UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. 1-13245
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039
- ------------------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
----- ------
Number of shares of Common Stock outstanding as of April 28, 2003... 117,649,893
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002....................................... 4
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002.................... 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2003....................... 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002.................... 7
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2003 and 2002...... 8
Notes to Consolidated Financial Statements................. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 33
Item 4. Controls and Procedures..................................... 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 36
Item 6. Exhibits and Reports on Form 8-K............................ 36
Signatures.................................................. 37
Certifications.............................................. 38
Exhibit Index............................................... 40
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions
have specific meanings: "Bbl" means a standard barrel containing 42 United
States gallons; "BOE" means a barrel of oil equivalent and is a standard
convention used to express oil and gas volumes on a comparable oil equivalent
basis; "Btu" means British thermal unit and is a measure of the amount of energy
required to raise the temperature of one pound of water one degree Fahrenheit;
"LIBOR" means London Interbank Offered Rate, which is a market rate of interest;
"MMBtu" means one million Btu's; "MBbl" means one thousand Bbls; "MBOE" means
one thousand BOE; "Mcf" means one thousand cubic feet and is a measure of
natural gas volume; "MMcf" means one million cubic feet; "NGL" means natural gas
liquid; "NYMEX" means The New York Mercantile Exchange; "proved reserves" mean
the estimated quantities of crude oil, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made. Prices include consideration of changes in existing prices provided only
by contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Gas equivalents are determined under the relative energy content
method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.
With respect to information on the working interest in wells,
drilling locations and acreage, "net" wells, drilling locations and acres are
determined by multiplying "gross" wells, drilling locations and acres by Pioneer
Natural Resources Company's working interest in such wells, drilling locations
or acres. Unless otherwise specified, wells, drilling locations and acreage
statistics quoted herein represent gross wells, drilling locations or acres;
and, all currency amounts are expressed in U.S. dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 6,858 $ 8,490
Accounts receivable:
Trade, net of reserves for doubtful accounts of $4,955
and $4,744 as of March 31, 2003 and December 31, 2002,
respectively................................................ 125,374 97,774
Affiliates.................................................... 462 448
Inventories...................................................... 10,951 10,648
Prepaid expenses................................................. 13,707 5,485
Deferred income taxes............................................ 14,400 13,900
Other current assets:
Derivative assets, net of valuation reserves of $3,638
and $3,351 as of March 31, 2003 and December 31, 2002....... 5,346 3,150
Other......................................................... 7,447 7,198
---------- ----------
Total current assets........................................ 184,545 147,093
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................. 4,550,198 4,252,897
Unproved properties........................................... 190,585 219,073
Accumulated depletion, depreciation and amortization............. (1,346,096) (1,303,541)
---------- ----------
3,394,687 3,168,429
---------- ----------
Deferred income taxes.............................................. 76,449 76,840
Other property and equipment, net.................................. 22,577 22,784
Other assets, net:
Derivative assets, net of valuation reserves of $848 and
$1,136 as of March 31, 2003 and December 31, 2002............. 5,046 793
Other............................................................ 39,103 39,177
---------- ----------
$ 3,722,407 $ 3,455,116
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................................... $ 158,884 $ 117,582
Affiliates.................................................... 2,214 7,192
Interest payable................................................. 37,980 37,458
Income taxes payable............................................. 1,452 -
Other current liabilities:
Derivative obligations........................................ 118,075 83,638
Other......................................................... 37,863 28,722
---------- ----------
Total current liabilities................................... 356,468 274,592
---------- ----------
Long-term debt..................................................... 1,767,650 1,668,536
Noncurrent derivative obligations.................................. 59,073 42,490
Other noncurrent liabilities....................................... 115,372 85,841
Deferred income taxes.............................................. 11,889 8,760
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
119,601,844 and 119,592,344 shares issued as of March 31,
2003 and December 31, 2002, respectively...................... 1,196 1,196
Additional paid-in-capital....................................... 2,715,198 2,714,567
Treasury stock, at cost; 1,980,711 and 2,339,806 shares as of
March 31, 2003 and December 31, 2002, respectively............ (27,274) (32,219)
Deferred compensation............................................ (13,153) (14,292)
Accumulated deficit.............................................. (1,214,220) (1,298,440)
Accumulated other comprehensive income:
Deferred hedge gains (losses), net............................ (56,514) 9,555
Cumulative translation adjustment............................. 6,722 (5,470)
---------- ----------
Total stockholders' equity.................................. 1,411,955 1,374,897
Commitments and contingencies
---------- ----------
$ 3,722,407 $ 3,455,116
========== ==========
The financial information included as of March 31, 2003 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
----------------------
2003 2002
--------- ---------
Revenues and other income:
Oil and gas......................................................... $ 281,156 $ 165,539
Interest and other.................................................. 2,713 1,193
Gain (loss) on disposition of assets, net........................... 1,426 (74)
-------- --------
285,295 166,658
-------- --------
Costs and expenses:
Oil and gas production.............................................. 64,024 51,018
Depletion, depreciation and amortization............................ 70,049 50,388
Exploration and abandonments........................................ 35,867 21,120
General and administrative.......................................... 15,481 11,918
Accretion of discount on asset retirement obligations............... 1,094 -
Interest............................................................ 22,491 26,317
Other............................................................... 5,178 8,266
-------- --------
214,184 169,027
-------- --------
Income (loss) before income taxes and cumulative effect of
change in accounting principle....................................... 71,111 (2,369)
Income tax (provision) benefit.......................................... (2,304) 410
-------- --------
Income (loss) before cumulative effect of change in accounting
principle............................................................ 68,807 (1,959)
Cumulative effect of change in accounting principle, net of tax......... 15,413 -
-------- --------
Net income (loss)....................................................... $ 84,220 $ (1,959)
======== ========
Net income (loss) per share:
Basic:
Income (loss) before cumulative effect of change in accounting
principle...................................................... $ .59 $ (.02)
Cumulative effect of change in accounting principle, net of tax... .13 -
-------- --------
Net income (loss).............................................. $ .72 $ (.02)
======== ========
Diluted:
Income (loss) before cumulative effect of change in accounting
principle...................................................... $ .58 $ (.02)
Cumulative effect of change in accounting principle, net of tax... .13 -
-------- --------
Net income (loss).............................................. $ .71 $ (.02)
======== ========
Weighted average shares outstanding:
Basic............................................................... 116,743 104,055
======== ========
Diluted............................................................. 118,675 104,055
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive
Income (Loss)
-----------------------
Common Deferred
Stock Additional Deferred Hedge Total
Shares Common Paid-in Treasury Compen- Accumulated Gains Translation Stockholders'
Outstanding Stock Capital Stock sation Deficit (Losses) Adjustment Equity
----------- ------- ---------- -------- --------- ----------- ---------- ----------- ------------
Balance as of January 1,
2003.................... 117,253 $ 1,196 $2,714,567 $(32,219) $(14,292) $(1,298,440) $ 9,555 $(5,470) $ 1,374,897
Stock options exercised.. 359 - 401 4,945 - - - - 5,346
Deferred compensation:
Compensation deferred.. 9 - 230 - (230) - - - -
Deferred compensation
included in net
income................ - - - - 1,369 - - - 1,369
Net income............... - - - - - 84,220 - - 84,220
Other comprehensive
income (loss):
Deferred hedge gains
and losses, net of
tax:
Deferred hedge
losses.............. - - - - - - (116,432) - (116,432)
Net losses included
in net income....... - - - - - - 50,363 - 50,363
Translation adjustment. - - - - - - - 12,192 12,192
------- ------ --------- ------- -------- ---------- -------- ------ ----------
Balance as of March 31,
2003.................... 117,621 $ 1,196 $2,715,198 $(27,274) $(13,153) $(1,214,220) $ (56,514) $ 6,722 $ 1,411,955
======= ====== ========= ======= ======= ========== ======== ====== ==========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
March 31,
---------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss).................................................. $ 84,220 $ (1,959)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization......................... 70,049 50,388
Exploration expenses, including dry holes........................ 30,263 18,666
Deferred income taxes............................................ 254 (684)
(Gain) loss on disposition of assets, net........................ (1,426) 74
Accretion of discount on asset retirement obligations............ 1,094 -
Interest related amortization.................................... (4,565) (992)
Commodity hedge related amortization............................. (17,782) 6,680
Cumulative effect of change in accounting principle, net of tax.. (15,413) -
Other noncash items.............................................. 4,733 6,304
Changes in operating assets and liabilities:
Accounts receivable.............................................. (25,967) (13,721)
Inventory........................................................ (360) 2,239
Prepaid expenses................................................. (8,222) 43
Other current assets............................................. 398 (50)
Accounts payable................................................. 8,381 (14,456)
Interest payable................................................. 522 (295)
Income taxes payable............................................. 1,452 -
Other current liabilities........................................ 9,158 (2,201)
-------- --------
Net cash provided by operating activities..................... 136,789 50,036
-------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................................ 15,553 51,644
Additions to oil and gas properties................................ (252,753) (88,262)
Other property additions, net...................................... (2,281) (2,154)
-------- --------
Net cash used in investing activities......................... (239,481) (38,772)
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................................... 116,628 33,290
Principal payments on long-term debt............................... (15,000) (15,290)
Payment of noncurrent liabilities.................................. (6,380) (30,504)
Exercise of long-term incentive plan stock options................. 5,346 4,439
-------- --------
Net cash provided by (used in) financing activities........... 100,594 (8,065)
-------- --------
Net increase (decrease) in cash and cash equivalents................... (2,098) 3,199
Effect of exchange rate changes on cash and cash equivalents........... 466 (776)
Cash and cash equivalents, beginning of period......................... 8,490 14,334
-------- --------
Cash and cash equivalents, end of period............................... $ 6,858 $ 16,757
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended
March 31,
----------------------
2003 2002
--------- ---------
Net income (loss)............................................ $ 84,220 $ (1,959)
-------- --------
Other comprehensive income (loss):
Deferred hedge gains and losses, net of tax:
Deferred hedge losses.................................. (116,432) (64,082)
Net (gains) losses included in net income (loss)....... 50,363 (31,842)
Cumulative translation adjustment........................ 12,192 (134)
-------- --------
Other comprehensive loss............................ (53,877) (96,058)
-------- --------
Comprehensive income (loss).................................. $ 30,343 $ (98,017)
======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company") is a Delaware
corporation whose common stock is listed and traded on the New York Stock
Exchange. The Company is an oil and gas exploration and production company with
ownership interests in oil and gas properties located in the United States,
Argentina, Canada, Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation and Use of Estimates
Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of March 31, 2003 and for the three month
periods ended March 31, 2003 and 2002 include all adjustments and accruals,
consisting only of normal, recurring accrual adjustments, which are necessary
for a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
Adoption of SFAS 143. On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
the provisions of SFAS 143, asset retirement obligations are capitalized as part
of the carrying value of the long-lived asset. Under the provisions of SFAS 19,
asset retirement obligations were recognized using a cost-accumulation approach.
Prior to the adoption of SFAS 143, the Company recorded significant asset
retirement obligations through the unit-of-production method, except for asset
retirement obligations that were assumed in business combinations, which were
recorded at their estimated fair values on their dates of acquisition.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $13.8 million increase in the carrying values of
proved properties, (ii) a $26.3 million decrease in accumulated depreciation,
depletion, and amortization of property, plant and equipment, (iii) a $1.0
million increase in current abandonment liabilities, (iv) a $22.4 million
increase in noncurrent abandonment liabilities and (v) a $1.3 million increase
in deferred income tax liabilities. The net impact of items (i) through (v) was
to record a gain of $15.4 million, net of tax, as a cumulative effect adjustment
of a change in accounting principle in the Company's consolidated statements of
operations upon adoption on January 1, 2003. See Note E for additional
information regarding the Company's asset retirement obligations.
The following pro forma data summarizes the Company's net income (loss)
and net income (loss) per share as if the Company had adopted the provisions of
SFAS 143 on January 1, 2002, including an associated pro forma asset retirement
obligation on that date of $60.2 million:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Three months ended
March 31,
---------------------
2003 2002
-------- --------
(in thousands, except
per share amounts)
Net income (loss), as reported....................... $ 84,220 $ (1,959)
Pro forma adjustments to reflect retroactive
adoption of SFAS 143............................... (15,413) 563
------- -------
Pro forma net income (loss).......................... $ 68,807 $ (1,396)
======= =======
Net income (loss) per share:
Basic - as reported................................ $ .72 $ (.02)
======= =======
Basic - pro forma.................................. $ .59 $ (.01)
======= =======
Diluted - as reported.............................. $ .71 $ (.02)
======= =======
Diluted- pro forma................................. $ .58 $ (.01)
======= =======
Adoption of SFAS 145. On January 1, 2003, the Company adopted the
provisions of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" ("SFAS 145"). Prior to SFAS 145, gains or losses on the early
extinguishment of debt were required to be classified in a company's periodic
consolidated statements of operations as extraordinary gains or losses, net of
associated income taxes, after the determination of income or loss from
continuing operations. SFAS 145 requires, except in the case of events or
transactions of a highly unusual and infrequent nature, that gains or losses
from the early extinguishment of debt be classified, on both a prospective and
retrospective basis, as components of a company's income or loss from continuing
operations. The adoption of SFAS 145 did not affect the Company's financial
position or liquidity. Under the provisions of SFAS 145, gains or losses from
the early extinguishment of debt are recognized in the Company's consolidated
statements of operations, except in the case of events or transactions of a
highly unusual and infrequent nature, as components of other income or other
expense and are included in the determination of the income (loss) from
continuing operations. Accordingly, extraordinary losses from the early
extinguishment of debt of $2.8 million and $19.5 million recorded during the
three month periods ended June 30 and September 30,2002, respectively, have been
reclassified to other expense.
Stock-based compensation. The Company accounts for stock-based
compensation granted under it's the long-term incentive plan using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Stock-based compensation expenses associated with option grants were not
recognized in the net income (loss) of the three month periods ended March 31,
2003 and 2002, as all options granted had exercise prices equal to the market
value of the underlying common stock on the dates of grant. The following table
illustrates the effect on net income (loss) and earnings per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to stock-based employee compensation:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Three months ended
March 31,
---------------------
2003 2002
-------- --------
(in thousands, except
per share amounts)
Net income (loss), as reported......................... $ 84,220 $ (1,959)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects... (3,032) (2,541)
------- -------
Pro forma net income (loss)............................ $ 81,188 $ (4,500)
======= ========
Net income (loss) per share:
Basic - as reported................................. $ .72 $ (.02)
======= ========
Basic - pro forma................................... $ .70 $ (.04)
======= ========
Diluted - as reported............................... $ .71 $ (.02)
======= ========
Diluted - pro forma................................. $ .68 $ (.04)
======= ========
Use of Estimates
As of March 31, 2003, the Company used an exchange rate of 3.0 pesos to
$1 to remeasure the peso-denominated monetary assets and liabilities of the
Company's Argentine subsidiaries.
NOTE C. Asset Acquisition
On March 28, 2003, the Company purchased the remaining 25 percent working
interest that it did not already own in the Falcon field, the Harrier field and
surrounding satellite prospects in the deepwater Gulf of Mexico for $119.4
million, including $113.1 million of cash paid upon closing, $1.7 million of
asset retirement obligations assumed and $4.6 million of closing adjustments.
NOTE D. Derivative Financial Instruments
Fair value hedges. The Company monitors capital markets and trends to
identify opportunities to enter into interest rate swaps to minimize its costs
of capital. During February 2003, the Company entered into interest rate swap
contracts to hedge a portion of the fair value of its 9-5/8 percent senior
notes. Under the terms of the interest rate swap contracts, the Company will
receive a fixed annual rate of 9-5/8 percent on $250 million notional amount and
will pay the counterparties a variable rate on the notional amount equal to the
six-month London Interbank Offered Rate, reset semi-annually, plus a weighted
average margin of 566.4 basis points. As of March 31, 2003, the carrying value
of the Company's fair value hedges was an asset of $3.3 million.
As of March 31, 2003, the carrying value of the Company's long-term debt
in the accompanying Consolidated Balance Sheets included $29.5 million of
incremental liability attributable to unamortized deferred hedge gains realized
from fair value hedge agreements terminated during 2002 and 2001. The
amortization of these deferred hedge gains reduced the Company's reported
interest expense by $5.9 million and $2.9 million during the periods ended March
31, 2003 and 2002, respectively.
The following table sets forth the scheduled amortization of deferred
hedge gains on terminated fair value hedges that will be recognized as
reductions in the Company's future interest expense:
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
2003 hedge gain amortization...... $ 5,540 $ 4,700 $ 4,131 $ 14,371
2004 hedge gain amortization...... $ 3,491 $ 3,099 $ 2,437 $ 2,086 11,113
Remaining net gains to be amortized
through 2008.................... 4,051
-------
$ 29,535
=======
The terms of the fair value hedges described above perfectly matched the
terms of the underlying senior notes. The Company did not exclude any component
of the derivatives' gains or losses from the measurement of hedge effectiveness.
Cash flow hedges. The Company utilizes, from time to time, commodity swap
and collar contracts to (i) reduce the effect of price volatility on the
commodities the Company produces and sells, (ii) support the Company's annual
capital budgeting and expenditure plans and (iii) reduce commodity price risk
associated with certain capital projects. The Company has also utilized interest
rate swap agreements to reduce the effect of interest rate volatility on the
Company's variable rate line of credit indebtedness and forward currency
exchange agreements to reduce the effect of U.S. dollar to Canadian dollar
exchange rate volatility.
Oil. All material sales contracts governing the Company's oil production
have been tied directly or indirectly to the New York Mercantile Exchange
prices. The following table sets forth the Company's outstanding oil hedge
contracts and the weighted average NYMEX prices for those contracts as of March
31, 2003:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
Daily oil production:
2003 - Swap Contracts
Volume (Bbl).............. 23,000 21,043 17,000 20,338
Price per Bbl............. $ 24.85 $ 24.37 $ 24.30 $ 24.53
2004 - Swap Contracts
Volume (Bbl).............. 9,000 9,000 9,000 9,000 9,000
Price per Bbl............. $ 22.96 $ 22.96 $ 22.96 $ 22.96 $ 22.96
2005 - Swap Contracts
Volume (Bbl).............. 2,000 2,000 2,000 2,000 2,000
Price per Bbl............. $ 24.00 $ 24.00 $ 24.00 $ 24.00 $ 24.00
The Company reports average oil prices per Bbl including the effects of
oil quality adjustments and the net effect of oil hedges. The following table
sets forth the Company's oil prices, both reported (including hedge results) and
realized (excluding hedge results), and the net effect of settlements of oil
price hedges to revenue:
Three months ended
March 31,
-------------------
2003 2002
------- -------
Average price reported per Bbl.......................... $ 25.82 $ 23.17
Average price realized per Bbl.......................... $ 30.92 $ 18.54
Addition (reduction) to revenue (in millions)........... $ (14.7) $ 14.4
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Natural gas liquids prices. During the three month periods ended March
31, 2003 and 2002, the Company did not enter into any NGL hedge contracts.
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth the Company's outstanding gas hedge contracts and the
weighted average index prices for those contracts as of March 31, 2003:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
---------- ---------- ---------- ---------- -----------
Daily gas production:
2003 - Swap Contracts
Volume (Mcf)................. 230,000 230,000 230,000 230,000
Index price per MMBtu........ $ 3.76 $ 3.76 $ 3.76 $ 3.76
2004 - Swap Contracts
Volume (Mcf)................. 230,000 230,000 230,000 230,000 230,000
Index price per MMBtu........ $ 4.06 $ 4.06 $ 4.06 $ 4.06 $ 4.06
2004 - Collar Contracts
Volume (Mcf)................. 35,000 35,000 35,000 35,000 35,000
Index price per MMBtu........ $4.00-6.76 $4.00-6.76 $4.00-6.76 $4.00-6.76 $4.00-6.76
2005 - Swap Contracts
Volume (Mcf)................. 10,000 10,000 10,000 10,000 10,000
Index price per MMBtu........ $ 3.70 $ 3.70 $ 3.70 $ 3.70 $ 3.70
2006 - Swap Contracts
Volume (Mcf)................. 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu........ $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75
2007 - Swap Contracts
Volume (Mcf)................. 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu........ $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75
The Company reports average gas prices per Mcf including the effects of
Btu content, gas processing and shrinkage adjustments and the net effect of gas
hedges. The following table sets forth the Company's gas prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of gas price hedges to revenue:
Three months ended
March 31,
-------------------
2003 2002
------- -------
Average price reported per Mcf.......................... $ 4.06 $ 2.47
Average price realized per Mcf.......................... $ 4.95 $ 1.87
Addition (reduction) to revenue (in millions)........... $ (35.7) $ 17.8
Hedge ineffectiveness and excluded items. During the thee month periods
ended March 31, 2003 and 2002, the Company recognized other expense of $1.8
million and $78 thousand, respectively, related to the ineffective portions of
its cash flow hedging instruments.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Accumulated other comprehensive income ("AOCI") - deferred hedge gains
and losses, net. As of March 31, 2003 and December 31, 2002, "AOCI - deferred
hedge gains (losses), net" represented net deferred losses of $56.5 million and
net deferred gains of $9.6 million, respectively. The AOCI - deferred hedge
gains, net balance as of March 31, 2003 was comprised of $154.7 million of
unrealized deferred hedge losses on the effective portions of open commodity
cash flow hedges and $98.2 million of net deferred gains on terminated cash flow
hedges. The decrease in AOCI - deferred hedge gains, net during the three months
ended March 31, 2003 was primarily attributable to increases in future commodity
prices relative to the commodity prices stipulated in the hedge agreements,
offset by the reclassification of deferred hedge losses to net income as
derivatives matured by their terms. The unrealized deferred hedge gains and
losses associated with open cash flow hedges remain subject to market price
fluctuations until the positions are either settled under the terms of the hedge
agreements or terminated prior to settlement. The net deferred gains and losses
on terminated cash flow hedges are fixed.
During the twelve month period ending March 31, 2004, the Company expects
to reclassify $103.1 million of net deferred losses associated with open cash
flow hedges and $64.1 million of net deferred gains on terminated cash flow
hedges from AOCI - deferred hedge gains, net to oil and gas revenue.
The following table sets forth the scheduled reclassifications of
deferred hedge gains on terminated cash flow hedges that will be recognized in
the Company's future oil and gas revenues:
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(in thousands)
2003 deferred hedge gains......... $18,167 $17,807 $17,136 $53,110
2004 deferred hedge gains......... $10,978 $10,932 $11,001 $10,954 43,865
2005 deferred hedge gains......... $ 307 $ 310 $ 315 $ 317 1,249
------
$98,224
======
NOTE E. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provisions of SFAS 143
on January 1, 2003. The Company has asset retirement obligations primarily
associated with the future plugging and abandonment of proved properties and
related facilities. The Company has no assets that are legally restricted for
purposes of settling asset retirement obligations. The following table
summarizes the Company's asset retirement obligation transactions recorded in
accordance with the provisions of SFAS 143 during the three months ended March
31, 2003 and in accordance with the provisions of SFAS 19 during the three
months ended March 31, 2002.
Three months ended
March 31,
---------------------
2003 2002
-------- --------
(in thousands)
Beginning asset retirement obligation.................. $ 34,692 $ 39,461
Cumulative effect adjustment........................... 23,393 -
Liabilities incurred during period..................... 6,965 -
Liabilities settled during period...................... (2,442) (1,641)
Accretion expense...................................... 1,094 651
Currency translation................................... 472 (597)
------- -------
Ending asset retirement obligation .................... $ 64,174 $ 37,874
======= =======
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE F. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental to
its business, including, but not limited to, the proceedings described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. The Company believes that
the ultimate disposition of these legal actions will not have a material adverse
effect on the Company's consolidated financial position, liquidity, capital
resources or future results of operations. The Company will continue to evaluate
its litigation matters on a quarter-by-quarter basis and will adjust its
litigation reserves as appropriate to reflect the then current status of
litigation.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings to add claims regarding
the field compression installed by the Company in the 1990's. The lawsuit now
has two material claims. First, the plaintiffs assert that the expenses related
to the field compression are a "cost of production" for which plaintiffs cannot
be charged their proportionate share under the applicable oil and gas leases.
Second, the plaintiffs claim they are entitled to 100 percent of the value of
the helium extracted at the Company's Satanta gas plant. If the plaintiffs were
to prevail on the above two claims in their entirety, it is possible that the
Company's liability could reach $30 million, plus prejudgment interest. However,
the Company believes it has valid defenses to plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases, and intends to
vigorously defend itself.
The Company believes the cost of the field compression is not a "cost of
production", but is rather an expense of transporting the gas to the Company's
Satanta gas plant for processing, where valuable hydrocarbon liquids and helium
are extracted from the gas. The plaintiffs benefit from such extractions and the
Company believes that charging the plaintiffs with their proportionate share of
such transportation and processing expenses is consistent with Kansas law. The
Company has also vigorously defended against plaintiffs' claims to 100 percent
of the value of the helium extracted, and believes that in accordance with
applicable law, it has properly accounted to the plaintiffs for their fractional
royalty share of the helium under the specified royalty clauses of the
respective oil and gas leases.
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to plaintiffs and believes it presented strong
evidence at trial to support its positions. The Company has not yet determined
the amount of damages, if any, that would be payable if the lawsuit was
determined adversely to the Company. Although the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the quarterly reporting period in which such liability is
recorded, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity, capital resources or future annual results of operations.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows
a "severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, one of the
Company's predecessor entities collected the Kansas ad valorem tax in addition
to the otherwise maximum lawful price. The FERC's ruling was appealed to the
United States Court of Appeals for the District of Columbia ("D.C. Circuit"),
which held in June 1988 that the FERC failed to provide a reasoned basis for its
findings and remanded the case to the FERC for further consideration.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various gas producers subsequently
filed a petition for writ of certiori with the United States Supreme Court
seeking to limit the scope of the potential refunds to tax bills rendered on or
after June 28, 1988 (the effective date originally selected by the FERC).
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non-recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
1997 to file claims on refunds sought from producers and refund claims totaling
approximately $30.2 million were made against the Company. Through March 31,
2003, the Company has settled $21.7 million of the original claim amounts. As of
March 31, 2003 and December 31, 2002, the Company had on deposit $10.6 million,
including accrued interest, in an escrow account and had corresponding
obligations for the remaining claim recorded in other current liabilities in the
accompanying Consolidated Balance Sheets. The Company believes that the escrowed
amounts, plus accrued interest, will be sufficient to settle the remaining
claims.
NOTE G. Income (Loss) Per Share Before Cumulative Effect of Change in
Accounting Principle
Basic income (loss) per share before cumulative effect of change in
accounting principle is computed by dividing income (loss) before cumulative
effect of change in accounting principle by the weighted average number of
common shares outstanding for the period. The computation of diluted net income
(loss) per share before cumulative effect of change in accounting principle
reflects the potential dilution that could occur if securities or other
contracts to issue common stock that are dilutive to net income were exercised
or converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average shares outstanding for the three months ended March 31, 2003 and 2002:
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Three months ended
March 31,
----------------------
2003 2002
--------- ---------
(in thousands)
Weighted average common shares outstanding:
Basic............................................. 116,743 104,055
Dilutive common stock options (a)................. 1,793 -
Restricted stock awards (b)....................... 139 -
------- -------
Diluted........................................... 118,675 104,055
======= =======
- ---------------
(a) Common stock options to purchase 1,377,519 shares and 4,998,951shares of
common stock were outstanding but not included in the computations of
diluted net income (loss) per share for the three months ended March 31,
2003 and 2002, respectively, because the exercise prices of the options
were greater than the average market price of the common shares and would
be anti-dilutive to the computations. In-the-money options representing
1,226,746 weighted average equivalent shares of common stock were not
included in the computation of diluted net loss per share for the three
months ended March 31, 2002, since they have a dilutive effect to net loss
per share.
(b) During the three months ended March 31, 2003, the Company issued 9,500
restricted shares of the Company's common stock to key employees of the
Company. The restricted shares issued to the key employees vest on the
third anniversaries of their issuances.
NOTE H. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the
oil and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina and Canada.
Other foreign is primarily comprised of operations in Gabon, South Africa and
Tunisia.
The following table provides the Company's interim geographic operating
segment data. Geographic operating segment income tax benefits (provisions) have
been determined based on statutory rates existing in the various tax
jurisdictions where the Company has oil and gas producing activities. The
"Headquarters and Other" table column includes revenues and expenses that are
not routinely included in the earnings measures internally reported to
management on a geographic operating segment basis.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and other Total
-------- --------- -------- --------- ------------ ------------
(in thousands)
Three months ended March 31, 2003:
Oil and gas revenue............. $239,251 $ 23,381 $ 18,524 $ - $ - $ 281,156
Interest and other.............. - - - - 2,713 2,713
Gain on disposition of assets... 1,246 - 1 - 179 1,426
------- ------- ------- ------- ------- ---------
240,497 23,381 18,525 - 2,892 285,295
------- ------- ------- ------- ------- ---------
Production costs................ 55,537 5,409 3,078 - - 64,024
Depletion, depreciation and
amortization................. 52,858 8,326 6,551 - 2,314 70,049
Exploration and abandonments.... 17,787 3,044 11,327 3,709 - 35,867
General and administrative...... - - - - 15,481 15,481
Accretion of discount on asset
retirement obligations....... - - - - 1,094 1,094
Interest........................ - - - - 22,491 22,491
Other .......................... - - - - 5,178 5,178
------- ------- ------- ------- ------- ---------
126,182 16,779 20,956 3,709 46,558 214,184
------- ------- ------- ------- ------- ---------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle...... 114,315 6,602 (2,431) (3,709) (43,666) 71,111
Income tax benefit (provision).. (40,010) (2,311) 960 1,298 37,759 (2,304)
------- ------- ------- ------- ------- ---------
Income (loss) before cumulative
effect of change in accounting
principle.................... $ 74,305 $ 4,291 $ (1,471) $ (2,411) $ (5,907) $ 68,807
======= ======= ======= ======= ======= =========
United Other Headquarters Consolidated
States Argentina Canada Foreign and other Total
-------- --------- -------- --------- ------------ ------------
(in thousands)
Three months ended March 31, 2002:
Oil and gas revenue............. $131,461 $ 23,259 $ 10,819 $ - $ - $ 165,539
Interest and other.............. - - - - 1,193 1,193
Loss on disposition of assets... - - (11) - (63) (74)
------- ------- ------- ------ ------- ---------
131,461 23,259 10,808 - 1,130 166,658
------- ------- ------- ------ ------- ---------
Production costs................ 44,844 3,585 2,589 - - 51,018
Depletion, depreciation and
amortization................. 31,674 10,099 6,464 - 2,151 50,388
Exploration and abandonments.... 13,311 2,140 2,303 3,366 - 21,120
General and administrative...... - - - - 11,918 11,918
Interest........................ - - - - 26,317 26,317
Other .......................... - - - - 8,266 8,266
------- ------- ------- ------- ------- ---------
89,829 15,824 11,356 3,366 48,652 169,027
------- ------- ------- ------- ------- ---------
Income (loss) before income
taxes........................ 41,632 7,435 (548) (3,366) (47,522) (2,369)
Income tax benefit (provision).. (14,571) (2,602) 231 1,178 16,174 410
------- ------- ------- ------- ------- ---------
Net income (loss)............... $ 27,061 $ 4,833 $ (317) $ (2,188) $(31,348) $ (1,959)
======= ======= ======= ======= ======= =========
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE I. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed the
long-term debt of the Company. In accordance with practices accepted by the SEC,
the Company has prepared Consolidating Condensed Financial Statements in order
to quantify the assets and results of operations of Pioneer USA as a subsidiary
guarantor. The following Consolidating Condensed Balance Sheets, Consolidating
Condensed Statements of Operations and Comprehensive Income (Loss) and
Consolidating Condensed Statements of Cash Flows present financial information
for Pioneer Natural Resources Company as the Parent on a stand-alone basis
(carrying any investments in subsidiaries under the equity method), financial
information for Pioneer USA on a stand-alone basis (carrying any investment in
non-guarantor subsidiaries under the equity method), the non-guarantor
subsidiaries of the Company on a consolidated basis, the consolidation and
elimination entries necessary to arrive at the information for the Company on a
consolidated basis, and the financial information for the Company on a
consolidated basis. Pioneer USA is not restricted from making distributions to
the Company.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of March 31, 2003
(in thousands)
(Unaudited)
ASSETS
Pioneer
Natural
Resources Non-
Company Pioneer Guarantor The
(Parent) USA Subsidiaries Eliminations Company
----------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 23 $ 2,463 $ 4,372 $ $ 6,858
Other current assets.................. 1,809,562 (1,529,990) (101,885) 177,687
---------- ---------- --------- ----------
Total current assets............. 1,809,585 (1,527,527) (97,513) 184,545
---------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 3,215,816 1,334,382 4,550,198
Unproved properties................ - 28,856 161,729 190,585
Accumulated depletion, depreciation
and amortization.................... - (972,799) (373,297) (1,346,096)
---------- ---------- --------- ----------
- 2,271,873 1,122,814 3,394,687
---------- ---------- ---------- ----------
Deferred income taxes................... 74,811 - 1,638 76,449
Other property and equipment, net....... - 18,488 4,089 22,577
Other assets, net....................... 18,693 15,952 9,504 44,149
Investment in subsidiaries.............. 1,354,117 136,602 - (1,490,719) -
---------- ---------- --------- ----------
$ 3,257,206 $ 915,388 $1,040,532 $ 3,722,407
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 31,689 $ 255,459 $ 69,320 $ $ 356,468
Long-term debt.......................... 1,767,650 - - 1,767,650
Other noncurrent liabilities............ - 189,415 (14,970) 174,445
Deferred income taxes................... - - 11,889 11,889
Stockholders' equity.................... 1,457,867 470,514 974,293 (1,490,719) 1,411,955
Commitments and contingencies - - - -
---------- ---------- --------- ----------
$ 3,257,206 $ 915,388 $1,040,532 $ 3,722,407
========== ========== ========= ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2002
(in thousands)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
----------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 6 $ 1,783 $ 6,701 $ $ 8,490
Other current assets.................. 1,727,828 (1,480,657) (108,568) 138,603
---------- ---------- --------- ----------
Total current assets............. 1,727,834 (1,478,874) (101,867) 147,093
---------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 3,024,845 1,228,052 4,252,897
Unproved properties................ - 43,969 175,104 219,073
Accumulated depletion, depreciation
and amortization.................... - (947,091) (356,450) (1,303,541)
---------- ---------- --------- ----------
- 2,121,723 1,046,706 3,168,429
---------- ---------- ---------- ----------
Deferred income taxes................... 75,311 - 1,529 76,840
Other property and equipment, net....... - 19,000 3,784 22,784
Other assets, net....................... 16,067 14,231 9,672 39,970
Investment in subsidiaries.............. 1,247,042 136,159 - (1,383,201) -
---------- ---------- --------- ----------
$ 3,066,254 $ 812,239 $ 959,824 $ 3,455,116
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,785 $ 216,065 $ 27,742 $ $ 274,592
Long-term debt, less current maturities. 1,668,536 - - 1,668,536
Other noncurrent liabilities............ - 147,970 (19,639) 128,331
Deferred income taxes................... - - 8,760 8,760
Stockholders' equity.................... 1,366,933 448,204 942,961 (1,383,201) 1,374,897
Commitments and contingencies........... - - - -
---------- ---------- -------- ---------
$ 3,066,254 $ 812,239 $ 959,824 $ 3,455,116
========== ========== ========= ==========
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
--------- --------- ------------ ------------ ----------
Revenues:
Oil and gas.............................. $ - $ 214,715 $ 66,441 $ $ 281,156
Interest and other....................... - 786 1,927 2,713
Gain on disposition of assets, net....... - 1,230 196 1,426
-------- -------- -------- ---------
- 216,731 68,564 285,295
-------- -------- -------- ---------
Costs and expenses:
Oil and gas production.................... - 50,529 13,495 64,024
Depletion, depreciation and
amortization............................ - 51,830 18,219 70,049
Exploration and abandonments.............. - 19,792 16,075 35,867
General and administrative................ 295 12,310 2,876 15,481
Accretion of discount on asset
retirement obligations.................. - 857 237 1,094
Interest.................................. 5,081 17,192 218 22,491
Equity (income) loss from subsidiaries.... (89,626) 5,454 - 84,172 -
Other..................................... 30 813 4,335 5,178
-------- -------- -------- ---------
(84,220) 158,777 55,455 214,184
-------- -------- -------- ---------
Income before income taxes and cumulative
effect of change in accounting
principle................................ 84,220 57,954 13,109 71,111
Income tax provision........................ - - (2,304) (2,304)
-------- -------- -------- ---------
Income before cumulative effect of change
in accounting principle.................. 84,220 57,954 10,805 68,807
Cumulative effect of change in accounting
principle, net of tax.................... - 11,859 3,554 15,413
-------- -------- -------- ---------
Net income.................................. 84,220 69,813 14,359 84,220
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses, net of tax...... - (103,549) (12,883) (116,432)
Net losses included in net income...... - 44,444 5,919 50,363
Cumulative translation adjustment........ - - 12,192 12,192
-------- -------- -------- ---------
Comprehensive income........................ $ 84,220 $ 10,708 $ 19,587 $ 30,343
======== ======== ======== =========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
--------- --------- ------------ ------------ ----------
Revenues:
Oil and gas.............................. $ - $ 125,921 $ 39,618 $ $ 165,539
Interest and other....................... - 741 452 1,193
Loss on disposition of assets, net....... - - (74) (74)
-------- -------- -------- ---------
- 126,662 39,996 166,658
-------- -------- -------- ---------
Costs and expenses:
Oil and gas production................... - 44,541 6,477 51,018
Depletion, depreciation and
amortization........................... - 32,266 18,122 50,388
Exploration and abandonments............. - 13,950 7,170 21,120
General and administrative............... 263 9,501 2,154 11,918
Interest................................. 4,517 17,969 3,831 26,317
Equity (income) loss from subsidiaries... (2,822) 2,766 - 56 -
Other.................................... 1 268 7,997 8,266
-------- -------- -------- ---------
1,959 121,261 45,751 169,027
-------- -------- -------- ---------
Income (loss) before income taxes............ (1,959) 5,401 (5,755) (2,369)
Income tax benefit.......................... - - 410 410
-------- -------- -------- ---------
Net income (loss)............................ (1,959) 5,401 (5,345) (1,959)
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses, net of tax....... (138) (50,485) (13,459) (64,082)
Net (gains) losses included in net
income............................... 290 (26,547) (5,585) (31,842)
Cumulative translation adjustment......... - - (134) (134)
-------- -------- -------- ---------
Comprehensive loss........................... $ (1,807) $ (71,631) $ (24,523) $ (98,017)
======== ======== ======== =========
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ----------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities...................................... $(106,957) $ 198,841 $ 44,905 $ 136,789
-------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets............... - 15,472 81 15,553
Additions to oil and gas properties............... - (204,983) (47,770) (252,753)
Other property (additions) dispositions, net...... - (2,358) 77 (2,281)
-------- -------- -------- ---------
Net cash used in investing activities.......... - (191,869) (47,612) (239,481)
-------- -------- -------- ---------
Cash flows from financing activities:
Borrowings under long-term debt................... 116,628 - - 116,628
Principal payments on long-term debt.............. (15,000) - - (15,000)
Payment of noncurrent liabilities................. - (6,292) (88) (6,380)
Exercise of long-term incentive plan
stock options.................................. 5,346 - - 5,346
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities......................... 106,974 (6,292) (88) 100,594
-------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 17 680 (2,795) (2,098)
Effect of exchange rate changes on
cash and cash equivalents........................ - - 466 466
Cash and cash equivalents,
beginning of period.............................. 6 1,783 6,701 8,490
-------- -------- -------- ---------
Cash and cash equivalents, end
of period........................................ $ 23 $ 2,463 $ 4,372 $ 6,858
======== ======== ======== =========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ----------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities..................................... $ (73,878) $ 93,313 $ 30,601 $ 50,036
-------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets............... 51,420 162 62 51,644
Additions to oil and gas properties............... - (57,342) (30,920) (88,262)
Other property additions, net..................... - (1,092) (1,062) (2,154)
-------- -------- -------- ---------
Net cash provided by (used in)
investing activities........................ 51,420 (58,272) (31,920) (38,772)
-------- -------- -------- ---------
Cash flows from financing activities:
Borrowings under long-term debt................... 33,290 - - 33,290
Principal payments on long-term debt.............. (15,290) - - (15,290)
Payment of noncurrent liabilities................. - (29,988) (516) (30,504)
Exercise of long-term incentive plan
stock options.................................. 4,439 - - 4,439
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities........................ 22,439 (29,988) (516) (8,065)
-------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... (19) 5,053 (1,835) 3,199
Effect of exchange rate changes on
cash and cash equivalents........................ - - (776) (776)
Cash and cash equivalents,
beginning of period.............................. 79 10,900 3,355 14,334
-------- -------- -------- ---------
Cash and cash equivalents, end
of period........................................ $ 60 $ 15,953 $ 744 $ 16,757
======== ======== ======== =========
23
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information included in Item 2 and Item 3 of this document includes
forward-looking statements that are made pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, and the business prospects of Pioneer Natural Resources Company
("Pioneer" or the "Company"), are subject to a number of risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from the forward-looking statements. These risks and uncertainties
include, among other things, volatility of oil and gas prices, product supply
and demand, competition, international operations and associated international
political and economic instability, government regulation or action, litigation,
the costs and results of drilling and operations, the Company's ability to
replace reserves or implement its business plans, access to and cost of capital,
uncertainties about estimates of reserves, quality of technical data and
environmental risks, acts of war and terrorism. These and other risks are
described in the Company's 2002 Annual Report on Form 10-K that is available
from the United States Securities and Exchange Commission ("SEC").
Financial and Operating Performance
The Company's financial and operating performance for the first quarter
of 2003 was highlighted by favorable worldwide oil and North American gas
prices; growth in the Company's deepwater Gulf of Mexico sales volumes,
including reaching full production rates from the Canyon Express gas development
and first production during March 2003 from the Company-operated Falcon field,
which is the second of five significant projects that the Company plans to bring
on production through early 2004; the announcement of a strategic joint
exploration agreement with Woodside Energy (USA) Inc. ("Woodside") for a
two-year drilling program over the shallow-water Texas shelf region of the Gulf
of Mexico; the Harrier field discovery, a Falcon field satellite that has been
sanctioned for development; a discovery in Alaska on three exploration wells
drilled on the Company's NW Kuparuk prospect which are currently being evaluated
for commercial viability; and the acquisition of the remaining 25 percent
working interest that the Company did not already own in the Falcon field, the
Harrier field and surrounding satellite prospects for $119.4 million (see Note C
of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information regarding this acquisition).
The Company reported net income of $84.2 million ($.71 per diluted share)
for the three months ended March 31, 2003, including a $15.4 million ($.13 per
share) benefit from the cumulative effect of change in accounting principle
associated with the Company's adoption of Statement of Accounting Principles No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143") on January 1,
2003, as compared to a net loss of $2.0 million ($.02 per share) for the same
period in 2002. See Notes B and E of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for additional information regarding
the Company's adoption of new accounting pronouncements.
The Company's net cash provided by operating activities was $136.8
million for the three months ended March 31, 2003, representing an increase of
$86.8 million, or 174 percent, over the net cash provided by operating
activities of the same period in 2002. The increase in net cash provided by
operating activities was primarily a result of higher gas volumes and commodity
prices. During the three months ended March 31, 2003, the Company used its net
cash provided by operating activities, together with proceeds from the
disposition of assets and net borrowings under long-term debt to fund $252.8
million of additions to oil and gas properties.
Drilling Highlights
During the first three months of 2003, the Company completed its Falcon
field development, continued development activities at Devils Tower in the
deepwater Gulf of Mexico and Sable in South Africa, successfully drilled its
Harrier prospect, a Falcon satellite discovery, and drilled its first three
exploratory wells in Alaska, as referred to above. The Company also acquired the
25 percent working interest it did not already own in the Falcon field, the
Harrier field and surrounding satellite prospects during March of 2003. In
total, the Company incurred $285.7 million in capital expenditures during the
first quarter of 2003 including $77.4 million for development activities, $85.0
million for exploration activities and $123.3 million on acquisitions. Other
than the Falcon area acquisition, the majority of the Company's capital
24
PIONEER NATURAL RESOURCES COMPANY
expenditures was spent on drilling wells and fabricating infrastructure for the
Company's significant development projects. The following tables summarize the
Company's development drilling and exploration and extension drilling activities
for the three months ended March 31, 2003:
Development Drilling
---------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- -------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast..... 1 6 7 - -
Permian Basin................. 2 36 33 - 5
Mid-Continent................. 4 18 18 - 4
------ ------ ------ ------ ------
Total Domestic......... 7 60 58 - 9
------ ------ ------ ------ ------
Argentina..................... 3 9 8 - 4
Canada........................ 4 10 7 7 -
------ ------ ------ ------ ------
Total Worldwide........ 14 79 73 7 13
====== ====== ====== ====== ======
Exploration/Extension Drilling
---------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- -------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast.... - 4 1 2 1
Alaska....................... - 3 - - 3
------ ------ ------ ------ ------
Total Domestic.......... - 7 1 2 4
Argentina.................... 6 10 9 3 4
Canada....................... 4 46 16 24 10
Tunisia...................... - 2 - 1 1
------ ------ ------ ------ ------
Total Worldwide......... 10 65 26 30 19
====== ====== ====== ====== ======
Domestic. The Company spent $227.6 million during the first three months
of 2003 on acquisition, drilling and seismic activities in the Gulf of
Mexico/Gulf Coast, Permian Basin and Mid-Continent areas of the United States.
Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area,
the Company spent $170.3 million of acquisition, drilling and seismic capital.
In the deepwater Gulf of Mexico, the Company has two major producing properties
and two major development projects that remain in progress as of March 31, 2003:
o Canyon Express - The TotalFinaElf-operated Aconcagua and the
Marathon-operated Camden Hills discoveries in Mississippi Canyon began
producing in September 2002. Associated with the start-up of this project,
several operational and mechanical difficulties were encountered which
delayed achieving full production rates of 110 to 120 MMcf of gas per day
until late January 2003.
o Falcon - The Company-operated Falcon field started producing in mid-March
2003. On March 28, 2003, the Company purchased the remaining 25 percent
working interest that the Company did not already own in 32 blocks in the
Falcon area, including the Falcon field, the Harrier field and surrounding
satellite prospects. To accommodate incremental Harrier field production
and potential throughput associated with planned exploration, an additional
parallel pipeline connecting the Falcon field to the Falcon platform on the
Gulf of Mexico shelf will be added, doubling its capacity to 400 MMcf of
gas per day. As is further discussed below, the Company expects first gas
production from Harrier field in late 2003 or early 2004 with combined
daily gas production from Falcon field and Harrier field expected to reach
275 MMcf per day.
25
PIONEER NATURAL RESOURCES COMPANY
o Devils Tower - The Dominion-operated Devils Tower development project in
Mississippi Canyon was sanctioned in 2001 as a spar development project
with the owners leasing a spar from a third party for the life of the
field. The hull of the spar was constructed in Indonesia and was
successfully transported to the United States during the first quarter of
2003 where the topsides will be added during the third quarter of 2003. The
spar has slots for eight dry tree wells and up to three subsea tie-back
wells and is capable of handling 60 MBbls of oil per day and 60 MMcf of gas
per day. Eight Devils Tower wells and one subsea tie-back well have been
drilled and are awaiting completion. Devils Tower production is scheduled
to begin in early 2004 and will be phased in as the wells are individually
completed from the spar. Pioneer holds a 25 percent working interest in the
projects.
o Harrier - The Company discovered the Harrier field during the first quarter
of 2003, encountering over 350 feet of gas-bearing sand in a single zone.
Pioneer operates the block with a 100 percent working interest, subsequent
to the acquisition discussed above, and expects to develop the field as a
single-well subsea tie-back to the Falcon field facilities which were
designed to be expandable. First production from the Harrier field is
anticipated in late 2003 or early 2004.
In addition to the development projects described above in the deepwater
Gulf of Mexico, the Company drilled two exploratory dry holes in the Falcon area
during the first quarter and plans to drill two additional exploration prospects
there later this year. If successful, these Falcon area prospects could also be
tied back to the Falcon field to utilize excess pipeline capacity. Additionally,
the Company has a multi-year inventory of prospects on the 32 blocks it holds in
the area.
During January 2003, the Company announced a joint exploration agreement
with Woodside, for a two-year drilling program over the shallow-water Texas
shelf region of the Gulf of Mexico. Under the agreement, Woodside has taken a 50
percent working interest in 47 offshore exploration blocks operated by the
Company. The agreement covers eight prospects and 19 leads and includes five
exploratory wells to be drilled in 2003 and three in 2004. Most of the wells to
be drilled under the agreement will target gas plays below 15,000 feet. The
eight wells to be drilled by the parties in 2003 and 2004 are on prospects
generated and leased by the Company since 1997. The first well under this joint
agreement was spud during the first quarter of 2003. The well is still in
progress and the results are expected to be known in May 2003. Additionally, the
Company and Woodside will evaluate shallower gas prospects on the Gulf of Mexico
shelf on other blocks covered by the leases for potential inclusion in the
drilling program.
In the onshore Gulf Coast region of the United States, the Company has
concentrated its drilling efforts in the Pawnee field in South Texas, where one
well that was in progress at year end was completed and two wells were
successfully drilled during the first quarter of 2003. The Company spud an
extension well to the Pawnee field subsequent to quarter end and plans to drill
an additional three development wells and two extension wells during the
remainder of 2003.
Alaska. In Alaska, the Company spent $26.6 million during the first three
months of 2003 to drill three exploration wells on the NW Kuparuk prospect to
test a possible extension of the productive sands in the Kuparuk River field
into the shallow waters offshore. Although all three of the wells found the
sands filled with oil, they were too thin to be considered commercial. The wells
also encountered thick sections of oil-bearing Jurassic-aged sands. The first
well flowed at a sustained rate of approximately 1,300 barrels per day. The test
results are being evaluated to determine the commercial viability of the
Jurassic reservoir.
Permian Basin area. In the Permian Basin area, the Company spent $19.4
million during the first three months of 2003 primarily on development drilling
in the Spraberry oil trend where the Company plans to drill up to 150 wells
during 2003.
Mid-Continent area. In the Mid-Continent area, the Company spent $11.3
million during the first three months of 2003 primarily in the West Panhandle
field where the Company plans to drill up to 100 wells this year. The Company
also plans to drill up to 30 Hugoton wells later this year.
26
PIONEER NATURAL RESOURCES COMPANY
Argentina. In Argentina, the Company spent $10.0 million of acquisition,
drilling and seismic capital during the first three months of 2003. The majority
of costs was spent on extension and development drilling in the Neuquen Basin.
Canada. In Canada, the Company spent $37.3 million of acquisition,
drilling and seismic capital during the first three months of 2003, primarily in
the Chinchaga, Martin Creek and Ladyfern areas that are only accessible for
drilling during the winter months. Pioneer tested several shallow gas plays
finding multiple gas-bearing zones based on open-hole logs and mud log shows in
several wells. However, unseasonably warm weather resulted in a very short
drilling season in Canada, and approximately eight of the wells drilled will
have to be tested during next year's winter drilling season. Three wells were
drilled to test the Slave Point formation in the Ladyfern field area. One well
was successful and has been connected to a production pipeline, one well is
being evaluated and one well was unsuccessful.
Africa. In Africa, the Company spent $10.9 million of acquisition,
drilling and seismic capital during the first three months of 2003 in South
Africa, Tunisia and Gabon.
South Africa. In South Africa, the Company spent $6.0 million of capital
on the development of its Sable field that is expected to have first oil sal