Disclosures About Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Disclosures About Fair Value Measurements

Disclosures About Fair Value Measurements

NOTE D. Disclosures About Fair Value Measurements

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

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

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

• Level 3 – unobservable inputs for the asset or liability.

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011, for each of the fair value hierarchy levels:

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at June 30, 2011
	(in thousands)
Assets:
Trading securities	$	289	$	30,149	$	—	$	30,438
Commodity derivatives		—		271,544		—		271,544
Interest rate derivatives (a)		—		24,946		—		24,946
Deferred compensation plan assets		40,223		—		—		40,223
Total assets	$	40,512	$	326,639	$	—	$	367,151
Liabilities:
Commodity derivatives	$	—	$	170,732	$	13,351	$	184,083
Pioneer Southwest credit facility		—		84,542		—		84,542
5.875% senior notes due 2016		482,139		—		—		482,139
6.65% senior notes due 2017		529,972		—		—		529,972
6.875% senior notes due 2018		496,698		—		—		496,698
7.50% senior notes due 2020		512,158		—		—		512,158
7.20% senior notes due 2028		250,000		—		—		250,000
2.875% senior convertible notes due 2038 (b)		742,800		—		—		742,800
Total liabilities	$	3,013,767	$	255,274	$	13,351	$	3,282,392

(a) Subsequent to June 30, 2011, the Company terminated the interest rate derivatives shown in the table above and received $26.1 million of proceeds. See Note G for additional information about the Company's interest rate derivatives.

(b) The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege.

The following table presents the changes in the fair values of the Company's natural gas liquid ("NGL") derivative liabilities classified as Level 3 in the fair value hierarchy:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
	(in thousands)
Beginning liability balance	$	(16,675	)	$	(9,556	)
Total gains and losses:
Net unrealized gains (losses) included in earnings (a)		3,324			(3,795	)
Net realized losses included in earnings (a)		(4,629	)		(7,325	)
Settlement payments		4,629			7,325
Ending liability balance	$	(13,351	)	$	(13,351	)

(a) Non-hedge derivatives gains and losses are included in net derivative (gains) losses in the accompanying consolidated statements of operations.

The following table presents the carrying amounts and fair values of the Company's financial instruments as of June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets:
Commodity price derivatives	$	271,544	$	271,544	$	304,434	$	304,434
Interest rate derivatives (a)	$	24,946	$	24,946	$	18,256	$	18,256
Trading securities	$	30,438	$	30,438	$	467	$	467
Deferred compensation plan assets	$	40,223	$	40,223	$	36,162	$	36,162
Liabilities:
Commodity price derivatives	$	184,083	$	184,083	$	136,867	$	136,867
Interest rate derivatives	$	—	$	—	$	704	$	704
Pioneer credit facility	$	—	$	—	$	49,000	$	58,382
Pioneer Southwest credit facility	$	87,000	$	84,542	$	81,200	$	77,241
5.875 % senior notes due 2016	$	401,037	$	482,139	$	396,880	$	475,194
6.65 % senior notes due 2017	$	484,114	$	529,972	$	484,046	$	516,632
6.875 % senior notes due 2018	$	449,209	$	496,698	$	449,192	$	480,969
7.50 % senior notes due 2020	$	446,572	$	512,158	$	446,433	$	494,145
7.20 % senior notes due 2028	$	249,927	$	250,000	$	249,925	$	259,350
2.875% senior convertible notes due 2038 (b)	$	453,119	$	742,800	$	444,994	$	728,400

(a) Subsequent to June 30, 2011, the Company terminated the interest rate derivatives shown in the table above and received $26.1 million of proceeds. See Note G for additional information about the Company's interest rate derivatives.

(b) The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege.

Trading securities and deferred compensation plan assets. The Company's trading securities represent securities that are both actively traded and not actively traded on major exchanges. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges plus unallocated contributions as of the measurement date. As of June 30, 2011, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for certain trading securities that are not actively traded on major exchanges, which were corroborated broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company's interest rate derivative assets and liabilities as of June 30, 2011 represent swap contracts for $470 million notional amount of debt, whereby the Company pays a variable LIBOR-based rate and the counterparty pays a fixed rate of interest. The net derivative values attributable to the Company's interest rate derivative contracts as of June 30, 2011 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative asset and liability measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company's commodity derivatives represent oil, NGL, gas and diesel swap contracts, collar contracts and collar contracts with short puts (which are also known as three-way collar contracts). The Company's oil, gas and diesel swap, collar and three-way collar derivative contract asset and liability measurements represent Level 2 inputs in the hierarchy priority and NGL derivative contract asset and liability measurements represent Level 3 inputs in the hierarchy priority.

Oil derivatives. The Company's oil derivatives are swap, collar and three-way collar contracts for notional barrels ("Bbls") of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The asset and liability values attributable to the Company's oil derivatives were determined based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company's collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling oil options and were corroborated by market-quoted volatility factors.

NGL derivatives. The Company's NGL derivatives include swap and collar contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs, Conway-posted-price NGLs or NGL component prices per Bbl. The asset and liability values attributable to the Company's NGL derivatives were determined based on (i) the contracted notional volumes, (ii) independent active market-quoted NGL component prices and (iii) the applicable credit-adjusted risk-free rate yield curve. The implied rates of volatility inherent in the Company's collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling NGL options and were corroborated by market-quoted volatility factors.

Gas derivatives. The Company's gas derivatives are swap, collar and three-way collar contracts for notional volumes of gas (expressed in millions of British thermal units "MMBtus") contracted at various posted price indexes, including NYMEX Henry Hub ("HH") contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company's gas derivative contracts were determined based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) independent market-quoted forward index prices, (iv) the applicable credit-adjusted risk-free rate yield curve and (v) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company's collar contracts and three-way collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling gas options and were corroborated by market-quoted volatility factors.

Diesel derivatives. The Company's diesel derivatives are comprised of swap contracts for notional Bbls posted as Gulf Coast Ultra Low Sulfur (Pipeline) diesel by a posting service. The asset and liability values attributable to the Company's diesel derivatives were determined based on (i) the contracted notional volumes, (ii) independent active market-quoted diesel prices and (iii) the applicable credit-adjusted risk-free rate yield curve.

Credit facility. The fair value of the Company's credit facility and Pioneer Southwest's credit facility is based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.

Senior notes. The Company's senior notes represent debt securities that are actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.