UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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
October 30, 2002................................................. 117,044,020
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001....................................... 4
Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and 2001-........... 5
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2002..................... 6
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2002 and 2001............ 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended September 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..... 35
Item 4. Controls and Procedures........................................ 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 38
Item 6. Exhibits and Reports on Form 8-K............................... 38
Signatures..................................................... 39
Certifications................................................. 40
Exhibit Index.................................................. 42
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this quarterly report on Form 10-Q (the "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
currency amounts are expressed in U.S. dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2002 2001
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 25,502 $ 14,334
Accounts receivable:
Trade, net...................................................... 76,960 81,616
Affiliates...................................................... 513 595
Inventories........................................................ 10,151 14,549
Deferred income taxes.............................................. 12,700 6,400
Other current assets:
Derivatives..................................................... 978 127,074
Other........................................................... 9,098 11,075
---------- ----------
Total current assets.......................................... 135,902 255,643
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................... 4,151,830 3,691,783
Unproved properties............................................. 203,270 187,785
Accumulated depletion, depreciation and amortization............... (1,245,139) (1,095,310)
---------- ----------
3,109,961 2,784,258
---------- ----------
Deferred income taxes................................................ 78,033 84,319
Other property and equipment, net.................................... 21,118 21,560
Other assets, net:
Derivatives........................................................ 2,604 54,486
Other.............................................................. 41,860 70,787
---------- ----------
$ 3,389,478 $ 3,271,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade........................................................... $ 88,186 $ 92,760
Affiliates...................................................... 5,240 6,405
Interest payable................................................... 37,592 37,410
Other current liabilities:
Derivatives..................................................... 35,980 36,830
Other........................................................... 37,096 54,804
---------- ----------
Total current liabilities..................................... 204,094 228,209
---------- ----------
Long-term debt....................................................... 1,650,756 1,577,304
Noncurrent derivative obligations.................................... 42,174 32,438
Other noncurrent liabilities......................................... 90,960 133,945
Deferred income taxes................................................ 6,394 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;
119,558,094 and 107,422,467 shares issued as of September 30,
2002 and December 31, 2001, respectively........................ 1,196 1,074
Additional paid-in capital......................................... 2,713,980 2,462,272
Treasury stock, at cost; 2,581,874 and 3,486,073 shares as of
September 30, 2002 and December 31, 2001, respectively.......... (35,552) (48,002)
Deferred compensation.............................................. (15,439) -
Accumulated deficit................................................ (1,316,793) (1,323,343)
Accumulated other comprehensive income:
Deferred hedge gains, net....................................... 53,539 201,046
Cumulative translation adjustment............................... (5,831) (7,658)
---------- ----------
Total stockholders' equity.................................... 1,395,100 1,285,389
Commitments and contingencies........................................
---------- ----------
$ 3,389,478 $ 3,271,053
========== ==========
The financial information included as of September 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 Nine months ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Oil and gas.................................. $ 168,317 $ 198,088 $ 506,286 $ 674,685
Interest and other........................... 7,083 6,471 9,089 22,593
Gain (loss) on disposition of assets, net.... 3,353 (88) 4,374 8,677
-------- -------- -------- --------
178,753 204,471 519,749 705,955
-------- -------- -------- --------
Costs and expenses:
Oil and gas production....................... 49,970 51,713 150,705 159,489
Depletion, depreciation and amortization..... 54,748 60,065 156,081 169,622
Exploration and abandonments................. 18,324 24,666 57,304 94,132
General and administrative................... 12,466 8,153 35,142 26,606
Interest..................................... 20,347 32,261 71,405 102,137
Other........................................ 2,098 2,006 15,259 29,097
-------- -------- -------- --------
157,953 178,864 485,896 581,083
-------- -------- -------- --------
Income before income taxes and extraordinary
items........................................ 20,800 25,607 33,853 124,872
Income tax provision........................... (2,189) (2,379) (3,216) (5,387)
-------- -------- -------- --------
Income before extraordinary items.............. 18,611 23,228 30,637 119,485
Extraordinary items - gain (loss) on early
extinguishment of debt, net of tax........... (19,501) 1,374 (22,344) 1,374
-------- -------- -------- --------
Net income (loss).............................. $ (890) $ 24,602 $ 8,293 $ 120,859
======== ======== ======== ========
Net income (loss) per share:
Basic:
Income before extraordinary items......... $ .16 $ .24 $ .27 $ 1.22
Extraordinary items....................... (.17) .01 (.20) .01
-------- -------- -------- --------
Net income (loss)....................... $ (.01) $ .25 $ .07 $ 1.23
======== ======== ======== ========
Diluted:
Income before extraordinary items......... $ .16 $ .24 $ .27 $ 1.20
Extraordinary items....................... (.17) .01 (.20) .01
-------- -------- -------- --------
Net income (loss)....................... $ (.01) $ .25 $ .07 $ 1.21
======== ======== ======== ========
Weighted average shares outstanding:
Basic..................................... 116,193 98,468 111,227 98,395
======== ======== ======== ========
Diluted................................... 118,021 99,523 112,889 99,646
======== ======== ======== ========
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 Deferred
Stock Additional Hedge Total
Shares Common Paid-in Treasury Deferred Accumulated Gains & Translation Stockholders'
Outstanding Stock Capital Stock Compensation Deficit Losses Adjustment 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................. 11,500 115 235,885 - - - - - 236,000
Adjustment to common
stock issued for
2001 partnership
acquisitions........ (10) - (175) - - - - - (175)
Stock options
exercised........... 904 - 49 12,450 - (1,743) - - 10,756
Deferred
compensation:
Compensation
deferred.......... 646 7 15,949 - (15,956) - - - -
Deferred
compensation
included in net
income............ - - - - 517 - - - 517
Net income........... - - - - - 8,293 - - 8,293
Other comprehensive
income (loss):
Deferred hedge
gains and losses,
net of tax:
Deferred hedge
losses.......... - - - - - - (113,360) - (113,360)
Net gains
included in
net income..... - - - - - - (34,147) - (34,147)
Translation
adjustment........ - - - - - - - 1,827 1,827
------- ----- --------- ------- -------- ---------- -------- ------- ---------
Balance as of September
30, 2002............... 116,976 $1,196 $2,713,980 $(35,552) $ (15,439) $(1,316,793) $ 53,539 $ (5,831) $1,395,100
======= ===== ========= ======= ======== ========== ======== ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................... $ (890) $ 24,602 $ 8,293 $ 120,859
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation and amortization..... 54,748 60,065 156,081 169,622
Exploration expenses, including dry holes.... 12,589 17,250 43,437 80,082
Deferred income taxes........................ 1,512 567 1,617 (4,095)
(Gain) loss on disposition of assets, net.... (3,353) 88 (4,374) (8,677)
Extraordinary items, net of tax.............. 19,501 (1,374) 22,344 (1,374)
Interest related amortization................ (19) 2,559 (1,660) 8,446
Commodity hedge related amortization......... 6,184 3,076 20,307 5,484
Other noncash items.......................... (3,408) (551) 5,993 268
Changes in operating assets and liabilities:
Accounts receivable.......................... 6,153 8,862 (4,715) 36,916
Inventories.................................. 69 (3,489) 4,052 (4,401)
Other current assets......................... (851) (763) (928) (5,795)
Accounts payable............................. (3,907) 11,431 (18,056) (7,426)
Interest payable............................. (384) (626) 183 288
Other current liabilities.................... (290) 1,203 (4,320) (233)
-------- -------- -------- --------
Net cash provided by operating activities.. 87,654 122,900 228,254 389,964
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............. 59,895 57,811 118,831 73,006
Additions to oil and gas properties............. (226,440) (125,704) (489,733) (364,428)
Other property additions, net................... (2,675) (6,529) (8,535) (10,490)
-------- -------- -------- --------
Net cash used in investing activities...... (169,220) (74,422) (379,437) (301,912)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................. 210,792 95,000 466,668 204,175
Principal payments on long-term debt............ (56,257) (125,055) (442,583) (249,230)
Common stock issuance proceeds, net of
issuance costs............................... (4) - 236,000 -
Payment of noncurrent liabilities............... (67,142) (10,971) (103,704) (41,710)
Exercise of long-term incentive plan stock
options...................................... 3,149 1,165 10,756 6,610
Purchase of treasury stock...................... - (5,962) - (13,032)
Deferred debt issuance costs.................... (135) - (3,293) -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities..................... 90,403 (45,823) 163,844 (93,187)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,837 2,655 12,661 (5,135)
Effect of exchange rate changes on cash and
cash equivalents................................ (63) (145) (1,493) (287)
Cash and cash equivalents, beginning of period.... 16,728 18,227 14,334 26,159
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 25,502 $ 20,737 $ 25,502 $ 20,737
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss)................................. $ (890) $ 24,602 $ 8,293 $ 120,859
-------- -------- -------- --------
Other comprehensive income (loss):
Deferred hedge gains and losses, net of tax:
Transition adjustment........................ - - - (197,444)
Deferred hedge gains (losses)................ (24,269) 148,116 (113,360) 343,080
Net (gains) losses included in net
income (loss).............................. 1,651 (14,800) (34,147) 37,055
Gains and losses on available for sale
securities:
Unrealized holding losses.................... - - - (45)
Gains included in net income (loss).......... - - - (8,109)
Translation adjustment.......................... (6,915) (7,994) 1,827 (9,749)
-------- -------- -------- --------
Other comprehensive income (loss).......... (29,533) 125,322 (145,680) 164,788
-------- -------- -------- --------
Comprehensive income (loss)....................... $ (30,423) $ 149,924 $(137,387) $ 285,647
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2002 and
for the three and nine month periods ended September 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 September 30, 2002, the Company used an exchange
rate of 3.74 pesos to $1 to remeasure the peso-denominated monetary assets and
liabilities of the Company's Argentine subsidiaries and exchange rates of 1.58
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.
During the three and nine month periods ended September 30, 2002, the
remeasurement of the Company's Argentine peso-denominated monetary assets and
liabilities resulted in a $176 thousand decrease and a $7.7 million increase,
respectively, in other expense included in the accompanying Consolidated
Statements of Operations. Prior to December 2001, the value of the Argentine
peso was tied to, and was perfectly correlated with, the value of the U.S.
dollar.
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, gains or losses on the early extinguishment of debt are
required to be classified in a company's periodic consolidated statements of
operations as extraordinary gains or losses, net of associated income taxes,
after the determination of income or loss from continuing operations. SFAS 145
requires, except in the case of events or transactions of a highly unusual and
infrequent nature, gains or losses from the early extinguishment of debt to 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.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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 obligated the
Company to pay the counterparties a variable annual rate equal to the six-month
London Interbank Offered Rate plus 3.97 percent and obligated the counterparties
to pay the Company a fixed rate of 8-7/8 percent. The interest rate swap
contracts were to mature on April 15, 2005.
During the three and nine month periods ended September 30, 2002,
aggregate settlement gains associated with the Company's various interest rate
swaps that were designated as fair value hedges of the Company's fixed rate debt
reduced the Company's reported interest expense by $4.4 million and $11.2
million, respectively, as compared to aggregate settlement gains of $2.4 million
and $3.1 million during the same respective periods of 2001. During the nine
months ended September 30, 2002 and 2001, there were no ineffective changes in
the fair values of the Company's interest rate swaps.
During September 2002 and September 2001, the Company terminated all of
its interest rate swaps that were active at each respective date in order to
lock-in the existing hedge gains. Associated therewith, the carrying value of
the Company's long-term debt in the accompanying Consolidated Balance Sheets was
increased by the unamortized portion of the deferred hedge gains. As of
September 30, 2002, the unamortized portion of the deferred hedge gains was
$43.0 million, comprised of $32.0 million associated with interest rate swaps
terminated during September 2002 and $11.0 million of unamortized deferred gains
on interest rate swaps terminated during September 2001. Amortization of these
deferred hedge gains reduced the Company's reported interest expense by $2.3
million and $7.9 million during the three and nine month periods ended September
30, 2002, respectively, and by $194 thousand during the three and nine month
periods ended September 30, 2001.
The following table sets forth the scheduled amortization of deferred
hedge gains on terminated fair value hedges that will be recognized as
reductions in the Company's future interest expense:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
2002 hedge gain amortization...... $ 6,275 $ 6,275
2003 hedge gain amortization...... $ 6,135 $ 5,727 $ 4,882 $ 4,280 21,024
2004 hedge gain amortization...... $ 3,629 $ 3,217 $ 2,544 $ 2,177 11,567
Net gains amortized, thereafter... 4,166
-------
$ 43,032
=======
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 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 September 30,
2002:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- ------- -----------
Daily oil production:
2002 - Swap Contracts
Volume (Bbl).................. 22,000 22,000
Price per Bbl................. $ 23.91 $ 23.91
2003 - Swap Contracts
Volume (Bbl).................. 28,000 28,000 28,000 28,000 28,000
Price per Bbl................. $ 24.48 $ 24.45 $ 24.42 $ 24.42 $ 24.44
2004 - Swap Contracts
Volume (Bbl).................. 14,000 14,000 14,000 14,000 14,000
Price per Bbl................. $ 23.11 $ 23.11 $ 23.11 $ 23.11 $ 23.11
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
adjustment to revenue from oil price hedges:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
Average price reported per Bbl................. $ 21.77 $ 25.06 $ 22.86 $ 24.95
Average price realized per Bbl................. $ 24.43 $ 24.84 $ 21.91 $ 25.74
Addition (reduction) to revenue (in millions).. $ (7.2) $ .7 $ 8.2 $ (7.4)
Natural gas liquids prices. During the three and nine month periods ended
September 30, 2002 and 2001, the Company did not enter into, nor was it a party
to, any NGL hedge contracts.
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth the Company's outstanding gas hedge contracts and the
weighted average index price for those contracts as of September 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
Index price per MMBtu......... $ 3.98 $ 3.98
2002 - Collar Contracts
Volume (Mcf).................. 120,000 120,000
Index price per MMBtu......... $2.79-$3.64 $2.79-$3.64
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
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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 adjustment to revenue from gas price
hedges:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Average price reported per Mcf................. $ 2.25 $ 2.66 $ 2.39 $ 3.40
Average price realized per Mcf................. $ 2.09 $ 2.24 $ 2.12 $ 3.59
Addition (reduction) to revenue (in millions).. $ 5.8 $ 14.6 $ 26.3 $ (18.6)
Interest rate hedges. During the nine months ended September 30, 2002,
the Company recognized settlement losses of $447 thousand associated with
interest rate swap agreements that were designated as cash flow hedges. These
interest rate swaps matured during the three months ended June 30, 2002. The
2002 settlement losses increased the Company's reported interest expense. No
settlement gains or losses were recognized associated with interest rate swap
agreements during the three and nine month periods ended September 30, 2001. The
Company recognized no ineffectiveness associated with any of 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
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 $50 thousand and $192 thousand associated
with these forward agreements during the three and nine month periods ended
September 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 nine months ended
September 30, 2002.
Hedge ineffectiveness and excluded items. During the three and nine month
periods ended September 30, 2002, the Company recognized increases to other
expense of $1.4 million and $1.7 million, respectively, related to the
ineffective portions of its cash flow commodity price hedges. During the three
and nine month periods ended September 30, 2001, the ineffective portions of the
Company's cash flow commodity hedges decreased other expense by $.2 million and
increased other expense by $11.0 million, respectively.
Accumulated other comprehensive income - deferred hedge gains, net.
During the twelve month period ending September 30, 2003, the Company expects to
reclassify $26.4 million of net deferred losses associated with open cash flow
hedges and $45.9 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 net
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 deferred hedge losses........ $ (8,645) $ (8,645)
2003 deferred hedge gains......... $ 18,122 $ 18,167 $ 18,207 $ 18,050 72,546
2004 deferred hedge gains......... $ 11,291 $ 11,242 $ 11,311 $ 11,258 45,102
2005 deferred hedge gains......... $ 301 $ 305 $ 307 $ 307 1,220
-------
$110,223
=======
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Non-hedge Derivatives
Btu swap agreements. The Company is a party to 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 market risk associated
with the agreements and fixed the Company's remaining obligations associated
with the Btu swap agreements. Mark-to-market adjustments of the carrying values
of the Btu swap agreements resulted in $7.3 million of other revenues during the
second quarter of 2001 and $6.6 million of other expense during the first
quarter of 2001.
NOTE D. Acquisitions
Falcon acquisitions. During 2002, the Company 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. As a result of these transactions, the
Company owns a 75 percent working interest and operates the Falcon field
development and related exploration blocks.
West Panhandle acquisitions. During 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. In connection with these
transactions, the Company recorded a $100.4 million increase to proved oil and
gas properties, a $3.8 million increase to unproved oil and gas properties and
$1.9 million of assets held for resale; retired a capital cost obligation for
$60.8 million; retired a $20.9 million gas balancing receivable; assumed trade
and environmental obligations amounting to $5.8 million in the aggregate; and
paid $140.2 million of cash.
The assets held for resale represented proved oil and gas properties in
Oklahoma that were not strategic to the Company's focus of operations. The
Company divested the assets held for resale in August 2002 for $4.7 million of
net proceeds, realizing an associated gain of $2.8 million.
The capital cost obligation retired by the Company for $60.8 million
represented an obligation for West Panhandle gas field capital additions that
bore interest at an annual rate of 20 percent. The capital cost obligation had a
carrying value of $45.2 million, resulting in an extraordinary loss of $15.6
million from the early retirement of this obligation in July 2002.
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 gas
field acquisitions in July 2002.
Senior notes offering. In April 2002, the Company sold $150 million of
7-1/2 percent senior notes that will mature on April 15, 2012. The 7-1/2 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
$146.7 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 7-1/2 percent senior notes on April 15 and October
15 of each year. The first interest payment was made on October 15, 2002 and
consisted of interest from the closing date of the offering through October 15,
2002.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Early extinguishment of debt and capital cost obligation. During the
three and nine month periods ended September 30, 2002, the Company repurchased
and retired $27.1 million and $47.1 million, respectively, of its outstanding
9-5/8 percent senior notes due 2010. Associated therewith, the Company
recognized extraordinary losses from the early extinguishment of debt of $3.9
million and $6.7 million, respectively. Additionally, as discussed in Note D,
the Company recorded a $15.6 million extraordinary loss associated with the
repayment of a $45.2 million capital cost obligation that was associated with
the West Panhandle assets acquired during July 2002.
In July 2001, the Company redeemed its outstanding 11-5/8 percent senior
subordinated discount notes due 2006 and 10-5/8 percent senior subordinated
notes due 2006 for $31.0 million. The aggregate carrying value of the 11- 5/8
percent senior subordinated discount notes due 2006 and the 10-5/8 percent
senior subordinated notes due 2006 was $32.4 million on the date of redemption.
Associated with this redemption, the Company recognized an extraordinary gain of
$1.4 million during the three and nine month periods ended September 30, 2001.
See Note B for a discussion of the classification of losses on the early
extinguishment of debt after the 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, 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
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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 September 30,
2002, the Company has settled $9.8 million of the original claim amounts. In
early October 2002, the Company received final approval to settle an additional
$11.8 million of the original claim amounts. This approval resulted in the
Company reducing its contingent liability and recognizing other income of $3.5
million in September 2002. As of September 30, 2002 and December 31, 2001, the
Company had on deposit $21.3 million and $24.5 million, respectively, including
accrued interest, in an escrow account and had corresponding obligations for the
remaining claims recorded in other current liabilities in the accompanying
Consolidated Balance Sheets. The Company believes that the escrowed amounts,
plus accrued interest, will be sufficient to settle the remaining claims.
NOTE G. Income Per Share Before Extraordinary Items
Basic income per share before extraordinary items is computed by dividing
income before extraordinary items by the weighted average number of common
shares outstanding for the period. The computation of diluted income per share
before extraordinary items reflects the potential dilution that could occur if
securities or other contracts to issue common stock that are dilutive to income
before extraordinary items were exercised or converted into common stock or
resulted in the issuance of common stock.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
The following table is a reconciliation of the basic and diluted weighted
average common shares outstanding during the three and nine month periods ended
September 30, 2002 and 2001:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 116,193 98,468 111,227 98,395
Dilutive common stock options (a)........... 1,826 1,055 1,662 1,251
Restricted stock awards (b)................. 2 - - -
------- ------- ------- -------
Diluted..................................... 118,021 99,523 112,889 99,646
======= ======= ======= =======
- -----------
(a) Common stock options to purchase 1,868,588 shares and 4,347,845 shares of
common stock were outstanding but not included in the computations of
diluted income per share for the three month periods ended September 30,
2002 and 2001, respectively, and common stock options to purchase 2,024,455
shares and 3,022,779 shares of common stock were outstanding but not
included in the computations of diluted income per share for the nine month
periods ended September 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.
(b) During the nine months ended September 30, 2002, the Company issued fixed
awards for 645,545 restricted shares of the Company's common stock. The
fixed awards were issued as compensation to directors, officers and key
employees of the Company. The restricted share awards include 18,545 shares
that were granted to directors of the Company on May 13, 2002. Director
awards for 3,302 shares vest on a quarterly pro-rata basis during the year
ended May 13, 2003, and director awards for 15,243 shares vest on May 13,
2005. The remaining 627,000 restricted shares were awarded to officers and
key employees of the Company on August 12, 2002 and vest on August 12,
2005.
NOTE H. Capitalized Interest
Interest expense incurred by the Company is presented in the accompanying
Consolidated Statements of Operations net of capitalized interest. Capitalized
interest during the three and nine month periods ended September 30, 2002 and
2001 is presented in the following table:
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- -------
(in thousands)
Capitalized interest................... $ 5,294 $ 1,527 $ 10,252 $ 4,233
====== ====== ======= ======
NOTE I. Geographic Operating Segment Information
The Company has operations in only one industry segment, which is the oil
and gas exploration and production industry. The Company is organizationally
structured along geographic operating segments, or regions. The Company has
reportable operations in the United States, Argentina and Canada.
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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" column includes revenues and expenses that are not
routinely included in the earnings measures internally reported to management on
a geographic operating segment basis.
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- --------- --------- ------------ ------------
(in thousands)
Three months ended September 30, 2002:
Oil and gas revenue................. $137,155 $ 19,149 $ 12,013 $ - $ - $ 168,317
Interest and other.................. - - - - 7,083 7,083
Gain on disposition of assets, net.. 3,087 - - - 266 3,353
------- ------- ------- ------ ------- --------
140,242 19,149 12,013 - 7,349 178,753
------- ------- ------- ------ ------- --------
Production costs.................... 43,713 3,622 2,635 - - 49,970
Depletion, depreciation and
amortization...................... 33,607 12,227 6,713 - 2,201 54,748
Exploration and abandonments........ 12,557 2,843 1,429 1,495 - 18,324
General and administrative.......... - - - - 12,466 12,466
Interest............................ - - - - 20,347 20,347
Other............................... - - - - 2,098 2,098
------- ------- ------- ------ ------- --------
89,877 18,692 10,777 1,495 37,112 157,953
------- ------- ------- ------ ------- --------
Income (loss) before income taxes
and extraordinary items........... 50,365 457 1,236 (1,495) (29,763) 20,800
Income tax benefit (provision)...... (17,628) (160) (521) 523 15,597 (2,189)
------- ------- ------- ------ ------- --------
Income (loss) before extraordinary
items............................. $ 32,737 $ 297 $ 715 $ (972) $(14,166) $ 18,611
======= ======= ======= ====== ======= ========
Three months ended September 30, 2001:
Oil and gas revenue................. $149,283 $ 36,919 $ 11,886 $ - $ - $ 198,088
Interest and other.................. - - - - 6,471 6,471
Gain (loss) on disposition of
assets, net....................... 8 - (7) - (89) (88)
------- ------- ------- ------ ------- --------
149,291 36,919 11,879 - 6,382 204,471
------- ------- ------- ------ ------- --------
Production costs.................... 41,516 7,059 3,138 - - 51,713
Depletion, depreciation and
amortization...................... 34,061 15,003 7,793 - 3,208 60,065
Exploration and abandonments........ 16,292 2,728 1,440 4,206 - 24,666
General and administrative.......... - - - - 8,153 8,153
Interest............................ - - - - 32,261 32,261
Other............................... - - - - 2,006 2,006
------- ------- ------- ------ ------- --------
91,869 24,790 12,371 4,206 45,628 178,864
------- ------- ------- ------ ------- --------
Income (loss) before income taxes
and extraordinary items........... 57,422 12,129 (492) (4,206) (39,246) 25,607
Income tax benefit (provision)...... (20,098) (4,245) 210 1,473 20,281 (2,379)
------- ------- ------- ------ ------- --------
Income (loss) before extraordinary
items............................. $ 37,324 $ 7,884 $ (282) $(2,733) $(18,965) $ 23,228
======= ======= ======= ======= ======= ========
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- --------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2002:
Oil and gas revenue................. $411,139 $ 57,459 $ 37,688 $ - $ - $ 506,286
Interest and other.................. - - - - 9,089 9,089
Gain on disposition of assets, net.. 3,249 (3) 1,010 - 118 4,374
------- ------- ------- ------- -------- --------
414,388 57,456 38,698 - 9,207 519,749
------- ------- ------- ------- -------- --------
Production costs................... 132,725 10,023 7,957 - - 150,705
Depletion, depreciation and
amortization..................... 97,594 31,263 20,758 - 6,466 156,081
Exploration and abandonments....... 39,841 6,631 5,272 5,560 - 57,304
General and administrative......... - - - - 35,142 35,142
Interest........................... - - - - 71,405 71,405
Other.............................. - - - - 15,259 15,259
------- ------- ------- ------- -------- --------
270,160 47,917 33,987 5,560 128,272 485,896
------- ------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary items.......... 144,228 9,539 4,711 (5,560) (119,065) 33,853
Income tax benefit (provision)..... (50,480) (3,339) (1,986) 1,946 50,643 (3,216)
------- ------- ------- ------- -------- --------
Income (loss) before extraordinary
items............................ $93,748 $ 6,200 $ 2,725 $ (3,614) $ (68,422) $ 30,637
======= ======= ======= ======= ======== ========
Nine months ended September 30, 2001:
Oil and gas revenue................ $512,483 $104,439 $ 57,763 $ - $ - $ 674,685
Interest and other................. - - - - 22,593 22,593
Gain on disposition of assets, net. 224 - 31 - 8,422 8,677
------- ------- ------- ------- ------- --------
512,707 104,439 57,794 - 31,015 705,955
------- ------- ------- ------- -------- --------
Production costs................... 130,196 19,676 9,617 - - 159,489
Depletion, depreciation and
amortization..................... 95,274 41,380 22,273 - 10,695 169,622
Exploration and abandonments....... 50,567 13,211 8,921 21,433 - 94,132
General and administrative......... - - - - 26,606 26,606
Interest........................... - - - - 102,137 102,137
Other.............................. - - - - 29,097 29,097
------- ------- ------- ------- -------- --------
276,037 74,267 40,811 21,433 168,535 581,083
------- ------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary items.......... 236,670 30,172 16,983 (21,433) (137,520) 124,872
Income tax benefit (provision)..... (82,835) (10,560) (7,238) 7,502 87,744 (5,387)
------- ------- ------- ------- -------- --------
Income (loss) before extraordinary
items............................ $153,835 $ 19,612 $ 9,745 $(13,931) $ (49,776) $ 119,485
======= ======= ======= ======= ======== ========
NOTE J. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed 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.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2002
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 68 $ 20,365 $ 5,069 $ $ 25,502
Other current assets.................. 1,705,788 (1,468,803) (126,585) 110,400
--------- ---------- --------- ----------
Total current assets............. 1,705,856 (1,448,438) (121,516) 135,902
--------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,952,978 1,198,852 4,151,830
Unproved properties................ - 41,425 161,845 203,270
Accumulated depletion, depreciation
and amortization.................... - (907,584) (337,555) (1,245,139)
--------- ---------- --------- ----------
- 2,086,819 1,023,142 3,109,961
--------- ---------- --------- ----------
Deferred income taxes................... 76,511 - 1,522 78,033
Other property and equipment, net....... - 17,404 3,714 21,118
Other assets, net....................... 16,755 15,360 12,349 44,464
Investment in subsidiaries.............. 1,199,599 210,243 - (1,409,842) -
--------- ---------- --------- ----------
$2,998,721 $ 881,388 $ 919,211 $ 3,389,478
========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,355 $ 151,449 $ 22,290 $ $ 204,094
Long-term debt.......................... 1,650,756 - - 1,650,756
Other noncurrent liabilities............ - 153,488 (20,354) 133,134
Deferred income taxes................... - - 6,394 6,394
Stockholders' equity.................... 1,317,610 576,451 910,881 (1,409,842) 1,395,100
Commitments and contingencies...........
--------- ---------- --------- ----------
$2,998,721 $ 881,388 $ 919,211 $ 3,389,478
========= ========== ========= ==========
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
========= ========== ========= ==========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------- ----------- ------------ ---------
Revenues:
Oil and gas...................... $ - $ 386,021 $ 120,265 $ - $ $ 506,286
Interest and other............... - 7,143 1,946 - 9,089
Gain on disposition of
assets, net.................... - 3,224 1,150 - 4,374
-------- -------- -------- ------ --------
- 396,388 123,361 - 519,749
-------- -------- -------- ------ --------
Costs and expenses:
Oil and gas production........... - 127,402 23,303 - 150,705
Depletion, depreciation and
amortization................... - 98,268 57,813 - 156,081
Exploration and abandonments..... - 41,131 16,173 - 57,304
General and administrative....... 945 27,518 6,679 - 35,142
Interest......................... 62,036 9,166 203 - 71,405
Equity (income) loss from
subsidiaries................... (24,243) 5,856 - - 18,387 -
Other............................ (53,717) 56,430 12,546 - 15,259
-------- -------- -------- ------ --------
(14,979) 365,771 116,717 - 485,896
-------- -------- -------- ------ --------
Income before income taxes and
extraordinary items.............. 14,979 30,617 6,644 - 33,853
Income tax provision .............. - - (3,216) (3,216)
-------- -------- -------- ------ --------
Income before extraordinary items.. 14,979 30,617 3,428 30,637
Extraordinary items - loss on
early extinguishment of debt,
net of tax....................... (6,686) - (15,658) - (22,344)
-------- -------- -------- ------ --------
Net income (loss).................. 8,293 30,617 (12,230) 8,293
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses.......... (4) (94,816) (18,540) - (113,360)
Net (gains) losses included
in net income (loss)......... 447 (29,023) (5,571) - (34,147)
Translation adjustment........... - - 1,827 - 1,827
-------- -------- -------- ------ --------
Comprehensive loss................. $ 8,736 $ (93,222) $ (34,514) $ - $(137,387)
======== ======== ======== ====== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2001
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------- ----------- ------------ ---------
Revenues:
Oil and gas...................... $ - $ 494,474 $ 180,211 $ - $ $ 674,685
Interest and other............... - 18,042 4,551 - 22,593
Gain on disposition of assets,
net............................ - 8,762 (85) - 8,677
-------- -------- -------- ------ --------
- 521,278 184,677 - 705,955
-------- -------- -------- ------ --------
Costs and expenses:
Oil and gas production........... - 128,922 30,567 - 159,489
Depletion, depreciation and
amortization................... - 101,062 68,560 - 169,622
Exploration and abandonments..... - 52,713 41,419 - 94,132
General and administrative....... 616 18,434 7,556 - 26,606
Interest......................... 3,823 85,328 12,986 - 102,137
Equity (income) loss from
subsidiaries................... (123,937) 7,030 - - 116,907 -
Other............................ - 7,374 21,723 - 29,097
-------- -------- -------- ------ --------
(119,498) 400,863 182,811 - 581,083
-------- -------- -------- ------ --------
Income (loss) before income taxes
and extraordinary items.......... 119,498 120,415 1,866 - 124,872
Income tax benefit (provision) .... - (783) (4,591) (13) (5,387)
-------- -------- -------- ------ --------
Income before extraordinary items.. 119,498 119,632 (2,725) (13) 119,485
Extraordinary items - gain on
early extinguishment of debt,
net of tax....................... 1,374 - - - 1,374
-------- -------- -------- ------ --------
Net income (loss).................. 120,872 119,632 (2,725) (13) 120,859
Other comprehensive income (loss):
Deferred hedge gains and losses:
Transition adjustment.......... - (172,007) (25,437) - (197,444)
Deferred hedge gains (losses).. (519) 317,510 26,089 - 343,080
Net losses included in net
income........................ - 19,726 17,329 - 37,055
Gains and losses on available
for sale securities:
Unrealized holding losses...... - (45) - - (45)
Gains included in net income... - (8,109) - - (8,109)
Translation adjustment........... - - (9,749) - (9,749)
-------- -------- -------- ------ --------
Comprehensive income............... $ 120,353 $ 276,707 $ 5,507 $ (13) $ 285,647
======== ======== ======== ====== ========
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 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..................................... $(299,553) $ 259,502 $ 268,305 $ 228,254
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 31,994 85,682 1,155 118,831
Additions to oil and gas properties.............. - (284,367) (205,366) (489,733)
Other property additions, net.................... - (7,466) (1,069) (8,535)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................. 31,994 (206,151) (205,280) (379,437)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................. 466,668 - - 466,668
Principal payments on long-term debt............. (442,583) - - (442,583)
Common stock issuance proceeds, net of
issuance costs................................. 236,000 - - 236,000
Payment of noncurrent liabilities................ - (43,886) (59,818) (103,704)
Exercise of stock options........................ 10,756 - - 10,756
Deferred debt issuance costs..................... (3,293) - - (3,293)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 267,548 (43,886) (59,818) 163,844
-------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (11) 9,465 3,207 12,661
Effect of exchange rate changes on cash and
cash equivalents............................... - - (1,493) (1,493)
Cash and cash equivalents, beginning of period.... 79 10,900 3,355 14,334
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 68 $ 20,365 $ 5,069 $ 25,502
======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001
(in thousands)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ---------
Cash flows from operating activities:
Net cash provided by operating activities........ $ 30,343 $ 225,330 $ 134,291 $ 389,964
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 21,170 51,105 731 73,006
Additions to oil and gas properties.............. - (228,154) (136,274) (364,428)
Other property additions, net.................... - (6,809) (3,681) (10,490)
-------- -------- --------- --------
Net cash provided by (used in) investing
activities.................................. 21,170 (183,858) (139,224) (301,912)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................. 204,175 - - 204,175
Principal payments on long-term debt............. (249,230) - - (249,230)
Payment of noncurrent liabilities................ - (43,823) 2,113 (41,710)
Exercise of stock options........................ 6,610 - - 6,610
Purchase of treasury stock....................... (13,032) - - (13,032)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. (51,477) (43,823) 2,113 (93,187)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 36 (2,351) (2,820) (5,135)
Effect of exchange rate changes on cash and
cash equivalents............................... - - (287) (287)
Cash and cash equivalents, beginning of period.... 15 18,387 7,757 26,159
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 51 $ 16,036 $ 4,650 $ 20,737
======== ======== ========= ========
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, environmental and
weather 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 nine month periods ended September 30, 2002, as
compared to the same respective periods in 2001, commodity price declines and a
weak Argentine peso negatively impacted the Company's financial and operating
results. Additionally, Pioneer repaid relatively high cost bonds and capital
obligations during the three and nine month periods ended September 30, 2002,
reducing the Company's ongoing cost of capital. Associated therewith, the
Company recorded extraordinary losses of $19.5 million ($.17 per share) and
$22.3 million ($.20 per share) during the three and nine month periods ended
September 30, 2002, respectively. Including the extraordinary losses, the
Company reported a net loss of $890 thousand ($.01 per share) and net income of
$8.3 million ($.07 per share) during the three and nine month periods ended
September 30, 2002, as compared to net income of $24.6 million ($.25 per share)
and $120.9 million ($1.21 per diluted share) for the same respective periods of
2001. During the three and nine month periods ended September 30, 2002, the
Company also recorded gains of $3.4 million and $4.4 million, respectively, from
asset divestitures and a noncash credit of $.2 million and a noncash charge of
$7.7 million, respectively, for the remeasurement of Argentine peso-denominated
net monetary assets. During the three months ended September 30, 2001, the
Company's earnings were positively impacted by a $1.4 million ($.01 per share)
extraordinary gain on the early extinguishment of debt. During the nine months
ended September 30, 2001, the Company's earnings were positively impacted by
favorable commodity prices, an $8.7 million gain on the disposition of assets
and the aforementioned extraordinary gain.
The Company's net cash provided by operating activities was $87.7 million
and $228.3 million during the three and nine month periods ended September 30,
2002, respectively, as compared to net cash provided by operating activities of
$122.9 million and $390.0 million during the three and nine month periods ended
September 30, 2001, respectively. The decrease in net cash provided by operating
activities was primarily due to declines in commodity prices and slightly lower
production volumes. During the three months ended September 30, 2002, the
Company used its net cash provided by operating activities, together with
proceeds from asset divestitures and net borrowings under its corporate credit
facility to fund additions to oil and gas properties. During the nine months
ended September 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 September 30,
2002 was $3.05 billion, consisting of total debt of $1.65 billion and
stockholders' equity of $1.4 billion. Debt as a percentage of total book
capitalization was 54 percent at September 30, 2002, as compared to 55 percent
at December 31, 2001. The slight improvement of the Company's ratio of debt to
total book capitalization during the nine months ended September 30, 2002 was
primarily due to $236.0 million of net proceeds from the Stock Offering,
partially offset by a $147.5 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, and a $73.5 million increase in long-term debt.
22
PIONEER NATURAL RESOURCES COMPANY
2002 Activities
During 2002, the Company has announced or completed the following
activities:
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 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 Falcon discovery. See Note D of Item 1. "Financial Statements" for
information regarding these acquisitions that were completed during July
2002;
o the completion of the Stock Offering during April 2002, which resulted in
net proceeds to the Company of $236.0 million;
o the completion during April 2002 of a public offering of $150 million of
7-1/2 percent senior notes that will mature on April 15, 2012 (the "Debt
Offering"). The Company realized net proceeds, after payment of issuance
costs, of $146.7 million from the Debt Offering;
o the successful drilling of three additional wells on its Olowi Block in
offshore Gabon. The four wells drilled to date have established the
presence of a continuous oil rim along the edge of a large geologic
structure;
o the leasing of 42 blocks offered in the Western Gulf of Mexico by the
Minerals Management Service. The Company leased 34 blocks on the Gulf of
Mexico shelf and eight deepwater blocks in the Gulf of Mexico covering
prospects and leads within subsea tie-back range of its Falcon field;
o a successful exploration well in the Borj El Khadra permit in the Ghadames
basin onshore southern Tunisia. A total of four intervals were tested in
the Adam 1 discovery well at a combined rate of 6,000 barrels of oil and
condensate per day and 16 MMcf of gas per day; and
o the signing of an agreement with Armstrong Resources LLC in October 2002 to
acquire a 70 percent working interest and operatorship in ten state leases
on Alaska's North Slope. The leases cover approximately 14,000 acres
between the Kuparuk River unit and Thetis Island. The agreement will be
effective November 1, 2002. The Company plans to drill up to three wells
during this winter drilling season, contingent upon the receipt of required
permits, to test an area that the Company believes is prospective for oil
in the same sands as the offsetting Kuparuk River unit eight to ten miles
to the southeast. The Kuparuk River unit was discovered in 1969 and is
estimated to hold 2.5 billion barrels of recoverable oil. No wells have
been drilled on the acreage covered by Pioneer's leases to date, but wells
drilled just outside the perimeter of the acreage have encountered the
primary target, the Kuparuk "C" sand, and were oil-bearing. The acreage is
offshore in approximately five to ten feet of water. Drilling plans call
for grounded sea ice pad locations that will be accessed via ice roads from
Oliktok Point dock. No tundra travel is planned. All sea ice operations are
expected to be completed by the end of March.
Through these transactions, the Company has increased its ownership in
and control over certain of its core assets, improved its financial flexibility
and ratio of debt to total book capitalization and added to the Company's
portfolio of exploration opportunities including a new potentially high-impact
project for 2003 exploration in Alaska.
23
PIONEER NATURAL RESOURCES COMPANY
Drilling Highlights
During the first nine months of 2002, the Company continued progress on
its development projects at Canyon Express, Falcon and Devils Tower in the
deepwater Gulf of Mexico and Sable in South Africa, increased its ownership in
its Falcon project and West Panhandle Field, successfully extended the oil
accumulation previously established by the Olowi Marin-1 discovery well in the
shallow water offshore Gabon and announced the successful exploration well in
the Borj El Khadra permit in the Ghadames basin onshore Southern Tunisia. In
total, the Company's costs incurred for the first nine months of 2002 totaled
$529.5 million and included $256.0 million for development activities, $95.5
million for exploration activities and $178.0 million for acquisitions. While a
significant amount of capital this year has been spent on 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 nine months ended
September 30, 2002:
Development Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast... 3 10 9 - 4
Permian Basin............... 17 59 73 1 2
Mid-Continent............... 1 36 31 3 3
------ ------ ------ ------ ------
Total Domestic......... 21 105 113 4 9
------ ------ ------ ------ ------
Argentina................... 1 1 - - 2
South Africa................ - 3 2 - 1
Canada...................... 5 12 13 3 1
------ ------ ------ ------ ------
Total Worldwide........ 27 121 128 7 13
====== ====== ====== ====== ======
Exploration/Extension Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast.... 3 4 6 1 -
------ ------ ------ ------ ------
Total Domestic.......... 3 4 6 1 -
------ ------ ------ ------ ------
Argentina.................... 3 8 2 3 6
Canada....................... 1 12 8 3 2
Gabon........................ - 3 3 - -
Tunisia...................... - 1 1 - -
------ ------ ------ ------ ------
Total Worldwide......... 7 28 20 7 8
====== ====== ====== ====== ======
Domestic. The Company incurred capital costs of $423.1 million during the
first nine months of 2002 on acquisition, drilling and seismic activities in the
Gulf of Mexico, 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 $288.4 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 September 30, 2002:
o Canyon Express - The Company incurred capital costs of $93.2 million during
the first nine months of 2002 at the TotalFinaElf-operated Aconcagua and
the Marathon Oil Corp. ("Marathon")-operated Camden Hills discoveries in
Mississippi Canyon that were jointly developed as part of the Canyon
Express gas project. First production occurred on September 19, 2002.
However, hurricanes in the Gulf of Mexico and normal start-up problems have
slowed the ramp-up of production from the project and full production is
24
PIONEER NATURAL RESOURCES COMPANY
now expected in November 2002. Production from Canyon Express for the
fourth quarter of 2002 is expected to average 70 MMcf per day net to the
Company's interest. Once the initial start-up issues are resolved and full
production is reached, the Company expects production rates of
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 Falcon - As previously discussed, the Company now has a 75 percent working
interest in the Falcon project and 30 surrounding exploration blocks and
became the operator of these projects in April 2002. The Company incurred
capital costs of $31.5 million, in addition to the $61.1 million of
acquisition costs discussed above, on the Falcon project during the first
nine months of 2002. The two development wells planned for the Falcon
development were spud during the third quarter of 2002 and will be
completed during the fourth quarter of 2002. The wells will be produced via
subsea tiebacks flowing to a production platform owned and operated by El
Paso Energy Partners, L.P. 32 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.
o Devils Tower - At the Dominion Resources Inc.-operated Devils Tower
development project in Mississippi Canyon, the Company incurred capital
costs of $20.9 million during the first nine months 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 has
experienced delays and first production is now expected no earlier than
late third quarter 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 during 2004. The Company also drilled
its Triton prospect on a block adjacent to Devils Tower during 2002, which
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 a 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.
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 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 two or 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
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. The Stirrup #2 well is currently being
evaluated for completion and a decision should be made during the fourth
quarter of 2002. The Stirrup #3 well completion attempts were not
successful and the approval to plug and abandon the well has been given by
all the partners in the project. As a result, the Company recognized a $4.7
million dry hole charge associated with this well during the third quarter
of 2002. The Company has a 25 percent working interest in this project.
25
PIONEER NATURAL RESOURCES COMPANY
o Oneida - The Aviara-operated Oneida project in East Cameron is anticipated
to commence production in early November 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.
o Cyrus - The ChevronTexaco-operated Cyrus project in High Island is now on
production at initial rates of approximately 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 and 2003 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 an eight well drilling program over the next
18 months. No assurances can be given that the Company will secure partners for
this drilling program or that the entire program will continue as planned.
In the onshore Gulf Coast region, the Company has concentrated its
drilling efforts in the Pawnee field in South Texas, where four wells were
successfully drilled during the first nine months of 2002 with two additional
wells planned for the fourth quarter of 2002 and up to seven wells to be drilled
in 2003. In addition, the Company drilled its first exploration well in its
recently acquired acreage in North Louisiana and the well is being completed as
a producer.
Permian Basin area. In the Permian Basin area, the Company incurred $14.4
million of capital costs during the first nine months of 2002 primarily on
development drilling in the Spraberry oil trend. The Company plans to drill
approximately 20 wells during the remainder of 2002 and up to 150 wells during
2003.
Mid-Continent area. In the Mid-Continent area, the Company incurred
$120.3 million of capital costs during the first nine months of 2002. As
previously discussed, during the third quarter of 2002 the Company closed the
acquisition to purchase the remaining West Panhandle assets that it did not
already own. The acquisition greatly enhances the economics of future drilling,
offers the Company greater flexibility and provides 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 in this area. The Company plans to
drill approximately 20 wells during the remainder of 2002 and up to 100 wells in
2003.
Argentina. In Argentina, the Company incurred $21.1 million of
acquisition, drilling and seismic costs during the first nine 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, during the
third quarter of 2002 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 $25.9 million of acquisition,
drilling and seismic costs during the first nine 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 the coming winter's drilling
program.
Africa. In Africa, the Company incurred $59.4 million of acquisition,
drilling and seismic costs during the first nine months of 2002 in South Africa,
Gabon and Tunisia.
South Africa. In South Africa, the Company incurred $30.6 million of
capital costs during the first nine months of 2002 on the development of its
Sable field that is expected to begin production during the first quarter of
2003. Development drilling is complete and floating production facility upgrades
are in progress. Initial production from the project is expected to average
approximately 15,000 Bbls of oil per day net to the Company's 40 percent working
26
PIONEER NATURAL RESOURCES COMPANY
interest. The Company is also evaluating its recently acquired seismic data and
anticipates spudding three exploration wells during 2003.
Gabon. In Gabon, the Company incurred $22.1 million of capital costs
during the first nine months of 2002 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 and
may drill additional extension wells in 2003. In addition, the Company is
considering the possibility of drilling one or more wells targeting deeper
horizons than those encountered in the first four wells.
Tunisia. In Tunisia, the Company incurred $6.7 million of capital costs
during the first nine months of 2002 to drill an exploration well, shoot 3-D
seismic on its operated blocks and acquire a 40 percent non-operated interest in
a fifth permit in Tunisia. In September 2002, the Company announced a successful
exploration well in its newly acquired Borj El Khadra permit in the Ghadames
basin onshore southern Tunisia. A total of four intervals were tested in the
Adam 1 discovery well at a combined rate of 6,000 barrels of oil and condensate
per day and 16 MMcf of gas per day. The field development plans contemplates
connecting production to existing facilities of Eni S.p.A. ("Eni") 12 kilometers
southwest of the location, pending partner and government approval. AGIP Tunisia
BV, a wholly-owned subsidiary of Eni, is the operator with a 50 percent working
interest; the Company has a 40 percent working interest; and Paladin Expro
Limited has the remaining 10 percent working interest. Plans for 2003 include
analyzing the seismic data acquired and drilling up to six exploration wells on
nearby blocks, of which three are scheduled for early 2003.
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 have been reduced as a result of the Argentine peso devaluation and
export tax; however, these reductions are 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. During the third quarter of
2002, the Company exchanged the peso deposits for 10-year U.S. dollar
denominated Argentine bonds at an exchange rate of 1.4 pesos to $1. The
Argentine bonds are being held as trading securities pending the Company being
able to sell the bonds in the secondary market.
Recently, the legal Counsel of the Republic of Argentina has issued
opinions that are contradictory to a decree published in January 1990 that
currently allows the Company to repatriate up to 70 percent of its cash proceeds
from Argentine oil and gas export sales. The recent opinions indicate that the
ability of oil and gas exporters to continue to freely dispose of up to 70
percent of their cash proceeds from oil and gas export sales outside of
Argentina may be challenged. The impact of such a change, if it were to occur,
on the Company's future financial position, results of operations and liquidity
would depend on the extent to which the Company's ability to repatriate proceeds
from export sales were restricted, the duration of such a restriction and the
Company's future working capital and capital expenditure plans within Argentina.
Changes in the value of the Argentine peso vis-a'-vis the U.S. dollar
resulted in a noncash credit to other expense of $176 thousand and a noncash
charge to other expense of $7.7 million during the three and nine month periods
ended September 30, 2002, respectively. These credits and charges reflect the
remeasurement of the peso-denominated monetary assets and liabilities of the
Company's Argentine subsidiaries, based on an exchange rate of 3.74 pesos to $1
as of September 30, 2002 and 3.8 pesos to $1 as of June 30, 2002.
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
27
PIONEER NATURAL RESOURCES COMPANY
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 are required to be classified in a company's
periodic consolidated statements of operations as extraordinary gains or losses,
net of associated income taxes, after the determination of income or loss from
continuing operations. SFAS 145 requires, except in the case of events or
transactions of a highly unusual and infrequent nature, gains or losses from the
early extinguishment of debt to 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 $168.3
million and $506.3 million for the three and nine month periods ended September
30, 2002, respectively, compared to $198.1 million and $674.7 million for the
same respective periods in 2001. The decline in revenues was attributable to
declines in commodity prices and slightly lower production volumes.
The following table provides the Company's volumes and average reported
prices, including the results of hedging activities, for the three and nine
month periods ended September 30, 2002 and 2001:
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Production:
Oil (MBbls).................. 2,724 3,029 8,639 9,329
NGLs (MBbls)................. 2,088 2,039 6,008 5,838
Gas (MMcf)................... 35,404 34,452 96,065 97,710
Total (MBOE)................. 10,713 10,809 30,658 31,452
Average daily production:
Oil (Bbls)................... 29,611 32,920 31,646 34,172
NGLs (Bbls).................. 22,693 22,158 22,007 21,383
Gas (Mcf).................... 384,822 374,476 351,888 357,912
Total (BOE).................. 116,441 117,491 112,301 115,208
Average reported prices:
Oil (per Bbl):
United States.............. $ 22.28 $ 25.15 $ 23.74 $ 24.93
Argentina.................. $ 20.25 $ 24.99 $ 20.27 $ 25.09
Canada..................... $ 24.67 $ 23.70 $ 21.32 $ 23.80
Worldwide.................. $ 21.77 $ 25.06 $ 22.86 $ 24.95
NGLs (per Bbl):
United States.............. $ 14.12 $ 14.77 $ 13.05 $ 18.56
Argentina.................. $ 12.73 $ 16.93 $ 13.12 $ 21.93
Canada..................... $ 14.57 $ 18.66 $ 15.85 $ 23.31
Worldwide.................. $ 14.10 $ 15.01 $ 13.17 $ 18.87
Gas (per Mcf):
United States.............. $ 3.08 $ 3.54 $ 3.12 $ 4.34
Argentina.................. $ .42 $ 1.39 $ .49 $ 1.33
Canada..................... $ 2.31 $ 1.69 $ 2.41 $ 3.35
Worldwide.................. $ 2.25 $ 2.66 $ 2.39 $ 3.40
On a BOE basis, the Company's worldwide average daily production declined
by less than one percent and three percent during the three and nine month
periods ended September 30, 2002, respectively, as compared to the same periods
in 2001. On a BOE basis, average daily production during the first nine months
of 2002, as compared to that of the first nine months of 2001, increased by two
percent in the United States, while production in Argentina and Canada decreased
28
PIONEER NATURAL RESOURCES COMPANY
by 14 percent and eight percent, respectively. Domestic production volumes
increased primarily as a result of the 42 unconsolidated affiliate partnerships
that were merged into a wholly-owned subsidiary of the Company in December 2001
and the West Panhandle acquisition that was closed in July 2002, partially
offset by natural decline. 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 was primarily attributable to the sale of the Rycroft/Spirit
River field in December 2001.
Fourth quarter 2002 production volumes are expected to average 118 MBOE
to 124 MBOE per day. Included in the mid-point of the estimate is 70 MMcf per
day net to the Company from Canyon Express as the project ramps up during the
fourth quarter to full production.
Comparing the third quarter of 2002 to the same period in 2001, the
Company's average worldwide oil price decreased 13 percent; the Company's
average worldwide NGL price decreased six percent; and the Company's average
worldwide gas price decreased 15 percent (the Company's North American gas price
decreased by seven percent). Comparing the first nine months of 2002 to the same
period in 2001, the Company's average worldwide oil price decreased by eight
percent; the Company's average worldwide NGL price decreased by 30 percent; and
the Company's average worldwide gas price decreased by 30 percent (the Company's
North American gas price decreased by 28 percent).
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
derivative instruments (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 months ended September 30, 2002, the
Company's commodity price hedges decreased oil revenues by $7.2 million and
increased gas revenues by $5.8 million, as compared to increases of $.7 million
and $14.6 million, respectively, during the third quarter of 2001. During the
nine months ended September 30, 2002, the Company's commodity price hedges
increased oil and gas revenues by $8.2 million and $26.3 million, respectively,
as compared to decreases in oil and gas revenues attributable to hedge
activities of $7.4 million and $18.6 million, respectively, during the nine
months ended September 30, 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 nine month
periods ended September 30, 2002 and 2001.
Interest and other revenues. Interest and other revenues during the three
and nine month periods ended September 30, 2002 totaled $7.1 million and $9.1
million, respectively, as compared to $6.5 million and $22.6 million during the
same respective periods of 2001. Interest and other revenue for the three months
ended September 30, 2002 included $3.5 million from a reduction to the Company's
Kansas ad valorem contingency (see Note F included in Item 1. "Financial
Statements" for information regarding the Kansas ad valorem contingency).
Interest and other revenue for the three months ended September 30, 2001
included $4.5 million from the early settlement of a contractual right received
as part of a prior litigation settlement. Interest and other revenue for the
nine months ended September 30, 2001 also included a $7.3 million mark-to-market
gain recognized on the Company's BTU swap agreements that did not qualify for
hedge accounting treatment.
Gain (loss) on disposition of assets. During the three and nine months
ended September 30, 2002, the Company recorded $3.4 million and $4.4 million,
respectively, of net gains on the disposition of assets, as compared to an $88
thousand loss on the disposition of assets during the three months ended
September 30, 2001 and a gain of $8.7 million during the nine months ended
September 30, 2001. The net gains recorded on the disposition of assets during
the three and nine month periods ended September 30, 2002 included a $2.8
million gain on the sale of non-strategic Oklahoma assets acquired during 2002
in connection with the acquisitions of West Panhandle gas field assets (see Note
D included in "Item 1. Financial Statements" and "Recent Activities", above, for
additional information regarding the West Panhandle gas field acquisitions). The
gains recognized during the first nine months of 2001 were primarily comprised
of an $8.1 million gain from the sale of shares of a non-affiliated entity's
common stock.
29
PIONEER NATURAL RESOURCES COMPANY
Production costs. During the three and nine month periods ended September
30, 2002, total production costs per BOE averaged $4.66 and $4.92, respectively,
representing decreases of $.12 per BOE (three percent) and $.15 per BOE (three
percent), as compared to total production costs per BOE of $4.78 and $5.07 per
BOE, respectively, during the same periods in 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 Company's
production cost components for the three and nine month periods ended September
30, 2002 and 2001are presented in the following table:
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
------- ------- ------- -------
(per BOE)
Lease operating expense............ $ 2.63 $ 2.89 $ 2.93 $ 2.61
Taxes:
Production...................... .60 .61 .58 .81
Ad valorem...................... .54 .52 .54 .47
Field fuel expenses................ .63 .60 .59 1.00
Workover costs..................... .26 .16 .28 .18
------ ------ ------ ------
Total production costs....... $ 4.66 $ 4.78 $ 4.92 $ 5.07
====== ====== ====== ======
The quarter-to-quarter decrease in lease operating expenses was
attributable to lower Argentine expenses on a U.S. dollar equivalent basis due
to the devaluation of the Argentine peso versus the U.S. dollar and cost savings
on the assets acquired as part of the West Panhandle acquisition. Lease
operating expenses, on a per BOE basis, have increased during the nine months
ended September 30, 2002, as compared to the nine months ended September 30,
2001, 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. The decrease in third party gas processing and treating income during
2002 was offset by lower Argentine lease operating expenses resulting from the
devaluation during 2002 of the Argentine peso relative to the U.S. dollar.
Based on market-quoted commodity prices in October 2002, the Company
expects fourth quarter 2002 production costs to average $4.75 to $5.00 per BOE.
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $5.11 and $5.09
during the three and nine month periods ended September 30, 2002, respectively,
as compared to $5.56 and $5.39 during the three and nine month periods ended
September 30, 2001. Depletion expense per BOE, the largest component of
depletion, depreciation and amortization, was $4.91 and $4.88 per BOE during the
three and nine month periods ended September 30, 2002, respectively, as compared
to $5.26 and $5.05 per BOE during the same periods in 2001. The decrease in
depletion expense per BOE during 2002 as compared to 2001 was primarily due to
increased proved reserves in Argentina as a result of the successful exploration
and extension drilling program in Argentina during 2001 at favorable finding
costs and a greater portion of 2002 worldwide production being lower-cost- basis
domestic production than was the case during 2001.
The Company expects fourth quarter 2002 depletion, depreciation and
amortization expense to average $5.50 to $5.75 per BOE. The increase is
principally due to the higher depletion rate per BOE attributable to the
production from Canyon Express.
Exploration and abandonments/geological and geophysical costs.
Exploration and abandonments, geological and geophysical costs were $18.3
million and $57.3 million during the three and nine month periods ended
September 30, 2002, respectively, as compared to $24.7 million and $94.1 million
during the same respective periods in 2001. During the nine months ended
September 30, 2002, the Company's exploratory dry holes in the United States
were primarily comprised of the Turnberry exploratory well that was drilled in
the Gulf of Mexico and was determined to be noncommercial, the first Ozona Deep
appraisal sidetrack which was unsuccessful during the second quarter of 2002 and
the Mustang Island 861 #3 well in the Stirrup prospect that was determined to be
unsuccessful during the third quarter of 2002.
30
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's geological and geophysical,
exploratory dry hole, lease abandonment and other exploration expenses by
country for the three and nine month periods ended September 30, 2002 and 2001:
United Other
States Argentina Canada Foreign Total
-------- --------- -------- -------- ---------
(in thousands)
Three months ended September 30, 2002:
Geological and geophysical................ $ 6,210 $ 114 $ 682 $ 1,450 $ 8,456
Exploratory dry holes..................... 4,119 1,212 8 45 5,384
Leasehold abandonments and other.......... 2,228 1,517 739 - 4,484
------- ------- ------- ------- -------
$ 12,557 $ 2,843 $ 1,429 $ 1,495 $ 18,324
======= ======= ======= ======= =======
Three months ended September 30, 2001:
Geological and geophysical............... $ 8,463 $ 827 $ 163 $ 2,617 $ 12,070
Exploratory dry holes.................... 6,764 1,291 1,195 1,589 10,839
Leasehold abandonments and other......... 1,065 610 82 - 1,757
------- ------- ------- ------- -------
$ 16,292 $ 2,728 $ 1,440 $ 4,206 $ 24,666
======= ======= ======= ======= =======
Nine months ended September 30, 2002:
Geological and geophysical................ $ 16,512 $ 3,329 $ 3,049 $ 5,303 $ 28,193
Exploratory dry holes..................... 18,803 1,611 1,198 249 21,861
Leasehold abandonments and other.......... 4,526 1,691 1,025 8 7,250
------- ------- ------- ------- -------
$ 39,841 $ 6,631 $ 5,272 $ 5,560 $ 57,304
======= ======= ======= ======= =======
Nine months ended September 30, 2001:
Geological and geophysical............... $ 22,264 $ 2,283 $ 662 $ 11,395 $ 36,604
Exploratory dry holes.................... 25,043 3,423 6,550 10,030 45,046
Leasehold abandonments and other......... 3,260 7,505 1,709 8 12,482
------- ------- ------- ------- -------
$ 50,567 $ 13,211 $ 8,921 $ 21,433 $ 94,132
======= ======= ======= ======= =======
The Company expects fourth 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 nine month periods ended September 30, 2002 were $12.5 million
and $35.1 million, respectively, as compared to general and administrative
expenses of $8.2 million and $26.6 million during the same respective periods in
2001. The $4.3 million and $8.5 million increases in general and administrative
expenses during the three and nine month periods ended September 30, 2002, as
compared to the same periods in 2001, were principally due to the elimination of
operating overhead being charged by the Company to the 42 unconsolidated
affiliated partnerships that were merged into a wholly-owned subsidiary of the
Company during December 2001. Additionally, the Company awarded 645,545 shares
of restricted stock to directors, officers and key employees as part of the
Company's compensation program. Amortization of the deferred costs of the
restricted stock increased general and administrative expenses by approximately
$.3 million during the three and nine month periods ended September 30, 2002.
The Company expects fourth quarter 2002 general and administrative
expense to be approximately $13 million. The increase in forecasted general and
administrative expense is principally due to approximately $1.0 million of
restricted stock amortization that is scheduled to be recognized in general and
administrative expense during the fourth quarter of 2002.
Interest expense. Interest expense for the three and nine months ended
September 30, 2002 was $20.3 million and $71.4 million, respectively, as
compared to $32.3 million and $102.1 million for the same periods in 2001,
respectively. The $12.0 million (37 percent) decrease in interest expense during
the three months ended September 30, 2002, as compared to the same period in
2001, was primarily due to a $4.1 million increase in interest savings from the
Company's interest rate hedging program, reductions in underlying market
interest rates, approximately $2.3 million of savings from the repayment of the
West Panhandle gas field capital obligation in July 2002, the retirement of the
Company's 10-5/8 percent and 11-5/8 percent senior notes during the third
31
PIONEER NATURAL RESOURCES COMPANY
quarter of 2001,the repurchase of $85.8 million of the Company's 9-5/8 percent
senior notes during the fourth quarter of 2001 and the first nine months of 2002
and a $3.8 million increase in capitalized interest.
The $30.7 million (30 percent) decrease in interest expense during the
nine months ended September 30, 2002, as compared to the same period in 2001, is
primarily the result of a $15.8 million increase in interest savings from the
Company's interest rate hedging program, reductions in underlying market
interest rates, approximately $2.3 million of savings from the repayment of the
West Panhandle gas field capital obligation, the retirement of the Company's
10-5/8 percent and 11-5/8 percent senior notes during the third quarter of 2001,
the repurchase of $85.8 million of the Company's 9-5/8 percent senior notes
during the fourth quarter of 2001 and the first half of 2002 and a $6.0 million
increase in capitalized interest.
As noted above, increases in capitalized interest and hedge gains on
interest rate swaps significantly decreased the Company's interest expense
during the three and nine month periods ended September 30, 2002. The largest
capital project for which interest has been capitalized by the Company is the
Canyon Express development project, which was completed and placed into
operation during September 2002. As such, capitalization of Canyon Express
interest costs has ceased. Additionally, as discussed in Note C of Item 1.
"Financial Statements", the Company has terminated the interest rate swaps that
hedge the fair value of its long-term debt and has deferred $43.0 million of
aggregate hedge gains that will be amortized as reductions to the interest
expense of future periods.
The Company expects fourth quarter 2002 interest expense to be $23
million to $25 million. The forecasted increase in interest expense during the
fourth quarter of 2002 is principally due to completion of the Canyon Express
development project. Additionally, based on the Company's ratio of total debt to
earnings before depletion, depreciation and amortization expense; exploration
and abandonments; interest expense; income taxes; gain or loss on the
disposition of assets; extraordinary items; commodity related amortization; and,
other noncash charges and expenses during the year ended September 30, 2002, he
effective annual rate of interest incurred on borrowings under the Company's
$575 million corporate credit facility is expected to increase by 12.5 basis
points during the fourth quarter of 2002.
Other expenses. Other expense for the three and nine month periods ended
September 30, 2002 was $2.1 million and $15.3 million, respectively, compared to
$2.0 million and $29.1 million for the same periods in 2001. Significant
elements of the $13.8 million decrease in other expense during the nine months
ended September 30, 2002, as compared to the same period in 2001, included a
$9.6 million decrease in charges associated with ineffective and excluded
components of changes in the fair value of hedge derivatives, an $8.0 million
decrease in gas marketing losses and a $6.6 million decrease in mark-to-market
charges associated with non-hedge derivatives, partially offset by $7.7 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. During the three and nine month periods ended
September 30, 2002, the Company recognized income tax provisions of $2.2 million
and $3.2 million, respectively, compared to income tax provisions of $2.4
million and $5.4 million for the three and nine month periods ended September
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 will be reduced when
the Company's financial results establish that it is more likely than not that
deferred tax assets previously reserved will be used prior to their expiration.
During the fourth quarter of 2002, the Company estimates that its income
tax provision will be approximately $2 million and primarily associated with
Argentine operations as the Company benefits from its net operating loss
carryforwards in the United States and Canada.
Extraordinary items - loss on early extinguishment of debt, net of tax.
During the three and nine month periods ended September 30, 2002, the Company
repurchased $27.1 million and $47.1 million, respectively, of its outstanding
9-5/8 percent senior notes due 2010. In connection therewith, the Company
recognized losses of $3.9 million and $6.7 million which are classified as
extraordinary items in the Company's consolidated statements of operations for
the three and nine month periods ended September 30, 2002, respectively.
Additionally, during July 2002, the Company repaid a $45.2 million capital cost
32
PIONEER NATURAL RESOURCES COMPANY
obligation in connection with the acquisition of West Panhandle field assets
(see Note D 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 repayment of the
capital cost obligation, the Company recognized a third quarter 2002
extraordinary loss, net of associated taxes, of $15.6 million. See "New
Accounting Pronouncement", above, for information regarding the future
classification of gains and losses from the early extinguishment of debt. In
July 2001, the Company redeemed its outstanding 11-5/8 percent senior
subordinated discount notes due 2006 and 10-5/8 percent subordinated notes due
2006 for $31.0 million. The aggregate carrying value of the 11-5/8 percent
senior subordinated discount notes due 2006 and 10-5/8 percent senior
subordinated notes due 2006 was $32.4 million. Associated with this redemption,
the Company recognized an extraordinary gain of $1.4 million during the three
and nine month periods ended September 30, 2001.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of contractual obligations and working capital obligations.
Oil and gas properties. The Company's cash capital expenditures for oil
and gas producing activities during the three and nine month periods ended
September 30, 2002 totaled $226.4 million and $489.7 million, respectively. The
Company's third quarter 2002 capital expenditures were funded by $87.7 million
of net cash provided by operating activities, $59.9 million of proceeds from the
disposition of assets (see "Sales of Assets", below) and borrowings under the
Company's credit facility. The Company's capital expenditures during the nine
months ended September 30, 2002 were funded by $228.3 million of net cash
provided by operating activities, $118.8 million of proceeds from the
disposition of assets and a portion of the net proceeds from the Stock Offering.
The Company's capital expenditures for the first nine months of 2001 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 nine months ended September 30, 2002, the
Company increased its long-term debt by $73.5 million, reduced its obligations
under the Btu swap agreements by $4.5 million and settled terminated commodity
hedge obligations for $27.8 million. Additionally, the Company terminated
interest rate swap contracts, locking-in deferred cash gains of $32.0 million
and settled a $45.2 million capital cost obligation that bore interest at an
annual rate of 20 percent for $60.8 million (see Notes C and D in Item 1.
"Financial Statements" for additional information regarding these transactions).
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 nine months ended September 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 remaining capital commitments in 2002.
Operating activities. Net cash provided by operating activities was $87.7
million and $228.3 million during the three and nine months ended September 30,
2002, respectively, as compared to net cash provided by operating activities of
$122.9 million and $390.0 million for the same periods in 2001. The decrease in
net cash provided by operating activities during the three and nine months ended
September 30, 2002, as compared to the same periods in 2001, was primarily due
to declines in commodity prices and slightly lower production volumes.
33
PIONEER NATURAL RESOURCES COMPANY
Financing activities. During the three and nine months ended September
30, 2002, the Company received $90.4 million and $163.8 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 $382.7
million. The net proceeds were utilized to fund the acquisition of the Falcon
assets and associated acreage in the deepwater Gulf of Mexico and the July 2002
closing of the West Panhandle transaction.
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 obligated the Company to pay the
counterparties a variable annual rate equal to the six-month London Interbank
Offered Rate plus 3.97 percent and obligated the counterparties to pay the
Company a fixed rate of 8-7/8 percent. The interest rate swap contracts were to
mature on April 15, 2005. During September 2002, the Company terminated the
interest rate swaps associated with the 8-7/8 percent senior note and its other
interest rate swap agreements in order to lock-in $32.0 million of hedge gains
that will be amortized as reductions in the Company's interest expense reported
during future operating periods. See Note C in Item 1. "Financial Statements"
for additional information regarding interest rate swap transactions.
During the three and nine month periods ended September 30, 2002, the
Company repurchased $27.1 million and $47.1 million of respective principal
amounts of its 9-5/8 percent senior notes due 2010 and repaid $45.2 million of
capital cost obligations. See "Results of Operations" for additional information
regarding these early extinguishments of debt.
Outstanding borrowings under the corporate credit facility totaled $221.0
million as of September 30, 2002. The weighted average interest rate on the
Company's indebtedness for the three and nine months ended September 30, 2002
was 4.63 percent and 5.57 percent, respectively, as compared to 7.27 percent and
7.79 percent for the same respective periods in 2001, taking into account the
effect of lower market interest rates, the Company's interest rate hedge gains
and capitalized interest.
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 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 nine months ended September 30,
2002, proceeds from asset dispositions totaled $59.9 million and $118.8 million,
respectively, as compared to $57.8 million and $73.0 million for the same
periods in 2001. The Company's assets divested during 2002 were primarily
comprised of hedge derivatives and gas balancing assets. During the three and
nine month periods ended September 30, 2001, the sale of hedge derivatives and
an investment in a non-affiliated entity were the primary sources of the
Company's proceeds from asset dispositions.
Book capitalization and liquidity. Total debt was $1.65 billion as of
September 30, 2002, as compared to total debt of $1.58 billion on December 31,
2001. The Company's total book capitalization at September 30, 2002 was $3.05
billion, consisting of total debt and stockholders' equity of $1.4 billion.
Consequently, the Company's debt to total capitalization decreased to 54 percent
at September 30, 2002 from 55 percent at December 31, 2001. The Company's ratio
of current assets to current liabilities was .67 at September 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 $326.1 million of unused borrowing capacity available
under its corporate credit facility as of September 30, 2002.
34
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 nine 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........... (118,286) 62,786 159 (55,341)
Contract realizations:
Maturities........................... (61,244) (11,155) (192 (72,591)
Termination - cash settlements....... (59,289) (31,994) - (91,283)
-------- ------- ---- -------
Fair value of contracts outstanding
as of September 30, 2002.............. $ (58,265) $ - $ 28 $ (58,237)
======== ======== ===== ========
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 September 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 nine months ended September 30,
2002, the Company sold $150 million of 7-1/2 percent senior notes due 2012,
reduced its outstanding borrowings under the Company's corporate credit facility
and terminated its interest rate swap agreements for proceeds of $32.0 million.
The following table provides information, in U. S. dollar equivalent amounts,
about financial instruments that the Company was a party to as of September 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 September 30, 2002. For variable
rate debt, the average interest rate represents the average rates currently
being paid on the debt projected forward based upon eurodollar synthetic forward
rates.
Interest Rate Sensitivity
Financial Instruments as of September 30, 2002
(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.......... $ - $ - $ - $150,000 $ - $1,279,756 $1,429,756 $(1,395,791)
Weighted average
interest rate.......... 7.94% 7.94% 7.94% 7.87% 7.83% 7.83%
Variable rate debt....... $ - $ - $ - $221,000 $ - $ - $ 221,000 $ (221,000)
Average interest rates... 3.32% 4.08% 6.44% 7.97%
35
PIONEER NATURAL RESOURCES COMPANY
Commodity price sensitivity. During the first nine 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 September 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
prices.
Oil Price Sensitivity
Derivative Financial Instruments as of September 30, 2002
(Liability)
2002 2003 2004 Fair Value
------- ------- ------- ----------
(in thousands, except volumes and prices)
Oil Hedge Derivatives:
Average daily notional Bbl volumes (1):
Swap contracts............................ 22,000 28,000 14,000 $(29,383)
Weighted average fixed price per Bbl... $ 23.91 $ 24.44 $ 23.11
Average forward NYMEX oil
prices per Bbl (2)........................ $ 26.81 $ 25.03 $ 23.16
- ---------------
(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) The average forward NYMEX oil prices are based on October 30, 2002 market
quotes.
Gas Price Sensitivity
Derivative Financial Instruments as of September 30, 2002
2006
& (Liability)
2002 2003 2004 2005 2007 Fair Value
-------- -------- -------- -------- --------- -----------
(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 $ (22,983)
Weighted average fixed price per
MMBtu................................ $ 3.98 $ 3.83 $ 3.84 $ 3.74 $ 3.75
Collar contracts........................ 120,000 $ (5,899)
Weighted average short call ceiling
price per MMBtu...................... $ 3.64
Weighted average long put floor price
per MMBtu............................ $ 2.79
Average forward NYMEX gas
prices per MMBtu (3).................... $ 4.39 $ 4.12 $ 3.95 $ 3.83 $ 3.81
- --------------
(1) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to convert 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 gas prices are based on October 30, 2002 market
quotes.
36
PIONEER NATURAL RESOURCES COMPANY
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Within 90 days prior to
the filing date of this Report, the Company's principal executive officer
("CEO") and principal financial officer ("CFO") carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures. Based on
those evaluations, the Company's CEO and CFO believe (i) that the Company's
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports it files under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms and that such
information is accumulated and communicated to the Company's management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure; and (ii) that the Company's disclosure controls and
procedures are effective.
(b) Changes in internal controls. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the evaluation referred to
in Item 4. (a), above, nor have there been any corrective actions with regard to
significant deficiencies or material weaknesses.
37
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 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 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).
10.4 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).
10.5 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).
Reports on Form 8-K
During the three months ended September 30, 2002, the Company filed one
Current Report on Form 8-K dated July 24, 2002. The Company's July 24, 2002 Form
8-K provided, under Items 7 and 9, (i) the Company's news release dated July 24,
2002 that announced the Company's financial and operating results for the three
and six month periods ended June 30, 2002, an operational update and the
Company's third quarter 2002 financial outlook; and (ii) tables summarizing, as
of July 23, 2002, the Company's open oil hedge positions, open gas hedge
positions and deferred hedge gains and losses on terminated commodity hedges.
38
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 thereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: October 31, 2002 By: /s/ Timothy L. Dove
----------------------------------
Timothy L. Dove
Executive Vice President and
Chief Financial Officer
Date: October 31, 2002 By: /s/ Richard P. Dealy
----------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
39
PIONEER NATURAL RESOURCES COMPANY
CERTIFICATIONS
I, Scott D. Sheffield, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer Natural
Resources Company (the "Company"):
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
October 31, 2002
/s/ Scott D. Sheffield
-----------------------------------------
Scott D. Sheffield, Chairman, President
and Chief Executive Officer
40
PIONEER NATURAL RESOURCES COMPANY
I, Timothy L. Dove, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer Natural
Resources Company (the "Company"):
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
October 31, 2002
/s/ Timothy L. Dove
------------------------------------------
Timothy L. Dove, Executive Vice President
and Chief Financial Officer
41
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 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).
10.4 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).
10.5 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).
42