Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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.)
1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(972) 444-9001
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock.................................. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 27, 1998....... $2,377,781,760
Number of shares of Common Stock outstanding as of
February 27, 1998.............................................. 100,899,720
Documents Incorporated by Reference:
(1) Proxy Statement for Annual Meeting of Shareholders to be held May 21, 1998
- Referenced in Part III of this report.
PIONEER NATURAL RESOURCES COMPANY
CROSS REFERENCE SHEET
Pursuant to National Policy Statement No. 47 (Canada)
(Annual Information Form ("AIF"))
Item Number and Caption of AIF Heading or Location in Form 10-K
- ------------------------------ --------------------------------
1. Incorporation Item 1. Business
2. General Development of the Item 1. Business
Business
3. Narrative Description of the Item 1. Business
Business Item 2. Properties
4. Selected Consolidated Financial Item 6. Selected Financial Data
Information Item 8. Financial Statements and
Supplementary Data
5. Management's Discussion and Item 7. Management's Discussion and
Analysis Analysis of Financial Conditions
and Results of Operations
6. Market for Securities Item 5. Market for Registrant's Common
Stock and Related Stockholder
Matters
7. Directors and Officers Item 10. Directors and Executive Officers
of the Registrant
8. Additional Information Item 10. Directors and Executive Officers
of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Item 13. Certain Relationships and
Related Transactions
2
Parts I and II of this Report contain forward looking statements that
involve risks and uncertainties. Accordingly, no assurances can be given that
the actual events and results will not be materially different than the
anticipated results described in the forward looking statements. See "Item 1.
Business - Competition, Markets and Regulation" and "Item 1. Business - Risks
Associated with Business Activities" for a description of various factors that
could materially affect the ability of the Company to achieve the anticipated
results described in the forward looking statements.
PART I
Unless otherwise specified, all dollar amounts are expressed in United
States dollars. Certain oil and gas terms used in this Report are defined under
"Item 1. Business - Definition of Certain Oil and Gas Terms".
ITEM 1. BUSINESS
General
Pioneer Natural Resources Company (the "Company") was formed in April 1997
as a Delaware corporation and, prior to August 7, 1997, had not conducted any
significant activities. Effective as of August 7, 1997, Parker & Parsley
Petroleum Company ("Parker & Parsley"), formerly a Delaware corporation, and
MESA Inc. ("Mesa"), formerly a Texas corporation, completed their business
combination pursuant to an Amended and Restated Agreement and Plan of Merger
dated as of April 6, 1997 (the "Merger Agreement"), among Parker & Parsley, Mesa
and its wholly-owned subsidiaries, the Company and Mesa Operating Company
("MOC"). The Company was significantly expanded by the subsequent acquisition of
the Canadian and Argentine oil and gas business of Chauvco Resources Ltd.
("Chauvco"), a publicly traded independent oil and gas company based in Calgary,
Canada on December 18, 1997.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", both the merger with Mesa and the acquisition of
Chauvco have been accounted for as purchases by the Company (formerly Parker &
Parsley). As a result, the historical financial, reserve and other statistical
information for the Company are those of Parker & Parsley, and the Company's
financial, reserve and other statistical information present the addition of
Mesa's and Chauvco's assets and liabilities as an acquisition by Parker &
Parsley in August and December 1997, respectively.
The Company's proved reserves at December 31, 1997 totaled 761.6 million
BOE, representing $3.1 billion in SEC 10 Value. Of the total, domestic reserves
represent 81% of the BOEs and 82% of the SEC 10 Value.
The Company's business activities are conducted through wholly-owned
subsidiaries and are comprised of the business activities formerly conducted by
Parker & Parsley, Mesa and Chauvco. Domestic drilling and production operations
are principally located in Texas, Kansas, Oklahoma, Louisiana, New Mexico and
offshore Gulf of Mexico. The Company also owns interests in oil and gas
properties in Argentina and Canada.
The Company's executive offices are located at 1400 Williams Square West,
5205 N. O'Connor Blvd., Irving, Texas 75039, and its telephone number at those
offices is (972) 444-9001. The Company maintains division offices in Midland and
Houston, Texas, Oklahoma City, Oklahoma, Buenos Aires, Argentina and Calgary,
Canada. At December 31, 1997, the Company had 1,321 employees, 399 of which were
employed in field and plant operations.
Mission and Strategies
The Company's mission is to provide its shareholders with superior
long-term profitability and value. The "opportunity driven" strategies to be
employed to achieve this mission will include: (a) developing and increasing
production from existing properties through low-risk development drilling and
other activities, (b) concentrating on defined geographic areas to achieve
operating and technical efficiencies, (c) pursuing strategic acquisitions in the
Company's core areas that will complement the Company's existing asset base and
that will provide additional growth opportunities, (d) utilizing or acquiring
technological and operating efficiencies to selectively expand into new
geographic areas that feature producing properties and provide
exploration/exploitation opportunities, (e) allocating the personnel and
technology necessary to increase the Company's exploration opportunities, (f)
maintaining financial flexibility to take advantage of additional exploration,
development and acquisition opportunities and (g) encouraging high levels of
3
equity ownership among senior managers and the Company's Board of Directors to
further align the interests of management and shareholders. The Company is
committed to continuing to enhance shareholder value through adherence to these
strategies.
Business Activities
Production
The Company focuses its efforts toward increasing its average daily
production of oil and gas through development drilling, production enhancement
activities and acquisitions of producing properties. Average daily oil and gas
production have each increased every year since 1991 with the exception of 1996
when average daily production declined due to significant property dispositions.
In spite of production decreases due to property sales, the Company's efforts
towards production growth have been largely successful as illustrated by the
five-year average daily production growth rates. Comparing 1992 to 1997, average
daily oil production has increased 279% and average daily gas production has
increased 327%, while production costs per BOE have declined 30%. Production,
price and cost information with respect to the Company's properties for each of
1997, 1996 and 1995 is set forth under "Item 2. Properties - Selected Oil and
Gas Information - Production, Price and Cost Data".
Drilling Activities
The Company seeks to increase its oil and gas reserves, production and
cash flow by concentrating on drilling low-risk development wells and by
conducting additional development activities such as recompletions. From the
beginning of 1993 through the end of 1997, the Company drilled 2,351 gross
(1,585 net) wells, 94% of which were successfully completed as productive wells,
at a total cost (net to the Company's interest) of $938 million. During 1997,
the Company drilled 592 gross (405 net) wells for a total cost (net to the
Company's interest) of approximately $343 million, 72% of which was spent on
development wells and related facilities. The Company's current 1998 capital
expenditure budget is $500 million which the Company has allocated as follows:
$301 million to exploitation activities, $125 million to exploration activities
and $74 million to oil and gas property acquisitions. This capital expenditure
budget reflects the Company's plans to drill approximately 600 development wells
and 95 exploratory wells and to perform recompletions on over 200 wells.
The Company believes that its current property base provides a substantial
inventory of prospects for continued reserve, production and cash flow growth.
The Company's domestic reserves as of December 31, 1997 include proved
undeveloped and proved developed nonproducing reserves of 71.9 million Bbls of
oil and NGLs and 395.6 Bcf of gas. Development of these reserves is anticipated
to occur principally in 1998 and 1999. The Company believes that its current
portfolio of undeveloped prospects provides attractive development and
exploration opportunities for at least the next three to five years.
Exploratory Activities
Since 1995, the Company has dedicated an increasing percentage of its
annual exploration/exploitation capital budget to exploratory projects, 17% in
1995, 18% in 1996 and 28% in 1997. The Company will continue to allocate a
significant portion of its capital budget to its exploration opportunities with
a focus on generating a portfolio of short to medium term impact projects. The
Company currently anticipates that approximately 29% of its 1998
exploration/exploitation capital budget will be spent on exploratory projects.
The majority of the 1998 exploratory budget is allocated to domestic activities
in the Gulf Coast region and internationally in Africa, Argentina and Canada.
Exploratory drilling involves greater risks of dry holes or failure to find
commercial quantities of hydrocarbons than development drilling or enhanced
recovery activities. See "Item 1. Business - Risks Associated with Business
Activities - Risks of Drilling Activities" below.
Asset Divestitures
The Company regularly reviews its property base for the purpose of
identifying nonstrategic assets, the disposition of which would increase capital
resources available for other activities and create organizational and
operational efficiencies. While the Company generally does not dispose of assets
4
solely for the purpose of reducing debt, such dispositions can have the result
of furthering the Company's objective of financial flexibility through decreased
debt levels.
For the year ended December 31, 1997, the Company's asset disposition
activity primarily consisted of the sale of certain domestic assets, primarily
oil and gas properties, for proceeds of $114.1 million, which resulted in a net
gain of $4.3 million and the sale of the Company's subsidiary with an ownership
interest in oil and gas properties in Turkey for proceeds of $1.6 million, which
resulted in the recognition of a gain of $706 thousand. During the year ended
December 31, 1996, the Company sold certain wholly-owned subsidiaries for
proceeds of $183.2 million resulting in a pre-tax gain of $83.3 million and
certain nonstrategic domestic assets for proceeds of $58.4 million that resulted
in the recognition of a pre-tax net gain of $13.8 million. During 1995, the
Company divested certain assets, primarily oil and gas properties, for proceeds
of $175.1 million that resulted in a pre-tax net gain of $16.6 million. The
proceeds from the asset dispositions were used to reduce the Company's
outstanding bank indebtedness and to provide funding for a portion of the
Company's capital expenditures, including purchases of oil and gas properties in
the Company's core areas.
In February 1998, the Company announced its intentions to sell domestic
nonstrategic properties for proceeds ranging from $375 to $550 million. These
properties represent approximately 15% of the Company's total cash flow from
operations. The Company plans to complete this divestiture in the latter part of
1998. The proceeds will be initially used to reduce the Company's outstanding
indebtedness and subsequently to provide funding for the Company's capital
expenditures program. This will leave the Company with approximately 25 domestic
fields, which represent the Company's core producing assets with complementary
development opportunities and the Company's assets with significant future
exploration opportunities.
The consummation of the Company's 1998 divestiture plans and any future
divestiture plans is entirely dependent on finding one or more willing buyers
who have the financial wherewithal to complete such a purchase. Until such a
buyer is found, the Company may reevaluate its portfolio of properties and at
any time may adjust its plans concerning divestitures. As a result, there can be
no assurance that the divestiture of any or all of these properties will be
completed or that the estimated proceeds will be realized.
Acquisition Activities
General. The Company regularly seeks to acquire properties that complement
its operations and provide exploitation and development opportunities and
cost-reduction potential. In addition, the Company pursues strategic
acquisitions that will allow the Company to expand into new geographical areas
that feature producing properties and provide exploration/exploitation
opportunities. During 1997, the Company completed three major transactions: the
merger with Mesa for total consideration of $991.0 million, the acquisition of
Chauvco for total consideration of $696.4 million and the acquisition of assets
from America Cometra for total consideration of $130 million. These acquisitions
added significantly to the Company's exploratory and development drilling
opportunities, balanced the Company's reserve mix between oil and natural gas,
increased the scale of its operations in the MidContinent region, the offshore
Gulf Coast region, Argentina and Canada and provided the Company with a
significant base of operations and experienced personnel for its areas of
geographic focus, including international areas. During 1996 and 1995, the
Company reduced its previous emphasis on major acquisitions and, instead,
concentrated its efforts on maximizing the value from its existing properties.
However, the Company continued its program of smaller acquisitions of properties
that exhibit one or more of the following characteristics: properties that are
near or otherwise complement the Company's existing properties, properties that
represent additional working interests in Company-operated properties or
properties that provide the Company with strategic exploitation or exploration
opportunities. In 1996 and 1995, aggregate expenditures to acquire such
interests and properties amounted to approximately $21 million and $48.5
million, respectively.
Future Acquisition Opportunities. The Company regularly pursues and
evaluates acquisition opportunities (including opportunities to acquire
particular oil and gas properties or related assets or entities owning oil and
gas properties or related assets and opportunities to engage in mergers,
consolidations or other business combinations with such entities) and at any
given time may be in various stages of evaluating such opportunities. Such
stages may take the form of internal financial analysis, oil and gas reserve
analysis, due diligence, the submission of an indication of interest,
preliminary negotiations, negotiation of a letter of intent or negotiation of a
definitive agreement.
5
Financial Management
The Company strives to maintain its outstanding indebtedness at a moderate
level in order to provide sufficient financial flexibility for future
exploration, development and acquisition opportunities. While the Company may
occasionally incur higher levels of debt to take advantage of opportunities,
management's objective is to maintain a flexible capital structure and to
strengthen the Company's financial position by reducing debt through an increase
in equity capital or through the divestiture of nonstrategic assets.
As with any organization, the Company has experienced various debt levels
in recent years as it has responded to strategic opportunities. During 1996 and
1995, the Company took deliberate actions to reduce its debt levels or extend
its debt maturities in order to improve its financial flexibility and enable it
to take advantage of future strategic opportunities. The Company was able to
reduce its debt level significantly each year through the application of
proceeds from the dispositions of assets that the Company had identified as
nonstrategic (see "Asset Divestitures" above). In 1997, the Company's debt level
increased as a result of the assumption of the debt of Mesa and Chauvco. Also
during 1997, the Company recorded a noncash pre-tax charge of $1.4 billion in
accordance with SFAS 121 as defined in Note B of Notes to Consolidated Financial
Statements included in "Item 8. "Financial Statements and Supplementary Data".
As a result of the decrease in capital and the increase in debt, the Company's
debt as a percentage of total capitalization was 56% at December 31, 1997, up
from 31% at December 31, 1996.
In January 1998, the Company completed the issuance of two series of
senior notes for total net proceeds of $593 million. The first issuance was for
$350 million of ten year notes with a coupon rate of 6.5%, and the second
issuance was for $250 million of thirty year notes with a coupon rate of 7.2%.
The proceeds were used primarily to repay the Company's bank indebtedness and
had the effect of extending the Company's debt maturities.
Marketing of Production
General. Production from the Company's properties is marketed consistent
with industry practices, which include the sale of oil at the wellhead to third
parties and the sale of gas to third parties. Sales prices for both oil and gas
production are negotiated based on factors normally considered in the industry
such as the spot price for gas or the posted price for oil, price regulations,
distance from the well to the pipeline, well pressure, estimated reserves,
commodity quality and prevailing supply conditions.
Significant Purchasers. During 1997, the Company's two primary purchasers
of crude oil were Mobil Oil Corporation ("Mobil") and Genesis Crude Oil, L.P.
("Genesis"), both of which purchase oil pursuant to contracts that provide for
prices that are based on prevailing market prices. Approximately 16% and 23% of
the Company's 1997 oil and gas revenues were attributable to sales to Mobil and
Genesis, respectively. During 1997, the Company marketed its natural gas,
including natural gas products, to a variety of purchasers. Approximately 11%
and 10% of the Company's 1997 oil and gas revenues were attributable to sales to
Producers Energy Marketing, LLC and Western Gas Resources, Inc., respectively.
The Company is of the opinion that the loss of any one purchaser would not have
an adverse effect on its ability to sell its oil and gas production or natural
gas products.
Hedging Activities. The Company periodically enters into commodity
derivative contracts (swaps, futures and options) in order to (i) reduce the
effect of the volatility of price changes on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects. The hedging strategy for each product the Company
sells is described in further detail below.
Crude Oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The average oil
prices per Bbl that the Company reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges.
Natural Gas Liquids. The Company employs a policy of hedging natural gas
liquids based on actual product prices in order to mitigate some of the
volatility associated with NYMEX pricing. Natural gas liquids are sold under
long-term contracts which provide price flexibility and allow the Company to
maximize prices between trading hubs.
6
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas prices
per Mcf that the Company reports includes the effects of Btu content, gathering
and transportation costs, gas processing and shrinkage and the net effect of the
gas hedges.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a description of the Company's results of its
hedging activities and Item 8. "Financial Statements and Supplementary Data" for
a description of the Company's open hedge positions at December 31, 1997 and the
related prices to be realized.
Operations by Geographic Area
The Company operates in one industry segment. During 1997 and 1996, the
Company did not have significant operations in geographic areas other than the
United States. For financial information with respect to the Company's 1995
operations by geographic area, see Note O of Notes to Consolidated Financial
Statements included in "Item 8.
Financial Statements and Supplementary Data".
Competition, Markets and Regulation
Competition. The oil and gas industry is highly competitive. A large
number of companies and individuals engage in the exploration for and
development of oil and gas properties, and there is a high degree of competition
for oil and gas properties suitable for development or exploration. Acquisitions
of oil and gas properties have been an important element of the Company's
growth, and the Company intends to continue to acquire oil and gas properties.
The principal competitive factors in the acquisition of oil and gas properties
include the staff and data necessary to identify, investigate and purchase such
properties and the financial resources necessary to acquire and develop them.
Many of the Company's competitors are substantially larger and have financial
and other resources greater than those of the Company.
Markets. The Company's ability to produce and market oil and gas
profitably depends on numerous factors beyond the Company's control. The effect
of these factors cannot be accurately predicted or anticipated. In recent years,
worldwide oil production capacity and gas production capacity in certain areas
of the United States have exceeded demand, with resulting declines in the price
of oil and gas. Although the Company cannot predict the occurrence of events
that may affect oil and gas prices or the degree to which oil and gas prices
will be affected, it is possible that prices for any oil or gas the Company
produces will be lower than those currently available. Any significant decline
in the price of oil or gas would adversely affect the Company's revenues,
profitability and cash flow and could, under certain circumstances, result in a
reduction in the carrying value of the Company's oil and gas properties.
During most of 1996 and 1997, the Company benefitted from higher oil
prices as compared to previous years. However, during the fourth quarter of
1997, oil prices began a downward trend that has continued into March 1998. A
continuation of the oil price environment experienced during the first quarter
of 1998 will have an adverse effect on the Company's revenues and operating cash
flow, and may result in a downward adjustment to the Company's current 1998
capital budget of $500 million. Also, a continuing decline in oil prices could
result in additional decreases in the carrying value of the Company's oil and
gas properties.
Governmental Regulation. Oil and gas exploration and production are
subject to various types of regulation by local, state, federal and foreign
agencies. The Company's operations are also subject to state conservation laws
and regulations, including provisions for the unitization or pooling of oil and
gas properties, the establishment of maximum rates of production from wells and
the regulation of spacing, plugging and abandonment of wells. Each state
generally imposes a production or severance tax with respect to production and
sale of oil and gas within their respective jurisdictions. The regulatory burden
on the oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.
The Outer Continental Shelf Lands Act (the "OCSLA") requires that all
pipelines operating on or across the Outer Continental Shelf (the "OCS") provide
open-access, nondiscriminatory service. Although the Federal Energy Regulatory
Commission ("FERC") has chosen not to impose the regulations of Order No. 509,
which implements the OCSLA, on gatherers and other nonjurisdictional entities,
FERC has retained the authority to exercise jurisdiction over those entities if
7
necessary to permit nondiscriminatory access to service on the OCS. In addition,
gathering lines are currently exempt from FERC's jurisdiction, regardless of
whether they are on the OCS, but FERC could eliminate this exception. Commencing
May 1994, FERC issued a series of orders in individual cases that delineate its
current gathering policy. FERC's gathering policy was retained and clarified
with regard to deep water offshore facilities in a statement of policy issued in
February 1996. FERC's new gathering policy does not address its jurisdiction
over pipelines operating on or across the OCS pursuant to the OCSLA. If FERC
were to apply Order No. 509 to gatherers on the OCS, eliminate the exemption of
gathering lines and redefine its jurisdiction over gathering lines, these acts
could result in a reduction in available pipeline space for existing shippers in
the Gulf of Mexico and elsewhere, such as the Company.
The United States Minerals Management Service (the "MMS") is conducting an
inquiry into certain contract settlement agreements from which producers on
federal oil and gas leases have received settlement proceeds that the MMS claims
are royalty-bearing and into the extent to which producers have paid appropriate
royalty on those proceeds.
Additional proposals and proceedings that might affect the oil and gas
industry are considered from time to time by Congress, FERC, state regulatory
bodies, the courts and foreign governments. The Company cannot predict when or
if any such proposals might become effective or their effect, if any, on the
Company's operations.
Environmental and Health Controls. The Company's operations are subject to
numerous federal, state, local and foreign laws and regulations relating to
environmental and health protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the type, quantities
and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas and impose substantial liabilities for pollution
resulting from oil and gas operations. These laws and regulations may also
restrict air or other discharges resulting from the operation of natural gas
processing plants, pipeline systems and other facilities that the Company owns.
Although the Company believes that compliance with environmental laws and
regulations will not have a material adverse effect on operations or earnings,
risks of substantial costs and liabilities are inherent in oil and gas
operations, and there can be no assurance that significant costs and
liabilities, including potential criminal penalties, will not be incurred.
Moreover, it is possible that other developments, such as stricter environmental
laws and regulations or claims for damages to property or persons resulting from
the Company's operations, could result in substantial costs and liabilities.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
with respect to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
hazardous substances released at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment.
The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The U.S. Environmental Protection Agency and various state
agencies have limited the approved methods of disposal for certain hazardous and
nonhazardous wastes. Furthermore, certain wastes generated by the Company's oil
and natural gas operations that are currently exempt from treatment as
"hazardous wastes" may in the future be designated as "hazardous wastes," and
therefore be subject to more rigorous and costly operating and disposal
requirements.
The Company currently owns or leases, and has in the past owned or leased,
properties that for many years have been used for the exploration and production
of oil and gas. Although the Company has used operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company or on or under other locations where such wastes have been taken for
disposal. In addition, some of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes diposed
8
thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
laws, the Company could be required to remove or remediate previously disposed
wastes or property contamination or to perform remedial plugging operations to
prevent future contamination.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention control plans, countermeasure plans, and facility response
plans relating to the possible discharge of oil into surface waters. The Oil
Pollution Prevention Act of 1990 ("OPA") amends certain provisions of the
federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA") and other statutes as they pertain to the prevention of and
response to oil spills into navigable waters. The OPA subjects owners of
facilities to strict joint and several liability for all containment and cleanup
costs and certain other damages arising from a spill, including, but not limited
to, the costs of responding to a release of oil to surface waters. The CWA
provides penalties for any discharges of petroleum products in reportable
quantities and imposes substantial liability for the costs of removing a spill.
State laws for the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground.
OPA requires responsible parties to establish and maintain evidence of
financial responsibility to cover removal costs and damages resulting from an
oil spill. OPA calls for a financial responsibility increase from $35 million to
$150 million to cover pollution cleanup for offshore facilities. In August 1993,
MMS, which has been charged with implementing certain segments of OPA, issued
its advanced notice of proposed rulemaking that would increase financial
responsibility requirements for offshore lessees and permittees to $150 million
as required by OPA. Due to the OPA's broad definition of "offshore facility,"
the Company could become subject to the financial responsibility rule if it is
proposed and adopted; to date, however, the MMS has not formally proposed the
financial responsibility regulations. On May 9, 1995, the U.S. House of
Representatives passed a bill that would lower the financial responsibility
requirements applicable to offshore facilities to $35 million (the current
requirement under the federal OCSLA). The bill allows the limit to be increased
to $150 million if a formal risk assessment indicates the increase to be
warranted. It would also define "offshore facility" to include only coastal oil
and gas properties. A U.S. Senate bill that would also lower the financial
responsibility requirements for offshore facilities was passed in late 1995. The
Senate bill would reduce the scope of "offshore facilities" subject to this
financial assurance requirement to those facilities seaward of the U.S.
coastline that are engaged in drilling for, producing or processing oil or that
have the capacity to transport, store, transfer, or handle more than 1,000
barrels of oil at a time. Currently, the House and Senate bills are being
reconciled in Conference Committee. The Clinton Administration has indicated
support for these changes to the OPA financial responsibility requirements. The
Company cannot predict the final form of the financial responsibility
requirements that will be ultimately established, but any role that requires the
Company to establish evidence of financial responsibility in the amount of $150
million has the potential to have a material adverse effect on Company
operations and earnings. The Company does not believe that the rule to be
proposed by the MMS will be any more burdensome to it than it will be to other
similarly situated oil and gas companies.
Many states in which the Company operates have recently begun to regulate
naturally occurring radioactive materials ("NORM") and NORM wastes that are
generated in connection with oil and gas exploration and production activities.
NORM wastes typically consist of very low-level radioactive substances that
become concentrated in pipe scale and in production equipment. State regulations
may require the testing of pipes and production equipment for the presence of
NORM, the licensing of NORM-contaminated facilities and the careful handling and
disposal of NORM wastes. The Company believes that the growing regulation of
NORM will have a minimal effect on the Company's operations because the Company
generates only a very small quantity of NORM on an annual basis.
The Company does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or processing or a material
increase in the costs of production, development, exploration or processing or
otherwise adversely affect the Company's operations and financial condition.
The Company employs an environmental specialist charged with monitoring
regulatory compliance. The Company performs an environmental review as part of
the due diligence work on potential acquisitions, including acquisitions of oil
and gas properties. The Company is not aware of any material environmental legal
proceedings pending against it or any significant environmental liabilities to
which it may be subject.
9
Risks Associated with Business Activities
The nature of the business activities conducted by the Company subjects it
to certain hazards and risks. The following is a summary of some of the material
risks relating to the Company's business activities.
Oil and Gas Prices and General Market Risks. The Company's revenues,
profitability, cash flow and future rate of growth are highly dependent on the
prevailing prices of oil and gas, which are affected by numerous factors beyond
the Company's control. Oil and gas prices historically have been very volatile.
A substantial or extended decline in the prices of oil or gas could have a
material adverse effect on the Company's revenues, profitability and cash flow
and could, under certain circumstances, result in a reduction in the carrying
value of the Company's oil and gas properties and a reduction in the Company's
borrowing base under its bank credit facility.
Risks of Drilling Activities. As noted under "Item 1. Business - Business
Activities," of the total 1998 capital budget of $500 million, the Company
anticipates spending approximately $301 million on exploitation activities and
$125 million on exploration activities. This capital expenditure budget reflects
the Company's plans to drill approximately 600 development wells and 95
exploratory wells and to perform recompletions on over 200 wells. Drilling
involves numerous risks, including the risk that no commercially productive
natural gas or oil reservoirs will be encountered. The cost of drilling,
completing and operating wells is often uncertain and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, adverse weather conditions and shortages or
delays in the delivery of equipment. The Company's future drilling activities
may not be successful and, if unsuccessful, such failure could have an adverse
effect on the Company's future results of operations and financial condition.
While all drilling, whether developmental or exploratory, involves these risks,
exploratory drilling involves greater risks of dry holes or failure to find
commercial quantities of hydrocarbons. Because of the percentage of the
Company's capital budget devoted to exploratory projects, it is likely that the
Company will continue to experience exploration and abandonment expense.
Risks Associated with Unproved Properties. At December 31, 1997 and 1996,
the Company had unproved property costs of $545 million and $7 million,
respectively. U.S. GAAP requires periodic evaluation of these costs on a
project-by-project basis in comparison to their estimated value. These
evaluations will be affected by results of exploration activities, future sales
or expiration of all or a portion of such projects. If the quantity of proved
reserves determined by such evaluations are not sufficient to fully recover the
cost invested in each project, the Company may be required to recognize
significant non-cash charges in the earnings of future periods. There can be no
assurance that economic reserves will be determined to exist for such projects.
Acquisitions. Acquisitions of producing oil and gas properties have been a
key element of the Company's growth. The Company's growth following the full
development of its existing property base could be impeded if it is unable to
acquire additional oil and gas properties on a profitable basis. The success of
any acquisition will depend on a number of factors, including the ability to
estimate accurately the recoverable volumes of reserves, rates of future
production and future net revenues attributable to reserves and to assess
possible environmental liabilities. All of these factors affect whether an
acquisition will ultimately generate cash flows sufficient to provide a suitable
return on investment. Even though the Company performs a review of the
properties it seeks to acquire that it believes is consistent with industry
practices, such reviews are often limited in scope.
Divestitures. The Company regularly reviews its property base for the
purpose of identifying nonstrategic assets, the disposition of which would
increase capital resources available for other activities and create
organizational and operational efficiencies. Various factors could materially
affect the ability of the Company to dispose of nonstrategic assets, including
the availability of purchasers willing to purchase the nonstrategic assets at
prices acceptable to the Company.
Risks Associated with Operation of Natural Gas Processing Plants. The
Company owns interests in seven natural gas processing plants and operates three
of those plants, although the net revenues derived from natural gas processing
during 1997 represented only 1% of the total net revenues from oil and gas
activities. There are significant risks associated with the operation of natural
gas processing plants. Natural gas and natural gas liquids are volatile and
explosive and may include carcinogens. Damage to or misoperation of a natural
10
gas processing plant could result in an explosion or the discharge of toxic
gases, which could result in significant damage claims in addition to
interrupting a revenue source.
Operating Hazards and Uninsured Risks. The Company's operations are
subject to all the risks normally incident to the oil and gas exploration and
production business, including blowouts, cratering, explosions and pollution and
other environmental damage, any of which could result in substantial losses to
the Company due to injury or loss of life, damage to or destruction of wells,
production facilities or other property, clean-up responsibilities, regulatory
investigations and penalties and suspension of operations. Although the Company
currently maintains insurance coverage that it considers reasonable and that is
similar to that maintained by comparable companies in the oil and gas industry,
it is not fully insured against certain of these risks, either because such
insurance is not available or because of high premium costs.
Environmental Risks. The oil and gas business is also subject to
environmental hazards, such as oil spills, gas leaks and ruptures and discharges
of toxic substances or gases that could expose the Company to substantial
liability due to pollution and other environmental damage. A variety of federal,
state and foreign laws and regulations govern the environmental aspects of the
oil and gas business. Noncompliance with these laws and regulations may subject
the Company to penalties, damages or other liabilities, and compliance may
increase the cost of the Company's operations. Such laws and regulations may
also affect the costs of acquisitions. See "Item 1. Business - Competition,
Markets and Regulation - Environmental and Health Controls".
The Company does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or processing or a material
increase in the costs of production, development, exploration or processing or
otherwise adversely affect the Company's operations and financial condition.
Pollution and similar environmental risks generally are not fully insurable.
Competition. The oil and gas industry is highly competitive. The Company
competes with other companies, producers and operators for acquisitions and in
the exploration, development, production and marketing of oil and gas. Some of
these competitors have substantially greater financial and other resources than
the Company. See "Item 1. Business - Competition, Markets and Regulation".
Government Regulation. The Company's business is regulated by a variety of
federal, state, local and foreign laws and regulations. There can be no
assurance that present or future regulations will not adversely affect the
Company's business and operations. See "Item 1. Business - Competition, Markets
and Regulation".
Risks of International Operations. At December 31, 1997, approximately 20%
of the Company's proved reserves of oil and gas were located outside the United
States (12% in Argentina and 8% in Canada). The success and profitability of
international operations may be adversely affected by risks associated with
international activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes
in the value of the United States dollar versus the local currency in which oil
and gas are sold. To the extent that the Company is involved in international
activities, changes in exchange rates may adversely affect the Company's
consolidated revenues and expenses (as expressed in United States dollars).
Estimates of Reserves and Future Net Revenues. Numerous uncertainties
exist in estimating quantities of proved reserves and future net revenues
therefrom. The estimates of proved reserves and related future net revenues set
forth in this Report are based on various assumptions, which may ultimately
prove to be inaccurate. Therefore, such estimates should not be construed as
estimates of the current market value of the Company's proved reserves.
Definition of Certain Oil and Gas Terms
When used in this Report, the following terms have the meanings indicated
below.
"Bbl" means a standard barrel of 42 U.S. gallons and represents the basic
unit for measuring the production of crude oil, natural gas liquids and
condensate.
11
"Bcf" means one billion cubic feet.
"Bcfe" means a billion cubic feet equivalent and is a customary convention
used in the United States to express oil and gas volumes on a comparable basis.
It is determined on the basis of the estimated relative energy content of oil to
natural gas, being approximately one barrel of oil per six Mcf of gas.
"BOE" means a barrel-of-oil-equivalent and is a customary convention used
in the United States to express oil and gas volumes on a comparable basis. It is
determined on the basis of the estimated relative energy content of natural gas
to oil, being approximately six Mcf of natural gas per Bbl of oil.
"Btu" means British thermal unit and represents the amount of heat needed
to raise the temperature of one pound of water one degree Fahrenheit.
"gross" acre or well means an acre or well in which a working interest is
owned.
"MBbl" means one thousand Bbls.
"MBOE" means one thousand BOEs.
"Mcf" means one thousand cubic feet under prescribed conditions of
pressure and temperature and represents the basic unit for measuring the
production of natural gas.
"MMcf" means one million cubic feet.
"net" acres or wells is determined by multiplying the gross acres or
wells, as the case may be, by the applicable working interest in those gross
acres or wells.
"NGLs" means natural gas liquids.
"NYMEX" means The New York Mercantile Exchange.
"proved reserves" means those estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known oil and gas reservoirs
under existing economic and operating conditions. Proved reserves are limited to
those quantities of oil and gas that can be expected to be recoverable
commercially at current prices and costs, under existing regulatory practices
and with existing conventional equipment and operating methods.
"SEC 10 value" means the present value of estimated future net revenues,
before income taxes, of proved reserves, determined in all material respects in
accordance with the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC") (generally using prices and costs in effect at the specified
date and a 10% discount rate). The reserve estimates for 1997 utilize an oil
price of $16.89 per Bbl (reflecting adjustments for oil quality and gathering
and transportation costs), an NGL price of $12.79 per Bbl and a gas price of
$2.06 per Mcf (reflecting adjustments for BTU content, gathering and
transportation costs and gas processing and shrinkage).
ITEM 2. PROPERTIES
The information included in this Report about the Company's proved oil and
gas reserves at December 31, 1997, including estimated quantities and SEC 10
value, is based on reserve reports prepared by the Company's engineers for all
properties other than Canada, which have been prepared by Martin Petroleum &
Associates and Gilbert Laustsen Jung Associates.
Numerous uncertainties exist in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the Company's control. This Report
contains estimates of the Company's proved oil and gas reserves and the related
future net revenues, which are based on various assumptions, including those
prescribed by the SEC. Actual future production, oil and gas prices, revenues,
12
taxes, capital expenditures, operating expenses, geologic success and quantities
of recoverable oil and gas reserves may vary substantially from those assumed in
the estimates and could materially affect the estimated quantities and related
SEC 10 value of proved reserves set forth in this Report. In addition, the
Company's reserves may be subject to downward or upward revisions based on
production performance, purchases or sales of properties, results of future
development, prevailing oil and gas prices and other factors. Therefore,
estimates of the SEC 10 value of proved reserves contained in this Report should
not be construed as estimates of the current market value of the Company's
proved reserves.
SEC 10 value is a reporting convention that provides a common basis for
comparing oil and gas companies subject to the rules and regulations of the SEC.
It requires the use of oil and gas prices prevailing as of the date of
computation. Consequently, it may not reflect the prices ordinarily received or
that will be received for oil and gas because of seasonal price fluctuations or
other varying market conditions. SEC 10 values as of any date are not
necessarily indicative of future results of operations. Accordingly, estimates
of future net revenues in this Report may be materially different from the net
revenues that are ultimately received.
The Company did not provide estimates of total proved oil and gas reserves
during 1997 to any federal authority or agency, other than the SEC.
Proved Reserves
The Company's proved reserves totaled 761.6 million BOE at December 31,
1997, 302.2 million BOE at December 31, 1996 and 296.8 million BOE at December
31, 1995, representing $3.1 billion, $2.3 billion and $1.4 billion,
respectively, in SEC 10 value. The Company achieved these annual increases in
reserves despite having sold reserves of 18.1 million BOE in 1997, 45.8 million
BOE in 1996 and 34.8 million BOE in 1995.
On a BOE basis, 86% of the Company's total proved reserves at December 31,
1997 are proved developed reserves. Based on reserve information as of December
31, 1997 and using the Company's reserve report production information for 1998,
the reserve-to-production ratio associated with the Company's proved reserves is
11.3 years on a BOE basis. The following table provides information regarding
the Company's proved reserves by geographic area as of and for the year ended
December 31, 1997.
PROVED OIL AND GAS RESERVES
1997 Average
Proved Reserves as of December 31, 1997 Daily Production (a)
------------------------------------------ ---------------------------
Oil Natural SEC 10 Oil Natural
& NGLs Gas Value & NGLs Gas
(MBbls) (MMcf) MBOE (000) (Bbls) (Mcf) BOE
------- -------- ------- ---------- ------- -------- ------
United States:
Gulf Coast Region.... 19,289 316,238 71,996 $ 412,296 5,919 110,657 24,362
MidContinent Region.. 102,331 1,101,421 285,901 1,153,385 9,828 101,860 26,805
Permian Basin........ 207,696 301,471 257,941 931,345 32,847 74,792 45,312
-------- -------- ------- --------- ------- ------- -------
329,316 1,719,130 615,838 2,497,026 48,594 287,309 96,479
Argentina............. 31,612 340,392 88,344 345,721 406 - 406
Canada................ 22,796 207,868 57,441 232,925 - - -
-------- -------- ------- --------- ------- ------- -------
Total............... 383,724 2,267,390 761,623 $ 3,075,672 49,000 287,309 96,885
======== ========= ======= ========== ======= ======= =======
- ---------------
(a) The 1997 average daily production is calculated using a 365-day year and
without making pro forma adjustments for any acquisitions, divestitures or
drilling activity that occurred during the year.
Reserve Replacement
For the ninth consecutive year, the Company was able to replace its annual
production volumes with proved reserves of crude oil, NGLs and natural gas,
stated on an energy equivalent basis. During 1997, the Company added 512.9
million BOE resulting in reserve replacement of 1450% of total production. Of
the 512.9 million BOE reserve additions, 457.7 million BOE were added through
acquisitions of proved properties, 2.4 million BOE were added through
13
exploration and development drilling activities and 52.8 million BOE were the
net result of revisions. Reserves added by development drilling are primarily
from the identification of additional infill drilling locations and new
secondary recovery projects. Reserve revisions result from several factors
including changes in existing estimates of quantities available for production
and changes in estimates of quantities which are economical to produce under
current pricing conditions. The Company's reserves as of December 31, 1997 were
estimated using a price of $16.89 per Bbl of oil, $12.79 per Bbl of NGLs and
$2.06 per Mcf of gas. Should prices decline in future periods, reserves may be
revised downward for quantities which may be uneconomical to produce at lower
prices.
The Company's 1997 reserve replacement rate on a BOE basis was 1450%,
which included reserve replacement rates for oil and natural gas of 1375% and
1528%, respectively. Previous reserve replacement performance rates were 314% in
1996 (398% for oil and 239% for gas) and 281% in 1995 (263% for oil and 297% for
gas). For the three year period ended December 31, 1997, the average reserve
replacement rate was 769%, as compared to a three year average replacement rate
of 377% in 1996 and 412% in 1995. During 1997, the Company's reserve replacement
rate was primarily the product of its acquisition activities. In 1995, and to a
greater extent in 1996, the reserve replacement rates were influenced more by
exploration and development activities and less by acquisition activities.
Finding Cost
The Company's acquisition and finding cost for 1997 was $8.23 per BOE as
compared to the 1996 and 1995 acquisition and finding costs of $3.10 and $2.87
per BOE, respectively. The increased rate in 1997 is a result of the fair value
associated with Mesa's and Chauvco's long-lived, low production cost reserves.
The average acquisition and finding cost for the three-year period from 1995 to
1997 was $7.04 per BOE representing a 76% increase from the 1996 three-year
average rate of $3.99.
Oil and Gas Mix
The Company seeks to maintain a strategic balance between oil and natural
gas reserves and production. While the Company's reserve and production mix may
vary somewhat on a short-term basis as the Company takes advantage of market
conditions and specific acquisition and development opportunities, management
believes that a relative mix of approximately 50% oil and NGLs and 50% natural
gas is in the best long-term interests of the Company and its stockholders. The
Company's reserve mix was 50% oil and NGLs and 50% gas at December 31, 1997, and
its production mix was 51% oil and NGLs and 49% gas during 1997.
Description of Properties
The Company manages its domestic oil and gas properties based upon their
geographic area, and, as a result, the Company has divided its domestic
operations into three domestic operating regions: the Permian Basin region, the
onshore and offshore Gulf Coast region and the MidContinent region. In addition,
at December 31, 1997, the Company has international operations principally in
Argentina and Canada.
Gulf Coast. The Gulf Coast region includes onshore oil and gas properties
located in South and East Texas, Louisiana and Mississippi and offshore
properties in the Gulf of Mexico. In the Gulf Coast region, the Company is
focused on reserve and production growth through a balanced portfolio of
development and exploration activities. To accomplish this, the Company has
devoted most of its domestic exploration efforts to this region as well as its
investment in and utilization of 3-D seismic technology.
Utilization of 3-D seismic technology during 1997 yielded substantial
results in the Company's Lopeno field which produces from the Wilcox formation.
Gross gas production from this area increased from 36 MMcf per day to 57 MMcf
per day during 1997 as a result of drilling eight development wells, most of
which were identified from 3-D seismic data. The Company has identified at least
eight additional drilling locations after further interpretation of the 3-D
data. In addition, the Company continues to experience successful results in its
100% owned Pawnee field which produces 21 MMcf per day from 23 wells in the
Edwards formation. The Company has been actively developing this field with new
drilling, horizontal recompletions, adding new perforations and acidizing
existing wellbores which increased field production seven MMcf per day during
1997. A 3-D seismic survey will be utilized to identify additional drilling
locations in this field area.
14
Cotton Valley. In May of 1997, the Company acquired a 35% interest in
approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from
Union Pacific Resources Company ("UPRC") for $26.9 million. The Company and UPRC
have signed an exploration agreement to jointly explore and develop this area
located in eastern Texas.
On December 19, 1997, the Company completed the acquisition of assets in
the East Texas Basin from affiliates of American Cometra, Inc. ("ACI") and
Rockland Pipe Co. ("Rockland"), both subsidiaries of Electrafina S.A. of
Belgium. Purchase consideration consisted of $85 million cash and 1.6 million
shares of Company common stock. The Company acquired all of ACI's producing
wells, acreage (95,000 gross and 38,000 net), seismic data, royalties and
mineral interests and Rockland's gathering system, pipeline and Plum Creek gas
processing plant in the East Texas Basin. The acquired acreage is in Henderson,
Freestone, Anderson and Leon counties. The acquired wells are currently
producing approximately 18 MMcf of gas per day and have significant upside
potential with the planned drilling of additional wells.
During 1998, the Company plans an aggressive drilling program in the Gulf
Coast region with a total budget of $157.5 million to drill approximately 49
exploratory wells and 25 development wells. Exploration expenditures are
estimated at $75 million and will be focused in the inland water transition zone
areas of Louisiana and Texas and the Cotton Valley Pinnacle Reef Trend in East
Texas. During 1998, the Company will focus development activities in five core
properties: Lopeno and Pawnee fields in South Texas, Timbalier Bay and Grand Bay
fields in South Louisiana and Eugene Island 208 field in the Gulf of Mexico.
MidContinent. The MidContinent region includes properties located in the
Texas Panhandle, Oklahoma, Arkansas and Kansas. By far, the largest of these
assets is the Company's Hugoton field followed by the West Panhandle field, both
acquired from Mesa in August 1997. These two fields combined account for
approximately $1 billion of the Company's $3.1 billion of SEC 10 reserve value
at December 31, 1997. During 1998, the Company plans to spend approximately
$48.8 million in the MidContinent region. This activity includes drilling
approximately 110 development wells and six exploratory wells and performing
recompletions on approximately 26 targeted wells.
Hugoton Field. The Hugoton field in southwest Kansas is one of the largest
producing gas fields in the continental United States. The Company's Hugoton
properties represent approximately 13% of the proved reserves in the field and
are located on over 237,000 net acres, covering approximately 400 square miles.
The Company has working interest in approximately 1,200 wells in the Hugoton
field, 977 of which it operates, and royalty interest in approximately 750
wells. The Company owns substantially all of the gathering and processing
facilities, primarily the Satanta plant, that service its production from the
Hugoton field. Such ownership allows the Company to control the production,
gathering, processing and sale of its gas and associated NGLs.
Production in the Hugoton field is subject to allowables set by state
regulators, but the Company's Hugoton properties are capable of producing
approximately 188 MMcf of wet gas per day (i.e., gas production at the wellhead
before processing and before reduction for royalties). The Company estimates
that it and other major producers in the Hugoton field produced at or near
capacity in 1997. By continuing its successful installation of compression and
artificial lift, in combination with an extensive stimulation program and a
selective replacement well drilling program, the Company anticipates that the
normal 8% Hugoton properties production decline may be temporarily arrested.
The Company intends to submit an application to the Kansas Corporation
Commission (the "KCC") to allow infill drilling into the Council Grove
Formation. The Company believes that such infill drilling could increase
production from its Hugoton properties. There can be no assurance that the
application will be approved or as to the timing of receipt of such approval if
such approval is obtained.
West Panhandle Field. The West Panhandle properties are located in the
panhandle region of Texas where initial production commenced in 1918. These
stable, long-lived reserves are attributable to the Red Cave, Brown Dolomite,
Granite Wash and fractured Granite formations at depths no greater than 3,500
feet. The Company's natural gas in the West Panhandle field is produced from
approximately 600 wells on more than 241,000 gross (185,000 net) acres covering
over 375 square miles. The Company's wellhead gas produced from the West
Panhandle field contains a high quantity of NGLs, yielding relatively greater
NGL volumes than realized from other natural gas fields. The Company operates
the wells and production equipment and Colorado Interstate Gas Company owns and
operates the gathering system.
15
The production from the West Panhandle field is processed through the
Company-owned Fain natural gas processing plant. In February 1997, the Company
initiated a project to add nitrogen rejection capabilities at the Fain Plant.
This project, which is scheduled for completion in mid-1998, will allow the
Company to recover in excess of 90% of the helium in the processed gas, increase
NGL recoveries and upgrade residue quality to improve marketing flexibility.
As of December 31, 1997, the Company's West Panhandle properties
represented approximately 12% of the Company's equivalent proved reserves and
approximately 12% of the present value of estimated future net cash flows,
determined in accordance with SEC guidelines. The Company has identified over 50
locations that have additional production potential in new areas or deeper zones
that the Company plans to redrill in 1998.
Permian Basin. Of the $931.3 million of SEC 10 value contained in the
properties in the Permian Basin region, the Spraberry field accounts for $642.6
million. The Spraberry field was discovered in 1949 and encompasses eight
counties in West Texas. The field is approximately 150 miles long and 75 miles
wide at its widest point. The oil produced is West Texas Intermediate Sweet, and
the gas produced is casinghead gas with an average Btu content of 1,400 Btu per
Mcf. The oil and gas is produced from three formations, the upper and lower
Spraberry and the Dean, at depths ranging from 6,700 feet to 9,200 feet. The
center of the Spraberry field was unitized in the late 1950's and early 1960's
by the major oil companies but until the late 1980's experienced very limited
development activity. Since 1989, the Company has focused acquisition and
development drilling activities in the unitized portion of the Spraberry field
due to the dormant condition of the properties and the high net revenue
interests available. The Company believes the area offers excellent
opportunities to enhance oil and gas reserves because of the hundreds of
undeveloped infill drilling locations and the ability to reduce operating
expenses through economies of scale. In February 1997, the Texas Railroad
Commission (which regulates oil and gas production) entered a favorable order on
the Company's application to allow administrative approval of uncontested
applications to increase the density of drilling in the Spraberry field from one
well per 80 acres to one well in 40 acres. The Company believes such reduced
spacing may provide in excess of 1,000 additional drilling locations which have
the potential to add 70 million BOE's to the Company's reserve base. Through
December 31, 1997, the Company has drilled 60 wells in the Spraberry field under
the reduced spacing requirements resulting in the addition of approximately 6.9
million BOE's to its reserve portfolio.
Since the early 1960's, the Company has been involved in acquisition and
development activities in other fields in the Permian region which includes all
of West Texas and Southeastern New Mexico. The Iatan field in Mitchell County,
Texas, the Lusk and Dagger Draw fields in Eddy County, New Mexico, the Abell
(Devonian) field in Crane and Pecos Counties of Texas, the Ozona field in
Crockett and Sutton Counties of Texas and the War-Wink West Field in the
Delaware Basin of West Texas are core areas for the Company's Permian region
operations in terms of existing production, production and reserve growth, and
identification of additional drilling locations.
The Company will continue to focus on the development of the existing
properties utilizing waterflood procedures and secondary recovery technologies
as these efforts have consistently resulted in increased production, reserve
additions due to development drilling, and new drilling locations. In addition,
all of the fields in this operational group have been screened for feasibility
for carbon dioxide (CO2) flood implementation, and the Company plans to move
forward in utilizing this technology in 1998. In total, the Company anticipates
spending $112.5 million in 1998 in the Permian Basin to drill approximately 295
wells and to perform recompletions on approximately 135 targeted wells.
Development activities will account for 95% of these planned expenditures.
International. The acquisition of Chauvco provided the Company with a
significant presence in Argentina and Canada, representing 11% and 8% of the
Company's SEC 10 value at December 31, 1997. The Canadian producing properties
are primarily located in Alberta and British Columbia, Canada in the following
areas: Thompson/Alliance, Spirit River/Rycroft, Cherhill, Killam, Choice, David,
Martin Creek and Chinchaga. During 1997, these properties produced an average of
17,532 BOE's per day, net to the Company's interest. These properties currently
include more than 700 development drilling locations.
The Company's Argentine properties are primarily located in the Tierra del
Fuego and Neuquen basins. Chauvco's share of Argentine production during 1997
averaged 16,147 BOE's per day. The Tierra del Fuego production concession is
located in the extreme southern portion of Argentina, approximately 1,500 miles
south of the country's capital, Buenos Aires. Crude oil, natural gas, condensate
and NGLs are produced from six separate fields in which the Company has a 35%
16
working interest. The most significant area is the San Sebastian field which
accounts for approximately 40% of crude oil and condensate production, 100% of
propane and butane production, and 84% of natural gas sales from the concession.
In Argentina, recent expansion of gas processing facilities and completed
pipeline connections at Tierra del Fuego will allow handling of increased
production volumes committed for delivery under a gas contract to a
petrochemical plant in Chile. Natural gas deliveries under the contract to the
methanol plant in Chile commenced in January 1997 at a rate of 17.0 MMcf per
day.
The Company's operated production in Argentina is concentrated in the
Neuquen Basin which is located about 925 miles southwest of the country's
capital city and just to the east of the Andes Mountains. Crude oil and natural
gas are produced from two separate fields in the Loma Negra/NI Block, the
Huincul field in the Dadin Block and from three oil fields and one natural gas
field in the Al Norte de la Dorsal Block in which the Company has a 100% working
interest.
In addition to the proved producing assets of Chauvco, the Company
acquired a substantial inventory of unproved oil and gas properties which will
provide the Company with many exploration opportunities with the potential for
significant reserve additions. Although the acquisition of a portfolio of
unproved properties represents an exciting challenge to the Company's team of
engineers, geologists and geophysicists, such opportunities are not without
risk. U.S. GAAP requires periodic evaluation of these costs on a
project-by-project basis in comparison to their estimated value. These
evaluations will be affected by results of exploration activities, future sales
or expiration of all or a portion of such projects. If the quantity of proved
reserves determined by such evaluations are not sufficient to fully recover the
cost invested in each project, the Company may be required to recognize
significant noncash charges to the earnings of future periods. There can be no
assurance that economic reserves will be determined to exist for such projects.
On a smaller scale, the Company has recently entered into agreements to
begin exploratory activity in the African nations of South Africa and Gabon. The
South African Block covers over five million acres along the southern coast of
South Africa, generally in water depths less than 650 feet. It is located
between Block 9, which produces quantities of oil from Oribi Field (up to 25,000
barrels per day) and gas from F-A Field (about 190 MMcf per day), and Pioneer's
study block 13A/14A offshore Port Elizabeth. In addition, Pioneer concluded in
November of 1997, a Technical Cooperation Agreement on Block 7 which is located
adjacent to and west of Block 9, and covers an area of about three million
acres, the most prospective portion of which is in water depths of less than 500
feet.
The Company plans to spend approximately $181.2 million internationally in
1998 as follows: $97.5 million in Argentina, $57.5 million in Canada, and $26.2
million in Africa and other international areas. The Company's international
exploration budget of $50 million is primarily devoted to Africa, Argentina and
Canada.
Selected Oil and Gas Information
The following tables set forth selected oil and gas information for the
Company as of and for each of the years ended December 31, 1997, 1996 and 1995.
Because of normal production declines, increased or decreased drilling
activities and the effects of future acquisitions or divestitures, the
historical information presented below should not be interpreted as indicative
of future results.
17
Production, Price and Cost Data. The following table sets forth
production, price and cost data with respect to the Company's properties for the
years ended December 31, 1997, 1996 and 1995.
PRODUCTION, PRICE AND COST DATA (a)
Year ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Australia(b)
United United and United
States Argentina Total States Argentina Total States Australia Total
-------- --------- -------- ------- ---------- -------- -------- --------- --------
Production information:
Annual production:
Oil (MBbls)..... 13,470 148 13,618 10,872 403 11,275 11,328 1,574 12,902
NGLs (MBbls)... 4,267 - 4,267 - - - - - -
Gas (MMcf)...... 104,868 - 104,868 73,924 1,927 75,851 76,669 8,626 85,295
Total (MBOE).... 35,215 148 35,363 23,193 723 23,916 24,106 3,012 27,118
Average daily
production:
Oil (Bbls).... 36,903 406 37,309 29,705 1,100 30,805 31,036 4,312 35,348
NGLs (Bbls)... 11,691 - 11,691 - - - - - -
Gas (Mcf)..... 287,309 - 287,309 201,979 5,265 207,244 210,052 23,633 233,685
Total (BOE)... 96,479 406 96,885 63,368 1,978 65,346 66,045 8,251 74,296
Average prices:
Oil (per Bbl).... $ 18.50 $ 19.68 $ 18.51 $ 19.96 $ 19.81 $ 19.96 $ 16.70 $ 18.78 $ 16.96
NGLs (per Bbl)... $ 12.59 $ - $ 12.59 $ - $ - $ - $ - $ - $ -
Gas (per Mcf).... $ 2.20 $ - $ 2.20 $ 2.27 $ 1.95 $ 2.27 $ 1.84 $ 1.88 $ 1.84
Revenue (per BOE) $ 15.16 $ 19.68 $ 15.18 $ 16.61 $ 16.21 $ 16.60 $ 13.69 $ 15.21 $ 13.85
Average costs:
Production costs
(per BOE):
Lease operating
expense....... $ 3.01 $ 5.47 $ 3.02 $ 3.39 $ 4.75 $ 3.43 $ 3.97 $ 4.12 $ 3.99
Production taxes. .81 .19 .81 .94 - .91 .70 - .62
Workover....... .25 - .25 .28 - .27 .25 - .22
------- ------ ------- ------- ------ ------- ------- ----- -------
Total........ $ 4.07 $ 5.66 $ 4.08 $ 4.61 $ 4.75 $ 4.61 $ 4.92 $ 4.12 $ 4.83
Depletion expense
(per BOE)...... $ 5.77 $ 8.70 $ 5.78 $ 4.25 $ 5.73 $ 4.30 $ 5.19 $ 6.74 $ 5.36
- ---------------
(a) These amounts are calculated without making pro forma adjustments for any
acquisitions, divestitures or drilling activity that occurred during the
respective years.
(b) Represents production associated with the Company's Australian subsidiaries
prior to their divestiture in 1996.
18
Productive Wells. The following table sets forth the number of productive
oil and gas wells attributable to the Company's properties as of December 31,
1997, 1996 and 1995.
PRODUCTIVE WELLS(a)
Gross Productive Wells Net Productive Wells
------------------------ -----------------------
Oil Gas Total Oil Gas Total
------ ------ ------ ------ ------ ------
Year ended December 31, 1997:
United States.................. 6,075 3,931 10,006 3,399 2,326 5,725
Argentina...................... 213 53 266 154 38 192
Canada......................... 1,666 428 2,094 667 202 869
------ ------ ------ ------ ------ ------
Total.......................... 7,954 4,412 12,366 4,220 2,566 6,786
====== ====== ====== ====== ====== ======
Year ended December 31, 1996:
United States.................. 5,572 1,393 6,965 3,119 650 3,769
Argentina...................... 5 - 5 1 - 1
------ ------ ------ ------ ------ ------
Total.......................... 5,577 1,393 6,970 3,120 650 3,770
====== ====== ====== ====== ====== ======
Year ended December 31, 1995:
United States.................. 6,138 2,137 8,275 3,198 680 3,878
Australia and Other Foreign.... 112 450 562 27 54 81
------ ------ ------ ------ ------ ------
Total.......................... 6,250 2,587 8,837 3,225 734 3,959
====== ====== ====== ====== ====== ======
- ---------------
(a) Productive wells consist of producing wells and wells capable of
production, including shut-in wells. One or more completions in the same
well bore are counted as one well. Any well in which one of the multiple
completions is an oil completion is classified as an oil well. As of
December 31, 1997, the Company owned interests in 182 wells containing
multiple completions.
Leasehold Acreage. The following table sets forth information about the
Company's developed, undeveloped and royalty leasehold acreage as of December
31, 1997.
LEASEHOLD ACREAGE
Developed Acreage Undeveloped Acreage
------------------------ ------------------------ Royalty
Gross Acres Net Acres Gross Acres Net Acres Acreage
----------- ---------- ----------- ---------- --------
Year ended December 31, 1997:
United States................. 1,665,292 989,027 1,472,049 591,005 420,907
Canada........................ 331,000 152,000 701,000 478,000 -
Argentina..................... 697,683 301,820 1,650,769 1,027,490 -
----------- ---------- ----------- ---------- --------
Total......................... 2,693,975 1,442,847 3,823,818 2,096,495 420,907
=========== ========== =========== ========== ========
Drilling Activities. The following table sets forth the number of gross
and net productive and dry wells in which the Company had an interest that were
drilled and completed during the years ended December 31, 1997, 1996 and 1995.
This information should not be considered indicative of future performance, nor
should it be assumed that there is necessarily any correlation between the
number of productive wells drilled and the oil and gas reserves generated
thereby or the costs to the Company of productive wells compared to the costs of
dry wells.
19
DRILLING ACTIVITIES
Gross Wells Net Wells
Year Ended December 31, Year Ended December 31,
---------------------- ----------------------
1997 1996(b) 1995 1997 1996(b) 1995
----- ------ ----- ----- ------ -----
United States:
Productive wells:
Development................ 483 535 432 341.2 362.9 307.0
Exploratory................ 38 37 30 23.8 24.2 18.0
Dry holes:
Development................ 18 7 7 8.8 4.4 2.1
Exploratory................ 46 10 16 30.3 6.0 4.7
----- ----- ----- ----- ------ -----
585 589 485 404.1 397.5 331.8
----- ----- ----- ----- ------ -----
Australia and other foreign:
Productive wells:
Development................ - 2 6 - .3 1.4
Exploratory................ - - 1 - - .3
Dry holes:
Development................ - 1 - - .2 -
Exploratory................ 1 1 9 .4 .2 2.8
----- ----- ----- ----- ------ -----
1 4 16 .4 .7 4.5
----- ----- ----- ----- ------ -----
Argentina:
Productive wells:
Development................ 4 3 - .6 .4 -
Exploratory................ 1 - 1 .1 - .1
Dry holes:
Development................ - - - - - -
Exploratory................ 1 3 7 .1 .4 1.0
----- ----- ----- ----- ------ -----
6 6 8 .8 .8 1.1
----- ----- ----- ----- ------ -----
Total.................... 592 599 509 405.3 399.0 337.4
===== ===== ===== ===== ====== =====
Success ratio(a)............. 89% 96% 92% 90% 97% 97%
- ---------------
(a) Represents those wells that were successfully completed as productive wells.
(b) The 1996 Australian amounts include only three months of activity related
to the Company's Australian properties prior to their sale in March 1996.
The following table sets forth information about the Company's wells that
were in progress at December 31, 1997.
Gross Wells Net Wells
----------- ---------
United States:
Development....................... 112 82.0
Exploratory....................... 13 9.1
----- ------
125 91.1
----- ------
Canada:
Development....................... 1 0.9
Exploratory....................... 1 0.6
----- ------
2 1.5
----- ------
Argentina:
Development....................... 5 5.0
Exploratory....................... 4 2.3
----- ------
9 7.3
----- ------
Total.......................... 136 99.9
===== ======
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal proceedings, which are described
under "Legal Actions" in Note H of Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary Data". The Company
is also party to other litigation incidental to its business. The claims for
damages from such other legal actions are not in excess of 10% of the Company's
current assets and the Company believes none of these actions to be material.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Acquisition of Chauvco
On December 18, 1997, the Company held a Special Meeting for stockholders
in Dallas, Texas. The Special Meeting related to the acquisition by the Company
of the Canadian and Argentine oil and gas businesses of Chauvco Resources Ltd.,
an Alberta corporation, and the spinoff to Chauvco shareholders and
optionholders of Chauvco's Gabonese oil and gas operations and other
international interests (the "Combination Agreement"). Also on December 18,
1997, Chauvco held a Special Meeting for its stockholders in Alberta, Canada in
connection with the Combination Agreement. Each of the proposals was approved by
stockholders as follows:
The Company
- -----------
Broker
Proposal For Against Abstain Non-Votes
-------- ---------- ------- ------- ---------
Combination Agreement 57,282,078 345,596 285,770 -
Chauvco
- -------
Broker
Proposal For Against Abstain Non-Votes
-------- ---------- ------- ------- ---------
Combination Agreement 43,788,841 1,226 - -
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange and the Toronto Stock Exchange under the symbol "PXD". The following
table sets forth, for the periods indicated, the high and low sales prices for
the Company's common stock, as reported in the New York Stock Exchange composite
transactions, and the amount of dividends paid.
Dividends
High Low Paid per share
--------- -------- --------------
1997
Fourth quarter..................... $43 13/16 $ 25 5/8 -
Third quarter...................... $ 44 3/8 $ 34 3/4 $.05
Second quarter..................... $ 36 3/16 $ 28 1/2 -
First quarter...................... $ 37 5/8 $ 28 7/8 $.05
1996
Fourth quarter..................... $ 37 1/4 $ 26 1/8 -
Third quarter...................... $ 27 3/4 $ 22 1/4 $.05
Second quarter..................... $ 27 7/8 $ 22 3/4 -
First quarter...................... $ 23 3/4 $ 19 3/8 $.05
On February 27, 1998, the last reported sales price of the Company's
common stock, as reported in the New York Stock Exchange composite transactions,
was $23.69 per share.
As of February 27, 1998, the Company's common stock was held by
approximately 55,000 holders of record, representing approximately 112,000 total
owners.
Since the third quarter of 1991, the Company has paid a cash dividend of
$.05 per share of common stock in the first and third quarters of each calendar
year. Subject to the continuation of successful operations and the discretion of
the Company's Board of Directors, the Company intends to continue to declare a
$.05 per share dividend on a semi-annual basis to achieve an annual dividend
level of $.10 per share. The Company's Board of Directors may from time to time
reconsider the dividend policy and make any changes that it deems appropriate.
There can be no assurance that any future dividends or distributions will be
paid on the Company's common stock.
On December 19, 1997, the Company completed the purchase of certain assets
in the East Texas Basin from affiliates of American Cometra, Inc. and Rockland
Pipeline Co., both of which are subsidiaries of Electrafina S.A. of Belgium. The
total consideration paid was approximately $130 million, consisting of $85
million in cash and 1.6 million shares of the Company's common stock. The common
stock, which was issued in a private placement, was distributed to the following
persons:
Common Stock Common Stock
Owned Prior to Acquired in
Transaction Transaction
-------------- -----------
Cometra Energy, L.P. 0 1,605,290
Terry N. McClure 0 9,800
James D. Paquin 0 19,600
Mark W. Young 1,000 19,600
In connection with such purchase of assets, the Company agreed to file and keep
continuously effective for up to 24 months a registration statement covering the
resale of the common stock issued in the transaction. Such registration
statement was declared effective by the SEC on March 2, 1998.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company should
be read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements, related notes and other financial information included in
"Item 8. Financial Statements and Supplementary Data".
Year ended December 31,
-------------------------------------------------
1997(a) 1996 1995 1994(b) 1993(c)
--------- -------- -------- -------- --------
(in millions, except per share data)
Statement of Operations Data:
Revenues:
Oil and gas.............................. $ 536.8 $ 396.9 $ 375.7 $ 337.6 $ 207.2
Natural gas processing................... - 23.8 33.2 39.2 77.5
Gas marketing............................ - - 76.8 103.0 43.8
Interest and other....................... 4.3 17.5 11.4 6.9 4.4
Gain on disposition of assets, net(d).... 4.9 97.1 16.6 9.5 23.2
-------- ------- ------- ------- -------
546.0 535.3 513.7 496.2 356.1
-------- ------- ------- ------- -------
Costs and expenses:
Oil and gas production................... 144.2 110.3 130.9 127.1 78.3
Natural gas processing................... - 12.5 25.9 33.6 51.6
Gas marketing............................ - - 75.7 101.5 42.8
Depletion, depreciation and amortization. 212.4 112.1 159.1 145.4 80.4
Impairment of oil and gas properties and
natural gas processing facilities...... 1,356.4 - 130.5 - -
Exploration and abandonments............. 77.2 23.0 27.5 25.2 3.6
General and administrative............... 48.8 28.4 37.4 29.0 23.8
Interest................................. 77.5 46.2 65.4 50.6 23.3
Other.................................... 7.1 2.5 11.3 4.3 3.9
-------- ------- ------- ------- -------
1,923.6 335.0 663.7 516.7 307.7
-------- ------- ------- ------- -------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of accounting change..................... (1,377.6) 200.3 (150.0) (20.5) 48.4
Income tax benefit (provision)............. 500.3 (60.1) 45.9 6.5 (17.0)
-------- ------- ------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change... (877.3) 140.2 (104.1) (14.0) 31.4
Extraordinary item......................... (13.4) - 4.3 (.6) -
Cumulative effect of accounting change..... - - - - 17.1
-------- ------- ------- ------- -------
Net income (loss)............................ $ (890.7) $ 140.2 $ (99.8) $ (14.6) $ 48.5
======== ======= ======= ======= =======
Income (loss) before extraordinary item
and cumulative effect of accounting
change per share:
Basic.................................. $ (16.88) $ 3.95 $ (2.96) $ (.47) $ 1.15
======== ======= ======= ======= =======
Diluted................................ $ (16.88) $ 3.47 $ (2.96) $ (.47) $ 1.12
======== ======= ======= ======= =======
Net income (loss) per share:
Basic.................................... $ (17.14) $ 3.95 $ (2.84) $ (.49) $ 1.77
======== ======= ======= ======= =======
Diluted.................................. $ (17.14) $ 3.47 $ (2.84) $ (.49) $ 1.73
======== ======= ======= ======= =======
Dividends per share ....................... $ .10 $ .10 $ .10 $ .10 $ .10
======== ======= ======= ======= =======
Weighted average shares outstanding........ 52.0 35.5 35.1 29.9 27.4
Other Financial Data:
Cash flows from operating activities....... $ 228.2 $ 230.1 $ 156.6 $ 129.8 $ 112.2
Cash flows from investing activities....... (341.2) 13.7 (52.6) (446.0) (398.2)
Cash flows from financing activities....... 166.0 (245.4) (107.9) 331.4 278.9
Balance Sheet Data:
Working capital............................ $ 46.6 $ 26.1 $ 31.5 $ 43.7 $ 39.5
Property, plant and equipment, net......... 3,515.8 1,040.4 1,121.7 1,349.9 802.0
Total assets............................... 3,946.6 1,199.9 1,319.2 1,604.9 1,016.9
Long-term obligations...................... 2,124.0 329.0 603.2 727.2 544.3
Preferred stock of subsidiary.............. - 188.8 188.8 188.8 -
Total stockholders' equity................. 1,548.8 530.3 411.0 509.6 348.8
- ---------------
23
(a) Includes amounts relating to the acquisition of Mesa beginning in August
1997.
(b) Includes amounts relating to the acquisition of Bridge Oil Limited in July
1994 and the acquisition of properties from PG&E Resources Company in
August 1994.
(c) Includes amounts relating to the acquisition of certain Prudential-Bache
Energy limited partnerships in July 1993. Also includes results of
operations related to the Company's interest in the Carthage gas processing
plant that had been deferred in 1992 and 1993 and the gain of $7.3 million
recognized on the sale of that interest on June 30, 1993.
(d) Includes a gain of $83.3 million in 1996 related to the disposition of
certain wholly-owned subsidiaries.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Formation of Pioneer
Pioneer Natural Resources Company (the "Company"), a Delaware corporation,
was formed by the merger of Parker & Parsley Petroleum Company ("Parker &
Parsley") and MESA Inc. ("Mesa") on August 7, 1997. The Company was
significantly expanded by the subsequent acquisition of the Canadian and
Argentine oil and gas business of Chauvco Resources Ltd. ("Chauvco"), a publicly
traded independent oil and gas company based in Calgary, Canada on December 18,
1997. The Company is an oil and gas exploration and production company with
ownership interests in oil and gas properties located principally in the
MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the
United States and in Argentina and Canada.
Combining the physical assets and management teams of Parker & Parsley and
Mesa into the Company created a company with a solid foundation of core assets.
This foundation includes three core areas (the Hugoton gas field located in
Southwest Kansas, the West Panhandle gas field located in the Texas Panhandle,
and the Spraberry oil and gas field in West Texas) that provide consistent and
dependable production, cash flow and ongoing development opportunities; a
reserve portfolio which is balanced between oil and natural gas liquids and gas;
a portfolio of exciting exploration opportunities; and a team of dedicated
employees representing the professional disciplines and sciences which will
allow the Company to continue to provide its shareholders with superior
long-term value.
The Company's first significant accomplishment after the merger was the
acquisition of Chauvco. The Chauvco acquisition provided the Company with 87.6
MMBOE and 57.4 MMBOE of proved reserves in Argentina and Canada, respectively,
and a substantial inventory of unproved oil and gas properties which will
provide the Company with many exploration opportunities with the potential for
significant reserve additions. Although the acquisition of the portfolio of
unproved properties from Chauvco represents an exciting challenge to the
Company's team of engineers, geologists and geophysicists, such opportunities
are not without risk. U.S. GAAP requires periodic evaluations of these costs on
a project-by-project basis in comparison to their estimated value. These
evaluations will be affected by results of exploration activities, future sales
or expiration of all or a portion of such projects. If the quantity of proved
reserves determined by such evaluations are not sufficient to fully recover the
cost invested in each project, the Company may be required to recognize
significant noncash charges to the earnings of future periods. There can be no
assurance that economic reserves will be determined to exist for such projects.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", both the merger with Mesa and the acquisition of
Chauvco have been accounted for as purchases by the Company (formerly Parker &
Parsley). As a result, the historical financial statements for the Company are
those of Parker & Parsley, and the Company's financial statements present the
addition of Mesa's and Chauvco's assets and liabilities as an acquisition by the
Company in August and December 1997, respectively. Specifically, the
accompanying Consolidated Statements of Operations and Consolidated Statements
of Cash Flows include the financial results of Mesa beginning in August 1997.
The aggregate purchase consideration related to the assets and liabilities of
Mesa and Chauvco, including transaction costs, was $991.0 million and $696.4
million, respectively.
Financial Performance
The Company reported a net loss of $890.7 million ($17.14 per share) as
compared to net income of $140.2 million ($3.95 per share) for the years ended
December 31, 1997 and 1996, respectively. The 1997 loss is primarily generated
by a noncash charge of $1.4 billion ($863 million after-tax) in December of
1997, resulting from an impairment charge taken in accordance with the Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). In
addition to the above, the process of organizationally, operationally and
financially combining Parker & Parsley and Mesa to create the Company resulted
in the following pre-tax charges: the redemption of two issuances of senior
notes at a loss of $18.3 million; $6.4 million of relocation expenses and $1.9
million of severance expenses; and a $2.3 million write-off of commitment fees
related to Parker & Parsley's credit facility that was replaced with a new $1.4
billion credit agreement for the Company during 1997. As discussed more fully in
"Results of Operations" below, the Company's financial performance during 1997
has been positively affected by increases in oil and gas production and
25
decreases in production costs per BOE due to ongoing cost reduction efforts,
offset by decreases in commodity prices, increases in exploration and general
and administrative expenses and an increase in interest expense due to the
additional debt assumed from Mesa. The year ended December 31, 1996 includes
$67.3 million ($1.90 per share) related to net after-tax gains on asset
dispositions primarily due to the sale of the Company's Australasian
subsidiaries.
Net cash provided by operating activities of $228.2 million for the year
ended December 31, 1997 was comparable to $230.1 million for the year ended
December 31, 1996. The additional cash flow generated by increased production
was offset by increased general and administrative expenses and interest expense
and the payment of certain liabilities assumed from Mesa.
Long-term debt has increased to $2.0 billion at December 31, 1997 from
$320.9 million at December 31, 1996 due principally to the assumption of the
outstanding debt of Mesa and Chauvco and the property acquisitions described
below. The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility for future
opportunities. The Company's total book capitalization at December 31, 1997 was
$3.5 billion, consisting of total long-term debt of $2.0 billion and
stockholders' equity of $1.5 billion. Consequently, the Company's long-term debt
to total capitalization increased to 56% at December 31, 1997 from 31% at
December 31, 1996.
1998 Outlook
During 1998, the Company plans to accelerate its portfolio management
initiatives through a major divestiture program focused on improving operating
efficiency and profitability. Approximately 95% of the Company's domestic fields
generate only 15% of the Company's total cash flow. The Company plans to sell
these nonstrategic fields for estimated proceeds of $375 to $550 million during
the latter part of 1998. The proceeds will be used to reduce the Company's
outstanding indebtedness and to fund the Company's capital expenditures program.
This will leave the Company with approximately 25 fields, which represent its
core producing assets and complementary development and exploration
opportunities.
The consummation of the Company's 1998 divestiture plans is entirely
dependent on finding one or more willing buyers who have the financial
wherewithal to complete such a purchase. Until such a buyer is found, the
Company may reevaluate its portfolio of properties and at any time may adjust
its plans concerning divestitures. As a result, there can be no assurance that
the divestiture of any or all of these properties will be completed or that the
estimated proceeds will be realized.
Coincidentally with the property divestiture program, the Company has
announced its intentions to reorganize its operations to take advantage of the
economies of scale provided by the concentration of reserves in a small number
of fields. The Company will combine the six domestic regions created by the
merger between Parker & Parsley and Mesa into three geographic regions: the
Permian Basin region, the MidContinent region and the onshore and offshore Gulf
Coast region. The Company anticipates that it will incur nonrecurring
expenditures of approximately $20 million during 1998 as a result of this
reorganization.
During 1998, the Company will continue its emphasis on core development,
exploration and production activities, with a primary focus on the exploitation
of its current portfolio of drilling locations. This portfolio was significantly
enhanced and expanded by the major acquisitions completed in 1997. In addition,
the 1996 and 1997 drilling programs have added a large number of new locations
to which proved reserves have been assigned. The Company believes that its
current portfolio of undeveloped prospects provides attractive development and
exploration opportunities for at least the next three to five years. The Company
expects to invest $500 million in capital projects during 1998. Of the total
1998 capital expenditure budget of $500 million, the Company has allocated $301
million to exploitation activities, $125 million to exploration activities and
$74 million to oil and gas property acquisitions. The Company anticipates that
the $426 million exploration and development budget will be spent geographically
as follows: $106 million in the Permian Basin, $142 million in the onshore and
offshore Gulf Coast, $47 million in the MidContinent, $26 million in Canada, $79
million in Argentina and $26 million in Africa and other international areas.
This capital expenditure budget reflects the Company's plan to drill
approximately 695 oil and gas wells. The Company currently expects to fund its
1998 capital expenditure budget primarily with internally-generated cash flow
and the proceeds from the 1998 oil and gas property divestiture program.
26
This budget reflects the Company's ongoing strategy to commit a greater
portion of its cash flow to higher growth potential projects, including
significant 3-D seismic projects. Historically, Mesa and Parker & Parsley had
each spent a small percentage of its respective capital on exploration projects.
The Company now expects to spend approximately 29% of its
exploration/exploitation capital budget on exploration.
During most of 1996 and 1997, the Company benefitted from higher oil
prices as compared to previous years. However, during the fourth quarter of
1997, oil prices began a downward trend that has continued into March 1998. A
continuation of the oil price environment experienced during the first quarter
of 1998 will have an adverse effect on the Company's revenues and operating cash
flow, and may result in a downward adjustment to the Company's current 1998
capital budget of $500 million. Also, a continuing decline in oil prices could
result in additional decreases in the carrying value of the Company's oil and
gas properties.
The forward looking statements in these projections, including statements
relating to capital budget, production, cash flows and drilling activities, are
based upon a number of assumptions, including among others, limited changes in
oil and gas prices and the accuracy of reserve engineering studies. These
assumptions may prove not to have been accurate.
Significant Activities in 1997
Property Acquisition Activities
Cotton Valley. In May of 1997, the Company acquired a 35% interest in
approximately 375,000 gross acres within the Cotton Valley Pinnacle Reef Trend
from Union Pacific Resources Company ("UPRC") for $26.9 million. The Company and
UPRC have signed an exploration agreement to jointly explore and develop this
area located in eastern Texas and plan to begin drilling the first exploration
well before the end of the year.
On December 19, 1997, the Company completed the acquisition of assets in
the East Texas Basin from American Cometra, Inc. ("ACI") and Rockland Pipe Co.
("Rockland"), both subsidiaries of Electrafina S.A. of Belgium. The total
consideration paid was approximately $130 million, consisting of $85 million in
cash and 1.6 million shares of the Company's common stock. The Company acquired
all of ACI's producing wells, acreage (95,000 gross and 38,000 net), seismic
data, royalties and mineral interests and Rockland's gathering system, pipeline
and Plum Creek gas processing plant in the East Texas Basin. The acquired
acreage is in Henderson, Freestone, Anderson and Leon counties. The acquired
wells are currently producing approximately 18 MMcf per day and have significant
future drilling opportunities.
Maude Traylor. In February of 1997, the Company completed the acquisition
of a majority interest in the Maude Traylor field in Calhoun County, Texas for
approximately $8.8 million. This acquisition represented an average working
interest of 87% in approximately 1,840 acres and five wells which produce from
the upper and lower Frio formations.
Guatemala. During May of 1997, the Company finalized negotiations with
Triton Energy for a 40% working interest in a joint exploration program of two
blocks in Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1
resulted in an unsuccessful exploratory well at a total cost to the Company of
$5.4 million.
Exploration and Development Activities
Drilling Activities. Excluding the merger with Mesa and the acquisition of
Chauvco, the Company's 1997 capital expenditures totaled $544 million reflecting
expenditures of $247 million for exploitation activities, $96 million for
exploration activities and $201 million for oil and gas property acquisitions in
the Company's core areas. During 1997, the Company participated in the
completion of 592 gross exploration and development wells, 453 wells in the
Permian region, 56 wells in the Gulf Coast region, 76 wells in the MidContinent
region, six wells in Argentina and one well in Guatemala. Of these wells, 85
were in progress at December 31, 1996. Of the total wells completed during the
year ended December 31, 1997, 526 wells were completed successfully which
resulted in an 89% success rate. In addition to the wells completed during 1997,
the Company had 136 wells in progress at December 31, 1997.
27
Proved Reserves. The Company's proved reserves totaled 761.6 million BOE
at December 31, 1997, 302.2 million BOE at December 31, 1996 and 296.8 million
BOE at December 31, 1995. The Company achieved these annual increases in
reserves despite having sold reserves of 18.1 million BOE in 1997, 45.8 million
BOE in 1996 and 34.8 million BOE in 1995. Oil and NGL reserves at year-end 1997
were 383.7 million Bbls compared to 163.9 million Bbls at year-end 1996 and
147.3 million Bbls at year-end 1995 (a 134% increase from 1996 to 1997 and an
11% increase from 1995 to 1996). Natural gas reserves at year-end 1997 were
2,267.4 Bcf, compared to 829.4 Bcf at year-end 1996 and 896.9 Bcf at year-end
1995 (a 173% increase from 1996 to 1997 and an 8% decrease from 1995 to 1996).
Reserve Replacement. For the ninth consecutive year, the Company was able
to replace its annual production volumes with proved reserves of crude oil and
natural gas, stated on an energy equivalent basis. During 1997, the Company
added 512.9 million BOE resulting in reserve replacement of 1450% of total
production. Of the 512.9 million BOE reserve additions, 457.7 million BOE were
added through acquisitions of proved properties, 2.4 million BOE were added
through exploration and development drilling activities and 52.8 million BOE
were the net result of revisions. Reserves added by development drilling are
primarily from the identification of additional infill drilling locations and
new secondary recovery projects. Reserve revisions result from several factors
including changes in existing estimates of quantities available for production
and changes in estimates of quantities which are economical to produce under
current pricing conditions. The Company's reserves as of December 31, 1997 were
estimated using a price of $16.89 per Bbl for oil, $12.79 per Bbl of NGLs and
$2.06 per Mcf of gas. Should prices decline in future periods, reserves may be
revised downward for quantities which may be uneconomical to produce at lower
prices.
The Company's 1997 reserve replacement rate on a BOE basis was 1450%,
which included reserve replacement rates for oil and natural gas of 1375% and
1528%, respectively. Previous reserve replacement performance rates were 314% in
1996 (398% for oil and 239% for gas) and 281% in 1995 (263% for oil and 297% for
gas). For the three and five year periods ended December 31, 1997, the three and
five year average reserve replacement rates were 769% and 685%, respectively.
Finding Cost. The Company's acquisition and finding cost for 1997 was
$8.23 per BOE as compared to the 1996 and 1995 acquisition and finding costs of
$3.10 and $2.87 per BOE, respectively. The increased rate in 1998 is a result of
the fair value assigned to Mesa's long-lived, low cost reserves. The average
acquisition and finding cost for the three-year period from 1995 to 1997 was
$7.04 per BOE representing a 76% increase from the 1996 three-year average rate
of $3.99.
Unproved Properties. Although the acquisition of the portfolio of unproved
properties from Chauvco represents an exciting challenge to the Company's team
of engineers, geologists and geophysicists, such opportunities are not without
risk. U.S. GAAP requires periodic evaluations of these costs on a
project-by-project basis in comparison to their estimated value. These
evaluations will be affected by results of exploration activities, future sales
or expiration of all or a portion of such projects. If the quantities of proved
reserves determined by such evaluations are not sufficient to fully recover the
cost invested in each project, the Company may be required to recognize
significant noncash charges to the earnings of future periods. There can be no
assurance that economic reserves will be determined to exist for such projects.
Other Events
Asset Dispositions. From time to time, the Company disposes of
nonstrategic assets in order to raise capital for other activities, reduce debt
or eliminate costs associated with nonstrategic assets. For the year ended
December 31, 1997, the Company's asset disposition activity primarily consisted
of the sale of certain domestic assets, primarily oil and gas properties, for
proceeds of $114.1 million, which resulted in a pre-tax net gain of $4.3
million, and the sale of the Company's subsidiary with an ownership interest in
oil and gas properties in Turkey for proceeds of $1.6 million, which resulted in
the recognition of a pre-tax gain of $706 thousand. During the year ended
December 31, 1996, the Company sold certain wholly-owned Australasian
subsidiaries for proceeds of $183.2 million resulting in a pre-tax gain of $83.3
million and certain nonstrategic domestic assets for proceeds of $58.4 million
that resulted in the recognition of a pre-tax net gain of $13.8 million. The
proceeds from the asset dispositions were initially used to reduce the Company's
outstanding bank indebtedness and subsequently to provide funding for a portion
of the Company's capital expenditures, including purchases of oil and gas
properties in the Company's core areas. During 1998, the Company anticipates
selling certain nonstrategic domestic oil and gas properties for approximately
$375 to $550 million.
28
Conversion of Subsidiary Preferred Shares to Common Stock. On July 28,
1997, the Company exercised its right to require each holder of its 6-1/4%
Cumulative Guaranteed Monthly Income Convertible Preferred Shares ("Preferred
Shares") to exchange all Preferred Shares for shares of common stock of the
Company (see Note I of Notes to Consolidated Financial Statements included in
"Item 8. Financial Statements and Supplementary Data"). On July 28, 1997, the
Company issued 6.7 million shares of common stock in exchange for the 3,776,400
Preferred Shares outstanding. As a result, the Company will no longer incur
interest expense associated with the Preferred Shares of approximately $12
million per year.
Information Systems for the Year 2000. The Company will be required to
modify its information systems in order to accurately process data referencing
the year 2000. Because of the importance of occurrence dates in the oil and gas
industry, the consequences of not pursuing these modifications could be very
significant to the Company's ability to manage and report operating activities.
Currently, the Company plans to contract with third parties to perform the
software programming changes necessary to correct any existing deficiencies. The
Company currently believes the total cost to make the necessary software program
modifications will be approximately $3 million. Such programming changes are
anticipated to be completed and tested by March 1, 1999.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Specifically, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
Segment Reporting. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") which establishes standards for public
business enterprises for reporting information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
The Company operates in the one product line - oil and gas production - in
limited geographic areas. The geographic information and information about major
customers is disclosed in the Company's annual financial statements.
29
Results of Operations
Oil and Gas Production
The following table describes the results of the Company's oil and gas
production activities during 1997, 1996 and 1995.
Year ended December 31,
------------------------------------
1997 1996 1995
----------- ---------- ---------
(in thousands, except average
price and cost data)
Revenues:
Oil and gas............................ $ 536,782 $ 396,931 $ 375,720
Gain on disposition of oil and gas
properties, net (a)................. 3,304 7,786 16,847
---------- --------- --------
540,086 404,717 392,567
---------- --------- --------
Costs and expenses:
Oil and gas production................. 144,170 110,334 130,905
Depletion.............................. 204,450 102,803 145,468
Impairment of oil and gas properties... 1,356,390 - 129,745
Exploration and abandonments........... 37,603 12,653 16,431
Geological and geophysical............. 39,557 9,054 11,121
---------- --------- --------
1,782,170 234,844 433,670
---------- --------- --------
Operating profit (loss) (excluding
general and administrative expense
and income taxes).................... $(1,242,084) $ 169,873 $ (41,103)
========== ========= =========
- ---------------
(a) The 1997 amount does not include the gain related to the disposition of the
Company's subsidiary which owned an interest in oil and gas properties in
Turkey. The 1996 amount does not include the gain related to the
disposition of the Company's Australasian assets.
Production:
Oil (MBbls).......................... 13,618 11,275 12,902
NGLs (MBbls)......................... 4,267 - -
Gas (MMcf)........................... 104,868 75,851 85,295
Total (MBOE)......................... 35,363 23,916 27,118
Average daily production:
Oil (Bbls)........................... 37,309 30,805 35,348
NGLs (Bbls).......................... 11,691 - -
Gas (Mcf)............................ 287,309 207,244 233,685
Average oil price (per Bbl)............ $ 18.51 $ 19.96 $ 16.96
Average NGL price (per Bbl)............ $ 12.59 $ - $ -
Average gas price (per Mcf)............ $ 2.20 $ 2.27 $ 1.84
Costs:
Lease operating expense (per BOE).... $ 3.02 $ 3.43 $ 3.99
Production taxes (per BOE)........... $ .81 $ .91 $ .62
Workover costs (per BOE)............. $ .25 $ .27 $ .22
------ ------- -------
Total production costs (per BOE)... $ 4.08 $ 4.61 $ 4.83
====== ======= =======
Depletion (per BOE).................. $ 5.78 $ 4.30 $ 5.36
Oil and Gas Revenues. Revenues from oil and gas operations totaled $536.8
million in 1997, $396.9 million in 1996 and $375.7 million in 1995, representing
a 35% increase from 1996 to 1997 and a 6% increase from 1995 to 1996. The
increase from 1996 to 1997 is primarily attributable to increases in oil and gas
production, offset by declines in commodity prices. The majority of the
increased production is a direct result of the oil and gas properties acquired
from Mesa.
Parker & Parsley historically accounted for processed natural gas
production as wellhead production on a wet gas basis while Mesa accounted for
processed natural gas production in two components: natural gas liquids and dry
residue gas. The combined entities own three major gas processing facilities,
and the majority of the gas processed by these facilities is owned by the
Company and produced by Company-operated properties. Consequently, the Company
now produces a higher proportion of processed gas relative to total natural gas
production and will account for natural gas production as processed natural gas
liquids and dry residue gas. Separate product volumes will not be comparable for
periods prior to September 30, 1997.
30
On a BOE basis, production increased by 48% for the year ended December
31, 1997, as compared to the same period in 1996. The additional production
volumes from the Mesa properties contributed 85% of production growth from 1996
to 1997. The remainder of the increases are a direct result of the successes of
the Company's exploration and exploitation efforts. Such production growth
becomes particularly evident in light of the fact that a portion of the average
daily oil and gas production for 1996 related to properties included in the 1996
sale of the Company's Australasian subsidiaries and the 1996 sale of certain
nonstrategic domestic assets. Excluding production associated with assets sold
during 1996 and the Mesa properties acquired in 1997, on a BOE basis, production
increased 14% for the year ended December 31, 1997 as compared to the year ended
1996.
The increase in oil and gas revenues from 1995 to 1996 is primarily
attributable to the higher average prices being received for both oil and gas
production and increases in production due to the Company's successful
exploitation and exploration activities in 1995 and 1996, offset by the
decreased production resulting from the 1996 sale of the Company's Australasian
assets and the 1995 and 1996 sales of certain domestic assets.
The average oil price received for the year ended December 31, 1997
decreased 7% (from $19.96 in 1996 to $18.51 in 1997), and the average gas price
received decreased 3% (from $2.27 in 1996 to $2.20 in 1997). During 1997, the
Company received an average of $12.59 per Bbl for NGLs. The average oil price
received for the year ended December 31, 1996 increased 18% (from $16.96 in 1995
to $19.96 in 1996), while the average gas price received increased 23% (from
$1.84 in 1995 to $2.27 in 1996).
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
hedging activities. The Company utilizes commodity derivative contracts (swaps,
futures and options) in order to (i) reduce the effect of the volatility of
price changes on the commodities the Company produces and sells, (ii) support
the Company's annual capital budgeting and expenditure plans and (iii) lock in
prices to protect the economics related to certain capital projects.
Crude Oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The average oil
price per Bbl that the Company reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. The
Company's average realized price for physical oil sales (excluding hedge
results) for the years ended December 31, 1997, 1996 and 1995 was $19.09 per
Bbl, $21.33 per Bbl and $17.02 per Bbl, respectively. The Company recorded net
reductions to oil revenues of $7.9 million, $15.4 million and $825 thousand for
the years ended December 31, 1997, 1996 and 1995, respectively, as a result of
its oil price hedges.
Natural Gas Liquids. The Company employs a policy of hedging natural gas
liquids based on actual product prices in order to mitigate some of the
volatility associated with NYMEX pricing. Natural gas liquids are sold under
long-term contracts which provide price flexibility and allow the Company to
maximize prices between trading hubs. During the year ended December 31, 1997,
the Company realized an average natural gas liquids price for physical sales
(excluding hedge results) of $12.61 per Bbl and recorded a net decrease to
natural gas liquids revenue of $77,600.
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas price
per Mcf that the Company reports includes the effects of Btu content, gathering
and transportation costs, gas processing and shrinkage and the net effect of the
gas hedges. The Company's average realized price for physical gas sales
(excluding hedge results) for the years ended December 31, 1997, 1996 and 1995
was $2.41 per Mcf, $2.39 per Mcf and $1.70 per Mcf, respectively. The Company
recorded net reductions to gas revenues of $21.9 million and $9.0 million for
the years ended December 31, 1997 and 1996, respectively, and an increase to gas
revenues of $12.1 million during 1995, as a result of its gas price hedges.
See Note J of Notes to Consolidated Financial Statements included in "Item
8. Financial Statements and Supplementary Data" for information concerning the
Company's open hedge positions at December 31, 1997 and the related prices to be
realized.
31
Production Costs. Total production costs per BOE decreased in 1997 and
1996 by approximately 11% and 5%, respectively (from $4.83 in 1995 to $4.61 in
1996 to $4.08 in 1997). The primary component of production costs, lease
operating expense, has also decreased significantly, 12% in 1997 and 14% in
1996. These costs represent the majority of the oil and gas property operating
expenses over which the Company has control and the costs on which the Company
has focused its reduction efforts. As discussed more fully in "Natural Gas
Processing" below, the Company has adopted a new method of reporting the
financial results of its natural gas processing facilities and is now presenting
these results as oil and gas production activities. In 1997, the operating
margin from the Company's gas plants (i.e., third party processing revenues less
processing costs and expenses) is included in oil and gas production costs,
specifically lease operating expense, which resulted in a decrease in lease
operating expense per BOE of $.07 for the year ended December 31, 1997, as
compared to 1996. The additional reductions in lease operating expense during
the three years ended December 31, 1997 are primarily due to the Company's
concentrated efforts to evaluate and reduce all operating costs and the sale of
certain high operating cost properties during 1996.
Depletion Expense. Depletion expense per BOE increased 34% in 1997 (to
$5.78 in 1997 from $4.30 in 1996) and decreased 20% in 1996 (from $5.36 in
1995). The increase in depletion expense per BOE in 1997 is primarily associated
with the fair value allocated to Mesa's long-lived, low production cost natural
gas reserves. The decrease in depletion expense per BOE in 1996 is primarily the
result of the following factors: (i) the significant increase in oil and gas
reserves during 1995 and 1996 resulting from the Company's exploration and
development drilling activities, including revisions, and (ii) a reduction in
the Company's net depletable basis from charges taken in 1995 in accordance with
SFAS 121 (see "Impairment of Oil and Gas Properties" below).
Impairment of Oil and Gas Properties. In accordance with SFAS 121, the
Company reviews its oil and gas properties for impairment whenever events and
circumstances indicate a decline in the recoverability of the carrying value of
the Company's assets. Historically, a decline in the recoverability of the
carrying value of the Company's oil and gas properties has been the result of
depressed commodity prices. The Company recognized noncash pre-tax charges of
$1.4 billion ($863 million after-tax) and $129.7 million ($84.3 million
after-tax) related to its oil and gas properties during 1997 and 1995,
respectively. See Note B and Note M of Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data" for
further explanation of the Company's policies concerning SFAS 121 and its 1997
and 1995 charges for impairment.
Exploration and Abandonments/Geological and Geophysical Costs. Exploration
and abandonments/geological and geophysical costs totaled $77.2 million, $21.7
million and $27.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in 1997 is primarily the result of increased domestic
exploratory drilling and geological and geophysical activity due to the
expansion of the Company's exploration program. The decrease in 1996 is largely
the result of decreased activity, both in exploratory drilling and geological
and geophysical activity, resulting from the sale in March 1996 of the Company's
Australasian assets (see " Asset Dispositions" above and Note L of Notes to
Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data"), offset by increases in geological and geophysical activity
in the United States as a result of the Company's increased focus on
exploitation and exploration activities. The following table sets forth the
components of the Company's 1997, 1996 and 1995 exploration and
abandonments/geological and geophysical costs:
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
Exploratory dry holes:
United States........................... $ 27,182 $ 6,256 $ 2,491
Australia and other foreign............. 5,695 3,431 9,636
Geological and geophysical costs:
United States........................... 35,737 7,042 2,302
Foreign................................. 3,820 2,012 8,819
Leasehold abandonments and other......... 4,726 2,966 4,304
------- ------- -------
$ 77,160 $ 21,707 $ 27,552
======= ======= =======
Approximately 29% of the Company's 1998 exploration/exploitation capital
budget will be spent on exploratory projects (compared to 28% in 1997 and 18% in
1996). The Company currently anticipates that its 1998 exploration efforts will
be concentrated domestically in the Gulf Coast region and internationally in
Argentina, Canada and Africa.
32
The Company continues to review opportunities involving exploration joint
ventures in domestic and international areas outside the Company's existing core
operating areas.
Natural Gas Processing
The Company historically reflected its ownership interests in and revenues
and expenses related to its natural gas processing facilities as separate items
in the consolidated financial statements while Mesa reported revenues and
expenses from its natural gas processing facilities as oil and gas production
costs. During the last four years, the Company has sold its interests in 12
natural gas processing facilities and now owns interests in seven facilities.
The ownership interest in the remaining gas plant facilities and the related
results of operations from third party gas processed through such facilities are
not material to the Company's financial position. To report the results of gas
processing activities consistently within the financial statements, during 1997,
the Company reclassified the natural gas processing facilities into oil and gas
properties for financial statement purposes and will report all third party
revenues and expenses from its natural gas processing facilities in oil and gas
production costs.
Natural gas processing revenues were $23.8 million in 1996 and $33.3
million in 1995; and natural gas processing costs were $12.5 million in 1996 and
$25.9 million in 1995. The 1996 natural gas processing revenues and costs
decreased 29% and 52%, respectively, when compared to the 1995 amounts primarily
due to the sale of four gas plants during 1995 and the sale of one gas plant
during 1996. The average price per Bbl of NGLs increased 30% in 1996 (from
$11.59 in 1995 to $15.10 in 1996), while the average price per Mcf of residue
gas increased 55% in 1996 (from $1.39 in 1995 to $2.15 in 1996).
During January 1996, the Company realized proceeds of $2.1 million from
sales of gas plants and related assets which resulted in the Company recognizing
a net pre-tax gain of $639 thousand. In addition, in October 1995, the Company
sold its interests in the Cargray and Schafer plants located in Carson County,
Texas. The Company received net proceeds of $9.5 million from the disposition of
such plants which resulted in the Company recognizing a net pre-tax gain of $4.6
million.
During 1996, the Company recognized noncash pre-tax charges of $1.3
million related to abandonments of certain of the Company's gas processing
facilities and the cancellation of certain gas processing contracts.
Additionally, during 1995, the Company recognized a noncash pre-tax impairment
charge of $748 thousand related to a natural gas processing facility.
General and Administrative Expense
General and administrative expense was $48.8 million in 1997, $28.4
million in 1996 and $37.4 million in 1995, representing a 72% increase from 1996
to 1997 and a 24% decrease from 1995 to 1996. The increase from 1996 to 1997
resulted from the increased size of the Company and reorganization and
relocation costs caused by the merger between Parker & Parsley and Mesa and the
acquisition of Chauvco. The decrease from 1995 to 1996 is primarily due to 1995
including pre-tax charges of $10.6 million associated with the amortization of
deferred compensation awarded in 1993 and organizational changes implemented by
the Company that were designed to reduce overall general and administrative
expenses.
Interest Expense
Interest expense was $77.6 million in 1997, $46.2 million in 1996 and
$65.4 million in 1995. The increase from 1996 to 1997 is primarily the result of
an increase in the weighted average outstanding balance of the Company's
indebtedness during 1997 as compared to 1996 due to the additional debt assumed
from Mesa. The decrease from 1995 to 1996 is due to a decrease of $226.3 million
in the weighted average outstanding balance of the Company's indebtedness for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, resulting primarily from the application of proceeds from the sale of the
Company's Australasian assets and the sales of certain domestic assets during
1995 and 1996, and a decrease in the weighted average interest rate on the
Company's indebtedness from 8.02% in 1995 to 7.83% in 1996. In addition, the
1997, 1996 and 1995 amounts include $6 million, $12 million and $12 million of
interest, respectively, associated with the preferred stock of the Company's
subsidiary, Parker & Parsley Capital LLC, which was converted to common stock of
the Company in July 1997 (see Note I of Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data").
The 1997,
33
1996 and 1995 amounts also include $1.2 million, $1.3 million and $2 million,
respectively, of amortization of capitalized loan fees.
During each of the years 1997, 1996 and 1995, the Company was a party to
various interest rate swap agreements. As a result, the Company recorded a
reduction in interest expense of $847 thousand and $787 thousand for the years
ended December 31, 1997 and 1996, respectively, and additional interest expense
of $532 thousand for the year ended December 31, 1995. For a description of the
Company's interest rate swap agreements, see Note J of the Notes to the
Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data".
Other Expense
During 1996, Mesa entered into BTU swap agreements covering 13,036 MMBTU
per day from January 1, 1997 through December 31, 2004. Under the terms of these
agreements, the Company will receive a premium of $.52 per MMBTU over market
natural gas prices from January 1, 1997 through December 31, 1998. Following
this two-year period, the Company will receive 10% of the NYMEX oil price for
the volumes covered for a six-year period beginning January 1, 1999 and ending
December 31, 2004. As these derivative contracts do not qualify as hedges, the
Company recorded a $5.2 million noncash pre-tax mark-to-market adjustment to the
carrying value of the BTU swap agreements in 1997. These contracts will continue
to be marked-to-market at the end of each reporting period during their
respective lives and the effects on the Company's results of operations in
future periods could be significant.
Income Taxes
The Company's income tax benefit of $500.3 million and $45.9 million for
1997 and 1995, respectively (both of which exclude the tax effects related to
extraordinary items), and its income tax provision of $60.1 million for 1996
reflect the net provision or benefit, resulting from the separate tax
calculation prepared for each tax jurisdiction in which the Company is subject
to income taxes. For 1997, 1996 and 1995 the Company had effective total tax
rates of approximately 36%, 30% and 31%, respectively. See Note N of Notes to
Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" for further discussion of the Company's income tax provision
and benefits.
Extraordinary Items
On December 18, 1997, the Company completed a cash tender offer for a
significant portion of the 11-5/8% senior subordinated discount notes due 2006
and the 10-5/8% senior subordinated notes due 2006 (the "10-5/8% Notes")
(collectively, the "Subordinated Notes") assumed from Mesa for a redemption
price of $829.90 and $1,171.40, respectively, per $1,000 tendered plus any
interest accrued on the 10 5/8% Notes (the "Tender Offer"). As a result of the
Tender Offer, the Company recognized an extraordinary loss on early
extinguishment of debt of $11.9 million (net of a related tax benefit of $6.4
million) during the fourth quarter of 1997. The Company financed the purchase
price of the Subordinated Notes tendered in the offer with borrowings under its
bank credit facility.
The accompanying Consolidated Statement of Operations for the year ended
December 31, 1997 also includes a $1.5 million (net of a related tax benefit of
$800 thousand) noncash charge for an extraordinary loss on early extinguishment
of debt resulting from the mergers. This extraordinary loss relates to
capitalized issuance fees associated with Parker & Parsley's previously existing
bank credit facility which was replaced by the new credit facility agreement for
the Company.
In October 1995, the Company transferred cash and certain oil and gas
properties with an aggregate estimated value of $1.1 million in full
satisfaction of a non-recourse note secured by the properties, the balance of
which was approximately $7.7 million. As a result, the Company recognized an
extraordinary gain on the early extinguishment of debt of $4.3 million (net of
related tax expense of $2.3 million).
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 principal and interest on outstanding indebtedness and working capital
obligations.
34
The Company's cash expenditures during 1997, 1996 and 1995 for additions
to oil and gas properties (including individual property acquisitions, but not
including company acquisitions) totaled $428.6 million, $219.4 million and
$215.7 million, respectively. The 1997 amount includes $292.6 million for
development and exploratory drilling and, as in 1996 and 1995, the Company's
drilling activities were focused primarily in the Spraberry field of the Permian
Basin. Significant drilling expenditures in 1997 included $99.0 million in the
unitized portion of the Spraberry field of the Permian Basin (including $47.6
million in the Driver unit, $12.7 million in the Preston unit, $12.6 million in
the Shackelford unit, $12.2 million in the North Pembrook unit and $10.5 million
in the Merchant unit), $14.9 million in other portions of the Spraberry field,
$46.5 million in other areas of the Permian Basin, $91.3 million in the onshore
and offshore Gulf Coast region, $29.9 million in the MidContinent region and
$11.0 million in Argentina and Guatemala.
The Company's 1998 capital expenditure budget has been set at $500
million, reflecting planned expenditures of $301 million for exploitation
activities, $125 million for exploration activities and $74 million for oil and
gas property acquisitions in the Company's core areas. The Company budgets it
capital expenditures based on projected internally-generated cash flows and
routinely adjusts the level of its capital expenditures in response to
anticipated changes in cash flows.
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 nonstrategic 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 nonstrategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments in 1998.
Operating Activities
Net cash provided by operating activities during 1997 of $228.2 million
was comparable to that of 1996 of $230.1 million. The additional cash flow
generated by increased production was offset by increased general and
administrative expenses and interest expenses and the payment of certain
liabilities assumed from Mesa, including severance payments made to former Mesa
employees. During 1996, net cash provided by operating activities increased 47%
(from $156.6 million in 1995 to $230.1 million in 1996). This increase during
1996 is primarily attributable to stronger oil and gas prices combined with
declining production costs due to improvements in the Company's overall cost
structure in 1995 and 1996.
Financing Activities
As described more fully in Note E of Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data", on
August 7, 1997, the Company entered into two credit facility agreements with a
syndicate of banks which provide for a total domestic bank credit facility of
$1.4 billion. The Company had an outstanding balance under its bank facility at
December 31, 1997 of $1.4 billion (including outstanding, undrawn letters of
credit of $30.6 million), leaving approximately $161 thousand of unused
borrowing base immediately available. At December 31, 1997, the Company also had
$234.7 million outstanding under its Canadian credit facility leaving a
borrowing capacity of $55.3 million. At December 31, 1997, the Company had two
other outstanding significant debt issuances. Such debt issuances consist of (i)
$150 million aggregate principal amount of 8-7/8% senior notes issued by Parker
& Parsley in 1995 and due in 2005 (carrying value of $150.0 million) and (ii)
$150 million aggregate principal amount of 8-1/4% senior notes issued by Parker
& Parsley in 1995 and due in 2007 (carrying value of $149.3 million). The
weighted average interest rate for the year ended December 31, 1997 on the
Company's indebtedness was 7.04% as compared to 7.83% for the year ended
December 31, 1996 and 8.02% for the year ended December 31, 1995 (taking into
account the effect of interest rate swaps).
Senior note issuance. During January 1998, the Company completed the
issuance of the following two series of senior notes for total net proceeds of
$593 million. The proceeds were used primarily to repay the Company's bank
indebtedness.
35
6.5% senior notes due 2008. $350 million aggregate principal amount 6.5%
senior notes dated January 13, 1998, due January 15, 2008. Interest on the
6.5% senior notes is payable semi-annually on January 15 and July 15 of
each year, commencing July 15, 1998.
7.2% senior notes due 2028. $250 million aggregate principal amount 7.2%
senior notes dated January 13, 1998, due July 15, 2028. Interest on the
7.2% senior notes is payable semi-annually on January 15 and July 15 of
each year, commencing July 15, 1998.
Both senior note issuances are governed by an Indenture between the
Company and The Bank of New York dated January 13, 1998. Both senior note
issuances 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 addition, the Company is a holding company that
conducts all its operations through subsidiaries, and the senior notes are
structurally subordinated to all obligations of its subsidiaries. The senior
notes were fully and unconditionally guaranteed by Pioneer Natural Resources
USA, Inc., a wholly-owned subsidiary of the Company.
As the Company continues to pursue its strategy, it may utilize
alternative financing sources, including the issuance for cash of fixed rate
long-term public debt, convertible securities or preferred 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.
Sales of Nonstrategic Assets. During 1997, 1996 and 1995, proceeds from
the sale of domestic nonstrategic assets totaled $115.7 million, $58.4 million
and $175.1 million, respectively. In addition, during 1996, the Company sold
certain subsidiaries resulting in cash proceeds of $183.2 million (see Note L of
Notes to Consolidated Financial Statements included in "Item 8. Financial
Statements and Supplementary Data"). The proceeds from these sales were
primarily utilized to reduce the Company's outstanding bank indebtedness and for
general working capital purposes.
In February 1998, the Company announced its intentions to sell domestic
nonstrategic properties for proceeds ranging from $375 to $550 million. These
properties represent an estimated 10% to 12% of the Company's reserves at
December 31, 1997. The Company plans to complete this divestiture in the latter
part of 1998. The Company anticipates that it will continue to sell nonstrategic
properties from time to time to increase capital resources available for other
activities and to achieve operating and administrative efficiencies and improved
profitability.
The consummation of the Company's 1998 divestiture plans is entirely
dependent on finding one or more willing buyers who have the financial
wherewithal to complete such a purchase. Until such a buyer is found, the
Company may reevaluate its portfolio of properties and at any time may adjust
its plans concerning divestitures. As a result, there can be no assurance that
the divestiture of any or all of these properties will be completed or that the
estimated proceeds will be realized.
Liquidity. At December 31, 1997, the Company had $71.7 million of cash and
cash equivalents on hand, compared to $18.7 million at December 31, 1996. The
Company's ratio of current assets to current liabilities was 1.18 at December
31, 1997 and 1.29 at December 31, 1996.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements of Pioneer Natural Resources Company:
Independent Auditors' Report............................................. 38
Consolidated Balance Sheets as of December 31, 1997
and 1996............................................................... 39
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... 40
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995................................. 41
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... 42
Notes to Consolidated Financial Statements............................... 43
Unaudited Supplementary Information...................................... 69
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Pioneer Natural Resources Company:
We have audited the consolidated financial statements of Pioneer Natural
Resources Company and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pioneer
Natural Resources Company and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Notes B and M to the consolidated financial statements,
the Company changed its method of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
KPMG Peat Marwick LLP
Midland, Texas
February 13, 1998
38
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31,
-----------------------
1997 1996
---------- ----------
Current assets:
Cash and cash equivalents.......................... $ 71,713 $ 18,711
Restricted cash.................................... 1,695 1,749
Accounts receivable:
Trade, net....................................... 75,432 34,075
Affiliates....................................... - 434
Oil and gas sales................................ 116,500 48,459
Inventories........................................ 13,576 3,644
Deferred income taxes.............................. 16,900 7,400
Other current assets............................... 12,372 2,567
--------- ---------
Total current assets........................... 308,188 117,039
--------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties................................ 3,575,971 1,419,051
Unproved properties.............................. 545,074 7,331
Natural gas processing facilities.................. - 59,276
Accumulated depletion, depreciation and
amortization..................................... (605,203) (445,238)
--------- ---------
3,515,842 1,040,420
Other property and equipment, net.................... 44,017 27,779
Other assets, net.................................... 78,543 14,627
--------- ---------
$3,946,590 $1,199,865
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............... $ 5,791 $ 5,381
Undistributed unit purchases....................... 1,695 1,749
Accounts payable:
Trade ........................................... 176,697 56,713
Affiliates....................................... 9,994 7,528
Domestic and foreign income taxes.................. - 1,743
Other current liabilities.......................... 67,375 17,856
--------- ---------
Total current liabilities...................... 261,552 90,970
--------- ---------
Long-term debt, less current maturities.............. 1,943,718 320,908
Other noncurrent liabilities......................... 180,275 8,071
Deferred income taxes................................ 12,200 60,800
Preferred stock of subsidiary........................ - 188,820
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000
shares authorized; none issued and outstanding... - -
Common stock, $.01 par value; 500,000,000 shares
authorized; 101,037,562 and 36,899,618 shares
issued at December 31, 1997 and 1996,
respectively..................................... 1,010 369
Additional paid-in capital......................... 2,359,992 462,873
Treasury stock, at cost; 591 and 1,833,383 shares
at December 31, 1997 and 1996, respectively...... (21) (31,528)
Unearned compensation.............................. (16,196) (1,625)
Retained earnings (deficit)........................ (795,940) 100,207
--------- ---------
Total stockholders' equity..................... 1,548,845 530,296
Commitments and contingencies (Note H)
--------- ---------
$3,946,590 $1,199,865
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
39
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
---------------------------------
1997 1996 1995
----------- --------- ---------
Revenues:
Oil and gas............................... $ 536,782 $ 396,931 $ 375,720
Natural gas processing.................... - 23,814 33,258
Gas marketing............................. - - 76,784
Interest and other........................ 4,278 17,458 11,364
Gain on disposition of assets, net........ 4,969 97,140 16,620
---------- -------- --------
546,029 535,343 513,746
---------- -------- --------
Costs and expenses:
Oil and gas production.................... 144,170 110,334 130,905
Natural gas processing.................... - 12,528 25,865
Gas marketing............................. - - 75,664
Depletion, depreciation and amortization.. 212,435 112,134 159,058
Impairment of oil and gas properties and
natural gas processing facilities....... 1,356,390 - 130,494
Exploration and abandonments.............. 77,160 23,030 27,552
General and administrative................ 48,763 28,363 37,409
Interest.................................. 77,550 46,155 65,449
Other..................................... 7,124 2,451 11,357
---------- -------- --------
1,923,592 334,995 663,753
---------- -------- --------
Income (loss) before income taxes and
extraordinary item........................ (1,377,563) 200,348 (150,007)
Income tax benefit (provision).............. 500,300 (60,100) 45,900
---------- -------- --------
Income (loss) before extraordinary item...... (877,263) 140,248 (104,107)
Extraordinary item - gain (loss) on early
extinguishment of debt, net of tax........ (13,408) - 4,338
---------- -------- --------
Net income (loss)............................ $ (890,671) $ 140,248 $ (99,769)
========== ======== ========
Income (loss) per share:
Basic:
Income (loss) before extraordinary item. $ (16.88) $ 3.95 $ (2.96)
Extraordinary item...................... (.26) - .12
---------- -------- --------
Net income (loss)....................... $ (17.14) $ 3.95 $ (2.84)
========== ======== ========
Diluted:
Income (loss) before extraordinary item. $ (16.88) $ 3.47 $ (2.96)
Extraordinary item...................... (.26) - .12
---------- -------- --------
Net income (loss)....................... $ (17.14) $ 3.47 $ (2.84)
========== ======== ========
Dividends declared per share................. $ .10 $ .10 $ .10
========== ======== ========
Weighted average shares outstanding.......... 51,973 35,475 35,090
=========== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
40
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional Unearned Retained Cumulative Total
Common Paid-in Treasury Compen- Earnings Translation Stockholders'
Stock Capital Stock sation (Deficit) Adjustment Equity
------ ---------- --------- -------- --------- ----------- ------------
Balance at January 1, 1995..... $ 359 $ 445,321 $ (6,788) $ (5,726) $ 66,779 $ 9,639 $ 509,584
Common stock issued............ 2 3,963 - - - - 3,965
Exercise of long-term incentive
plan stock options........... 2 2,065 223 (365) - - 1,925
Restricted shares awarded...... 1 769 - (1,387) - - (617)
Tax benefits related to
stock options................ - 600 - - - - 600
Purchase of treasury stock..... - - (279) - - - (279)
Amortization of unearned
compensation................. - - - 5,423 - - 5,423
Net loss....................... - - - - (99,769) - (99,769)
Dividends ($.10 per share)..... - - - - (3,501) - (3,501)
Currency translation
adjustment................... - - - - - (6,336) (6,336)
----- --------- ------- ------- -------- ------ ---------
Balance at December 31, 1995... 364 452,718 (6,844) (2,055) (36,491) 3,303 410,995
----- --------- ------- ------- -------- ------ ---------
Exercise of long-term incentive
plan stock options........... 5 6,899 - - - - 6,904
Restricted shares awarded...... - 1,091 - (1,199) - - (108)
Restricted shares forfeited.... - (35) (13) 48 - - -
Tax benefits related to
stock options................ - 2,200 - - - - 2,200
Purchase of treasury stock..... - - (24,671) - - - (24,671)
Amortization of unearned
compensation................. - - - 1,581 - - 1,581
Net income..................... - - - - 140,248 - 140,248
Dividends ($.10 per share)..... - - - - (3,550) - (3,550)
Currency translation
adjustment................... - - - - - (3,303) (3,303)
----- --------- ------- ------- -------- ------ ---------
Balance at December 31, 1996... 369 462,873 (31,528) (1,625) 100,207 - 530,296
----- --------- ------- ------- -------- ------ ---------
Common stock issued:
Acquisition of MESA, Inc..... 318 982,248 - - - - 982,566
Acquisition of Chauvco
Resources, Ltd............. 249 688,081 - - - - 688,330
Acquisition of properties.... 16 44,857 - - - - 44,873
Exercise of long-term incentive
plan stock options........... 5 11,591 - - - - 11,596
Cancellation of treasury shares (19) (34,441) 34,460 - - - -
Exchange of Preferred Shares
for common shares............ 67 182,909 - - - - 182,976
Restricted shares awarded...... 5 18,974 - (18,079) - - 900
Tax benefits related to
stock options................ - 2,900 - - - - 2,900
Purchase of treasury stock..... - - (2,953) - - - (2,953)
Amortization of unearned
compensation................. - - - 3,508 - - 3,508
Net loss....................... - - - - (890,671) - (890,671)
Dividends ($.10 per share)..... - - - - (5,476) - (5,476)
----- --------- ------- ------- -------- ------ ---------
Balance at December 31, 1997... $1,010 $2,359,992 $ (21) $(16,196) $(795,940) $ - $1,548,845
===== ========= ======= ======= ======== ====== =========
The accompanying notes are an integral part of these
consolidated financial statements.
41
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
Cash flows from operating activities:
Net income (loss)...................................... $ (890,671) $ 140,248 $ (99,769)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization........... 212,435 112,134 159,058
Impairment of oil and gas properties and natural
gas processing facilities....................... 1,356,390 - 130,494
Exploration expenses, including dry holes.......... 63,288 17,262 23,500
Deferred income taxes.............................. (501,300) 57,400 (44,900)
Gain on disposition of assets, net................. (4,969) (97,140) (16,620)
(Gain) loss on early extinguishment of debt,
net of tax...................................... 13,408 - (4,338)
Other noncash items................................ 18,886 (1,360) 16,770
Change in operating assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable................................ (39,774) (2,674) 4,870
Inventory.......................................... (5,941) 1,842 682
Other current assets............................... (1,913) (32) 1,146
Accounts payable................................... 27,138 (656) (15,712)
Accrued income taxes and other current liabilities. (18,768) 3,035 2,758
Other................................................ - 47 (1,383)
--------- -------- --------
Net cash provided by operating activities....... 228,209 230,106 156,556
--------- -------- --------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired......... (15,490) - -
Proceeds from disposition of wholly-owned
subsidiaries, net of cash disposed................... - 183,181 -
Proceeds from disposition of assets.................... 115,735 58,370 175,085
Additions to oil and gas properties.................... (428,640) (219,394) (215,731)
Other property additions, net.......................... (12,783) (8,428) (11,954)
--------- -------- --------
Net cash provided by (used in) investing
activities................................... (341,178) 13,729 (52,600)
--------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt........................ 821,148 782 334,458
Principal payments on long-term debt................... (648,208) (222,157) (434,681)
Payments of other noncurrent liabilities............... (7,740) (2,534) (1,588)
Deferred loan fees/issuance costs...................... (2,396) (20) (4,121)
Dividends.............................................. (5,476) (3,550) (3,501)
Purchase of treasury stock............................. (2,953) (24,671) (279)
Exercise of long-term incentive plan stock options..... 11,596 6,904 1,925
Other ................................................ - (108) (137)
--------- -------- --------
Net cash provided by (used in) financing
activities................................... 165,971 (245,354) (107,924)
--------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................ - 290 (299)
Net increase (decrease) in cash and cash equivalents ..... 53,002 (1,519) (3,968)
Cash and cash equivalents, beginning of year.............. 18,711 19,940 24,207
--------- -------- --------
Cash and cash equivalents, end of year.................... $ 71,713 $ 18,711 $ 19,940
========= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
42
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company"), is a Delaware
Corporation whose common stock is listed and traded on the New York Stock
Exchange and the Toronto Stock Exchange. The Company was formed as a result of
the merger between Parker & Parsley Petroleum Company ("Parker & Parsley") and
MESA Inc. ("Mesa"). Both Parker & Parsley and Mesa were oil and gas exploration
and production concerns with ownership interest in oil and gas properties
located principally in the MidContinent, Southwestern and onshore and offshore
Gulf Coast regions of the United States, and with limited international
interests.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the merger has been accounted for as a purchase of Mesa
by Parker & Parsley. As a result, the historical financial statements for the
Company are those of Parker & Parsley, and the Company's financial statements
present the addition of Mesa's assets and liabilities as an acquisition by
Parker & Parsley in August 1997. Specifically, the accompanying Consolidated
Statements of Operations and Consolidated Statements of Cash Flows include the
financial results of Mesa beginning in August 1997.
NOTE B. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries since their
acquisition or formation and the Company's interest in the affiliated oil and
gas partnerships for which it serves as general partner through certain of its
wholly-owned subsidiaries. Investments in less-than-majority-owned subsidiaries
where the Company has the ability to exercise significant influence over the
investee's operations are accounted for by the equity method; otherwise, they
are accounted for at cost. The Company proportionately consolidates
less-than-100%-owned oil and gas partnerships in accordance with industry
practice. The Company owns less than a 20% interest in the oil and gas
partnerships that it proportionally consolidates. All material intercompany
balances and transactions have been eliminated.
Use of estimates in the preparation of financial statements. Preparation
of the accompanying consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents. For purposes of the Consolidated Statements of Cash
Flows, cash and cash equivalents include cash on hand and depository accounts
held by banks.
Restricted cash at December 31, 1997 and 1996 represents the Company's
remaining obligation to redeem for cash the unconverted limited partner units in
the Prudential-Bache Energy limited partnerships acquired in 1993.
Inventories. Inventories consist of lease and well equipment which are
carried at the lower of cost (first-in, first-out) or market.
Oil and gas properties. The Company utilizes the successful efforts method
of accounting for its oil and gas properties as promulgated by Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies". Under this method, all costs associated with
productive wells and nonproductive development wells are capitalized while
nonproductive exploration costs are expensed. The Company capitalizes interest
on expenditures for significant development projects until such time as
significant operations commence.
Capitalized costs relating to proved properties are depleted using the
unit-of-production method based on proved reserves expressed as BOE as prepared
by the Company's engineers, except for Canada, which were prepared by
43
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
independent petroleum engineers. Costs of significant nonproducing properties,
wells in the process of being drilled and development projects are excluded from
depletion until such time as the related project is developed and proved
reserves are established or impairment is determined.
Capitalized costs of individual properties sold or abandoned are charged
to accumulated depletion, depreciation and amortization. Proceeds from sales of
individual properties are credited to property costs. No gain or loss is
recognized until the entire amortization base is sold.
If significant, the Company accrues the estimated future costs to plug and
abandon wells under the units-of-production method. The charge, if any, is
reflected in the accompanying Consolidated Statements of Operations as
abandonment expense while the liability is reflected in the accompanying
Consolidated Balance Sheets as other liabilities. Plugging and abandonment
liabilities assumed in a business combination accounted for as a purchase are
recorded at fair value. At December 31, 1997 and 1996, the Company has a
plugging and abandonment liability of $35.9 million and $29,675, respectively.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment by comparing their cost to their estimated
value on a project-by-project basis. The estimated value is affected by results
of exploration activities, future sales or expiration of all or a portion of
such projects. If the quantity of proved reserves determined by such evaluation
is not sufficient to fully recover the cost invested in each project, the
Company will recognize a loss at the time of impairment by providing an
impairment allowance. The remaining unproved oil and gas properties are
aggregated and an overall impairment allowance is provided based on the
Company's historical experience.
Impairment of long-lived assets. In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of the
expected future cash flows is less than the carrying amount of the assets. In
this circumstance, the Company recognizes an impairment loss for the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Natural gas processing facilities. Through December 31, 1996, the Company
depreciated its gas processing, gathering and transmission facilities and
equipment on a straight-line basis over the estimated useful lives of the
assets, which ranged from 14 to 21 years. Capitalized costs relating to gas
contracts, representing the right to extract liquids and gas, were amortized on
a plant-by-plant basis using the unit-of-production method over the lives of gas
reserves expected to be processed through the facility, as prepared by the
Company's engineers. Upon disposition of a natural gas processing facility, the
cost and related accumulated depreciation and amortization was eliminated from
the accounts and any gain or loss was included in operations.
In 1997, the Company began accounting for its natural gas processing
facilities activities as part of its oil and gas properties for financial
reporting purposes. During 1997, all third party revenues and expenses
attributable to the Company's natural gas processing facilities have been
reported as oil and gas production costs, and the capitalized costs of natural
gas processing facilities are included in proved oil and gas properties.
Treasury stock. Treasury stock purchases are recorded at cost. Upon
reissuance, the cost of treasury shares held is reduced by the average purchase
price per share of the aggregate treasury shares held.
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"). Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
44
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rate is recognized in
income in the period that includes the enactment date.
The Company and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U.S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
Income (loss) per share. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") which simplifies the existing standards for
computing earnings per share ("EPS") and makes them comparable to international
standards. In accordance with the provisions of SFAS 128, the Company adopted
SFAS 128 in its year ended December 31, 1997 financial statements and all prior
period EPS information (including interim EPS) have been restated. Under SFAS
128, primary EPS is replaced by "basic" EPS, which excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. "Diluted" EPS, which
is computed similarly to fully-diluted EPS, reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. For 1997 and 1995, the
computation of diluted net loss per share was antidilutive; therefore, the
amounts reported for basic and diluted net loss per share were the same. The
computation of diluted net income per share for the year ended December 31, 1996
assumes conversion of the Company's 6-1/4% Cumulative Guaranteed Monthly Income
Convertible Preferred Shares ("Preferred Shares") which increased the weighted
average number of shares outstanding to 42.6 million.
Environmental. The Company is subject to extensive federal, state, local
and foreign environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit. Expenditures that relate to an existing condition caused by
past operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable and the costs can be
reasonably estimated. Such liabilities are generally undiscounted unless the
timing of cash payments for the liability are fixed or reliably determinable.
The Company believes that the costs for compliance with current environmental
laws and regulations have not had and will not have a material effect on the
Company's financial position or results of operations.
Revenue recognition. The Company uses the entitlements method of
accounting for crude oil and natural gas revenues. Sales proceeds in excess of
the Company's entitlement are included in other liabilities and the Company's
share of sales taken by others is included in other assets in the accompanying
Consolidated Balance Sheets. As of December 31, 1997, such assets and
liabilities total $49.2 million and $20.2 million, respectively. The Company did
not have a material amount recorded in other assets or other liabilities
associated with gas balancing during 1996.
Stock-based compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Accordingly, the Company has only adopted the disclosure provisions
of Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). See Note G for the pro forma disclosures
of compensation expense determined under the fair-value provisions of SFAS 123.
Hedging. The financial instruments that the Company accounts for as
hedging contracts must meet the following criteria: the underlying asset or
liability must expose the Company to price or interest rate risk that is not
offset in another asset or liability, the hedging contract must reduce that
price or interest rate risk, and the instrument must be designated as a hedge at
the inception of the contract and throughout the hedge period. In order to
45
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
qualify as a hedge, there must be clear correlation between changes in the fair
value of the financial instrument and the fair value of the underlying asset or
liability such that changes in the market value of the financial instrument will
be offset by the effect of price or interest rate changes on the exposed items.
See Note J for a description of the specific types of hedging transactions in
which the Company participates.
Foreign currency translation. The financial statements of non-U.S.
entities are translated to U.S. dollars as follows: all assets and liabilities
at year-end exchange rates; revenues, costs and expenses at average exchange
rates. Gains and losses from translating non-U.S. balances are recorded directly
in stockholders' equity. Foreign currency transaction gains and losses are
included in net income (loss).
A summary of the exchange rates used in the preparation of these
consolidated financial statements appear below:
December 31,
------------------------
1997 1996 1995
------ ------ ------
U.S. Dollar from Canadian Dollar - Balance sheet .6997 N/A N/A
U.S. Dollar from Australian Dollar - Statements
of operations N/A .7562 .7431
Reclassifications. Certain reclassifications have been made to the 1996
and 1995 amounts to conform to the 1997 presentation.
NOTE C. Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996
----------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- -------- --------
(in thousands)
Financial assets:
Cash, cash equivalents and restricted cash $ 73,408 $ 73,408 $ 20,460 $ 20,460
Financial liabilities:
Long-term debt:
Practicable to estimate fair value:
Lines of credit and term note 1,608,980 1,608,980 9,000 9,000
8-7/8% senior notes due 2005 150,000 170,025 150,000 165,945
8-1/4% senior notes due 2007 149,345 166,950 149,277 160,965
Not practicable to estimate fair value:
Other long-term debt 41,184 - 18,012 -
Derivative financial instruments, including
off-balance sheet instruments (see
Note J):
Interest rate swaps 2,100 2,704 - 1,782
Foreign currency agreements (7,438) (7,438) - -
Commodity price hedges (689) 12,061 - (35,560)
BTU swap agreements (6,893) (6,893) - -
Cash and cash equivalents, restricted cash, accounts receivable, other
current assets, accounts payable and other current liabilities. The carrying
amounts approximate fair value due to the short maturity of these instruments.
Long-term debt. The carrying amount of borrowings outstanding under the
Company's line of credit (see Note E for definition and description of each)
approximates fair value because these instruments bear interest at rates tied to
current market rates. The fair values of each of the senior note issuances were
based on quoted market prices for each of these issues.
46
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
It was not practicable to estimate the fair value of certain of the
long-term debt obligations because quoted market prices are not available and
the Company does not have a current borrowing rate which could be used as a
comparable rate for the stated maturities of the obligations.
Interest rate swap agreements. At December 31, 1997, the Company had the
following interest rate agreements outstanding: five interest rate fixed-rate to
floating-rate swap agreements with an aggregate notional amount of $150 million,
one floating-rate to fixed-rate swap agreement with a notional amount of $250
million, one cross-currency interest swap with a notional amount of $60 million,
and one interest rate cap agreement denominated in Canadian dollars with a
notional amount of C$80 million. At December 31, 1996, the Company had the five
fixed-rate to floating-rate swap agreements mentioned above outstanding with an
aggregate notional amount of $150 million. These are more fully described in
Note J. The fair values of each of the open interest rate swap agreements were
obtained from quotes by the respective counterparties and represent the
estimated net amount the Company would receive or pay upon termination of the
agreements as of December 31 of each of the respective years, taking into
consideration interest rates at that time.
Foreign currency agreements. At December 31, 1997, the Company had two
foreign exchange swap agreements with an aggregate remaining notional amount of
$216 million. These are more fully described in Note J. The fair values of these
agreements were obtained from quotes from the counterparty and represent the
amount the Company would pay upon termination of the agreements at December 31,
1997, based upon the spot and forward foreign currency exchange rates existing
in the market at that time.
Commodity price hedges. The fair values of commodity price hedges
outstanding at December 31, 1997 and 1996 were obtained from quotes provided by
the individual counterparties for each agreement and represent the amount the
Company would be required to pay as of December 31 of each of the respective
years, based upon the differential between a fixed and a variable commodity
price as specified in the hedge contracts.
BTU swap agreements. The fair value of the Btu swap agreements outstanding
at December 31, 1997 were obtained from quotes provided by the counterparty to
these agreements and represent the amount the Company would be required to pay
as of December 31, 1997 based upon the market price for oil and gas as specified
in the agreements.
NOTE D. Acquisitions
During August 1997, Parker & Parsley completed a merger with Mesa that
resulted in the creation of the Company. The transaction was accounted for as a
purchase of Mesa by Parker & Parsley in accordance with Accounting Principles
Board No. 16, "Business Combinations". In December 1997, the Company acquired
the Canadian and Argentine oil and gas business of Chauvco Resources, Ltd.
("Chauvco"), which was also accounted for as a purchase by the Company. These
transactions were accomplished through the issuance of common stock of the
Company to Mesa and Chauvco shareholders (31,782,263 shares and 24,916,934
shares, respectively). The aggregate purchase consideration for assets acquired
and liabilities assumed from Mesa and Chauvco was $991.0 million and $696.4
million, respectively. The following table represents the allocation of the
total purchase price of Mesa and Chauvco to the acquired assets and liabilities
based upon the fair values assigned to each of the significant assets acquired
and liabilities assumed. Any future adjustments to the allocation of the
purchase price are not anticipated to be material to the Company's financial
statements.
47
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Allocation
of Aggregate
Purchase
Consideration
----------- ----------
Mesa Chauvco
----------- ----------
(in thousands)
Net working capital $ 4,480 $ (19,989)
Property, plant and equipment 2,514,649 1,164,797
Other assets 52,693 32,025
Long-term debt (1,191,038) (234,709)
Other non-current liabilities,
including deferred taxes (389,814) (245,748)
---------- ---------
$ 990,970 $ 696,376
========== =========
The Company common stock consideration $ 982,566 $ 688,330
Transaction costs 8,404 8,046
---------- ---------
Aggregate purchase consideration $ 990,970 $ 696,376
========== =========
The liabilities assumed include amounts recorded for litigation and
certain other preacquisition contingencies of Mesa and Chauvco.
On December 19, 1997, the Company completed an acquisition of assets in
the East Texas Basin from American Cometra, Inc. ("ACI") and Rockland Pipeline
Co. ("Rockland"), both subsidiaries of Electrafina S.A. of Belgium ("America
Cometra Acquisition"). The total consideration paid was approximately $130
million, consisting of $85 million in cash and 1.6 million shares of the
Company's common stock. The Company acquired ACI's producing wells, acreage,
seismic data, royalties and mineral interests, and Rockland's gathering system
pipeline and gas processing plant in the East Texas Basin.
Pro forma results of operations. The following table reflects the pro
forma results of operations as though the merger with Mesa, the acquisition of
Chauvco, the 1996 sale of certain wholly-owned subsidiaries and the 1996 sale of
certain nonstrategic domestic assets occurred on January 1, 1996. The pro forma
results of operations of the America Cometra Acquisition are not presented as
they are not material to the consolidated financial statements of the Company.
Year ended
December 31,
---------------------
1997 1996
--------- ---------
(in thousands, except
per share data)
(Unaudited)
Revenues............................................. $ 909,564 $ 959,208
Income (loss) before extraordinary item.............. $(931,784) $ 48,717
Income (loss) per share before extraordinary item.... $ (9.42) $ .49
48
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE E. Long-term Debt
Long-term debt consists of the following:
December 31,
-----------------------
1997 1996
---------- ----------
(in thousands)
Lines of credit and term note.................... $1,608,980 $ 9,000
8-7/8% senior notes due 2005..................... 150,000 150,000
8-1/4% senior notes due 2007 (net of discount)... 149,345 149,277
Other............................................ 41,184 18,012
--------- ---------
1,949,509 326,289
Less current maturities.......................... 5,791 5,381
--------- ---------
$1,943,718 $ 320,908
========= =========
Maturities of long-term debt at December 31, 1997 are as follows (in
thousands):
1998............................................ $ 5,791
1999............................................ 34,098
2000............................................ 10,943
2001............................................ 12,053
2002............................................ 1,357,646
Thereafter...................................... 528,978
Lines of credit and term note. On August 7, 1997, the successor to Parker
& Parsley and Mesa Operating Company, Pioneer Natural Resources USA, Inc.
("Pioneer USA") (the "Borrower"), entered into two credit Facility Agreements
("Credit Facility Agreements") with a syndicate of banks (the "Banks") that
refinanced the credit facilities of Parker & Parsley and Mesa. On December 18,
1997, the Company amended and restated the Credit Facility Agreements to
substitute the Company as the Borrower in place of Pioneer USA. One Credit
Facility Agreement (the "Primary Facility") provides for a $1.075 billion credit
facility. The maturity date for the Primary Facility is August 7, 2002. The
second Credit Facility Agreement (the "364-day Facility") provides for a $300
million credit facility with a maturity date of August 5, 1998. The Borrower has
the option to renew the 364-day Facility for another period of 364 days by
notifying the lending banks in writing of such election not more than 60 days
and not less than 45 days prior to the maturity date.
Advances on both Credit Facility Agreements bear interest, at the
Borrower's option, based on (a) the prime rate of NationsBank of Texas, N.A.
("Prime Rate") (8.5% at December 31, 1997), (b) a Eurodollar rate (substantially
equal to the London Interbank Offered Rate ("LIBOR")), adjusted for the reserve
requirement as determined by the Board of Governors of the Federal Reserve
System with respect to transactions in Eurocurrency liabilities ("LIBOR Rate"),
or (c) a competitive bid rate as quoted by the lending banks electing to
participate pursuant to a request by the Borrower. Advances that are LIBOR Rate
have periodic maturities, at the Borrower's option, of one, two, three, six,
nine or twelve months. Advances that are competitive bid rate have periodic
maturities, at the Borrower's option, of not less than 15 days nor more than 360
days. The interest rates on the LIBOR Rate advances vary, with the interest rate
margin ranging from 18 basis points to 47 basis points. The interest rate margin
is determined by a grid based upon the Company's senior unsecured long-term
public debt rating. The Company's obligations are guaranteed by Pioneer USA and
certain other U.S. subsidiaries, and are secured by a pledge of a portion of the
capital stock of certain non-U.S. subsidiaries.
The Credit Facility Agreements contain various restrictive covenants and
compliance requirements, which include (a) limits on the incurrence of
additional indebtedness and certain types of liens and (b) restrictions as to
merger, sale or transfer of assets and transactions without the Banks' consent.
49
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
The Company also executed a $100 million note (the "Term Note"), dated as
of December 22, 1997, payable to NationsBank of Texas, N.A. to fund short-term
working capital needs. The Term Note has a maturity date of April 1, 1999, and
bears interest at the borrower's option, at the Prime Rate or the LIBOR Rate. At
the request of the Company, the Term Note was canceled on January 20, 1998.
Also, on December 18, 1997, the Company refinanced all of Chauvco's outstanding
debt by establishing a $290 million Canadian credit facility under which the
borrower is Pioneer Natural Resources Canada Inc. (formerly known as Chauvco),
and the Company and certain of its subsidiaries (not including Pioneer USA)
provide guarantees.
Senior notes. At December 31, 1997, the following two issuances of senior
indebtedness were outstanding.
8-7/8% senior notes due 2005. $150 million aggregate principal amount
8-7/8% senior notes dated April 12, 1995, due April 15, 2005. Interest on the
8-7/8% senior notes is payable semi-annually on April 15 and October 15 of each
year, commencing October 15, 1995.
8-1/4% senior notes due 2007. $150 million aggregate principal amount
8-1/4% senior notes dated August 22, 1995, due August 15, 2007. These 8-1/4%
senior notes were sold at a discount aggregating $816,000. Interest on the
8-1/4% senior notes is payable semi-annually on February 15 and August 15 of
each year, commencing February 15, 1996.
Both senior note issuances are governed by an Indenture between the
Company and The Chase Manhattan Bank (National Association) dated April 12,
1995. Both senior note issuances 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 addition, the Company is
a holding company that conducts all its operations through subsidiaries, and the
senior notes issuances are structurally subordinated to all obligations of its
subsidiaries. Pioneer USA has fully and unconditionally guaranteed both senior
note issuances.
Tender Offer for Senior Subordinated Notes. On December 18, 1997, the
Company completed a cash tender offer for two senior subordinated note issuances
(the "Subordinated Notes") assumed as part of the merger with Mesa. The Company
redeemed approximately 91% of the 11-5/8% senior subordinated discount notes due
2006 and approximately 98% of the 10-5/8% senior subordinated notes due 2006
(the "10-5/8% Notes") for a purchase price of $829.90 and $1,171.40,
respectively, per $1,000 tendered plus any interest accrued on the 10-5/8% Notes
(the "Tender Offer"). As a result, the Company paid $574.5 million for the
principal amount tendered on the Subordinated Notes, including related fees, and
$15.7 million of accrued interest on the 10-5/8% Notes. As a result of the
Tender Offer, the Company recognized an extraordinary loss on early
extinguishment of debt of $11.9 million (net of a related tax benefit of $6.4
million) during the fourth quarter of 1997. The Company financed the purchase
price of the Subordinated Notes tendered in the offer with borrowings under its
Credit Facility Agreements.
Extraordinary item. In addition to the extraordinary loss resulting from
the Tender Offer described above, the accompanying Consolidated Statement of
Operations for the year ended December 31, 1997 includes a $1.5 million (net of
a related tax benefit of $800 thousand) noncash charge for an extraordinary loss
on early extinguishment of debt resulting from the mergers. This extraordinary
loss relates to capitalized issuance fees associated with Parker & Parsley's
previously existing bank credit facility which was replaced by the new Credit
Facility Agreements for the Company.
In October 1995, the Company transferred cash and certain oil and gas
properties with an aggregate estimated value of $1.1 million in full
satisfaction of a non-recourse note secured by the properties, the balance of
which was approximately $7.7 million. As a result, in 1995, the Company
recognized an extraordinary gain on the early extinguishment of debt of $4.3
million (net of related tax expense of $2.3 million).
50
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Interest expense. The following amounts have been charged to interest
expense for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
------- ------- -------
(in thousands)
Cash payments for interest..................... $64,667 $44,405 $59,767
Cash payments for commitment and agency fees... 1,073 804 1,650
Accretion of discounts on loans................ 7,348 261 617
Amortization of capitalized loan fees.......... 1,177 1,286 2,022
Net change in accruals......................... 3,285 (601) 1,393
------ ------ ------
$77,550 $46,155 $65,449
====== ====== ======
The above amounts include $6 million in 1997, $12 million in 1996 and $12
million in 1995 associated with the Preferred Shares of the Company's
wholly-owned finance subsidiary (see Note I).
NOTE F. Related Party Transactions
Activities with affiliated partnerships. The Company, through its
wholly-owned subsidiaries, has in the past sponsored certain affiliated
partnerships, including thirty-five public and nine private drilling
partnerships and three public income partnerships, all of which were formed
primarily for the purpose of drilling and completing wells or acquiring
producing properties. In accordance with the terms of the partnership agreements
and the related tax partnership agreements of the affiliated partnerships, the
Company participated in the activities of the sponsored partnerships on a
promoted basis. In 1992, the Company discontinued sponsoring public and private
oil and gas development drilling and income partnerships.
During each of 1994, 1993 and 1992, the Company formed a Direct Investment
Partnership for the purpose of permitting selected key employees to invest
directly, on an unpromoted basis, in wells that the Company drills. The partners
in the Direct Investment Partnerships formed in 1994, 1993 and 1992 pay and
receive approximately .337%, 1.5375% and 1.865%, respectively, of the costs and
revenues attributable to the Company's interest in the wells in which such
Direct Investment Partnership participates. The Company discontinued the
formation of Direct Investment Partnerships in 1995.
The Company, through a wholly-owned subsidiary, serves as operator of
properties in which it and its affiliated partnerships have an interest.
Accordingly, the Company receives producing well overhead, drilling well
overhead and other fees related to the operation of the properties. The
affiliated partnerships also reimburse the Company for their allocated share of
general and administrative charges.
The activities with affiliated partnerships are summarized for the
following related party transactions for the years ended December 31, 1997, 1996
and 1995:
1997 1996 1995
------ ------ ------
(in thousands)
Receipt of lease operating and supervision charges
in accordance with standard industry operating
agreements........................................... $8,547 $8,484 $8,458
Reimbursement of general and administrative expenses... 1,476 1,246 1,153
Retirement Plans. Effective August 8, 1997, the Compensation Committee of
the Board of Directors approved a deferred compensation retirement plan for the
officers and certain key employees of the Company. Each officer and key employee
is allowed to contribute up to 25% of their base salary. The Company will then
provide a matching contribution of 100% of the officer's and key employee's
contribution limited to the first 10% of the officer's base salary and 8% of the
key employee's base salary. The Company's matching contribution vests
immediately. A trust fund has been established by the Company to accumulate the
contributions made under this retirement plan. The Company does not have a
defined benefit retirement plan.
51
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
During 1996 and prior to August 1997, the officers of Parker & Parsley
participated in a similar deferred compensation retirement plan as noted above.
As part of the merger with Mesa, the plan's change of control provision was
triggered and all funds contributed through August 1997 were immediately vested
and distributed.
Consulting Fee. Effective September 1, 1997, the Company entered into an
agreement with Rainwater, Inc., the general partner of DNR-Mesa Holdings, L.P.
("DNR"), modifying certain terms of a prior agreement between DNR and Mesa. The
prior agreement was assumed by the Company upon consummation of the merger
between Parker & Parsley and Mesa. Pursuant to the terms of this agreement, as
modified, the Company will pay Rainwater, Inc. $400,000 per year and reimburse
Rainwater, Inc. for certain expenses in consideration for certain consulting and
financial analysis services to the Company by Rainwater, Inc. and its
representatives.
NOTE G. Incentive Plans
Long-Term Incentive Plan
In August 1997, the Company's stockholders approved a new long-term
incentive plan (the "Long-Term Incentive Plan"), which provides for the granting
of incentive awards in the form of stock options, stock appreciation rights,
performance units and restricted stock to directors, officers and employees of
the Company. The Long-Term Incentive Plan provides for the issuance of a maximum
number of shares of common stock equal to 10% of the total number of shares of
common stock equivalents outstanding minus the total number of shares of common
stock subject to outstanding awards on the date of calculation under any other
stock-based plan for the directors, officers or employees of the Company.
The following table summarizes the cumulative stock and option awards
granted, forfeited, exercised, in the case of options, and the lapse of
restrictions, in the case of shares, under the Company's Long-Term Incentive
Plan during 1997:
For the year ended
December 31, 1997
-------------------------------------
Shares Options Total
--------- --------- ---------
Granted 476,914 1,716,625 2,193,539
Forfeited - - -
Options exercised - - -
Shares with lapse of restrictions - - -
--------- ---------- ----------
Outstanding, end of year 476,914 1,716,625 2,193,539
--------- ---------- ---------
The following table calculates the number of shares or options available
for grant under the Company's Long-Term Incentive Plan as of December 31, 1997:
December 31, 1997
-----------------
Shares outstanding 101,036,971
Options outstanding 1,716,625
-----------
102,753,596
===========
Maximum shares/options allowed under
Long-Term Incentive Plan 10,275,360
Less: Outstanding awards under Long-Term Incentive Plan (2,193,539)
Outstanding options under Mesa 1991 stock option plan (418,478)
Outstanding options under Mesa 1996 incentive plan (510,000)
Outstanding options under Parker & Parsley long-term
incentive plan (896,042)
-----------
Shares/options available for future grant 6,257,301
===========
52
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Restricted stock awards
Non-employee directors. Pursuant to the Long-Term Incentive Plan, on the
last business day of the month in which the annual meeting of the stockholders
of the Company is held, each non-employee director will automatically receive an
award of Common Stock equal to 50% of the then current annual retainer fee. This
award is made in lieu of an amount of cash equal to 50% of the annual retainer
fee. The number of shares included in each such award is determined by dividing
50% of the annual retainer fee by the closing sales price of the Company's
common stock on the business day immediately preceding the date of the award. In
August 1997, each non-employee director received 50% of the amount of the annual
retainer fee to be paid to such non-employee director as compensation for his
services during the 1997 annual term in restricted stock. The Company issued
5,939 shares pursuant to this arrangement.
When issued, the shares of common stock awarded pursuant to the Long-Term
Incentive Plan are subject to transfer restrictions that lapse on the first
anniversary of the date of the award. In addition, if a non-employee director's
services as a director of the Company are terminated for any reason before the
next annual meeting of the Company's stockholders, a portion of the shares are
forfeited, with the number of forfeited shares being based on the number of
regularly scheduled meetings of the Board of Directors remaining to be held
before the next annual meeting of the Company's stockholders.
Officers and key employees. The Company's policy is to pay any annual
bonuses awarded to selected officers and key employees partially in cash and
partially in the form of restricted stock awards under the Long-Term Incentive
Plan. The Company has established target bonus levels for each officer and key
employee. Based upon Company and individual performance during the year, each
officer or key employee has the potential to earn more or less than their target
bonus level. The bonus awards are determined in the quarter following the
Company's December 31 year-end. Any restricted stock awarded pursuant to this
program will be limited to one-half of each officer's or key employee's target
bonus level, and the remainder of the officer's or key employee's annual bonus
will be paid in cash. The number of shares of restricted stock that are awarded
pursuant to the annual bonus program is based on the closing sales price of the
Company's common stock on the day immediately preceding the date of the award.
Ownership of the restricted stock awarded vests one year after the date it is
issued but is subject to transfer restrictions that lapse on one-third of the
shares on each of the first, second and third anniversaries of the date of
grant. Each recipient of restricted stock also receives an amount of cash equal
to the estimated federal income taxes payable as a result of the receipt of such
award. On February 9, 1998, the Company awarded an aggregate of 81,378 shares of
restricted stock at a price of $22.375 pursuant to the 1997 annual bonus
program.
During 1997, the Company has made other Long-Term Incentive Plan awards of
470,975 shares to certain officers and key employees. The shares awarded are
subject to a vesting period and transfer restrictions.
Stock Options Awards
The Company has a program of awarding annual stock options to its officers
and employees as part of their annual compensation package. This program
provides for annual awards at an exercise price based upon the closing sales
price of the Company's common stock on the date of grant, a three year vesting
schedule and a five year exercise period from each vesting date. The Company
granted 1,719,625 options under the Long-Term Incentive Plan during 1997.
Other Stock Based Plans
Prior to the merger with Mesa, both Parker & Parsley and Mesa had
long-term incentive plans (Parker & Parsley Long-Term Incentive Plan, 1991 Stock
Option Plan of Mesa and the 1996 Incentive Plan of Mesa) in place that allowed
Parker & Parsley and Mesa to grant incentive awards similar to the provisions of
the Long-Term Incentive Plan. Upon consummation of the merger between Parker &
Parsley and Mesa, all awards under these plans were assumed by the Company with
the provision that no additional awards be granted under these plans.
53
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
The information presented in the remainder of this footnote represents the
awards granted under the Long-Term Incentive Plan since its approval in August
1997, the awards granted in 1997, 1996 and 1995 under the Parker & Parsley
Long-Term Incentive Plan, and the assumption in August 1997 of the outstanding
option awards granted under the 1991 Stock Option Plan of Mesa and the 1996
Incentive Plan of Mesa.
Restricted stock awards. The following table reflects the outstanding
restricted stock awards and activity related thereto for 1997, 1996 and 1995:
For the year ended For the year ended For the year ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- ---------
Restricted stock awards:
Restricted shares outstanding at
beginning of year............. 79,819 $ 23.35 225,244 $ 23.90 476,034 $ 24.46
Shares granted................ 506,786 $ 37.43 35,080 $ 26.54 33,834 $ 19.21
Shares forfeited.............. - $ - (1,980) $ 25.13 - $ -
Lapse of restrictions......... (109,691) $ 25.66 (178,525) $ 24.65 (284,624) $ 24.28
-------- -------- --------
Restricted shares outstanding at end
of year....................... 476,914 $ 37.88 79,819 $ 23.35 225,244 $ 23.90
======== ======== ========
Stock options awards. The Company applies APB 25 and related
Interpretations in accounting for its stock option awards. Accordingly, no
compensation expense has been recognized for its stock option awards. If
compensation expense for the stock option awards had been determined consistent
with SFAS 123, the Company's net income (loss) and net income (loss) per share
would have been adjusted to the pro forma amounts indicated below:
For the year ended
December 31,
---------------------------------
1997 1996 1995
---------- --------- ----------
(in thousands, except per share amounts)
Net income (loss): $(893,729) $ 139,297 $ (99,891)
Basic net income (loss) per share: $ (17.20) $ 3.90 $ (2.83)
Diluted net income (loss) per share: $ (17.20) $ 3.43 $ (2.83)
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995
---------- ---------- ----------
Risk-free interest rate 5.72% 6.18% 6.06%
Expected life 7 years 4 years 4 years
Expected volatility 36% 32% 35%
Expected dividend yield .30% .34% .52%
54
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
A summary of the Company's stock option plans as of December 31, 1997,
1996 and 1995, and changes during the years ended on those dates is presented
below:
For the year ended For the year ended For the year ended
December 31, 1997 December 31, 1996 December 31, 1995
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
Non-statutory stock options:
Outstanding at beginning of year 1,362,629 $ 24.04 1,230,411 $ 17.51 924,075 $ 15.39
Options granted............... 1,744,704 $ 34.00 637,300 $ 29.52 514,283 $ 19.23
Options assumed............... 928,478 $ 33.97 - - - -
Options forfeited............. (1,500) $ 21.33 (35,000) $ 23.81 (16,664) $ 26.18
Options exercised............. (493,166) $ 23.45 (470,082) $ 14.55 (191,283) $ 10.97
--------- --------- ---------
Outstanding at end of year...... 3,541,145 $ 31.63 1,362,629 $ 24.04 1,230,411 $ 17.51
========= ========= =========
Exercisable at end of year...... 1,824,520 $ 29.37 358,177 $ 18.79 616,591 $ 14.89
========= ========= =========
Weighted average fair value of options
granted during the year......... $ 16.10 $ 10.03 $ 6.71
======== ======== ========
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------
Number Weighted Average Weighted Weighted
Range of Outstanding at Remaining Average Number Exercisable Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price at December 31, 1997 Exercise Price
- --------------- ----------------- ---------------- -------------- -------------------- --------------
$ 6 - 15 115,291 3.0 years $ 13.22 115,291 $ 13.22
$19 - 28 1,019,989 4.9 years $ 24.41 911,989 $ 24.03
$29 - 38 1,483,294 4.5 years $ 30.27 461,619 $ 29.98
$39 - 52 903,642 4.3 years $ 43.29 316,692 $ 46.61
$80 - 82 18,929 2.3 years $ 81.81 18,929 $ 81.81
----------- ----------
3,541,145 1,824,520
=========== ==========
The Company recognized $3.3 million, $1.9 million and $7.7 million in
compensation expense related to its Incentive Plans during 1997, 1996 and 1995,
respectively.
NOTE H. Commitments and Contingencies
Severance agreements. On August 8, 1997, the Company entered into
severance agreements with its parent company and subsidiary company officers.
Salaries and bonuses for the Company's officers are set independent of this
severance agreement by the Compensation Committee for the parent company
officers and the Management Committee for subsidiary company officers. These
committees can grant increases or reductions to base salary at its discretion.
The current annual salaries for the parent company officers and the subsidiary
company officers covered under such severance agreement total approximately $3.1
million and $3.2 million, respectively.
Either the Company or the officer may terminate the officer's employment
under the severance agreement at any time. The Company must pay the officer an
amount equal to one year's base salary if employment is terminated because of
death, disability, or normal retirement. The Company must pay the officer an
amount equal to one year's base salary and continue health insurance for the
officer and his immediate family for one year if the Company terminates
employment without cause or if the officer terminates employment with good
reason, which occurs when reductions in the officer's base annual salary exceed
specified limits or if the officer is demoted to an officer position junior to
55
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
their current officer position or to a non-officer position. If within one year
after a change in control of the Company, the Company terminates the officer
without cause or if the officer terminates employment with good reason, the
Company must pay parent company officers an amount equal to 2.99 times the sum
of the officer's base salary plus target bonus for the year and subsidiary
company officers an amount equal to two times the officer's base salary and
continue health insurance for the officer and his immediate family for one year.
If the officer terminates employment with the Company without good reason
between six months and one year after a change in control, or at any time within
one year after a change in control if the officer is required to move, then the
Company must pay the officer one year's base salary and continue health
insurance for the officer and his immediate family for one year. Officers are
also entitled to additional payments for certain tax liabilities that may apply
to severance payments following a change in control.
Indemnifications. The Company has indemnified its directors and certain of
its officers, employees and agents with respect to claims and damages arising
from acts or omissions taken in such capacity, as well as with respect to
certain litigation.
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 the
litigation reserve as appropriate to reflect the then current status of its
litigation.
Masterson. In February 1992, the current lessors of an oil and gas lease
(the "Gas Lease") dated April 30, 1955, between R.B. Masterson et al., as
lessor, and Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in
Federal District Court in Amarillo, Texas, claiming that CIG had underpaid
royalties due under the Gas Lease. Under the agreements with CIG, the Company,
as successor to Mesa, has an entitlement to gas produced from the Gas Lease. In
August 1992, CIG filed a third-party complaint against the Company for any such
royalty underpayment which may be allocable to the Company. Plaintiffs alleged
that the underpayment was the result of CIG's use of an improper gas sales price
upon which to calculate royalties and that the proper price should have been
determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment
to the Gas Lease. The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995, the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiff's claims (which related to periods
prior to October 1, 1989), but which also reduced a number of the Company's
defenses. The Company and CIG filed stipulations with the court whereby the
Company would have been liable for between 50% and 60%, depending on the time
period covered, of an adverse judgment against CIG or post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiff's stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs filed a motion for new trial on June
22, 1995. The court, on July 18, 1997, denied plaintiffs' motion. The plaintiffs
have appealed to the Fifth Circuit.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and the
Company in state court in Amarillo, Texas, similarly claiming underpayment of
royalties under the "favored-nations" clause, but based upon the above-described
56
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The
plaintiffs also claim underpayment of royalties since June 7, 1995, under the
"favored-nations" clause based upon either the pricing-scheme to pricing-scheme
method or their previously alleged higher price method. The Company believes it
has several defenses to this action and intends to contest it vigorously. The
Company has not yet determined the amount of damages, if any, that would be
payable if such action was determined adversely to the Company.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the state suit pending the plaintiffs' resolution of
the first suit.
However, based on the jury verdict and final judgment, the Company does
not currently expect the ultimate resolution of either of these lawsuits to have
a material adverse effect on its financial position or 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 natural gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa
collected the Kansas ad valorem tax in addition to the otherwise maximum lawful
price. The FERC's ruling was appealed to the United States Court of Appeals for
the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC
failed to provide a reasoned basis for its findings and remanded the case to the
FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various natural 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 natural gas producers
subsequently filed a petition for writ of certiori with the United States
Supreme Court seeking to limit the scope of the potential refunds to tax bills
rendered on or after June 28, 1988 (the effective date originally selected by
the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company is seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non-recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
1997 to file claims on refunds sought from producers and refunds totaling
approximately $30 million were made against the Company. Although the Company is
unable at this time to predict the final outcome of this matter or the amount,
if any, that will ultimately be refunded, the Company has recorded a $30 million
provision for such litigation in the accompanying Consolidated Balance Sheet at
December 31, 1997.
57
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Lease agreements. The Company leases equipment and office facilities under
noncancellable operating leases on which rental expense for the years ended
December 31, 1997, 1996 and 1995 was approximately $3.7 million, $2.9 million
and $3.6 million, respectively. Future minimum lease commitments under
noncancellable operating leases at December 31, 1997 are as follows (in
thousands):
1998.................................. $ 7,648
1999.................................. 6,625
2000.................................. 5,321
2001.................................. 2,149
2002.................................. 1,493
Thereafter............................ 1,860
NOTE I. Preferred Stock of Subsidiary
On July 28, 1997, the Company issued 6.7 million shares of common stock in
exchange for the 3,776,400 Preferred Shares outstanding. These Preferred Shares
were originally issued by Parker & Parsley Capital LLC, a wholly-owned finance
subsidiary of the Company, in 1994. As a result of the exchange, the $188.8
million reflected in the caption "Preferred stock of subsidiary" in the
accompanying Consolidated Balance Sheet as of December 31, 1996 was
reclassified, net of unamortized issuance costs of $5.8 million, into
stockholders' equity. During 1997, 1996 and 1995, the Company recorded $6
million, $12 million and $12 million, respectively, of interest expense
associated with the Preferred Shares.
NOTE J. Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and generally does not use them for trading purposes. They are used
to manage well-defined interest rate and commodity price risks. The Company is
exposed to credit losses in the event of nonperformance by the counterparties to
its interest rate swap agreements and its commodity hedges. The Company
anticipates, however, that such counterparties will be able to fully satisfy
their obligations under the contracts. The Company does not obtain collateral or
other security to support financial instruments subject to credit risk but
monitors the credit standing of the counterparties.
As part of the acquisitions of Mesa and Chauvco, the Company became the
successor to certain derivative financial instruments entered into by Mesa or
Chauvco which do not qualify for hedge accounting treatment. Such instruments
will be marked-to-market at the end of each reporting period during their
respective lives and the effects on the Company's results of operations in
future periods could be significant. During 1998, the Company intends to review
each of these instruments to determine if it is feasible to unwind such
instruments in light of market conditions. Those instruments not qualifying for
hedge accounting are designated under the heading "Mark-to-Market Derivatives"
below.
Hedge Derivatives
Interest rate swap agreements. During the second quarter of 1996, the
Company entered into a series of interest rate swap agreements for an aggregate
amount of $150 million with four counterparties. These agreements, which have a
term of three years, effectively convert a portion of the Company's fixed-rate
borrowings into floating-rate obligations. The weighted average fixed rate being
received by the Company over the term of these agreements is 6.62% while the
weighted average variable rate paid by the Company for the years ended December
31, 1997 and 1996 was 5.78% and 5.56%, respectively. The variable rate will be
redetermined approximately every six months based upon the London interbank
offered rate at that point in time. The Company is also party to an interest
rate swap agreement for an aggregate amount of $250 million with one
counterparty. This two-year agreement expires in August 1998 and effectively
converts a portion of the Company's floating-rate borrowings into fixed-rate
obligations. The effect of this agreement is to provide the Company with an
interest rate of 6.23% on $250 million in nominal principal amount for the term
of the agreement. Under market conditions at December 31, 1997, the effective
annual interest rate associated with this agreement was 6.51%. The accompanying
Consolidated Statements of Operations for the years ended December 31, 1997 and
58
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
and 1996 include a reduction in interest expense of $847 thousand and $787
thousand, respectively, to account for the settlement of these rate swap
agreements.
During 1997, the Company entered into two agreements with a counterparty
that obligated the Company to sell U.S. Treasury securities at a designated
point in the future. The face amount of the U.S. Treasury securities to be sold
is $300 million at interest rates ranging from 6.05% to 6.33%. These agreements
effectively convert a portion of the Company's floating-rate borrowings into
fixed-rate obligations. In January 1998, the Company terminated these agreements
at a cost of $16.8 million. This amount will be amortized over the life of the
Company's Primary Facility.
Commodity hedges. The Company utilizes various swap and option contracts
to (i) reduce the effect of the volatility of price changes on the commodities
the Company produces and sells, (ii) support the Company's annual capital
budgeting and expenditure plans and (iii) lock in prices to protect the
economics related to certain capital projects.
Crude oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The following table
sets forth the Company's outstanding oil hedge contracts as of December 31,
1997.
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ ------------
Daily oil production:
1998 - Swap Contracts
Volume (Bbl) 12,900 11,581 8,900 8,900 10,555
Price per Bbl $ 19.23 $ 19.36 $ 19.75 $ 19.74 $ 19.48
1998 - Collar Options
Volume (Bbl) 2,000 2,000 2,000 2,000 2,000
Price per Bbl $18.40-21.50 $18.40-21.50 $18.40-21.50 $18.40-21.50 $18.40-21.50
1998 - Put Options
Volume (Bbl) 2,000 2,000 2,000 2,000 2,000
Price per Bbl $ 18.40 $ 18.40 $ 18.40 $ 18.40 $ 18.40
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. The following table sets forth the Company's oil prices, both realized
and reported, and net effects of settlements of oil price hedges to revenue:
Year ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
Average price reported per Bbl $ 18.51 $ 19.96 $ 16.96
Average price realized per Bbl $ 19.09 $ 21.33 $ 17.02
Reduction to revenue (in millions) $ 7.9 $ 15.4 $ .8
Natural Gas Liquids. The Company employs a policy of hedging natural gas
liquids based on actual product prices in order to mitigate some of the
volatility associated with NYMEX pricing. Natural gas liquids are sold under
long-term contracts which provide price flexibility and allow the Company to
maximize prices between trading hubs. At December 31, 1997, the Company had no
outstanding NGL hedge contracts.
During year ended December 31, 1997, the Company reported average natural
gas liquids prices of $12.59 per Bbl while realizing an average price for
physical sales (excluding hedging results) of $12.61 per Bbl and recorded a net
decrease to natural gas liquids revenue of $77,600.
59
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The following table
sets forth the Company's outstanding gas hedge contracts as of December 31,
1997. Prices included herein represent the Company's weighted average index
price per MMBtu and, as an additional point of reference, the weighted average
price for the portion of the Company's gas which is hedged based on NYMEX.
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Average
---------- -------- -------- ------- ---------
Daily gas production:
1998 - Swap Contracts
Volume (Mcf) 170,346 87,643 75,000 48,478 94,977
Index price per MMBtu $ 2.51 $ 2.20 $ 2.17 $ 2.16 $ 2.33
NYMEX price per MMBtu $ 2.61 $ 2.28 $ 2.27 $ 2.32 $ 2.44
1998 - Collar Options
Volume (Mcf) 40,000 - - - 9,863
Index price per MMBtu $2.50-3.44 $ - $ - $ - $2.50-3.44
1998 - Put Options
Volume (Mcf) 3,278 102,555 122,500 72,772 75,596
Index price per MMBtu $ 2.50 $ 1.88 $ 1.87 $ 1.87 $ 1.88
1999 - Swap Contracts
Volume (Mcf) 15,000 37,445 32,500 10,951 23,986
Index price per MMBtu $ 1.86 $ 2.04 $ 2.07 $ 2.07 $ 2.03
NYMEX price per MMBtu $ 2.03 $ 2.03 $ 2.15 $ 2.32 $ 2.10
In addition to the open positions above for the first quarter of 1998, the
Company has sold short put options for 43,278 MMBtu's per day. Consequently,
there is no effective minimum price to be realized from the collar and put
options if the NYMEX price falls below $2.48.
The Company reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. The following table sets forth the
Company's gas prices, both realized and reported, and net effects of settlements
of gas price hedges to revenue:
Year ended December 31,
--------------------------
1997 1996 1995
------ ------ ------
Average price reported per Mcf $ 2.20 $ 2.27 $ 1.84
Average price realized per Mcf $ 2.41 $ 2.39 $ 1.70
Addition/(reduction) to revenue (in millions) $(21.9) $ (9.0) $ 12.1
Mark-to-Market Derivatives
Interest rate swap/currency swap. At December 31, 1997, the Company was
party to a swap agreement with a counterparty in which the Company paid a
fixed-rate of interest in Canadian dollars and received a fixed-rate of interest
in U.S. dollars. This agreement was entered into in 1994 and expires in 2001.
During its term the notional amount of the swap is U.S. $60 million through
August 1998 at which time it reduces by U.S. $15 million per year until
termination. The C$ notional amount also reduces accordingly during this period
while maintaining the U.S.$/C$ exchange rate specified in the agreement. The
overall effect of this agreement is that the Company pays a fixed rate of 6.50%
on the C$ notional amount utilizing a fixed currency conversion rate of $U.S./C$
of 1.343.
Interest rate cap. At December 31, 1997, the Company was party to an
interest rate cap agreement with a counterparty which caps the Canadian dollar
banker's acceptance rate at 8.00% on a notional amount of C$80 million. The
agreement was entered into in 1997 and expires in September 1999. Under the
agreement, the Company pays the counterparty a fixed amount in C$ on a quarterly
60
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
basis. The counterparty has no payment obligation to the Company until such time
as the Canadian banker's acceptance reference rate exceeds 8.00%. The effect of
this agreement, in periods in which the reference rate is below 8.00%, is to
increase the interest rate on C$80 million of floating-rate debt by 28 basis
points (0.28%).
Foreign currency agreements. The Company has a series of forward foreign
exchange swap agreements to exchange one currency for a second currency at
future dates for a fixed amount of the first currency. As of December 31, 1997,
the U.S. dollar equivalent of foreign currency exchange swap agreements
approximated $216 million. All such contracts were Canadian dollars to U.S.
dollar swaps. The average forward rate achieved on these swaps at December 31,
1997 was $1.365 to one Canadian dollar. These contracts mature at various dates
in the fourth quarter of 2000.
Fair market value adjustment. During 1996, Mesa entered into BTU swap
agreements covering 13,036 MMBTU per day from January 1, 1997 through December
31, 2004. Under the terms of these agreements, the Company will receive a
premium of $.52 per MMBTU over market natural gas prices from January 1, 1997
through December 31, 1998. Following this two-year period, the Company will
receive 10% of the NYMEX oil price for the volumes covered for a six-year period
beginning January 1, 1999 and ending December 31, 2004. As these derivative
contracts do not qualify as hedges, the Company recorded a $5.2 million noncash
pre-tax mark-to-market adjustment to the carrying value of the BTU swap
agreements in 1997. These contracts will continue to be marked-to-market at the
end of each reporting period during their respective lives and the effects on
the Company's results of operations in future periods could be significant.
NOTE K. Sales to Major Customers
The Company's share of oil and gas production is sold to various
purchasers. The Company is of the opinion that the loss of any one purchaser
would not have an adverse effect on the ability of the Company to sell its oil
and gas production.
The following customers individually accounted for more than 10% of the
consolidated oil and gas revenues of the Company:
Percentage of Consolidated
Customer Oil and Gas Revenues
------------------------
1997 1996 1995
---- ---- ----
Genesis Crude Oil, L.P...................... 23% 28% 19%
Mobil Oil Corporation....................... 16% 22% 17%
Producers Energy Marketing, LLC (a)......... 11% 6% -
Western Gas Resources....................... 10% 9% 4%
- -------------
(a) Producers Energy Marketing, LLC ("ProEnergy") is a natural gas marketing
company in which the Company owned a noncontrolling member interest of
approximately 10% during 1997 and 1996. Effective January 1, 1998, the
Company has withdrawn as a member of ProEnergy.
At December 31, 1997, the amounts receivable from Genesis, Mobil,
ProEnergy and Western were $7.9 million, $5.9 million, $9.2 million and $7.8
million, respectively, which are included in the caption "Accounts receivable -
oil and gas sales" in the accompanying Consolidated Balance Sheet.
NOTE L. Disposition of Australasian Assets
On March 28, 1996, the Company completed the sale of certain wholly-owned
Australian subsidiaries to Santos Ltd., and on June 20, 1996, the Company
completed the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea,
Inc., to Phillips Petroleum International Investment Company. During the year
61
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
ended December 31, 1996, the Company received aggregate consideration of $237.5
million for these combined sales which consisted of $186.6 million of proceeds
for the equity of such entities, $21.8 million for reimbursement of certain
intercompany cash advances, and the assumption of such subsidiaries' net
liabilities, exclusive of oil and gas properties, of $29.1 million. The
accompanying Consolidated Statement of Operations for the year ended December
31, 1996 includes a pre-tax gain of $83.3 million from the disposition of these
subsidiaries (net of transaction expenses of $8.7 million) and an income tax
provision of $16 million. The income tax provision for the year ended December
31, 1996, includes $6.4 million related to the write-off of certain net
operating loss carryforwards which, with the sale of the income producing assets
in the Australian tax jurisdiction, will not be utilized in the future.
NOTE M. Impairment of Long-Lived Assets
In accordance with SFAS 121, the Company reviews its oil and gas
properties for impairment whenever events and circumstances indicate a decline
in the recoverability of the carrying value of the Company's oil and gas
properties. Based upon a decline in the Company's outlook for future commodity
prices during December 1997 and January 1998, the Company estimated the expected
future cash flows of its oil and gas properties and compared such future cash
flows to the carrying amount of the oil and gas properties to determine if the
carrying amount is recoverable. For those oil and gas properties for which the
carrying amount exceeded the estimated future cash flows, an impairment was
determined to exist; therefore, the Company adjusted the carrying amount of
those oil and gas properties to their fair value as determined by discounting
their expected future cash flows at a discount rate commensurate with the risks
involved in the industry. As a result, the Company recognized noncash pre-tax
charges of $1.4 billion ($863 million after tax) related to its oil and gas
properties during 1997. In 1995, the Company recognized a noncash pre-tax charge
of $129.7 million ($84.3 million after tax) after performing a similar review of
its oil and gas properties. The Company also recognized a noncash pre-tax charge
of $748,000 ($486,000 after tax) related to a natural gas processing facility in
1995.
NOTE N. Income Taxes
Income tax provision (benefit) and amounts separately allocated were as
follows:
Year ended December 31,
--------------------------------
1997 1996 1995
--------- -------- ---------
(in thousands)
Income (loss) before extraordinary item.... $(500,300) $ 60,100 $(45,900)
Extraordinary gain (loss).................. (7,200) - 2,300
Benefit arising from exercise of stock
options.................................. (2,900) (2,200) (600)
Change in cumulative translation
adjustment............................... - - (550)
-------- ------- -------
$(510,400) $ 57,900 $(44,750)
======== ======= =======
62
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Income tax provision (benefit) attributable to income (loss) before
extraordinary item consists of the following:
Year ended December 31,
------------------------------------
1997 1996 1995
---------- --------- ---------
(in thousands)
Current:
U.S. federal.................. $ 900 $ 300 $ (1,000)
State and local............... 100 - -
--------- -------- --------
1,000 300 (1,000)
--------- -------- --------
Deferred:
U.S. federal.................. (470,000) 51,700 (35,500)
State and local............... (28,500) - -
Foreign....................... (2,800) 8,100 (9,400)
--------- -------- --------
(501,300) 59,800 (44,900)
--------- -------- --------
Total........................... $ (500,300) $ 60,100 $ (45,900)
========= ======== ========
Income (loss) before income taxes and extraordinary item consists of the
following:
Year ended December 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
(in thousands)
Income (loss) before income taxes
and extraordinary item:
U.S. federal..................... $(1,369,582) $ 121,680 $(118,871)
Foreign.......................... (7,981) 78,668 (31,136)
---------- -------- --------
$(1,377,563) $ 200,348 $(150,007)
========== ======== ========
Reconciliations of the U.S. federal statutory rate to the Company's
effective rate for income (loss) before extraordinary item are as follows:
1997 1996 1995
------- ------- ------
U.S. federal statutory tax rate................... (35.0%) 35.0% (35.0%)
Disposition of foreign subsidiaries............... - (6.9%) -
Amortization of foreign permanent differences..... - - 3.1%
State income tax, net of federal income tax
benefit......................................... (1.3%) - -
Rate differential on foreign operations........... - .4% (.1%)
Other............................................. - 1.5% 1.4%
------- ------- -------
Consolidated effective tax rate................... (36.3%) 30.0% (30.6%)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows:
December 31,
---------------------
1997 1996
--------- --------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards................... $ 184,438 $ 23,704
Alternative minimum tax credit carryforwards....... 4,903 4,005
Other.............................................. 57,248 7,716
-------- -------
Total gross deferred tax assets.................. 246,589 35,425
-------- -------
Deferred tax liabilities:
Oil and gas properties, principally due to
differences in basis and depletion and the
deduction of intangible drilling costs for
tax purposes..................................... 206,721 88,790
Other.............................................. 35,168 35
-------- -------
Total gross deferred tax liabilities............. 241,889 88,825
-------- -------
Net deferred tax asset (liability)............... $ 4,700 $(53,400)
======== =======
63
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
expectations for the future and the availability of certain tax planning
strategies that would generate taxable income to realize the net tax benefits,
if implemented, management has determined that taxable income of the Company
will more likely than not be sufficient to fully utilize available carryforwards
prior to their ultimate expiration.
At December 31, 1997, the Company had net operating loss carryforwards
("NOLs") for U.S. federal income tax purposes of $527 million, which are
available to offset future regular taxable income, if any. Additionally, the
Company has alternative minimum tax net operating loss carryforwards ("AMT
NOLs") of $460 million, which are available to reduce future alternative minimum
taxable income, if any. These carryforwards expire as follows:
Expiration Date NOLs AMT NOLs
--------------- --------- ---------
(in thousands)
December 31, 2002................ $ 2,554 $ 3,463
December 31, 2003................ 838 -
December 31, 2005................ 11,049 10,762
December 31, 2006................ 26,420 8,451
December 31, 2007................ 105,085 102,069
December 31, 2008................ 112,508 106,558
December 31, 2009................ 129,357 101,978
December 31, 2010................ 116,025 103,699
December 31, 2012................ 23,129 23,013
--------- ---------
$ 526,965 $ 459,993
========= =========
As discussed in Note B, certain subsidiaries that are consolidated for
financial reporting purposes are not eligible to be included in the Company's
consolidated U.S. federal income tax return, and separate provisions for income
taxes have been determined for these entities or groups of entities. As a
result, the NOLs and AMT NOLs from certain of these subsidiaries are subject to
various utilization limitations. In total, approximately $80.1 million of the
NOLs and $60.4 million of the AMT NOLs are limited in use to specific entities
or groups of entities. Section 382 of the Internal Revenue Code provides another
limitation to $303.3 million of the Company's total NOLs and AMT NOLs. The
Company believes the utilization of $260 million of its NOLs and AMT NOLs
subject to the Section 382 limitation are limited in each taxable year to
approximately $20 million and the remaining $43.3 million of its NOLs and AMT
NOLs subject to the Section 382 limitation are limited in each taxable year to
approximately $10 million.
The tax returns and the amount of taxable income or loss are subject to
examination by U.S. federal, state and foreign taxing authorities. Current and
estimated tax payments of $2.7 million, $970,000 and $93,000 were made in 1997,
1996 and 1995, respectively.
NOTE O. Operations by Geographic Area
The Company operates in one industry segment. As a result of the
acquisition of Chauvco, the Company had identifiable assets of $2.7 billion in
the United States, $725 million in Canada and $495 million in Argentina at
December 31, 1997. During 1997 and 1996, the Company did not have significant
operations in geographic areas other than the United States. Information about
the Company's operations for the year ended December 31, 1995 by different
geographic areas is shown below.
64
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Year ended December 31,
-------------------------------------
1995
-------------------------------------
Australia
United and Other
States Foreign Total
----------- ---------- ---------
(in thousands)
Operating revenue..................... $ 439,957 $ 45,805 $ 485,762
Loss before income taxes and
extraordinary item................. $ (118,871) $ (31,136) $ (150,007)
Identifiable assets................... $ 1,120,738 $ 198,491 $1,319,229
NOTE P. Earnings per Share
In accordance with the requirements of SFAS 128, the following table
provides a reconciliation between basic and diluted earnings per share for the
year ended December 31, 1996. For 1997 and 1995 the computation of diluted net
loss per share was antidilutive; therefore, the amounts reported for basic and
diluted net loss per share were the same.
Per Share
Income Shares Amount
---------- ------- ---------
(in thousands)
Basic EPS:
Income available to common stockholders $ 140,248 35,475 $ 3.95
========
Effect of Dilutive Securities:
Options/restricted stock - 394
Preferred shares 7,683 6,714
-------- -------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 147,931 42,583 $ 3.47
========= ======= ========
NOTE Q. Pioneer USA
Pioneer USA is a wholly-owned subsidiary of the Company that has fully and
unconditionally guaranteed certain debt securities of the Company (see Note E
above). The Company has not prepared financial statements and related
disclosures for Pioneer USA under separate cover because management of the
Company has determined that such information is not material to investors. In
accordance with practices accepted by the U.S. Securities and Exchange
Commission ("SEC"), the Company has prepared Consolidating Financial Statements
in order to quantify the assets of Pioneer USA as a subsidiary guarantor. The
following Consolidating Balance Sheet and Consolidating Statement of Operations
present financial information for Pioneer Natural Resources Company as the
Parent on a stand-alone basis (carrying any investments in subsidiaries under
the equity method), financial information for Pioneer USA on a stand-alone basis
(carrying any investment in non-guarantor subsidiaries under the equity method),
financial information for the non-guarantor subsidiaries of the Company on a
consolidated basis, the consolidation and elimination entries necessary to
arrive at the information for the Company on a consolidated basis, and the
financial information for the Company on a consolidated basis. Pioneer USA is
not restricted from making distributions to the Company.
Pioneer USA's guarantees of the Company's debt securities were executed as
a result of the merger with Mesa in August 1997. Consequently, a Consolidating
Balance Sheet at December 31, 1996 and Consolidating Statements of Operations
for the years ended December 31, 1996 and 1995 have not been presented.
65
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
CONSOLIDATING BALANCE SHEET
At December 31, 1997
ASSETS
Pioneer
Natural
Resources Non-
Company Pioneer Guarantor The
(Parent) USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ ----------
Current assets:
Cash and cash equivalents............. $ 41 $ 49,033 $ 22,639 $ $ 71,713
Restricted cash....................... - 1,695 - 1,695
Accounts receivable:
Trade, net.......................... 5 56,424 19,003 75,432
Oil and gas sales................... - 82,145 34,355 116,500
Intercompany notes receivable......... 2,088,082 (1,673,443) (414,639) -
Inventories........................... - 11,677 1,899 13,576
Deferred income taxes................. 16,700 - 200 16,900
Other current assets.................. - 9,293 3,079 12,372
--------- ---------- ---------- ---------
Total current assets.............. 2,104,828 (1,463,176) (333,464) 308,188
--------- ---------- ---------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties................. - 2,453,750 1,122,221 3,575,971
Unproved properties............... - 98,664 446,410 545,074
Accumulated depletion, depreciation
and amortization.................... - (504,628) (100,575) (605,203)
--------- ---------- ---------- ---------
- 2,047,786 1,468,056 3,515,842
--------- ---------- ---------- ---------
Other property and equipment, net....... - 26,096 17,921 44,017
Other assets, net....................... 4,705 68,715 28,098 (22,975) 78,543
Investment in subsidiaries.............. 645,113 284,046 - (929,159) -
--------- ---------- ---------- ---------
$2,754,646 $ 963,467 $ 1,180,611 $3,946,590
========= ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt. $ - $ 538 $ 28,228 $ (22,975) $ 5,791
Undistributed unit purchases......... - 1,695 - 1,695
Accounts payable:
Trade ............................. 663 113,432 62,602 176,697
Affiliates......................... 90 9,904 - 9,994
Other current liabilities............ 5,771 59,953 1,651 67,375
--------- ---------- ---------- ---------
Total current liabilities........ 6,524 185,522 92,481 261,552
--------- ---------- ---------- ---------
Long-term debt, less current maturities 1,700,500 565 242,653 1,943,718
Other noncurrent liabilities........... - 140,668 39,607 180,275
Deferred income taxes.................. (216,253) - 228,453 12,200
Stockholders' equity:
GP Capital........................... - - 4 (4) -
LP Capital........................... - - 397 (397) -
Preferred stock...................... - - - -
Common stock......................... 901 1 110 (2) 1,010
Additional paid-in capital........... 2,058,935 2,049,072 739,518 (2,487,533) 2,359,992
Treasury stock, at cost.............. (21) - - (21)
Unearned compensation................ - (16,196) - (16,196)
Retained deficit..................... (795,940) (1,396,165) (162,612) 1,558,777 (795,940)
--------- ---------- ---------- ---------
Total stockholders' equity....... 1,263,875 636,712 577,417 1,548,845
Commitments and contingencies --------- ---------- ---------- ---------
$2,754,646 $ 963,467 $ 1,180,611 $3,946,590
========= ========== ========== =========
66
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
Pioneer
Natural
Resources Non- Consolidated
Company Pioneer Guarantor Income The
(Parent) USA Subsidiaries Tax Benefit Eliminations Company
---------- ----------- ------------ ----------- ------------ -----------
Revenues:
Oil and gas.................. $ - $ 453,771 $ 83,011 $ $ $ 536,782
Interest and other........... - 5,357 873 (1,952) 4,278
Gain on disposition of assets,
net........................ - 6,062 (402) (691) 4,969
---------- ---------- --------- ----------
- 465,190 83,482 546,029
---------- ---------- --------- ----------
Costs and expenses:
Oil and gas production....... - 128,644 15,526 144,170
Depletion, depreciation and
amortization............... - 166,495 45,940 212,435
Impairment of oil and gas
properties and natural gas
processing facilities...... - 1,220,920 135,470 1,356,390
Exploration and abandonments. - 67,679 9,481 77,160
General and administrative... 613 44,766 3,384 48,763
Interest..................... 5,910 67,969 5,623 (1,952) 77,550
Equity loss from subsidiary.. 1,407,844 124,874 - (1,532,718) -
Other........................ - 7,065 59 7,124
---------- ---------- --------- ----------
1,414,367 1,828,412 215,483 1,923,592
---------- ---------- --------- ----------
Loss before income taxes and
extraordinary item........... (1,414,367) (1,363,222) (132,001) (1,377,563)
Income tax benefit............. - - - 500,300 500,300
---------- ---------- --------- ----------
Loss before extraordinary item. (1,414,367) (1,363,222) (132,001) (877,263)
Extraordinary item - loss on
early extinguishment of debt,
net of tax................... - (13,408) - (13,408)
---------- ---------- --------- ----------
Net loss................... $(1,414,367) $(1,376,630) $ (132,001) $ (890,671)
========== ========== ========= ==========
67
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE R. Subsequent Events
Senior note issuance. During January 1998, the Company completed the
issuance of the following two series of senior notes for total net proceeds of
$593 million. The proceeds were used primarily to repay the Company's bank
indebtedness.
6.5% senior notes due 2008. $350 million aggregate principal amount 6.5%
senior notes dated January 13, 1998, due January 15, 2008. Interest on the 6.5%
senior notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1998.
7.2% senior notes due 2028. $250 million aggregate principal amount 7.2%
senior notes dated January 13, 1998, due July 15, 2028. Interest on the 7.2%
senior notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1998.
Both senior note issuances are governed by an Indenture between the
Company and The Bank of New York dated January 13, 1998. Both senior note
issuances 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 addition, the Company is a holding company that
conducts all its operations through subsidiaries, and the senior notes are
structurally subordinated to all obligations of its subsidiaries. Pioneer USA
has fully and unconditionally guaranteed both senior note issuances.
Reorganization. The Company plans to sell certain nonstrategic fields for
estimated proceeds of $375 to $550 million during the latter part of 1998. These
domestic fields generate only 15% of the Company's total cash flow. The proceeds
will be used to reduce the Company's outstanding indebtedness and to fund the
Company's capital expenditures program. Coincidentally with the property
divestiture program, the Company has announced its intentions to reorganize its
operations by combining the six domestic operating regions created by the merger
between Parker & Parsley and Mesa into three geographic regions: the Permian
Basin region, the MidContinent region and the onshore and offshore Gulf Coast
region. The Company anticipates that it will incur nonrecurring expenditures of
approximately $20 million during 1998 as a result of this reorganization.
68
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Capitalized Costs
December 31,
------------------------
1997 1996
---------- ----------
(in thousands)
Oil and Gas Properties:
Proved $3,575,971 $1,419,051
Unproved 545,074 7,331
--------- ---------
4,121,045 1,426,382
Less accumulated depletion (605,203) (424,594)
--------- ---------
Net capitalized costs for oil and gas properties $3,515,842 $1,001,788
========= =========
Costs Incurred for Oil and Gas
Producing Activities
Property
Acquisition Costs Total
----------------------- Exploration Development Costs
Proved Unproved Costs Costs Incurred
---------- ---------- ----------- ----------- ----------
(in thousands)
Year ended December 31, 1997:
United States $2,623,993 $ 91,373 $ 88,710 $ 243,119 $3,047,195
Argentina 430,607 252,343 1,822 3,927 688,699
Canada 287,787 194,067 - - 481,854
Other foreign (a) - 332 5,442 - 5,774
--------- --------- -------- -------- ---------
Total costs incurred $3,342,387 $ 538,115 $ 95,974 $ 247,046 $4,223,522
========= ========= ======== ======== =========
Year ended December 31, 1996:
United States $ 15,699 $ 5,255 $ 31,568 $ 168,553 $ 221,075
Foreign (b) 18 - 7,240 4,659 11,917
--------- --------- -------- -------- ---------
Total costs incurred $ 15,717 $ 5,255 $ 38,808 $ 173,212 $ 232,992
========= ========= ======== ======== =========
Year ended December 31, 1995:
United States $ 46,796 $ - $ 8,062 $ 130,461 $ 185,319
Australia and Other Foreign 1,698 - 21,129 10,877 33,704
--------- --------- -------- -------- ---------
Total costs incurred $ 48,494 $ - $ 29,191 $ 141,338 $ 219,023
========= ========= ======== ======== =========
- ---------------
(a) Primarily relates to an unsuccessful well in Guatemala.
(b) Includes $7.4 million of expenditures related to the Company's Australian
properties prior to their sale in 1996. The remainder relates to the
Company's interests in Argentine properties.
69
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Results of Operations
For the year ended December 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
(in thousands)
UNITED STATES
Oil and gas revenues $ 533,865 $ 385,198 $ 329,915
Production costs (143,332) (106,898) (118,487)
Exploration and abandonments (31,909) (9,222) (6,795)
Geological and geophysical (37,987) (7,042) (2,302)
Depletion (203,160) (98,655) (125,165)
Impairment of oil and gas properties (1,356,390) - (129,745)
----------- --------- ---------
(1,238,913) 163,381 (52,579)
Income tax benefit (provision) (a) 458,397 (57,183) 18,403
---------- --------- ---------
Results of operations for oil and gas
producing activities $ (780,516) $ 106,198 $ (34,176)
========== ========= =========
AUSTRALIA AND OTHER FOREIGN (b)
Oil and gas revenues $ - $ 10,591 $ 45,805
Production costs - (3,300) (12,418)
Exploration and abandonments (5,442) (15) (6,779)
Geological and geophysical - (1,420) (6,874)
Depletion - (3,917) (20,303)
---------- --------- ---------
(5,442) 1,939 (569)
Income tax benefit (provision) (a) 1,905 (698) 205
---------- --------- ---------
Results of operations for oil and gas
producing activities $ (3,537) $ 1,241 $ (364)
========== ========= =========
ARGENTINA
Oil and gas revenues $ 2,917 $ 1,142 $ -
Production costs (838) (136) -
Exploration and abandonments (252) (3,416) (2,857)
Geological and geophysical (1,570) (592) (1,945)
Depletion (1,290) (231) -
---------- --------- -
(1,033) (3,233) (4,802)
Income tax benefit (a) 341 1,067 1,585
---------- --------- ---------
Results of operations for oil and gas
producing activities $ (692) $ (2,166) $ (3,217)
========== ========= =========
TOTAL
Oil and gas revenues $ 536,782 $ 396,931 $ 375,720
Production costs (144,170) (110,334) (130,905)
Exploration and abandonments (37,603) (12,653) (16,431)
Geological and geophysical (39,557) (9,054) (11,121)
Depletion (204,450) (102,803) (145,468)
Impairment of oil and gas properties (1,356,390) - (129,745)
----------- --- ---------
(1,245,388) 162,087 (57,950)
Income tax benefit (provision) (a) 460,643 (56,814) 20,193
---------- ------- ---------
Results of operations for oil and gas
producing activities $ (784,745) $ 105,273 $ (37,757)
========== ======= =========
- ---------------
(a) The income tax benefit (provision) is calculated using the current statutory
tax rate for each jurisdiction.
(b) 1997 amounts primarily relate to an unsuccessful well in Guatemala and the
1996 and 1995 amounts relate to the Company's Australian properties prior to
their divestiture in March 1996.
70
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Reserve Quantity Information
The estimates of the Company's proved oil and gas reserves, which are
located principally in the United States, Argentina and Canada are prepared by
the Company's engineers with respect to all properties other than Canada, which
were prepared by Martin Petroleum & Associates and Gilbert Laustsen Jung
Associates. Reserves were estimated in accordance with guidelines established by
the SEC and the Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions with no
provision for price and cost escalations except by contractual arrangements. The
reserve estimates for 1997 utilize an oil price of $16.89 per Bbl (reflecting
adjustments for oil quality and gathering and transportation costs), an NGL
price of $12.79 per Bbl and a gas price of $2.06 per Mcf (reflecting adjustments
for BTU content, gathering and transportation costs and gas processing and
shrinkage).
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
71
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Oil and Gas Producing Activities:
1997 1996 1995
--------------------------- ------------------------- -------------------------
Oil Oil Oil
& NGLs Gas & NGLs Gas & NGLs Gas
Total Proved Reserves: (Bbls) (Mcf) BOE (Bbls) (Mcf) BOE (Bbls) (Mcf) BOE
------- --------- ------- ------- -------- ------- ------- ------- -------
UNITED STATES
Balance, January 1 162,836 828,268 300,881 134,891 778,609 264,659 131,736 723,078 252,249
Revisions of previous estimates 70,063 (100,755) 53,271 42,614 151,095 67,797 27,697 142,516 51,449
Purchases of minerals-in-place 121,286 1,147,921 312,606 300 11,494 2,216 4,309 82,713 18,094
New discoveries and extensions 1,109 7,659 2,385 760 17,607 3,694 761 6,015 1,764
Production (17,737) (104,868) (35,215) (10,872) (73,924) (23,193) (11,328) (76,669) (24,106)
Sales of minerals-in-place (8,241) (59,095) (18,090) (4,857) (56,613) (14,292) (18,284) (99,044) (34,791)
------- --------- ------- ------- -------- ------- ------- ------- -------
Balance, December 31 329,316 1,719,130 615,838 162,836 828,268 300,881 134,891 778,609 264,659
CANADA
Balance, January 1 - - - - - - - - -
Revisions of previous estimates - - - - - - - - -
Purchases of minerals-in-place 22,796 207,868 57,441 - - - - - -
New discoveries and extensions - - - - - - - - -
Production - - - - - - - - -
Sales of minerals-in-place - - - - - - - - -
------- --------- ------- ------- -------- ------- ------- ------- -------
Balance, December 31 22,796 207,868 57,441 - - - - - -
AUSTRALIA
Balance, January 1 - - - 12,443 118,297 32,159 12,805 104,430 30,210
Revisions of previous estimates - - - - - - 1,212 22,493 4,961
Purchases of minerals-in-place - - - - - - - - -
New discoveries and extensions - - - - - - - - -
Production - - - (349) (1,927) (669) (1,574) (8,626) (3,012)
Sales of minerals-in-place - - - (12,094) (116,370) (31,490) - - -
------- --------- ------- ------- -------- ------- ------- ------- -------
Balance, December 31 - - - - - - 12,443 118,297 32,159
ARGENTINA
Balance, January 1 1,105 1,108 1,290 - - - - - -
Revisions of previous estimates (259) (1,108) (444) - - - - - -
Purchases of minerals-in-place 30,914 340,392 87,646 - - - - - -
New discoveries and extensions - - - 1,159 1,108 1,344 - - -
Production (148) - (148) (54) - (54) - - -
Sales of minerals-in-place - - - - - - - - -
------- --------- ------- ------- -------- ------- ------- ------- -------
Balance, December 31 31,612 340,392 88,344 1,105 1,108 1,290 - - -
TOTAL
Balance, January 1 163,941 829,376 302,171 147,334 896,906 296,818 144,541 827,508 282,459
Revisions of previous estimates 69,804 (101,863) 52,827 42,614 151,095 67,797 28,909 165,009 56,410
Purchases of minerals-in-place 174,996 1,696,181 457,693 300 11,494 2,216 4,309 82,713 18,094
New discoveries and extensions 1,109 7,659 2,385 1,919 18,715 5,038 761 6,015 1,764
Production (17,885) (104,868) (35,363) (11,275) (75,851) (23,916) (12,902) (85,295) (27,118)
Sales of minerals-in-place (8,241) (59,095) (18,090) (16,951) (172,983) (45,782) (18,284) (99,044) (34,791)
------- --------- ------- ------- -------- ------- ------- ------- -------
Balance, December 31 383,724 2,267,390 761,623 163,941 829,376 302,171 147,334 896,906 296,818
======= ========= ======= ======= ======== ======= ======= ======= =======
Proved Developed Reserves:
January 1 126,370 660,174 236,399 108,920 646,066 216,598 107,068 622,775 210,864
======= ========= ======= ======= ======== ======= ======= ======= =======
December 31 329,920 1,956,658 656,030 126,370 660,174 236,399 108,920 646,066 216,598
======= ========= ======= ======= ======== ======= ======= ======= =======
72
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is computed
by applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, discounted using a rate of 10% per year to reflect the estimated
timing of the future cash flows. Future income taxes are calculated by comparing
discounted future cash flows to the tax basis of oil and gas properties plus
available carryforwards and credits and applying the current tax rates to the
difference.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
73
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
For the year ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
UNITED STATES Oil and gas producing activities:
Future cash inflows $ 8,936,044 $ 7,280,710 $ 4,134,327
Future production costs (3,185,357) (2,325,274) (1,618,191)
Future development costs (325,659) (196,410) (164,794)
Future income tax expense (860,632) (1,385,399) (523,755)
---------- ---------- ----------
4,564,396 3,373,627 1,827,587
10% annual discount factor (2,067,371) (1,574,103) (727,743)
---------- ---------- ----------
Standardized measure of discounted future
net cash flows $ 2,497,025 $ 1,799,524 $ 1,099,844
========== ========== ==========
ARGENTINA
Oil and gas producing activities:
Future cash inflows $ 912,688 $ 28,211 $ -
Future production costs (168,105) (8,099) -
Future development costs (137,060) (4,456) -
Future income tax expense (60,069) - -
---------- ---------- ----------
547,454 15,656 -
10% annual discount factor (201,732) (7,615) -
---------- ---------- ----------
Standardized measure of discounted future
net cash flows $ 345,722 $ 8,041 $ -
========== ========== ==========
CANADA
Oil and gas producing activities:
Future cash inflows $ 662,104 $ - $ -
Future production costs (223,325) - -
Future development costs (48,323) - -
Future income tax expense (79,044) - -
---------- ---------- ----------
311,412 - -
10% annual discount factor (102,395) - -
---------- ---------- ----------
Standardized measure of discounted future
net cash flows $ 209,017 $ - $ -
========== ========== ==========
AUSTRALIA
Oil and gas producing activities:
Future cash inflows $ - $ - $ 428,191
Future production costs - - (136,681)
Future development costs - - (47,085)
Future income tax expense - - (69,649)
---------- ---------- ----------
- - 174,776
10% annual discount factor - - (70,831)
---------- ---------- ----------
Standardized measure of discounted future
net cash flows $ - $ - $ 103,945
========== ========== ==========
TOTAL
Oil and gas producing activities:
Future cash inflows $10,510,836 $ 7,308,921 $ 4,562,518
Future production costs (3,576,787) (2,333,373) (1,754,872)
Future development costs (511,042) (200,866) (211,879)
Future income tax expense (999,745) (1,385,399) (593,404)
---------- ---------- ----------
5,423,262 3,389,283 2,002,363
10% annual discount factor (2,371,498) (1,581,718) (798,574)
---------- ---------- ----------
Standardized measure of discounted future
net cash flows $ 3,051,764 $ 1,807,565 $ 1,203,789
========== ========== ==========
74
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
Years ended December 31, 1997, 1996 and 1995
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
(in thousands)
Oil and Gas Producing Activities:
Oil and gas sales, net of production costs $ (392,612) $ (286,597) $ (244,815)
Net changes in prices and production costs (1,034,678) 866,196 221,581
Extensions and discoveries 19,993 53,314 12,321
Sales of minerals-in-place (126,879) (185,859) (139,250)
Purchases of minerals-in-place 1,880,570 20,606 53,628
Revisions of estimated future development
costs (15,158) (73,587) (47,459)
Revisions of previous quantity estimates and
reserves added by development drilling 240,375 569,529 288,445
Accretion of discount 234,537 123,174 105,891
Changes in production rates, timing and other (99,753) (106,896) (3,496)
---------- --------- ---------
Change in present value of future net revenues 706,395 979,880 246,846
Net change in present value of future income
taxes 537,804 (376,104) (114,714)
---------- --------- ---------
1,244,199 603,776 132,132
Balance, beginning of year 1,807,565 1,203,789 1,071,657
---------- --------- ---------
Balance, end of year $ 3,051,764 $1,807,565 $1,203,789
========== ========= =========
Selected Quarterly Financial Results
Quarter
------------------------------------------
First Second Third Fourth
-------- -------- -------- ---------
(in thousands, except per share data)
1997
Operating revenues $103,779 $ 94,847 $150,354 $ 187,802
Total revenues 106,707 97,389 151,278 190,655
Costs and expenses 77,994 85,576 168,326 1,591,696
Income (loss) before
extraordinary item 18,613 7,413 (11,048) (892,241)
Net income (loss) 18,613 7,413 (12,566) (904,131)
Income (loss) before
extraordinary item per share .53 .21 (.18) (11.43)
Net income (loss) per share .53 .21 (.21) (11.58)
1996
Operating revenues $103,444 $ 99,674 $ 97,019 $ 120,608
Total revenues 118,282 182,508 111,230 123,323
Costs and expenses 91,272 82,952 74,765 86,006
Net income 14,710 80,156 20,965 24,417
Net income per share .41 2.24 .59 .69
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting held on December 5, 1997, the Board of Directors of the Company
approved the engagement of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1998 to replace the firm of
KPMG Peat Marwick LLP, who were dismissed as auditors of the Company after
completing the audit of the Company for the fiscal year ending December 31,
1997. The audit committee of the Board of Directors approved the change in
auditors on December 5, 1997, subject to ratification by the Company's
stockholders. The audit of the Company for the fiscal year ended December 31,
1997 was completed on February 13, 1998.
The reports of KPMG Peat Marwick LLP on the Company's financial statements for
the past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with the audits of the Company's financial statements for each of
the two fiscal years ended December 31, 1997 and 1996, there were no
disagreements with KPMG Peat Marwick LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of KPMG Peat Marwick LLP would have
caused KPMG Peat Marwick LLP to make reference to the matter in their report.
The Company has received from KPMG Peat Marwick LLP a letter addressed to the
Securities and Exchange Commission stating that KPMG Peat Marwick LLP agrees
with the above statements. A copy of the letter is included as Exhibit 16.1 to
this Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth in the
Company's definitive proxy statement for the annual meeting of stockholders to
be held in 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth in the
Company's definitive proxy statement for the annual meeting of stockholders to
be held in 1998 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required in response to this item is set forth in the
Company's definitive proxy statement for the annual meeting of stockholders to
be held in 1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth in the
Company's definitive proxy statement for the annual meeting of stockholders to
be held in 1998 and is incorporated herein by reference.
76
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listing of Financial Statements and Exhibits
Financial Statements
The following consolidated financial statements of the Company are included
in "Item 8. Financial Statements and Supplementary Data":
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 Consolidated Statements
of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes
to Consolidated Financial Statements Unaudited Supplementary Information
All other statements and schedules for which provision is made in the
applicable accounting regulations of the SEC have been omitted because they are
not required under related instructions or are inapplicable, or the information
is shown in the financial statements and related notes.
Exhibits
Exhibit
Number Description
2.1 - Amended and Restated Agreement and Plan of Merger, dated as of April 6,
1997, by and among Mesa, Mesa Operating Co. ("MOC"), MXP Reincorporation
Corp. and Parker & Parsley (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4, dated June 27, 1997,
Registration No. 333-26951).
3.1 - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, dated June 27, 1997, Registration No. 333- 26951).
3.2 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-4, dated June 27, 1997,
Registration No. 333-26951).
3.3 - Certificate of Designations of Special Preferred Voting Stock
(incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-3, Registration No. 333-42315, filed with the SEC on
December 17, 1997).
3.4 - Terms and Conditions of Exchangeable Shares (incorporated by reference to
Annex F to the Definitive Joint Management Information Circular and Proxy
Statement of the Company and Chauvco, File No. 001- 13245, filed with the
SEC on November 17, 1997).
4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the
Company (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, dated June 27, 1997, Registration No.
333-26951).
4.2 - Form of Certificate of Special Preferred Voting Stock (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, File
No. 001-13245, filed with the SEC on January 2, 1998).
4.3 - Form of Certificate of Exchangeable Shares (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
77
Exhibit
Number Description
9.1 - Shareholder Agreement, dated as of April 6, 1997, between Mesa, Boone
Pickens and Parker & Parsley (incorporated by reference to Exhibit 2.4 to
Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997).
9.2 - Shareholders Agreement, dated as of April 6, 1997, between DNR-Mesa
Holdings, L.P. ("DNR") and Mesa (incorporated by reference to Exhibit 2.2
to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997).
9.3 - Voting and Exchange Trust Agreement, dated as of December 18, 1997, among
the Company, Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada") and
Montreal Trust Company of Canada, as Trustee (incorporated by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K, File No. 001-
13245, filed with the SEC on January 2, 1998).
9.4 - Amended and Restated Shareholders Agreement, dated as of September 3,
1997, by and between the Company and Guy J. Turcotte (incorporated by
reference to Exhibit 2.6 to the Company's Registration Statement on Form
S-3, Registration No. 333-42315, filed with the SEC on December 15, 1997).
9.5 - Shareholders Agreement, dated as of September 3, 1997, by and among the
Company, Chauvco, DNR, Scott D. Sheffield and I. Jon Brumley (incorporated
by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K,
File No. 001-13245, filed with the SEC on October 2, 1997).
9.6 - Shareholders Agreement, dated as of September 3, 1997, by and among the
Company, Trimac Corporation and Gendis Inc. (incorporated by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on October 2, 1997).
10.1 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as
Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as
Trustee, relating to the 115/8% Senior Subordinated Discount Notes Due 2006
(incorporated by reference to Exhibit 4.17 to Mesa's Quarterly Report on
Form 10-Q for the period ended June 30, 1996).
10.2 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.1 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.3 - Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.1 (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.4 - Third Supplemental Indenture, dated as of December 18, 1997, among
Pioneer USA, the Subsidiary Guarantors named therein, the Company, and
Harris Trust and Savings Bank, as Trustee, with respect to the indenture
identified above as Exhibit 10.1 (incorporated by reference to Exhibit
10.12 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.5 - Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA (formerly MOC), a Delaware corporation, the Company, a Delaware
corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust
and Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.1 (incorporated by reference to
Exhibit 10.13 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
78
Exhibit
Number Description
10.6 - Fifth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer NewSub1, Inc. (as successor to Pioneer USA), a Texas corporation,
the Company, a Delaware corporation, Pioneer DebtCo., Inc., a Texas
corporation, and Harris Trust and Savings Bank, an Illinois corporation, as
Trustee, with respect to the indenture identified above as Exhibit 10.1
(incorporated by reference to Exhibit 10.14 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.7 - Sixth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo. Inc. (as successor to Pioneer NewSub1, Inc.), a Texas
corporation, the Company, a Delaware corporation, and Harris Trust and
Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.1 (incorporated by reference to
Exhibit 10.15 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
10.8 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as
Issuer, the Company (Mesa's successor), as Guarantor, and Harris Trust and
Savings Bank, as Trustee, relating to the 105/8% Senior Subordinated Notes
Due 2006 (incorporated by reference to Exhibit 4.18 to Mesa's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).
10.9 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.8 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.10- Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.8 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.11- Third Supplemental Indenture, dated as of December 18, 1997, among
Pioneer USA, the Subsidiary Guarantors named therein, the Company, and
Harris Trust and Savings Bank, as Trustee, with respect to the indenture
identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.6
to the Company's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 2, 1998).
10.12- Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA, a Delaware corporation, the Company, a Delaware corporation,
Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings
Bank, an Illinois corporation, as Trustee, with respect to the indenture
identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.7
to the Company's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 2, 1998).
10.13- Fifth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer NewSub 1, Inc. (as successor to Pioneer USA), a Texas corporation,
the Company, a Delaware corporation, Pioneer DebtCo, Inc, a Texas
corporation, and Harris Trust and Savings Bank, an Illinois corporation, as
Trustee, with respect to the indenture identified above as Exhibit 10.8
(incorporated by reference to Exhibit 10.8 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.14- Sixth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc.), a Texas
corporation, the Company, a Delaware corporation, and Harris Trust and
Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.8 (incorporated by reference to
Exhibit 10.9 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
79
Exhibit
Number Description
10.15- Indentures relating to $50,000,000 principal amount of 8 1/2%
Convertible Subordinated Debentures due 2005 of Dorchester Master Limited
Partnership ($2,143,000 principal amount of which were outstanding and held
by non affiliates at December 31, 1997) and $100,000,000 principal amount
of 9 1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000
principal amount of which were outstanding at December 31, 1997) have been
omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company
hereby agrees to furnish a copy of the indentures to the SEC upon request
(incorporated by reference to Parker & Parsley's Annual Report on Form 10-K
for the period ended December 31, 1996, file No. 1-10695).
10.16- Indenture, dated April 12, 1995, between Pioneer USA (successor to
Parker & Parsley), and The Chase Manhattan Bank (National Association), as
Trustee (incorporated by reference to Exhibit 4.1 to Parker & Parsley's
Current Report on Form 8-K, dated April 12, 1995, File No. 1-10695).
10.17- First Supplemental Indenture, dated as of August 7, 1997, among Parker &
Parsley, The Chase Manhattan Bank, as Trustee, and Pioneer USA, with
respect to the indenture identified above as Exhibit 10.16 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.18- Second Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA, a Delaware corporation, Pioneer NewSub1, Inc., a Texas
corporation, and The Chase Manhattan Bank, a New York banking association,
as Trustee, with respect to the indenture identified above as Exhibit 10.16
(incorporated by reference to Exhibit 10.17 to the Company's Current Report
on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998).
10.19- Third Supplemental Indenture, dated as of December 30, 1997, among
Pioneer New Sub1, Inc. (as successor to Pioneer USA), a Texas corporation,
Pioneer DebtCo, Inc., a Texas corporation, and The Chase Manhattan Bank, a
New York banking association, as Trustee, with respect to the indenture
identified above as Exhibit 10.16 (incorporated by reference to Exhibit
10.18 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.20- Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc., as successor
to Pioneer USA), a Texas corporation, the Company, a Delaware corporation,
Pioneer USA, a Delaware corporation, and The Chase Manhattan Bank, a New
York banking association, as trustee, with respect to the indenture
identified above as Exhibit 10.16 (incorporated by reference to Exhibit
10.19 to the Company's Current Report on Form 8-K, File No. 001- 13245,
filed with the SEC on January 2, 1998).
10.21- Guarantee, dated as of December 30, 1997, by Pioneer USA relating to the
$150,000,000 in aggregate principal amount of 87/8% Senior Notes due 2005
and $150,000,000 in aggregate principal amount of 8 1/4% Senior Notes due
2007 issued under the indenture identified above as Exhibit 10.16
(incorporated by reference to Exhibit 10.20 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.22- Form of 87/8% Senior Notes Due 2005, dated as of April 12, 1995, in the
aggregate principal amount of $150,000,000, together with Officers'
Certificate dated April 12, 1995, establishing the terms of the 87/8%
Senior Notes Due 2005 pursuant to the indenture identified above as Exhibit
10.16 (incorporated by reference to Exhibit 4.2 to Parker & Parsley's
Quarterly Report on Form 10-Q for the period ended June 30, 1995, File No.
1-10695).
10.23- Form of 8 1/4% Senior Notes due 2007, dated as of August 22, 1995, in
the aggregate principal amount of $150,000,000, together with Officers'
Certificate dated August 22, 1995, establishing the terms of the 8 1/4%
Senior Notes due 2007 pursuant to the indenture identified above as Exhibit
10.16 (incorporated by reference to Exhibit 1.2 to Parker & Parsley's
Current Report on Form 8-K, dated August 17, 1995, File No. 1-10695).
80
Exhibit
Number Description
10.24- Indenture, dated January 13, 1998, between the Company and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 99.1 to the
Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 14, 1998).
10.25- First Supplemental Indenture, dated as of January 13, 1998, among the
Company, Pioneer USA, as the Subsidiary Guarantor, and The Bank of New
York, as Trustee, with respect to the indenture identified above as Exhibit
10.24 (incorporated by reference to Exhibit 99.2 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 14, 1998).
10.26- Form of 6.50% Senior Notes Due 2008 of the Company (incorporated by
reference to Exhibit 99.3 to the Company's and Pioneer USA's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998).
10.27- Form of 7.20% Senior Notes Due 2028 of the Company (incorporated by
reference to Exhibit 99.4 to the Company's and Pioneer USA's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998).
10.28- Guarantee (2008 Notes), dated as of January 13, 1998, entered into by
Pioneer USA (incorporated by reference to Exhibit 99.5 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001- 13245, filed with
the SEC on January 14, 1998).
10.29- Guarantee (2028 Notes), dated as of January 13, 1998, entered into by
Pioneer USA (incorporated by reference to Exhibit 99.6 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001- 13245, filed with
the SEC on January 14, 1998).
10.30- Amended and Restated Credit Facility Agreement (Primary Facility), dated
as of December 18, 1997, between the Company, as Borrower, and NationsBank
of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, and The
Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and
lenders named therein (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on January 2, 1998).
10.31- Amended and Restated Credit Facility Agreement (364 Day Facility), dated
as of December 18, 1997, between the Company, as Borrower, and NationsBank
of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, and The
Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and
lenders named therein (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on January 2, 1998).
10.32- Credit Agreement, dated as of December 18, 1997, among Chauvco, Canadian
Imperial Bank of Commerce, as Agent, and the other Lenders named therein
(incorporated by reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.33- Note, dated December 22, 1997, between the Company, as Borrower, and
NationsBank of Texas, N.A., as Lender (incorporated by reference to Exhibit
10.21 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.34+ - 1991 Stock Option Plan of Mesa (incorporated by reference to Exhibit
10(v) to Mesa's Annual Report on Form 10-K for the period ended December
31, 1991).
10.35+ - 1996 Incentive Plan of Mesa (incorporated by reference to Exhibit 10.28
to the Company's Registration Statement on Form S-4, dated June 27, 1997,
Registration No. 333-26951).
10.36+ - Parker & Parsley Long-Term Incentive Plan, dated February 19, 1991
(incorporated by reference to Exhibit 4.1 to Parker & Parsley's
Registration Statement on Form S-8, Registration No. 33-38971).
81
Exhibit
Number Description
10.37+ - First Amendment to the Parker & Parsley Long-Term Incentive Plan, dated
August 23, 1991 (incorporated by reference to Exhibit 10.2 to Parker &
Parsley's Registration Statement on Form S-1, dated February 28, 1992,
Registration No. 33-46082).
10.38+ - The Company's Long-Term Incentive Plan (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration No. 333-35087).
10.39+ - The Company's Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration No. 333-35165).
10.40+ - The Company's Deferred Compensation Retirement Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8, Registration No. 333- 39153).
10.41+ - Pioneer USA 401(k) Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8, Registration No.
333-39249).
10.42+*- Pioneer USA Matching Plan.
10.43+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as
part of the Parker & Parsley Long-Term Incentive Plan, dated as of November
16, 1995, between Parker & Parsley and Named Executive Officers identified
on Schedule 1 setting forth additional details relating to the Parker &
Parsley Long-Term Incentive Plan (incorporated by reference to Parker &
Parsley's Annual Report on Form 10-K for the period ended December 31,
1995, Commission File No. 1-10695).
10.44+ - Employment Agreement, dated as of August 21, 1996, between Mesa and I.
Jon Brumley (incorporated by reference to Exhibit 10.26 to Mesa's Annual
Report on Form 10-K for the period ended December 31, 1996).
10.45+ - Mesa Management Severance Plan, dated April 4, 1997, including a
Schedule of Participants on Schedule A for the purpose of defining the
payment of certain benefits upon the termination of the officer's
employment under certain circumstances (incorporated by reference to
Exhibit 10.29 to the Company's Registration Statement on Form S-4, dated
June 27, 1997, Registration No. 333-26951).
10.46+ - Severance Agreement, dated as of August 8, 1997, between the Company
and Scott D. Sheffield, together with a schedule identifying substantially
identical agreements between the Company and each of the other named
executive officers identified on Schedule I for the purpose of defining the
payment of certain benefits upon the termination of the officer's
employment under certain circumstances (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997, File No. 001-13245).
10.47+ - Indemnification Agreement, dated as of August 8, 1997, between the
Company and Scott D. Sheffield, together with a schedule identifying
substantially identical agreements the Company and each of the Company's
other directors and named executive officers identified on Schedule I
(incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997, File No.
001-13245).
10.48+ - Stock Acquisition Loan Agreement entered into as of June 15, 1995,
between Parker & Parsley and Scott D. Sheffield, together with Schedule I
identifying named executive officers with substantially identical
agreements, providing for Parker & Parsley's loans to such officers of the
amounts respectively identified on Schedule I thereto, for the purpose of
acquiring Parker & Parsley's Common Stock, par value $0.01 per share
(incorporated by reference to Exhibit 10.48 to the Company's Registration
Statement on Form S-3, Registration No. 333-39381, filed with the SEC on
December 17, 1997).
82
Exhibit
Number Description
10.49- Purchase and Sale Agreement, dated as of October 22, 1997, between
Cometra Energy, L.P., and Pioneer USA (incorporated by reference to Exhibit
10.22 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.50- Combination Agreement, dated September 3, 1997, between the Company and
Chauvco (incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2,
1997).
10.51- Plan of Arrangement, as amended, under Section 186 of the Business
Corporations Act (Alberta) (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K, File No. 001- 13245, filed with the
SEC on January 2, 1998).
10.52- Support Agreement, dated as of December 18, 1997, between the Company
and Pioneer Canada (incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K, File No. 001- 13245, filed with the
SEC on January 2, 1998).
10.53- Stock Purchase Agreement, dated April 26, 1996, between Mesa and DNR
(incorporated by reference to Exhibit No. 10 to Mesa's Current Report on
Form 8-K filed with the SEC on April 29, 1996).
10.54- "B" Contract Production Allocation Agreement, dated July 29, 1991, and
effective as of January 1, 1991, between Colorado Interstate Gas Company
and Mesa Operating Limited Partnership (incorporated by reference to
Exhibit 10(r) to Mesa's Annual Report on Form 10-K for the period ended
December 31, 1991).
10.55- Amendment to "B" Contract Production Allocation Agreement effective as
of January 1, 1993, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (incorporated by reference to Exhibit 10.24
to Mesa's Registration Statement on Form S-1, Registration No. 33-51909).
10.56- Amarillo Supply Agreement between Mesa Operating Limited Partnership,
Seller, and Energas Company, a division of Atmos Energy Corporation, Buyer,
dated effective January 2, 1993 (incorporated by reference to Exhibit 10.14
to Mesa's Annual Report on Form 10-K for the period ended December 31,
1995).
10.57+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly
P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley,
Ltd. and the Investor Partners (as defined therein, which includes
individuals who are directors and executive officers of Parker & Parsley),
together with a schedule identifying substantially identical documents and
setting forth the material details in which those documents differ from the
foregoing document (incorporated by reference to Exhibit 10.50 to Parker &
Parsley's Registration Statement on Form S-4, dated December 31, 1990,
Registration No. 33-38436).
10.58+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated
May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as
defined therein, which includes individuals who are directors and
executives officers of Parker & Parsley), together with a schedule
identifying substantially identical documents and setting forth the
material details in which those documents differ form the foregoing
document (incorporated by reference to Exhibit 10.51 to Parker & Parsley's
Registration Statement on Form S-4, dated December 31, 1990, Registration
No. 33-38436).
10.59+ - Schedule identifying additional documents substantially identical to
the Amendment to Agreement of Partnership of P&P Employees 89-B GP included
as Exhibit 10.58 and setting forth the material details in which those
documents differ from that document (incorporated by reference to Exhibit
10.52 to Parker & Parsley's Registration Statement on Form S-1, dated
February 28, 1992, Registration No. 33-46082).
83
Exhibit
Number Description
10.60+ - Agreement of Partnership of P&P Employees 90 Spraberry Private
Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James
D. Moring, and the General Partners (as defined therein, which includes
individuals who are directors and executive officers of Parker & Parsley),
and form of Amendment to Agreement of Partnership of P&P Employees 90
Spraberry Private Development GP, together with a schedule identifying
substantially identical documents and setting forth the material details in
which those documents differ from the foregoing document (incorporated by
reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on
Form S-4, dated December 31, 1990, Registration No. 33- 38436).
10.61+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP,
dated February 19, 1991, among Parker & Parsley Development Company and the
Investor Partners (as defined therein, which includes individuals who are
directors and executive officers of Parker & Parsley), together with a
schedule identifying substantially identical documents and setting forth
the material details in which those documents differ from the foregoing
document (incorporated by reference to Exhibit 10.58 to Parker & Parsley's
Registration Statement on Form S-1, dated February 28, 1992, Registration
No. 33-46082).
10.62+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30,
1991, among Parker & Parsley Development Company, James D. Moring, and the
General Partners (as defined therein, which includes individuals who are
directors and executive officers of Parker & Parsley), together with a
schedule identifying substantially identical documents and setting forth
the material details in which those documents differ from the foregoing
document (incorporated by reference to Exhibit 10.61 to Parker & Parsley's
Registration Statement on Form S-1, dated February 28, 1992, Registration
No. 33-46082).
10.63+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry
Private Development GP, dated April 22, 1991, among the Partners (as
defined therein, which includes individuals who are directors and executive
officers of Parker & Parsley) (incorporated by reference to Exhibit 10.67
to Parker & Parsley's Registration Statement on Form S-1, dated February
28, 1992, Registration No. 33-46082).
11.1* - Statement of Computation of Earnings per Share
16.1* - Change in Certifying Accountant
21.1* - Subsidiaries of the registrant.
23.1* - Consent of KPMG Peat Marwick LLP
27.1* - Financial Data Schedule
- ---------------
* Filed herewith
+ Executive Compensation Plan or Arrangement previously filed pursuant to Item
14(c).
Reports on Form 8-K
During the quarter ended December 31, 1997, Pioneer filed the following Current
Reports on Form 8-K:
(1) On December 23, 1997, the Company filed a Current Report on
Form 8-K/A dated December 5, 1997 reporting (a) under Item 4
(Other Events) the approval by the Company's Board of
Directors of the engagement of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1998 to replace the firm of KPMG Peat Marwick LLP
and (b) under Item 7 (Financial Statements and Exhibits) the
letter from KPMG Peat Marwick LLP addressed to the Securities
and Exchange Commission in connection with the audits of the
Company's financial statements.
(2) On December 12, 1997, the Company filed a Current Report on
Form 8-K dated December 5, 1997 reporting under Item 4 (Other
Events) the approval by the Company's Board of Directors of
the engagement of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
1998. Ernst & Young LLP will replace the firm of KPMG Peat
Marwick LLP, who will be dismissed as auditors of the Company
after completing the audit of the Company for the fiscal year
ending December 31, 1997.
(3) On October 2, 1997, the Company filed a Current Report on Form
8-K dated September 3, 1997 reporting under Item 5 (Other
Events) the signing of a Combination Agreement with Chauvco
and under Item 7 (Financial Statements and Exhibits) various
documents related to such business combination.
Exhibits
The exhibits to this Report required to be filed pursuant to Item 14(c)
are listed under "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K - Listing of Financial Statements and Exhibits - Exhibits" above and
in the "Index to Exhibits" attached hereto.
Financial Statement Schedules
No financial statement schedules are required to be filed as part of this
Report or are inapplicable.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: March 18, 1998 By: /s/ Scott D. Sheffield
----------------------------------
Scott D. Sheffield, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Scott D. Sheffield President, Chief Executive March 18, 1998
- ----------------------------- Officer and Director (principal
Scott D. Sheffield executive officer)
/s/ M. Garrett Smith Executive Vice President and March 18, 1998
- ----------------------------- Chief Financial Officer
M. Garrett Smith
/s/ Rich Dealy Vice President and Chief March 18, 1998
- ----------------------------- Accounting Officer
Rich Dealy
/s/ I. Jon Brumley Chairman of the Board March 18, 1998
- -----------------------------
I. Jon Brumley
/s/ James R. Baroffio Director March 18, 1998
- -----------------------------
James R. Baroffio
/s/ R. Hartwell Gardner Director March 18, 1998
- -----------------------------
R. Hartwell Gardner
/s/ John S. Herrington Director March 18, 1998
- -----------------------------
John S. Herrington
/s/ Kenneth A. Hersh Director March 18, 1998
- -----------------------------
Kenneth A. Hersh
/s/ James L. Houghton Director March 18, 1998
- -----------------------------
James L. Houghton
/s/ Jerry P. Jones Director March 18, 1998
- -----------------------------
Jerry P. Jones
85
Signature Title Date
/s/ T. Boone Pickens Director March 18, 1998
- --------------------------------------
T. Boone Pickens
/s/ Richard E. Rainwater Director March 18, 1998
- --------------------------------------
Richard E. Rainwater
/s/ Charles E. Ramsey, Jr. Director March 18, 1998
- --------------------------------------
Charles E. Ramsey, Jr.
/s/ Arthur L. Smith Director March 18, 1998
- --------------------------------------
Arthur L. Smith
/s/ Philip B. Smith Director March 18, 1998
- --------------------------------------
Philip B. Smith
/s/ Robert L. Stillwell Director March 18, 1998
- --------------------------------------
Robert L. Stillwell
/s/ Michael D. Wortley Director March 18, 1998
- --------------------------------------
Michael D. Wortley
86
INDEX TO EXHIBITS
Exhibit
Number Description
2.1 - Amended and Restated Agreement and Plan of Merger, dated as of April 6,
1997, by and among Mesa, Mesa Operating Co. ("MOC"), MXP Reincorporation
Corp. and Parker & Parsley (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4, dated June 27, 1997,
Registration No. 333-26951).
3.1 - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951).
3.2 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-4, dated June 27, 1997,
Registration No. 333-26951).
3.3 - Certificate of Designations of Special Preferred Voting Stock
(incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-3, Registration No. 333-42315, filed with the SEC on
December 17, 1997).
3.4 - Terms and Conditions of Exchangeable Shares (incorporated by reference to
Annex F to the Definitive Joint Management Information Circular and Proxy
Statement of the Company and Chauvco, File No. 001-13245, filed with the
SEC on November 17, 1997).
4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the
Company (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, dated June 27, 1997, Registration No.
333-26951).
4.2 - Form of Certificate of Special Preferred Voting Stock (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, File
No. 001-13245, filed with the SEC on January 2, 1998).
4.3 - Form of Certificate of Exchangeable Shares (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
9.1 - Shareholder Agreement, dated as of April 6, 1997, between Mesa, Boone
Pickens and Parker & Parsley (incorporated by reference to Exhibit 2.4 to
Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997).
9.2 - Shareholders Agreement, dated as of April 6, 1997, between DNR-Mesa
Holdings, L.P. ("DNR") and Mesa (incorporated by reference to Exhibit 2.2
to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997).
9.3 - Voting and Exchange Trust Agreement, dated as of December 18, 1997, among
the Company, Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada") and
Montreal Trust Company of Canada, as Trustee (incorporated by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
87
Exhibit
Number Description
9.4 - Amended and Restated Shareholders Agreement, dated as of September 3,
1997, by and between the Company and Guy J. Turcotte (incorporated by
reference to Exhibit 2.6 to the Company's Registration Statement on Form
S-3, Registration No. 333-42315, filed with the SEC on December 15, 1997).
9.5 - Shareholders Agreement, dated as of September 3, 1997, by and among the
Company, Chauvco, DNR, Scott D. Sheffield and I. Jon Brumley (incorporated
by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K,
File No. 001-13245, filed with the SEC on October 2, 1997).
9.6 - Shareholders Agreement, dated as of September 3, 1997, by and among the
Company, Trimac Corporation and Gendis Inc. (incorporated by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on October 2, 1997).
10.1 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as
Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as
Trustee, relating to the 115/8% Senior Subordinated Discount Notes Due 2006
(incorporated by reference to Exhibit 4.17 to Mesa's Quarterly Report on
Form 10-Q for the period ended June 30, 1996).
10.2 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.1 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.3 - Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.1 (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.4 - Third Supplemental Indenture, dated as of December 18, 1997, among
Pioneer USA, the Subsidiary Guarantors named therein, the Company, and
Harris Trust and Savings Bank, as Trustee, with respect to the indenture
identified above as Exhibit 10.1 (incorporated by reference to Exhibit
10.12 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.5 - Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA (formerly MOC), a Delaware corporation, the Company, a Delaware
corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust
and Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.1 (incorporated by reference to
Exhibit 10.13 to the Company's Current Report on Form 8-K, File No.
001-13245, filed with the SEC on January 2, 1998).
10.6 - Fifth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer NewSub1, Inc. (as successor to Pioneer USA), a Texas corporation,
the Company, a Delaware corporation, Pioneer DebtCo., Inc., a Texas
corporation, and Harris Trust and Savings Bank, an Illinois corporation, as
Trustee, with respect to the indenture identified above as Exhibit 10.1
(incorporated by reference to Exhibit 10.14 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
88
Exhibit
Number Description
10.7 - Sixth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo. Inc. (as successor to Pioneer NewSub1, Inc.), a Texas
corporation, the Company, a Delaware corporation, and Harris Trust and
Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.1 (incorporated by reference to
Exhibit 10.15 to the Company's Current Report on Form 8-K, File No. 001-
13245, filed with the SEC on January 2, 1998).
10.8 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as
Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as
Trustee, relating to the 105/8% Senior Subordinated Notes Due 2006
(incorporated by reference to Exhibit 4.18 to Mesa's Quarterly Report on
Form 10-Q for the period ended June 30, 1996).
10.9 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.8 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.10- Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer
USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named
therein, the Company, and Harris Trust and Savings Bank, as Trustee, with
respect to the indenture identified above as Exhibit 10.8 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.11- Third Supplemental Indenture, dated as of December 18, 1997, among
Pioneer USA, the Subsidiary Guarantors named therein, the Company, and
Harris Trust and Savings Bank, as Trustee, with respect to the indenture
identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.6
to the Company's Current Report on Form 8- K, File No. 001-13245, filed
with the SEC on January 2, 1998).
10.12- Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA, a Delaware corporation, the Company, a Delaware corporation,
Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings
Bank, an Illinois corporation, as Trustee, with respect to the indenture
identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.7
to the Company's Current Report on Form 8-K, File No. 001- 13245, filed
with the SEC on January 2, 1998).
10.13- Fifth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer NewSub 1, Inc. (as successor to Pioneer USA), a Texas corporation,
the Company, a Delaware corporation, Pioneer DebtCo, Inc, a Texas
corporation, and Harris Trust and Savings Bank, an Illinois corporation, as
Trustee, with respect to the indenture identified above as Exhibit 10.8
(incorporated by reference to Exhibit 10.8 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.14- Sixth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc.), a Texas
corporation, the Company, a Delaware corporation, and Harris Trust and
Savings Bank, an Illinois corporation, as Trustee, with respect to the
indenture identified above as Exhibit 10.8 (incorporated by reference to
Exhibit 10.9 to the Company's Current Report on Form 8-K, File No. 001-
13245, filed with the SEC on January 2, 1998).
89
Exhibit
Number Description
10.15- Indentures relating to $50,000,000 principal amount of 8 1/2%
Convertible Subordinated Debentures due 2005 of Dorchester Master Limited
Partnership ($2,143,000 principal amount of which were outstanding and held
by non affiliates at December 31, 1997) and $100,000,000 principal amount
of 9 1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000
principal amount of which were outstanding at December 31, 1997) have been
omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company
hereby agrees to furnish a copy of the indentures to the SEC upon request
(incorporated by reference to Parker & Parsley's Annual Report on Form 10-K
for the period ended December 31, 1996, file No. 1-10695).
10.16- Indenture, dated April 12, 1995, between Pioneer USA (successor to
Parker & Parsley), and The Chase Manhattan Bank (National Association), as
Trustee (incorporated by reference to Exhibit 4.1 to Parker & Parsley's
Current Report on Form 8-K, dated April 12, 1995, File No. 1-10695).
10.17- First Supplemental Indenture, dated as of August 7, 1997, among Parker &
Parsley, The Chase Manhattan Bank, as Trustee, and Pioneer USA, with
respect to the indenture identified above as Exhibit 10.16 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, File No. 001-13245).
10.18- Second Supplemental Indenture, dated as of December 30, 1997, among
Pioneer USA, a Delaware corporation, Pioneer NewSub1, Inc., a Texas
corporation, and The Chase Manhattan Bank, a New York banking association,
as Trustee, with respect to the indenture identified above as Exhibit 10.16
(incorporated by reference to Exhibit 10.17 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
10.19- Third Supplemental Indenture, dated as of December 30, 1997, among
Pioneer New Sub1, Inc. (as successor to Pioneer USA), a Texas corporation,
Pioneer DebtCo, Inc., a Texas corporation, and The Chase Manhattan Bank, a
New York banking association, as Trustee, with respect to the indenture
identified above as Exhibit 10.16 (incorporated by reference to Exhibit
10.18 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.20- Fourth Supplemental Indenture, dated as of December 30, 1997, among
Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc., as successor
to Pioneer USA), a Texas corporation, the Company, a Delaware corporation,
Pioneer USA, a Delaware corporation, and The Chase Manhattan Bank, a New
York banking association, as trustee, with respect to the indenture
identified above as Exhibit 10.16 (incorporated by reference to Exhibit
10.19 to the Company's Current Report on Form 8-K, File No. 001- 13245,
filed with the SEC on January 2, 1998).
10.21- Guarantee, dated as of December 30, 1997, by Pioneer USA relating to the
$150,000,000 in aggregate principal amount of 87/8% Senior Notes due 2005
and $150,000,000 in aggregate principal amount of 8 1/4% Senior Notes due
2007 issued under the indenture identified above as Exhibit 10.16
(incorporated by reference to Exhibit 10.20 to the Company's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998).
90
Exhibit
Number Description
10.22- Form of 87/8% Senior Notes Due 2005, dated as of April 12, 1995, in the
aggregate principal amount of $150,000,000, together with Officers'
Certificate dated April 12, 1995, establishing the terms of the 87/8%
Senior Notes Due 2005 pursuant to the indenture identified above as Exhibit
10.16 (incorporated by reference to Exhibit 4.2 to Parker & Parsley's
Quarterly Report on Form 10-Q for the period ended June 30, 1995, File No.
1-10695).
10.23- Form of 8 1/4% Senior Notes due 2007, dated as of August 22, 1995, in
the aggregate principal amount of $150,000,000, together with Officers'
Certificate dated August 22, 1995, establishing the terms of the 8 1/4%
Senior Notes due 2007 pursuant to the indenture identified above as Exhibit
10.16 (incorporated by reference to Exhibit 1.2 to Parker & Parsley's
Current Report on Form 8-K, dated August 17, 1995, File No. 1-10695).
10.24- Indenture, dated January 13, 1998, between the Company and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 99.1 to the
Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 14, 1998).
10.25- First Supplemental Indenture, dated as of January 13, 1998, among the
Company, Pioneer USA, as the Subsidiary Guarantor, and The Bank of New
York, as Trustee, with respect to the indenture identified above as Exhibit
10.24 (incorporated by reference to Exhibit 99.2 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 14, 1998).
10.26- Form of 6.50% Senior Notes Due 2008 of the Company (incorporated by
reference to Exhibit 99.3 to the Company's and Pioneer USA's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998).
10.27- Form of 7.20% Senior Notes Due 2028 of the Company (incorporated by
reference to Exhibit 99.4 to the Company's and Pioneer USA's Current Report
on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998).
10.28- Guarantee (2008 Notes), dated as of January 13, 1998, entered into by
Pioneer USA (incorporated by reference to Exhibit 99.5 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 14, 1998).
10.29- Guarantee (2028 Notes), dated as of January 13, 1998, entered into by
Pioneer USA (incorporated by reference to Exhibit 99.6 to the Company's and
Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with
the SEC on January 14, 1998).
10.30- Amended and Restated Credit Facility Agreement (Primary Facility), dated
as of December 18, 1997, between the Company, as Borrower, and NationsBank
of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, and The
Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and
lenders named therein (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8- K, File No. 001-13245, filed with the
SEC on January 2, 1998).
91
Exhibit
Number Description
10.31- Amended and Restated Credit Facility Agreement (364 Day Facility), dated
as of December 18, 1997, between the Company, as Borrower, and NationsBank
of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, and The
Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and
lenders named therein (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8- K, File No. 001-13245, filed with the
SEC on January 2, 1998).
10.32- Credit Agreement, dated as of December 18, 1997, among Chauvco, Canadian
Imperial Bank of Commerce, as Agent, and the other Lenders named therein
(incorporated by reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998).
10.33- Note, dated December 22, 1997, between the Company, as Borrower, and
NationsBank of Texas, N.A., as Lender (incorporated by reference to Exhibit
10.21 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.34+ - 1991 Stock Option Plan of Mesa (incorporated by reference to Exhibit
10(v) to Mesa's Annual Report on Form 10-K for the period ended December
31, 1991).
10.35+ - 1996 Incentive Plan of Mesa (incorporated by reference to Exhibit
10.28 to the Company's Registration Statement on Form S-4, dated June 27,
1997, Registration No. 333-26951).
10.36+ - Parker & Parsley Long-Term Incentive Plan, dated February 19, 1991
(incorporated by reference to Exhibit 4.1 to Parker & Parsley's
Registration Statement on Form S-8, Registration No. 33-38971).
10.37+ - First Amendment to the Parker & Parsley Long-Term Incentive Plan,
dated August 23, 1991 (incorporated by reference to Exhibit 10.2 to Parker
& Parsley's Registration Statement on Form S-1, dated February 28, 1992,
Registration No. 33-46082).
10.38+ - The Company's Long-Term Incentive Plan (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration No. 333-35087).
10.39+ - The Company's Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration No. 333-35165).
10.40+ - The Company's Deferred Compensation Retirement Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8, Registration No. 333- 39153).
10.41+ - Pioneer USA 401(k) Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8, Registration No.
333-39249).
10.42+*- Pioneer USA Matching Plan.
92
Exhibit
Number Description
10.43+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as
part of the Parker & Parsley Long-Term Incentive Plan, dated as of November
16, 1995, between Parker & Parsley and Named Executive Officers identified
on Schedule 1 setting forth additional details relating to the Parker &
Parsley Long-Term Incentive Plan (incorporated by reference to Parker &
Parsley's Annual Report on Form 10-K for the period ended December 31,
1995, Commission File No. 1-10695).
10.44+ - Employment Agreement, dated as of August 21, 1996, between Mesa and I.
Jon Brumley (incorporated by reference to Exhibit 10.26 to Mesa's Annual
Report on Form 10-K for the period ended December 31, 1996).
10.45+ - Mesa Management Severance Plan, dated April 4, 1997, including a
Schedule of Participants on Schedule A for the purpose of defining the
payment of certain benefits upon the termination of the officer's
employment under certain circumstances (incorporated by reference to
Exhibit 10.29 to the Company's Registration Statement on Form S-4, dated
June 27, 1997, Registration No. 333-26951).
10.46+ - Severance Agreement, dated as of August 8, 1997, between the Company
and Scott D. Sheffield, together with a schedule identifying substantially
identical agreements between the Company and each of the other named
executive officers identified on Schedule I for the purpose of defining the
payment of certain benefits upon the termination of the officer's
employment under certain circumstances (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997, File No. 001-13245).
10.47+ - Indemnification Agreement, dated as of August 8, 1997, between the
Company and Scott D. Sheffield, together with a schedule identifying
substantially identical agreements between the Company and each of the
Company's other directors and named executive officers identified on
Schedule I (incorporated by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1997, File
No. 001-13245).
10.48+ - Stock Acquisition Loan Agreement entered into as of June 15, 1995,
between Parker & Parsley and Scott D. Sheffield, together with Schedule I
identifying named executive officers with substantially identical
agreements, providing for Parker & Parsley's loans to such officers of the
amounts respectively identified on Schedule I thereto, for the purpose of
acquiring Parker & Parsley's Common Stock, par value $0.01 per share
(incorporated by reference to Exhibit 10.48 to the Company's Registration
Statement on Form S-3, Registration No. 333-39381, filed with the SEC on
December 17, 1997).
10.49- Purchase and Sale Agreement, dated as of October 22, 1997, between
Cometra Energy, L.P., and Pioneer USA (incorporated by reference to Exhibit
10.22 to the Company's Current Report on Form 8-K, File No. 001-13245,
filed with the SEC on January 2, 1998).
10.50- Combination Agreement, dated September 3, 1997, between the Company and
Chauvco (incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2,
1997).
93
Exhibit
Number Description
10.51- Plan of Arrangement, as amended, under Section 186 of the Business
Corporations Act (Alberta) (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on January 2, 1998).
10.52- Support Agreement, dated as of December 18, 1997, between the Company
and Pioneer Canada (incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K, File No. 001-13245, filed with the
SEC on January 2, 1998).
10.53- Stock Purchase Agreement, dated April 26, 1996, between Mesa and DNR
(incorporated by reference to Exhibit No. 10 to Mesa's Current Report on
Form 8-K filed with the SEC on April 29, 1996).
10.54- "B" Contract Production Allocation Agreement, dated July 29, 1991, and
effective as of January 1, 1991, between Colorado Interstate Gas Company
and Mesa Operating Limited Partnership (incorporated by reference to
Exhibit 10(r) to Mesa's Annual Report on Form 10-K for the period ended
December 31, 1991).
10.55- Amendment to "B" Contract Production Allocation Agreement effective as
of January 1, 1993, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (incorporated by reference to Exhibit 10.24
to Mesa's Registration Statement on Form S-1, Registration No. 33-51909).
10.56- Amarillo Supply Agreement between Mesa Operating Limited Partnership,
Seller, and Energas Company, a division of Atmos Energy Corporation, Buyer,
dated effective January 2, 1993 (incorporated by reference to Exhibit 10.14
to Mesa's Annual Report on Form 10-K for the period ended December 31,
1995).
10.57+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly
P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley,
Ltd. and the Investor Partners (as defined therein, which includes
individuals who are directors and executive officers of Parker & Parsley),
together with a schedule identifying substantially identical documents and
setting forth the material details in which those documents differ from the
foregoing document (incorporated by reference to Exhibit 10.50 to Parker &
Parsley's Registration Statement on Form S-4, dated December 31, 1990,
Registration No. 33-38436).
10.58+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated
May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as
defined therein, which includes individuals who are directors and
executives officers of Parker & Parsley), together with a schedule
identifying substantially identical documents and setting forth the
material details in which those documents differ form the foregoing
document (incorporated by reference to Exhibit 10.51 to Parker & Parsley's
Registration Statement on Form S-4, dated December 31, 1990, Registration
No. 33-38436).
10.59+ - Schedule identifying additional documents substantially identical to
the Amendment to Agreement of Partnership of P&P Employees 89-B GP included
as Exhibit 10.58 and setting forth the material details in which those
documents differ from that document (incorporated by reference to Exhibit
10.52 to Parker & Parsley's Registration Statement on Form S-1, dated
February 28, 1992, Registration No. 33-46082).
94
Exhibit
Number Description
10.60+ - Agreement of Partnership of P&P Employees 90 Spraberry Private
Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James
D. Moring, and the General Partners (as defined therein, which includes
individuals who are directors and executive officers of Parker & Parsley),
and form of Amendment to Agreement of Partnership of P&P Employees 90
Spraberry Private Development GP, together with a schedule identifying
substantially identical documents and setting forth the material details in
which those documents differ from the foregoing document (incorporated by
reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on
Form S-4, dated December 31, 1990, Registration No. 33-38436).
10.61+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP,
dated February 19, 1991, among Parker & Parsley Development Company and the
Investor Partners (as defined therein, which includes individuals who are
directors and executive officers of Parker & Parsley), together with a
schedule identifying substantially identical documents and setting forth
the material details in which those documents differ from the foregoing
document (incorporated by reference to Exhibit 10.58 to Parker & Parsley's
Registration Statement on Form S-1, dated February 28, 1992, Registration
No. 33-46082).
10.62+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30,
1991, among Parker & Parsley Development Company, James D. Moring, and the
General Partners (as defined therein, which includes individuals who are
directors and executive officers of Parker & Parsley), together with a
schedule identifying substantially identical documents and setting forth
the material details in which those documents differ from the foregoing
document (incorporated by reference to Exhibit 10.61 to Parker & Parsley's
Registration Statement on Form S-1, dated February 28, 1992, Registration
No. 33-46082).
10.63+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry
Private Development GP, dated April 22, 1991, among the Partners (as
defined therein, which includes individuals who are directors and executive
officers of Parker & Parsley) (incorporated by reference to Exhibit 10.67
to Parker & Parsley's Registration Statement on Form S-1, dated February
28, 1992, Registration No. 33-46082).
11.1* - Statement of Computation of Earnings per Share
16.1* - Change in Certifying Accountants
21.1* - Subsidiaries of the registrant.
23.1* - Consent of KPMG Peat Marwick LLP
23.2* - Consent of Martin Petroleum & Associates
23.3* - Consent of Gilbert Laustsen Jung Associates
27.1* - Financial Data Schedule
- ---------------
* Filed herewith
+ Executive Compensation Plan or Arrangement previously filed pursuant to Item
14(c).
95