UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. 1-13245
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039
- ------------------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Number of shares of Common Stock outstanding as of July 29, 2002.... 116,113,912
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001................................. 4
Consolidated Statements of Operations for the three
and six months ended June 30, 2002 and 2001........... 5
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2002.................... 6
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2002 and 2001........... 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2002
and 2001.............................................. 8
Notes to Consolidated Financial Statements............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 37
Item 4. Submission of Matters to a Vote of Security Holders...... 37
Item 6. Exhibits and Reports on Form 8-K......................... 38
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; "Bcf" means one billion cubic feet; "Tcf" means one
trillion cubic feet; "Bcfe" means a billion cubic feet equivalent and is a
standard convention used to express oil and gas volumes on a comparable gas
equivalent basis; "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;
"MMBtu" means one million Btu's; "MBbl" means one thousand Bbls; "MBOE" means
one thousand BOE; "MMBOE" means one million BOE; "Mcf" means one thousand cubic
feet and is a measure of 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 respect to information on the working interest in wells,
drilling locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by 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 dollar 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)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 16,728 $ 14,334
Accounts receivable:
Trade, net.................................................... 83,086 81,616
Affiliates.................................................... 415 595
Inventories...................................................... 10,079 14,549
Deferred income taxes............................................ 10,500 6,400
Other current assets:
Derivatives................................................... 4,245 127,074
Other......................................................... 10,955 11,075
---------- ----------
Total current assets........................................ 136,008 255,643
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties............................................. 3,975,062 3,691,783
Unproved properties........................................... 194,588 187,785
Accumulated depletion, depreciation and amortization............. (1,196,172) (1,095,310)
---------- ----------
2,973,478 2,784,258
---------- ----------
Deferred income taxes.............................................. 80,295 84,319
Other property and equipment, net.................................. 21,135 21,560
Other assets, net:
Derivatives...................................................... 4,094 54,486
Other............................................................ 63,798 70,787
---------- ----------
$ 3,278,808 $ 3,271,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................................... $ 117,016 $ 92,760
Affiliates.................................................... 3,391 6,405
Interest payable................................................. 37,977 37,410
Other current liabilities:
Derivatives................................................... 13,934 36,830
Other......................................................... 52,398 54,804
---------- ----------
Total current liabilities................................... 224,716 228,209
---------- ----------
Long-term debt..................................................... 1,461,794 1,577,304
Noncurrent derivative obligations.................................. 40,357 32,438
Other noncurrent liabilities....................................... 125,147 133,945
Deferred income taxes.............................................. 4,900 13,768
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares authorized;
one share issued and outstanding.............................. - -
Common stock, $.01 par value; 500,000,000 shares authorized;
118,931,094 and 107,422,467 shares issued as of June 30,
2002 and December 31, 2001, respectively...................... 1,189 1,074
Additional paid-in capital....................................... 2,698,443 2,462,272
Treasury stock, at cost; 2,822,254 and 3,486,073 shares as of
June 30, 2002 and December 31, 2001, respectively............. (38,862) (48,002)
Accumulated deficit.............................................. (1,315,695) (1,323,343)
Accumulated other comprehensive income:
Deferred hedge gains, net..................................... 76,157 201,046
Cumulative translation adjustment............................. 1,084 (7,658)
Deferred compensation......................................... (422) -
---------- ----------
Total stockholders' equity.................................. 1,421,894 1,285,389
Commitments and contingencies......................................
---------- ----------
$ 3,278,808 $ 3,271,053
========== ==========
The financial information included as of June 30, 2002 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 Six months ended
June 30, June 30,
--------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- -------------
Revenues:
Oil and gas................................ $ 172,430 $ 218,611 $ 337,969 $ 476,597
Interest and other......................... 813 10,955 2,006 16,122
Gain on disposition of assets, net......... 1,095 1,472 1,021 8,765
-------- -------- -------- --------
174,338 231,038 340,996 501,484
-------- -------- -------- --------
Costs and expenses:
Oil and gas production..................... 49,717 51,974 100,735 107,776
Depletion, depreciation and amortization... 50,945 57,396 101,333 109,557
Exploration and abandonments............... 17,860 46,583 38,980 69,466
General and administrative................. 10,758 8,005 22,676 18,453
Interest................................... 24,741 34,260 51,058 69,876
Other...................................... 4,895 1,874 13,161 27,091
-------- -------- -------- --------
158,916 200,092 327,943 402,219
-------- -------- -------- --------
Income before income taxes and
extraordinary item......................... 15,422 30,946 13,053 99,265
Income tax provision......................... (1,437) (2,608) (1,027) (3,008)
-------- -------- -------- --------
Income before extraordinary item............. 13,985 28,338 12,026 96,257
Extraordinary item - loss on early
extinguishment of debt, net of tax......... (2,843) - (2,843) -
-------- -------- -------- --------
Net income................................... $ 11,142 $ 28,338 $ 9,183 $ 96,257
======== ======== ======== ========
Net income per share:
Basic:
Income before extraordinary item........ $ .13 $ .29 $ .11 $ .98
Extraordinary item...................... (.03) - (.03) -
-------- -------- -------- --------
Net income............................ $ .10 $ .29 $ .08 $ .98
======== ======== ======== ========
Diluted:
Income before extraordinary item........ $ .12 $ .28 $ .11 $ .97
Extraordinary item...................... (.02) - (.03) -
-------- -------- -------- --------
Net income............................ $ .10 $ .28 $ .08 $ .97
======== ======== ======== ========
Weighted average shares outstanding:
Basic................................... 113,306 98,337 108,702 98,358
======== ======== ======== ========
Diluted................................. 115,239 99,700 110,282 99,709
======== ======== ======== ========
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)
Common ----------------------------------
Stock Additional Hedge Total
Shares Common Paid-in Treasury Accumulated Gains & Translation Deferred Stockholders'
Outstanding Stock Capital Stock Deficit Losses Adjustment Compensation Equity
----------- ------ ---------- -------- ----------- --------- ---------- ------------ ------------
Balance as of January 1,
2002...................... 103,936 $1,074 $2,462,272 $(48,002) $(1,323,343) $201,046 $ (7,658) $ - $1,285,389
Issuance of common stock.. 11,500 115 235,889 - - - - - 236,004
Adjustment to common
stock issued for 2001
partnership
acquisitions............ (10) - (175) - - - - - (175)
Stock options exercised... 664 - 1 9,140 (1,535) - - - 7,606
Net income................ - - - - 9,183 - - - 9,183
Other comprehensive
income (loss):
Deferred hedge gains
and losses, net of
tax:
Deferred hedge
losses............... - - - - - (89,091) - - (89,091)
Net gains included
in net income........ - - - - - (35,798) - - (35,798)
Translation adjustment... - - - - - - 8,742 - 8,742
Deferred compensation:
Compensation deferred.. 19 - 456 - - - - (456) -
Deferred compensation
included in net
income............... - - - - - - - 34 34
------- ----- --------- ------ ---------- ------- ------- ------ ---------
Balance as of June 30,
2002...................... 116,109 $1,189 $2,698,443 $(38,862) $(1,315,695) $ 76,157 $ 1,084 $ (422) $1,421,894
======= ===== ========= ======= ========== ======= ======== ====== =========
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 Six months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Cash flows from operating activities:
Net income.......................................... $ 11,142 $ 28,338 $ 9,183 $ 96,257
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization......... 50,945 57,396 101,333 109,557
Exploration expenses, including dry holes........ 12,182 40,985 30,848 62,832
Deferred income taxes............................ 789 138 105 (4,662)
Gain on disposition of assets, net............... (1,095) (1,472) (1,021) (8,765)
Interest related amortization.................... (649) 2,889 (1,641) 5,887
Extraordinary item, net of tax................... 2,843 - 2,843 -
Other noncash items.............................. 10,540 (7,331) 23,524 3,228
Changes in operating assets and liabilities:
Accounts receivable.............................. 2,853 1,605 (10,868) 28,054
Inventories...................................... 1,744 (2,036) 3,983 (912)
Other current assets............................. (70) 922 (77) (5,032)
Accounts payable................................. 307 6,750 (14,149) (18,857)
Interest payable................................. 862 194 567 914
Other current liabilities........................ (1,829) 6,953 (4,030) (1,436)
-------- -------- -------- --------
Net cash provided by operating activities...... 90,564 135,331 140,600 267,065
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................. 7,292 3,292 58,936 15,195
Additions to oil and gas properties................. (175,031) (141,004) (263,293) (238,724)
Other property additions, net....................... (3,706) (977) (5,860) (3,961)
-------- -------- -------- --------
Net cash used in investing activities.......... (171,445) (138,689) (210,217) (227,490)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt..................... 222,586 49,000 255,876 109,175
Principal payments on long-term debt................ (371,036) (25,000) (386,326) (124,175)
Issuance of common stock............................ 236,004 - 236,004 -
Payment of noncurrent liabilities................... (6,058) (24,089) (36,561) (30,739)
Exercise of long-term incentive plan stock options.. 3,168 3,272 7,606 5,444
Purchase of treasury stock.......................... - - - (7,070)
Deferred debt issuance costs........................ (3,158) - (3,158) -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities......................... 81,506 3,183 73,441 (47,365)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.. 625 (175) 3,824 (7,790)
Effect of exchange rate changes on cash and
cash equivalents.................................... (654) 97 (1,430) (142)
Cash and cash equivalents, beginning of period........ 16,757 18,305 14,334 26,159
-------- -------- -------- --------
Cash and cash equivalents, end of period.............. $ 16,728 $ 18,227 $ 16,728 $ 18,227
======== ======== ======== ========
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 Six months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income........................................... $ 11,142 $ 28,338 $ 9,183 $ 96,257
-------- -------- -------- --------
Other comprehensive income (loss):
Deferred hedge gains and losses, net of tax:
Transition adjustment............................ - - - (197,444)
Deferred hedge gains (losses).................... (25,009) 141,898 (89,091) 194,964
Net (gains) losses included in net income........ (3,956) 17,984 (35,798) 51,855
Gains and losses on available for sale securities:
Unrealized holding (gains) losses................ - 13 - (45)
Gains included in net income..................... - (1,067) - (8,109)
Translation adjustment............................. 8,876 7,592 8,742 (1,755)
Deferred compensation:
Compensation deferred............................ (456) - (456) -
Deferred compensation included in net income..... 34 - 34 -
-------- -------- -------- --------
Other comprehensive income (loss)............. (20,511) 166,420 (116,569) 39,466
-------- -------- -------- --------
Comprehensive income (loss).......................... $ (9,369) $ 194,758 $(107,386) $ 135,723
======== ======== ======== ========
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
June 30, 2002
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company") is a Delaware
corporation whose common stock is listed and traded on the New York Stock
Exchange and the Toronto Stock Exchange. The Company is an oil and gas
exploration and production company with ownership interests in oil and gas
properties located principally in the Mid Continent, Southwestern and onshore
and offshore Gulf Coast regions of the United States and in Argentina, Canada,
Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation and Use of Estimates
Basis of presentation. In the opinion of management, the unaudited
consolidated financial statements of the Company as of June 30, 2002 and for the
three and six month periods ended June 30, 2002 and 2001 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 ("GAAP") have been condensed or omitted in this Form 10-Q pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
These consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Exchange rates. As of June 30, 2002, the Company used an exchange rate of
3.8 pesos to $1 to remeasure the peso-denominated monetary assets and
liabilities of the Company's Argentine subsidiaries and exchange rates of 1.52
Canadian dollars to $1 and 1.57 Canadian dollars to $1 for the translations of
the Company's Canadian subsidiary's balance sheet and statement of operations,
respectively.
New accounting pronouncement. During April 2002, the Financial Accounting
Standards Board issued 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 the adoption of the
provisions of SFAS 145, generally accepted accounting principles ("GAAP")
required gains or losses on the early extinguishment of debt be classified in a
company's periodic consolidated statements of operations as extraordinary gains
or losses, net of associated income taxes, below the determination of income or
loss from continuing operations. SFAS 145 changes GAAP to require, except in the
case of events or transactions of a highly unusual and infrequent nature, gains
or losses from the early extinguishment of debt be classified as components of a
company's income or loss from continuing operations. The Company will adopt the
provisions of SFAS 145 on January 1, 2003. The adoption of the provisions of
SFAS 145 is not expected to affect the Company's future financial position or
liquidity. When the Company adopts the provisions of SFAS 145, gains or losses
from the early extinguishment of debt recognized in the Company's consolidated
statements of operations for prior years will be reclassified to other revenues
or other expense and included in the determination of the income (loss) from
continuing operations of those periods.
NOTE C. Derivative Financial Instruments
Hedge Derivatives
Fair value hedges. During April 2002, the Company entered into interest
rate swap contracts to hedge the fair value of $150 million of its 8-7/8 percent
senior notes due in 2005. The terms of these swap contracts obligate the Company
to pay the counterparties a variable annual rate equal to the six-month London
Interbank Offered Rate plus 3.97 percent and obligate the counterparties to pay
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
the Company a fixed rate of 8.875 percent. The interest rate swap contracts
mature on April 15, 2005. During the three and six month periods ended June 30,
2002, aggregate settlement gains associated with the Company's interest rate
swaps that are designated as hedges of the fair value of the Company's 8-7/8
percent senior notes due April 15, 2005, 8-1/4 percent senior notes due August
15, 2007 and 6-1/2 percent senior notes due January 15, 2008 reduced the
Company's reported interest expense by $4.0 million and $7.2 million,
respectively, as compared to aggregate settlement gains of $.4 million and $.7
million during the same respective periods of 2001. During the six months ended
June 30, 2002 and 2001, there were no ineffective changes in the fair values of
the Company's interest rate swaps.
During September 2001, the Company terminated interest rate swaps that
were designated as hedges of the fair value of the Company's 8-7/8 percent
senior notes due April 15, 2005 and 8-1/4 percent senior notes due August 15,
2007. Associated therewith, the Company recognized deferred hedge gains that
have a remaining unamortized carrying value of $12.8 million as of June 30,
2002. Amortization of these deferred hedge gains reduced the Company's reported
interest expense by $2.7 million and $5.6 million during the three and six month
periods ended June 30, 2002, respectively.
Cash flow hedges. The Company, from time to time, uses derivative
instruments as cash flow hedges of its commodity price, interest rate and
currency exchange rate risks.
Oil price hedges. All material sales contracts governing the Company's
oil production have been tied directly or indirectly to the New York Mercantile
Exchange ("NYMEX") prices. The following table sets forth the Company's
outstanding oil hedge contracts and the associated weighted average NYMEX prices
for those contracts as of June 30, 2002:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- -------------
Daily oil production:
2002 - Swap Contracts
Volume (Bbl).................. 24,000 22,000 23,000
Price per Bbl................. $ 24.03 $ 23.91 $ 23.97
2003 - Swap Contracts
Volume (Bbl).................. 18,000 18,000 18,000 18,000 18,000
Price per Bbl................. $ 24.08 $ 24.08 $ 24.13 $ 24.13 $ 24.11
2004 - Swap Contracts
Volume (Bbl).................. 12,000 12,000 12,000 12,000 12,000
Price per Bbl................. $ 22.97 $ 22.97 $ 22.97 $ 22.97 $ 22.97
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. The following table sets forth the Company's oil prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of oil price hedges to revenue:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Average price reported per Bbl................. $ 23.58 $ 24.74 $ 23.37 $ 24.89
Average price realized per Bbl................. $ 23.20 $ 25.64 $ 20.75 $ 26.17
Addition (reduction) to revenue (in millions).. $ 1.1 $ (2.8) $ 15.5 $ (8.1)
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Natural gas liquids price hedges. During the three and six month periods
ended June 30, 2002 and 2001, the Company did not enter into any NGL hedge
contracts.
Gas price hedges. The Company employs a policy of hedging a portion of
its gas production based on the index price upon which the gas is actually sold
in order to mitigate the basis risk between NYMEX prices and actual index
prices. The following table sets forth the Company's outstanding gas hedge
contracts and the associated weighted average prices for those contracts as of
June 30, 2002:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
--------- --------- ----------- ---------- -----------
Daily gas production:
2002 - Swap Contracts
Volume (Mcf).................. 140,000 140,000 140,000
Index price per MMBtu......... $ 4.00 $ 3.98 $ 3.99
2002 - Collar Contracts
Volume (Mcf).................. 103,152 120,000 111,576
Index price per MMBtu......... $2.84-$3.70 $2.79-$3.64 $2.81-$3.67
2003 - Swap Contracts
Volume (Mcf).................. 230,000 230,000 230,000 230,000 230,000
Index price per MMBtu......... $ 3.83 $ 3.83 $ 3.83 $ 3.83 $ 3.83
2004 - Swap Contracts
Volume (Mcf).................. 210,000 210,000 210,000 210,000 210,000
Index price per MMBtu......... $ 3.84 $ 3.84 $ 3.84 $ 3.84 $ 3.84
2005 - Swap Contracts
Volume (Mcf).................. 90,000 90,000 90,000 90,000 90,000
Index price per MMBtu......... $ 3.74 $ 3.74 $ 3.74 $ 3.74 $ 3.74
2006 - 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
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, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. The following table sets forth the
Company's gas prices, both reported (including hedge results) and realized
(excluding hedge results), and the net effect of settlements of gas price hedges
to revenue:
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Average price reported per Mcf................. $ 2.48 $ 3.10 $ 2.48 $ 3.80
Average price realized per Mcf................. $ 2.39 $ 3.57 $ 2.14 $ 4.33
Addition (reduction) to revenue (in millions).. $ 2.8 $ (15.5) $ 20.6 $ (33.2)
Interest rate hedges. During the three and six months ended June 30,
2002, the Company recognized settlement losses of $157 thousand and $447
thousand, respectively, associated with interest rate swap agreements that are
designated as cash flow hedges. No settlement gains or losses were recognized
associated with these interest rate swap agreements during the three and six
month periods ended June 30, 2001. The 2002 settlement losses increased the
Company's reported interest expense. These interest rate swaps matured during
the three months ended June 30, 2002. The Company recognized no ineffectiveness
associated with these interest rate swaps during their terms.
Foreign currency rate hedges. During the fourth quarter of 2001, the
Company entered into forward agreements to exchange an aggregate $24.8 million
U.S. dollars during 2002 for Canadian dollars at a weighted average exchange
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
rate of .6266 U.S. dollars for 1.0 Canadian dollar. These agreements are
designated as hedges of the exchange rate risk associated with forecasted
Canadian sales of gas under U.S. dollar denominated sales agreements. The
Company recognized settlement gains of $180 thousand and $142 thousand
associated with these forward agreements during the three and six month periods
ended June 30, 2002, which increased the Company's reported gas sales price. The
Company did not recognize any ineffectiveness associated with changes in the
fair values of these derivative instruments during the six months ended June 30,
2002.
Hedge ineffectiveness and excluded items. During the three and six month
periods ended June 30, 2002, the Company recognized increases to other expense
of $268 thousand and $346 thousand, respectively, related to the ineffective
portions of its cash flow commodity price hedges. During the three and six month
periods ended June 30, 2001, the ineffective portions of the Company's cash flow
commodity hedges decreased other expense by $1.9 million and increased other
expense by $11.5 million, respectively.
Accumulated other comprehensive income - deferred hedge gains, net.
During the twelve month period ending June 30, 2003, the Company expects to
reclassify $1.0 million of net deferred gains associated with open cash flow
hedges and $19.0 million of net deferred gains on terminated cash flow hedges
from "Accumulated other comprehensive income - deferred hedge gains, net" to oil
and gas revenue.
The following table sets forth the scheduled reclassifications of
deferred hedge gains and (losses) on terminated cash flow hedges that will be
recognized in the Company's future oil and gas revenues:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- -----------
(in thousands)
2002 gas revenue......... $ (8,645) $ (8,645) $(17,290)
2003 gas revenue......... $ 18,122 $ 18,167 $ 18,207 $ 18,050 $ 72,546
2004 gas revenue......... $ 10,826 $ 10,776 $ 10,841 $ 10,787 $ 43,230
2005 gas revenue......... $ 301 $ 305 $ 307 $ 307 $ 1,220
Non-hedge Derivatives
Btu swap agreements. The Company is a party to certain Btu swap
agreements that mature at the end of 2004. The Btu swap agreements do not
qualify for hedge accounting treatment. During the second quarter of 2001, the
Company entered into offsetting Btu swap agreements that eliminated the future
market risk associated with the agreements and fixed the Company's remaining
obligations associated with the Btu swap agreements. The Company recognized in
other revenues a $7.3 million mark-to-market gain associated with Btu swap
agreements during the second quarter of 2001. The Company recognized in other
expense a $6.6 million mark-to-market charge associated with Btu swap agreements
during the first quarter of 2001.
NOTE D. Acquisitions
Acquisitions of assets. In April 2002, the Company announced that it had
purchased through two transactions an additional 30 percent working interest in
the Falcon field development and a 25 percent working interest in associated
acreage in the deepwater Gulf of Mexico for a combined purchase price of $61.1
million including normal closing adjustments. The acquisition of five percent of
this incremental interest in the Falcon field development was completed during
March 2002. As a result of these transactions, the Company owns a 75 percent
working interest and operates the Falcon field development and related
exploration blocks.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE E. Financing Activities
Common stock offering. In April 2002, the Company completed a public
offering of 11.5 million shares of its common stock at $21.50 per share.
Associated therewith, the Company received $236.0 million of net proceeds after
the payment of issuance costs. The Company used the net proceeds from the public
offering to fund the acquisition of Falcon assets and associated acreage in the
deepwater Gulf of Mexico and to reduce outstanding borrowings under its $575
million corporate credit facility pending the closing of the West Panhandle
acquisitions that are discussed in Note J below.
Senior notes offering. In April 2002, the Company sold $150 million of
7.5 percent senior notes that will mature on April 15, 2012. The 7.5 percent
senior notes were sold at a price equal to 100 percent of their principal amount
and resulted in net proceeds to the Company, after payment of issuance costs, of
$146.6 million. The net proceeds from this offering were used to reduce
outstanding borrowings under the Company's corporate credit facility. Interest
is payable to holders of the 7.5 percent senior notes on April 15 and October 15
of each year. The first interest payment will be made on October 15, 2002 and
will consist of interest from the closing date of the offering through October
15, 2002.
Early extinguishment of 9-5/8 percent senior notes. During the three
months ended June 30, 2002, the Company repurchased and retired $20.0 million
principal amount of its 9-5/8 percent senior notes due 2010. Associated
therewith, the Company recognized an extraordinary loss of $2.8 million from the
early extinguishment of debt. See Note B for a discussion of the classification
of losses on the early extinguishment of debt after the planned adoption of SFAS
145 on January 1, 2003.
NOTE F. 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
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 $25 million, plus prejudgment interest. However,
the Company believes it has valid defenses to 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,
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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 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 lawsuit was
determined adversely to the Company. However, the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the period in which such liability is recorded, but 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 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, the
Company collected the Kansas ad valorem tax in addition to the otherwise maximum
lawful price. The FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988
that the FERC failed to provide a reasoned basis for its findings and remanded
the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various 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.
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 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 June 30,
2002, the Company has settled $9.8 million of the original claim amounts. As of
June 30, 2002 and December 31, 2001, the Company had on deposit $24.7 million
and $24.5 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 is unable at this time to predict the amount that will ultimately be
refunded, but believes the escrowed amounts, plus accrued interest, will be
sufficient to settle all claims.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE G. Income Per Share Before Extraordinary Item
Basic income per share before extraordinary item is computed by dividing
income before extraordinary item by the weighted average number of common shares
outstanding for the period. The computation of diluted income per share before
extraordinary item reflects the potential dilution that could occur if
securities or other contracts to issue common stock that are dilutive to income
before extraordinary item were exercised or converted into common stock or
resulted in the issuance of common stock.
The following table is a reconciliation of the basic and diluted income
per share before extraordinary item computations for the three and six month
periods ended June 30, 2002 and 2001:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands, except per share data)
Basic and diluted income before
extraordinary item.......................... $ 13,985 $ 28,338 $ 12,026 $ 96,257
Weighted average common shares outstanding:
Basic ..................................... 113,306 98,337 108,702 98,358
Dilutive common stock options (a)........... 1,933 1,363 1,580 1,351
-------- -------- -------- --------
Diluted..................................... 115,239 99,700 110,282 99,709
======== ======== ======== ========
Income per share before extraordinary item:
Basic ..................................... $ .13 $ .29 $ .11 $ .98
Diluted..................................... $ .12 $ .28 $ .11 $ .97
- ---------------
(a) Common stock options to purchase 1,639,032 shares and 3,189,653 shares of
common stock were outstanding but not included in the computations of
diluted income per share for the three month periods ended June 30, 2002
and 2001, respectively, and common stock options to purchase 1,971,461
shares and 2,946,318 shares of common stock were outstanding but not
included in the computations of diluted income per share for the six month
periods ended June 30, 2002 and 2001 respectively, because the exercise
prices of the options were greater than the average market price of the
common shares and would be anti-dilutive to the computations.
NOTE H. 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. Geographic operating segment income tax benefits (provisions) have
been determined based on statutory rates existing in the various tax
jurisdictions where the Company has oil and gas producing activities. The
"Headquarters and Other" table column includes revenues and expenses that are
not routinely included in the earnings measures internally reported to
management on a geographic operating segment basis.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
--------- --------- -------- --------- ------------- -----------
(in thousands)
Three months ended June 30, 2002:
Oil and gas revenue...................... $ 142,523 $ 15,051 $ 14,856 $ - $ - $ 172,430
Interest and other....................... - - - - 813 813
Gain on disposition of assets, net....... 162 (3) 1,021 - (85) 1,095
-------- ------- ------- ------- ------- ---------
142,685 15,048 15,877 - 728 174,338
-------- ------- ------- ------- ------- ---------
Production costs......................... 44,168 2,816 2,733 - - 49,717
Depletion, depreciation and
amortization.......................... 32,312 8,937 7,581 - 2,115 50,945
Exploration and abandonments............. 13,973 1,648 1,540 699 - 17,860
General and administrative............... - - - - 10,758 10,758
Interest................................. - - - - 24,741 24,741
Other.................................... - - - - 4,895 4,895
-------- ------- ------- ------- ------- ---------
90,453 13,401 11,854 699 42,509 158,916
-------- ------- ------- ------- ------- ---------
Income (loss) before income taxes and
extraordinary item.................... 52,232 1,647 4,023 (699) (41,781) 15,422
Income tax benefit (provision)........... (18,281) (577) (1,696) 245 18,872 (1,437)
-------- ------- ------- ------- ------- ---------
Income (loss) before extraordinary item.. $ 33,951 $ 1,070 $ 2,327 $ (454) $(22,909) $ 13,985
======== ======= ======= ======= ======= =========
Three months ended June 30, 2001:
Oil and gas revenue...................... $ 163,779 $ 35,918 $ 18,914 $ - $ - $ 218,611
Interest and other....................... - - - - 10,955 10,955
Gain on disposition of assets, net....... 146 - 38 - 1,288 1,472
-------- ------- ------- ------- ------- ---------
163,925 35,918 18,952 - 12,243 231,038
-------- ------- ------- ------- ------- ---------
Production costs......................... 42,412 6,062 3,500 - - 51,974
Depletion, depreciation and
amortization.......................... 31,985 14,242 7,798 - 3,371 57,396
Exploration and abandonments............. 29,060 3,873 868 12,782 - 46,583
General and administrative............... - - - - 8,005 8,005
Interest................................. - - - - 34,260 34,260
Other.................................... - - - - 1,874 1,874
-------- ------- ------- ------- ------- ---------
103,457 24,177 12,166 12,782 47,510 200,092
-------- ------- ------- ------- ------- ---------
Income (loss) before income taxes........ 60,468 11,741 6,786 (12,782) (35,267) 30,946
Income tax benefit (provision)........... (21,164) (4,109) (3,027) 4,474 21,218 (2,608)
-------- ------- ------- ------- ------- ---------
Net income (loss)........................ $ 39,304 $ 7,632 $ 3,759 $ (8,308) $(14,049) $ 28,338
======== ======= ======= ======= ======= =========
Six months ended June 30, 2002:
Oil and gas revenue...................... $ 273,984 $ 38,310 $ 25,675 $ - $ - $ 337,969
Interest and other....................... - - - - 2,006 2,006
Gain on disposition of assets, net....... 162 (3) 1,010 - (148) 1,021
-------- ------- ------- ------- ------- ---------
274,146 38,307 26,685 - 1,858 340,996
-------- ------- ------- ------- ------- ---------
Production costs......................... 89,012 6,401 5,322 - - 100,735
Depletion, depreciation and
amortization.......................... 63,986 19,036 14,045 - 4,266 101,333
Exploration and abandonments............. 27,284 3,788 3,843 4,065 - 38,980
General and administrative............... - - - - 22,676 22,676
Interest................................. - - - - 51,058 51,058
Other.................................... - - - - 13,161 13,161
-------- ------- ------- ------- ------- ---------
180,282 29,225 23,210 4,065 91,161 327,943
-------- ------- ------- ------- ------- ---------
Income (loss) before income taxes
and extraordinary item................ 93,864 9,082 3,475 (4,065) (89,303) 13,053
Income tax benefit (provision)........... (32,852) (3,179) (1,465) 1,423 35,046 (1,027)
-------- ------- ------- ------- ------- ---------
Income (loss) before extraordinary item.. $ 61,012 $ 5,903 $ 2,010 $ (2,642) $(54,257) $ 12,026
======== ======= ======= ======= ======= =========
Six months ended June 30, 2001:
Oil and gas revenue...................... $ 363,200 $ 67,520 $ 45,877 $ - $ - $ 476,597
Interest and other....................... - - - - 16,122 16,122
Gain on disposition of assets, net....... 216 - 38 - 8,511 8,765
-------- ------- ------- ------- ------- ---------
363,416 67,520 45,915 - 24,633 501,484
-------- ------- ------- ------- ------- ---------
Production costs......................... 88,680 12,617 6,479 - - 107,776
Depletion, depreciation and
amortization.......................... 61,213 26,377 14,480 - 7,487 109,557
Exploration and abandonments............. 34,275 10,483 7,481 17,227 - 69,466
General and administrative............... - - - - 18,453 18,453
Interest................................. - - - - 69,876 69,876
Other.................................... - - - - 27,091 27,091
-------- ------- ------- ------- ------- ---------
184,168 49,477 28,440 17,227 122,907 402,219
-------- ------- ------- ------- ------- ---------
Income (loss) before income taxes........ 179,248 18,043 17,475 (17,227) (98,274) 99,265
Income tax benefit (provision)........... (62,737) (6,315) (7,794) 6,029 67,809 (3,008)
-------- ------- ------- ------- ------- ---------
Net income (loss)........................ $ 116,511 $ 11,728 $ 9,681 $(11,198) $(30,465) $ 96,257
======== ======= ======= ======= ======= =========
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE I. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed certain
debt securities of the Company. In accordance with practices accepted by the
SEC, the Company has prepared Consolidating Financial Statements in order to
quantify the assets of Pioneer USA as a subsidiary guarantor. The following
Consolidating Condensed Balance Sheets, Consolidating Condensed Statements of
Operations and Comprehensive Income (Loss) and Consolidating Condensed
Statements of Cash Flows present financial information for Pioneer Natural
Resources Company as the Parent on a stand-alone basis (carrying any investments
in subsidiaries under the equity method), financial information for Pioneer USA
on a stand-alone basis (carrying any investment in non-guarantor subsidiaries
under the equity method), the non-guarantor subsidiaries of the Company on a
consolidated basis, the consolidation and elimination entries necessary to
arrive at the information for the Company on a consolidated basis, and the
financial information for the Company on a consolidated basis. Pioneer USA is
not restricted from making distributions to the Company.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of June 30, 2002
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
----------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............... $ 10 $ 13,413 $ 3,305 $ $ 16,728
Other current assets.................... 1,509,101 (1,308,149) (81,672) 119,280
---------- ---------- --------- ----------
Total current assets............... 1,509,111 (1,294,736) (78,367) 136,008
---------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................... - 2,900,088 1,074,974 3,975,062
Unproved properties.................. - 30,684 163,904 194,588
Accumulated depletion, depreciation
and amortization....................... - (876,776) (319,396) (1,196,172)
---------- --------- --------- ----------
- 2,053,996 919,482 2,973,478
---------- --------- -------- ----------
Deferred income taxes..................... 78,711 - 1,584 80,295
Other property and equipment, net......... - 17,458 3,677 21,135
Other assets, net......................... 20,879 31,931 15,082 67,892
Investment in subsidiaries................ 1,202,809 94,367 - (1,297,176) -
---------- ---------- --------- ----------
$ 2,811,510 $ 903,016 $ 861,458 $ 3,278,808
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................... $ 30,372 $ 176,563 $ 17,781 $ $ 224,716
Long-term debt............................ 1,461,794 - - 1,461,794
Other noncurrent liabilities.............. 4,485 138,423 22,596 165,504
Deferred income taxes..................... - - 4,900 4,900
Stockholders' equity...................... 1,314,859 588,030 816,181 (1,297,176) 1,421,894
Commitments and contingencies.............
---------- ---------- --------- ----------
$ 2,811,510 $ 903,016 $ 861,458 $ 3,278,808
========== ========== ========= ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2001
(in thousands)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
----------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............... $ 79 $ 10,900 $ 3,355 $ $ 14,334
Other current assets.................... 1,540,985 (1,125,968) (173,708) 241,309
---------- ---------- --------- ----------
Total current assets............... 1,541,064 (1,115,068) (170,353) 255,643
---------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................... - 2,688,962 1,002,821 3,691,783
Unproved properties.................. - 25,222 162,563 187,785
Accumulated depletion, depreciation
and amortization...................... - (815,323) (279,987) (1,095,310)
--------- ---------- --------- ----------
- 1,898,861 885,397 2,784,258
--------- ---------- --------- ----------
Deferred income taxes..................... 82,811 - 1,508 84,319
Other property and equipment, net......... - 17,881 3,679 21,560
Other assets, net......................... 15,911 81,356 28,006 125,273
Investment in subsidiaries................ 1,060,457 87,636 - (1,148,093) -
---------- ---------- --------- ----------
$ 2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................... $ 30,745 $ 176,442 $ 21,022 $ $ 228,209
Long-term debt............................ 1,577,304 - - 1,577,304
Other noncurrent liabilities.............. 19,582 124,552 22,249 166,383
Deferred income taxes..................... - - 13,768 13,768
Stockholders' equity...................... 1,072,612 669,672 691,198 (1,148,093) 1,285,389
Commitments and contingencies.............
---------- --------- --------- ----------
$ 2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========== ========= ========= ==========
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------ ------------ ------------ ---------
Revenues:
Oil and gas........................... $ - $ 263,499 $ 74,470 $ - $ $ 337,969
Interest and other.................... - 1,077 929 - 2,006
Gain on disposition of assets, net.... - 54 967 - 1,021
-------- -------- ------- -------- --------
- 264,630 76,366 - 340,996
-------- -------- ------- -------- --------
Costs and expenses:
Oil and gas production................ - 88,381 12,354 - 100,735
Depletion, depreciation and
amortization........................ - 65,454 35,879 - 101,333
Exploration and abandonments.......... - 28,303 10,677 - 38,980
General and administrative............ 602 17,868 4,206 - 22,676
Interest.............................. 43,345 7,542 171 - 51,058
Equity income from subsidiaries....... (22,501) (3,674) - - 26,175 -
Other................................. (33,472) 34,517 12,116 - 13,161
-------- -------- ------- -------- --------
(12,026) 238,391 75,403 - 327,943
-------- -------- ------- -------- --------
Income before income taxes............... 12,026 26,239 963 - 13,053
Income tax provision..................... - - (1,027) (1,027)
-------- -------- ------- -------- --------
Income (loss) before extraordinary item.. 12,026 26,239 (64) 12,026
Extraordinary item - loss on early
extinguishment of debt................ (2,843) - - - (2,843)
-------- -------- ------- -------- --------
Net income (loss)........................ 9,183 26,239 (64) - 9,183
Other comprehensive income (loss):
Deferred hedge gains and losses:
Unrealized hedge losses............. (181) (77,579) (11,331) - (89,091)
Net gains included in net income.... 262 (30,300) (5,760) - (35,798)
Cumulative translation adjustment... - - 8,742 - 8,742
Deferred compensation:
Compensation deferred.............. (456) - - - (456)
Deferred compensation included in
net income....................... 34 - - - 34
-------- -------- -------- -------- --------
Comprehensive income (loss).............. $ 8,842 $ (81,640) $ (8,413) $ - $(107,386)
======== ========= ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2001
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------ ------------ ------------ ---------
Revenues:
Oil and gas........................... $ - $ 351,037 $125,560 $ - $ $ 476,597
Interest and other.................... - 12,960 3,162 - 16,122
Gain on disposition of assets, net.... - 8,719 46 - 8,765
-------- -------- ------- -------- --------
- 372,716 128,768 - 501,484
-------- -------- ------- -------- --------
Costs and expenses:
Oil and gas production................ - 87,876 19,900 - 107,776
Depletion, depreciation and
amortization........................ - 65,283 44,274 - 109,557
Exploration and abandonments.......... - 35,189 34,277 - 69,466
General and administrative............ 417 12,537 5,499 - 18,453
Interest.............................. (15,668) 59,298 26,246 - 69,876
Equity (income) loss from
subsidiaries........................ (81,018) 8,375 - - 72,643 -
Other................................. - 7,203 19,888 - 27,091
-------- -------- ------- -------- --------
(96,269) 275,761 150,084 - 402,219
-------- -------- ------- -------- --------
Income (loss) before income taxes........ 96,269 96,955 (21,316) - 99,265
Income tax provision..................... - (783) (2,212) (13) (3,008)
-------- -------- ------- -------- --------
Net income (loss)........................ 96,269 96,172 (23,528) (13) 96,257
Other comprehensive income (loss):
Deferred hedge gains and losses:
Transition adjustment............... - (172,007) (25,437) - (197,444)
Unrealized hedge gains (losses)..... (59) 186,271 8,752 - 194,964
Net losses included in net income... - 35,441 16,414 - 51,855
Gains and losses on available for
sale securities:
Unrealized holding gains and losses. - (45) - - (45)
Gains included in net income........ - (8,109) - - (8,109)
Cumulative translation adjustment...... - - (1,755) - (1,755)
-------- -------- ------- --------- --------
Comprehensive income (loss).............. $ 96,210 $ 137,723 $(25,554) $ (13) $ 135,723
======== ======== ======= ========= ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
----------- --------- ------------ ---------
Cash flows from operating activities:
Net cash provided by (used in) operating activities... $ (110,071) $ 185,900 $ 64,771 $ 140,600
--------- -------- ------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................... - 57,791 1,145 58,936
Additions to oil and gas properties................... - (198,066) (65,227) (263,293)
Other property additions, net......................... - (6,830) 970 (5,860)
--------- -------- ------- --------
Net cash used in investing activities............... - (147,105) (63,112) (210,217)
--------- -------- ------- --------
Cash flows from financing activities:
Borrowings under long-term debt....................... 255,876 - - 255,876
Principal payments on long-term debt.................. (386,326) - - (386,326)
Issuance of common stock.............................. 236,004 - - 236,004
Payment of noncurrent liabilities..................... - (36,282) (279) (36,561)
Exercise of long-term incentive plan stock options.... 7,606 - - 7,606
Deferred debt issuance costs.......................... (3,158) - - (3,158)
--------- -------- ------- --------
Net cash provided by (used in) financing activities. 110,002 (36,282) (279) 73,441
--------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents..... (69) 2,513 1,380 3,824
Effect of exchange rate changes on cash and
cash equivalents....................................... - - (1,430) (1,430)
Cash and cash equivalents, beginning of period........... 79 10,900 3,355 14,334
--------- -------- ------- --------
Cash and cash equivalents, end of period................. $ 10 $ 13,413 $ 3,305 $ 16,728
========= ======== ======= ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2001
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
----------- --------- ------------ ---------
Cash flows from operating activities:
Net cash provided by operating activities............. $ 16,662 $ 159,009 $ 91,394 $ 267,065
--------- -------- ------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................... - 14,859 336 15,195
Additions to oil and gas properties................... - (146,033) (92,691) (238,724)
Other property additions, net......................... - (3,872) (89) (3,961)
--------- -------- ------- --------
Net cash used in investing activities............... - (135,046) (92,444) (227,490)
--------- -------- ------- --------
Cash flows from financing activities:
Borrowings under long-term debt....................... 109,175 - - 109,175
Principal payments on long-term debt.................. (124,175) - - (124,175)
Payment of noncurrent liabilities..................... - (31,601) 862 (30,739)
Exercise of long-term incentive plan stock options.... 5,444 - - 5,444
Purchase of treasury stock............................ (7,070) - - (7,070)
--------- -------- ------- --------
Net cash provided by (used in) financing activities. (16,626) (31,601) 862 (47,365)
--------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents..... 36 (7,638) (188) (7,790)
Effect of exchange rate changes on cash
and cash equivalents................................... - - (142) (142)
Cash and cash equivalents, beginning of period........... 15 18,387 7,757 26,159
--------- -------- ------- --------
Cash and cash equivalents, end of period................. $ 51 $ 10,749 $ 7,427 $ 18,227
========= ======== ======= ========
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE J. Subsequent Events
In July 2002, the Company completed the purchase of the remaining 23
percent of the rights that the Company did not already own in its core area West
Panhandle gas field, 100 percent of the West Panhandle reserves attributable to
field fuel, 100 percent of the related West Panhandle field gathering system and
ten blocks surrounding the Company's deepwater Gulf of Mexico Falcon discovery.
The total purchase price for these transactions was $138 million before normal
closing adjustments.
21
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
("Pioneer" or the "Company"), are subject to a number of risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from the forward-looking statements. These risks and uncertainties
include, among other things, volatility of oil and gas prices, product supply
and demand, competition, government regulation or action, foreign currency
valuation changes, foreign government tax and regulation changes, foreign
operations and associated foreign political and economic instability,
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 and environmental risks.
These and other risks are described in the Company's 2001 Annual Report on Form
10-K that is available from the United States Securities and Exchange Commission
("SEC").
Financial and Operating Performance
During the three and six month periods ended June 30, 2002, as compared
to the same respective periods in 2001, commodity price declines and continued
weakening of the Argentine peso negatively impacted the Company's financial and
operating results. The Company reported net income of $11.1 million ($.10 per
share) and $9.2 million (.08 per share) for the three and six month periods
ended June 30, 2002, as compared to net income of $28.3 million ($.28 per
diluted share) and $96.3 million ($.97 per diluted share) for the same
respective periods in 2001. During the three and six month periods ended June
30, 2002, the Company recorded gains of $1.1 million and $1.0 million,
respectively, from asset divestitures; a $2.8 million extraordinary loss on the
early extinguishment of debt; and, noncash charges of $2.5 million and $7.9
million, respectively, for the remeasurement of Argentine peso-denominated net
monetary assets. During the three months ended June 30, 2001, earnings were
positively impacted by favorable commodity prices, a $9.3 million mark-to-market
gain primarily related to derivatives not treated as hedges and a $1.5 million
gain on the disposition of assets. During the six months ended June 30, 2001,
earnings were positively impacted by favorable commodity prices, an $8.8 million
gain on the disposition of assets and a $.5 million mark-to-market gain
primarily related to derivatives not treated as hedges.
The Company's net cash provided by operating activities was $90.6 million
and $140.6 million during the three and six month periods ended June 30, 2002,
respectively, as compared to net cash provided by operating activities of $135.3
million and $267.1 million during the three and six month periods ended June 30,
2001, respectively. The decrease in net cash provided by operating activities is
primarily due to declines in commodity prices and slightly lower production
volumes. During the three and six month periods ended June 30, 2002, the Company
used its net cash provided by operating activities, together with proceeds from
asset divestitures and a portion of the proceeds from the April 2002 sale of
11.5 million new shares of the Company's common stock (the "Stock Offering"), to
fund additions to oil and gas properties.
The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Company's total book capitalization at June 30, 2002
was $2.9 billion, consisting of total debt of $1.5 billion and stockholders'
equity of $1.4 billion. Debt as a percentage of total book capitalization was 51
percent at June 30, 2002, as compared to 55 percent at December 31, 2001. The
improvement of the Company's ratio of debt to total book capitalization during
the six months ended June 30, 2002 is primarily due to $236.0 million of net
proceeds from the Stock Offering, partially offset by an $89.1 million reduction
in the fair value of the Company's cash flow hedge derivatives which are
recorded in the "Accumulated other comprehensive income - deferred hedge gains,
net" component of stockholders' equity.
22
Recent Activities
During the second quarter of 2002, the Company announced the following
transactions:
o the purchase through two transactions of an additional 30 percent
working interest in the Falcon field development and a 25 percent
working interest in associated acreage in the deepwater Gulf of
Mexico for a combined purchase price of $61.1 million including
normal closing adjustments. As a result of these transactions, the
Company owns a 75 percent working interest in, and operates, the
Falcon field development and related exploration blocks. These
acquisitions were completed in April 2002;
o agreements to purchase the remaining 23 percent of the rights that
the Company did not already own in its core area West Panhandle gas
field, 100 percent of the West Panhandle reserves attributable to
field fuel, 100 percent of the related West Panhandle field
gathering system and ten blocks surrounding the Falcon discovery.
The total purchase price for these transactions was $138 million
before normal closing adjustments. These transactions were
completed during July 2002;
o the completion during April 2002 of the Stock Offering, which
resulted in net proceeds to the Company of $236.0 million; and,
o the completion during April 2002 of a public offering of $150
million of 7.5 percent senior notes that will mature on April 15,
2012 (the "Debt Offering"). The Company realized net proceeds,
after payment of issuance costs, of $146.8 million from the Debt
Offering.
Through these transactions, the Company has increased its ownership in
and control over certain of its core assets and significantly improved its
financial flexibility and ratio of debt to total book capitalization.
Drilling Highlights
During the first six months of 2002, the Company continued progress on
its development projects at Canyon Express, Devils Tower and Falcon in the
deepwater Gulf of Mexico and Sable in South Africa and successfully extended the
oil accumulation previously established by the Olowi Marin-1 discovery well in
the shallow water offshore Gabon. In total, the Company's costs incurred for the
first half of 2002 totaled $315.9 million and included $180.0 million for
development activities, $70.2 million for exploration activities and $65.7
million for acquisitions. The majority of the Company's capital expenditures was
incurred on drilling wells and fabricating infrastructure for the Company's
significant development projects. The following tables summarize the Company's
development drilling and exploration and extension drilling activities for the
six months ended June 30, 2002:
23
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
---------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------------ ------------ ------------ ------------
Gulf of Mexico/Gulf Coast..... 3 6 8 - 1
Permian Basin................. 17 39 52 1 3
Mid-Continent................. 1 13 11 - 3
------ ------ ------ ------ ------
Total Domestic........... 21 58 71 1 7
------ ------ ------ ------ ------
Argentina..................... 1 - - - 1
South Africa.................. - 2 2 - -
Canada........................ 5 12 13 3 1
------ ------ ------ ------ ------
Total Worldwide.......... 27 72 86 4 9
====== ====== ====== ====== ======
Exploration/Extension Drilling
---------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------------ ------------ ------------ ------------
Gulf of Mexico/Gulf Coast.... 3 4 4 1 2
------ ------ ------ ------ ------
Total Domestic.......... 3 4 4 1 2
------ ------ ------ ------ ------
Argentina.................... 3 - - - 3
Canada....................... 1 12 8 3 2
Gabon........................ - 3 2 - 1
------ ------ ------ ------ ------
Total Worldwide......... 7 19 14 4 8
====== ====== ====== ====== ======
Domestic. The Company incurred capital costs of $243.3 million during the
first six months of 2002 on acquisition, drilling and seismic activities in the
Gulf Coast, 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 incurred $227.8 million of acquisition, drilling and seismic costs
primarily in the deepwater Gulf of Mexico, the Gulf of Mexico shelf, the Pawnee
field in South Texas and in an exploration play in North Louisiana.
In the deepwater Gulf of Mexico, the Company has three major development
projects that remain in progress as of June 30, 2002:
o Canyon Express - The Company incurred capital costs of $80.3
million during the first half of 2002 at the TotalFinaElf-operated
Aconcagua and the Marathon-operated Camden Hills discoveries in
Mississippi Canyon that are being jointly developed as part of the
Canyon Express gas project. The Canyon Station platform is in
place, four of six producing wells have been completed on our two
blocks and the last of the pipeline is being laid. First production
is anticipated near the end of September 2002 at approximately 110
MMcf of gas per day and 180 Bbls of condensate per day net to the
Company's 37.5 percent working interest in Aconcagua and 33 percent
working interest in Camden Hills.
o Devils Tower - At the Dominion-operated Devils Tower development
project in Mississippi Canyon, the Company incurred capital costs
of $15.1 million during the first half of 2002 to finish drilling
three wells that were in progress at year end and to drill two
additional development wells. The Company has drilled eight wells
to date which will fill all eight slots on the spar. Construction
of the spar is approximately 50 percent completed. The Company
anticipates first production during the second quarter of 2003. The
Company plans to bring on wells sequentially with peak production
expected to exceed 15,000 BOEs per day net to the Company's 25
percent working interest by the end of 2003. The Company also spud
24
PIONEER NATURAL RESOURCES COMPANY
its Triton prospect on a block adjacent to Devils Tower during the
second quarter of 2002, which was still in progress as of June 30,
2002. Subsequent to quarter end, the Company announced that this
well encountered 80 feet of net pay in two intervals that are
stratigraphically equivalent to Devils Tower, but are structurally
separated. The Company believes that the Triton discovery is
commercially viable for a three-mile subsea tieback to the spar
being constructed for the Devils Tower development. In addition,
Dominion and the Company were the high bidder on another adjacent
Mississippi Canyon block at the most recent lease sale where the
Company has identified its Goldfinger prospect that, if successful,
could also be brought on production via a subsea tieback to Devils
Tower.
o Falcon - As previously discussed, the Company now has a 75 percent
working interest in the Falcon project and 24 surrounding
exploration blocks and became the operator of these projects in
April 2002. The Company incurred capital costs of $15.3 million,
in addition to the $61.1 million of acquisition costs discussed
above, on the Falcon project during the first half of 2002. Two
development wells are planned for Falcon during 2002 that will be
subsea tiebacks flowing to a production platform owned and operated
by El Paso Energy Partners, L.P. 10 miles away on the shelf. The
flowlines and umbilicals are being fabricated as well as the
production platform and related facilities. All work is on schedule
with initial production anticipated during the second quarter of
2003 at expected rates of 130 MMcf of gas per day and 350 Bbls of
condensate per day net to the Company's 75 percent working
interest.
In addition to the development projects described above in the deepwater
Gulf of Mexico, the Company drilled two appraisal sidetrack wells on the
Marathon-operated Ozona Deep discovery during the second quarter of 2002, where
the Company holds a 32 percent working interest. The first appraisal sidetrack
was drilled approximately 2,000 feet east of the initial discovery well and
encountered salt at the expected reservoir location. This well was abandoned and
charged to expense. The second appraisal sidetrack, drilled approximately 1,000
feet southeast of the original discovery, was successful and found over 200 feet
of net pay in three intervals. The Company is currently evaluating these results
and considering options for development of the field. In the deepwater Gulf of
Mexico, the Company also has plans to drill three prospects near its Falcon
project during the remainder of 2002 and early 2003.
On the Gulf of Mexico shelf, the Company is a participant in three
significant development projects:
o Stirrup - The Spinnaker-operated Stirrup project in Mustang Island
began production in early April 2002 at initial rates of 2.3 MMcf
of gas and 12 Bbls of condensate per day net to the Company's 25
percent working interest. Three wells have been drilled with one
being completed and put on production. Production on the initial
well has declined substantially faster than originally anticipated.
Spinnaker and the Company are currently evaluating the initial
well's performance. The Stirrup #2 well has been suspended pending
further results from the Stirrup #1 well. Recent completion
attempts at the Stirrup #3 well have proven unsuccessful after
lengthy mechanical delays between well stimulation and flow-back.
The Company, together with other partners in the Stirrup project,
is continuing to evaluate the Stirrup #3 well. If it is determined
that further attempts at completion are unwarranted and that the
well should be plugged and abandoned, the Company will record an
associated dry hole charge of approximately $5 million during the
third quarter of 2002. The Company has a 25 percent working
interest in this project.
o Oneida - The Aviara-operated Oneida project in East Cameron has an
estimated initial production date of August 2002 and is being
developed with a tripod platform. Initial production rates from
this prospect are anticipated to be 1.1 MMcf of gas and 10 Bbls of
condensate per day net to the Company's 13.7 percent working
interest. Once production begins, well performance will be
evaluated and the Company will determine if a second well will be
drilled in 2003.
25
PIONEER NATURAL RESOURCES COMPANY
o Cyrus - The ChevronTexaco-operated Cyrus project in High Island is
on schedule to begin production during August 2002. The Company
anticipates initial production from this project to approximate 2.3
MMcf of gas and 340 Bbls of condensate per day net to the Company's
5.7 percent working interest.
Other activities on the Gulf of Mexico shelf during 2002 will be
concentrated on evaluating the developed properties in the Company's inventory
to determine if there are any untapped zones in existing wellbores. In addition,
the Company is seeking partners in a twelve prospect drilling program over the
next 18 months that could begin late in the third quarter of 2002. No assurances
can be given that the Company will secure partners for this drilling program or
that the program will proceed as planned.
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 wells were successfully drilled during the first half of 2002 with one
additional well in progress as of June 30, 2002. In addition, the Company
drilled its first exploration well in its recently acquired acreage in North
Louisiana. Post-drilling evaluations are underway with results expected during
the third quarter of 2002.
Permian Basin area. In the Permian Basin area, the Company incurred $7.6
million of capital costs during the first six months of 2002 primarily on
development drilling in the Spraberry oil trend. The Company plans to drill 50
wells during the remainder of 2002.
Mid-Continent area. In the Mid-Continent area, the Company incurred $7.9
million of capital costs during the first six months of 2002. As previously
discussed, subsequent to quarter end, the Company closed the acquisition to
purchase the remaining West Panhandle assets that it did not already own. The
acquisition will greatly enhance the economics of future drilling, offer the
Company greater flexibility and provide operational efficiencies in the field.
The acquisition, along with the recent increase in gas prices and the favorable
long-term outlook for gas prices in the United States, has caused the Company to
increase its drilling program to 40 wells this year.
Argentina. In Argentina, the Company incurred $12.9 million of
acquisition, drilling and seismic costs during the first six months of 2002. The
majority of costs was associated with the construction of the Company's Loma
Negra gas plant and on seismic activities that were in progress at December 31,
2001. Other significant capital projects during the first half of 2002 were
suspended due to the economic instability in Argentina. However, subsequent to
quarter end, the Company resumed oil drilling activities in Argentina as a
result of improved oil prices, reductions in drilling costs and lease operating
expenses and the improving economic stability within the oil industry (see
"Argentina Update", below).
Canada. In Canada, the Company incurred $24.2 million of acquisition,
drilling and seismic costs during the first six months of 2002, primarily in the
Chinchaga, North Chinchaga and Martin Creek areas that are only accessible for
drilling during the winter months. The Company completed 21 wells in Canada
during the 2002 winter drilling season. Capital dollars for the remainder of the
year will be spent primarily in preparation for next winter's drilling campaign.
Africa. In Africa, the Company incurred $35.5 million of acquisition,
drilling and seismic costs during the first six months of 2002 in South Africa,
Gabon and Tunisia.
South Africa. In South Africa, the Company incurred $15.8 million of
capital costs on the development of its Sable field that is expected to begin
production during December 2002 or January 2003. Development drilling is
continuing, floating production facility upgrades are in progress and subsea
trees have been manufactured. Production for the first year is expected to
average approximately 12,000 Bbls of oil per day net to the Company's 40 percent
working interest. The Company is also evaluating its recently acquired seismic
data and anticipates spudding two exploration wells during the fourth quarter of
2002 and first quarter of 2003.
26
PIONEER NATURAL RESOURCES COMPANY
Gabon. In Gabon, the Company incurred $15.0 million of capital costs
drilling three appraisal wells that successfully extended the oil accumulation
previously established by the Olowi Marin-1 discovery. The Company plans to take
the information obtained from the four wells drilled to date and complete plans
for potential initial development by year end. The Company also plans to spend
the remaining portion of 2002 processing and interpreting seismic data on other
areas of the oil rim in preparation for drilling additional extension wells in
2003.
Tunisia. In Tunisia, the Company incurred $4.7 million of capital costs
during the first six months of 2002 on shooting 3-D seismic data on its blocks
located in Tunisia, as well as acquiring a 40% non-operated interest in a fourth
permit in Tunisia. Plans for the remainder of 2002 include analyzing the seismic
data acquired and drilling two to three wells targeting the Silurian and TAGI
sand prospects.
Argentina Update
The Company continues to monitor the political and economic environment
in Argentina. During 2002, the Argentine government has continued to implement
reforms that are intended to stabilize the economy, including the imposition of
a 20 percent tax on oil exports effective March 1, 2002. The Company's oil and
gas revenues will be reduced as a result of the Argentine peso devaluation and
recent export tax; however, the reduction will be mitigated by decreases in the
costs of Argentine operations and administration as a result of the peso
devaluation. During the second quarter of 2002, the Company had 5.5 million of
peso deposits frozen in accounts at the Company's then local Argentine bank when
the Central Bank of Argentina suspended the bank's operations. Subsequent to
June 30, 2002, the Company exchanged the peso deposits into 10-year U.S. dollar
denominated Argentine bonds at an exchange rate of 1.4 pesos to $1.
The continuing devaluation of the Argentine peso resulted in noncash
charges to other expense of $2.5 million and $7.9 million during the three and
six month periods ended June 30, 2002. These charges reflect the remeasurement
of the peso-denominated monetary assets and liabilities of the Company's
Argentine subsidiaries, based on an exchange rate of 3.8 pesos to $1 as of June
30, 2002 and 3.0 pesos to $1 as of March 31, 2002. Once the exchange rate of
Argentine pesos to U.S. dollars stabilizes, the effect of future remeasurement
assessments should be minimal.
New Accounting Pronouncement
During April 2002, the Financial Accounting Standards Board issued
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 the adoption of the provisions of SFAS 145,
generally accepted accounting principles ("GAAP") required gains or losses on
the early extinguishment of debt be classified in a company's periodic
consolidated statements of operations as extraordinary gains or losses, net of
associated income taxes, below the determination of income or loss from
continuing operations. SFAS 145 changes GAAP to require, except in the case of
events or transactions of a highly unusual and infrequent nature, gains or
losses from the early extinguishment of debt be classified as components of a
company's income or loss from continuing operations. The Company will adopt the
provisions of SFAS 145 on January 1, 2003. The adoption of the provisions of
SFAS 145 is not expected to affect the Company's future financial position or
liquidity. When the Company adopts the provisions of SFAS 145, gains or losses
from the early extinguishment of debt recognized in the Company's consolidated
statements of operations for prior years will be reclassified to other revenues
or other expense and included in the determination of the income (loss) from
continuing operations of those periods.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $172.4
million and $338.0 million for the three and six month periods ended June
30, 2002, respectively, compared to $218.6 million and $476.6 million for the
same respective periods in 2001. The decline in revenues is attributable to
declines in commodity prices and slightly lower production volumes.
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 six month
periods ended June 30, 2002 and 2001:
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
Production:
Oil (MBbls)......................... 2,806 3,138 5,915 6,300
NGLs (MBbls)........................ 1,981 1,961 3,920 3,799
Gas (MMcf).......................... 31,166 33,316 60,662 63,258
Total (MBOE)........................ 9,983 10,651 19,946 20,462
Average daily production:
Oil (Bbls).......................... 30,840 34,482 32,680 34,809
NGLs (Bbls)......................... 21,776 21,546 21,658 20,989
Gas (Mcf)........................... 342,478 366,116 335,148 349,493
Total (BOE)......................... 109,696 117,047 110,196 114,047
Average reported prices:
Oil (per Bbl):
United States..................... $ 24.54 $ 24.39 $ 24.40 $ 24.82
Argentina......................... $ 19.74 $ 25.68 $ 20.28 $ 25.14
Canada............................ $ 20.08 $ 23.88 $ 18.94 $ 23.85
Worldwide......................... $ 23.58 $ 24.74 $ 23.37 $ 24.89
NGLs (per Bbl):
United States..................... $ 14.20 $ 18.78 $ 12.47 $ 20.59
Argentina......................... $ 17.64 $ 22.60 $ 13.32 $ 24.70
Canada............................ $ 20.37 $ 27.34 $ 16.47 $ 25.86
Worldwide......................... $ 14.58 $ 19.29 $ 12.68 $ 20.94
Gas (per Mcf):
United States..................... $ 3.23 $ 3.93 $ 3.14 $ 4.75
Argentina......................... $ .44 $ 1.34 $ .54 $ 1.30
Canada............................ $ 2.64 $ 3.03 $ 2.47 $ 4.29
Worldwide......................... $ 2.48 $ 3.10 $ 2.48 $ 3.80
On a BOE basis, the Company's worldwide average daily production declined
by six percent and three percent during the three and six month periods ended
June 30, 2002, respectively, as compared to the same periods in 2001. Per BOE
average daily production during the first half of 2002, as compared to that of
the first half of 2001, increased by one percent in the United States, while
production in Argentina and Canada decreased by 17 percent and five percent,
respectively. Production volumes in Argentina declined primarily due to reduced
gas demand and the Company's curtailment of drilling activities during the first
half of 2002, as the Company monitored developing political and economic
reforms. During the third quarter of 2002, the Company resumed oil drilling
activities in Argentina (see "Drilling Highlights" above). The Canada volume
decrease is attributable to the sale of the Rycroft/Spirit River field in
December 2001.
Third quarter 2002 production volumes are expected to average 112 to 118
BOE per day. Gas production is expected to rise as a result of increased demand
in Argentina during their winter season and the purchase of additional interest
in the West Panhandle field on July 1, 2002 (see "Recent Activities" above).
Comparing the second quarter of 2002 to the same period in 2001, the
Company's average worldwide oil price decreased five percent; the Company's
average worldwide NGL price decreased 24 percent; and the Company's average
worldwide gas price decreased 20 percent. Comparing the first six months of 2002
to the same period in 2001, the Company's average worldwide oil price decreased
by six percent; the Company's average worldwide NGL price decreased by 39
percent; and the Company's average worldwide gas price decreased by 35 percent.
28
PIONEER NATURAL RESOURCES COMPANY
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
derivative instruments (swaps and collar contracts) in order to (i) reduce the
effect of the volatility of price changes on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects. During the three and six month periods ended June 30,
2002, the Company's commodity price hedges increased oil and gas revenues by
$3.9 million and $36.1 million, respectively, as compared to $18.3 million and
$41.3 million of commodity price hedge losses during the same respective periods
of 2001. See Note C 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 six month periods ended June 30, 2002
and 2001.
During July 2002, the Company entered into additional oil price swap
contracts to hedge 7,734 Bbls per day of 2003 oil production at an average per
Bbl fixed price of $25.07.
Interest and other revenues. Interest and other revenues during the three
and six month periods ended June 30, 2002 totaled $.8 million and $2.0 million,
respectively, as compared to $11.0 million and $16.1 million during the same
respective periods of 2001. Other revenue of $7.3 million, representing an
increase in the fair value of non-hedge derivative instruments, is the largest
component of the Company's interest and other revenues during the three and six
month periods ended June 30, 2001.
Gain (loss) on disposition of assets. During the three and six months
ended June 30, 2002, the Company recorded $1.1 million and $1.0 million,
respectively, of net gains on the disposition of assets, as compared to gains of
$1.5 million and $8.8 million, respectively, during the same period in 2001. The
gains recognized during the first half of 2001 are primarily comprised of an
$8.1 million gain from the sale of shares of a non-affiliated entity's common
stock.
Production costs. During the three and six month periods ended June 30,
2002, total production costs per BOE averaged $4.98 and $5.05, respectively,
representing an increase of $.10 per BOE (two percent), as compared to
production costs per BOE during the first quarter of 2001, and a decrease of
$.14 per BOE (three percent) as compared to production costs per BOE during the
first half of 2001. 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 June 30, 2002, as compared to the second quarter
of 2001, is reflective of increases in lease operating expenses, ad valorem
taxes and workover costs, partially offset by decreases in production taxes and
field fuel expenses. The decrease in production costs per BOE during the six
months ended June 30, 2002, as compared to the first half of 2001, is reflective
of decreases in production taxes and field fuel expenses partially offset by
increases in lease operating expenses, ad valorem taxes and workover costs.
Lease operating expenses, on a per BOE basis, have increased during 2002
primarily due to decreases in the third party gas processing and treating income
component of lease operating expenses, which are directly related to gas prices.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- --------
(per BOE)
Lease operating expense............... $ 2.87 $ 2.58 $ 3.08 $ 2.47
Taxes:
Production......................... .63 .76 .56 .92
Ad valorem......................... .55 .48 .55 .44
Field fuel expenses................... .65 .90 .57 1.21
Workover costs........................ .28 .16 .29 .18
------ ------ ------ ------
Total production costs.......... $ 4.98 $ 4.88 $ 5.05 $ 5.22
====== ====== ====== ======
29
PIONEER NATURAL RESOURCES COMPANY
Based on market-quoted commodity prices in late July 2002, the Company
expects third quarter 2002 production costs to average $4.90 to $5.10 per BOE.
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $5.10 and $5.08
during the three and six month periods ended June 30, 2002, respectively, as
compared to $5.39 and $5.31 during the three and six month periods ended June
30, 2001. Depletion expense per BOE, the largest component of depletion,
depreciation and amortization, was $4.89 and $4.87 per BOE during the three and
six month periods ended June 30, 2002, respectively, as compared to $5.07 and
$4.94 per BOE during the same periods in 2001.
The Company expects third quarter 2002 depletion, depreciation and
amortization expense to average $5.00 to $5.20 per BOE.
Exploration and abandonments/geological and geophysical costs.
Exploration and abandonments/geological and geophysical costs were $17.9 million
and $39.0 million during the three and six month periods ended June 30, 2002,
respectively, as compared to $46.6 million and $69.5 million during the same
respective periods in 2001. During the six months ended June 30, 2002, the
Company's exploratory dry holes in the United States are primarily comprised of
the Turnberry exploratory well that was drilled in the Gulf of Mexico and was
determined to be noncommercial and the first Ozona Deep appraisal sidetrack
which was unsuccessful during the second quarter of 2002.
The following table provides the Company's geological and geophysical
costs, exploratory dry hole expense, lease abandonments expense and other
exploration expense by country for the three and six month periods ended June
30, 2002 and 2001:
United Other
States Argentina Canada Foreign Total
------- --------- -------- ---------- ----------
(in thousands)
Three months ended June 30, 2002:
Geological and geophysical costs...... $ 6,002 $ 1,645 $ 1,364 $ 521 $ 9,532
Exploratory dry holes................. 6,844 - 31 178 7,053
Leasehold abandonments and other...... 1,127 3 145 - 1,275
------ ------ ------- ------ -------
$13,973 $ 1,648 $ 1,540 $ 699 $ 17,860
====== ====== ======= ====== =======
Three months ended June 30, 2001:
Geological and geophysical costs...... $ 9,777 $ 802 $ 272 $ 5,163 $ 16,014
Exploratory dry holes................. 18,121 1,550 401 7,619 27,691
Leasehold abandonments and other...... 1,162 1,521 195 - 2,878
------ ------ ------- ------ -------
$29,060 $ 3,873 $ 868 $12,782 $ 46,583
====== ====== ======= ====== =======
Six months ended June 30, 2002:
Geological and geophysical costs...... $10,302 $ 3,215 $ 2,367 $ 3,853 $ 19,737
Exploratory dry holes................. 14,684 399 1,190 204 16,477
Leasehold abandonments and other...... 2,298 174 286 8 2,766
------ ------ ------- ------ -------
$27,284 $ 3,788 $ 3,843 $ 4,065 $ 38,980
====== ====== ======= ====== =======
Six months ended June 30, 2001:
Geological and geophysical costs...... $13,801 $ 1,456 $ 499 $ 8,778 $ 24,534
Exploratory dry holes................. 18,279 2,132 5,355 8,441 34,207
Leasehold abandonments and other...... 2,195 6,895 1,627 8 10,725
------ ------ ------- ------ -------
$34,275 $10,483 $ 7,481 $17,227 $ 69,466
====== ====== ======= ====== =======
30
PIONEER NATURAL RESOURCES COMPANY
The Company expects third quarter 2002 exploration and abandonment
expense to be $15 million to $30 million, dependent largely on exploratory
drilling results.
General and administrative expenses. General and administrative expenses
for the three and six month periods ended June 30, 2002 were $10.8 million and
$22.7 million, respectively, as compared to $8.0 million and $18.5 million
during the same respective periods in 2001. The $2.8 million and $4.2 million
increases in general and administrative expenses during the respective three and
six month periods ended June 30, 2002, as compared to the same periods in 2001,
are principally due to the elimination of operating overhead being charged by
the Company to the 42 unconsolidated affiliated partnerships that were merged
into Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of the
Company, in December 2001.
The Company expects third quarter 2002 general and administrative expense
to be approximately $11 million.
Interest expense. Interest expense for the three and six months ended
June 30, 2002 was $24.7 million and $51.1 million, respectively, as compared to
$34.3 million and $69.9 million, respectively, for the same periods in 2001. The
$9.6 million decrease in interest expense during the three months ended June 30,
2002, as compared to the same period in 2001, is primarily due to a $6.1 million
increase in interest savings from the Company's interest rate hedging program,
reductions in underlying market interest rates, the retirement of the Company's
10-5/8% and 11-5/8% senior notes during the third quarter of 2001, the
repurchase of $58.7 million of the Company's 9-5/8% senior notes during the
fourth quarter of 2001 and the first half of 2002, a $1.4 million increase in
interest capitalized and the repayment of indebtedness during the quarter ended
June 30, 2002 with a portion of the net proceeds from the Stock Offering,
pending the completion of the West Panhandle gas field acquisitions discussed in
"Recent Activities" above. The $18.8 million decrease in interest expense during
the six months ended June 30, 2002, as compared to the same period in 2001, is
primarily the result of an $11.6 million increase in interest savings from the
Company's interest rate hedging program, reductions in underlying market
interest rates, the retirement of the Company's 10-5/8% and 11-5/8% senior notes
during the third quarter of 2001, the repurchase of $58.7 million of the
Company's 9-5/8% senior notes during the fourth quarter of 2001 and the first
half of 2002, a $2.3 million increase in interest capitalized and the temporary
repayment of indebtedness with a portion of the net proceeds from the Stock
Offering.
The Company expects third quarter 2002 interest expense to be $22 million
to $24 million.
Other expenses. Other expense for the three and six month periods ended
June 30, 2002 was $4.9 million and $13.2 million, respectively, compared to $1.9
million and $27.1 million for the same periods in 2001. Significant elements of
the $3.0 million increase in other expense during the three months ended June
30, 2002, as compared to the same period in 2001, include $2.5 million of 2002
charges associated with the remeasurement of Argentine net monetary assets and a
$2.0 million relative increase in charges associated with ineffective and
excluded components of changes in the fair value of hedge derivatives, partially
offset by a $3.6 million decrease in gas marketing losses. Significant elements
of the $13.9 million decrease in other expense during the six months ended June
30, 2002, as compared to the same period in 2001, include an $11.2 million
decrease in charges associated with ineffective and excluded components of
changes in the fair value of hedge derivatives, a $6.6 million decrease in
mark-to-market charges associated with non- hedge derivatives and a $5.7 million
decrease in gas marketing losses, partially offset by $7.9 million of 2002
charges associated with the remeasurement of Argentine net monetary assets. See
Note C of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for information regarding the Company's derivative
instruments and "Argentina Update", above, for information regarding political
and economic developments in Argentina.
Income tax provision (benefit). During the three and six month periods
ended June 30, 2002 and 2001, the Company recognized income tax provisions of
$1.4 million and $1.0 million, respectively, compared to income tax provisions
of $2.6 million and $3.0 million for the three and six month periods ended June
30, 2001, respectively. Due to uncertainties regarding the Company's utilization
of net operating loss carryforwards and other credit carryforwards, the Company
has established valuation reserves to reduce the carrying value of its deferred
tax assets. The Company's deferred tax valuation reserves are reduced when the
Company's financial results establish that it is more likely than not that
deferred tax assets previously reserved will be used prior to their expiration.
31
PIONEER NATURAL RESOURCES COMPANY
During the third quarter of 2002, the Company estimates that its income
tax provision will be approximately $1 million to $2 million as the Company
benefits from its net operating loss carryforwards in the United States and
Canada.
Extraordinary item - loss on early extinguishment of debt, net of tax.
During the three months ended June 30, 2002, the Company repurchased $20.0
million of its 9-5/8% senior notes due 2010. In connection therewith, the
Company recognized a $2.8 million loss which is classified as an extraordinary
item in the Company's consolidated statements of operations for the three and
six month periods ended June 30, 2002. During the third quarter of 2002, the
Company has continued to repurchase portions of its outstanding 9-5/8% senior
notes and, to the extent that market conditions indicate that it is beneficial
for the Company to do so, may continue to repurchase portions of its outstanding
indebtedness in future periods. Additionally, during July 2002, the Company
settled a capital cost obligation in connection with the acquisition of West
Panhandle field assets (see Note J of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" and "Recent Activities", above, for
information regarding the West Panhandle field acquisitions). Associated with
the settlement of the capital cost obligation, the Company will recognize a
third quarter extraordinary loss, net of associated taxes, of approximately $14
million to $17 million. Extraordinary losses during the third quarter of 2002
associated with the continued repurchase of 9-5/8% senior notes are expected to
be in excess of $2 million. See "New Accounting Pronouncement", above, for
information regarding the future classification of gains and losses from the
early extinguishment of debt.
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 capital expenditures for oil and
gas producing activities during the three and six month periods ended June 30,
2002 totaled $175.0 million and $263.3 million, respectively. The Company's
second quarter 2002 capital expenditures were funded by $90.6 million of net
cash provided by operating activities, $7.3 million of proceeds from the
disposition of assets and a portion of the net proceeds from the Stock Offering.
The Company's capital expenditures during the six months ended June 30, 2002
were funded by $140.6 million of net cash provided by operating activities,
$58.9 million of proceeds from the disposition of assets and a portion of the
net proceeds from the Stock Offering. The Company's second quarter 2001 capital
expenditures were internally funded by net cash provided by operating
activities.
Contractual obligations. The Company's contractual obligations include
long-term debt, operating leases, Btu swap agreements, terminated commodity
hedges and other contracts. During the six months ended June 30, 2002, the
Company decreased its long-term debt by $115.5 million, reduced its obligations
under the Btu swap agreements by $3.0 million and settled terminated commodity
hedge obligations for $25.3 million. Contractual obligations for which the
ultimate settlement amounts are not fixed and determinable include derivative
contracts that are sensitive to future changes in commodity prices, currency
exchange rates and interest rates. 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 six months ended
June 30, 2002.
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 in 2002.
32
PIONEER NATURAL RESOURCES COMPANY
Operating activities. Net cash provided by operating activities was $90.6
million and $140.6 million during the three and six months ended June 30, 2002,
respectively, as compared to net cash provided by operating activities of $135.3
million and $267.1 million for the same periods in 2001. The decrease in net
cash provided by operating activities during the three and six months ended June
30, 2002, as compared to the same period in 2001, is primarily due declines in
commodity prices and slightly lower production volumes.
Financing activities. During the three and six months ended June 30,
2002, the Company received $81.5 million and $73.4 million, respectively, of net
cash from financing activities. During April 2002, the Company completed the
Stock Offering and Debt Offering for aggregate net proceeds of $382.8 million.
The net proceeds were utilized to fund the acquisition of the Falcon assets and
associated acreage in the deepwater Gulf of Mexico and to reduce outstanding
borrowings under the Company's $575 million corporate credit facility pending
the July 2002 closing of the West Panhandle transactions.
During April 2002, the Company entered into interest rate swap contracts
to hedge the fair value of $150 million of its 8-7/8 percent senior notes due in
2005. The terms of these swap contracts obligate the Company to pay the
counterparties a variable annual rate equal to the six-month London Interbank
Offered Rate plus 3.97 percent and obligate the counterparties to pay the
Company a fixed rate of 8.875 percent. The interest rate swap contracts mature
on April 15, 2005.
During the three months ended June 30, 2002, the Company repurchased
$20.0 million principal amount of its 9-5/8% senior notes due 2010. See "Results
of Operations" for additional information regarding the early extinguishment of
debt.
Outstanding borrowings under the corporate credit facility totaled $36.0
million as of June 30, 2002. The weighted average interest rate on the Company's
indebtedness for the three and six months ended June 30, 2002 was 6.0 percent
and 6.1 percent, respectively, as compared to 8.2 percent and 8.6 percent for
the same respective periods in 2001, 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. Although there are no definitive current
plans to issue securities of the types described above, the Company filed a new
$1 billion shelf registration with the SEC during May 2002 to increase the
Company's ability to react to future financing opportunities in a timely manner.
Sales of assets. During the three and six months ended June 30, 2002,
proceeds from asset dispositions totaled $7.3 million and $58.9 million,
respectively, as compared to $3.3 million and $15.2 million for the same periods
in 2001. The Company's assets divested during 2002 were primarily comprised of
hedge derivatives. During the three and six month periods ended June 30, 2001,
the sale of 80,715 shares and 613,215 shares of common stock of a non-affiliated
entity for $1.7 million and $12.7 million, respectively, was the primary source
of the Company's proceeds from asset dispositions.
Book capitalization and liquidity. Total debt was $1.5 billion as of June
30, 2002, as compared to total debt of $1.6 billion on December 31, 2001. The
Company's total book capitalization at June 30, 2002 was $2.9 billion,
consisting of total debt of $1.5 billion and stockholders' equity of $1.4
billion. Consequently, the Company's debt to total capitalization decreased to
51 percent at June 30, 2002 from 55 percent at December 31, 2001. The Company's
ratio of current assets to current liabilities was .61 at June 30, 2002 and 1.12
at December 31, 2001. The decline in the ratio of current assets to current
liabilities was primarily due to declines in the fair values of hedge
derivatives. Including $27.9 million of undrawn and outstanding letters of
credit, the Company has $511.1 million of unused borrowing capacity available
under its corporate credit facility as of June 30, 2002.
33
PIONEER NATURAL RESOURCES COMPANY
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative disclosures about market risk
are supplementary to and should be read in conjunction with the quantitative and
qualitative disclosures provided in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
The following table reconciles the changes that occurred in the fair
values of the Company's derivative contracts during the first six months of
2002:
Derivative Contract Assets (Liabilities)
------------------------------------------------
Foreign
Interest Exchange
Commodity Rate Rate Total
--------- -------- -------- ---------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2001............... $ 180,554 $(19,637) $ 61 $ 160,978
Changes in contract fair value........... (93,078) 25,059 499 (67,520)
Contract realizations:
Maturities........................... (54,779) (6,735) (142) (61,656)
Termination - cash settlements....... (57,417) - - (57,417)
-------- ------- ----- --------
Fair value of contracts outstanding
as of June 30, 2002................... $ (24,720) $ (1,313) $ 418 $ (25,615)
======== ======= ===== ========
A material change in the Company's portfolio of financial instruments has
occurred since December 31, 2001. The following disclosure reflects information
about financial instruments that the Company was a party to as of June 30, 2002.
The Company may recognize future gains or losses on its portfolio of financial
instruments from changes in commodity prices, interest rates or foreign exchange
rates.
Interest rate sensitivity. During the three months ended June 30, 2002,
the Company sold $150 million of 7-1/2% senior notes due 2012, significantly
reduced its outstanding borrowings under the Company's corporate credit facility
and entered into new hedges of the fair value of 8-7/8% senior notes due 2005.
The following table provides information, in U. S. dollar equivalent amounts,
about derivative financial instruments and other financial instruments that the
Company was a party to as of June 30, 2002 and which are sensitive to changes in
interest rates. For debt obligations, the table presents maturities by expected
maturity dates together with the weighted average interest rates expected to be
paid on the debt, given current contractual terms and market conditions. For
fixed rate debt, the weighted average interest rate represents the contractual
fixed rates that the Company is obligated to periodically pay on the debt as of
June 30, 2002. For variable rate debt, the average interest rate represents the
average rates being paid on the debt projected forward proportionate to
eurodollar synthetic forward rates.
The accompanying table also provides information about interest rate swap
agreements to which the Company is a party. The interest rate swap agreements as
of June 30, 2002 hedge (i) the fair value of the Company's 8-7/8 percent senior
notes due April 15, 2005; (ii) the fair value of the Company's 8-1/4 percent
senior notes due August 15, 2007; and (iii) the fair value of the Company's
6-1/2 percent senior notes due January 15, 2008.
34
PIONEER NATURAL RESOURCES COMPANY
Interest Rate Sensitivity
Derivative And Other Financial Instruments as of June 30, 2002
Asset
(Liability)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
--------- --------- --------- -------- --------- ----------- ---------- -----------
(in thousands except interest rates)
Total Debt:
U.S. dollar denominated
maturities:
Fixed rate debt............ $ - $ - $ - $160,413 $ - $1,265,381 $1,425,794 $(1,396,402)
Weighted average
interest rate............ 7.98% 7.98% 7.98% 7.31% 7.04% 7.04%
Variable rate debt......... $ - $ - $ - $ 36,000 $ - $ - $ 36,000 $ (36,000)
Average interest rates..... 2.77% 4.25% 6.45% 7.49%
Interest Rate Hedge
Derivatives (1):
8-7/8% senior notes hedge:
Notional debt amount....... $150,000 $150,000 $150,000 $150,000 $ - $ - $ 150,000 $ 1,654
Fixed rate receivable...... 8.875% 8.875% 8.875% 8.875%
Variable rate payable...... 5.86% 6.87% 8.37% 9.08%
8-1/4% senior notes hedge:
Notional debt amount....... $150,000 $150,000 $150,000 $150,000 $150,000 $ 150,000 $ 150,000 $ 1,518
Fixed rate receivable...... 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%
Variable rate payable...... 5.26% 6.27% 7.77% 8.48% 8.77% 9.01%
6-1/2% senior notes hedge:
Notional debt amount....... $350,000 $350,000 $350,000 $350,000 $350,000 $ 350,000 $ 350,000 $ (4,485)
Fixed rate receivable...... 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
Variable rate payable...... 3.91% 4.92% 6.42% 7.13% 7.42% 7.66%
- ---------------
(1) The Company's 8-7/8% senior notes hedge matures April 15, 2005; the 8-1/4%
senior notes hedge matures August 15, 2007; and the 6-1/2% senior notes
hedge matures January 15, 2008.
Commodity price sensitivity. During the first six months of 2002, the
Company entered into additional oil and gas hedge derivatives and terminated
other oil and gas hedge derivatives. The following tables provide information
about the Company's oil and gas derivative financial instruments that the
Company was a party to as of June 30, 2002.
See Note C of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil and gas
commodity prices.
35
PIONEER NATURAL RESOURCES COMPANY
Pioneer Natural Resources Company
Oil Price Sensitivity
Derivative Financial Instruments as of June 30, 2002
Fair Value
2002 2003 2004 (Liability)
------- --------- --------- -----------
(in thousands, except volumes and prices)
Oil Hedge Derivatives:
Average daily notional Bbl volumes (1):
Swap contracts (2).......................... 23,000 18,000 12,000 $ (13,137)
Weighted average per Bbl fixed price..... $ 23.97 $ 24.11 $ 22.97
Average forward NYMEX oil
prices per Bbl (3)........................ $ 26.38 $ 24.71 $ 23.33
- ---------------
(1) See Note C of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(2) During July 2002, the Company entered into additional oil price swap
contracts to hedge 7,734 Bbls per day of 2003 oil production at an average
per Bbl fixed price of $25.07. These contracts are not included in the
table above.
(3) The average forward NYMEX oil prices are based on July 22, 2002 market
quotes.
Pioneer Natural Resources Company
Gas Price Sensitivity
Derivative Financial Instruments as of June 30, 2002
2006
& Fair Value
2002 2003 2004 2005 2007 (Liability)
-------- -------- -------- -------- -------- ----------
(in thousands, except volumes and prices)
Gas Hedge Derivatives (1):
Average daily notional MMBtu volumes (2):
Swap contracts.......................... 140,000 230,000 210,000 90,000 20,000 $ (8,979)
Weighted average per MMBtu fixed
price................................ $ 3.99 $ 3.83 $ 3.84 $ 3.74 3.75
Collar contracts........................ 111,576 $ (2,604)
Weighted average short call per MMBtu
ceiling price........................ $ 3.67
Weighted average long put per MMBtu
contingent floor price............... $ 2.81
Average forward NYMEX gas
prices per MMBtu (3).................. $ 3.16 $ 3.76 $ 3.96 $ 4.00 $ 4.09
- --------------
(1) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connect the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap and
option contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(2) See Note C of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(3) The average forward NYMEX oil and gas prices are based on July 22, 2002
market quotes.
36
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note F of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements".
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 14, 2002 in
Irving, Texas. At the meeting, two proposals were submitted for vote of
stockholders (as described in the Company's Proxy Statement dated April 10,
2002). The following is a brief description of the proposal and results of the
stockholders' votes.
Election of Directors. Prior to the meeting, the Company's Board of
Directors designated three nominees as Class II directors with their terms to
expire at the annual meeting in 2005 when their successors are elected and
qualified. Messrs. Baroffio and Sheffield were, at the time of such nomination
and at the time of the meeting, directors of the Company and Mr. Buchanan was a
new nominee to the Board of Directors. Each nominee was elected as a director of
the Company, with the results of the stockholder voting being as follows:
Authority Broker
For Withheld Abstain Non-Votes
---------- --------- ------- ---------
James R. Baroffio 89,905,242 945,448 - -
Edison C. Buchanan 89,902,596 948,094 - -
Scott D. Sheffield 82,715,760 8,134,930 - -
In addition, the term of office for the following d irectors continued
after May 14, 2002: R. Hartwell Gardner, James L. Houghton, Jerry P. Jones,
Linda K. Lawson, Charles E. Ramsey, Jr. and Robert A. Solberg.
Ratification of selection of auditors. The engagement of Ernst & Young
LLP as the Company's independent auditors for 2002 was submitted to the
stockholders for ratification. Such election was ratified, with the results of
the stockholder voting being as follows:
For 86,834,623
Against 3,888,754
Abstain 127,313
Broker non-votes -
37
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits and Reports on Form 8-K
Exhibits
10.1 Underwriting Agreement dated April 16, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc. and Credit Suisse
First Boston Corporation (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on April 17, 2002).
10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural Resources
Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston
Corporation, Banc of America Securities LLC, J.P. Morgan Securities Inc.
and Lehman Brothers Inc. as representatives of the underwriters
(incorporated by reference to Exhibit 99.2 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002).
10.3 Underwriting Agreement dated April 25, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse First
Boston Corporation and J.P. Morgan Securities Inc. as the underwriters, and
Raymond James & Associates, Inc. as the qualified independent underwriter
(incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002).
10.4 Third Supplemental Indenture dated as of April 30, 2002, among Pioneer
Natural Resources Company, Pioneer Natural Resources USA, Inc. as the
subsidiary guarantor and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the three months ended March 31, 2002, File No. 001-13245, filed with
the SEC on May 14, 2002).
10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural Resources Company
(incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002).
10.6 Guarantee dated April 30, 2002 of Pioneer Natural Resources USA, Inc.
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 2002, File No.
001- 13245, filed with the SEC on May 14, 2002).
38
PIONEER NATURAL RESOURCES COMPANY
Reports on Form 8-K
During the three months ended June 30, 2002, the Company filed with the
SEC current reports on Form 8-K on April 9, April 17, April 25 and April 29.
The Company's April 9 Form 8-K provides, as exhibits thereto, (i) the
Company's news release dated April 9, 2002 updating the Company's first quarter
2002 outlook, outlining developments in Argentina and providing the status of
the Company's hedging program at that time; (ii) the Company's news release
dated April 9, 2002 announcing the purchase of an additional 30% working
interest in the Falcon field development and associated acreage in the deepwater
Gulf of Mexico, the signing of an agreement to purchase the remaining 23% of the
rights that the Company does not already own in its core area West Panhandle
field and the Texas Panhandle and that the Company is in final negotiations on
another agreement to acquire the related West Panhandle field gathering system,
and the Company's intention to publicly offer and sell 10.0 million newly issued
shares of its common stock during April 2002 to fund the aforementioned
acquisitions; and (iii) the Company's news release dated April 9, 2002
announcing that the Company's Awena Marin-1 well drilled in the shallow water
offshore Gabon successfully extended the Olowi Field and providing an update on
the Company's other exploration activity.
The Company's April 17 Form 8-K provides (i) notice that the Company
signed an Underwriting Agreement and related Terms Agreement for the public
issuance and sale of 10.0 million shares of its common stock, par value $.01 per
share, and granted the underwriters an option to purchase an additional 1.5
million shares solely to cover over-allotments, if any; (ii) identified the
co-managing underwriters to the aforementioned underwriting agreement; and (iii)
filed as exhibits thereto the associated Underwriting Agreement and Terms
Agreement.
The Company's April 25 Form 8-K (i) reported the Company's announcement
on April 24, 2002 of its financial and operating results for the quarter ended
March 31, 2002; (ii) filed as exhibits thereto the Company's Ratio of Earnings
to Fixed Charges and Earnings to Fixed Charges and Preferred Stock Dividends,
the Company's news release dated April 23, 2002 announcing the completion of the
Company's public offering of 11.5 million shares of its common stock at $21.50
per share, including 1.5 million shares sold pursuant to the exercise of the
underwriters' over-allotment options, and the Company's news release dated April
24, 2002 announcing the Company's financial and operating results for the
quarter ended March 31, 2002 and the Company's second quarter 2002 outlook based
on then-current expectations; and (iii), provided the Company's supplemental
commodity hedge information as of April 23, 2002.
The Company's April 29 Form 8-K filed, as exhibits thereto, (i) the
Company's Underwriting Agreement dated April 25, 2002, (ii) the Form of Third
Supplemental Indenture to be dated as of April 30, 2002, (iii) the Form of 7.50%
Senior Notes due 2012 of the Company, and (iv) the Form of Guarantee to be dated
as of April 30, 2002 of Pioneer Natural Resources USA, Inc.
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 hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: August 1, 2002 By: /s/ Timothy L. Dove
--------------------------------------
Timothy L. Dove
Executive Vice President and Chief
Financial Officer
Date: August 1, 2002 By: /s/ Richard P. Dealy
--------------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
40
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
10.1 Underwriting Agreement dated April 16, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc. and Credit
Suisse First Boston Corporation (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on April 17, 2002).
10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc., Credit
Suisse First Boston Corporation, Banc of America Securities LLC,
J.P. Morgan Securities Inc. and Lehman Brothers Inc. as
representatives of the underwriters (incorporated by reference
to Exhibit 99.2 to the Company's Current Report on Form 8-K, File
No. 001-13245, filed with the SEC on April 17, 2002).
10.3 Underwriting Agreement dated April 25, 2002, among Pioneer Natural
Resources Company, Pioneer Natural Resources USA, Inc., Credit
Suisse First Boston Corporation and J.P. Morgan Securities Inc. as
the underwriters, and Raymond James & Associates, Inc. as the
qualified independent underwriter (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on April 29, 2002).
10.4 Third Supplemental Indenture dated as of April 30, 2002, among
Pioneer Natural Resources Company, Pioneer Natural Resources USA,
Inc. as the subsidiary guarantor and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 2002, File No. 001-13245, filed with the SEC on
May 14, 2002).
10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural Resources
Company (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K, File No. 001-13245, filed with the SEC
on April 29, 2002).
10.6 Guarantee dated April 30, 2002 of Pioneer Natural Resources USA,
Inc. (incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the three months ended March 31,
2002, File No. 001-13245, filed with the SEC on May 14, 2002).
41