UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 1-13245
PIONEER NATURAL RESOURCES COMPANY
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
(972) 444-9001
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / x / No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / x / No / /
Number of shares of Common Stock outstanding as of July 31, 2004.... 120,092,405
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and Conventions Used Herein............ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003..................................... 4
Consolidated Statements of Operations for the three
and six months ended June 30, 2004 and 2003........... 5
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2004.................... 6
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2004 and 2003........... 7
Consolidated Statements of Comprehensive Income
(Loss) for the three and six months ended
June 30, 2004 and 2003................................ 8
Notes to Consolidated Financial Statements............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 35
Item 4. Controls and Procedures.................................. 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 39
Item 4. Submission of Matters to a Vote of Security Holders...... 39
Item 6. Exhibits and Reports on Form 8-K......................... 40
Signatures ......................................................... 41
Exhibit Index ......................................................... 42
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions have
specific meanings: "Bbl" means a standard barrel containing 42 United States
gallons; "BOE" means a barrel of oil equivalent and is a standard convention
used to express oil and gas volumes on a comparable oil equivalent basis; "Btu"
means British thermal unit and is a measure of the amount of energy required to
raise the temperature of one pound of water one degree Fahrenheit; "LIBOR" means
London Interbank Offered Rate, which is a market rate of interest;"MBbl" means
one thousand Bbls; "MBOE" means one thousand BOEs; "Mcf" means one thousand
cubic feet and is a measure of natural gas volume; "MMBtu" means one million
Btus; "MMcf" means one million cubic feet; "NGL" means natural gas liquid;
"NYMEX" means the New York Mercantile Exchange; "proved reserves" mean the
estimated quantities of crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made. Prices include consideration of changes in existing prices provided only
by contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes (A) that portion delineated by drilling and
defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately
adjoining portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of information on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately as
"indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Gas equivalents are determined under the relative energy content method by
using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.
With respect to information on the working interest in wells, drilling
locations and acreage, "net" wells, drilling locations and acres are determined
by multiplying "gross" wells, drilling locations and acres by Pioneer Natural
Resources Company's ("Pioneer" or the "Company") working interest in such wells,
drilling locations or acres. Unless otherwise specified, wells, drilling
locations and acreage statistics quoted herein represent gross wells, drilling
locations or acres; and, all currency amounts are expressed in U.S. dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 15,212 $ 19,299
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,950 and
$4,727 as of June 30, 2004 and December 31, 2003, respectively... 166,120 111,033
Due from affiliates................................................ 419 447
Inventories........................................................... 21,784 17,509
Prepaid expenses...................................................... 6,236 11,083
Deferred income taxes................................................. 29,241 40,514
Other current assets:
Derivatives........................................................ 188 423
Other, net of allowance for doubtful accounts of $4,486 as of
June 30, 2004 and December 31, 2003.............................. 8,460 4,807
---------- ----------
Total current assets.......................................... 247,660 205,115
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties.................................................. 5,181,261 4,983,558
Unproved properties................................................ 203,758 179,825
Accumulated depletion, depreciation and amortization.................. (1,946,172) (1,676,136)
---------- ----------
Total property, plant and equipment........................... 3,438,847 3,487,247
---------- ----------
Deferred income taxes................................................... 182,142 192,344
Other property and equipment, net....................................... 29,224 28,080
Other assets:
Derivatives........................................................... 105 209
Other, net of allowance for doubtful accounts of $92 as of
June 30, 2004 and December 31, 2003................................ 46,483 38,577
---------- ----------
$ 3,944,461 $ 3,951,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.............................................................. $ 165,496 $ 177,614
Due to affiliates.................................................. 4,773 8,804
Interest payable...................................................... 37,321 37,034
Income taxes payable.................................................. 10,383 5,928
Other current liabilities:
Derivatives........................................................ 203,811 161,574
Other.............................................................. 37,388 38,798
---------- ----------
Total current liabilities..................................... 459,172 429,752
---------- ----------
Long-term debt.......................................................... 1,391,363 1,555,461
Derivatives............................................................. 147,080 48,825
Deferred income taxes................................................... 11,329 12,121
Other liabilities....................................................... 150,604 145,641
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
120,134,938 and 119,665,784 shares issued as of
June 30, 2004 and December 31, 2003, respectively.................. 1,202 1,197
Additional paid-in capital............................................ 2,751,495 2,734,403
Treasury stock, at cost; 90,524 and 378,012 shares as of
June 30, 2004 and December 31, 2003, respectively.................. (2,716) (5,385)
Deferred compensation................................................. (21,614) (9,933)
Accumulated deficit................................................... (770,840) (887,848)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax.............................. (198,262) (104,130)
Cumulative translation adjustment.................................. 25,648 31,468
---------- ----------
Total stockholders' equity.................................... 1,784,913 1,759,772
Commitments and contingencies
---------- ----------
$ 3,944,461 $ 3,951,572
========== ==========
The financial information included as of June 30, 2004 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues and other income:
Oil and gas....................................... $ 446,993 $ 344,240 $ 893,519 $ 629,239
Interest and other................................ 1,610 1,260 3,345 3,973
Gain (loss) on disposition of assets, net......... (232) 104 (245) 1,530
-------- -------- -------- --------
448,371 345,604 896,619 634,742
-------- -------- -------- --------
Costs and expenses:
Oil and gas production............................ 95,565 73,843 184,776 141,710
Depletion, depreciation and amortization.......... 142,750 100,559 279,249 170,608
Exploration and abandonments...................... 39,683 47,047 120,189 82,914
General and administrative........................ 17,194 13,644 35,523 29,125
Accretion of discount on asset retirement
obligations...................................... 2,016 1,235 3,982 2,329
Interest.......................................... 21,402 23,823 42,978 46,314
Other............................................. 8,300 5,638 8,496 10,816
-------- -------- -------- --------
326,910 265,789 675,193 483,816
-------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle................. 121,461 79,815 221,426 150,926
Income tax provision................................ (51,759) (2,630) (91,536) (4,934)
-------- -------- -------- --------
Income before cumulative effect of change in
accounting principle.............................. 69,702 77,185 129,890 145,992
Cumulative effect of change in accounting
principle, net of tax............................. - - - 15,413
-------- -------- -------- --------
Net income.......................................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
======== ======== ======== ========
Net income per share:
Basic:
Income before cumulative effect of change in
accounting principle......................... $ .59 $ .66 $ 1.09 $ 1.25
Cumulative effect of change in accounting
principle, net of tax........................ - - - .13
-------- -------- -------- --------
Net income................................... $ .59 $ .66 $ 1.09 $ 1.38
======== ======== ======== ========
Diluted:
Income before cumulative effect of change in
accounting principle......................... $ .58 $ .65 $ 1.08 $ 1.23
Cumulative effect of change in accounting
principle, net of tax........................ - - - .13
-------- -------- -------- --------
Net income................................... $ .58 $ .65 $ 1.08 $ 1.36
======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 118,855 117,005 118,787 116,875
======== ======== ======== ========
Diluted........................................ 120,402 118,969 120,333 118,823
======== ======== ======== ========
Dividends declared per share........................ $ - $ - $ .10 $ -
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Net
Deferred
Additional Hedge Cumulative Total
Common Paid-in Treasury Deferred Accumulated Losses, Translation Stockholders'
Stock Capital Stock Compensation Deficit Net of Tax Adjustment Equity
------ ---------- -------- ------------ ----------- ----------- ----------- ------------
Balance as of January 1, 2004..... $1,197 $2,734,403 $ (5,385) $ (9,933) $ (887,848) $(104,130) $ 31,468 $1,759,772
Dividends declared.............. - - - - (12,005) - - (12,005)
Exercise of long-term incentive
plan stock options............ - (3,070) 17,955 - (877) - - 14,008
Purchase of treasury stock...... - - (15,286) - - - - (15,286)
Tax benefits related to
stock-based compensation...... - 3,620 - - - - - 3,620
Deferred compensation:
Compensation deferred......... 5 16,542 - (16,547) - - - -
Deferred compensation included
in net income................ - - - 4,866 - - - 4,866
Net income...................... - - - - 129,890 - - 129,890
Other comprehensive income (loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses... - - - - - (237,596) - (237,596)
Net hedge losses included in
net income................. - - - - - 86,885 - 86,885
Tax benefits related to net
hedge losses............... - - - - - 56,579 - 56,579
Translation adjustment........ - - - - - - (5,820) (5,820)
----- --------- ------- ------- --------- -------- ------- ---------
Balance as of June 30, 2004....... $1,202 $2,751,495 $ (2,716) $(21,614) $ (770,840) $(198,262) $ 25,648 $1,784,913
===== ========= ======= ======= ========= ======== ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Cash flows from operating activities:
Net income........................................ $ 69,702 $ 77,185 $ 129,890 $ 161,405
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization....... 142,750 100,559 279,249 170,608
Exploration expenses, including dry holes...... 33,458 37,264 112,278 67,527
Deferred income taxes.......................... 47,144 (501) 79,864 (247)
(Gain) loss on disposition of assets, net...... 232 (104) 245 (1,530)
Accretion of discount on asset retirement
obligations.................................. 2,016 1,235 3,982 2,329
Interest related amortization.................. (4,993) (4,614) (11,363) (9,179)
Commodity hedge related amortization........... (11,242) (18,205) (22,533) (35,987)
Cumulative effect of change in accounting
principle, net of tax........................ - - - (15,413)
Amortization of stock-based compensation....... 2,887 1,343 4,866 2,712
Other noncash items............................ 6,463 906 5,704 4,270
Changes in operating assets and liabilities:
Accounts receivable, net....................... (24,803) 11,322 (58,540) (14,645)
Inventories.................................... (4,161) (3,857) (4,180) (4,217)
Prepaid expenses............................... 3,930 (1,362) 4,847 (9,584)
Other current assets, net...................... - (884) 757 (486)
Accounts payable............................... 1,248 (2,711) (4,754) 5,670
Interest payable............................... (607) (791) 86 (269)
Income taxes payable........................... 1,397 724 4,455 2,176
Other current liabilities...................... (717) (7,645) (6,519) (929)
-------- -------- -------- --------
Net cash provided by operating activities.... 264,704 189,864 518,334 324,211
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............... 255 10,159 540 25,712
Additions to oil and gas properties............... (183,605) (134,343) (350,831) (387,096)
Other property additions, net..................... (8,883) (4,075) (14,243) (6,356)
-------- -------- -------- --------
Net cash used in investing activities........ (192,233) (128,259) (364,534) (367,740)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................... 100,394 55,184 156,477 171,812
Principal payments on long-term debt.............. (146,394) (112,349) (292,477) (127,349)
Payment of other liabilities...................... (3,764) (2,290) (8,119) (6,228)
Exercise of long-term incentive plan stock
options......................................... 5,513 4,515 14,008 9,861
Purchase of treasury stock........................ (9,720) (2,349) (15,286) (2,349)
Payment of financing fees......................... (132) - (132) -
Dividends paid.................................... (12,005) - (12,005) -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities..................... (66,108) (57,289) (157,534) 45,747
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 6,363 4,316 (3,734) 2,218
Effect of exchange rate changes on cash and
cash equivalents.................................. (173) 982 (353) 1,448
Cash and cash equivalents, beginning of period...... 9,022 6,858 19,299 8,490
-------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 15,212 $ 12,156 $ 15,212 $ 12,156
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income...................................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
-------- -------- -------- --------
Other comprehensive loss:
Net deferred hedge losses, net of tax:
Net deferred hedge losses.................. (120,204) (118,894) (237,596) (235,058)
Net hedge losses included in net income.... 56,129 22,598 86,885 72,961
Tax benefits (provisions) related to net
hedge gains and losses................... 24,692 - 56,579 (268)
Translation adjustment........................ (3,579) 17,633 (5,820) 29,825
-------- -------- -------- --------
Other comprehensive loss................. (42,962) (78,663) (99,952) (132,540)
-------- -------- -------- --------
Comprehensive income (loss)..................... $ 26,740 $ (1,478) $ 29,938 $ 28,865
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part
of these consolidated financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is an independent oil and gas
exploration and production company with ownership interests in oil and gas
properties located in the United States, Argentina, Canada, Equatorial Guinea,
Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of June 30, 2004 and for the three and
six months ended June 30, 2004 and 2003 include all adjustments and accruals,
consisting only of normal, recurring accrual adjustments, which are necessary
for a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been condensed or omitted in this Form 10-Q pursuant to the rules
and regulations of the United States Securities and Exchange Commission ("SEC").
These consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2003.
Adoption of SFAS 143. On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
the provisions of SFAS 143, asset retirement obligations are capitalized as part
of the carrying value of the long-lived asset.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record a gain of $15.4 million, net of $1.3 million of deferred
tax, as a cumulative effect adjustment of a change in accounting principle in
the Company's Consolidated Statements of Operations. See Note F for additional
information regarding the Company's asset retirement obligations.
Inventories. Inventories are comprised of $20.3 million and $15.3 million
of lease and well equipment and $1.5 million and $2.2 million of commodities as
of June 30, 2004 and December 31, 2003, respectively. Lease and well equipment
inventories are net of lower of cost or market allowances of $.6 million as of
June 30, 2004 and December 31, 2003.
Stock-based compensation. The Company has a long-term incentive plan (the
"Long-Term Incentive Plan") under which the Company grants stock-based
compensation. The Company accounts for stock-based compensation granted under
the Long-Term Incentive Plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company did not grant any stock
options during the six months ended June 30, 2004. Stock-based compensation
expense associated with option grants was not recognized in the determination of
the Company's net income during the three and six months ended June 30, 2004 and
2003, as all options granted under the Long-Term Incentive Plan had exercise
prices equal to the market value of the underlying common stock on the dates of
grant. Stock-based compensation expense associated with restricted stock awards
is deferred and amortized to earnings ratably over the vesting periods of the
awards.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The following table illustrates the pro forma effect on net income and
earnings per share as if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" to stock-based compensation during the three and
six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported....................... $ 69,702 $ 77,185 $ 129,890 $ 161,405
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a).............................. 1,833 1,343 3,090 2,712
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (a).............. (3,421) (4,537) (6,536) (8,938)
------- ------- -------- --------
Pro forma net income.......................... $ 68,114 $ 73,991 $ 126,444 $ 155,179
======= ======= ======== ========
Net income per share:
Basic - as reported......................... $ .59 $ .66 $ 1.09 $ 1.38
======= ======= ======== ========
Basic - pro forma........................... $ .57 $ .63 $ 1.06 $ 1.33
======= ======= ======== ========
Diluted - as reported....................... $ .58 $ .65 $ 1.08 $ 1.36
======= ======= ======== ========
Diluted - pro forma......................... $ .57 $ .62 $ 1.05 $ 1.31
======= ======= ======== ========
- -----------
(a) For the three and six months ended June 30, 2004, stock-based compensation
expense included in net income is net of tax benefits of $1.1 million and
$1.8 million, respectively. Similarly, stock-based compensation expense
determined under the fair value based method for the three and six months
ended June 30, 2004 is net of tax benefits of $2.0 million and $3.8
million, respectively. No tax benefits were recognized for stock-based
compensation expense during the three and six months ended June 30, 2003.
See Note C for additional information regarding the Company's income taxes.
NOTE C. Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that the Company continually assess both
positive and negative evidence to determine whether it is more likely than not
that deferred tax assets can be realized prior to their expiration. From 1998
until 2003, the Company maintained a valuation allowance against a portion of
its deferred tax asset position in the United States. During the third quarter
of 2003, the Company concluded that it was more likely than not that it would be
able to realize its gross deferred tax asset position in the United States.
Accordingly, the Company reversed its valuation allowances in the United States.
As a result of the reversal of the valuation allowances against the Company's
United States deferred tax assets, the Company's effective tax rate on future
earnings in the United States will approximate statutory rates.
Pioneer will continue to monitor Company-specific, oil and gas industry and
worldwide economic factors and will assess the likelihood that the Company's net
operating loss carryforwards and other deferred tax attributes in the United
States and foreign tax jurisdictions will be utilized prior to their expiration.
As of June 30, 2004, the Company's valuation allowances related to foreign tax
jurisdictions were $102.2 million.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Income tax provision (benefit) attributable to income before cumulative
effect of change in accounting principle consisted of the following for the
three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Current:
U.S. state and local.................... $ 1,798 $ 660 $ 2,801 $ 638
Foreign................................. 2,817 2,471 8,871 4,543
------- ------- ------- -------
4,615 3,131 11,672 5,181
------- ------- ------- -------
Deferred:
U.S. state and local.................... 47,661 - 83,170 -
Foreign................................. (517) (501) (3,306) (247)
------- ------- ------- -------
47,144 (501) 79,864 (247)
------- ------- ------- -------
$ 51,759 $ 2,630 $ 91,536 $ 4,934
======= ======= ======= =======
NOTE D. Long-term Debt
During June 2004, the Company entered into a first amendment (the "First
Amendment") to its $700 million, five-year revolving credit agreement (the
"Revolving Credit Agreement"). As a result of the First Amendment, Pioneer
Natural Resources USA, Inc., a wholly-owned subsidiary of the Company ("Pioneer
USA"), is no longer a guarantor of the Revolving Credit Agreement. The
indentures of the Company's senior notes provide for subsidiary guarantees
equivalent to any such guarantees provided under the Revolving Credit Agreement.
Accordingly, the First Amendment also has the effect of removing Pioneer USA as
a guarantor of the Company's senior notes.
NOTE E. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of minimizing costs of capital.
During March 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge the fair value of its 7-1/2
percent senior notes. The terms of the interest rate swap contracts match the
scheduled maturity of the hedged senior notes, require the counterparties to pay
the Company a 7-1/2 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six-month LIBOR plus a weighted average annual margin of 3.71 percent. During
April 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge the fair value of its 9-5/8
percent senior notes. The terms of the new 9-5/8 percent interest rate swap
contracts match the scheduled maturity of the senior notes which they hedge,
require the counterparties to pay the Company a 9-5/8 percent fixed annual
interest rate and require the Company to pay the counterparties variable annual
interest rates equal to the periodic six-month LIBOR plus a weighted average
annual margin of 5.66 percent. During February 2003, the Company entered into
similar interest rate swap contracts which were terminated during May 2003 for
$11.4 million of cash proceeds. As of June 30, 2004, the aggregate carrying
value of the Company's open fair value hedges was a liability of $14.9 million.
Settlements of open fair value hedges reduced the Company's interest expense by
$1.8 million and $1.1 million during the three-month periods ended June 30, 2004
and 2003, respectively, and by $2.0 million and $1.9 million during the
six-month periods then ended, respectively.
As of June 30, 2004, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included $14.0 million of
incremental carrying value attributable to net deferred hedge gains on
terminated interest rate swaps that are being amortized as net reductions to
interest expense over the original terms of the terminated agreements. The
amortization of net deferred hedge gains on terminated interest rate swaps
reduced the Company's reported interest expense by $6.1 million and $6.0 million
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
during the three-month periods ended June 30, 2004 and 2003, respectively, and
by $13.4 million and $11.9 million during the six-month periods then ended,
respectively.
The following table sets forth, as of June 30, 2004, the scheduled
amortization of net deferred hedge gains and losses on terminated fair value
hedges that will be recognized as increases in the case of losses, or decreases
in the case of gains, to the Company's future interest expense:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ---------
(in thousands)
2004 net deferred hedge gains......... $ 5,489 $ 4,555 $ 10,044
2005 net deferred hedge gains......... $ 4,264 $ 2,816 $ 2,313 $ 1,575 10,968
Thereafter............................ (7,061)
--------
$ 13,951
========
The terms of the fair value hedge agreements described above perfectly
matched the terms of the hedged senior notes. The Company did not exclude any
component of the interest rate swaps' gains or losses from the measurement of
hedge effectiveness. Accordingly, the Company did not realize any hedge
ineffectiveness associated with its fair value hedges during the three and six
month periods ended June 30, 2004 or 2003.
Cash flow hedges. The Company utilizes commodity swap and collar contracts
to (i) reduce the effect of price volatility on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) reduce commodity price risk associated with certain
capital projects. The Company has also, from time to time, utilized interest
rate contracts to reduce the effect of interest rate volatility on the Company's
indebtedness and forward currency exchange agreements to reduce the effect of
U.S. dollar to Canadian dollar exchange rate volatility.
Oil prices. All material sales contracts governing the Company's oil
production have been tied directly or indirectly to NYMEX prices. The following
table sets forth the Company's outstanding oil hedge contracts and the weighted
average NYMEX prices for those contracts as of June 30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- ------- -----------
Daily oil production hedged:
2004 - Swap Contracts
Volume (Bbl)................. 22,500 24,000 23,250
Price per Bbl................ $ 29.26 $ 29.65 $ 29.46
2005 - Swap Contracts
Volume (Bbl)................. 27,000 27,000 27,000 27,000 27,000
Price per Bbl................ $ 27.97 $ 27.97 $ 27.97 $ 27.97 $ 27.97
2006 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.19 $ 26.19 $ 26.19 $ 26.19 $ 26.19
2007 - Swap Contracts
Volume (Bbl)................. 11,000 11,000 11,000 11,000 11,000
Price per Bbl................ $ 30.17 $ 30.17 $ 30.17 $ 30.17 $ 30.17
2008 - Swap Contracts
Volume (Bbl)................. 15,000 15,000 15,000 15,000 15,000
Price per Bbl................ $ 28.56 $ 28.56 $ 28.56 $ 28.56 $ 28.56
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The Company reports average oil prices per Bbl including the effects of oil
quality adjustments and the net effect of oil hedges. The following table sets
forth the Company's oil prices, both reported (including hedge results) and
realized (excluding hedge results), and the net effect of settlements of oil
price hedges on oil revenue for the three and six months ended June 30, 2004 and
2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Average price reported per Bbl................. $ 27.94 $ 24.25 $ 28.13 $ 25.03
Average price realized per Bbl................. $ 33.94 $ 27.40 $ 33.00 $ 29.15
Reduction to oil revenue (in millions)......... $ (24.5) $ (9.2) $ (41.0) $ (23.8)
Natural gas liquids prices. During the three and six months ended June 30,
2004 and 2003, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at June 30, 2004.
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
price. The following table sets forth the Company's outstanding gas hedge
contracts and the weighted average index prices for those contracts as of June
30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
--------- --------- --------- --------- -----------
Daily gas production hedged:
2004 - Swap Contracts
Volume (Mcf).................... 310,000 310,000 310,000
Index price per MMBtu........... $ 4.34 $ 4.34 $ 4.34
2005 - Swap Contracts
Volume (Mcf).................... 190,000 180,000 180,000 150,000 174,904
Index price per MMBtu........... $ 5.28 $ 5.05 $ 5.05 $ 5.00 $ 5.10
2006 - Swap Contracts
Volume (Mcf).................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu........... $ 4.16 $ 4.16 $ 4.16 $ 4.16 $ 4.16
2007 - Swap Contracts
Volume (Mcf).................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu........... $ 3.51 $ 3.51 $ 3.51 $ 3.51 $ 3.51
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments and the net effect of gas hedges.
The following table sets forth the Company's gas prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
effect of settlements of gas price hedges on gas revenue for the three and six
months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Average price reported per Mcf............... $ 4.36 $ 4.15 $ 4.39 $ 4.15
Average price realized per Mcf............... $ 4.84 $ 4.39 $ 4.75 $ 4.66
Reduction to gas revenue (in millions)....... $ (31.6) $ (13.4) $ (45.9) $ (49.2)
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Interest rate. During June 2004, the Company entered into costless collar
contracts and designated the contracts as cash flow hedges of the forecasted
interest rate risk attributable to the yield on the benchmark 4.75 percent U.S.
Treasury Notes due May 15, 2014 (the "U.S. Treasuries"). The terms of the collar
contracts fixed the annual yield on $250 million notional amount of U.S.
Treasuries within a yield collar having a ceiling rate of 4.70 percent and a
floor rate of 4.65 percent. The yield on the U.S. Treasuries as of July 7, 2004
was the benchmark rate used to determine the coupon rate on the Company's 5-7/8
percent senior notes due July 15, 2016, which were issued on July 15, 2004 in
exchange for portions of three series of the Company's outstanding senior notes.
The Company did not realize any ineffectiveness in connection with the costless
collar contracts during the three months ended June 30, 2004. See Note L for
information regarding the July 15, 2004 debt exchange.
Hedge ineffectiveness. During the three-month periods ended June 30, 2004
and 2003, the Company recognized other expense of $1.8 million and $503
thousand, respectively, related to the ineffective portions of its cash flow
hedging instruments. During the six-month periods ended June 30, 2004 and 2003,
the Company recognized other expense of $1.9 million and $2.3 million,
respectively, related to the ineffective portions of its cash flow hedging
instruments.
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of June 30, 2004 and December 31, 2003, AOCI -
Hedging represented net deferred losses of $198.3 million and $104.1 million,
respectively. The AOCI - Hedging balance as of June 30, 2004 was comprised of
$329.4 million of net deferred losses on the effective portions of open cash
flow hedges, $23.2 million of net deferred gains on terminated cash flow hedges
and $107.9 million of associated net deferred tax benefits. The increase in AOCI
- - Hedging during the six months ended June 30, 2004 was primarily attributable
to increases in future commodity prices relative to the commodity prices
stipulated in the hedge contracts, partially offset by the reclassification of
net deferred hedge losses to net income as derivatives matured by their terms.
The net deferred losses associated with open cash flow hedges remain subject to
market price fluctuations until the positions are either settled under the terms
of the hedge contracts or terminated prior to settlement. The net deferred gains
on terminated cash flow hedges are fixed.
During the twelve months ending June 30, 2005, based on current estimates
of future commodity prices, the Company expects to reclassify $175.9 million of
net deferred losses associated with open cash flow hedges and $22.6 million of
net deferred gains on terminated cash flow hedges from AOCI - Hedging to oil and
gas revenues. The Company also expects to reclassify approximately $64.2 million
of net deferred income tax benefits during the twelve months ending June 30,
2005 from AOCI - Hedging to income tax provision.
The following table sets forth, as of June 30, 2004, the scheduled
amortization of net deferred gains on terminated cash flow hedges that will be
recognized as increases to the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(in thousands)
2004 net deferred hedge gains..... $11,001 $10,954 $ 21,955
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
-------
$ 23,204
=======
NOTE F. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provision of SFAS 143 on
January 1, 2003. The Company's asset retirement obligations primarily relate to
the future plugging and abandonment of proved properties and related facilities.
The Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. The
Company has no assets that are legally restricted for purposes of settling asset
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
retirement obligations. The following table summarizes the Company's asset
retirement obligation transactions recorded in accordance with the provisions of
SFAS 143 during the three and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Beginning asset retirement obligations..... $107,034 $ 64,174 $105,036 $ 34,692
Cumulative effect adjustment............... - - - 23,393
New wells placed on production and
changes in estimates.................... 336 50 3,068 7,015
Liabilities settled........................ (381) (934) (2,978) (3,376)
Accretion of discount...................... 2,016 1,235 3,982 2,329
Currency translation....................... (185) 698 (288) 1,170
------- ------- ------- -------
Ending asset retirement obligations ....... $108,820 $ 65,223 $108,820 $ 65,223
======= ======= ======= =======
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities, respectively, in
the accompanying Consolidated Balance Sheets.
NOTE G. Postretirement Benefit Obligations
As of June 30, 2004 and December 31, 2003, the Company had recorded $15.6
million of unfunded accumulated postretirement benefit obligations, the current
and noncurrent portions of which are included in other current liabilities and
other liabilities, respectively, in the accompanying Consolidated Balance
Sheets. The following table reconciles changes in the Company's unfunded
accumulated postretirement benefit obligations during the three and six months
ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 15,501 $ 19,926 $ 15,556 $ 19,743
Benefit payments............................... (175) (342) (514) (582)
Service costs.................................. 59 52 117 103
Accretion of discounts......................... 226 373 452 745
------- ------- ------- -------
Ending accumulated postretirement benefit
obligations.................................. $ 15,611 $ 20,009 $ 15,611 $ 20,009
======= ======= ======= =======
NOTE H. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental to
its business, including, but not limited to, the proceedings described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. The Company believes that
the ultimate disposition of these legal actions will not have a material adverse
effect on the Company's consolidated financial position, liquidity, capital
resources or future results of operations. The Company will continue to evaluate
its litigation matters on a quarter-by-quarter basis and will adjust its
litigation reserves as appropriate to reflect the then current status of
litigation.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings and it now contains two
material claims. First, the plaintiffs assert that they were improperly charged
expenses (primarily field compression), which are a "cost of production", and
for which plaintiffs, as royalty owners, are not responsible. Second, the
plaintiffs claim they are entitled to 100 percent of the value of the helium
extracted at the Company's Satanta gas plant. If the plaintiffs were to prevail
on the above two claims in their entirety, it is possible that the Company's
liability (both for periods covered by the lawsuit and from the last date
covered by the lawsuit to the present - because the deductions continue to be
taken and the plaintiffs continue to be paid for a royalty share of the helium)
could reach $67 million, plus prejudgment interest. However, the Company
believes it has valid defenses to the plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases and other
agreements, and intends to vigorously defend itself.
The Company does not believe the costs it has deducted are a "cost of
production". The costs being deducted are post production costs incurred to
transport the gas to the Company's Satanta gas plant for processing, where the
valuable hydrocarbon liquids and helium are extracted from the gas. The
plaintiffs benefit from such extractions and the Company believes that charging
the plaintiffs with their proportionate share of such transportation and
processing expenses is consistent with Kansas law and with the parties'
agreements.
The Company has also vigorously defended against the plaintiffs' claims to
100 percent of the value of the helium extracted, and believes that in
accordance with applicable law, it has properly accounted to the plaintiffs for
their fractional royalty share of the helium under the specified royalty clauses
of the respective oil and gas leases.
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to the plaintiffs and believes it presented strong
evidence at trial to support its positions. Although the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the quarterly reporting period in which such liability is
recorded, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity, capital resources or future annual results of operations.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows a
"severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, one of the
Company's predecessor entities collected the Kansas ad valorem tax in addition
to the otherwise maximum lawful price. The FERC's ruling was appealed to the
United States Court of Appeals for the District of Columbia ("D.C. Circuit"),
which held in June 1988 that the FERC failed to provide a reasonable basis for
its findings and remanded the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limited the effect of its decision to Kansas ad valorem taxes for sales made
on or after June 28, 1988. The FERC clarified the effective date of its decision
by an order dated May 18, 1994. The order clarified that the effective date
applies to tax bills rendered after June 28, 1988, not sales made on or after
that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various gas producers subsequently
filed a petition for writ of certiori with the United States Supreme Court
seeking to limit the scope of the potential refunds to tax bills rendered on or
after June 28, 1988 (the effective date originally selected by the FERC).
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking a waiver or set-off from the FERC
with respect to that portion of the refund associated with (i) nonrecoupable
royalties, (ii) nonrecoupable Kansas property taxes based, in part, upon the
higher prices collected and (iii) interest for all periods. On September 10,
1997, the FERC denied this request, and on October 10, 1997, the Company and
other producers filed a request for rehearing. Pipelines were given until
November 10, 1997 to file claims on refunds sought from producers and refund
claims totaling approximately $30.2 million were made against the Company.
Through June 30, 2004, the Company has settled $21.6 million of the original
claim amounts. As of June 30, 2004 and December 31, 2003, the Company had on
deposit $10.7 million, including accrued interest, in an escrow account and had
a corresponding obligation for the remaining claim recorded in other current
liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2004.
The Company believes that the accrued obligations will be sufficient to resolve
the remaining claims.
NOTE I. Income Per Share Before Cumulative Effect of Change in Accounting
Principle
Basic income per share before cumulative effect of change in accounting
principle is computed by dividing income before cumulative effect of change in
accounting principle by the weighted average number of common shares outstanding
for the period. The computation of diluted income per share before cumulative
effect of change in accounting principle reflects the potential dilution that
could occur if securities or other contracts to issue common stock that are
dilutive to income before cumulative effect of change in accounting principle
were exercised or converted into common stock or resulted in the issuance of
common stock that would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average shares outstanding for the three and six months ended June 30, 2004 and
2003:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 118,855 117,005 118,787 116,875
Dilutive common stock options (a)........... 1,080 1,766 1,128 1,780
Restricted stock awards..................... 467 198 418 168
-------- -------- -------- --------
Diluted..................................... 120,402 118,969 120,333 118,823
======== ======== ======== ========
- ---------------
(a) Common stock options to purchase 30,712 shares and 1,364,706 shares of
common stock were outstanding but not included in the computations of
diluted income per share before cumulative effect of change in accounting
principle for the three-month periods ended June 30, 2004 and 2003,
respectively, and common stock options to purchase 30,712 shares and
1,368,612 shares of common stock were outstanding but not included in the
computations of diluted income per share before cumulative effect of change
in accounting principle for the six-month periods ended June 30, 2004 and
2003, respectively, because the exercise prices of the options were greater
than the average market price of the common shares and would be
anti-dilutive to the computations.
NOTE J. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the oil
and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina, Canada and
Africa. Africa is primarily comprised of operations in Equatorial Guinea, Gabon,
South Africa and Tunisia.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
The following tables provide the Company's interim geographic operating
segment data for the three and six months ended June 30, 2004 and 2003.
Geographic operating segment income tax benefits (provisions) have been
determined based on statutory rates existing in the various tax jurisdictions
where the Company has oil and gas producing activities. The "Headquarters and
Other" table column includes revenues and expenses that are not routinely
included in the earnings measures internally reported to management on a
geographic operating segment basis.
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
-------- --------- -------- -------- ------------ ------------
(in thousands)
Three months ended June 30, 2004:
Revenues and other income:
Oil and gas......................... $367,843 $ 26,614 $ 19,879 $ 32,657 $ - $ 446,993
Interest and other.................. - - - - 1,610 1,610
Gain (loss) on disposition of
assets, net....................... - - (252) - 20 (232)
------- ------- ------- ------- ------- --------
367,843 26,614 19,627 32,657 1,630 448,371
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production.............. 71,248 8,416 7,552 8,349 - 95,565
Depletion, depreciation and
amortization..................... 106,087 14,820 7,392 11,737 2,714 142,750
Exploration and abandonments........ 11,834 7,847 1,254 18,748 - 39,683
General and administrative.......... - - - - 17,194 17,194
Accretion of discount on asset
retirement obligations........... - - - - 2,016 2,016
Interest............................ - - - - 21,402 21,402
Other............................... - - - - 8,300 8,300
------- ------- ------- ------- ------- --------
189,169 31,083 16,198 38,834 51,626 326,910
------- ------- ------- ------- ------- --------
Income (loss) before income taxes...... 178,674 (4,469) 3,429 (6,177) (49,996) 121,461
Income tax benefit (provision)......... (65,216) 1,564 (1,294) 1,955 11,232 (51,759)
------- ------- ------- ------- ------- --------
Net income (loss)...................... $113,458 $ (2,905) $ 2,135 $ (4,222) $(38,764) $ 69,702
======= ======= ======= ======= ======= ========
Three months ended June 30, 2003:
Revenues and other income:
Oil and gas......................... $294,884 $ 25,474 $ 23,882 $ - $ - $ 344,240
Interest and other.................. - - - - 1,260 1,260
Gain on disposition of assets, net.. 75 - - - 29 104
------- ------- ------- ------- ------- --------
294,959 25,474 23,882 - 1,289 345,604
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production............... 60,384 6,179 7,280 - - 73,843
Depletion, depreciation and
amortization...................... 78,439 11,993 7,751 - 2,376 100,559
Exploration and abandonments......... 22,603 6,528 1,833 16,083 - 47,047
General and administrative........... - - - - 13,644 13,644
Accretion of discount on asset
retirement obligations............ - - - - 1,235 1,235
Interest............................. - - - - 23,823 23,823
Other................................ - - - - 5,638 5,638
------- ------- ------- ------- ------- --------
161,426 24,700 16,864 16,083 46,716 265,789
------- ------- ------- ------- ------- --------
Income (loss) before income taxes...... 133,533 774 7,018 (16,083) (45,427) 79,815
Income tax benefit (provision)......... (46,737) (271) (2,771) 5,629 41,520 (2,630)
------- ------- ------- ------- ------- --------
Net income (loss)...................... $ 86,796 $ 503 $ 4,247 $(10,454) $ (3,907) $ 77,185
======= ======= ======= ======= ======= ========
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
--------- --------- -------- -------- ------------ ------------
(in thousands)
Six months ended June 30, 2004:
Revenues and other income:
Oil and gas......................... $ 725,151 $ 57,497 $ 38,098 $ 72,773 $ - $ 893,519
Interest and other.................. - - - - 3,345 3,345
Gain (loss) on disposition of
assets, net....................... 51 - (252) - (44) (245)
-------- ------- ------- ------- -------- --------
725,202 57,497 37,846 72,773 3,301 896,619
-------- ------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production.............. 137,267 15,175 15,501 16,833 - 184,776
Depletion, depreciation and
amortization..................... 203,458 27,362 14,867 28,133 5,429 279,249
Exploration and abandonments........ 65,390 11,397 14,230 29,172 - 120,189
General and administrative.......... - - - - 35,523 35,523
Accretion of discount on asset
retirement obligations........... - - - - 3,982 3,982
Interest............................ - - - - 42,978 42,978
Other............................... - - - - 8,496 8,496
-------- ------- ------- ------- -------- --------
406,115 53,934 44,598 74,138 96,408 675,193
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes..... 319,087 3,563 (6,752) (1,365) (93,107) 221,426
Income tax benefit (provision)........ (116,467) (1,247) 2,549 793 22,836 (91,536)
-------- ------- ------- ------- ------- --------
Net income (loss)..................... $ 202,620 $ 2,316 $ (4,203) $ (572) $(70,271) $ 129,890
======== ======= ======= ======= ======= ========
Six months ended June 30, 2003:
Revenues and other income:
Oil and gas......................... $ 534,135 $ 48,855 $ 46,249 $ - $ - $ 629,239
Interest and other.................. - - - - 3,973 3,973
Gain on disposition of assets, net.. 1,321 - 1 - 208 1,530
-------- ------- ------- -------- ------- --------
535,456 48,855 46,250 - 4,181 634,742
-------- ------- ------- -------- ------- --------
Costs and expenses:
Oil and gas production.............. 115,921 11,588 14,201 - - 141,710
Depletion, depreciation and
amortization..................... 131,297 20,319 14,302 - 4,690 170,608
Exploration and abandonments........ 40,390 9,572 13,160 19,792 - 82,914
General and administrative.......... - - - - 29,125 29,125
Accretion of discount on asset
retirement obligations........... - - - - 2,329 2,329
Interest............................ - - - - 46,314 46,314
Other............................... - - - - 10,816 10,816
-------- ------- ------- -------- ------- --------
287,608 41,479 41,663 19,792 93,274 483,816
-------- ------- ------- -------- ------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............... 247,848 7,376 4,587 (19,792) (89,093) 150,926
Income tax benefit (provision)........ (86,747) (2,582) (1,811) 6,927 79,279 (4,934)
-------- ------- ------- -------- ------- --------
Income (loss) before cumulative
effect of change in accounting
principle.......................... $ 161,101 $ 4,794 $ 2,776 $ (12,865) $ (9,814) $ 145,992
======== ======= ======= ======== ======= ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE K. Evergreen Merger
Proposed merger with Evergreen Resources, Inc. On May 3, 2004, the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Evergreen Resources, Inc. ("Evergreen"). Evergreen is a publicly traded
independent oil and gas company primarily engaged in the operation, development,
production, exploration and acquisition of North American unconventional natural
gas. Evergreen is based in Denver, Colorado and is one of the leading developers
of coal bed methane reserves in the United States. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary Basin. The Merger Agreement
provides for a merger by which Evergreen will become a wholly-owned subsidiary
of Pioneer (the "Proposed Merger").
In accordance with the Merger Agreement, holders of approximately 44
million shares of Evergreen common stock will have the right to receive an
aggregate of approximately 25 million shares of Pioneer common stock (with
related stockholders rights) and a total of approximately $850 million in cash.
This represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock-based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be limited to those
amounts set forth in the first sentence of this paragraph.
In addition, Evergreen is seeking to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment equal to the sum of (i) $.35 per share (approximately
$15 million) as consideration from Pioneer for the Kansas properties in the
Proposed Merger; plus (ii) an amount per share equal to a pro rata share of the
net proceeds in excess of $15 million from the sale of the Kansas properties, if
any, to a third party that closes before the closing date of the Proposed
Merger.
The Company filed with the SEC a registration statement on Form S-4 on June
14, 2004 relating to the shares of Pioneer common stock to be issued in the
Proposed Merger. A portion of such registration statement constituted a joint
proxy statement/prospectus to be submitted to the stockholders of Evergreen's
common stock and the Company's common stock for special meetings to be held by
each company's stockholders in connection with the Proposed Merger. It is
expected that such joint proxy statement/prospectus will be mailed to all
stockholders during August 2004, and that such meeting will be held, and the
Proposed Merger will be consummated, in September 2004. Since meetings of both
Evergreen's and Pioneer's stockholders are required in connection with the
Proposed Merger, in addition to a number of other conditions, there can be no
assurance that the Proposed Merger will occur.
NOTE L. Subsequent Events
On July 15, 2004, the Company accepted tenders to exchange $117.9 million,
$275.1 million and $133.8 million in principal amount of its 8 1/4% Senior Notes
due 2007, 9-5/8% Senior Notes due April 1, 2010 (the "9-5/8% Notes") and 7.50%
Senior Notes due 2012 (the "7.50% Notes"), respectively, for a like principal
amount of a new series of 5.875% Senior Notes due 2016 (the "New Notes") and
cash. The aggregate exchange price paid to the holders of the tendered notes
exceeded their aggregate principal balances by $109.0 million. In accordance
with Financial Accounting Standards Board Emerging Issues Task Force Abstract
Issue No. 96-19, "Debtors Accounting for a Modification or Exchange of Debt
Instruments", this amount will be amortized as increases to the Company's future
interest expense over the term of the New Notes. Associated with the tendering
of the 9-5/8% Notes and the 7.50% Notes, the Company received consents which
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
permanently remove substantially all of the operating restrictions with respect
to those notes once certain investment grade ratings are achieved.
Interest on the New Notes is payable semi-annually on January 15 and July
15 of each year, commencing January 15, 2005. The New Notes are governed by an
Indenture between the Company and The Bank of New York dated January 13, 1998.
The New Notes are general unsecured obligations of the Company ranking equally
in right of payment with all other senior unsecured indebtedness of the Company
and are senior in right of payment to all existing and future subordinated
indebtedness of the Company.
In conjunction with the exchange, the Company paid $9.1 million (which
represented $10.6 million of settlement losses for future periods offset by $1.5
million of accrued settlement gains through the date of termination) to
terminate interest rate swap contracts hedging $140 million notional amount of
the 7.50% Notes and $90 million notional amount of the 9-5/8% Notes.
21
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information included in Item 2 and Item 3 of this document includes
forward-looking statements that are made pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, and the business prospects of the Company, are subject to a number
of risks and uncertainties which may cause the Company's actual results in
future periods to differ materially from the forward-looking statements. These
risks and uncertainties include, among other things, volatility of oil and gas
prices, product supply and demand, competition, international operations and
associated international political and economic instability, government
regulation or action, litigation, the costs and results of drilling and
operations, the Company's ability to replace reserves or implement its business
plans, access to and cost of capital, uncertainties about estimates of reserves,
quality of technical data and environmental risks, acts of war and terrorism.
These and other risks are described in the Company's 2003 Annual Report on Form
10-K that is available from the SEC.
Financial and Operating Performance
The Company's financial and operating performance for the first six months
of 2004, as compared to the first six months of 2003, included the following
highlights:
o A 30 percent increase in average daily production on a BOE basis,
with relatively balanced contributions from domestic and foreign
operations.
o A 42 percent increase in oil, NGL and gas revenues due to increased
sales volumes and commodity price levels.
o A 47 percent increase in income before income taxes and cumulative
effect of change in accounting principle.
o An increase in the Company's effective income tax rate from three
percent to 41 percent primarily due to the third quarter 2003
reversal of the Company's United States deferred tax asset
valuation allowances.
o A 60 percent increase in net cash provided by operating activities.
o A decrease in the Company's ratio of debt to book capitalization to
43.8 percent as of June 30, 2004 from 54.7 percent as of June 30,
2003.
o The declaration and payment of a $.10 per common share semiannual
dividend.
During the first six months of 2004, the Company also announced the
following financial and operating milestones:
o Rating agencies upgrade of the Company to investment grade status
in response to improved financial position and earnings trends,
along with other factors specific to the Company.
o The Proposed Merger with Evergreen Resources, Inc. ("Evergreen").
See Note K of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" and "Proposed Merger with
Evergreen Resources, Inc." for information regarding this important
business combination.
o The exchange of portions of the Company's outstanding senior notes
due 2007, 2010 and 2012 for new senior notes due 2016 and cash. See
Note L of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" and "Capital Commitments, Capital
Resources and Liquidity" for information regarding this $526.9
million debt exchange that was completed in July 2004.
o Completion of the First Amendment which removed Pioneer USA as a
guarantor of the Revolving Credit Agreement and had the effect of
removing Pioneer USA as a guarantor of the Company's senior notes.
See Note D of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for information regarding the
First Amendment.
o First production from the Company's deepwater Gulf of Mexico
Harrier field during January 2004, the Devils Tower field during
May 2004 and the Raptor and Tomahawk fields during mid-June 2004.
o The acquisition of a 40 percent interest in Block H offshore
Equatorial Guinea, West Africa.
o The announced agreement to participate in a joint exploration
program with ConocoPhillips and Anadarko Petroleum Corporation in
the National Petroleum Reserve on the North Slope of Alaska.
22
PIONEER NATURAL RESOURCES COMPANY
The Company recorded net income of $69.7 million ($.58 per diluted share)
and $129.9 million ($1.08 per diluted share) for the three and six months ended
June 30, 2004, respectively, as compared to net income of $77.2 million ($.65
per diluted share) and $161.4 million ($1.36 per diluted share), including a
$15.4 million benefit from the cumulative effect of change in accounting
principle, net of tax, associated with the Company's adoption of SFAS 143 on
January 1, 2003, for the same respective periods of 2003. See Note F of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
additional information regarding the Company's asset retirement obligations.
Income before income taxes and cumulative effect of change in accounting
principle increased by $41.6 million (52 percent) and $70.5 million (47 percent)
during the three and six month periods ended June 30, 2004 as compared to the
same respective periods ended June 30, 2003. However, primarily as a result of
the reversal of the Company's United States deferred tax asset valuation
allowances during the third quarter of 2003, the Company's income tax provision
increased by $49.1 million and $86.6 million during the three and six month
periods ended June 30, 2004 as compared to the same respective periods ended
June 30, 2003.
The Company's net cash provided by operating activities was $264.7 million
and $518.3 million for the three and six months ended June 30, 2004,
respectively, representing increases of $74.8 million and $194.1 million,
respectively, as compared to $189.9 million and $324.2 million for the same
respective periods in 2003. During the three months ended June 30, 2004, the
Company used its net cash provided by operating activities to fund $183.6
million of additions to oil and gas properties, to repay $46.0 million of
long-term debt, to purchase $9.7 million of treasury stock and to fund $12.0
million of dividends on common stock. During the six months ended June 30, 2004,
the Company used its net cash provided by operating activities to fund $350.8
million of additions to oil and gas properties, to repay $136.0 million of
long-term debt, to purchase $15.3 million of treasury stock and to fund $12.0
million of dividends on common stock.
Proposed Merger with Evergreen Resources, Inc.
Evergreen is a publicly traded independent oil and gas company primarily
engaged in the operation, development, production, exploration and acquisition
of North American unconventional natural gas. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary Basin. The Merger Agreement
provides for a merger by which Evergreen will become a wholly-owned subsidiary
of Pioneer.
Proposed purchase terms. In accordance with the Merger Agreement, holders
of approximately 44 million shares of Evergreen common stock will have the right
to receive an aggregate of approximately 25 million shares of Pioneer common
stock (with related stockholders rights) and a total of approximately $850
million in cash. This represents a price per Evergreen share of $39.00 (based on
Pioneer's last reported sale price on May 3, 2004 of $33.52 per share). Holders
of Evergreen common stock will have the option to elect among three types of
consideration for a share of Evergreen common stock: (1) 1.1635 shares of
Pioneer common stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common
stock and $19.50 in cash. Evergreen stockholders who do not make an election
will receive .58175 shares of Pioneer common stock and $19.50 in cash per
Evergreen share. All holders of unvested restricted stock under Evergreen's
stock-based employee plans will be deemed to have elected to receive Pioneer
common stock. Holders who elect all stock consideration or all cash
consideration (other than holders of unvested restricted stock) will be subject
to allocation of the stock and cash so that the aggregate amounts of stock and
cash will be limited to those amounts set forth in the first sentence of this
paragraph.
In addition, Evergreen is seeking to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment equal to the sum of (i) $.35 per share (approximately
$15 million) as consideration from Pioneer for the Kansas properties in the
Proposed Merger; plus (ii) an amount per share equal to a pro rata share of the
net proceeds in excess of $15 million from the sale, if any, of the Kansas
properties to a third party that closes before the closing date of the Proposed
Merger.
Strategic rationale. Pioneer's business strategy for sustaining above
average growth in per share value is predicated on the leveraging of its
long-lived foundation assets. Those foundation assets generate dependable
operating cash flows while requiring relatively low amounts of maintenance
capital. As a result, the Company's foundation assets provide free cash flows
(i.e., operating cash flows after maintenance capital expenditures) that finance
23
PIONEER NATURAL RESOURCES COMPANY
investments in high-impact, high-return exploration and acquisition
opportunities. The Proposed Merger offers an opportunity for the Company to
rebalance its portfolio of long-lived foundation assets by adding Evergreen's
long-lived onshore producing asset base and significant low-risk development
drilling opportunities. Additionally, the Company's decision to pursue the
Proposed Merger was positively impacted by the compatible technical and
corporate cultures of Pioneer and Evergreen, Evergreen's substantial acreage
position in key growth basins of the United States Rockies area and the
opportunity to leverage Evergreen's technical expertise in the area of coal bed
methane operations.
Liquidity and capital structure. The completion of the Proposed Merger is
expected to result in a short-term increase of approximately $1.2 billion in the
Company's long-term debt, comprised of the funding of $850 million in cash
consideration paid, approximately $8 million of transaction costs associated
with the Proposed Merger, approximately $15 million to fund the purchase of
Evergreen's Kansas assets if Evergreen is unable to sell those assets prior to
closing the Proposed Merger and the assumption of (i) $100 million of Evergreen
4.75 percent convertible senior subordinated bonds that are callable in December
2006 and (ii) $200 million of Evergreen 5.875 percent senior subordinated bonds
due in 2012. The Company intends to finance the cash costs of the Proposed
Merger with a new $900 million, 364-day senior unsecured revolving credit
facility, the terms of which will essentially mirror those of the Company's
Revolving Credit Agreement, including the bearing of a variable annual rate of
interest equal to the six-month LIBOR rate plus a 75 basis point LIBOR margin.
The completion of the Proposed Merger is expected to increase the Company's
stockholders' equity by approximately $900 million as a result of the associated
issuance of approximately 25 million shares of Pioneer common stock.
The Company has targeted a ratio of debt to book capitalization of 40
percent or less by the end of 2005. To achieve this target, the respective
companies have implemented an aggressive commodity hedging program of Pioneer's
and Evergreen's 2004 and 2005 forecasted oil and gas production, utilizing
commodity swap contracts entered into with highly-rated financial institution
counterparties. Consistent with this program, Evergreen has hedged approximately
75 percent of its remaining forecasted 2004 and forecasted 2005 gas production.
The Company has hedged approximately 35 percent of its remaining forecasted 2004
worldwide liquids and 50 percent of its remaining forecasted 2004 North American
gas production and approximately 35 percent of its forecasted 2005 worldwide
liquids and North American gas production. See Note E of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" and "Item 3.
Quantitative and Qualitative Disclosures About Market Risk" for more information
regarding the Company's commodity hedge positions.
Regulatory and shareholders approvals. The Company filed with the SEC a
registration statement on Form S-4 on June 14, 2004 relating to the shares of
Pioneer common stock to be issued in the Proposed Merger. A portion of such
registration statement constituted a joint proxy statement/prospectus to be
submitted to the stockholders of Evergreen's common stock and the Company's
common stock for special meetings to be held by each company's stockholders in
connection with the Proposed Merger. It is expected that such joint proxy
statement/prospectus will be mailed to all stockholders during August 2004, and
that such meeting will be held, and the Proposed Merger will be consummated, in
September 2004. Since meetings of both Evergreen's and Pioneer's stockholders
are required in connection with the Proposed Merger, in addition to a number of
other conditions, there can be no assurance that the Proposed Merger will occur.
Drilling Highlights
During the first six months of 2004, the Company incurred $348.8 million in
finding and development costs including $134.7 million for development
activities, $156.1 million for exploration activities and $58.0 million on
acquisitions. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure for the Company's significant development projects.
The following tables summarize the Company's development drilling and
exploration and extension drilling activities for the six months ended June 30,
2004:
24
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast... 3 11 9 - 5
Permian Basin............... - 59 56 - 3
Mid-Continent............... 25 41 48 - 18
------ ------ ----- ----- -----
Total Domestic........ 28 111 113 - 26
------ ------ ----- ----- -----
Argentina................... 3 21 19 - 5
Canada...................... 6 3 7 - 2
Africa...................... - 1 1 - -
------ ------ ----- ----- -----
Total Worldwide....... 37 136 140 - 33
====== ====== ===== ===== =====
Exploration/Extension Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast... 6 2 4 3 1
Mid-Continent............... 2 - - 2 -
Alaska...................... 3 - - - 3
------ ------ ----- ----- -----
Total Domestic......... 11 2 4 5 4
------ ------ ----- ----- -----
Argentina................... 10 12 12 2 8
Canada...................... 11 35 19 18 9
Africa...................... 2 6 2 4 2
------ ------ ----- ----- -----
Total Worldwide........ 34 55 37 29 23
====== ====== ===== ===== =====
Domestic. The Company spent $224.4 million during the first six months of
2004 on acquisition, drilling and seismic activities in the Gulf of Mexico/Gulf
Coast, Alaska, Permian Basin and Mid-Continent areas of the United States.
Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area, the
Company spent $134.3 million (93 percent of which was spent in the Gulf of
Mexico) of drilling, construction, acquisition and seismic capital. In the
deepwater Gulf of Mexico, the Company completed three development projects, had
development activities on one significant project underway and drilled three
significant exploration wells during the first half of 2004. During the second
quarter, the Company was also awarded leases on 19 Gulf of Mexico blocks
covering approximately 102,000 acres, of which 14 are located in the deepwater.
o Falcon Corridor - During the first quarter of 2003, the Company drilled its
Harrier discovery, which was completed as a one-well subsea tie-back to the
Falcon field facilities and placed on production in January 2004. In
addition, during the third quarter of 2003, the Company successfully
drilled the Tomahawk and Raptor prospects, which were also developed as
single-well subsea tie-backs to the Falcon field facilities and placed on
production in June 2004. To accommodate the incremental production from
Harrier, Tomahawk and Raptor as well as potential throughput associated
with additional planned exploration, an additional parallel pipeline
connecting the Falcon field to the Falcon Nest platform on the Gulf of
Mexico shelf has been added, doubling its capacity. The Company holds a 100
percent working interest and operates all four fields in the Falcon
Corridor. In addition, the Company may drill an additional Falcon Corridor
exploration prospect during the second half of 2004.
o Devils Tower Area - The Dominion-operated Devils Tower development project
was sanctioned in 2001 as a spar development project with the owners
leasing a spar from a third party for the life of the field. The spar has
slots for eight dry tree wells and up to two subsea tie-back risers and is
capable of handling 60 MBbls of oil per day and 60 MMcf of