive effect to that period's loss.
18 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) NOTE I. 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. The following tables provide the Company's interim geographic operating segment data for the three and nine month periods ended September 30, 2003 and 2002. 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" 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 month period ended September 30, 2003: Revenues and other income: Oil and gas............................ $285,623 $ 30,777 $ 15,592 $ 523 $ - $ 332,515 Interest and other..................... - - - - 348 348 Gain on disposition of assets, net..... (2) - - - 48 46 ------- ------- ------- ------ ------- -------- 285,621 30,777 15,592 523 396 332,909 ------- ------- ------- ------ ------- -------- Costs and expenses: Oil and gas production................. 61,456 6,616 3,689 45 - 71,806 Depletion, depreciation and amortization......................... 80,160 13,651 7,156 161 2,406 103,534 Exploration and abandonments........... 17,275 1,275 1,789 4,177 - 24,516 General and administrative............. - - - - 15,207 15,207 Accretion of discount on asset retirement obligations............... - - - - 1,327 1,327 Interest............................... - - - - 23,212 23,212 Other.................................. - - - - 1,389 1,389 ------- ------- ------- ------ ------- -------- 158,891 21,542 12,634 4,383 43,541 240,991 ------- ------- ------- ------ ------- -------- Income (loss) before income taxes........ 126,730 9,235 2,958 (3,860) (43,145) 91,918 Income tax benefit (provision)........... (46,256) (3,232) (1,168) 1,351 149,200 99,895 ------- ------- ------- ------ ------- -------- Net income (loss) ....................... $ 80,474 $ 6,003 $ 1,790 $(2,509) $106,055 $ 191,813 ======= ======= ======= ====== ======= ======== Three month period ended September 30, 2002: Revenues and other income: Oil and gas............................ $137,155 $ 19,149 $ 12,013 $ - $ - $ 168,317 Interest and other..................... - - - - 7,083 7,083 Gain on disposition of assets, net..... 3,087 - - - 266 3,353 ------- ------- ------- ------ ------- -------- 140,242 19,149 12,013 - 7,349 178,753 ------- ------- ------- ------ ------- -------- Costs and expenses: Oil and gas production................. 43,713 3,622 2,635 - - 49,970 Depletion, depreciation and amortization......................... 33,607 12,227 6,713 - 2,201 54,748 Exploration and abandonments........... 12,557 2,843 1,429 1,495 - 18,324 General and administrative............. - - - - 12,466 12,466 Interest............................... - - - - 20,347 20,347 Other.................................. - - - - 21,599 21,599 ------- ------- ------- ------ ------- -------- 89,877 18,692 10,777 1,495 56,613 177,454 ------- ------- ------- ------ ------- -------- Income (loss) before income taxes........ 50,365 457 1,236 (1,495) (49,264) 1,299 Income tax benefit (provision)........... (17,628) (160) (521) 523 15,597 (2,189) ------- ------- ------- ------ ------- -------- Net income (loss) ....................... $ 32,737 $ 297 $ 715 $ (972) $(33,667) $ (890) ======= ======= ======= ====== ======= =========
19 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited)
United Other Headquarters Consolidated States Argentina Canada Foreign and Other Total --------- --------- -------- -------- ------------ ------------ (in thousands) Nine month period ended September 30, 2003: Revenues and other income: Oil and gas............................ $ 819,758 $ 79,632 $ 53,712 $ 523 $ - $ 953,625 Interest and other..................... - - - - 4,321 4,321 Gain on disposition of assets, net..... 1,319 - 1 - 256 1,576 -------- ------- ------- ------- --------- -------- 821,077 79,632 53,713 523 4,577 959,522 -------- ------- ------- ------- --------- -------- Costs and expenses: Oil and gas production................. 177,377 18,204 9,761 45 - 205,387 Depletion, depreciation and amortization......................... 211,457 33,970 21,458 161 7,096 274,142 Exploration and abandonments........... 57,665 10,847 14,949 23,969 - 107,430 General and administrative............. - - - - 44,332 44,332 Accretion of discount on asset retirement obligations............... - - - - 3,656 3,656 Interest............................... - - - - 69,526 69,526 Other.................................. - - - - 12,205 12,205 -------- ------- ------- ------- --------- -------- 446,499 63,021 46,168 24,175 136,815 716,678 -------- ------- ------- ------- --------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle ................. 374,578 16,611 7,545 (23,652) (132,238) 242,844 Income tax benefit (provision).......... (136,721) (5,814) (2,979) 8,278 232,197 94,961 -------- ------- ------- ------- -------- -------- Income (loss) before cumulative effect of change in accounting principle..... $ 237,857 $ 10,797 $ 4,566 $(15,374) $ 99,959 $ 337,805 ======== ======= ======= ======= ======== ======== Nine month period ended September 30, 2002: Revenues and other income: Oil and gas........................... $ 411,139 $ 57,459 $ 37,688 $ - $ - $ 506,286 Interest and other.................... - - - - 9,089 9,089 Gain (loss) on disposition of assets, net......................... 3,249 (3) 1,010 - 118 4,374 -------- ------- ------- ------- -------- -------- 414,388 57,456 38,698 - 9,207 519,749 -------- ------- ------- ------- -------- -------- Costs and expenses: Oil and gas production................ 132,725 10,023 7,957 - - 150,705 Depletion, depreciation and amortization........................ 97,594 31,263 20,758 - 6,466 156,081 Exploration and abandonments.......... 39,841 6,631 5,272 5,560 - 57,304 General and administrative............ - - - - 35,142 35,142 Interest.............................. - - - - 71,405 71,405 Other................................. - - - - 37,603 37,603 -------- ------- ------- ------- -------- -------- 270,160 47,917 33,987 5,560 150,616 508,240 -------- ------- ------- ------- -------- -------- Income (loss) before income taxes...... 144,228 9,539 4,711 (5,560) (141,409) 11,509 Income tax benefit (provision)......... (50,480) (3,339) (1,986) 1,946 50,643 (3,216) -------- ------- ------- ------- -------- -------- Net income (loss)...................... $ 93,748 $ 6,200 $ 2,725 $ (3,614) $ (90,766) $ 8,293 ======== ======= ======= ======= ======== ========
NOTE J. Pioneer USA Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned subsidiary of the Company that has fully and unconditionally guaranteed the long-term debt 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 and results of operations 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. 20 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) CONSOLIDATING CONDENSED BALANCE SHEET As of September 30, 2003 (in thousands) (Unaudited) ASSETS
Non- Pioneer Guarantor Consolidated Parent USA Subsidiaries Eliminations Total ---------- ----------- ------------ ------------ ------------ Current assets: Cash and cash equivalents............. $ 2,182 $ 1,762 $ 8,707 $ - $ 12,651 Other current assets, net............. 1,706,269 (1,389,079) (134,103) - 183,087 --------- ---------- --------- ---------- ---------- Total current assets............. 1,708,451 (1,387,317) (125,396) - 195,738 --------- ---------- --------- ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 3,340,061 1,427,220 - 4,767,281 Unproved properties................ - 25,844 156,585 - 182,429 Accumulated depletion, depreciation and amortization........................ - (1,124,926) (430,783) - (1,555,709) --------- ---------- --------- ---------- ---------- - 2,240,979 1,153,022 - 3,394,001 --------- ---------- --------- ---------- ---------- Noncurrent deferred income taxes........ 186,935 - 1,777 - 188,712 Other property and equipment, net....... - 21,607 4,126 - 25,733 Other assets, net....................... 14,094 16,863 6,469 - 37,426 Investment in subsidiaries.............. 1,511,495 158,123 - (1,669,618) - --------- ---------- --------- ---------- ---------- $3,420,975 $ 1,050,255 $1,039,998 $(1,669,618) $ 3,841,610 ========= ========== ========= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 32,593 $ 257,300 $ 32,938 $ - $ 322,831 Long-term debt.......................... 1,621,364 - - - 1,621,364 Noncurrent deferred income taxes........ - - 12,713 - 12,713 Other noncurrent liabilities............ - 194,712 (25,915) - 168,797 Stockholders' equity.................... 1,767,018 598,243 1,020,262 (1,669,618) 1,715,905 Commitments and contingencies........... --------- ---------- --------- ---------- ---------- $3,420,975 $ 1,050,255 $1,039,998 $(1,669,618) $ 3,841,610 ========= ========== ========= ========== ==========
CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 2002 (in thousands) ASSETS
Non- Pioneer Guarantor Consolidated Parent USA Subsidiaries Eliminations Total ---------- ----------- ------------ ------------ ------------ Current assets: Cash and cash equivalents............. $ 6 $ 1,783 $ 6,701 $ - $ 8,490 Other current assets, net............. 1,727,828 (1,480,657) (108,568) - 138,603 --------- ---------- --------- ---------- ---------- Total current assets............. 1,727,834 (1,478,874) (101,867) - 147,093 --------- ---------- --------- ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 3,024,845 1,228,052 - 4,252,897 Unproved properties................ - 43,969 175,104 - 219,073 Accumulated depletion, depreciation and amortization........................ - (947,091) (356,450) - (1,303,541) --------- ---------- --------- ----------- ---------- - 2,121,723 1,046,706 - 3,168,429 --------- ---------- --------- ----------- ---------- Noncurrent deferred income taxes........ 75,311 - 1,529 - 76,840 Other property and equipment, net....... - 19,000 3,784 - 22,784 Other assets, net....................... 16,067 14,231 9,672 - 39,970 Investment in subsidiaries.............. 1,247,042 136,159 - (1,383,201) - --------- ---------- --------- ---------- ---------- $3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,116 ========= ========== ========= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 30,785 $ 216,065 $ 27,742 $ - $ 274,592 Long-term debt, net of current maturities 1,668,536 - - - 1,668,536 Noncurrent deferred income taxes........ - - 8,760 - 8,760 Other noncurrent liabilities............ - 147,970 (19,639) - 128,331 Stockholders' equity.................... 1,366,933 448,204 942,961 (1,383,201) 1,374,897 Commitments and contingencies........... --------- ---------- --------- ---------- ---------- $3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,116 ========= ========== ========= ========== ==========
21 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Nine Months Ended September 30, 2003 (in thousands) (Unaudited)
Non- Consolidated Pioneer Guarantor Income Tax Consolidated Parent USA Subsidiaries Provision Eliminations Total --------- ---------- ------------ ------------ ------------ ------------ Revenues and other income: Oil and gas......................... $ - $ 753,928 $ 199,697 $ - $ - $ 953,625 Interest and other.................. - 1,796 2,525 - - 4,321 Gain on disposition of assets, net.. - 1,469 107 - - 1,576 -------- --------- -------- --------- -------- -------- - 757,193 202,329 - - 959,522 -------- --------- -------- --------- -------- -------- Costs and expenses: Oil and gas production.............. - 162,911 42,476 - - 205,387 Depletion, depreciation and amortization...................... - 208,144 65,998 - - 274,142 Exploration and abandonments........ - 59,123 48,307 - - 107,430 General and administrative.......... 998 34,828 8,506 - - 44,332 Accretion of discount on asset retirement obligations............ - 2,824 832 - - 3,656 Interest............................ 17,690 50,803 1,033 - - 69,526 Equity (income) loss from subsidiaries...................... (268,108) 26,166 - - 241,942 - Other............................... 72 2,191 9,942 - - 12,205 -------- --------- -------- --------- -------- -------- (249,348) 546,990 177,094 - 241,942 716,678 -------- --------- -------- --------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle............... 249,348 210,203 25,235 - (241,942) 242,844 Income tax benefit (provision)....... - - (8,909) 103,870 - 94,961 -------- --------- -------- --------- -------- -------- Income before cumulative effect of change in accounting principle..... 249,348 210,203 16,326 103,870 (241,942) 337,805 Cumulative effect of change in accounting principle, net of tax... - 11,859 3,554 - - 15,413 -------- --------- -------- --------- -------- -------- Net income........................... 249,348 222,062 19,880 103,870 (241,942) 353,218 Other comprehensive income (loss): Net deferred hedge gains (losses), net of tax: Net deferred hedge losses........ - (176,351) (12,407) - - (188,758) Deferred income tax valuation reserve adjustment related to hedging.................... - - - 23,288 - 23,288 Net hedge losses included in net income........................ - 93,114 7,758 - - 100,872 Translation adjustment............. - - 28,808 - - 28,808 -------- --------- -------- --------- -------- -------- Comprehensive income................. $ 249,348 $ 138,825 $ 44,039 $ 127,158 $(241,942) $ 317,428 ======== ========= ======== ========= ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Nine Months Ended September 30, 2002 (in thousands) (Unaudited)
Non- Consolidated Pioneer Guarantor Income Tax Consolidated Parent USA Subsidiaries Provision Eliminations Total --------- ---------- ------------ ------------ ------------ ------------ Revenues and other income: Oil and gas........................ $ - $ 386,021 $ 120,265 $ - $ - $ 506,286 Interest and other................. - 7,143 1,946 - - 9,089 Gain on disposition of assets, net. - 3,224 1,150 - - 4,374 ------- --------- -------- --------- -------- -------- - 396,388 123,361 - - 519,749 ------- --------- -------- --------- -------- -------- Costs and expenses:................. Oil and gas production............ - 127,402 23,303 - - 150,705 Depletion, depreciation and amortization.................... - 98,268 57,813 - - 156,081 Exploration and abandonments...... - 41,131 16,173 - - 57,304 General and administrative........ 945 27,518 6,679 - - 35,142 Interest.......................... 62,036 9,166 203 - - 71,405 Equity (income) loss from subsidiaries.................... (24,243) 5,856 - - 18,387 - Other............................. (47,031) 56,430 28,204 - - 37,603 -------- --------- -------- --------- -------- -------- (8,293) 365,771 132,375 - 18,387 508,240 -------- --------- -------- --------- -------- -------- Income (loss) before income taxes 8,293 30,617 (9,014) - (18,387) 11,509 Income tax provision ............... - - (3,216) - - (3,216) -------- --------- -------- --------- -------- -------- Net income (loss)................... 8,293 30,617 (12,230) - (18,387) 8,293 Other comprehensive income (loss): Net deferred hedge gains (losses), net of tax: Net deferred hedge losses....... (4) (94,816) (18,540) - - (113,360) Net hedge (gains) losses included in net income (loss)........................ 447 (29,023) (5,571) - - (34,147) Translation adjustment............ - - 1,827 - - 1,827 -------- --------- -------- --------- -------- -------- Comprehensive income (loss)......... $ 8,736 $ (93,222) $ (34,514) $ - $ (18,387) $(137,387) ======== ========= ======== ========= ======== ========
22 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, 2003 (in thousands) (Unaudited)
Non- Pioneer Guarantor Consolidated Parent USA Subsidiaries Total --------- --------- ------------ ------------ Cash flows from operating activities: Net cash provided by operating activities........ $ 21,453 $ 355,799 $ 169,424 $ 546,676 -------- -------- --------- ---------- Cash flows from investing activities: Proceeds from disposition of assets.............. 18,267 16,124 615 35,006 Additions to oil and gas properties.............. - (351,174) (170,811) (521,985) Other property (additions) dispositions, net..... - (10,948) 2,778 (8,170) -------- -------- --------- ---------- Net cash provided by (used in) investing activities.................................. 18,267 (345,998) (167,418) (495,149) -------- -------- --------- ---------- Cash flows from financing activities: Borrowings under long-term debt.................. 222,725 - - 222,725 Principal payments on long-term debt............. (270,262) - - (270,262) Payment of other noncurrent liabilities.......... - (9,822) (1,275) (11,097) Exercise of stock options and employee stock purchases..................................... 12,342 - - 12,342 Purchase of treasury stock....................... (2,349) - - (2,349) -------- -------- --------- ---------- Net cash used in financing activities......... (37,544) (9,822) (1,275) (48,641) -------- -------- --------- ---------- Net increase (decrease) in cash and cash equivalents..................................... 2,176 (21) 731 2,886 Effect of exchange rate changes on cash and cash equivalents............................... - - 1,275 1,275 Cash and cash equivalents, beginning of period.... 6 1,783 6,701 8,490 -------- -------- --------- ---------- Cash and cash equivalents, end of period.......... $ 2,182 $ 1,762 $ 8,707 $ 12,651 ======== ======== ========= ==========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, 2002 (in thousands)
Non- Pioneer Guarantor Consolidated Parent USA Subsidiaries Total --------- --------- ------------ ------------ Cash flows from operating activities: Net cash provided by (used in) operating activities..................................... $(299,553) $ 259,502 $ 268,305 $ 228,254 -------- -------- --------- ---------- Cash flows from investing activities: Proceeds from disposition of assets.............. 31,994 85,682 1,155 118,831 Additions to oil and gas properties.............. - (284,367) (205,366) (489,733) Other property additions, net.................... - (7,466) (1,069) (8,535) -------- -------- --------- ---------- Net cash provided by (used in) investing activities.................................. 31,994 (206,151) (205,280) (379,437) -------- -------- --------- ---------- Cash flows from financing activities: Borrowings under long-term debt.................. 466,668 - - 466,668 Principal payments on long-term debt............. (442,583) - - (442,583) Common stock issuance proceeds, net of issuance costs.......................................... 236,000 - - 236,000 Payment of other noncurrent liabilities.......... - (43,886) (59,818) (103,704) Exercise of stock options and employee stock purchases...................................... 10,756 - - 10,756 Deferred debt issuance costs..................... (3,293) - - (3,293) -------- -------- --------- ---------- Net cash provided by (used in) financing activities.................................. 267,548 (43,886) (59,818) 163,844 -------- -------- --------- ---------- Net increase (decrease) in cash and cash equivalents..................................... (11) 9,465 3,207 12,661 Effect of exchange rate changes on cash and cash equivalents............................... - - (1,493) (1,493) Cash and cash equivalents, beginning of period.... 79 10,900 3,355 14,334 -------- -------- --------- ---------- Cash and cash equivalents, end of period.......... $ 68 $ 20,365 $ 5,069 $ 25,502 ======== ======== ========= ==========
23 PIONEER NATURAL RESOURCES COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The information included in Item 2 and Item 3 of 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 (the "Company" or "Pioneer"), 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, international operations and associated international political and economic instability, government regulation or action, litigation, the costs and results of drilling and operations, the Company's ability to replace reserves, implement its business plans or complete its development projects as scheduled, access to and cost of capital, uncertainties about estimates of reserves, quality of technical data, environmental and weather risks, acts of war and terrorism. These and other risks are described in the Company's 2002 Annual Report on Form 10-K that is available from the United States Securities and Exchange Commission ("SEC"). Financial and Operating Performance The Company's financial and operating performance for the third quarter of 2003 was highlighted by strong production from the Company's deepwater Gulf of Mexico Canyon Express and the Company-operated Falcon field gas projects and increased oil and gas sales in Argentina. Argentine oil drilling results exceeded expectations while a strengthening Argentine economy boosted gas sales. The production growth achieved by the Company, together with favorable worldwide oil and North American gas prices, has resulted in significant increases in the Company's net income and net cash provided by operating activities during the three and nine month periods ended September 30, 2003, as compared to the same respective periods of 2002. The Company reported net income of $191.8 million ($1.62 per diluted share) and $353.2 million ($2.99 per diluted share) for the three and nine month periods ended September 30, 2003, respectively, as compared to a net loss of $890 thousand ($.01 per diluted share) and net income of $8.3 million ($.07 per diluted share) for the same respective periods of 2002. The Company's net income for the nine months ended September 30, 2003 includes a $15.4 million ($.13 per share) benefit from the cumulative effect of change in accounting principle, net of tax, associated with the Company's adoption of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") on January 1, 2003. See Notes B and F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's adoption of new accounting pronouncements. Net income for the three and nine month periods ended September 30, 2003 was also positively impacted by the reversal of the Company's United States deferred tax asset valuation allowances. See "Results of Operations - Income tax benefits (provisions)" for information regarding the reversal of the United States deferred tax asset valuation allowances. The Company's net cash provided by operating activities was $222.5 million and $546.7 million for the three and nine month periods ended September 30, 2003, respectively, representing increases of $134.8 million, or 154 percent, and $318.4 million, or 140 percent, over the net cash provided by operating activities of the same respective periods of 2002. Net cash provided by operating activities during the three and nine month periods ended September 30, 2002 was $87.7 million and $228.3 million, respectively. During the three months ended September 30, 2003, the Company used its net cash provided by operating activities, together with proceeds from the disposition of assets, to fund $134.9 million of additions to oil and gas properties and to repay $92.0 million of long-term debt. During the nine months ended September 30, 2003, the Company used its net cash provided by operating activities, together with proceeds from the disposition of assets, to fund $522.0 million of additions to oil and gas properties and to repay $47.5 million of long-term debt. Drilling Highlights During the first nine months of 2003, the Company incurred $531.8 million in capital expenditures including $207.3 million for development activities, $192.7 million for exploration activities and $131.8 million on acquisitions. The majority of the Company's development and exploration expenditures was spent on drilling wells, seismic data and infrastructure for the Company's significant development projects. The primary component of the 24 PIONEER NATURAL RESOURCES COMPANY acquisition expenditures was the Company's purchase of the 25 percent working interest it did not already own in the Falcon field, the Harrier field and surrounding satellite prospects during March 2003. The following tables summarize the Company's development drilling and exploration and extension drilling activities for the nine months ended September 30, 2003:
Development Drilling -------------------------------------------------------------------- Beginning Wells Wells Successful Unsuccessful Ending Wells in Progress Spud Wells Wells in Progress --------------- ------- --------- ------------- ----------- Gulf of Mexico/Gulf Coast..... 1 18 18 - 1 Permian Basin................. 2 115 112 2 3 Mid-Continent................. 4 95 93 3 3 ------ ------ ------ ------ ------ Total Domestic......... 7 228 223 5 7 ------ ------ ------ ------ ------ Argentina..................... 3 26 26 2 1 Canada........................ 4 10 7 7 - Tunisia....................... - 1 1 - - ------ ------ ------ ------ ------ Total Worldwide........ 14 265 257 14 8 ====== ====== ====== ====== ======
Exploration/Extension Drilling -------------------------------------------------------------------- Beginning Wells Wells Successful Unsuccessful Ending Wells in Progress Spud Wells Wells in Progress --------------- ------- --------- ------------- ----------- Gulf of Mexico/Gulf Coast.... - 11 4 6 1 Alaska....................... - 3 - - 3 Mid-Continent................ - 2 2 - - ------ ------ ------ ------ ------ Total Domestic.......... - 16 6 6 4 ------ ------ ------ ------ ------ Argentina.................... 6 24 19 7 4 Canada....................... 4 46 16 26 8 South Africa................. - 3 - 3 - Tunisia...................... - 4 - 1 3 ------ ------ ------ ------ ------ Total Worldwide......... 10 93 41 43 19 ====== ====== ====== ====== ======
Domestic. The Company spent $405.1 million during the first nine months of 2003 on acquisition, drilling and seismic activities in the Gulf of Mexico/Gulf Coast, Alaska, Permian Basin and Mid-Continent areas of the United States. Gulf of Mexico/Gulf Coast area. In the Gulf of Mexico/Gulf Coast area, the Company spent $278.4 million of acquisition, drilling and seismic capital. In the deepwater Gulf of Mexico, the Company completed its Falcon field development in mid-March 2003 and, as previously discussed, purchased the remaining 25 percent working interest in Falcon and related prospects that the Company did not already own. The Company has two major development projects that remain in progress as of September 30, 2003: o Devils Tower - The Dominion-operated Devils Tower development project in Mississippi Canyon was sanctioned in 2001 as a spar development project with the owners leasing a spar from a third party for the life of the field. The hull of the spar was constructed in Indonesia and was successfully transported to the United States during the first quarter of 2003 where the topsides will be added during the fourth quarter of 2003. The spar has slots for eight dry tree wells and up to three subsea tie-back wells and is capable of handling 60 MBbls of oil per day and 60 MMcf of gas per day. Eight Devils Tower wells and one subsea tie-back well have been drilled and are awaiting completion. Devils Tower production is scheduled to begin in the second quarter of 2004 and will be phased in as the wells are individually completed from the spar. The Company also plans to spud its satellite Goldfinger prospect and participate in an appraisal well on the Triton prospect during the fourth quarter of 2003. If successful, these wells could be the second and third subsea tie-back wells. The Company holds a 25 percent working interest in these projects. o Harrier/Tomahawk/Raptor - The Company discovered the Harrier field during the first quarter of 2003 and the Tomahawk and Raptor fields during the third quarter of 2003. The Company operates the blocks with a 100 percent 25 PIONEER NATURAL RESOURCES COMPANY working interest subsequent to the acquisition discussed above, and is developing all three fields as single- well subsea tie-backs to the Falcon field facilities which were designed to be expandable. To accommodate this incremental production and potential throughput associated with additional planned exploration, an additional parallel pipeline connecting the Falcon field to the Falcon platform on the Gulf of Mexico shelf is being added, doubling its capacity to 400 MMcf of gas per day. The Company expects first gas production from the Harrier field in early 2004 with combined daily gas production from the Falcon field and the Harrier field expected to reach 275 MMcf per day. In addition, the Company expects first gas production from the Tomahawk and Raptor fields in the third quarter of 2004 thereby approaching full capacity on the Falcon subsea systems. The Company plans to spud a well on the BP-operated Juno prospect in the Mississippi Canyon area in early November 2003. The Juno well will test a high-potential deep structure. The Company owns a 25 percent working interest in this prospect. In addition to the development projects described above in the deepwater Gulf of Mexico, the Company drilled two exploratory dry holes in the Falcon area during the first quarter. The Company controls 32 blocks in the area providing numerous exploration opportunities for future subsea tiebacks to the Falcon systems. During January 2003, the Company announced a joint exploration agreement with Woodside Energy (USA), Inc. ("Woodside"), a subsidiary of Woodside Energy Ltd. of Australia, for a two-year drilling program over the shallow-water Texas shelf region of the Gulf of Mexico. Under the agreement, Woodside has taken a 50 percent working interest in 47 offshore exploration blocks operated by the Company. The agreement covers eight prospects and 19 leads and includes five exploratory wells to be drilled in 2003 and three in 2004. Most of the wells to be drilled under the agreement will target gas plays below 15,000 feet. The eight wells to be drilled by the parties in 2003 and 2004 are on prospects generated and leased by the Company since 1997. The first three wells under this joint agreement were unsuccessful. The fourth well is in progress and the results are expected to be known in December 2003. Additionally, the Company and Woodside will evaluate shallower gas prospects on the Gulf of Mexico shelf on other blocks covered by the leases for potential inclusion in the drilling program. In the onshore Gulf Coast region of the United States, the Company has concentrated its drilling efforts in the Pawnee field in South Texas, where three development wells and one extension well were successfully completed during the first nine months of 2003. The Company plans to drill an additional four development wells and two extension wells during the remainder of 2003. Alaska. In Alaska, the Company spent $34.1 million during the first nine months of 2003 to drill three exploration wells on the NW Kuparuk prospect to test a possible extension of the productive sands in the Kuparuk River field into the shallow waters offshore. Although all three of the wells found the sands filled with oil, they were too thin to be considered commercial. The wells also encountered thick sections of oil-bearing Jurassic-aged sands. The first well flowed at a sustained rate of approximately 1,300 barrels per day. The test results are currently being evaluated to determine the commercial viability of the Jurassic reservoir. On the North Slope of Alaska, the Company recently participated in a state lease sale and was the apparent high bidder on 53 tracts covering approximately 150,000 acres, establishing a leasehold over a variety of prospects. Permian Basin area. In the Permian Basin area, the Company spent $49.6 million during the first nine months of 2003 primarily on development drilling in the Spraberry field. The Company plans to drill approximately 140 wells in the Spraberry field during 2003. The Company has drilled 114 wells in the Permian Basin area during the nine months ended September 30, 2003, 103 of which were drilled in the Spraberry field. Mid-Continent area. In the Mid-Continent area, the Company spent $43.0 million during the first nine months of 2003, primarily in the West Panhandle field where the Company plans to drill approximately 100 wells this year. The Company plans to drill approximately 20 Hugoton wells this year. During the nine months ended September 30, 2003, the Company has drilled 79 West Panhandle field wells and 19 Hugoton wells. Argentina. In Argentina, the Company spent $36.7 million of acquisition, drilling and seismic capital during the first nine months of 2003. The majority of costs was spent to drill extension and development wells targeting oil reserves in the Neuquen Basin. 26 PIONEER NATURAL RESOURCES COMPANY Canada. In Canada, the Company spent $41.2 million of acquisition, drilling and seismic capital during the first nine months of 2003, primarily in the Chinchaga, Martin Creek and Ladyfern areas that are only accessible for drilling during the winter months. The Company tested several shallow gas plays finding multiple gas-bearing zones based on open-hole logs and mud log shows in several wells. However, unseasonably warm weather resulted in a very short drilling season in Canada, and approximately eight of the wells drilled will have to be tested during next year's winter drilling season. Three wells were drilled to test the Slave Point formation in the Ladyfern field area. One well was unsuccessful, and two wells were unsuccessful in the Slave Point formation but are being evaluated for uphole potential in another formation. Africa. In Africa, the Company spent $48.8 million of acquisition, drilling and seismic capital during the first nine months of 2003 in South Africa, Tunisia and Gabon. South Africa. In South Africa, the Company spent $32.8 million of capital to drill three exploratory wells and to continue development of its Sable field that began production during August 2003. First sales of Sable oil occurred during October 2003. During the second quarter of 2003, the Company drilled three 2003 planned exploratory wells in South Africa, none of which were commercial. Tunisia. In Tunisia, the Company spent $14.0 million of capital during the first nine months of 2003. The Company drilled two exploration wells on the Anadarko-operated Anaguid permit during the second quarter of 2003. The CEM-1 encountered 95 feet of net gas and condensate pay in upper Ordovician sandstones. In a drill stem test, the unstimulated well flowed at a rate of 3,600 Mcf per day and 540 Bbls per day. A second well, the SEA-1, encountered 52 feet of net pay in the same section. Both wells have been suspended pending the evaluation of commercial development plans. On the Borj El Khadra permit, the Company completed development activities on the Adam 1 discovery well and began production in late May 2003. The well has been producing at a gross stabilized rate of over 3,500 Bbls per day with first sales occurring during the third quarter of 2003. The Company participated in the successful Adam 2 development well, the first development well in the 860 square kilometer Adam concession. The Company also began drilling the Hawa exploration well in the southern portion of the Adam concession and results are expected during the fourth quarter of 2003. The Company has a 28 percent interest in the Adam concession. In addition, the Company drilled an unsuccessful exploration well on the Jorf permit early in 2003. Gabon. In Gabon, the Company spent $2.0 million during the first nine months of 2003. The Company has received ministerial approval for the improved terms negotiated for the Olowi permit, in which the Company has a 100 percent working interest. The Company plans to commence a multi-well drilling program in early 2004 to further define the scale of a development plan, initially focusing on the Lower Gamba. The Company has begun to solicit interest from possible new partners in the project. Results of Operations Oil and gas revenues. Revenues from oil and gas operations totaled $332.5 million and $953.6 million for the three and nine month periods ended September 30, 2003, respectively, compared to $168.3 million and $506.3 million for the same respective periods of 2002. The increase in oil and gas revenues during the three and nine month periods ended September 30, 2003, as compared to the same respective periods of 2002, was principally attributable to incremental gas sales from the Company's deepwater Gulf of Mexico Canyon Express and Falcon field projects, increased oil and gas sales in Argentina and commodity price increases. As expected, declines in Canadian production partially offset the above described increases to oil and gas revenues. 27 PIONEER NATURAL RESOURCES COMPANY The following table provides the Company's volumes and average reported prices, including the results of hedging activities, for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, --------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Production: Oil (MBbls).................. 3,088 2,724 8,877 8,639 NGLs (MBbls)................. 2,085 2,088 6,129 6,008 Gas (MMcf)................... 59,117 35,404 156,336 96,065 Worldwide (MBOE)............. 15,025 10,713 41,062 30,658 Average daily production: Oil (Bbls)................... 33,560 29,611 32,517 31,646 NGLs (Bbls).................. 22,658 22,693 22,451 22,007 Gas (Mcf).................... 642,579 384,822 572,659 351,888 Worldwide (BOE).............. 163,314 116,441 150,411 112,301 Average reported prices: Oil (per Bbl): United States.............. $ 25.04 $ 22.28 $ 25.06 $ 23.74 Argentina.................. $ 26.10 $ 20.25 $ 25.31 $ 20.27 Canada..................... $ 28.97 $ 24.67 $ 28.67 $ 21.32 Tunisia.................... $ 26.94 $ - $ 26.94 $ - Worldwide.................. $ 25.35 $ 21.77 $ 25.14 $ 22.86 NGLs (per Bbl): United States.............. $ 18.29 $ 14.12 $ 18.98 $ 13.05 Argentina.................. $ 21.63 $ 12.73 $ 22.86 $ 13.12 Canada..................... $ 23.62 $ 14.57 $ 26.10 $ 15.85 Worldwide.................. $ 18.71 $ 14.10 $ 19.51 $ 13.17 Gas (per Mcf): United States.............. $ 4.38 $ 3.08 $ 4.64 $ 3.12 Argentina.................. $ .54 $ .42 $ .55 $ .49 Canada..................... $ 3.57 $ 2.31 $ 4.00 $ 2.41 Worldwide.................. $ 3.64 $ 2.25 $ 3.91 $ 2.39
On a BOE basis, worldwide average daily production increased by 40 percent and 34 percent during the three and nine month periods ended September 30, 2003, respectively, as compared to the same respective periods of 2002. During the third quarter of 2003 as compared to the third quarter of 2002, worldwide oil production increased by 13 percent, NGL production remained virtually unchanged and gas production, augmented by incremental production from both the Canyon Express and Falcon field gas projects, increased by 67 percent. During the first nine months of 2003, as compared to the first nine months of 2002, worldwide oil production increased by three percent, NGL production increased by two percent and gas production, augmented by nine months of production from Canyon Express and production since March from the Falcon field, increased by 63 percent. Per BOE average daily production, on a third- quarter to third-quarter comparison, increased by 54 percent in the United States and by 15 percent in Argentina, while production in Canada decreased by 16 percent. During the first nine months of 2003 as compared to the first nine months of 2002, per BOE average daily production increased by 45 percent in the United States and by 13 percent in Argentina, while production in Canada decreased by 14 percent. Fourth quarter 2003 production is expected to average 150,000 to 165,000 BOE per day. During the fourth quarter, the Company expects the first cargo sales for oil produced into storage in both South Africa and Tunisia. However, due to uncertainty regarding the timing of cargos, total sales during the fourth quarter are difficult to predict. In South Africa, volume estimates reflect a slower ramp-up of Sable field production due to mechanical problems with compression equipment. As in past years, Argentine gas sales are expected to be impacted by the seasonal decline in gas demand as Argentina enters their summer season. Fourth quarter gas sales will also be impacted, as expected, by a one to two week shut-in of the Falcon field in order to tie in the Harrier satellite discovery for first production in early 2004. 28 PIONEER NATURAL RESOURCES COMPANY As previously discussed, oil and gas revenues for the three and nine month periods ended September 30, 2003 were positively impacted by commodity price increases. Comparing the third quarter of 2003 to the same respective period in 2002, the Company's average worldwide oil price increased 16 percent, average worldwide NGL prices increased 33 percent and average worldwide gas prices increased 62 percent. Comparing the first nine months of 2003 to the same respective period in 2002, the Company's average worldwide oil price increased 10 percent, average worldwide NGL prices increased 48 percent and average worldwide gas prices increased 64 percent. 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 (swap 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) reduce commodity price risk associated with certain capital projects. During the three and nine month periods ended September 30, 2003, the Company's commodity price hedges decreased oil and gas revenues by $28.0 million and $100.9 million, respectively, as compared to decreasing oil and gas revenues by $1.4 million and increasing oil and gas revenues by $34.5 million during the same respective periods in 2002. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for specific information regarding the Company's hedging activities during the three and nine month periods ended September 30, 2003 and 2002. During October 2003, the Company entered into new swap contracts to hedge 6,315 Bbls per day of fourth quarter 2003 oil sales at a weighted average fixed price per Bbl of $31.51, 4,227 Bbls per day of 2004 oil sales at a weighted average fixed price per Bbl of $29.20, 4,000 Bbls per day of 2008 oil sales at a fixed price per Bbl of $26.05 and 20,000 Mcf per day of 2004 gas sales at a weighted average fixed price per Mcf of $4.96. Additionally, the Company terminated its collar contracts that hedged 20,000 Mcf per day of 2004 gas sales. Interest and other revenues. Interest and other revenues during the three and nine month periods ended September 30, 2003 totaled $348 thousand and $4.3 million, respectively, as compared to $7.1 million and $9.1 million during the same respective periods in 2002. Gain on disposition of assets. During the three and nine month periods ended September 30, 2003, the Company recorded $46 thousand and $1.6 million, respectively, of net gains on the disposition of assets, as compared to $3.4 million and $4.4 million, respectively, of net gains on the disposition of assets during the same respective periods in 2002. See "Capital resources - Sales of assets" for additional information regarding proceeds from sales of assets. Oil and gas production costs. During the three and n ine month periods ended September 30, 2003, total production costs per BOE averaged $4.78 and $5.00, respectively, representing an increase of $.12 per BOE (three percent) and an increase of $.08 per BOE (two percent), respectively, as compared to total production costs per BOE of $4.66 and $4.92 during the same respective periods of 2002. 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 three months ended September 30, 2003, as compared to the same respective period in 2002, can be attributed to an increase in lease operating and field fuel expenses, partially offset by lower production and ad valorem taxes and workover costs. The increase in lease operating expenses is primarily due to the strengthening of both the Argentine peso and the Canadian dollar, while the increase in field fuel expenses is the result of higher gas prices. The decrease in per BOE production and ad valorem taxes is primarily due to the incremental production associated with Canyon Express and Falcon which are not subject to production or ad valorem taxes. The increase in production costs per BOE during the nine months ended September 30, 2003, as compared to the same respective period in 2002, can be attributed to an increase in field fuel and lease operating expenses as well as production taxes, partially offset by lower ad valorem taxes and workover costs. The increase in field fuel expenses is the result of higher gas prices, and the increase in production taxes, while benefitting from incremental production from Canyon Express and Falcon where there are no production taxes, still increased due to higher commodity prices. 29 PIONEER NATURAL RESOURCES COMPANY The following table provides the Company's production costs per BOE for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (per BOE) Lease operating expense............. $ 3.03 $ 2.63 $ 3.00 $ 2.93 Taxes: Production....................... .55 .60 .65 .58 Ad valorem....................... .37 .54 .41 .54 Field fuel expenses................. .68 .63 .79 .59 Workover costs...................... .15 .26 .15 .28 ------ ------ ------ ------ Total production costs........ $ 4.78 $ 4.66 $ 5.00 $ 4.92 ====== ====== ====== ======
Based on market-quoted commodity prices during October 2003, the Company expects fourth quarter 2003 production costs to average $4.75 to $5.15 per BOE. The potential increase is primarily due to higher per BOE lease operating expenses associated with forecasted Sable production and an increase in expected workover costs. Depletion, depreciation and amortization expense. The Company's total depletion, depreciation and amortization expense per BOE was $6.89 and $6.68 for the three and nine month periods ended September 30, 2003, respectively, as compared to $5.11 and $5.09 during the same respective periods of 2002. Depletion expense per BOE, the largest component of depletion, depreciation and amortization expense, was $6.73 and $6.50 per BOE during the three and nine month periods ended September 30, 2003, respectively, as compared to $4.91 and $4.88 per BOE during the same respective periods of 2002. The increase in per BOE depletion expense is primarily due to increases in higher cost-basis deepwater Gulf of Mexico production volumes. The Company expects fourth quarter 2003 depletion, depreciation and amortization expense to average $6.90 to $7.30 per BOE. The increase is principally attributable to higher cost-basis Sable production volumes. Exploration, abandonments, geological and geophysical costs. Exploration, abandonments, geological and geophysical costs were $24.5 million and $107.4 million during the three and nine month periods ended September 30, 2003, respectively, as compared to $18.3 million and $57.3 million during the same respective periods in 2002. The increase in exploration, abandonments, geological and geophysical costs during the first nine months of 2003 as compared to the first nine months of 2002 is primarily due to increased exploration/extension drilling in the Gulf of Mexico, South Africa, Canada and Tunisia and increases in seismic acquisitions that will contribute to future exploration activities. During the first nine months of 2003, the Company completed and evaluated 84 exploration/extension wells, 41 of which were successfully completed as discoveries. During the same respective period in 2002, the Company completed and evaluated 27 exploration/extension wells, 20 of which were successfully completed as discoveries. 30 PIONEER NATURAL RESOURCES COMPANY The following table provides the Company's geological and geophysical costs, exploratory dry hole expense and leasehold abandonments expense and other for the three and nine month periods ended September 30, 2003 and 2002:
United Other Consolidated States Argentina Canada Foreign Total -------- --------- --------- ------- ------------ (in thousands) Three months ended September 30, 2003: Geological and geophysical.............. $ 8,110 $ 458 $ 619 $ 774 $ 9,961 Exploratory dry holes................... 7,127 778 1,069 3,403 12,377 Leasehold abandonments and other........ 2,038 39 101 - 2,178 ------- ------- ------- ------- ------- $ 17,275 $ 1,275 $ 1,789 $ 4,177 $ 24,516 ======= ======= ======= ======= ======= Three months ended September 30, 2002: Geological and geophysical.............. 6,210 $ 114 $ 682 $ 1,450 $ 8,456 Exploratory dry holes................... 4,119 1,212 8 45 5,384 Leasehold abandonments and other........ 2,228 1,517 739 - 4,484 ------ ------- ------- ------- ------- $ 12,557 $ 2,843 $ 1,429 $ 1,495 $ 18,324 ======= ======= ======= ======= ======= Nine months ended September 30, 2003: Geological and geophysical.............. $ 25,797 $ 6,966 $ 2,534 $ 3,102 $ 38,399 Exploratory dry holes................... 28,306 2,209 10,939 20,859 62,313 Leasehold abandonments and other........ 3,562 1,672 1,476 8 6,718 ------- ------- ------- ------- ------- $ 57,665 $ 10,847 $ 14,949 $ 23,969 $107,430 ======= ======= ======= ======= ======= Nine months ended September 30, 2002: Geological and geophysical.............. $ 16,512 $ 3,329 3,049 $ 5,303 $ 28,193 Exploratory dry holes................... 18,803 1,611 1,198 249 21,861 Leasehold abandonments and other........ 4,526 1,691 1,025 8 7,250 ------- ------- ------ ------- ------- $ 39,841 $ 6,631 $ 5,272 $ 5,560 $ 57,304 ======= ======= ======= ======= =======
The Company expects fourth quarter 2003 exploration and abandonment expense to be $20 million to $40 million, dependent largely on exploratory drilling results and expected seismic expenditures. General and administrative expense. General and administrative expenses for the three and nine month periods ended September 30, 2003 were $15.2 million and $44.3 million, respectively, as compared to $12.5 million and $35.1 million during the same respective periods in 2002. The increases of $2.7 million and $9.2 million in general and administrative expense for the respective three and nine month periods ended September 30, 2003, as compared to the same respective periods in 2002, are primarily due to increases in administrative staff and performance-related compensation costs. The Company expects fourth quarter 2003 general and administrative expense to be $14 million to $15 million. Accretion of discount on asset retirement obligations. During the three and nine month periods ended September 30, 2003, accretion of discount on asset retirement obligations was $1.3 million and $3.7 million, respectively. The provisions of SFAS 143 require that the accretion of discount on asset retirement obligations be classified in the consolidated statement of operations separate from interest expense. Prior to 2003 and the adoption of SFAS 143, the Company classified accretion of discount on asset retirement obligations as a component of interest expense. The Company's interest expense during the three and nine month periods ended September 30, 2002 included $622 thousand and $1.9 million, respectively, of accretion of discount on asset retirement obligations that was calculated prior to the adoption of SFAS 143 based on asset retirement obligations recorded in purchased business combinations. See "Cumulative effect of change in accounting principle" and Notes B and F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's adoption of SFAS 143. The Company expects fourth quarter 2003 accretion of discount on asset retirement obligations to be approximately $1 million. 31 PIONEER NATURAL RESOURCES COMPANY Interest expense. Interest expense was $23.2 million and $69.5 million for the three and nine month periods ended September 30, 2003, respectively, as compared to $20.3 million and $71.4 million for the same respective periods in 2002. The increase of $2.9 million (or 14 percent) in interest expense for the three months ended September 30, 2003, as compared to the same respective period of 2002, is primarily attributable to a $4.3 million decrease in capitalized interest due to the completion of the Canyon Express gas project and Falcon field development, partially offset by an increase in recorded hedge gains. The decrease of $1.9 million (or three percent) in interest expense for the nine months ended September 30, 2003, as compared to the same respective period of 2002, is primarily attributable to interest savings from the repayment of a higher yielding capital cost obligation and a portion of the Company's 9-5/8 percent and 8-7/8 percent senior notes, lower underlying market rates of interest, a 12.5 basis point decrease on May 16, 2003 in the Eurodollar margin component of the interest rate specified in the Company's $575 million corporate credit facility (the "Credit Facility"), the aforementioned separate classification of accretion of discount on asset retirement obligations, and an increase of $2.3 million in interest rate hedge gains. Partially offsetting the decreases in interest expense components described above was a $6.0 million decline in interest capitalized during the first nine months of 2003, as compared to the same respective period in 2002. The Company expects fourth quarter 2003 interest expense to be $21 million to $23 million. Other expenses. Other expenses for the three and nine month periods ended September 30, 2003 were $1.4 million and $12.2 million, respectively, as compared to $21.6 million and $37.6 million for the same respective periods in 2002. The $20.2 million decrease in other expenses during the three months ended September 30, 2003, as compared to the same respective period of 2002, is primarily attributable to a $19.5 million loss recognized from the early extinguishment of higher yielding senior notes in 2002. The $25.4 million decrease in other expense during the nine months ended September 30, 2003, as compared to the same respective period of 2002, is primarily attributable to a $22.3 million loss recognized from the early extinguishment of higher yielding senior notes in 2002. See "Cumulative effect of change in accounting principle" presented below for information regarding the reclassification of 2002 extraordinary losses on the early extinguishment of debt. Income tax benefits (provisions). During the three and nine month periods ended September 30, 2003, the Company recognized income tax benefits of $99.9 million and $95.0 million, respectively. During the three and nine month periods ended September 30, 2002, the Company recognized income tax provisions of $2.2 million and $3.2 million, of which $2.1 million and $2.8 million, respectively, was attributable to Argentine taxable income. The income tax benefit for the nine months ended September 30, 2003 excludes a $1.3 million Argentine provision that is associated with the gain recognized from the adoption of SFAS 143 on January 1, 2003 (see "Cumulative effect of change in accounting principle" presented below). Since 1998, the Company has maintained a valuation allowance against a portion of its deferred tax asset position in the United States. As of December 31, 2002, the Company's deferred tax valuation allowances totaled $247.0 million, comprised of $204.3 million of United States deferred tax valuation allowances and $42.7 million of international deferred tax valuation allowances. Statement of Financial Accounting Standards No. 109 requires that the Company continually assess both positive and negative evidence to determine whether it is more likely than not that the deferred tax assets can be realized prior to their expiration. In the third quarter of 2003, the Company concluded that it is now more likely than not that it will realize its gross deferred tax asset position in the United States after giving consideration to the following specific facts: o Over the past several years, the Company has been steadily improving its portfolio of assets, including significant proved reserve discoveries and follow-up development projects that have recently started to produce. Specifically, Pioneer completed development activities and began production operations on its Canyon Express gas project in September 2002 and on the Falcon field in March 2003. The production performance to-date and the reservoir data that has been accumulated through September 30, 2003 on these projects provide assurance that these projects will recover the reserves as predicted. o During the three months ended September 30, 2003, the Company announced additional Falcon area discoveries in the Tomahawk and Raptor fields and expects first production from these fields in the second half of 2004. The Company also expects to complete its other significant United States Gulf of Mexico development projects, Harrier and Devils Tower, in early and mid-2004, respectively. 32 PIONEER NATURAL RESOURCES COMPANY o Commodity market supply and demand fundamentals have continued to stabilize during the quarter as evidenced by quoted futures prices, that suggest that North American gas prices will remain relatively flat over the next five years and that worldwide oil prices may decline modestly over that time span compared to relatively high current levels for each commodity. o The Company's future revenues are further protected against price declines through its significant hedging program. The Company has hedged portions of its oil price risk through 2005 and portions of its gas price risk through 2007. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for information regarding the Company's hedge positions. o The Company has generated record pretax income for the third quarter of 2003, significant net income for the nine months ended September 30, 2003 and net income in each of the years ended December 31, 2002, 2001 and 2000. The Company has also generated significant taxable income for the third consecutive quarter, including the deduction of 100 percent of its intangible drilling costs for those periods. The Company believes that these trends will continue for the foreseeable future. o The Company performed various economic evaluations in the third quarter to determine if the Company would be able to realize all of its deferred tax assets, including its net operating loss carryforwards, prior to any expiration. These evaluations were based on the Company's reserve projections of existing producing properties and recent discoveries being developed. These evaluations employed varying price assumptions, some of which included a significant negative change to commodity prices, and factored in limitations on the use of the Company's net operating loss carryforwards. The evaluations did not include assumptions of increases in proved reserves through future exploration or acquisitions. The evaluations indicated that the deferred tax assets are realizable in the future. Accordingly, during the third quarter of 2003, the Company reversed its valuation allowance in the United States, resulting in the recognition of a deferred tax benefit of $104.7 million. Further, the reversal of the allowance increased stockholders' equity by $32.6 million as the Company recognized the tax effects of previous stock option exercises and deferred hedging gains and losses in other comprehensive income. Pioneer will continue to monitor Company-specific, oil and gas industry and worldwide economic factors and will reassess the likelihood that the Company's net operating loss carryforwards and other deferred tax attributes will be utilized prior to their expiration. There can be no assurances that facts and circumstances will not materially change and require the Company to reestablish a United States deferred tax asset valuation allowance in a future period. As of September 30, 2003, the Company does not believe there is sufficient positive evidence to reverse its valuation allowances related to certain foreign tax jurisdictions. The Company estimates that its fourth quarter cash income taxes will be $4 million to $6 million, principally comprised of Argentine income taxes and nominal alternative minimum tax in the United States as the Company benefits from its net operating loss carryforwards in the United States and Canada. In the future, the Company's effective tax rate on earnings in the United States will approximate statutory rates as a result of the aforementioned reversal of deferred tax valuation allowances. Cumulative effect of change in accounting principle. As previously discussed, the Company adopted the provisions of SFAS 143 on January 1, 2003 and recognized a $15.4 million benefit from the cumulative effect of change in accounting principle, net of $1.3 million of associated Argentine deferred income taxes. On January 1, 2003, the Company also adopted the provisions of SFAS 145, the provisions of which did not result in a cumulative effect adjustment. In accordance with the provisions of SFAS 145, the Company reclassified to other expense extraordinary losses from the early extinguishment of debt of $2.8 million and $19.5 million realized during the three month periods ended June 30 and September 30, 2002, respectively. See Note B of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Company's adoption of SFAS 143 and SFAS 145. 33 PIONEER NATURAL RESOURCES COMPANY 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 contractual obligations and working capital obligations. Oil and gas properties. The Company's cash expenditures for additions to oil and gas properties during the three and nine month periods ended September 30, 2003 totaled $134.9 million and $522.0 million, respectively. The Company's additions to oil and gas properties were funded by $222.5 million and $546.7 million of net cash provided by operating activities during the three and nine month periods ended September 30, 2003, respectively. The Company's capital expenditures during the three months ended September 30, 2002 were funded by $87.7 million of net cash provided by operating activities, $59.9 million of proceeds from the disposition of assets and borrowings under the Credit Facility. The Company's capital expenditures during the nine months ended September 30, 2002 were funded by $228.3 million of net cash provided by operating activities, $118.8 million of proceeds from the disposition of assets and proceeds from the April 2002 sale of 11.5 million shares of common stock (the "Stock Offering"). Contractual obligations. The Company's contractual obligations include long-term debt, operating leases, Btu swap agreements (which are fixed in amount and are not subject to market risk), terminated commodity hedges and other contracts. During the nine months ended September 30, 2003, the Company reduced its long-term debt by $47.2 million, reduced its obligations under the Btu swap agreements by $4.9 million and locked-in $24.2 million of remaining liabilities associated with the termination of commodity hedges prior to their scheduled maturity. The Company's contractual obligations for which the ultimate settlement amounts are not fixed and determinable are currently limited to derivative contracts that are sensitive to future changes in commodity prices. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for a table of changes in the fair value of the Company's derivative contract assets and liabilities during the nine months ended September 30, 2003. Working capital. 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 and the Company's capital expenditure program may be provided by any combination of internally-generated cash flow, proceeds from the disposition of non- strategic 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 sales of non-strategic assets. The Company expects that these resources will be sufficient to fund its capital commitments during the remainder of 2003. Operating activities. Net cash provided by operating activities during the three and nine month periods ended September 30, 2003 were $222.5 million and $546.7 million, respectively, as compared to $87.7 million and $228.3 million for the same respective periods in 2002. The increase in net cash provided by operating activities during the three and nine month periods ended September 30, 2003, as compared to the same respective periods in 2002, is primarily due to higher gas production and higher commodity prices. Financing activities. Net cash used in financing activities during the three and nine month periods ended September 30, 2003 was $94.4 million and $48.6 million, respectively. In comparison, net cash provided by financing activities was $90.4 million and $163.8 million during the three and nine month periods ended September 30, 2002, respectively. During the nine months ended September 30, 2003, net cash provided by operating activities has been used to fund the Company's capital projects, repay borrowings of $117.7 million during the first half of 2003, including normal closing adjustments, to acquire an additional 25 percent working interest in the Falcon field, the Harrier field and surrounding satellite prospects in the deepwater Gulf of Mexico and to reduce long-term debt by $47.5 million. During the third quarter of 2003, net cash provided by operating activities increased while net cash used for investing activities declined allowing the Company to reduce long-term debt by $92.0 million. During the three and nine month periods ended September 30, 2002, the Company used a portion of the $236.0 million of net proceeds from the Stock Offering to fund a portion of the net cash used in investing activities and to repay a portion of its long-term debt and other noncurrent liabilities. During August and February 2003, the Company entered into interest rate swap contracts to hedge a portion of the fair value of its 9-5/8 percent senior notes. Under the terms of the interest rate swap contracts entered into during August (the "August Contracts"), the Company was to receive a fixed annual rate of 9-5/8 percent on $300.0 million notional amount and agreed to pay the counterparties a variable rate on the notional amount equal to the six-month 34 PIONEER NATURAL RESOURCES COMPANY LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of 521.0 basis points. The terms of the interest rate swap contracts entered into during February 2003 (the "February Contracts") differed from those of the August Contracts only in notional amount and LIBOR Margin, which terms were $250.0 million and 566.4 basis points, respectively. During September 2003, the Company terminated the August Contracts for $10.1 million of cash proceeds. The cash proceeds were comprised of $1.2 million of settlement gains attributable to the period from August 2003 through the date of termination and $8.9 million attributable to the fair value, on the date of termination, of the remaining term of the August Contracts. During May 2003, the Company terminated the February Contracts for $11.4 million of cash proceeds. The cash proceeds were comprised of $2.0 million of settlement gains attributable to the period from February 2003 through the date of termination and $9.4 million attributable to the fair value, on the date of termination, of the remaining term of the February Contracts. Outstanding borrowings under the Credit Facility totaled $218.0 million as of September 30, 2003, excluding $28.8 million of undrawn letters of credit issued under the Credit Facility. The weighted average interest rates on the Company's indebtedness for the three and nine month periods ended September 30, 2003 were 5.2 percent and 5.3 percent, respectively, as compared to 5.8 percent and 6.4 percent for the same respective periods in 2002, taking into account the effect of lower market interest rates and the Company's interest rate swaps. 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. Sales of assets. During the three and nine month periods ended September 30, 2003, proceeds from the sale of assets totaled $9.3 million and $35.0 million, respectively, as compared to $59.9 million and $118.8 million for the same respective periods in 2002. The Company's 2003 asset divestitures were primarily comprised of derivative assets and Gulf of Mexico shelf prospects, in which a partial interest was sold to Woodside. The Company's 2002 asset divestitures were primarily comprised of derivative assets. Book capitalization and liquidity. The Company's total debt was $1.6 billion as of September 30, 2003 and $1.7 billion as of December 31, 2002. The Company's total book capitalization at September 30, 2003 was $3.3 billion, consisting of total debt of $1.6 billion and stockholders' equity of $1.7 billion. Consequently, the Company's debt to total book capitalization at September 30, 2003 was 48.6 percent and at December 31, 2002 was 54.8 percent. The Company's ratio of current assets to current liabilities was .61 at September 30, 2003 and at December 31, 2002 was .54. Including $28.8 million of undrawn and outstanding letters of credit, the Company had $328.2 million of unused borrowing capacity available under its Credit Facility as of September 30, 2003. During the fourth quarter of 2003, the Company anticipates that net cash provided by operating activities, based on current commodity prices, will exceed budgeted capital expenditures and contractual obligations and be sufficient to reduce long-term debt by an additional $25 million to $50 million. New Accounting Interpretation and Recent Developments During January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the consolidation of certain entities that are determined to be variable interest entities ("VIE's"). An entity is considered to be a VIE when either (i) the entity lacks sufficient equity to carry on its principal operations, (ii) the equity owners of the entity cannot make decisions about the entity's activities or (iii) the entity's equity neither absorbs losses or benefits from gains. For VIEs created subsequent to January 31, 2003, the provisions of FIN 46 must be applied immediately. For VIEs created prior to that date, the adoption of FIN 46 is required for all reporting periods subsequent to December 15, 2003. Subsequent to January 31, 2003, the Company has not acquired an interest in any VIEs that would require immediate consolidation under FIN 46. The Company is currently reviewing its financial arrangements to determine whether any VIEs existed prior to January 31, 2003 that should be consolidated by the Company in accordance with FIN 46. The Company does not believe that the consolidation of VIEs that existed prior to January 31, 2003, if any, will have a material impact on its future financial position, results of operations or liquidity. 35 PIONEER NATURAL RESOURCES COMPANY In its recent review of registrants' filings, the staff of the SEC has taken the position that Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), requires oil and gas entities to separately report on their balance sheets the costs of leasehold mineral interests acquired after June 30, 2001, including related accumulated depletion, as intangible assets and provide related disclosures. The Company has historically included producing leasehold costs in the proved properties caption on its balance sheet since the value of the leases is inseparable from the value of the related oil and gas reserves. This classification is consistent with the provisions of Statement of Financial Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies", and standard industry practice. Almost all costs included in the unproved properties caption on the balance sheet are leasehold mineral interests that are regularly evaluated for impairment based on lease term and drilling activity. The SEC staff has referred the question of SFAS 142 applicability for consideration by the Emerging Issues Task Force. If the provisions of SFAS 142 are determined to be applicable to oil and gas leasehold mineral interests, reclassifications within property, plant and equipment on the Consolidated Balance Sheets and additional disclosures may be required. The Company does not believe that the provisions of SFAS 142, if determined to be applicable, will have a material impact on its financial position, results of operations or liquidity. At September 30, 2003, the Company had cumulative expenditures of no more than $450 million on costs of leasehold mineral interests since June 30, 2001, that are included in oil and gas properties in the Company's Consolidated Balance Sheet. Item 3. Quantitative and Qualitative Disclosures About Market Risk The following quantitative and qualitative disclosures about market risk are supplementary to the quantitative and qualitative disclosures provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. As such, the information contained herein should be read in conjunction with the related disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The following table reconciles the changes that occurred in the fair values of the Company's open derivative contracts during the first nine months of 2003:
Derivative Contract Assets (Liabilities) ---------------------------------------------- Foreign Interest Exchange Commodity Rate Rate Total --------- -------- -------- --------- (in thousands) Fair value of contracts outstanding as of December 31, 2002............... $(108,804) $ - $ 15 $(108,789) Changes in contract fair value........... (220,470) 21,497 3 (198,970) Contract realizations: Maturities........................... 156,539 (3,230) (18) 153,291 Terminations - cash settlements...... 125 (18,267) - (18,142) Terminations - future net obligations 53,362 - - 53,362 -------- ------- ----- -------- Fair value of contracts outstanding as of September 30, 2003.............. $(119,248) $ - $ - $(119,248) ======== ======= ===== ========
The following disclosures provide specific information about material changes that have occurred since December 31, 2002 in the Company's portfolio of financial instruments. The Company may recognize future earnings gains or losses on these instruments from changes in market commodity prices, interest rates or foreign exchange rates. Interest rate sensitivity. During August and February 2003, the Company entered into interest rate swap contracts to hedge a portion of the fair value of its 9-5/8 percent senior notes. Under the terms of the interest rate swap contracts entered into during August (the "August Contracts"), the Company was to receive a fixed annual rate of 9-5/8 percent on $300.0 million notional amount and agreed to pay the counterparties a variable rate on the notional amount equal to the six-month LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of 521.0 basis points. The terms of the interest rate swap contracts entered into during February 2003 (the "February Contracts") differed from those of the August Contracts only in notional amount and LIBOR Margin, which terms were $250.0 million and 566.4 basis points, respectively. During September 2003, the Company terminated the August Contracts for $10.1 million of cash proceeds. The cash proceeds were comprised of $1.2 million of settlement gains attributable to the period from August 2003 through the date of termination and $8.9 million attributable to the fair value, on the date of termination, of the remaining term of the August Contracts. During May 2003, the Company terminated the February Contracts for 36 PIONEER NATURAL RESOURCES COMPANY $11.4 million of cash proceeds. The cash proceeds were comprised of $2.0 million of settlement gains attributable to the period from February 2003 through the date of termination and $9.4 million attributable to the fair value, on the date of termination, of the remaining term of the February Contracts. The following table provides information about the debt obligations of the Company that are sensitive to changes in interest rates as of September 30, 2003. The table presents the debt obligations by maturity dates, the weighted average interest rates expected to be paid on the debt given current contractual terms and market conditions and the debt's estimated fair value. For fixed rate debt, the weighted average interest rate represents the contractual fixed rates that the Company was obligated to periodically pay on the debt as of September 30, 2003. For variable rate debt, the average interest rate represents the average rates being paid on the debt projected forward proportionate to the forward yield curve for the six-month LIBOR.
Interest Rate Sensitivity Debt Obligations as of September 30, 2003 Three months Fair Value ended Year ended December 31, Liability at December 31, -------------------------------------------------- September 30, 2003 2004 2005 2006 2007 Thereafter Total 2003 ----------- ------ -------- ------ -------- ---------- ---------- ------------ (in thousands, except interest rates) Total Debt: Fixed rate debt........... $ - $ - $136,376 $ - $156,393 $1,110,595 $1,403,364 $(1,534,589) Weighted average interest rate (%)....... 7.93 7.93 7.95 7.95 7.94 7.91 Variable rate debt........ $ - $ - $218,000 $ - $ - $ - $ 218,000 $ (218,000) Average interest rate (%). 2.45 3.15 4.61
Commodity price sensitivity. During the first nine months of 2003, 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 of the Company that were sensitive to oil and gas price changes as of September 30, 2003. All of these oil and gas derivative financial instruments qualified as hedges. See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for information regarding the terms of the Company's derivative financial instruments that are sensitive to changes in oil and gas prices. Oil Price Sensitivity Derivative Financial Instruments as of September 30, 2003(3)
Three months Year ended Fair Value ended December 31, Liability at December 31, -------------------- September 30, 2003 2004 2005 2003 ------------ -------- -------- ------------- (in thousands) Oil Hedge Derivatives: Average daily notional Bbl volumes (1): Swap contracts............................... 14,000 14,000 12,000 $ (20,467) Weighted average fixed price per Bbl................................. $ 24.35 $ 24.65 $ 24.44 Average forward NYMEX oil prices (2)................................... $ 28.47 $ 26.99 $ 25.38 - --------------- (1) See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (2) The average forward NYMEX oil prices are based on October 30, 2003 market quotes. The average forward NYMEX oil price per Bbl for calendar 2008, as of the close of business on October 30, 2003, was $25.91. (3) During October 2003, the Company entered into new oil swap contracts to hedge 6,315 Bbls per day of fourth quarter 2003 sales at a weighted average fixed price per Bbl of $31.51, 4,227 Bbls per day of 2004 sales at a weighted average fixed price per Bbl of $29.20 and 4,000 Bbls per day of 2008 sales at a fixed price per Bbl of $26.05.
37 PIONEER NATURAL RESOURCES COMPANY Gas Price Sensitivity Derivative Financial Instruments as of September 30, 2003 (4)
Three Months Fair Value ended Year ended December 31, Liability at December 31, ----------------------------------------- September 31, 2003 2004 2005 2006 2007 2003 ----------- -------- -------- -------- -------- ------------- (in thousands) Gas Hedge Derivatives (1): Average daily notional Mcf volumes (2): Swap contracts.................... 310,000 260,000 60,000 70,000 20,000 $ (98,720) Weighted average fixed price per MMBtu...................... $ 4.39 $ 4.05 $ 4.28 $ 4.23 $ 3.75 Collar contracts.................. 20,000 $ (61) Weighted average short call ceiling price per MMBtu........ $ 6.60 Weighted average long put floor price per MMBtu......... $ 4.00 Average forward NYMEX gas prices (3).......................... $ 4.71 $ 4.75 $ 4.70 $ 4.62 $ 4.65 - --------------- (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 collar contracts and, accordingly, the effects of the basis swaps have been presented together with the associated contracts. (2) See Note E of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (3) The average forward NYMEX gas prices are based on October 30, 2003 market quotes. (4) During October 2003, the Company entered into new gas swap contracts to hedge 20,000 Mcf per day of 2004 sales at a weighted average fixed price per MMBtu of $4.96. Additionally, the Company terminated its collar contracts that hedged 20,000 Mcf per day of 2004 sales.
Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this Report, the Company's chief executive officer ("CEO") and chief financial officer ("CFO") carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures. Based on those evaluations, the Company's CEO and CFO believe (i) that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure; and (ii) that the Company's disclosure controls and procedures are effective. (b) Changes in internal controls. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the evaluation referred to in Item 4. (a), above, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses. 38 PIONEER NATURAL RESOURCES COMPANY PART II. OTHER INFORMATION Item 1. Legal Proceedings As discussed in Note G 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 for the specific legal actions described in Note G, the Company believes that the probable damages from such other legal actions will not be in excess of 10 percent of the Company's current assets. Item 6. Exhibits and Reports on Form 8-K Exhibits 31.1 Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K During the three months ended September 30, 2003, the Company filed with the SEC current reports on Form 8-K on July 17, July 30 and August 19. The Company's July 17, 2003 Form 8-K provided, as an exhibit thereto, a news release issued by the Company on July 17, 2003 announcing, together with related information, (i) anticipated first production from the Sable field offshore of South Africa in August 2003, (ii) updates on the Harrier field and Devils Tower project developments and (iii) an update on second quarter guidance based upon then known market conditions. The Company's July 30, 2003 Form 8-K provided, as an exhibit thereto, a news release issued by the Company on July 30, 2003 announcing the Company's financial and operating results for the quarter ended June 30, 2003; providing the Company's third quarter 2003 financial outlook based on then current expectations and providing information regarding the Company's oil and gas price hedges. The Company's August 19, 2003 Form 8-K provided, as an exhibit thereto, a news release issued by the Company on August 18, 2003 announcing, together with related information, (i) commencement of production from the Sable field, (ii) a discovery on the Tomahawk prospect in the Falcon field in the Gulf of Mexico and (iii) the participation in a successful development well in the Adams field in Tunisia. 39 PIONEER NATURAL RESOURCES COMPANY S I G N A T U R E S 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 thereunto duly authorized. PIONEER NATURAL RESOURCES COMPANY Date: October 31, 2003 By: /s/ Timothy L. Dove ----------------------------------- Timothy L. Dove Executive Vice President and Chief Financial Officer Date: October 31, 2003 By: /s/ Richard P. Dealy ----------------------------------- Richard P. Dealy Vice President and Chief Accounting Officer 40 PIONEER NATURAL RESOURCES COMPANY Exhibit Index Page 31.1* Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Chief Executive Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Chief Financial Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. - ------------- * filed herewith 41 EX-31 3 sepqx311.txt PIONEER 09/30/2003 10-Q EXH 31.1 EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Scott D. Sheffield, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pioneer Natural Resources Company: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. October 31, 2003 /s/ Scott D. Sheffield -------------------------------------------- Scott D. Sheffield, Chairman, President and Chief Executive Officer EX-31 4 sepqx312.txt PIONEER 09/30/2003 10-Q EXH 31.2 EXHIBIT 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Timothy L. Dove, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pioneer Natural Resources Company: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. October 31, 2003 /s/ Timothy L. Dove ----------------------------------------- Timothy L. Dove, Executive Vice President and Chief Financial Officer EX-32 5 sepqx321.txt PIONEER 09/30/2003 10-Q EXH 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF PIONEER NATURAL RESOURCES COMPANY PURSUANT TO 18 U.S.C. ss. 1350 I, Scott D. Sheffield, Chairman, President and Chief Executive Officer of Pioneer Natural Resources Company (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarterly period ended September 30, 2003 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. I further certify that the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company. /s/ Scott D. Sheffield ----------------------------------- Name: Scott D. Sheffield, Chairman, President and Chief Executive Officer Date: October 31, 2003 EX-32 6 sepqx322.txt PIONEER 09/30/2003 10-Q EXH 32.2 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF PIONEER NATURAL RESOURCES COMPANY PURSUANT TO 18 U.S.C. ss. 1350 I, Timothy L. Dove, Executive Vice President and Chief Financial Officer of Pioneer Natural Resources Company (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarterly period ended September 30, 2003 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. I further certify that the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company. /s/ Timothy L. Dove -------------------------------- Name: Timothy L. Dove, Executive Vice President and Chief Financial Officer Date: October 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----