UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 29, 2003... 117,838,770
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002......................................... 4
Consolidated Statements of Operations for the three
and six months ended June 30, 2003 and 2002............... 5
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 2003............................ 6
Consolidated Statements of Cash Flows for the three and
six months ended June 30, 2003 and 2002................... 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2003
and 2002.................................................. 8
Notes to Consolidated Financial Statements................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 35
Item 4. Controls and Procedures...................................... 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 38
Item 4. Submission of Matters to a Vote of Security Holders.......... 38
Item 6. Exhibits and Reports on Form 8-K............................. 38
Signatures................................................... 40
Exhibit Index................................................ 41
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions
have specific meanings: "Bbl" means a standard barrel containing 42 United
States gallons; "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)
June 30, December 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 12,156 $ 8,490
Accounts receivable:
Trade, net of reserves for doubtful accounts of $4,791 and
$4,744 as of June 30, 2003 and December 31, 2002,
respectively................................................. 115,791 97,774
Affiliates..................................................... 438 448
Inventories....................................................... 14,810 10,648
Prepaid expenses.................................................. 14,991 5,485
Deferred income taxes............................................. 15,800 13,900
Other current assets:
Derivative assets.............................................. 2,538 2,508
Other, net of reserves for doubtful accounts of $3,923 and
$3,351 as of June 30, 2003 and December 31, 2002,
respectively................................................. 8,704 7,840
---------- ----------
Total current assets......................................... 185,228 147,093
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties.............................................. 4,644,603 4,252,897
Unproved properties............................................ 186,450 219,073
Accumulated depletion, depreciation and amortization.............. (1,454,957) (1,303,541)
---------- ----------
3,376,096 3,168,429
---------- ----------
Deferred income taxes............................................... 75,195 76,840
Other property and equipment, net................................... 24,085 22,784
Other assets:
Derivative assets................................................. 293 643
Other, net of reserves for doubtful accounts of $655 and $1,227
as of June 30, 2003 and December 31, 2002, respectively........ 39,791 39,327
---------- ----------
$ 3,700,688 $ 3,455,116
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................... $ 121,543 $ 117,582
Affiliates..................................................... 4,277 7,192
Interest payable.................................................. 37,189 37,458
Income taxes payable.............................................. 2,176 -
Other current liabilities:
Derivatives.................................................... 162,306 83,638
Other.......................................................... 31,688 28,722
---------- ----------
Total current liabilities.................................... 359,179 274,592
---------- ----------
Long-term debt...................................................... 1,710,737 1,668,536
Noncurrent derivative obligations................................... 88,052 42,490
Other noncurrent liabilities........................................ 116,510 85,841
Deferred income taxes............................................... 12,224 8,760
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
119,599,769 and 119,592,344 shares issued as of June 30,
2003 and December 31, 2002, respectively....................... 1,196 1,196
Additional paid-in capital........................................ 2,715,301 2,714,567
Treasury stock, at cost; 1,773,372 and 2,339,806 shares as of
June 30, 2003 and December 31, 2002, respectively.............. (25,262) (32,219)
Deferred compensation............................................. (11,759) (14,292)
Accumulated deficit............................................... (1,137,035) (1,298,440)
Accumulated other comprehensive income (loss):
Deferred hedge gains (losses), net............................. (152,810) 9,555
Cumulative translation adjustment.............................. 24,355 (5,470)
---------- ----------
Total stockholders' equity................................... 1,413,986 1,374,897
Commitments and contingencies.......................................
---------- ----------
$ 3,700,688 $ 3,455,116
========== ==========
The financial information included as of June 30, 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 Six months ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue and other income:
Oil and gas....................................... $ 339,954 $ 172,430 $ 621,110 $ 337,969
Interest and other................................ 1,260 813 3,973 2,006
Gain on disposition of assets, net................ 104 1,095 1,530 1,021
-------- -------- -------- --------
341,318 174,338 626,613 340,996
-------- -------- -------- --------
Costs and expenses:
Oil and gas production............................ 69,557 49,717 133,581 100,735
Depletion, depreciation and amortization.......... 100,559 50,945 170,608 101,333
Exploration and abandonments...................... 47,047 17,860 82,914 38,980
General and administrative........................ 13,644 10,758 29,125 22,676
Accretion of discount on asset retirement
obligations..................................... 1,235 - 2,329 -
Interest.......................................... 23,823 24,741 46,314 51,058
Other............................................. 5,638 7,738 10,816 16,004
-------- -------- -------- --------
261,503 161,759 475,687 330,786
-------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle................. 79,815 12,579 150,926 10,210
Income tax provision................................ (2,630) (1,437) (4,934) (1,027)
-------- -------- -------- --------
Income before cumulative effect of change in
accounting principle.............................. 77,185 11,142 145,992 9,183
Cumulative effect of change in accounting principle,
net of tax........................................ - - 15,413 -
-------- -------- -------- --------
Net income.......................................... $ 77,185 $ 11,142 $ 161,405 $ 9,183
======== ======== ======== ========
Net income per share:
Basic:
Income before cumulative effect of change in
accounting principle......................... $ .66 $ .10 $ 1.25 $ .08
Cumulative effect of change in accounting
principle, net of tax........................ - - .13 -
-------- -------- -------- --------
Net income................................... $ .66 $ .10 $ 1.38 $ .08
======== ======== ======== ========
Diluted:
Income before cumulative effect of change in
accounting principle......................... $ .65 $ .10 $ 1.23 $ .08
Cumulative effect of change in accounting
principle, net of tax........................ - - .13 -
-------- -------- -------- --------
Net income................................... $ .65 $ .10 $ 1.36 $ .08
======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 117,005 113,306 116,875 108,702
======== ======== ======== ========
Diluted........................................ 118,969 115,239 118,823 110,282
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive
Income (Loss)
---------------------
Common Deferred
Stock Additional Hedge Total
Shares Common Paid-in Treasury Deferred Accumulated Gains Translation Stockholders'
Outstanding Stock Capital Stock Compensation Deficit (Losses) Adjustment Equity
----------- ------ ---------- -------- ------------ ----------- --------- ----------- ------------
Balance as of January 1,
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... 666 - 555 9,306 - - - - 9,861
Purchase of treasury
stock.................... (100) - - (2,349) - - - - (2,349)
Deferred compensation:
Compensation deferred... 7 - 179 - (179) - - - -
Deferred compensation
included in net
income................ - - - - 2,712 - - - 2,712
Net income................ - - - - - 161,405 - - 161,405
Other comprehensive
income (loss):
Deferred hedge gains
and losses, net
of tax:
Deferred hedge
losses.............. - - - - - - (235,326) - (235,326)
Net losses included
in net income....... - - - - - - 72,961 - 72,961
Translation adjustment. - - - - - - - 29,825 29,825
------- ----- --------- ------- -------- ---------- -------- ------- -----------
Balance as of June 30,
2003..................... 117,826 $1,196 $2,715,301 $(25,262) $ (11,759) $(1,137,035) $(152,810) $ 24,355 $ 1,413,986
======= ===== ========= ======= ======== ========== ======== ======= ===========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash flows from operating activities:
Net income........................................ $ 77,185 $ 11,142 $ 161,405 $ 9,183
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization....... 100,559 50,945 170,608 101,333
Exploration expenses, including dry holes...... 37,264 12,182 67,527 30,848
Deferred income taxes.......................... (501) 789 (247) 105
Gain on disposition of assets, net............. (104) (1,095) (1,530) (1,021)
Accretion of discount on asset retirement
obligations.................................. 1,235 - 2,329 -
Interest related amortization.................. (4,614) (649) (9,179) (1,641)
Commodity hedge related amortization........... (18,205) 7,443 (35,987) 14,123
Cumulative effect of change in accounting
principle, net of tax........................ - - (15,413) -
Other noncash items............................ 2,249 5,940 6,982 12,244
Changes in operating assets and liabilities:
Accounts receivable............................ 11,322 2,853 (14,645) (10,868)
Inventories.................................... (3,857) 1,744 (4,217) 3,983
Prepaid expenses............................... (1,362) 17 (9,584) 60
Other current assets........................... (884) (87) (486) (137)
Accounts payable............................... (2,711) 307 5,670 (14,149)
Interest payable............................... (791) 862 (269) 567
Income taxes payable........................... 724 - 2,176 -
Other current liabilities...................... (7,645) (1,829) (929) (4,030)
-------- -------- -------- --------
Net cash provided by operating activities.... 189,864 90,564 324,211 140,600
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............... 10,159 7,292 25,712 58,936
Additions to oil and gas properties............... (134,343) (175,031) (387,096) (263,293)
Other property additions, net..................... (4,075) (3,706) (6,356) (5,860)
-------- -------- -------- --------
Net cash used in investing activities........ (128,259) (171,445) (367,740) (210,217)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................... 55,184 222,586 171,812 255,876
Principal payments on long-term debt.............. (112,349) (371,036) (127,349) (386,326)
Issuance of common stock.......................... - 236,004 - 236,004
Payment of noncurrent liabilities................. (2,290) (6,058) (6,228) (36,561)
Exercise of long-term incentive plan
stock options................................... 4,515 3,168 9,861 7,606
Purchase of treasury stock........................ (2,349) - (2,349) -
Deferred debt issuance costs...................... - (3,158) - (3,158)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities....................... (57,289) 81,506 45,747 73,441
-------- -------- -------- --------
Net increase in cash and cash equivalents........... 4,316 625 2,218 3,824
Effect of exchange rate changes on cash and
cash equivalents.................................. 982 (654) 1,448 (1,430)
Cash and cash equivalents, beginning of period...... 6,858 16,757 8,490 14,334
-------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 12,156 $ 16,728 $ 12,156 $ 16,728
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income.......................................... $ 77,185 $ 11,142 $ 161,405 $ 9,183
-------- -------- -------- --------
Other comprehensive loss:
Deferred hedge gains and losses, net of tax:
Deferred hedge losses.......................... (118,894) (25,009) (235,326) (89,091)
Net (gains) losses included in net income...... 22,598 (3,956) 72,961 (35,798)
Translation adjustment............................ 17,633 8,876 29,825 8,742
-------- -------- -------- --------
Other comprehensive loss..................... (78,663) (20,089) (132,540) (116,147)
-------- -------- -------- --------
Comprehensive income (loss)......................... $ (1,478) $ (8,947) $ 28,865 $(106,964)
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of
these consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of June 30, 2003 and for the three and
six month periods ended June 30, 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 and net
income 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
June 30, 2003
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share amounts)
Net income, as reported........................ $ 77,185 $ 11,142 $161,405 $ 9,183
Pro forma adjustments to reflect retroactive
adoption of SFAS 143........................ - 761 (15,413) 1,324
------- ------- ------- -------
Pro forma net income........................... $ 77,185 $ 11,903 $145,992 $ 10,507
======= ======= ======= =======
Net income per share:
Basic - as reported......................... $ .66 $ .10 $ 1.38 $ .08
======= ======= ======= =======
Basic - pro forma........................... $ .66 $ .11 $ 1.25 $ .10
======= ======= ======= =======
Diluted - as reported....................... $ .65 $ .10 $ 1.36 $ .08
======= ======= ======= =======
Diluted - pro forma......................... $ .65 $ .10 $ 1.23 $ .10
======= ======= ======= =======
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 of the three and six month periods ended June 30,
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 and net income 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
June 30, 2003
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share amounts)
Net income, as reported....................... $ 77,185 $ 11,142 $161,405 $ 9,183
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects.................. (3,194) (2,782) (6,226) (5,323)
------- ------- ------- -------
Pro forma net income.......................... $ 73,991 $ 8,360 $155,179 $ 3,860
======= ======= ======= =======
Net income per share:
Basic - as reported......................... $ .66 $ .10 $ 1.38 $ .08
======= ======= ======= =======
Basic - pro forma........................... $ .63 $ .07 $ 1.33 $ .04
======= ======= ======= =======
Diluted - as reported....................... $ .65 $ .10 $ 1.36 $ .08
======= ======= ======= =======
Diluted - pro forma......................... $ .62 $ .07 $ 1.31 $ .04
======= ======= ======= =======
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 and terminate interest rate swaps with the
objective of minimizing 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 was to receive a fixed annual rate of 9-5/8 percent on
$250 million notional amount and agreed to 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.
During May 2003, the Company terminated the 9-5/8 percent senior notes interest
rate swap contracts for $11.4 million of cash proceeds. The cash proceeds were
comprised of $2.0 million of settlement gains attributable to the period from
February 2003 through the date of termination and $9.4 million attributable to
the fair value, on the date of termination, of the remaining term of the
interest rate swap contracts. The $9.4 million of proceeds attributable to the
fair value of the remaining term of the interest rate swap contracts is included
in "Proceeds from disposition of assets" in the Company's Consolidated
Statements of Cash Flows for the three and six month periods ended June 30,
2003.
As of June 30, 2003, the carrying value of the Company's long-term debt
in the accompanying Consolidated Balance Sheets included $32.8 million of
incremental liability attributable to unamortized deferred hedge gains and
losses realized from fair value hedge agreements terminated during 2003, 2002
and 2001. The amortization of deferred hedge gains reduced the Company's
reported interest expense by $6.0 million and $2.7 million during the three
month periods ended June 30, 2003 and 2002, respectively, and by $11.9 million
and $5.6 million during the six month periods ended June 30, 2003 and 2002,
respectively.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
The following table sets forth the scheduled amortization of deferred
hedge gains and losses on terminated fair value hedges that will be recognized
as increases, in the case of losses, or decreases, in the case of gains, to the
Company's future interest expense:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
2003 hedge gain amortization...... $ 6,285 $ 5,664 $ 11,949
2004 hedge gain amortization...... $ 5,008 $ 4,509 $ 3,864 $ 3,226 16,607
2005 hedge gain amortization...... $ 2,965 $ 1,957 $ 1,445 $ 1,042 7,409
Remaining net losses to be
amortized through 2010.......... (3,144)
-------
$ 32,821
=======
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 June
30, 2003:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
Daily oil production:
2003 - Swap Contracts
Volume (Bbl).................... 19,717 14,000 16,859
Price per Bbl................... $ 24.93 $ 24.35 $ 24.69
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).................... 7,000 7,000 7,000 7,000 7,000
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:
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Average price reported per Bbl................. $ 24.25 $ 23.58 $ 25.03 $ 23.37
Average price realized per Bbl................. $ 27.40 $ 23.20 $ 29.15 $ 20.75
Addition (reduction) to revenue (in millions).. $ (9.2) $ 1.1 $ (23.8) $ 15.5
Natural gas liquids prices. During the three and six month periods ended
June 30, 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, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
prices, 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 June
30, 2003:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- -----------
Daily gas production:
2003 - Swap Contracts
Volume (Mcf)................ 130,000 130,000 130,000
Index price per MMBtu....... $ 3.79 $ 3.79 $ 3.79
2004 - Swap Contracts
Volume (Mcf)................ 230,000 230,000 230,000 230,000 230,000
Index price per MMBtu....... $ 3.99 $ 3.99 $ 3.99 $ 3.99 $ 3.99
2004 - Collar Contracts
Volume (Mcf)................ 50,000 50,000 50,000 50,000 50,000
Index price per MMBtu....... $4.00-$6.84 $4.00-$6.84 $4.00-$6.84 $4.00-$6.84 $4.00-$6.84
2005 - Swap Contracts
Volume (Mcf)................ 60,000 60,000 60,000 60,000 60,000
Index price per MMBtu....... $ 4.28 $ 4.28 $ 4.28 $ 4.28 $ 4.28
2006 - Swap Contracts
Volume (Mcf)................ 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu....... $ 4.23 $ 4.23 $ 4.23 $ 4.23 $ 4.23
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
and realized, and the net effect of settlements of gas price hedges to revenue:
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Average price reported per Mcf................. $ 4.08 $ 2.48 $ 4.07 $ 2.48
Average price realized per Mcf................. $ 4.31 $ 2.39 $ 4.58 $ 2.14
Addition (reduction) to revenue (in millions).. $ (13.4) $ 2.8 $ (49.2) $ 20.7
Hedge ineffectiveness and excluded items. During the three month periods
ended June 30, 2003 and 2002, the Company recognized other expense of $503
thousand and $268 thousand, respectively, related to the ineffective portions of
its cash flow hedging instruments. During the six month periods ended June 30,
2003 and 2002, the Company recognized other expenses of $2.3 million and $346
thousand, respectively, related to the ineffective portion of its cash flow
hedging instruments.
Accumulated other comprehensive income (loss) ("AOCI") - deferred hedge
gains (losses), net. As of June 30, 2003 and December 31, 2002, "AOCI - deferred
hedge gains (losses), net" represented net deferred losses of $152.8 million and
net deferred gains of $9.6 million, respectively. The "AOCI - deferred hedge
gains (losses), net" balance as of June 30, 2003 was comprised of $188.3 million
of unrealized deferred hedge losses on the effective portions of open commodity
cash flow hedges and $35.5 million of net deferred gains on terminated cash flow
hedges. The decrease in "AOCI - deferred hedge gains (losses), net" during the
six months ended June 30, 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
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 on
terminated cash flow hedges are fixed.
During the twelve month period ending June 30, 2004, the Company expects
to reclassify $105.4 million of net deferred losses associated with open cash
flow hedges and $12.3 million of net deferred gains on terminated cash flow
hedges from "AOCI - deferred hedge gains (losses), net" to oil and gas revenue.
The following table sets forth the scheduled reclassifications of
deferred hedge gains and losses on terminated cash flow hedges that will be
recognized in the Company's future oil and gas revenues:
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
(in thousands)
2003 deferred hedge losses........ $ (4,476) $ (5,141) $ (9,617)
2004 deferred hedge gains......... $ 10,978 $ 10,932 $ 11,001 $ 10,954 43,865
2005 deferred hedge gains......... $ 307 $ 310 $ 315 $ 317 1,249
-------
$ 35,497
=======
The deferred commodity hedge gains and losses shown in the table above
include the following gains and losses for which cash settlements have been
deferred until the indicated future periods: (i) $22.7 million of deferred
losses due during each of the third and fourth quarters of 2003, (ii) $1.2
million of deferred losses due during 2004, and (iii) $209 thousand of deferred
gains to be received during 2005.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
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 and six month
periods ended June 30, 2003 and in accordance with the provisions of SFAS 19
during the three and six month periods ended June 30, 2002.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Beginning asset retirement obligation...... $ 64,174 $ 37,874 $ 34,692 $ 39,461
Cumulative effect adjustment............... - - 23,393 -
Liabilities incurred during period......... 50 - 7,015 -
Liabilities settled during period.......... (934) (1,167) (3,376) (2,808)
Accretion expense.......................... 1,235 632 2,329 1,283
Currency translation....................... 698 (45) 1,170 (642)
------- ------- ------- -------
Ending asset retirement obligation ........ $ 65,223 $ 37,294 $ 65,223 $ 37,294
======= ======= ======= =======
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 $32.5 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
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
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.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various gas producers subsequently
filed a petition for writ of certiori with the United States Supreme Court
seeking to limit the scope of the potential refunds to tax bills rendered on or
after June 28, 1988 (the effective date originally selected by the FERC).
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non-recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
1997 to file claims on refunds sought from producers and refund claims totaling
approximately $30.2 million were made against the Company. Through June 30,
2003, the Company has settled $21.7 million of the original claim amounts. As of
June 30, 2003 and December 31, 2002, the Company had on deposit $10.6 million,
including accrued interest, in an escrow account and had corresponding
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
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 Per Share Before Cumulative Effect of Change in
Accounting Principle
Basic income per share before cumulative effect of change in accounting
principle is computed by dividing income before cumulative effect of change in
accounting principle by the weighted average number of common shares outstanding
for the period. The computation of diluted net income per share before
cumulative effect of change in accounting principle reflects the potential
dilution that could occur if securities or other contracts to issue common stock
that are dilutive to 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 and six month periods ended June 30,
2003 and 2002:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 117,005 113,306 116,875 108,702
Dilutive common stock options (a)........... 1,766 1,933 1,780 1,580
Restricted stock awards (b)................. 198 - 168 -
------- ------- ------- -------
Diluted..................................... 118,969 115,239 118,823 110,282
======= ======= ======= =======
- ---------------
(a) Common stock options to purchase 1,364,706 shares and 1,639,032 shares of
common stock were outstanding but not included in the computations of
diluted income per share for the three month periods ended June 30, 2003
and 2002, respectively, and common stock options to purchase 1,368,612
shares and 1,971,461 shares of common stock were outstanding but not
included in the computations of diluted income per share for the six month
periods ended June 30, 2003 and 2002 respectively, because the exercise
prices of the options were greater than the average market price of the
common shares and would have been anti- dilutive to the computations.
(b) On May 15, 2003, the Company awarded 4,425 shares of restricted stock in
partial payment of director fees. These director fee awards vest on a
quarterly pro-rata basis during the year ended May 15, 2004. During the
three months ended March 31, 2003, the Company issued 9,500 restricted
shares of the Company's common stock to key employees. The restricted
shares issued to the key employees vest on the third anniversaries of their
issuances.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE H. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the
oil and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina and Canada.
The following tables provide the Company's interim geographic operating
segment data. Geographic operating segment income tax benefits (provisions) have
been determined based on statutory rates existing in the various tax
jurisdictions where the Company has oil and gas producing activities. The
"Headquarters and Other" table column includes revenues and expenses that are
not routinely included in the earnings measures internally reported to
management on a geographic operating segment basis.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- -------- ------- ------------ ------------
(in thousands)
Three months ended June 30, 2003:
Oil and gas revenue.................. $294,884 $ 25,474 $ 19,596 $ - $ - $ 339,954
Interest and other................... - - - - 1,260 1,260
Gain on disposition of assets, net... 75 - - - 29 104
------- ------- ------- ------- ------- --------
294,959 25,474 19,596 - 1,289 341,318
------- ------- ------- ------- ------- --------
Production costs..................... 60,384 6,179 2,994 - - 69,557
Depletion, depreciation and
amortization...................... 78,439 11,993 7,751 - 2,376 100,559
Exploration and abandonments......... 22,603 6,528 1,833 16,083 - 47,047
General and administrative........... - - - - 13,644 13,644
Accretion of discount on asset
retirement obligations............ - - - - 1,235 1,235
Interest............................. - - - - 23,823 23,823
Other................................ - - - - 5,638 5,638
------- ------- ------- ------- ------- --------
161,426 24,700 12,578 16,083 46,716 261,503
------- ------- ------- ------- ------- --------
Income (loss) before income taxes.... 133,533 774 7,018 (16,083) (45,427) 79,815
Income tax benefit (provision)....... (46,737) (271) (2,771) 5,629 41,520 (2,630)
------- ------- ------- ------- ------- --------
Net income (loss).................... $ 86,796 $ 503 $ 4,247 $(10,454) $ (3,907) $ 77,185
======= ======= ======= ======= ======= ========
Three months ended June 30, 2002:
Oil and gas revenue.................. $142,523 $ 15,051 $ 14,856 $ - $ - $ 172,430
Interest and other................... - - - - 813 813
Gain (loss) on disposition of
assets, net........................ 162 (3) 1,021 - (85) 1,095
------- ------- ------- ------- ------- --------
142,685 15,048 15,877 - 728 174,338
------- ------- ------- ------- ------- --------
Production costs..................... 44,168 2,816 2,733 - - 49,717
Depletion, depreciation and
amortization...................... 32,312 8,937 7,581 - 2,115 50,945
Exploration and abandonments......... 13,973 1,648 1,540 699 - 17,860
General and administrative........... - - - - 10,758 10,758
Interest............................. - - - - 24,741 24,741
Other................................ - - - - 7,738 7,738
------- ------- ------- ------- ------- --------
90,453 13,401 11,854 699 45,352 161,759
------- ------- ------- ------- ------- --------
Income (loss) before income taxes.... 52,232 1,647 4,023 (699) (44,624) 12,579
Income tax benefit (provision)....... (18,281) (577) (1,696) 245 18,872 (1,437)
------ ------- ------- ------- ------- --------
Net income (loss).................... $ 33,951 $ 1,070 $ 2,327 $ (454) $(25,752) $ 11,142
======= ======= ======= ======= ======= ========
Six months ended June 30, 2003:
Oil and gas revenue.................. $534,135 $ 48,855 $ 38,120 $ - $ - $ 621,110
Interest and other................... - - - - 3,973 3,973
Gain on disposition of assets, net... 1,321 - 1 - 208 1,530
------- ------- ------- ------- ------- --------
535,456 48,855 38,121 - 4,181 626,613
------- ------- ------- ------- ------- --------
Production costs..................... 115,921 11,588 6,072 - - 133,581
Depletion, depreciation and
amortization...................... 131,297 20,319 14,302 - 4,690 170,608
Exploration and abandonments......... 40,390 9,572 13,160 19,792 - 82,914
General and administrative........... - - - - 29,125 29,125
Accretion of discount on asset
retirement obligations............ - - - - 2,329 2,329
Interest............................. - - - - 46,314 46,314
Other................................ - - - - 10,816 10,816
------- ------- ------- ------- ------- --------
287,608 41,479 33,534 19,792 93,274 475,687
------- ------- ------- ------- ------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle.............. 247,848 7,376 4,587 (19,792) (89,093) 150,926
Income tax benefit (provision)....... (86,747) (2,582) (1,811) 6,927 79,279 (4,934)
------- ------- ------- ------- ------- --------
Income (loss) before cumulative
effect of change in accounting
principle.......................... $161,101 $ 4,794 $ 2,776 $(12,865) $ (9,814) $ 145,992
======= ======= ======= ======= ======= ========
Six months ended June 30, 2002:
Oil and gas revenue.................. $273,984 $ 38,310 $ 25,675 $ - $ - $ 337,969
Interest and other................... - - - - 2,006 2,006
Gain (loss) on disposition of
assets, net........................ 162 (3) 1,010 - (148) 1,021
------- ------- ------- ------- ------- --------
274,146 38,307 26,685 - 1,858 340,996
------- ------- ------- ------- ------- --------
Production costs..................... 89,012 6,401 5,322 - - 100,735
Depletion, depreciation and
amortization...................... 63,986 19,036 14,045 - 4,266 101,333
Exploration and abandonments......... 27,284 3,788 3,843 4,065 - 38,980
General and administrative........... - - - - 22,676 22,676
Interest............................. - - - - 51,058 51,058
Other................................ - - - - 16,004 16,004
------- ------- ------- ------- ------- --------
180,282 29,225 23,210 4,065 94,004 330,786
------- ------- ------- ------- ------- --------
Income (loss) before income taxes.... 93,864 9,082 3,475 (4,065) (92,146) 10,210
Income tax benefit (provision)....... (32,852) (3,179) (1,465) 1,423 35,046 (1,027)
------- ------- ------- ------- ------- --------
Net income (loss).................... $ 61,012 $ 5,903 $ 2,010 $ (2,642) $(57,100) $ 9,183
======= ======= ======= ======= ======= ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of June 30, 2003
(in thousands)
(Unaudited)
ASSETS
Pioneer
Natural
Resources Non-
Company Pioneer Guarantor The
(Parent) USA Subsidiaries Eliminations Company
----------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 37 $ 4,258 $ 7,861 $ $ 12,156
Other current assets.................. 1,752,908 (1,454,052) (125,784) 173,072
---------- ---------- --------- ----------
Total current assets............. 1,752,945 (1,449,794) (117,923) 185,228
---------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 3,256,964 1,387,639 4,644,603
Unproved properties................ - 28,910 157,540 186,450
Accumulated depletion, depreciation
and amortization.................... - (1,048,291) (406,666) (1,454,957)
--------- ---------- --------- ----------
- 2,237,583 1,138,513 3,376,096
--------- ---------- --------- ----------
Deferred income taxes................... 73,411 - 1,784 75,195
Other property and equipment, net....... - 19,938 4,147 24,085
Other assets, net....................... 14,752 16,063 9,269 40,084
Investment in subsidiaries.............. 1,438,937 141,337 - (1,580,274) -
---------- ---------- --------- ----------
$ 3,280,045 $ 965,127 $1,035,790 $ 3,700,688
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,747 $ 287,992 $ 40,440 $ $ 359,179
Long-term debt.......................... 1,710,737 - - 1,710,737
Other noncurrent liabilities............ - 225,158 (20,596) 204,562
Deferred income taxes................... - - 12,224 12,224
Stockholders' equity.................... 1,538,561 451,977 1,003,722 (1,580,274) 1,413,986
Commitments and contingencies...........
---------- ---------- --------- ----------
$ 3,280,045 $ 965,127 $1,035,790 $ 3,700,688
========== ========== ========= ==========
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
========== ========== ========= ==========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Six Months Ended June 30, 2003
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax The
Parent USA Subsidiaries Provision Eliminations Company
--------- --------- ------------ ------------- ------------ ----------
Revenue and other income:
Oil and gas.......................... $ - $ 490,349 $ 130,761 $ - $ 621,110
Interest and other................... - 1,453 2,520 - 3,973
Gain on disposition of assets, net... - 1,413 117 - 1,530
-------- -------- -------- ----- ---------
- 493,215 133,398 - 626,613
-------- -------- -------- ----- ---------
Costs and expenses:
Oil and gas production............... - 107,404 26,177 - 133,581
Depletion, depreciation and
amortization...................... - 129,394 41,214 - 170,608
Exploration and abandonments......... - 41,626 41,288 - 82,914
General and administrative........... 632 22,744 5,749 - 29,125
Accretion of discount on asset
retirement obligations............ - 1,844 485 - 2,329
Interest............................. 11,487 34,173 654 - 46,314
Equity (income) loss from
subsidiaries...................... (174,196) 21,728 - - 152,468 -
Other................................ 72 1,312 9,432 - 10,816
-------- -------- -------- ----- ---------
(162,005) 360,225 124,999 - 475,687
-------- -------- -------- ----- ---------
Income before income taxes and cumulative
effect of change in accounting
principle............................ 162,005 132,990 8,399 - 150,926
Income tax provision.................... - - (4,334) (600) (4,934)
-------- -------- -------- ----- ---------
Income before cumulative effect of
change in accounting principle........ 162,005 132,990 4,065 (600) 145,992
Cumulative effect of change in
accounting principle, net of tax...... - 11,859 3,554 - 15,413
-------- -------- -------- ----- ---------
Net income.............................. 162,005 144,849 7,619 (600) 161,405
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses, net of tax.. - (218,050) (17,276) - (235,326)
Net losses included in net income.. - 65,761 7,200 - 72,961
Cumulative translation adjustment.... - - 29,825 - 29,825
-------- -------- -------- ----- ---------
Comprehensive income (loss)............. $ 162,005 $ (7,440) $ 27,368 $ (600) $ 28,865
======== ======== ======== ===== =========
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax The
Parent USA Subsidiaries Benefit Eliminations Company
--------- --------- ------------ ------------- ------------ ----------
Revenue and other income:
Oil and gas......................... $ - $ 263,499 $ 74,470 $ - $ $ 337,969
Interest and other.................. - 1,077 929 - 2,006
Gain on disposition of assets, net.. - 54 967 - 1,021
-------- -------- ------- -------- ---------
- 264,630 76,366 - 340,996
-------- -------- ------- -------- ---------
Costs and expenses:
Oil and gas production.............. - 88,381 12,354 - 100,735
Depletion, depreciation and
amortization...................... - 65,454 35,879 - 101,333
Exploration and abandonments........ - 28,303 10,677 - 38,980
General and administrative.......... 602 17,868 4,206 - 22,676
Interest............................ 9,739 40,656 663 - 51,058
Equity income from subsidiaries..... (22,501) (3,674) - - 26,175 -
Other............................... 2,977 1,403 11,624 - 16,004
-------- -------- ------- -------- ---------
(9,183) 238,391 75,403 - 330,786
-------- -------- ------- -------- ---------
Income before income taxes............. 9,183 26,239 963 - 10,210
Income tax provision................... - - (1,027) - (1,027)
-------- -------- ------- -------- ---------
Net income (loss)...................... 9,183 26,239 (64) - 9,183
Other comprehensive income (loss):
Deferred hedge gains and losses:
Unrealized hedge losses........... (181) (77,579) (11,331) - (89,091)
Net gains included in net income.. 262 (30,300) (5,760) - (35,798)
Cumulative translation
adjustment...................... - - 8,742 - 8,742
-------- -------- ------- -------- ---------
Comprehensive income (loss)......... $ 9,264 $ (81,640) $ (8,413) $ - $ (106,964)
======== ======== ======== ======== =========
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 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........................................ $ (61,384) $ 260,274 $ 125,321 $ 324,211
--------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................. 9,440 15,631 641 25,712
Additions to oil and gas properties................. - (260,680) (126,416) (387,096)
Other property (additions) dispositions, net........ - (6,705) 349 (6,356)
--------- -------- -------- --------
Net cash used in investing activities............. 9,440 (251,754) (125,426) (367,740)
--------- --------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt..................... 171,812 - - 171,812
Principal payments on long-term debt................ (127,349) - - (127,349)
Payment of noncurrent liabilities................... - (6,045) (183) (6,228)
Exercise of long-term incentive plan
stock options..................................... 9,861 - - 9,861
Purchase of treasury stock.......................... (2,349) - - (2,349)
--------- -------- -------- --------
Net cash provided by (used in) financing
activities...................................... 51,975 (6,045) (183) 45,747
--------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents... 31 2,475 (288) 2,218
Effect of exchange rate changes on cash and
cash equivalents.................................... - - 1,448 1,448
Cash and cash equivalents, beginning of period......... 6 1,783 6,701 8,490
--------- -------- -------- --------
Cash and cash equivalents, end of period............... $ 37 $ 4,258 $ 7,861 $ 12,156
========= ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
---------- --------- ------------- ---------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities....................................... $ (110,071) $ 185,900 $ 64,771 $ 140,600
--------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................. - 57,791 1,145 58,936
Additions to oil and gas properties................. - (198,066) (65,227) (263,293)
Other property additions, net....................... - (6,830) 970 (5,860)
--------- -------- -------- --------
Net cash used in investing activities............. - (147,105) (63,112) (210,217)
--------- --------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt..................... 255,876 - - 255,876
Principal payments on long-term debt................ (386,326) - - (386,326)
Issuance of common stock............................ 236,004 - - 236,004
Payment of noncurrent liabilities................... - (36,282) (279) (36,561)
Exercise of long-term incentive plan stock options.. 7,606 - - 7,606
Deferred debt issuance costs........................ (3,158) - - (3,158)
--------- -------- -------- --------
Net cash provided by (used in) financing
activities...................................... 110,002 (36,282) (279) 73,441
--------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents... (69) 2,513 1,380 3,824
Effect of exchange rate changes on cash and
cash equivalents.................................... - - (1,430) (1,430)
Cash and cash equivalents, beginning of period......... 79 10,900 3,355 14,334
--------- -------- -------- --------
Cash and cash equivalents, end of period............... $ 10 $ 13,413 $ 3,305 $ 16,728
========= ======== ======== ========
24
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 second quarter
of 2003 was highlighted by continued production growth, primarily associated
with a full quarter of production from the Company's deepwater Gulf of Mexico
Canyon Express gas project and 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 production growth realized by the Company
together with favorable worldwide oil and North American gas prices have
resulted in significant increases in Pioneer's net income and net cash provided
by operating activities during the three and six month periods ended June 30,
2003, as compared to the same periods of 2002.
The Company reported net income of $77.2 million ($.65 per diluted share)
and $161.4 million ($1.36 per diluted share) for the three and six month periods
ended June 30, 2003, respectively, as compared to net income of $11.1 million
($.10 per share) and $9.2 million ($.08 per share) for the same periods of 2002.
The Company's net income for the six months ended June 30, 2003 includes a $15.4
million ($.13 per share) benefit from the cumulative effect of change in
accounting principle, net of tax, associated with the Company's adoption of
Statement of Accounting Principles No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). 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 $189.9
million and $324.2 million for the three and six month periods ended June 30,
2003, respectively, representing increases of $99.3 million, or 110 percent, and
$183.6 million, or 131 percent, over the net cash provided by operating
activities of the same respective periods of 2002. Net cash provided by
operating activities during the three and six month periods ended June 30, 2002
was $90.6 million and $140.6 million, respectively. During the three months
ended June 30, 2003, the Company used its net cash provided by operating
activities, together with proceeds from the disposition of assets, to fund
$134.3 million of additions to oil and gas properties and to repay $57.2 million
of long-term debt. During the six months ended June 30, 2003, the Company used
its net cash provided by operating activities, together with proceeds from the
disposition of assets and borrowings under the Company's corporate credit
facility, to fund $387.1 million of additions to oil and gas properties.
Drilling Highlights
During the first six months of 2003, the Company incurred $395.1 million
in capital expenditures including $124.7 million for development activities,
$140.7 million for exploration activities and $129.7 million on acquisitions.
The majority of the Company's development and exploration expenditures was spent
on drilling wells, seismic data and infrastructure for the Company's significant
development projects. The primary component of the acquisition expenditures was
the Company's purchase of the 25 percent working interest it did not already own
in the Falcon field, the Harrier field and surrounding satellite prospects
during March 2003. The following tables summarize the Company's development
drilling and exploration and extension drilling activities for the six months
ended June 30, 2003:
25
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ----------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast..... 1 13 14 - -
Permian Basin................. 2 78 75 - 5
Mid-Continent................. 4 65 64 2 3
------ ------ ------ ------ ------
Total Domestic......... 7 156 153 2 8
------ ------ ------ ------ ------
Argentina..................... 3 19 18 1 3
Canada........................ 4 10 7 7 -
Tunisia....................... - 1 - - 1
------ ------ ------ ------ ------
Total Worldwide........ 14 186 178 10 12
====== ====== ====== ====== ======
Exploration/Extension Drilling
------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ----------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast..... - 8 2 5 1
Alaska........................ - 3 - - 3
------ ------ ------ ------ ------
Total Domestic........... - 11 2 5 4
------ ------ ------ ------ ------
Argentina..................... 6 19 17 5 3
Canada........................ 4 46 16 24 10
South Africa.................. - 3 - 3 -
Tunisia....................... - 3 - 1 2
------ ------ ------ ------ ------
Total Worldwide.......... 10 82 35 38 19
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