UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 Number: 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 No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
(972) 444-9001
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / x / No / /
Number of shares of Common Stock outstanding as of July 31, 2004.... 120,092,405
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and Conventions Used Herein............ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003..................................... 4
Consolidated Statements of Operations for the three
and six months ended June 30, 2004 and 2003........... 5
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2004.................... 6
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2004 and 2003........... 7
Consolidated Statements of Comprehensive Income
(Loss) for the three and six months ended
June 30, 2004 and 2003................................ 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.................................. 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 39
Item 4. Submission of Matters to a Vote of Security Holders...... 39
Item 6. Exhibits and Reports on Form 8-K......................... 40
Signatures ......................................................... 41
Exhibit Index ......................................................... 42
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions have
specific meanings: "Bbl" means a standard barrel containing 42 United States
gallons; "BOE" means a barrel of oil equivalent and is a standard convention
used to express oil and gas volumes on a comparable oil equivalent basis; "Btu"
means British thermal unit and is a measure of the amount of energy required to
raise the temperature of one pound of water one degree Fahrenheit; "LIBOR" means
London Interbank Offered Rate, which is a market rate of interest;"MBbl" means
one thousand Bbls; "MBOE" means one thousand BOEs; "Mcf" means one thousand
cubic feet and is a measure of natural gas volume; "MMBtu" means one million
Btus; "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 ("Pioneer" or the "Company") 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)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 15,212 $ 19,299
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,950 and
$4,727 as of June 30, 2004 and December 31, 2003, respectively... 166,120 111,033
Due from affiliates................................................ 419 447
Inventories........................................................... 21,784 17,509
Prepaid expenses...................................................... 6,236 11,083
Deferred income taxes................................................. 29,241 40,514
Other current assets:
Derivatives........................................................ 188 423
Other, net of allowance for doubtful accounts of $4,486 as of
June 30, 2004 and December 31, 2003.............................. 8,460 4,807
---------- ----------
Total current assets.......................................... 247,660 205,115
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties.................................................. 5,181,261 4,983,558
Unproved properties................................................ 203,758 179,825
Accumulated depletion, depreciation and amortization.................. (1,946,172) (1,676,136)
---------- ----------
Total property, plant and equipment........................... 3,438,847 3,487,247
---------- ----------
Deferred income taxes................................................... 182,142 192,344
Other property and equipment, net....................................... 29,224 28,080
Other assets:
Derivatives........................................................... 105 209
Other, net of allowance for doubtful accounts of $92 as of
June 30, 2004 and December 31, 2003................................ 46,483 38,577
---------- ----------
$ 3,944,461 $ 3,951,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.............................................................. $ 165,496 $ 177,614
Due to affiliates.................................................. 4,773 8,804
Interest payable...................................................... 37,321 37,034
Income taxes payable.................................................. 10,383 5,928
Other current liabilities:
Derivatives........................................................ 203,811 161,574
Other.............................................................. 37,388 38,798
---------- ----------
Total current liabilities..................................... 459,172 429,752
---------- ----------
Long-term debt.......................................................... 1,391,363 1,555,461
Derivatives............................................................. 147,080 48,825
Deferred income taxes................................................... 11,329 12,121
Other liabilities....................................................... 150,604 145,641
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
120,134,938 and 119,665,784 shares issued as of
June 30, 2004 and December 31, 2003, respectively.................. 1,202 1,197
Additional paid-in capital............................................ 2,751,495 2,734,403
Treasury stock, at cost; 90,524 and 378,012 shares as of
June 30, 2004 and December 31, 2003, respectively.................. (2,716) (5,385)
Deferred compensation................................................. (21,614) (9,933)
Accumulated deficit................................................... (770,840) (887,848)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax.............................. (198,262) (104,130)
Cumulative translation adjustment.................................. 25,648 31,468
---------- ----------
Total stockholders' equity.................................... 1,784,913 1,759,772
Commitments and contingencies
---------- ----------
$ 3,944,461 $ 3,951,572
========== ==========
The financial information included as of June 30, 2004 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues and other income:
Oil and gas....................................... $ 446,993 $ 344,240 $ 893,519 $ 629,239
Interest and other................................ 1,610 1,260 3,345 3,973
Gain (loss) on disposition of assets, net......... (232) 104 (245) 1,530
-------- -------- -------- --------
448,371 345,604 896,619 634,742
-------- -------- -------- --------
Costs and expenses:
Oil and gas production............................ 95,565 73,843 184,776 141,710
Depletion, depreciation and amortization.......... 142,750 100,559 279,249 170,608
Exploration and abandonments...................... 39,683 47,047 120,189 82,914
General and administrative........................ 17,194 13,644 35,523 29,125
Accretion of discount on asset retirement
obligations...................................... 2,016 1,235 3,982 2,329
Interest.......................................... 21,402 23,823 42,978 46,314
Other............................................. 8,300 5,638 8,496 10,816
-------- -------- -------- --------
326,910 265,789 675,193 483,816
-------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle................. 121,461 79,815 221,426 150,926
Income tax provision................................ (51,759) (2,630) (91,536) (4,934)
-------- -------- -------- --------
Income before cumulative effect of change in
accounting principle.............................. 69,702 77,185 129,890 145,992
Cumulative effect of change in accounting
principle, net of tax............................. - - - 15,413
-------- -------- -------- --------
Net income.......................................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
======== ======== ======== ========
Net income per share:
Basic:
Income before cumulative effect of change in
accounting principle......................... $ .59 $ .66 $ 1.09 $ 1.25
Cumulative effect of change in accounting
principle, net of tax........................ - - - .13
-------- -------- -------- --------
Net income................................... $ .59 $ .66 $ 1.09 $ 1.38
======== ======== ======== ========
Diluted:
Income before cumulative effect of change in
accounting principle......................... $ .58 $ .65 $ 1.08 $ 1.23
Cumulative effect of change in accounting
principle, net of tax........................ - - - .13
-------- -------- -------- --------
Net income................................... $ .58 $ .65 $ 1.08 $ 1.36
======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 118,855 117,005 118,787 116,875
======== ======== ======== ========
Diluted........................................ 120,402 118,969 120,333 118,823
======== ======== ======== ========
Dividends declared per share........................ $ - $ - $ .10 $ -
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Deferred
Additional Hedge Cumulative Total
Common Paid-in Treasury Deferred Accumulated Losses, Translation Stockholders'
Stock Capital Stock Compensation Deficit Net of Tax Adjustment Equity
------ ---------- -------- ------------ ----------- ----------- ----------- ------------
Balance as of January 1, 2004..... $1,197 $2,734,403 $ (5,385) $ (9,933) $ (887,848) $(104,130) $ 31,468 $1,759,772
Dividends declared.............. - - - - (12,005) - - (12,005)
Exercise of long-term incentive
plan stock options............ - (3,070) 17,955 - (877) - - 14,008
Purchase of treasury stock...... - - (15,286) - - - - (15,286)
Tax benefits related to
stock-based compensation...... - 3,620 - - - - - 3,620
Deferred compensation:
Compensation deferred......... 5 16,542 - (16,547) - - - -
Deferred compensation included
in net income................ - - - 4,866 - - - 4,866
Net income...................... - - - - 129,890 - - 129,890
Other comprehensive income (loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses... - - - - - (237,596) - (237,596)
Net hedge losses included in
net income................. - - - - - 86,885 - 86,885
Tax benefits related to net
hedge losses............... - - - - - 56,579 - 56,579
Translation adjustment........ - - - - - - (5,820) (5,820)
----- --------- ------- ------- --------- -------- ------- ---------
Balance as of June 30, 2004....... $1,202 $2,751,495 $ (2,716) $(21,614) $ (770,840) $(198,262) $ 25,648 $1,784,913
===== ========= ======= ======= ========= ======== ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Cash flows from operating activities:
Net income........................................ $ 69,702 $ 77,185 $ 129,890 $ 161,405
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization....... 142,750 100,559 279,249 170,608
Exploration expenses, including dry holes...... 33,458 37,264 112,278 67,527
Deferred income taxes.......................... 47,144 (501) 79,864 (247)
(Gain) loss on disposition of assets, net...... 232 (104) 245 (1,530)
Accretion of discount on asset retirement
obligations.................................. 2,016 1,235 3,982 2,329
Interest related amortization.................. (4,993) (4,614) (11,363) (9,179)
Commodity hedge related amortization........... (11,242) (18,205) (22,533) (35,987)
Cumulative effect of change in accounting
principle, net of tax........................ - - - (15,413)
Amortization of stock-based compensation....... 2,887 1,343 4,866 2,712
Other noncash items............................ 6,463 906 5,704 4,270
Changes in operating assets and liabilities:
Accounts receivable, net....................... (24,803) 11,322 (58,540) (14,645)
Inventories.................................... (4,161) (3,857) (4,180) (4,217)
Prepaid expenses............................... 3,930 (1,362) 4,847 (9,584)
Other current assets, net...................... - (884) 757 (486)
Accounts payable............................... 1,248 (2,711) (4,754) 5,670
Interest payable............................... (607) (791) 86 (269)
Income taxes payable........................... 1,397 724 4,455 2,176
Other current liabilities...................... (717) (7,645) (6,519) (929)
-------- -------- -------- --------
Net cash provided by operating activities.... 264,704 189,864 518,334 324,211
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............... 255 10,159 540 25,712
Additions to oil and gas properties............... (183,605) (134,343) (350,831) (387,096)
Other property additions, net..................... (8,883) (4,075) (14,243) (6,356)
-------- -------- -------- --------
Net cash used in investing activities........ (192,233) (128,259) (364,534) (367,740)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................... 100,394 55,184 156,477 171,812
Principal payments on long-term debt.............. (146,394) (112,349) (292,477) (127,349)
Payment of other liabilities...................... (3,764) (2,290) (8,119) (6,228)
Exercise of long-term incentive plan stock
options......................................... 5,513 4,515 14,008 9,861
Purchase of treasury stock........................ (9,720) (2,349) (15,286) (2,349)
Payment of financing fees......................... (132) - (132) -
Dividends paid.................................... (12,005) - (12,005) -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities..................... (66,108) (57,289) (157,534) 45,747
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 6,363 4,316 (3,734) 2,218
Effect of exchange rate changes on cash and
cash equivalents.................................. (173) 982 (353) 1,448
Cash and cash equivalents, beginning of period...... 9,022 6,858 19,299 8,490
-------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 15,212 $ 12,156 $ 15,212 $ 12,156
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income...................................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
-------- -------- -------- --------
Other comprehensive loss:
Net deferred hedge losses, net of tax:
Net deferred hedge losses.................. (120,204) (118,894) (237,596) (235,058)
Net hedge losses included in net income.... 56,129 22,598 86,885 72,961
Tax benefits (provisions) related to net
hedge gains and losses................... 24,692 - 56,579 (268)
Translation adjustment........................ (3,579) 17,633 (5,820) 29,825
-------- -------- -------- --------
Other comprehensive loss................. (42,962) (78,663) (99,952) (132,540)
-------- -------- -------- --------
Comprehensive income (loss)..................... $ 26,740 $ (1,478) $ 29,938 $ 28,865
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is an independent oil and gas
exploration and production company with ownership interests in oil and gas
properties located in the United States, Argentina, Canada, Equatorial Guinea,
Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of June 30, 2004 and for the three and
six months ended June 30, 2004 and 2003 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 United States Securities and Exchange Commission ("SEC").
These consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2003.
Adoption of SFAS 143. On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
the provisions of SFAS 143, asset retirement obligations are capitalized as part
of the carrying value of the long-lived asset.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record a gain of $15.4 million, net of $1.3 million of deferred
tax, as a cumulative effect adjustment of a change in accounting principle in
the Company's Consolidated Statements of Operations. See Note F for additional
information regarding the Company's asset retirement obligations.
Inventories. Inventories are comprised of $20.3 million and $15.3 million
of lease and well equipment and $1.5 million and $2.2 million of commodities as
of June 30, 2004 and December 31, 2003, respectively. Lease and well equipment
inventories are net of lower of cost or market allowances of $.6 million as of
June 30, 2004 and December 31, 2003.
Stock-based compensation. The Company has a long-term incentive plan (the
"Long-Term Incentive Plan") under which the Company grants stock-based
compensation. The Company accounts for stock-based compensation granted under
the Long-Term Incentive Plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company did not grant any stock
options during the six months ended June 30, 2004. Stock-based compensation
expense associated with option grants was not recognized in the determination of
the Company's net income during the three and six months ended June 30, 2004 and
2003, as all options granted under the Long-Term Incentive Plan had exercise
prices equal to the market value of the underlying common stock on the dates of
grant. Stock-based compensation expense associated with restricted stock awards
is deferred and amortized to earnings ratably over the vesting periods of the
awards.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The following table illustrates the pro forma effect on net income and
earnings per share as if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" to stock-based compensation during the three and
six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported....................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a).............................. 1,833 1,343 3,090 2,712
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (a).............. (3,421) (4,537) (6,536) (8,938)
------- ------- -------- --------
Pro forma net income.......................... $ 68,114 $ 73,991 $ 126,444 $ 155,179
======= ======= ======== ========
Net income per share:
Basic - as reported......................... $ .59 $ .66 $ 1.09 $ 1.38
======= ======= ======== ========
Basic - pro forma........................... $ .57 $ .63 $ 1.06 $ 1.33
======= ======= ======== ========
Diluted - as reported....................... $ .58 $ .65 $ 1.08 $ 1.36
======= ======= ======== ========
Diluted - pro forma......................... $ .57 $ .62 $ 1.05 $ 1.31
======= ======= ======== ========
- -----------
(a) For the three and six months ended June 30, 2004, stock-based compensation
expense included in net income is net of tax benefits of $1.1 million and
$1.8 million, respectively. Similarly, stock-based compensation expense
determined under the fair value based method for the three and six months
ended June 30, 2004 is net of tax benefits of $2.0 million and $3.8
million, respectively. No tax benefits were recognized for stock-based
compensation expense during the three and six months ended June 30, 2003.
See Note C for additional information regarding the Company's income taxes.
NOTE C. Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that the Company continually assess both
positive and negative evidence to determine whether it is more likely than not
that deferred tax assets can be realized prior to their expiration. From 1998
until 2003, the Company maintained a valuation allowance against a portion of
its deferred tax asset position in the United States. During the third quarter
of 2003, the Company concluded that it was more likely than not that it would be
able to realize its gross deferred tax asset position in the United States.
Accordingly, the Company reversed its valuation allowances in the United States.
As a result of the reversal of the valuation allowances against the Company's
United States deferred tax assets, the Company's effective tax rate on future
earnings in the United States will approximate statutory rates.
Pioneer will continue to monitor Company-specific, oil and gas industry and
worldwide economic factors and will assess the likelihood that the Company's net
operating loss carryforwards and other deferred tax attributes in the United
States and foreign tax jurisdictions will be utilized prior to their expiration.
As of June 30, 2004, the Company's valuation allowances related to foreign tax
jurisdictions were $102.2 million.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Income tax provision (benefit) attributable to income before cumulative
effect of change in accounting principle consisted of the following for the
three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Current:
U.S. state and local.................... $ 1,798 $ 660 $ 2,801 $ 638
Foreign................................. 2,817 2,471 8,871 4,543
------- ------- ------- -------
4,615 3,131 11,672 5,181
------- ------- ------- -------
Deferred:
U.S. state and local.................... 47,661 - 83,170 -
Foreign................................. (517) (501) (3,306) (247)
------- ------- ------- -------
47,144 (501) 79,864 (247)
------- ------- ------- -------
$ 51,759 $ 2,630 $ 91,536 $ 4,934
======= ======= ======= =======
NOTE D. Long-term Debt
During June 2004, the Company entered into a first amendment (the "First
Amendment") to its $700 million, five-year revolving credit agreement (the
"Revolving Credit Agreement"). As a result of the First Amendment, Pioneer
Natural Resources USA, Inc., a wholly-owned subsidiary of the Company ("Pioneer
USA"), is no longer a guarantor of the Revolving Credit Agreement. The
indentures of the Company's senior notes provide for subsidiary guarantees
equivalent to any such guarantees provided under the Revolving Credit Agreement.
Accordingly, the First Amendment also has the effect of removing Pioneer USA as
a guarantor of the Company's senior notes.
NOTE E. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of minimizing costs of capital.
During March 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge the fair value of its 7-1/2
percent senior notes. The terms of the interest rate swap contracts match the
scheduled maturity of the hedged senior notes, require the counterparties to pay
the Company a 7-1/2 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six-month LIBOR plus a weighted average annual margin of 3.71 percent. During
April 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge the fair value of its 9-5/8
percent senior notes. The terms of the new 9-5/8 percent interest rate swap
contracts match the scheduled maturity of the senior notes which they hedge,
require the counterparties to pay the Company a 9-5/8 percent fixed annual
interest rate and require the Company to pay the counterparties variable annual
interest rates equal to the periodic six-month LIBOR plus a weighted average
annual margin of 5.66 percent. During February 2003, the Company entered into
similar interest rate swap contracts which were terminated during May 2003 for
$11.4 million of cash proceeds. As of June 30, 2004, the aggregate carrying
value of the Company's open fair value hedges was a liability of $14.9 million.
Settlements of open fair value hedges reduced the Company's interest expense by
$1.8 million and $1.1 million during the three-month periods ended June 30, 2004
and 2003, respectively, and by $2.0 million and $1.9 million during the
six-month periods then ended, respectively.
As of June 30, 2004, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included $14.0 million of
incremental carrying value attributable to net deferred hedge gains on
terminated interest rate swaps that are being amortized as net reductions to
interest expense over the original terms of the terminated agreements. The
amortization of net deferred hedge gains on terminated interest rate swaps
reduced the Company's reported interest expense by $6.1 million and $6.0 million
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
during the three-month periods ended June 30, 2004 and 2003, respectively, and
by $13.4 million and $11.9 million during the six-month periods then ended,
respectively.
The following table sets forth, as of June 30, 2004, the scheduled
amortization of net deferred hedge gains and losses on terminated fair value
hedges that will be recognized as increases in the case of losses, or decreases
in the case of gains, to the Company's future interest expense:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ---------
(in thousands)
2004 net deferred hedge gains......... $ 5,489 $ 4,555 $ 10,044
2005 net deferred hedge gains......... $ 4,264 $ 2,816 $ 2,313 $ 1,575 10,968
Thereafter............................ (7,061)
--------
$ 13,951
========
The terms of the fair value hedge agreements described above perfectly
matched the terms of the hedged senior notes. The Company did not exclude any
component of the interest rate swaps' gains or losses from the measurement of
hedge effectiveness. Accordingly, the Company did not realize any hedge
ineffectiveness associated with its fair value hedges during the three and six
month periods ended June 30, 2004 or 2003.
Cash flow hedges. The Company utilizes commodity swap and collar contracts
to (i) reduce the effect of price volatility on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) reduce commodity price risk associated with certain
capital projects. The Company has also, from time to time, utilized interest
rate contracts to reduce the effect of interest rate volatility on the Company's
indebtedness and forward currency exchange agreements to reduce the effect of
U.S. dollar to Canadian dollar exchange rate volatility.
Oil prices. All material sales contracts governing the Company's oil
production have been tied directly or indirectly to NYMEX prices. The following
table sets forth the Company's outstanding oil hedge contracts and the weighted
average NYMEX prices for those contracts as of June 30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- ------- -----------
Daily oil production hedged:
2004 - Swap Contracts
Volume (Bbl)................. 22,500 24,000 23,250
Price per Bbl................ $ 29.26 $ 29.65 $ 29.46
2005 - Swap Contracts
Volume (Bbl)................. 27,000 27,000 27,000 27,000 27,000
Price per Bbl................ $ 27.97 $ 27.97 $ 27.97 $ 27.97 $ 27.97
2006 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.19 $ 26.19 $ 26.19 $ 26.19 $ 26.19
2007 - Swap Contracts
Volume (Bbl)................. 11,000 11,000 11,000 11,000 11,000
Price per Bbl................ $ 30.17 $ 30.17 $ 30.17 $ 30.17 $ 30.17
2008 - Swap Contracts
Volume (Bbl)................. 15,000 15,000 15,000 15,000 15,000
Price per Bbl................ $ 28.56 $ 28.56 $ 28.56 $ 28.56 $ 28.56
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The Company reports average oil prices per Bbl including the effects of oil
quality adjustments and the net effect of oil hedges. The following table sets
forth the Company's oil prices, both reported (including hedge results) and
realized (excluding hedge results), and the net effect of settlements of oil
price hedges on oil revenue for the three and six months ended June 30, 2004 and
2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Average price reported per Bbl................. $ 27.94 $ 24.25 $ 28.13 $ 25.03
Average price realized per Bbl................. $ 33.94 $ 27.40 $ 33.00 $ 29.15
Reduction to oil revenue (in millions)......... $ (24.5) $ (9.2) $ (41.0) $ (23.8)
Natural gas liquids prices. During the three and six months ended June 30,
2004 and 2003, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at June 30, 2004.
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, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
price. The following table sets forth the Company's outstanding gas hedge
contracts and the weighted average index prices for those contracts as of June
30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
--------- --------- --------- --------- -----------
Daily gas production hedged:
2004 - Swap Contracts
Volume (Mcf).................... 310,000 310,000 310,000
Index price per MMBtu........... $ 4.34 $ 4.34 $ 4.34
2005 - Swap Contracts
Volume (Mcf).................... 190,000 180,000 180,000 150,000 174,904
Index price per MMBtu........... $ 5.28 $ 5.05 $ 5.05 $ 5.00 $ 5.10
2006 - Swap Contracts
Volume (Mcf).................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu........... $ 4.16 $ 4.16 $ 4.16 $ 4.16 $ 4.16
2007 - Swap Contracts
Volume (Mcf).................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu........... $ 3.51 $ 3.51 $ 3.51 $ 3.51 $ 3.51
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments and the net effect of gas hedges.
The following table sets forth the Company's gas prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of gas price hedges on gas revenue for the three and six
months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Average price reported per Mcf............... $ 4.36 $ 4.15 $ 4.39 $ 4.15
Average price realized per Mcf............... $ 4.84 $ 4.39 $ 4.75 $ 4.66
Reduction to gas revenue (in millions)....... $ (31.6) $ (13.4) $ (45.9) $ (49.2)
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Interest rate. During June 2004, the Company entered into costless collar
contracts and designated the contracts as cash flow hedges of the forecasted
interest rate risk attributable to the yield on the benchmark 4.75 percent U.S.
Treasury Notes due May 15, 2014 (the "U.S. Treasuries"). The terms of the collar
contracts fixed the annual yield on $250 million notional amount of U.S.
Treasuries within a yield collar having a ceiling rate of 4.70 percent and a
floor rate of 4.65 percent. The yield on the U.S. Treasuries as of July 7, 2004
was the benchmark rate used to determine the coupon rate on the Company's 5-7/8
percent senior notes due July 15, 2016, which were issued on July 15, 2004 in
exchange for portions of three series of the Company's outstanding senior notes.
The Company did not realize any ineffectiveness in connection with the costless
collar contracts during the three months ended June 30, 2004. See Note L for
information regarding the July 15, 2004 debt exchange.
Hedge ineffectiveness. During the three-month periods ended June 30, 2004
and 2003, the Company recognized other expense of $1.8 million and $503
thousand, respectively, related to the ineffective portions of its cash flow
hedging instruments. During the six-month periods ended June 30, 2004 and 2003,
the Company recognized other expense of $1.9 million and $2.3 million,
respectively, related to the ineffective portions of its cash flow hedging
instruments.
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of June 30, 2004 and December 31, 2003, AOCI -
Hedging represented net deferred losses of $198.3 million and $104.1 million,
respectively. The AOCI - Hedging balance as of June 30, 2004 was comprised of
$329.4 million of net deferred losses on the effective portions of open cash
flow hedges, $23.2 million of net deferred gains on terminated cash flow hedges
and $107.9 million of associated net deferred tax benefits. The increase in AOCI
- - Hedging during the six months ended June 30, 2004 was primarily attributable
to increases in future commodity prices relative to the commodity prices
stipulated in the hedge contracts, partially offset by the reclassification of
net deferred hedge losses to net income as derivatives matured by their terms.
The net deferred losses associated with open cash flow hedges remain subject to
market price fluctuations until the positions are either settled under the terms
of the hedge contracts or terminated prior to settlement. The net deferred gains
on terminated cash flow hedges are fixed.
During the twelve months ending June 30, 2005, based on current estimates
of future commodity prices, the Company expects to reclassify $175.9 million of
net deferred losses associated with open cash flow hedges and $22.6 million of
net deferred gains on terminated cash flow hedges from AOCI - Hedging to oil and
gas revenues. The Company also expects to reclassify approximately $64.2 million
of net deferred income tax benefits during the twelve months ending June 30,
2005 from AOCI - Hedging to income tax provision.
The following table sets forth, as of June 30, 2004, the scheduled
amortization of net deferred gains on terminated cash flow hedges that will be
recognized as increases to the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(in thousands)
2004 net deferred hedge gains..... $11,001 $10,954 $ 21,955
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
-------
$ 23,204
=======
NOTE F. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provision of SFAS 143 on
January 1, 2003. The Company's asset retirement obligations primarily relate to
the future plugging and abandonment of proved properties and related facilities.
The Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS 143 during the three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Beginning asset retirement obligations..... $107,034 $ 64,174 $105,036 $ 34,692
Cumulative effect adjustment............... - - - 23,393
New wells placed on production and
changes in estimates.................... 336 50 3,068 7,015
Liabilities settled........................ (381) (934) (2,978) (3,376)
Accretion of discount...................... 2,016 1,235 3,982 2,329
Currency translation....................... (185) 698 (288) 1,170
------- ------- ------- -------
Ending asset retirement obligations ....... $108,820 $ 65,223 $108,820 $ 65,223
======= ======= ======= =======
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities, respectively, in
the accompanying Consolidated Balance Sheets.
NOTE G. Postretirement Benefit Obligations
As of June 30, 2004 and December 31, 2003, the Company had recorded $15.6
million of unfunded accumulated postretirement benefit obligations, the current
and noncurrent portions of which are included in other current liabilities and
other liabilities, respectively, in the accompanying Consolidated Balance
Sheets. The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three and six months
ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 15,501 $ 19,926 $ 15,556 $ 19,743
Benefit payments............................... (175) (342) (514) (582)
Service costs.................................. 59 52 117 103
Accretion of discounts......................... 226 373 452 745
------- ------- ------- -------
Ending accumulated postretirement benefit
obligations.................................. $ 15,611 $ 20,009 $ 15,611 $ 20,009
======= ======= ======= =======
NOTE H. 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
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings and it now contains two
material claims. First, the plaintiffs assert that they were improperly charged
expenses (primarily field compression), which are a "cost of production", and
for which plaintiffs, as royalty owners, are not responsible. 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 (both for periods covered by the lawsuit and from the last date
covered by the lawsuit to the present - because the deductions continue to be
taken and the plaintiffs continue to be paid for a royalty share of the helium)
could reach $67 million, plus prejudgment interest. However, the Company
believes it has valid defenses to the plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases and other
agreements, and intends to vigorously defend itself.
The Company does not believe the costs it has deducted are a "cost of
production". The costs being deducted are post production costs incurred to
transport the gas to the Company's Satanta gas plant for processing, where the
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 and with the parties'
agreements.
The Company has also vigorously defended against the plaintiffs' claims to
100 percent of the value of the helium extracted, and believes that in
accordance with applicable law, it has properly accounted to the plaintiffs for
their fractional royalty share of the helium under the specified royalty clauses
of the respective oil and gas leases.
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to the plaintiffs and believes it presented strong
evidence at trial to support its positions. Although the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the quarterly reporting period in which such liability is
recorded, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity, capital resources or future annual results of operations.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows a
"severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, one of the
Company's predecessor entities collected the Kansas ad valorem tax in addition
to the otherwise maximum lawful price. The FERC's ruling was appealed to the
United States Court of Appeals for the District of Columbia ("D.C. Circuit"),
which held in June 1988 that the FERC failed to provide a reasonable basis for
its findings and remanded the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limited the effect of its decision to Kansas ad valorem taxes for sales made
on or after June 28, 1988. The FERC clarified the effective date of its decision
by an order dated May 18, 1994. The order clarified that the effective date
applies to tax bills rendered after June 28, 1988, not sales made on or after
that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
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).
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking a waiver or set-off from the FERC
with respect to that portion of the refund associated with (i) nonrecoupable
royalties, (ii) nonrecoupable Kansas property taxes based, in part, upon the
higher prices collected and (iii) interest for all periods. On September 10,
1997, the FERC denied this request, and on October 10, 1997, the Company and
other producers filed a request for rehearing. Pipelines were given until
November 10, 1997 to file claims on refunds sought from producers and refund
claims totaling approximately $30.2 million were made against the Company.
Through June 30, 2004, the Company has settled $21.6 million of the original
claim amounts. As of June 30, 2004 and December 31, 2003, the Company had on
deposit $10.7 million, including accrued interest, in an escrow account and had
a corresponding obligation for the remaining claim recorded in other current
liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2004.
The Company believes that the accrued obligations will be sufficient to resolve
the remaining claims.
NOTE I. Income Per Share Before Cumulative Effect of Change in Accounting
Principle
Basic income per share before cumulative effect of change in accounting
principle is computed by dividing income before cumulative effect of change in
accounting principle by the weighted average number of common shares outstanding
for the period. The computation of diluted income per share before cumulative
effect of change in accounting principle reflects the potential dilution that
could occur if securities or other contracts to issue common stock that are
dilutive to income before cumulative effect of change in accounting principle
were exercised or converted into common stock or resulted in the issuance of
common stock that would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average shares outstanding for the three and six months ended June 30, 2004 and
2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 118,855 117,005 118,787 116,875
Dilutive common stock options (a)........... 1,080 1,766 1,128 1,780
Restricted stock awards..................... 467 198 418 168
-------- -------- -------- --------
Diluted..................................... 120,402 118,969 120,333 118,823
======== ======== ======== ========
- ---------------
(a) Common stock options to purchase 30,712 shares and 1,364,706 shares of
common stock were outstanding but not included in the computations of
diluted income per share before cumulative effect of change in accounting
principle for the three-month periods ended June 30, 2004 and 2003,
respectively, and common stock options to purchase 30,712 shares and
1,368,612 shares of common stock were outstanding but not included in the
computations of diluted income per share before cumulative effect of change
in accounting principle for the six-month periods ended June 30, 2004 and
2003, respectively, because the exercise prices of the options were greater
than the average market price of the common shares and would be
anti-dilutive to the computations.
NOTE J. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the oil
and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina, Canada and
Africa. Africa is primarily comprised of operations in Equatorial Guinea, Gabon,
South Africa and Tunisia.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The following tables provide the Company's interim geographic operating
segment data for the three and six months ended June 30, 2004 and 2003.
Geographic operating segment income tax benefits (provisions) have been
determined based on statutory rates existing in the various tax jurisdictions
where the Company has oil and gas producing activities. The "Headquarters and
Other" table column includes revenues and expenses that are not routinely
included in the earnings measures internally reported to management on a
geographic operating segment basis.
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
-------- --------- -------- -------- ------------ ------------
(in thousands)
Three months ended June 30, 2004:
Revenues and other income:
Oil and gas......................... $367,843 $ 26,614 $ 19,879 $ 32,657 $ - $ 446,993
Interest and other.................. - - - - 1,610 1,610
Gain (loss) on disposition of
assets, net....................... - - (252) - 20 (232)
------- ------- ------- ------- ------- --------
367,843 26,614 19,627 32,657 1,630 448,371
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production.............. 71,248 8,416 7,552 8,349 - 95,565
Depletion, depreciation and
amortization..................... 106,087 14,820 7,392 11,737 2,714 142,750
Exploration and abandonments........ 11,834 7,847 1,254 18,748 - 39,683
General and administrative.......... - - - - 17,194 17,194
Accretion of discount on asset
retirement obligations........... - - - - 2,016 2,016
Interest............................ - - - - 21,402 21,402
Other............................... - - - - 8,300 8,300
------- ------- ------- ------- ------- --------
189,169 31,083 16,198 38,834 51,626 326,910
------- ------- ------- ------- ------- --------
Income (loss) before income taxes...... 178,674 (4,469) 3,429 (6,177) (49,996) 121,461
Income tax benefit (provision)......... (65,216) 1,564 (1,294) 1,955 11,232 (51,759)
------- ------- ------- ------- ------- --------
Net income (loss)...................... $113,458 $ (2,905) $ 2,135 $ (4,222) $(38,764) $ 69,702
======= ======= ======= ======= ======= ========
Three months ended June 30, 2003:
Revenues and other income:
Oil and gas......................... $294,884 $ 25,474 $ 23,882 $ - $ - $ 344,240
Interest and other.................. - - - - 1,260 1,260
Gain on disposition of assets, net.. 75 - - - 29 104
------- ------- ------- ------- ------- --------
294,959 25,474 23,882 - 1,289 345,604
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production............... 60,384 6,179 7,280 - - 73,843
Depletion, depreciation and
amortization...................... 78,439 11,993 7,751 - 2,376 100,559
Exploration and abandonments......... 22,603 6,528 1,833 16,083 - 47,047
General and administrative........... - - - - 13,644 13,644
Accretion of discount on asset
retirement obligations............ - - - - 1,235 1,235
Interest............................. - - - - 23,823 23,823
Other................................ - - - - 5,638 5,638
------- ------- ------- ------- ------- --------
161,426 24,700 16,864 16,083 46,716 265,789
------- ------- ------- ------- ------- --------
Income (loss) before income taxes...... 133,533 774 7,018 (16,083) (45,427) 79,815
Income tax benefit (provision)......... (46,737) (271) (2,771) 5,629 41,520 (2,630)
------- ------- ------- ------- ------- --------
Net income (loss)...................... $ 86,796 $ 503 $ 4,247 $(10,454) $ (3,907) $ 77,185
======= ======= ======= ======= ======= ========
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
--------- --------- -------- -------- ------------ ------------
(in thousands)
Six months ended June 30, 2004:
Revenues and other income:
Oil and gas......................... $ 725,151 $ 57,497 $ 38,098 $ 72,773 $ - $ 893,519
Interest and other.................. - - - - 3,345 3,345
Gain (loss) on disposition of
assets, net....................... 51 - (252) - (44) (245)
-------- ------- ------- ------- -------- --------
725,202 57,497 37,846 72,773 3,301 896,619
-------- ------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production.............. 137,267 15,175 15,501 16,833 - 184,776
Depletion, depreciation and
amortization..................... 203,458 27,362 14,867 28,133 5,429 279,249
Exploration and abandonments........ 65,390 11,397 14,230 29,172 - 120,189
General and administrative.......... - - - - 35,523 35,523
Accretion of discount on asset
retirement obligations........... - - - - 3,982 3,982
Interest............................ - - - - 42,978 42,978
Other............................... - - - - 8,496 8,496
-------- ------- ------- ------- -------- --------
406,115 53,934 44,598 74,138 96,408 675,193
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes..... 319,087 3,563 (6,752) (1,365) (93,107) 221,426
Income tax benefit (provision)........ (116,467) (1,247) 2,549 793 22,836 (91,536)
-------- ------- ------- ------- ------- --------
Net income (loss)..................... $ 202,620 $ 2,316 $ (4,203) $ (572) $(70,271) $ 129,890
======== ======= ======= ======= ======= ========
Six months ended June 30, 2003:
Revenues and other income:
Oil and gas......................... $ 534,135 $ 48,855 $ 46,249 $ - $ - $ 629,239
Interest and other.................. - - - - 3,973 3,973
Gain on disposition of assets, net.. 1,321 - 1 - 208 1,530
-------- ------- ------- -------- ------- --------
535,456 48,855 46,250 - 4,181 634,742
-------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production.............. 115,921 11,588 14,201 - - 141,710
Depletion, depreciation and
amortization..................... 131,297 20,319 14,302 - 4,690 170,608
Exploration and abandonments........ 40,390 9,572 13,160 19,792 - 82,914
General and administrative.......... - - - - 29,125 29,125
Accretion of discount on asset
retirement obligations........... - - - - 2,329 2,329
Interest............................ - - - - 46,314 46,314
Other............................... - - - - 10,816 10,816
-------- ------- ------- -------- ------- --------
287,608 41,479 41,663 19,792 93,274 483,816
-------- ------- ------- -------- ------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............... 247,848 7,376 4,587 (19,792) (89,093) 150,926
Income tax benefit (provision)........ (86,747) (2,582) (1,811) 6,927 79,279 (4,934)
-------- ------- ------- -------- ------- --------
Income (loss) before cumulative
effect of change in accounting
principle.......................... $ 161,101 $ 4,794 $ 2,776 $ (12,865) $ (9,814) $ 145,992
======== ======= ======= ======== ======= ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE K. Evergreen Merger
Proposed merger with Evergreen Resources, Inc. On May 3, 2004, the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Evergreen Resources, Inc. ("Evergreen"). Evergreen is a publicly traded
independent oil and gas company primarily engaged in the operation, development,
production, exploration and acquisition of North American unconventional natural
gas. Evergreen is based in Denver, Colorado and is one of the leading developers
of coal bed methane reserves in the United States. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary Basin. The Merger Agreement
provides for a merger by which Evergreen will become a wholly-owned subsidiary
of Pioneer (the "Proposed Merger").
In accordance with the Merger Agreement, holders of approximately 44
million shares of Evergreen common stock will have the right to receive an
aggregate of approximately 25 million shares of Pioneer common stock (with
related stockholders rights) and a total of approximately $850 million in cash.
This represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock-based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be limited to those
amounts set forth in the first sentence of this paragraph.
In addition, Evergreen is seeking to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment equal to the sum of (i) $.35 per share (approximately
$15 million) as consideration from Pioneer for the Kansas properties in the
Proposed Merger; plus (ii) an amount per share equal to a pro rata share of the
net proceeds in excess of $15 million from the sale of the Kansas properties, if
any, to a third party that closes before the closing date of the Proposed
Merger.
The Company filed with the SEC a registration statement on Form S-4 on June
14, 2004 relating to the shares of Pioneer common stock to be issued in the
Proposed Merger. A portion of such registration statement constituted a joint
proxy statement/prospectus to be submitted to the stockholders of Evergreen's
common stock and the Company's common stock for special meetings to be held by
each company's stockholders in connection with the Proposed Merger. It is
expected that such joint proxy statement/prospectus will be mailed to all
stockholders during August 2004, and that such meeting will be held, and the
Proposed Merger will be consummated, in September 2004. Since meetings of both
Evergreen's and Pioneer's stockholders are required in connection with the
Proposed Merger, in addition to a number of other conditions, there can be no
assurance that the Proposed Merger will occur.
NOTE L. Subsequent Events
On July 15, 2004, the Company accepted tenders to exchange $117.9 million,
$275.1 million and $133.8 million in principal amount of its 8 1/4% Senior Notes
due 2007, 9-5/8% Senior Notes due April 1, 2010 (the "9-5/8% Notes") and 7.50%
Senior Notes due 2012 (the "7.50% Notes"), respectively, for a like principal
amount of a new series of 5.875% Senior Notes due 2016 (the "New Notes") and
cash. The aggregate exchange price paid to the holders of the tendered notes
exceeded their aggregate principal balances by $109.0 million. In accordance
with Financial Accounting Standards Board Emerging Issues Task Force Abstract
Issue No. 96-19, "Debtors Accounting for a Modification or Exchange of Debt
Instruments", this amount will be amortized as increases to the Company's future
interest expense over the term of the New Notes. Associated with the tendering
of the 9-5/8% Notes and the 7.50% Notes, the Company received consents which
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
permanently remove substantially all of the operating restrictions with respect
to those notes once certain investment grade ratings are achieved.
Interest on the New Notes is payable semi-annually on January 15 and July
15 of each year, commencing January 15, 2005. The New Notes are governed by an
Indenture between the Company and The Bank of New York dated January 13, 1998.
The New Notes are general unsecured obligations of the Company ranking equally
in right of payment with all other senior unsecured indebtedness of the Company
and are senior in right of payment to all existing and future subordinated
indebtedness of the Company.
In conjunction with the exchange, the Company paid $9.1 million (which
represented $10.6 million of settlement losses for future periods offset by $1.5
million of accrued settlement gains through the date of termination) to
terminate interest rate swap contracts hedging $140 million notional amount of
the 7.50% Notes and $90 million notional amount of the 9-5/8% Notes.
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 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, international operations and
associated international political and economic instability, government
regulation or action, litigation, the costs and results of drilling and
operations, the Company's ability to replace reserves or implement its business
plans, access to and cost of capital, uncertainties about estimates of reserves,
quality of technical data and environmental risks, acts of war and terrorism.
These and other risks are described in the Company's 2003 Annual Report on Form
10-K that is available from the SEC.
Financial and Operating Performance
The Company's financial and operating performance for the first six months
of 2004, as compared to the first six months of 2003, included the following
highlights:
o A 30 percent increase in average daily production on a BOE basis,
with relatively balanced contributions from domestic and foreign
operations.
o A 42 percent increase in oil, NGL and gas revenues due to increased
sales volumes and commodity price levels.
o A 47 percent increase in income before income taxes and cumulative
effect of change in accounting principle.
o An increase in the Company's effective income tax rate from three
percent to 41 percent primarily due to the third quarter 2003
reversal of the Company's United States deferred tax asset
valuation allowances.
o A 60 percent increase in net cash provided by operating activities.
o A decrease in the Company's ratio of debt to book capitalization to
43.8 percent as of June 30, 2004 from 54.7 percent as of June 30,
2003.
o The declaration and payment of a $.10 per common share semiannual
dividend.
During the first six months of 2004, the Company also announced the
following financial and operating milestones:
o Rating agencies upgrade of the Company to investment grade status
in response to improved financial position and earnings trends,
along with other factors specific to the Company.
o The Proposed Merger with Evergreen Resources, Inc. ("Evergreen").
See Note K of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" and "Proposed Merger with
Evergreen Resources, Inc." for information regarding this important
business combination.
o The exchange of portions of the Company's outstanding senior notes
due 2007, 2010 and 2012 for new senior notes due 2016 and cash. See
Note L of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" and "Capital Commitments, Capital
Resources and Liquidity" for information regarding this $526.9
million debt exchange that was completed in July 2004.
o Completion of the First Amendment which removed Pioneer USA as a
guarantor of the Revolving Credit Agreement and had the effect of
removing Pioneer USA as a guarantor of the Company's senior notes.
See Note D of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for information regarding the
First Amendment.
o First production from the Company's deepwater Gulf of Mexico
Harrier field during January 2004, the Devils Tower field during
May 2004 and the Raptor and Tomahawk fields during mid-June 2004.
o The acquisition of a 40 percent interest in Block H offshore
Equatorial Guinea, West Africa.
o The announced agreement to participate in a joint exploration
program with ConocoPhillips and Anadarko Petroleum Corporation in
the National Petroleum Reserve on the North Slope of Alaska.
22
PIONEER NATURAL RESOURCES COMPANY
The Company recorded net income of $69.7 million ($.58 per diluted share)
and $129.9 million ($1.08 per diluted share) for the three and six months ended
June 30, 2004, respectively, as compared to net income of $77.2 million ($.65
per diluted share) and $161.4 million ($1.36 per diluted share), including a
$15.4 million benefit from the cumulative effect of change in accounting
principle, net of tax, associated with the Company's adoption of SFAS 143 on
January 1, 2003, for the same respective periods of 2003. See Note F of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information regarding the Company's asset retirement obligations.
Income before income taxes and cumulative effect of change in accounting
principle increased by $41.6 million (52 percent) and $70.5 million (47 percent)
during the three and six month periods ended June 30, 2004 as compared to the
same respective periods ended June 30, 2003. However, primarily as a result of
the reversal of the Company's United States deferred tax asset valuation
allowances during the third quarter of 2003, the Company's income tax provision
increased by $49.1 million and $86.6 million during the three and six month
periods ended June 30, 2004 as compared to the same respective periods ended
June 30, 2003.
The Company's net cash provided by operating activities was $264.7 million
and $518.3 million for the three and six months ended June 30, 2004,
respectively, representing increases of $74.8 million and $194.1 million,
respectively, as compared to $189.9 million and $324.2 million for the same
respective periods in 2003. During the three months ended June 30, 2004, the
Company used its net cash provided by operating activities to fund $183.6
million of additions to oil and gas properties, to repay $46.0 million of
long-term debt, to purchase $9.7 million of treasury stock and to fund $12.0
million of dividends on common stock. During the six months ended June 30, 2004,
the Company used its net cash provided by operating activities to fund $350.8
million of additions to oil and gas properties, to repay $136.0 million of
long-term debt, to purchase $15.3 million of treasury stock and to fund $12.0
million of dividends on common stock.
Proposed Merger with Evergreen Resources, Inc.
Evergreen is a publicly traded independent oil and gas company primarily
engaged in the operation, development, production, exploration and acquisition
of North American unconventional natural gas. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary Basin. The Merger Agreement
provides for a merger by which Evergreen will become a wholly-owned subsidiary
of Pioneer.
Proposed purchase terms. In accordance with the Merger Agreement, holders
of approximately 44 million shares of Evergreen common stock will have the right
to receive an aggregate of approximately 25 million shares of Pioneer common
stock (with related stockholders rights) and a total of approximately $850
million in cash. This represents a price per Evergreen share of $39.00 (based on
Pioneer's last reported sale price on May 3, 2004 of $33.52 per share). Holders
of Evergreen common stock will have the option to elect among three types of
consideration for a share of Evergreen common stock: (1) 1.1635 shares of
Pioneer common stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common
stock and $19.50 in cash. Evergreen stockholders who do not make an election
will receive .58175 shares of Pioneer common stock and $19.50 in cash per
Evergreen share. All holders of unvested restricted stock under Evergreen's
stock-based employee plans will be deemed to have elected to receive Pioneer
common stock. Holders who elect all stock consideration or all cash
consideration (other than holders of unvested restricted stock) will be subject
to allocation of the stock and cash so that the aggregate amounts of stock and
cash will be limited to those amounts set forth in the first sentence of this
paragraph.
In addition, Evergreen is seeking to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment equal to the sum of (i) $.35 per share (approximately
$15 million) as consideration from Pioneer for the Kansas properties in the
Proposed Merger; plus (ii) an amount per share equal to a pro rata share of the
net proceeds in excess of $15 million from the sale, if any, of the Kansas
properties to a third party that closes before the closing date of the Proposed
Merger.
Strategic rationale. Pioneer's business strategy for sustaining above
average growth in per share value is predicated on the leveraging of its
long-lived foundation assets. Those foundation assets generate dependable
operating cash flows while requiring relatively low amounts of maintenance
capital. As a result, the Company's foundation assets provide free cash flows
(i.e., operating cash flows after maintenance capital expenditures) that finance
23
PIONEER NATURAL RESOURCES COMPANY
investments in high-impact, high-return exploration and acquisition
opportunities. The Proposed Merger offers an opportunity for the Company to
rebalance its portfolio of long-lived foundation assets by adding Evergreen's
long-lived onshore producing asset base and significant low-risk development
drilling opportunities. Additionally, the Company's decision to pursue the
Proposed Merger was positively impacted by the compatible technical and
corporate cultures of Pioneer and Evergreen, Evergreen's substantial acreage
position in key growth basins of the United States Rockies area and the
opportunity to leverage Evergreen's technical expertise in the area of coal bed
methane operations.
Liquidity and capital structure. The completion of the Proposed Merger is
expected to result in a short-term increase of approximately $1.2 billion in the
Company's long-term debt, comprised of the funding of $850 million in cash
consideration paid, approximately $8 million of transaction costs associated
with the Proposed Merger, approximately $15 million to fund the purchase of
Evergreen's Kansas assets if Evergreen is unable to sell those assets prior to
closing the Proposed Merger and the assumption of (i) $100 million of Evergreen
4.75 percent convertible senior subordinated bonds that are callable in December
2006 and (ii) $200 million of Evergreen 5.875 percent senior subordinated bonds
due in 2012. The Company intends to finance the cash costs of the Proposed
Merger with a new $900 million, 364-day senior unsecured revolving credit
facility, the terms of which will essentially mirror those of the Company's
Revolving Credit Agreement, including the bearing of a variable annual rate of
interest equal to the six-month LIBOR rate plus a 75 basis point LIBOR margin.
The completion of the Proposed Merger is expected to increase the Company's
stockholders' equity by approximately $900 million as a result of the associated
issuance of approximately 25 million shares of Pioneer common stock.
The Company has targeted a ratio of debt to book capitalization of 40
percent or less by the end of 2005. To achieve this target, the respective
companies have implemented an aggressive commodity hedging program of Pioneer's
and Evergreen's 2004 and 2005 forecasted oil and gas production, utilizing
commodity swap contracts entered into with highly-rated financial institution
counterparties. Consistent with this program, Evergreen has hedged approximately
75 percent of its remaining forecasted 2004 and forecasted 2005 gas production.
The Company has hedged approximately 35 percent of its remaining forecasted 2004
worldwide liquids and 50 percent of its remaining forecasted 2004 North American
gas production and approximately 35 percent of its forecasted 2005 worldwide
liquids and North American gas production. See Note E of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" and "Item 3.
Quantitative and Qualitative Disclosures About Market Risk" for more information
regarding the Company's commodity hedge positions.
Regulatory and shareholders approvals. The Company filed with the SEC a
registration statement on Form S-4 on June 14, 2004 relating to the shares of
Pioneer common stock to be issued in the Proposed Merger. A portion of such
registration statement constituted a joint proxy statement/prospectus to be
submitted to the stockholders of Evergreen's common stock and the Company's
common stock for special meetings to be held by each company's stockholders in
connection with the Proposed Merger. It is expected that such joint proxy
statement/prospectus will be mailed to all stockholders during August 2004, and
that such meeting will be held, and the Proposed Merger will be consummated, in
September 2004. Since meetings of both Evergreen's and Pioneer's stockholders
are required in connection with the Proposed Merger, in addition to a number of
other conditions, there can be no assurance that the Proposed Merger will occur.
Drilling Highlights
During the first six months of 2004, the Company incurred $348.8 million in
finding and development costs including $134.7 million for development
activities, $156.1 million for exploration activities and $58.0 million on
acquisitions. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure for the Company's significant development projects.
The following tables summarize the Company's development drilling and
exploration and extension drilling activities for the six months ended June 30,
2004:
24
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast... 3 11 9 - 5
Permian Basin............... - 59 56 - 3
Mid-Continent............... 25 41 48 - 18
------ ------ ----- ----- -----
Total Domestic........ 28 111 113 - 26
------ ------ ----- ----- -----
Argentina................... 3 21 19 - 5
Canada...................... 6 3 7 - 2
Africa...................... - 1 1 - -
------ ------ ----- ----- -----
Total Worldwide....... 37 136 140 - 33
====== ====== ===== ===== =====
Exploration/Extension Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast... 6 2 4 3 1
Mid-Continent............... 2 - - 2 -
Alaska...................... 3 - - - 3
------ ------ ----- ----- -----
Total Domestic......... 11 2 4 5 4
------ ------ ----- ----- -----
Argentina................... 10 12 12 2 8
Canada...................... 11 35 19 18 9
Africa...................... 2 6 2 4 2
------ ------ ----- ----- -----
Total Worldwide........ 34 55 37 29 23
====== ====== ===== ===== =====
Domestic. The Company spent $224.4 million during the first six months of
2004 on acquisition, drilling and seismic activities in the Gulf of Mexico/Gulf
Coast, Alaska, Permian Basin and Mid-Continent areas of the United States.
Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area, the
Company spent $134.3 million (93 percent of which was spent in the Gulf of
Mexico) of drilling, construction, acquisition and seismic capital. In the
deepwater Gulf of Mexico, the Company completed three development projects, had
development activities on one significant project underway and drilled three
significant exploration wells during the first half of 2004. During the second
quarter, the Company was also awarded leases on 19 Gulf of Mexico blocks
covering approximately 102,000 acres, of which 14 are located in the deepwater.
o Falcon Corridor - During the first quarter of 2003, the Company drilled its
Harrier discovery, which was completed as a one-well subsea tie-back to the
Falcon field facilities and placed on production in January 2004. In
addition, during the third quarter of 2003, the Company successfully
drilled the Tomahawk and Raptor prospects, which were also developed as
single-well subsea tie-backs to the Falcon field facilities and placed on
production in June 2004. To accommodate the incremental production from
Harrier, Tomahawk and Raptor as well as potential throughput associated
with additional planned exploration, an additional parallel pipeline
connecting the Falcon field to the Falcon Nest platform on the Gulf of
Mexico shelf has been added, doubling its capacity. The Company holds a 100
percent working interest and operates all four fields in the Falcon
Corridor. In addition, the Company may drill an additional Falcon Corridor
exploration prospect during the second half of 2004.
o Devils Tower Area - The Dominion-operated Devils Tower development project
was sanctioned in 2001 as a spar development project with the owners
leasing a spar from a third party for the life of the field. The spar has
slots for eight dry tree wells and up to two subsea tie-back risers and is
capable of handling 60 MBbls of oil per day and 60 MMcf of gas per day. Two
Devils Tower wells were completed and placed on production during the
25
PIONEER NATURAL RESOURCES COMPANY
second quarter of 2004, while six additional wells will be completed during
the remainder of 2004, including two wells during the third quarter, and
into early 2005. In addition, three subsea tie-back wells in the Goldfinger
and Triton satellite discoveries to the Devils Tower field are expected to
be jointly tied back to the Devils Tower spar with first production
expected in 2005. Production is expected to continue to increase as
additional wells are individually completed from the spar. The Company
holds a 25 percent working interest in each of the above projects.
In addition to the development and exploration projects above in the
deepwater Gulf of Mexico, the Company participated in three sub-salt deepwater
prospects during the first half of 2004 of which one well was successful and two
were noncommercial. A sidetrack well in the Dominion-operated Thunder Hawk
discovery at Mississippi Canyon Block 734 encountered in excess of 300 feet of
net oil pay in two high-quality reservoir zones, and the partners are currently
evaluating appraisal and development options, with an additional well to further
delineate the field likely to commence in late 2004. The Company owns a 12.5
percent working interest in the discovery. The Company also anticipates that its
Ozona Deep discovery will be sanctioned during the latter part of 2004.
The Company's joint exploration agreement with Woodside Energy (USA), Inc.
("Woodside"), a subsidiary of Woodside Energy Ltd. of Australia, has been
extended for an additional year through 2005 over the shallow-water Texas shelf
region of the Gulf of Mexico. Completion operations on the Midway prospect, the
fourth well drilled under this partnership, will begin late in the third quarter
of 2004 after which the well will be tested and evaluated prior to being tied
back to an existing production platform. If successful, first production is
anticipated during the first quarter of 2005. The Company has a 50 percent
working interest in this well. The four additional wells to be drilled under the
agreement were mutually agreed to be deferred until more technical work can be
performed on the prospects by both companies. Additionally, the Company and
Woodside are evaluating shallower gas prospects on the Gulf of Mexico shelf for
possible inclusion in the 2004 or 2005 drilling program.
Alaska area. The Company spent $24.8 million of acquisition and seismic
capital to add to its leasehold position and expand its North Slope seismic data
coverage. In June 2004, Pioneer announced that it agreed to a joint exploration
program in the National Petroleum Reserve-Alaska ("NPR-A") located on the North
Slope with ConocoPhillips and Anadarko Petroleum Corporation. At the federal
lease sale held June 3, 2004 in Anchorage, Pioneer was the apparent high
co-bidder on 63 tracts covering approximately 717,000 acres in the NPR-A
Northwest Planning Area. Pioneer will participate with a 20 percent to 30
percent working interest in the acreage operated by ConocoPhillips. Pioneer also
acquired a 20 percent interest in 167,000 total acres in the adjacent NPR-A
Northeast Planning Area and in federal offshore blocks, including seismic and
geologic data.
During 2002, the Company acquired a 70 percent working interest and
operatorship in ten state leases on Alaska's North Slope. Associated therewith,
the Company drilled three exploratory wells during 2003 to test a possible
extension of the productive sands in the Kuparuk River field into the shallow
waters offshore. Although all three of the wells found the sands filled with
oil, they were too thin to be considered commercial on a stand-alone basis.
However, the wells also encountered thick sections of oil-bearing Jurassic-aged
sands, and the first well flowed at a rate of approximately 1,300 barrels per
day. In January 2004, the Company farmed-into a large acreage block to the
southwest of the Company's discovery. During the remainder of 2004, the Company
plans to analyze seismic data and technical information from other wells drilled
southwest of its discovery and evaluate the feasibility of potential development
options.
Permian Basin area. The Company spent $42.2 million of capital during the
first six months of 2004 primarily on development drilling in the Spraberry oil
trend where the Company plans to drill approximately 100 wells during 2004. Also
included in the capital spent during the first half of 2004 was a $20.2 million
acquisition of various working interests in approximately 600 Spraberry oil
wells, 400 of which were already operated by the Company.
Mid-Continent area. The Company spent $23.1 million of capital during the
first six months of 2004 primarily in the West Panhandle field in Texas where
the Company plans to drill approximately 110 wells during 2004. The Company also
plans to drill approximately 20 wells during 2004 in the Hugoton field in
Kansas.
26
PIONEER NATURAL RESOURCES COMPANY
Argentina. The Company spent $54.0 million of acquisition, drilling and
seismic capital during the first six months of 2004. With the economic
environment in Argentina stabilizing and the potential for improvements in
future gas prices, the Company increased its capital budget in Argentina for
2004 to approximately $100 million.
The Company's drilling activities in Argentina continue to confirm the
presence of significant deep gas reserves. During the second quarter of 2004,
the Company completed the expansion of its Loma Negra gas plant in Neuquen and a
20-mile pipeline to deliver gas from the Company's development projects in the
Portezuelos and Anticlinal Campamento fields located west of the plant. The
Company also acquired additional 3-D seismic in support of future Argentine
drilling plans.
Canada. The Company spent $29.7 million of acquisition, drilling and
seismic capital during the first half of 2004, primarily in the Chinchaga,
Martin Creek and Lookout Butte areas that are mainly accessible for drilling
during the winter months.
Africa. The Company spent $40.7 million of acquisition, drilling and
seismic capital during the first six months of 2004 primarily in South Africa,
Tunisia, Gabon and Equatorial Guinea.
South Africa. The Company spent $6.2 million primarily to drill a water
injection well at the Sable field in an attempt to enhance production. The
production impact of the water injection well is not expected to be fully known
until later in 2004. The Company also continues to evaluate the potential to
develop its gas reserves by attempting to establish a contract to supply gas to
an existing synthetic fuels plant.
Tunisia. The Company spent $4.0 million of capital during the first six
months of 2004, primarily to place its most recent discovery, Hawa, on
production and to drill another exploration well on its Adam concession, the
Dalia discovery in which the Company has a 28 percent working interest, that was
placed on production subsequent to quarter-end. The well is currently producing
at an initial rate of approximately 1,600 barrels per day from one zone. Upon
completion of the initial production phase, the well is expected to produce from
multiple zones at significantly higher rates. During the remainder of 2004, the
Company plans to drill an exploration well on the Company-operated El Hamra
permit and a development well at Hawa, which is located on the ENI-operated Adam
concession. In addition, the Company plans to drill another exploration well and
perform additional tests on the discovery on its Anadarko-operated Anaguid
permit during the second half of 2004.
Gabon. The Company spent $14.0 million of capital during the first six
months of 2004 to drill five exploration wells, one of which was successful in
extending the planned development area to the south. The remaining four wells
were expensed as dry holes. The Company is currently in the process of
completing the plan of development to be filed with the government late in the
third quarter of 2004. If approved, development operations will commence with
first production expected in late 2006 or early 2007.
Equatorial Guinea. The Company spent $13.3 million of acquisition and
drilling capital during the first six months of 2004 to acquire a 40 percent
working interest in 400,000 acres of Block H offshore Equatorial Guinea, West
Africa. The Bravo 1 well was drilled in June 2004 and determined to be
noncommercial. The Company has several other prospects on the blocks that are
being evaluated for future drilling.
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $447.0
million and $893.5 million for the three and six months ended June 30, 2004,
respectively, compared to $344.2 million and $629.2 million for the same
respective periods of 2003. The increases in oil and gas revenues during the
three and six months ended June 30, 2004, as compared to the same respective
periods of 2003, were primarily attributable to increases in sales volumes in
the United States, Argentina, South Africa and Tunisia and increases in realized
oil, NGL and gas prices.
27
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's average daily production volumes
by geographic area and in total, for the three and six months ended June 30,
2004 and 2003:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Average daily production:
Oil (Bbls):
United States...................... 26,039 24,168 25,505 24,127
Argentina.......................... 8,531 7,786 8,579 7,730
Canada............................. 95 125 97 130
Africa............................. 10,215 - 12,125 -
Worldwide.......................... 44,880 32,079 46,306 31,987
NGLs (Bbls):
United States...................... 19,809 20,190 20,373 20,107
Argentina.......................... 1,494 1,442 1,459 1,287
Canada............................. 916 1,024 981 952
Worldwide.......................... 22,219 22,656 22,813 22,346
Gas (Mcf):
United States...................... 558,131 477,607 554,306 408,983
Argentina.......................... 122,326 103,265 110,072 85,050
Canada............................. 41,293 45,271 40,656 43,086
Worldwide.......................... 721,750 626,143 705,034 537,119
Total (BOE):
United States...................... 138,870 123,959 138,262 112,398
Argentina.......................... 30,414 26,439 28,384 23,192
Canada............................. 7,892 8,694 7,854 8,263
Africa............................. 10,215 - 12,125 -
Worldwide.......................... 187,391 159,092 186,625 143,853
Per BOE average daily production, on a second-quarter 2004 to
second-quarter 2003 comparison, increased by 18 percent worldwide, by 12 percent
in the United States, by 15 percent in Argentina and the Company realized first
production from Africa during the second half of 2003. Second quarter 2004
average daily production in Canada decreased by nine percent as compared to the
second quarter of 2003 due to normal decline rates.
During the first half of 2004 as compared to the first half of 2003, per
BOE average daily production increased by 30 percent worldwide, by 23 percent in
the United States, by 22 percent in Argentina and, as previously mentioned, the
Company realized first production from Africa during the second half of 2003.
Average daily production declined by five percent in Canada during the first
half of 2004 as compared to the first half of 2003 due to normal decline rates.
Oil and gas sales from the Company's deepwater Gulf of Mexico Harrier
field, Devils Tower project and Raptor and Tomahawk fields were first realized
during January, May and mid-June 2004, respectively, and oil sales were first
realized from the Company's Tunisian and South African oil projects during the
second and third quarters of 2003, respectively. Argentine oil and gas sales
volumes were higher than anticipated during the first half of 2004 primarily due
to strong energy demand during their summer and fall seasons.
Third quarter 2004 production is expected to average 185,000 to 200,000
BOEs per day, reflecting the incremental production expected from Devils Tower,
Tomahawk and Raptor, the variability of oil cargo shipments in Tunisia and South
Africa, and the seasonal increase in gas demand during Argentina's winter
season.
28
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's average reported prices,
including the results of hedging activities, and average realized prices,
excluding the results of hedging activities, by geographic area and in total,
for the three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Average reported prices:
Oil (per Bbl):
United States.................... $ 27.63 $ 24.31 $ 27.16 $ 25.07
Argentina........................ $ 20.13 $ 24.07 $ 24.05 $ 24.83
Canada........................... $ 39.48 $ 25.09 $ 37.18 $ 28.57
Africa........................... $ 35.13 $ - $ 32.98 $ -
Worldwide........................ $ 27.94 $ 24.25 $ 28.13 $ 25.03
NGLs (per Bbl):
United States.................... $ 22.29 $ 17.09 $ 21.90 $ 19.34
Argentina........................ $ 27.22 $ 23.13 $ 28.17 $ 23.63
Canada........................... $ 29.33 $ 26.90 $ 27.82 $ 27.18
Worldwide........................ $ 22.92 $ 17.92 $ 22.55 $ 19.92
Gas (per Mcf):
United States.................... $ 5.16 $ 4.84 $ 5.14 $ 4.79
Argentina........................ $ .65 $ .57 $ .62 $ .56
Canada........................... $ 4.55 $ 5.12 $ 4.39 $ 5.24
Worldwide........................ $ 4.36 $ 4.15 $ 4.39 $ 4.15
Average realized prices:
Oil (per Bbl):
United States.................... $ 36.30 $ 28.48 $ 34.55 $ 30.05
Argentina........................ $ 24.41 $ 24.07 $ 27.56 $ 26.34
Canada........................... $ 39.48 $ 25.09 $ 37.18 $ 28.57
Africa........................... $ 35.80 $ - $ 33.55 $ -
Worldwide........................ $ 33.94 $ 27.40 $ 33.00 $ 29.15
NGLs (per Bbl):
United States.................... $ 22.29 $ 17.09 $ 21.90 $ 19.34
Argentina........................ $ 27.22 $ 23.13 $ 28.17 $ 23.63
Canada........................... $ 29.33 $ 26.90 $ 27.82 $ 27.18
Worldwide........................ $ 22.92 $ 17.92 $ 22.55 $ 19.92
Gas (per Mcf):
United States.................... $ 5.71 $ 5.12 $ 5.52 $ 5.39
Argentina........................ $ .65 $ .57 $ .62 $ .56
Canada........................... $ 5.58 $ 5.43 $ 5.40 $ 5.89
Worldwide........................ $ 4.84 $ 4.39 $ 4.75 $ 4.66
As discussed above, oil and gas revenues for the three and six months ended
June 30, 2004 were positively impacted by commodity price increases. Comparing
the second quarter of 2004 to the same period in 2003, the Company's average
reported worldwide oil price increased 15 percent, average reported worldwide
NGL prices increased 28 percent and average reported worldwide gas prices
increased five percent. However, realized Argentine oil prices decreased during
the second quarter of 2004 primarily due to the implementation of a new formula
for domestic oil prices to bring them in approximate parity with oil exports
that are subject to a 20 percent export tax. In general, the formula provides
that if the average NYMEX price for crude oil exceeds $36 per Bbl, Argentine
producers will receive 80 percent of the price they would otherwise receive for
domestic sales, less normal quality differentials, and if the average NYMEX
price is below $36 per Bbl, Argentine producers will receive 86 percent of the
price they would otherwise receive for domestic sales, less normal quality
differentials. The 14 percent increase in Argentine realized gas prices was the
result of a federal decree governing future gas price increases to industrial
users and large customers during the next two years which became effective in
May. Comparing the first six months of 2004 to the same period in 2003, the
Company's average reported worldwide oil price increased 12 percent, average
reported worldwide NGL prices increased 13 percent and average reported
worldwide gas prices increased six percent.
29
PIONEER NATURAL RESOURCES COMPANY
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
swap and collar contracts in order to (i) reduce the effect of price volatility
on the commodities the Company produces and sells, (ii) support the Company's
annual capital budgeting and expenditure plans and (iii) reduce commodity price
risk associated with certain capital projects. During the three and six months
ended June 30, 2004, the Company's commodity price hedges decreased oil and gas
revenues by $56.1 million and $86.9 million, respectively, as compared to $22.6
million and $73.0 million during the same respective periods in 2003. See Note E
of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for specific information regarding the Company's hedging activities
during the three and six months ended June 30, 2004 and 2003.
Oil and gas production costs. During the three and six months ended June
30, 2004, total production costs per BOE averaged $5.60 and $5.44, respectively,
representing an increase of $.50 per BOE (ten percent) and no change,
respectively, as compared to total production costs per BOE of $5.10 and $5.44
during the same respective periods of 2003. Lease operating expenses and
workover costs represent the components of production costs for which the
Company has management control, while production and ad valorem taxes and field
fuel expenses are directly related to commodity price changes.
The increase in total production costs per BOE during the three months
ended June 30, 2004, as compared to the same period in 2003, is primarily due to
(i) two months of fixed lease operating expenses associated with the phased
start-up of the Devils Tower project in May which are expected to decline as
additional Devils Tower wells are completed during the remainder of 2004 and
into 2005, (ii) higher lease operating expenses associated with the Company's
South African oil production, (iii) increased workover costs and (iv) increased
ad valorem taxes.
During the six months ended June 30, 2004, as compared to the six months
ended June 30, 2003, higher lease operating expenses associated with Gulf of
Mexico and African production (which required minimal field fuel and are not
subject to ad valorem taxes) and higher per BOE workover costs were offset by
decreases in per BOE field fuel and ad valorem tax expenses.
The following tables provide the components of the Company's total
production costs per BOE and total production costs per BOE by geographic area
for the three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Lease operating expenses.............. $ 3.65 $ 3.30 $ 3.50 $ 3.31
Taxes:
Production......................... .57 .59 .58 .70
Ad valorem......................... .46 .38 .46 .43
Field fuel expenses................... .65 .72 .65 .85
Workover costs........................ .27 .11 .25 .15
------ ------ ------ ------
Total production costs.......... $ 5.60 $ 5.10 $ 5.44 $ 5.44
====== ====== ====== ======
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Total production costs:
United States...................... $ 5.64 $ 5.35 $ 5.45 $ 5.70
Argentina.......................... $ 3.04 $ 2.57 $ 2.94 $ 2.76
Canada............................. $ 10.52 $ 9.20 $ 10.84 $ 9.50
Africa............................. $ 8.98 $ - $ 8.31 $ -
Worldwide.......................... $ 5.60 $ 5.10 $ 5.44 $ 5.44
Based on market-quoted commodity prices during July 2004, the Company
expects third quarter 2004 production costs to average $5.40 to $5.90 per BOE,
based on current gas price outlooks and Gulf of Mexico and African production
forecasts.
30
PIONEER NATURAL RESOURCES COMPANY
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $8.37 and $8.22 for
the three and six months ended June 30, 2004, respectively, as compared to $6.95
and $6.55 during the same respective periods of 2003. Depletion expense per BOE,
the largest component of depletion, depreciation and amortization expense, was
$8.21 and $8.06 per BOE during the three and six months ended June 30, 2004,
respectively, as compared to $6.78 and $6.37 per BOE during the same respective
periods of 2003. The increases in per BOE depletion expense during the three and
six months ended June 30, 2004, as compared to the same respective periods of
2003, are primarily due to a greater proportion of the Company's production
being derived from higher cost-basis deepwater Gulf of Mexico and South African
developments.
The following table provides the Company's depletion expense per BOE by
geographic area for the three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Depletion expense:
United States..................... $ 8.39 $ 6.95 $ 8.09 $ 6.45
Argentina......................... $ 5.35 $ 4.98 $ 5.30 $ 4.84
Canada............................ $ 10.29 $ 9.80 $ 10.40 $ 9.56
Africa............................ $ 12.64 $ - $ 13.88 $ -
Worldwide......................... $ 8.21 $ 6.78 $ 8.06 $ 6.37
The Company expects third quarter 2004 depletion, depreciation and
amortization expense to average $8.75 to $9.25 per BOE, as a greater proportion
of the Company's production is being produced from higher-cost basis deepwater
Gulf of Mexico and South African properties.
Exploration, abandonments, geological and geophysical costs. Exploration,
abandonments, geological and geophysical costs were $39.7 million and $120.2
million during the three and six months ended June 30, 2004, respectively, as
compared to $47.0 million and $82.9 million during the same respective periods
in 2003. The decrease in exploration, abandonments, geological and geophysical
costs during the second quarter of 2004 as compared to the second quarter of
2003 is primarily comprised of a $9.5 million decrease in dry hole expense,
partially offset by a $2.6 million increase in geological and geophysical
expense. Significant components of the Company's dry hole expense during the
second quarter of 2004 included $9.5 million for the abandonment of a well that
was drilled in 2002 along the southern portion of the Olowi block oil
accumulation in Gabon which is not included in the current development plan and
$6.1 million on the Bravo prospect offshore Equatorial Guinea. The increase in
exploration, abandonments, geological and geophysical costs during the first
half of 2004 as compared to the first half of 2003 is primarily comprised of a
$21.5 million increase in dry hole expense and a $14.0 million increase in
geological and geophysical expenses. Significant components of the Company's dry
hole expense during the first half of 2004 included $26.7 million and $10.9
million on the Company's deepwater Gulf of Mexico Juno and Myrtle Beach
prospects, respectively, $18.7 million on the Company's Gabonese Olowi prospect,
$6.1 million on the Company's Bravo prospect offshore Equatorial Guinea and $486
thousand of South African credit adjustments. During the first half of 2004, the
Company completed and evaluated 66 exploration/extension wells, 37 of which were
successfully completed as discoveries. During the same period in 2003, the
Company completed and evaluated 73 exploration/extension wells, 35 of which were
successfully completed as discoveries.
31
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's geological and geophysical
costs, exploratory dry hole expense, lease abandonments expense and other
exploration expense for the three and six months ended June 30, 2004 and 2003:
Africa
United and
States Argentina Canada Other Total
------- --------- ------- ------- --------
(in thousands)
Three months ended June 30, 2004:
Geological and geophysical costs...... $ 9,338 $ 7,538 $ 688 $ 3,113 $ 20,677
Exploratory dry holes................. 895 287 412 15,635 17,229
Leasehold abandonments and other...... 1,601 22 154 - 1,777
------ ------ ------ ------ -------
$11,834 $ 7,847 $ 1,254 $18,748 $ 39,683
====== ====== ====== ====== =======
Three months ended June 30, 2003:
Geological and geophysical costs...... $11,849 $ 4,776 $ 578 $ 854 $ 18,057
Exploratory dry holes................. 9,820 551 1,156 15,229 26,756
Leasehold abandonments and other...... 934 1,201 99 - 2,234
------ ------ ------ ------ -------
$22,603 $ 6,528 $ 1,833 $16,083 $ 47,047
====== ====== ====== ====== =======
Six months ended June 30, 2004:
Geological and geophysical costs...... $25,107 $10,668 $ 1,835 $ 4,846 $ 42,456
Exploratory dry holes................. 37,863 692 8,582 24,319 71,456
Leasehold abandonments and other...... 2,420 37 3,813 7 6,277
------ ------ ------ ------ -------
$65,390 $11,397 $14,230 $29,172 $120,189
====== ====== ====== ====== =======
Six months ended June 30, 2003:
Geological and geophysical costs...... $17,688 $ 6,508 $ 1,915 $ 2,328 $ 28,439
Exploratory dry holes................. 21,178 1,431 9,870 17,456 49,935
Leasehold abandonments and other...... 1,524 1,633 1,375 8 4,540
------ ------ ------ ------ -------
$40,390 $ 9,572 $13,160 $19,792 $ 82,914
====== ====== ====== ====== =======
The Company expects third quarter 2004 exploration, abandonments,
geological and geophysical costs to be $25 million to $45 million, dependent
largely on exploratory drilling results and expected seismic expenditures.
General and administrative expense. General and administrative expense for
the three and six months ended June 30, 2004 was $17.2 million and $35.5
million, respectively, as compared to $13.6 million and $29.1 million during the
same respective periods in 2003. The increases in general and administrative
expense are primarily due to increases in administrative staff,
performance-related compensation costs and increases in the amortization of
restricted stock awards of $1.5 million and $2.2 million during the three and
six months ended June 30, 2004, respectively, as compared to the same respective
periods of 2003.
The Company expects third quarter 2004 general and administrative expense
to be $17 million to $19 million.
Accretion of discount on asset retirement obligations. During the three and
six months ended June 30, 2004, accretion of discount on asset retirement
obligations was $2.0 million and $4.0 million, respectively, as compared to $1.2
million and $2.3 million during the same respective periods of 2003. The
increases in accretion of discount on asset retirement obligations are primarily
due to the increase in future plugging and abandonment obligations related to
the deepwater Gulf of Mexico, Tunisian and South African wells which began
production during the twelve months ended June 30, 2004. See "Cumulative effect
of change in accounting principle" and Notes B and F of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" for additional
information regarding the Company's asset retirement obligations.
The Company expects third quarter 2004 accretion of discount on asset
retirement obligations to be approximately $2 million.
32
PIONEER NATURAL RESOURCES COMPANY
Interest expense. Interest expense was $21.4 million and $43.0 million for
the three and six months ended June 30, 2004, respectively, as compared to $23.8
million and $46.3 million for the same respective periods in 2003. The decrease
in interest expense during the second quarter of 2004 as compared to the second
quarter of 2003 is primarily attributable to reduced borrowings under the
Company's Revolving Credit Agreement and an $866 thousand increase in interest
rate hedge gains, partially offset by a $586 thousand decrease in interest
capitalized as the Company has completed major development projects in the Gulf
of Mexico and South Africa. The decrease in interest expense during the first
half of 2004 as compared to the first half of 2003 is primarily attributable to
reduced borrowings under the Company's Revolving Credit Agreement and a $1.6
million increase in interest rate hedge gains, partially offset by a $1.4
million decrease in interest capitalized. The weighted average interest rate on
the Company's indebtedness for each of the three and six months ended June 30,
2004 was 5.2 percent, as compared to 5.4 percent and 5.2 percent for the same
respective periods in 2003, including the effects of the Company's interest rate
swaps.
As is further described in Note L of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements", the Company exchanged
$526.9 million of three existing series of senior notes for a like principal
amount of New Notes and cash during July 2004. In accordance with GAAP, the
Company will account for the debt exchange during the third quarter of 2004 as a
replacement of the exchanged debt and will amortize the $109.0 million
associated payment of the trading premium or market value of the exchanged
senior notes in excess of their stated value, along with the unamortized
carrying values attributable to the issuance costs, discounts and deferred hedge
gains and losses of the exchanged debt, as adjustments of interest expense over
the remaining terms of the New Notes.
The Company expects third quarter 2004 interest expense to be $21 million
to $24 million.
Other expenses. Other expenses for the three and six months ended June 30,
2004 were $8.3 million and $8.5 million, respectively, as compared to $5.6
million and $10.8 million for the same respective periods in 2003. The increase
in other expenses during the three months ended June 30, 2004, as compared to
the same period of 2003, is attributable to a $4.8 million increase in bad debt
expense, $1.4 million of transaction costs incurred to complete the
aforementioned debt exchange, and a $1.3 million increase in hedge
ineffectiveness charges, partially offset by a $1.5 million decrease in foreign
currency exchange losses, a $1.2 million decrease in Argentine personal asset
taxes and other aggregate expense fluctuations. The decrease in other expenses
during the six months ended June 30, 2004, as compared to the same period of
2003, is attributable to a $1.8 million decrease in foreign currency exchange
losses, a $.9 million decrease in Argentine personal asset taxes and other
aggregate expense fluctuations.
Income tax provision. During the three and six months ended June 30, 2004,
the Company recognized income tax provisions of $51.8 million and $91.5 million,
respectively, as compared to $2.6 million and $4.9 million for the same
respective periods in 2003. The Company's effective tax rate is higher than the
combined United States federal and state statutory rate of approximately 36.5
percent primarily due to the reversal of the Company's United States deferred
tax asset valuation allowances during the third quarter of 2003 and the
aforementioned international exploration and abandonment expenses that created
deferred tax benefits which cannot be recognized until sufficient future taxable
income in those countries is assured. See Note C of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" for additional
information regarding the Company's income taxes.
During the third quarter of 2004, the Company estimates that its cash
income taxes will be $4 million to $8 million principally related to Argentine
and Tunisian income taxes and nominal alternative minimum tax in the United
States. The Company's effective income tax rate is expected to range from 36
percent to 39 percent based on current capital spending plans.
Cumulative effect of change in accounting principle. As previously
discussed, the Company adopted the provisions of SFAS 143 on January 1, 2003 and
recognized a $15.4 million benefit from the cumulative effect of change in
accounting principle, net of $1.3 million of deferred income taxes.
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.
33
PIONEER NATURAL RESOURCES COMPANY
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three and six months ended June 30, 2004
totaled $183.6 million and $350.8 million, respectively, as compared to
additions to oil and gas properties of $134.3 million and $387.1 million during
the same respective periods of 2003. During the three and six month periods
ended June 30, 2004, the Company's additions to oil and gas properties were
funded by $264.7 million and $518.3 million of net cash provided by operating
activities, respectively. The Company's second quarter 2003 additions to oil and
gas properties were funded by $189.9 million of net cash provided by operating
activities. During the six months ended June 30, 2003, the Company's additions
to oil and gas properties were funded by $324.2 million of net cash provided by
operating activities, $25.7 million of proceeds from the disposition of assets
and borrowings under long-term debt.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations and other liabilities. From
time-to- time, the Company enters into off-balance sheet arrangements and
transactions that can give rise to material off-balance sheet obligations of the
Company. As of June 30, 2004, the material off-balance sheet arrangements and
transactions that the Company has entered into include (i) undrawn letters of
credit, (ii) operating lease agreements, (iii) drilling commitments and (iv)
contractual obligations for which the ultimate settlement amounts are not fixed
and determinable such as derivative contracts that are sensitive to future
changes in commodity prices and gas transportation commitments. Other than the
Company's derivative obligations and the aforementioned exchange of senior notes
during July 2004, there have been no material changes in its contractual
obligations since December 31, 2003. See "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for a table of changes in the fair value of the
Company's open derivative contract liabilities during the six months ended June
30, 2004.
Working capital. Funding for the Company's working capital obligations is
provided by internally-generated cash flow. Funding for the repayment of
principal and interest on outstanding debt and the Company's capital expenditure
program may be provided by any combination of internally-generated cash flow,
proceeds from the disposition of non-strategic assets or alternative financing
sources as discussed in "Capital resources" below.
Capital resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of non-strategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments during the
remainder of 2004.
Operating activities. Net cash provided by operating activities during the
three and six months ended June 30, 2004 was $264.7 million and $518.3 million,
respectively, as compared to $189.9 million and $324.2 million for the same
respective periods in 2003. The increases in net cash provided by operating
activities were primarily due to higher production volumes and higher commodity
prices.
Investing activities. Net cash used in investing activities during the
three and six months ended June 30, 2004 was $192.2 million and $364.5 million,
respectively, as compared to $128.3 million and $367.7 million for the same
respective periods of 2003. The increase in net cash used in investing
activities during the second quarter of 2004, as compared to the second quarter
of 2003, was primarily due to second quarter 2004 acquisitions of proved oil and
gas properties in the United States Spraberry field and unproved property
interests in Alaska and Equatorial Guinea. The decrease in net cash used in
investing activities during the first half of 2004, as compared to the first
half of 2003, was primarily due to a $36.3 million decrease in additions to oil
and gas properties, partially offset by a $25.2 million decrease in proceeds
from disposition of assets.
Financing activities. Net cash used in financing activities during the
three and six months ended June 30, 2004 was $66.1 million and $157.5 million,
respectively. In comparison, net cash used in financing activities was $57.3
million during the three months ended June 30, 2003 and net cash provided by
financing activities was $45.7 million during the six months ended June 30,
2003. During the three and six month periods ended June 30, 2004, the Company
has repaid $46.0 million and $136.0 million of long-term debt, respectively, as
compared to a repayment of $57.2 million of long-term debt during the three
months ended June 30, 2003 and $44.5 million of net long-term borrowings during
the six months ended June 30, 2003. The reductions in long-term debt were funded
during 2004 by increased net cash provided by operating activities. During the
three and six months ended June 30, 2004, the Company also used $9.7 million to
purchase 320,000 shares of treasury stock and $15.3 million to purchase 503,300
shares of treasury stock, respectively.
34
PIONEER NATURAL RESOURCES COMPANY
During March 2004, the Company's board of directors also declared a $.10
per common share semiannual dividend, payable on April 13, 2004 to shareholders
of record on March 29, 2004. Associated therewith, the Company distributed $12.0
million of aggregate dividends during April 2004. If declared by the board of
directors, the Company's second semiannual dividend will be distributed during
October 2004.
The Company's operating, investing and financing activities during the
third and fourth quarters of 2004 will be materially impacted by the
aforementioned July 2004 debt exchange and by the Proposed Merger. The debt
exchange extended the maturities on $526.9 million of the Company's long-term
debt until 2016, reduced the coupon interest rate on the New Notes as compared
to the exchanged notes and used $109.0 million of cash for exchange price
payments, which represented the trading premium or market value of the exchanged
notes in excess of their stated value. The Proposed Merger, if consummated, will
be accounted for as a purchase business combination and will materially expand
the Company's assets, liabilities, shareholders' equity, outstanding common
shares, forecasted production volumes and general scope of operations.
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.
Liquidity. The Company's principal source of short-term liquidity is the
Revolving Credit Agreement. Outstanding borrowings under the Revolving Credit
Agreement totaled $24.0 million as of June 30, 2004. Including $49.3 million of
undrawn and outstanding letters of credit under the Revolving Credit Agreement,
the Company has $626.7 million of unused borrowing capacity as of June 30, 2004.
Book capitalization and current ratio. The Company's book capitalization at
June 30, 2004 was $3.2 billion, consisting of debt of $1.4 billion and
stockholders' equity of $1.8 billion. Consequently, the Company's debt to book
capitalization decreased to 43.8 percent at June 30, 2004 from 46.9 percent at
December 31, 2003. The Company's ratio of current assets to current liabilities
was .54 at June 30, 2004 and .48 at December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative disclosures about market risk
are supplementary to the quantitative and qualitative disclosures provided in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
As such, the information contained herein should be read in conjunction with the
related disclosures in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
The following table reconciles the changes that occurred in the fair values
of the Company's open derivative contracts during the first six months of 2004:
Derivative Contract Net Liabilities
--------------------------------------
Interest
Commodities Rate Total
----------- --------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2003............... $ (201,422) $ - $ (201,422)
Changes in contract fair value (a)....... (238,014) (13,575) (251,589)
Contract maturities...................... 113,874 (2,010) 111,864
Contract terminations.................... (5,515) - (5,515)
--------- -------- ---------
Fair value of contracts outstanding
as of June 30, 2004................... $ (331,077) $ (15,585) $ (346,662)
========= ======== =========
- ---------------
(a) At inception, new derivative contracts entered into by the Company have no
intrinsic value.
The following disclosures provide specific information about material
changes that have occurred since December 31, 2003 in the Company's portfolio of
financial instruments. The Company may recognize gains or losses in future
earnings on these instruments from changes in commodity prices or interest
rates.
35
PIONEER NATURAL RESOURCES COMPANY
Interest rate sensitivity. During March 2004, the Company entered into
interest rate swap contracts on an aggregate $150 million notional amount to
hedge the fair value of its 7-1/2 percent senior notes. The terms of the
interest rate swap contracts match the scheduled maturity of the hedged senior
notes, require the counterparties to pay the Company a 7-1/2 percent fixed
annual interest rate and require the Company to pay the counterparties variable
annual interest rates equal to the periodic six-month LIBOR plus a weighted
average annual margin of 3.71 percent.
During April 2004, the Company entered into interest rate swap contracts on
an aggregate $150 million notional amount to hedge the fair value of its 9-5/8
percent senior notes. The terms of the interest rate swap contracts match the
scheduled maturity of the hedged senior notes, require the counterparties to pay
the Company a 9-5/8 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six- month LIBOR plus a weighted average annual margin of 5.66 percent.
During June 2004, the Company entered into costless collar contracts to
hedge the yield on the benchmark U.S. Treasuries. The terms of the collar
contracts fixed the annual yield on $250 million notional amount of U.S.
Treasuries within a yield collar having a ceiling rate of 4.70 percent and a
floor rate of 4.65 percent. The yield on the U.S. Treasuries as of July 7, 2004
was the benchmark rate used to determine the coupon rate on the Company's 5-7/8
percent senior notes due July 15, 2016, which were issued on July 15, 2004 in
exchange for portions of three series of the Company's outstanding senior notes.
See Note L of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" and Capital Commitments, Capital Resources and Liquidity
included in Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information regarding the July 15,
2004 debt exchange.
The following table provides information about the debt obligations and
derivative financial instruments of the Company that are sensitive to changes in
interest rates as of June 30, 2004. For debt obligations, the table presents
maturities by expected maturity dates, the weighted average interest rates
expected to be paid on the debt given current contractual terms and market
conditions and the debt's estimated fair value. For fixed rate debt, the
weighted average interest rate represents the contractual fixed rates that the
Company was obligated to periodically pay on the debt as of June 30, 2004. For
variable rate debt, the average interest rate represents the average rates being
paid on the debt projected forward proportionate to the forward yield curve for
the six-month LIBOR. For interest rate swap contracts, the table presents the
notional amounts together with the fixed rate to be received by the Company and
the variable rate to be paid estimated based on the current variable rate being
paid by the Company projected forward proportionate to the forward yield curve
for the six-month LIBOR.
36
PIONEER NATURAL RESOURCES COMPANY
Interest Rate Sensitivity
Debt Obligations and Derivative Financial Instruments as of June 30, 2004
Six months Liability
ended Year ended December 31, Fair Value at
December 31, ------------------------------------------------------ June 30,
2004 2005 2006 2007 2008 Thereafter Total 2004
-------- -------- -------- -------- -------- ---------- ---------- ------------
(in thousands, except interest rates)
Total Debt:
Fixed rate maturities......... $ - $133,279 $ - $153,339 $351,932 $ 728,813 $1,367,363 $(1,542,732)
Weighted average
interest rate (%)........... 7.93 7.86 7.83 7.81 8.34 8.37
Variable rate maturities...... $ - $ - $ - $ - $ 24,000 $ - $ 24,000 $ (24,000)
Average interest rate (%)..... 3.29 4.68 5.58 6.16 6.57 -
Interest Rate Hedge Derivatives:
7-1/2 percent senior notes:
Notional debt amount........ $150,000 $150,000 $150,000 $150,000 $150,000 $ 150,000 $ 150,000 $ (10,491)
Fixed rate receivable (%)... 7.50 7.50 7.50 7.50 7.50 7.50 7.50
Variable rate payable (%)... 6.00 7.39 8.29 8.87 9.28 10.29
9-5/8 percent senior notes:
Notional debt amount........ $150,000 $150,000 $150,000 $150,000 $150,000 $ 150,000 $ 150,000 $ (4,361)
Fixed rate receivable (%)... 9.63 9.63 9.63 9.63 9.63 9.63 9.63
Variable rate payable (%)... 7.95 9.34 10.24 10.82 11.23 12.24
4.75 percent U.S. Treasury
Notes due May 15, 2014:
Notional debt amount....... $250,000 $ - $ - $ - $ - $ - $ 250,000 $ (733)
Weighted average maximum
ceiling rate (%).......... 4.70 - - - - - 4.70
Weighted average minimum
floor rate (%)............ 4.65 - - - - - 4.65
During July 2004 the Company entered into the following transactions that
materially changed the Company's portfolio of financial instruments that are
sensitive to changes in interest rates:
o The Company terminated interest rate swap contracts on $140 million
notional amount of its 7-1/2 percent senior notes. In connection
therewith, the Company paid $7.8 million to settle $8.8 million of
settlement losses for future periods offset by $1.0 million of accrued
settlement gains through the date of termination. The Company
continues to be a party to interest rate swaps on $10 million notional
amount whereby the Company is paid a fixed annual rate of 7-1/2
percent and pays the counterparties a variable annual rate equal to
the periodic six-month LIBOR rate plus a weighted average annual
margin of 3.72 percent.
o The Company terminated interest rate swap contracts on $90 million
notional amount of its 9-5/8 percent senior notes. In connection
therewith, the Company paid $1.3 million to settle $1.8 million of
settlement losses for future periods offset by $.5 million of accrued
settlement gains through the date of termination. The Company
continues to be a party to interest rate swaps on $60 million notional
amount whereby the Company is paid a fixed annual rate of 9-5/8
percent and pays the counterparties a variable annual rate equal to
the periodic six-month LIBOR rate plus a weighted average annual
margin of 5.62 percent.
o On July 15, 2004, the Company completed the aforementioned exchange of
outstanding senior notes for a new issuance of senior notes and cash.
In aggregate, $117.9 million of 8-1/4 percent senior notes due August
15, 2007, $339.2 million of 9-5/8 percent senior notes due April 1,
2010 and $133.8 million of 7-1/2 percent senior notes due April 15,
2012 were exchanged for a like principal amount of 5-7/8 percent
senior notes due July 15, 2016 plus $109.0 million of cash which
represented the trading premium or market value of the bonds in excess
of their stated value and $14.2 million of accrued interest payable.
o On July 7, 2004, the Company terminated the costless collar contracts
that hedged $250 million notional amount of U.S. Treasuries. In
connection therewith, the Company paid $3.4 million to the
counterparties.
37
PIONEER NATURAL RESOURCES COMPANY
Commodity price sensitivity. During the first six months of 2004, the
Company entered into certain oil and gas hedge derivatives and terminated other
oil and gas hedge derivatives. The following tables provide information about
the Company's oil and gas derivative financial instruments that were sensitive
to oil or gas price changes as of June 30, 2004. As of June 30, 2004, all of the
Company's oil and gas derivative financial instruments qualified as hedges.
See Note E of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil and gas
prices.
Oil Price Sensitivity
Derivative Financial Instruments as of June 30, 2004
Six months Liability
ended Year ended December 31, Fair Value at
December 31, ------------------------------------- June 30,
2004 2005 2006 2007 2008 2004
----------- ------- ------- ------- ------- -----------
(in thousands)
Oil Hedge Derivatives (a):
Average daily notional Bbl volumes:
Swap contracts......................... 23,250 27,000 5,000 11,000 15,000 $ (128,178)
Weighted average fixed price per Bbl.. $ 29.46 $ 27.97 $ 26.19 $ 30.17 $ 28.56
Average forward NYMEX oil prices (b).... $ 42.83 $ 39.57 $ 37.18 $ 35.65 $ 34.49
- ---------------
(a) See Note E of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(b) The average forward NYMEX oil prices are based on July 30, 2004 market
quotes.
Gas Price Sensitivity (a)
Derivative Financial Instruments as of June 30, 2004
Six months Liability
ended Year ended December 31, Fair Value at
December 31, --------------------------- June 30,
2004 2005 2006 2007 2004
----------- ------- ------- ------- -----------
(in thousands)
Gas Hedge Derivatives (b):
Average daily notional MMBtu volumes:
Swap contracts......................... 310,000 174,904 70,000 20,000 $ (202,899)
Weighted average fixed price
per MMBtu........................... $ 4.34 $ 5.10 $ 4.16 $ 3.51
Average forward NYMEX gas prices (c).... $ 6.42 $ 6.39 $ 5.95 $ 5.51
- ---------------
(a) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connect the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap
contract and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(b) See Note E of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(c) The average forward NYMEX gas prices are based on July 30, 2004 market
quotes.
38
PIONEER NATURAL RESOURCES COMPANY
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's principal
executive officer and principal financial officer have evaluated, as required by
Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"),
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly report on
Form 10-Q. Based on that evaluation, the principal executive officer and
principal financial officer concluded that the design and operation of the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting. There have been no
changes in the Company's internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's
last fiscal quarter that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note H of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements", the Company is a party to various
legal actions incidental to its business. Except for the specific legal actions
described in Note H, the Company believes that the probable damages from such
other legal actions will not be in excess of ten percent of the Company's
current assets.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 13, 2004 in
Irving, Texas. At the meeting, two proposals were submitted for vote of
stockholders (as described in the Company's Proxy Statement dated April 2,
2004). The following is a brief description of each proposal and results of the
stockholders' votes.
Election of Directors. Prior to the meeting, the Company's board of
directors designated three nominees as Class I directors with their terms to
expire at the annual meeting in 2007 when their successors are elected and
qualified. Messrs. Gardner and Houghton and Mrs. Lawson were, at the time of
such nomination and at the time of the meeting, directors of the Company. Each
nominee was elected as a director of the Company, with the results of the
stockholder voting being as follows:
Authority Broker
For Withheld Abstain Non-Votes
----------- --------- ------- ---------
R. Hartwell Gardner 105,926,894 1,036,477 - -
James L. Houghton 105,914,054 1,049,317 - -
Linda K. Lawson 105,029,162 1,934,209 - -
In addition, the term of office for the following directors continued after
May 13, 2004: James R. Baroffio, Edison C. Buchanan, Jerry P. Jones, Charles E.
Ramsey, Jr., Scott D. Sheffield and Robert A. Solberg.
Ratification of selection of auditors. The engagement of Ernst & Young LLP
as the Company's independent auditors for 2004 was submitted to the stockholders
for ratification. Such election was ratified, with the results of the
stockholder voting being as follows:
For 105,816,908
Against 1,078,369
Abstain 68,094
Broker non-votes -
39
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits and Reports on Form 8-K
Exhibits
2.1 Agreement and Plan of Merger, dated May 3, 2004, among the Company,
Evergreen and BC Merger Sub, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K, File No. 1-13245, filed
with the SEC on May 3, 2004).
10.1 5-Year Revolving Credit Agreement dated as of December 16, 2003 among
the Company, as the Borrower; JP Morgan Chase Bank as the Administrative
Agent; JP Morgan Chase Bank and Bank of America, N.A., as the Issuing
Banks; Wachovia Bank, National Association as the Syndication Agent;
Bank of America, N.A., Bank One, N.A., Fleet National Bank and Wells
Fargo Bank, National Association, as the Co-Documentation Agents and
certain other lenders.
10.2 First Amendment to 5-Year Revolving Credit Agreement dated as of June 9,
2004 among the Company, as the Borrower; JP Morgan Chase Bank as the
Administrative Agent; JP Morgan Chase Bank and Bank of America, N.A., as
the Issuing Banks; Wachovia Bank, National Association as the
Syndication Agent; Bank of America, N.A., Bank One, N.A., Fleet National
Bank and Wells Fargo Bank, National Association, as the Co-
Documentation Agents and certain other lenders.
31.1 Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
Reports on Form 8-K
During the three months ended June 30, 2004, the Company filed with the SEC
current reports on Form 8-K on May 5, May 7, June 10 and June 25, 2004, to
provide certain information that is deemed furnished, not filed, under the
Exchange Act.
The Company's May 5, 2004 Form 8-K provided, along with associated exhibits
thereto, information announcing that the Company had entered into a definitive
merger agreement with Evergreen whereby Evergreen would become a wholly-owned
subsidiary of the Company.
The Company's May 7, 2004 Form 8-K provided, as an exhibit thereto, a news
release issued by the Company on May 7, 2004 announcing, together with related
information, financial and operating results for the quarter ended March 31,
2004, providing an operations update and providing the Company's second quarter
2004 financial outlook based on current expectations.
The Company's June 10, 2004 Form 8-K provided, as an exhibit thereto, a
news release issued by the Company on June 10, 2004 announcing that the Company
had commenced offers to exchange any and all of three series of its outstanding
senior notes for a new series of Senior Notes due 2016 and cash.
The Company's first June 25, 2004 Form 8-K provided, along with an exhibit
thereto, information announcing that the Company had entered into a First
Amendment to the Company's $700,000,000 5-Year Revolving Credit Agreement that
changes certain definitions in the Revolving Credit Agreement and relinquishes
Pioneer USA's guarantor requirement of the Company's senior notes.
The Company's second June 25, 2004 Form 8-K provided, as an exhibit
thereto, a news release issued by the Company on June 25, 2004 announcing that
the Company had increased the consideration to be paid to holders of senior
notes who validly tender their old notes in connection with the exchange offers
commenced on June 10, 2004, and amended certain other terms of those exchange
offers.
40
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: August 3, 2004 By: /s/ Timothy L. Dove
----------------------------------
Timothy L. Dove
Executive Vice President and Chief
Financial Officer
Date: August 3, 2004 By: /s/ Richard P. Dealy
----------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
41
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
2.1 Agreement and Plan of Merger, dated May 3, 2004, among the
Company, Evergreen and BC Merger Sub, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on May 3, 2004).
10.1(a) 5-Year Revolving Credit Agreement dated as of December 16, 2003
among the Company, as the Borrower; JP Morgan Chase Bank as the
Administrative Agent; JP Morgan Chase Bank and Bank of America,
N.A., as the Issuing Banks; Wachovia Bank, National Association
as the Syndication Agent; Bank of America, N.A., Bank One, N.A.,
Fleet National Bank and Wells Fargo Bank, National Association,
as the Co-Documentation Agents and certain other lenders.
10.2(a) First Amendment to 5-Year Revolving Credit Agreement dated as of
June 9, 2004 among the Company, as the Borrower; JP Morgan Chase
Bank as the Administrative Agent; JP Morgan Chase Bank and Bank
of America, N.A., as the Issuing Banks; Wachovia Bank, National
Association as the Syndication Agent; Bank of America, N.A.,
Bank One, N.A., Fleet National Bank and Wells Fargo Bank,
National Association, as the Co-Documentation Agents and
certain other lenders.
31.1(a) Chief Executive Officer certification under Section 302 of
Sarbanes-Oxley Act of 2002.
31.2(a) Chief Financial Officer certification under Section 302 of
Sarbanes-Oxley Act of 2002.
32.1(a) Chief Executive Officer certification under Section 906 of
Sarbanes-Oxley Act of 2002.
32.2(a) Chief Financial Officer certification under Section 906 of
Sarbanes-Oxley Act of 2002.
- ------------------
(a) filed herewith
42