Disclosures About Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Disclosures About Fair Value Measurements [Abstract]

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 tables present the Company's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2011 and 2010 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 December 31, 2011
	(in thousands)
Assets:
Trading securities	$	257	$	168	$	—	$	425
Commodity derivatives		—		482,075		—		482,075
Deferred compensation plan assets		39,904		—		—		39,904
Total assets	$	40,161	$	482,243	$	—	$	522,404
Liabilities:
Commodity derivatives	$	—	$	92,322	$	—	$	92,322
Interest rate derivatives		—		15,654		—		15,654
Liability Awards		9,207		—		—		9,207
Total liabilities	$	9,207	$	107,976	$	—	$	117,183

	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 December 31, 2010
	(in thousands)
Assets:
Trading securities	$	316	$	151	$	—	$	467
Commodity derivatives		—		304,434		—		304,434
Interest rate derivatives		—		18,256		—		18,256
Deferred compensation plan assets		36,162		—		—		36,162
Total assets	$	36,478	$	322,841	$	—	$	359,319
Liabilities:
Commodity derivatives	$	—	$	127,311	$	9,556	$	136,867
Interest rate derivatives		—		704		—		704
Liability Awards		4,900		—		—		4,900
Total liabilities	$	4,900	$	128,015	$	9,556	$	142,471

The following table presents the changes in the fair values of the Company's net commodity derivative liabilities classified as Level 3 in the fair value hierarchy for the year ended December 31, 2011:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Year Ended December 31, 2011
	(in thousands)
Beginning liability balance	$	(9,556	)
Fair value changes (a):
Net unrealized gains included in earnings		188
Net realized losses included in earnings		(11,803	)
Settlement payments		11,803
Transfers out of Level 3 (b)		9,368
Ending liability balance	$	—

(a) Changes in fair value are included in derivative gains (losses), net in the accompanying consolidated statements of operations.

(b) The values related to NGL swap and collar contracts were transferred from Level 3 to Level 2 as a result of the Company's ability to obtain independent market-quoted NGL data. The Company recognized the transfer between Level 3 and Level 2 at the end of the reporting period of transfer.

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

	December 31, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets:
Commodity price derivatives	$	482,075	$	482,075	$	304,434	$	304,434
Interest rate derivatives	$	—	$	—	$	18,256	$	18,256
Trading securities	$	425	$	425	$	467	$	467
Deferred compensation plan assets	$	39,904	$	39,904	$	36,162	$	36,162
Liabilities:
Commodity price derivatives	$	92,322	$	92,322	$	136,867	$	136,867
Interest rate derivatives	$	15,654	$	15,654	$	704	$	704
Liability Awards	$	9,207	$	9,207	$	4,900	$	4,900
Pioneer credit facility	$	—	$	—	$	49,000	$	58,382
Pioneer Southwest credit facility	$	32,000	$	32,393	$	81,200	$	77,241
5.875% senior notes due 2016	$	405,388	$	488,445	$	396,880	$	475,194
6.65% senior notes due 2017	$	484,185	$	546,931	$	484,045	$	516,632
6.875% senior notes due 2018	$	449,225	$	505,688	$	449,192	$	480,969
7.50% senior notes due 2020	$	446,716	$	523,373	$	446,433	$	494,145
7.20% senior notes due 2028	$	249,928	$	269,125	$	249,925	$	259,350
2.875% convertible senior notes due 2038 (a)	$	461,463	$	739,630	$	444,994	$	728,400

(a) The fair value of the 2.875% convertible senior notes include the fair value of the conversion privilege.

Trading securities and deferred compensation plan assets. The Company's trading securities are comprised of securities that are 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. As of December 31, 2011, all significant inputs to these exchange-traded asset 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 provided by broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company's interest rate derivative assets and liabilities as of December 31, 2011 represent interest rate swap contracts that, at their inception, locked in a fixed forward 10-year annual rate of 3.06 percent on $200 million notional amount of debt for a period of one year. The Company's interest rate derivative assets and liabilities as of December 31, 2010 represent (i) swap contracts for $189 million notional amount of debt whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate and (ii) swap contracts for $470 million notional amount of debt, respectively, whereby the Company pays a variable LIBOR-based rate and the counterparty pays a fixed rate of interest. During July 2011, the Company terminated $470 million notional amount of fixed-for-variable interest rate derivative contracts and received $26.1 million of cash proceeds.

The net derivative asset and liability values attributable to the Company's interest rate derivative contracts as of December 31, 2011 and 2010 were determined 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, NGL, gas and diesel swap, collar and three-way collar derivative contract asset and liability measurements represent Level 2 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.

As of December 31, 2011, the Company is also party to "roll adjustment" swap derivatives to mitigate the timing risk associated with the sales price of oil in the Permian Basin. The asset value attributable to the Company's roll adjustment swaps as of December 31, 2011, of $181 thousand, was determined based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil and (iii) the applicable estimated credit-adjusted risk-free rate yield curve.

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, (iii) independent active NYMEX futures price quotes for WTI oil and (iv) 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") swap contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company's gas derivative contracts 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 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.

Liability Awards. The fair values of the Company's Liability Awards are updated each balance sheet date based on the closing stock price on the balance sheet date.

Credit facility. The fair values of the Company's credit facility and Pioneer Southwest's credit facility are 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.

Concentrations of credit risk. As of December 31, 2011, the Company's primary concentration of credit risks are the risks of collecting accounts receivable – trade and the risk of counterparties' failure to perform under derivative obligations. See Note B for information regarding the Company's accounts receivable – trade and Note J for information regarding the Company's major customers.

The Company has entered into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note I for additional information regarding the Company's derivative activities and Note J for information regarding derivative assets and liabilities by counterparty.