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 September 30, 1998
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)
1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
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 / /
Number of shares of Common Stock outstanding as of
October 31, 1998................................................ 100,217,893
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 .............................................3
Consolidated Statements of Operations and Comprehensive
Income for the three and nine months ended September 30,
1998 and 1997.....................................................5
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998...................................6
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 1998 and 1997..........................7
Notes to Consolidated Financial Statements..........................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................29
Item 5. Other Information..................................................29
Item 6. Exhibits and Reports on Form 8-K...................................29
Signatures.........................................................30
Exhibit Index......................................................31
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 70,285 $ 71,713
Restricted cash 25,020 1,695
Accounts receivable:
Trade, net 42,640 75,432
Oil and gas sales 56,751 116,500
Inventories 17,460 13,576
Deferred income taxes 16,100 16,900
Other current assets 10,238 12,372
---------- ----------
Total current assets 238,494 308,188
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties 3,899,703 3,575,971
Unproved properties 464,750 545,074
Accumulated depletion, depreciation and
amortization (847,496) (605,203)
---------- ----------
3,516,957 3,515,842
---------- ----------
Deferred income taxes 102,200 -
Other property and equipment, net 50,694 44,017
Other assets, net 84,281 78,543
---------- ----------
$ 3,992,626 $ 3,946,590
========== ==========
The financial information included as of September 30, 1998 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,712 $ 5,791
Undistributed unit purchases - 1,695
Accounts payable:
Trade 108,088 176,697
Affiliates 5,032 9,994
Other current liabilities 112,501 67,375
---------- ----------
Total current liabilities 227,333 261,552
---------- ----------
Long-term debt, less current maturities 2,164,259 1,943,718
Other noncurrent liabilities 176,595 180,275
Deferred income taxes - 12,200
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000
shares authorized; one share issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively - -
Common stock, $.01 par value; 500,000,000
shares authorized; 100,755,293 and
101,037,562 shares issued at September 30,
1998 and December 31, 1997, respectively 1,007 1,010
Additional paid-in capital 2,350,996 2,359,992
Treasury stock, at cost; 500,700 and 591
shares at September 30, 1998 and December
31, 1997, respectively (9,911) (21)
Unearned compensation (10,101) (16,196)
Retained deficit (909,574) (795,940)
Accumulated other comprehensive income:
Cumulative translation adjustment 2,022 -
---------- ----------
Total stockholders' equity 1,424,439 1,548,845
Commitments and contingencies (Note E)
---------- ----------
$ 3,992,626 $ 3,946,590
========== ==========
The financial information included as of September 30, 1998 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $ 173,462 $ 150,354 $ 554,478 $ 348,980
Interest and other 5,868 816 8,191 3,649
Gain (loss) on disposition of assets, net (461) 108 (136) 2,745
--------- --------- --------- ---------
178,869 151,278 562,533 355,374
--------- --------- --------- ---------
Costs and expenses:
Oil and gas production 57,753 42,003 169,508 91,674
Depletion, depreciation and amortization 87,150 67,388 247,208 126,897
Exploration and abandonments 35,627 15,513 86,149 34,310
General and administrative 19,236 16,779 56,648 31,769
Reorganization 609 - 21,158 -
Interest 41,822 24,110 122,317 44,264
Other 4,874 2,533 18,500 2,982
--------- --------- --------- ---------
247,071 168,326 721,488 331,896
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item (68,202) (17,048) (158,955) 23,478
Income tax benefit (provision) 24,300 6,000 55,400 (8,500)
--------- --------- --------- ---------
Income (loss) before extraordinary item (43,902) (11,048) (103,555) 14,978
Extraordinary item - loss on early
extinguishment of debt, net of tax - (1,518) - (1,518)
--------- --------- --------- ---------
Net income (loss) (43,902) (12,566) (103,555) 13,460
--------- --------- --------- ---------
Other comprehensive income:
Translation adjustment 4,784 - 2,022 -
--------- --------- --------- ---------
Comprehensive income (loss) $ (39,118) $ (12,566) $ (101,533) $ 13,460
========= ========= ========= =========
Net income (loss) per share:
Basic:
Income (loss) before extraordinary item $ (.44) $ (.18) $ (1.04) $ .34
Extraordinary item - (.03) - (.03)
--------- --------- --------- ---------
Net income (loss) $ (.44) $ (.21) $ (1.04) $ .31
========= ========= ========= =========
Diluted:
Income (loss) before extraordinary item $ (.44) $ (.18) $ (1.04) $ .34
Extraordinary item - (.03) - (.03)
--------- --------- --------- ---------
Net income (loss) $ (.44) $ (.21) $ (1.04) $ .31
========= ========= ========= =========
Dividends declared per share $ .05 $ .05 $ .10 $ .10
========= ========= ========= =========
Weighted average shares outstanding 99,939 59,200 99,982 43,180
========== ========== ========== ==========
</TABLE>
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
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
<TABLE>
Common Accumulated
Stock Additional Other Total
Shares Common Paid-in Treasury Unearned Retained Comprehensive Stockholders'
Outstanding Stock Capital Stock Compensation Deficit Income Equity
----------- ------- ---------- -------- ------------ --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 101,036,971 $ 1,010 $2,359,992 $ (21) $ (16,196) $(795,940) $ - $ 1,548,845
Common stock issued:
Adjustment to acquisition
of Chauvco Resources,
Ltd. (401,755) (4) (11,095) - - - - (11,099)
Tax provision related to
restricted stock - - (600) - - - - (600)
Purchase of treasury stock (500,109) - - (9,890) - - - (9,890)
Shares awarded 119,486 1 2,699 - (881) - - 1,819
Amortization of unearned
compensation - - - - 6,976 - - 6,976
Dividends ($.10 per share) - - - - - (10,079) - (10,079)
Net loss - - - - - (103,555) - (103,555)
Other comprehensive income:
Translation adjustment - - - - - - 2,022 2,022
----------- ------ --------- ------- --------- -------- ---------- -----------
Balance at September 30,
1998 100,254,593 $ 1,007 $2,350,996 $ (9,911) $ (10,101) $(909,574) $ 2,022 $ 1,424,439
=========== ====== ========= ======= ========= ======== ========== ===========
</TABLE>
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
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (43,902) $ (12,566) $(103,555) $ 13,460
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization 87,150 67,388 247,208 126,897
Exploration expenses, including dry holes 29,832 11,390 65,477 25,581
Deferred income taxes (24,600) (4,800) (53,000) 6,600
(Gain) loss on disposition of assets, net 461 (108) 136 (2,745)
Other noncash items 12,232 10,720 38,045 12,900
Change in operating assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable 59,383 (3,032) 96,685 8,992
Inventories 731 729 874 (1,122)
Other current assets 236 (544) (1,093) 136
Accounts payable (2,198) (4,074) (26,921) (975)
Accrued income taxes and other current liabilities (13,237) (10,628) 2,652 (10,656)
-------- -------- -------- --------
Net cash provided by operating activities 106,088 54,475 266,508 179,068
-------- -------- -------- --------
Cash flows from investing activities:
Payment for acquisition, net of cash acquired - (519) (424) (519)
Proceeds from disposition of assets 3,560 560 19,682 12,838
Additions to oil and gas properties (97,866) (81,300) (427,938) (246,574)
Other property additions, net (5,985) (4,902) (23,390) (9,878)
-------- -------- -------- --------
Net cash used in investing activities (100,291) (86,161) (432,070) (244,133)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt 96,709 63,353 922,910 104,896
Principal payments on long-term debt (63,277) (5,477) (694,502) (18,279)
Payments of other noncurrent liabilities (4,686) (1,775) (37,001) (2,482)
Deferred loan fees/issuance costs (1,765) - (7,199) -
Dividends (5,023) (3,722) (10,079) (5,476)
Purchase of treasury stock (3,112) - (9,890) (2,932)
Exercise of long-term incentive plan stock options - 10,095 - 11,258
-------- -------- -------- --------
Net cash provided by financing activities 18,846 62,474 164,239 86,985
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 24,643 30,788 (1,323) 21,920
Effect of exchange rate changes on cash and
cash equivalents (51) - (105) -
Cash and cash equivalents, beginning of period 45,693 9,843 71,713 18,711
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 70,285 $ 40,631 $ 70,285 $ 40,631
======== ======== ======== ========
</TABLE>
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
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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 and the Toronto Stock Exchange. The Company was formed by the merger of
Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa")
on August 7, 1997. The Company was significantly expanded by the subsequent
acquisition of the Canadian and Argentine oil and gas business of Chauvco
Resources Ltd ("Chauvco"), a publicly traded independent oil and gas company
based in Calgary, Canada, on December 18, 1997. The Company is an oil and gas
exploration and production company with ownership interests in oil and gas
properties located principally in the MidContinent, Southwestern and onshore and
offshore Gulf Coast regions of the United States, and in Canada and Argentina.
In accordance with the provisions of Accounting Principles Board Opinion
No. 16, "Business Combinations", both the merger with Mesa and the acquisition
of Chauvco have been accounted for as purchases by the Company (formerly Parker
& Parsley). As a result, the historical financial statements for the Company are
those of Parker & Parsley prior to August 1997; for the period from August 1997
through December 31, 1997, the historical financial statements for the Company
reflect the above described merger of Parker & Parsley and Mesa; and, as of
December 31, 1997, the financial statements for the Company have included the
addition of the acquired assets and liabilities of Chauvco.
NOTE B. Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements of the Company as of September 30, 1998 and for the three and nine
months ended September 30, 1998 and 1997 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. These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report on Form 10-K.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which establishes standards for reporting and display of comprehensive income
(loss) and its components in a full set of general purpose financial statements.
Comprehensive income (loss) includes net income (loss) and other comprehensive
income (loss), which includes, but is not limited to, unrealized gains for
marketable securities and future contracts, foreign currency translation
adjustments and minimum pension liability adjustments. The accompanying
consolidated financial statements for the Company reflect other comprehensive
income consisting of foreign currency translation adjustments.
NOTE C. Pending Asset Divestiture
In September 1998, the Company signed a purchase and sale agreement (the
"Agreement") to sell certain non-strategic oil and gas properties for estimated
proceeds of $410 million. The Agreement will be effective October 1, 1998 and is
anticipated to close by December 31, 1998. The consummation of this Agreement is
primarily dependent upon the buyer's successful ability to finance the purchase
as well as certain other contingencies defined in the Agreement. As a result,
there can be no assurance that the divestiture of any or all of these properties
will be completed or that the estimated proceeds will be realized in accordance
8
<PAGE>
with the Agreement. The buyer has paid a performance deposit of $25 million to
the Company. Such funds have been classified as restricted cash in the
accompanying Consolidated Balance Sheet as of September 30, 1998. When the
Agreement is consummated, the proceeds will be utilized to reduce the Company's
outstanding bank indebtedness.
NOTE D. Senior Note Issuances
During January 1998, the Company completed the issuance of the following
two series of senior notes for total net proceeds of $593 million. The proceeds
were used primarily to repay the Company's bank indebtedness.
6.5% senior notes due 2008. $350 million aggregate principal amount 6.5%
senior notes dated January 13, 1998, due January 15, 2008. Interest on the 6.5%
senior notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1998.
7.2% senior notes due 2028. $250 million aggregate principal amount 7.2%
senior notes dated January 13, 1998, due July 15, 2028. Interest on the 7.2%
senior notes is payable semi-annually on January 15 and July 15 of each year,
commencing July 15, 1998.
Both senior note issuances are governed by an Indenture between the
Company and The Bank of New York dated January 13, 1998. Both senior note
issuances are general unsecured obligations of the Company ranking equally in
right of payment with all other senior unsecured indebtedness of the Company and
are senior in right of payment to all existing and future subordinated
indebtedness of the Company.
NOTE E. 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 reserve as appropriate to reflect the then current status of its
litigation.
The Company believes that the costs for compliance with environmental
laws and regulations have not and will not have a material effect on the
Company's financial position or results of operations.
Masterson
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R.B. Masterson et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, the Company, as successor to Mesa,
has an entitlement to gas produced from the Gas Lease. In August 1992, CIG filed
a third-party complaint against the Company for any such royalty underpayment
which may be allocable to the Company. Plaintiffs alleged that the underpayment
was the result of CIG's use of an improper gas sales price upon which to
calculate royalties and that the proper price should have been determined
pursuant to a "favored-nations" clause in a July 1, 1967, amendment to the Gas
Lease. The plaintiffs also sought a declaration by the court as to the proper
price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500
million (including interest at 10%) dating from July 1, 1967. In March 1995, the
court made certain pretrial rulings that eliminated approximately $400 million
of the plaintiff's claims (which related to periods prior to October 1, 1989),
but which also reduced a number of the Company's defenses. The Company and CIG
filed stipulations with the court whereby the Company would have been liable for
between 50% and 60%, depending on the time period covered, of an adverse
judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
9
<PAGE>
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiff's stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs filed a motion for new trial on June
22, 1995. The court, on July 18, 1997, denied plaintiffs' motion. The plaintiffs
have appealed to the Fifth Circuit Court of Appeals, where oral arguments have
been scheduled for December 4, 1998. A decision by the Fifth Circuit Court could
be announced as early as the first quarter of 1999.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
the Company in state court in Amarillo, Texas, similarly claiming underpayment
of royalties under the "favored-nations" clause, but based upon the
above-described pricing-scheme to pricing-scheme comparison on a well-by-well
monthly basis. The plaintiffs also claim underpayment of royalties since June 7,
1995, under the "favored-nations" clause based upon either the pricing-scheme to
pricing-scheme method or their previously alleged higher price method. The
Company believes it has several defenses to this action and intends to contest
it vigorously. The Company has not yet determined the amount of damages, if any,
that would be payable if such action was determined adversely to the Company.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the state suit pending the resolution of the first
suit.
Based on the jury verdict and final judgment, the Company does not
currently expect the ultimate resolution of either of these lawsuits to have a
material adverse effect on its financial position or results of operations.
Kansas Ad Valorem Tax
The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa
collected the Kansas ad valorem tax in addition to the otherwise maximum lawful
price. The FERC's ruling was appealed to the United States Court of Appeals for
the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC
failed to provide a reasoned basis for its findings and remanded the case to the
FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior
ruling, but limiting the effect of its decision to Kansas ad valorem taxes for
sales made on or after June 28, 1988. The FERC clarified the effective date of
its decision by an order dated May 18, 1994. The order clarified that the
effective date applies to tax bills rendered after June 28, 1988, not sales made
on or after that date. Numerous parties filed appeals on the FERC's action in
the D.C. Circuit. Various natural gas producers challenged the FERC's orders on
two grounds: (1) that the Kansas ad valorem tax, properly understood, does
qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in
any event, have been applied prospectively. Other parties challenged the FERC's
orders on the grounds that the FERC's ruling should have been applied
retroactively to December 1, 1978, the date of the enactment of the NGPA and
producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983 as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various natural gas producers
subsequently filed a petition for writ of certiori with the United States
Supreme Court seeking to limit the scope of the potential refunds to tax bills
rendered on or after June 28, 1988 (the effective date originally selected by
the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company is seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non-recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
10
<PAGE>
1997 to file claims on refunds sought from producers and refunds totaling
approximately $30 million were made against the Company. The Company is unable
at this time to predict the final outcome of this matter or the amount, if any,
that will ultimately be refunded. As of September 30, 1998, the Company has paid
$1.4 million and has set aside $29.3 million, including accrued interest, in an
escrow account with a similar provision for such litigation recorded in the
accompanying Consolidated Balance Sheet as of September 30, 1998.
NOTE F. Commodity Hedge Derivatives
The Company utilizes various commodity swap and option contracts to (i)
reduce the effect of the volatility of price changes on the commodities the
Company produces and sells, (ii) support the Company's annual capital budgeting
and expenditure plans and (iii) lock in prices to protect the economics related
to certain capital projects.
Crude oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The following table
sets forth the Company's outstanding oil hedge contracts as of September 30,
1998.
<TABLE>
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Daily oil production:
1998 - Swap Contracts
Volume (Bbl) 8,900 8,900
Price per Bbl $ 19.74 $ 19.74
1998 - Collar Options
Volume (Bbl) 2,000 2,000
Price per Bbl $18.70-20.65 $18.70-20.65
1998 - Long Put Options
Volume (Bbl) 2,000 2,000
Price per Bbl $ 18.40 $ 18.40
1999 - Swap Contracts*
Volume (Bbl) 12,500 12,500 12,500 12,500 12,500
Price per Bbl $ 17.86 $ 17.86 $ 17.86 $ 17.86 $ 17.86
1999 - Collar Options**
Volume (Bbl) 5,000 5,000 5,000 5,000 5,000
Price per Bbl $17.00-19.05 $17.00-19.05 $17.00-19.05 $17.00-19.05 $17.00-19.05
</TABLE>
* The counterparties to the 1999 Swap Contracts have the contractual right to
extend 7,000 barrels per day through the year 2000 at a price per barrel of
$17.79.
** Concurrent with the Company's purchase of the 1999 Collar Options, the
Company sold 1999 put options to the counterparties for a volume of 5,000
Bbls per day at a price per barrel of $14.50. Consequently, there is no
effective minimum price to be realized from the collar options if the NYMEX
price falls below $14.50. The counterparties to the 1999 Collar Options
have the contractual right to extend the collar options and the associated
put options at the same prices through the year 2000.
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. The following table sets forth the Company's oil prices, both realized
(excluding hedge results) and reported, and net effects of settlements of oil
price hedges to revenue:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
Average price reported per Bbl $ 12.97 $ 17.93 $ 13.34 $ 18.70
Average price realized per Bbl $ 11.80 $ 18.03 $ 12.30 $ 19.37
Addition/(reduction) to revenue
(in millions) $ 6.2 $ (.4) $ 17.2 $ (6.3)
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The following table
11
<PAGE>
sets forth the Company's outstanding gas hedge contracts as of September 30,
1998. Prices included herein represent the Company's weighted average index
price per MMBtu and, as an additional point of reference, the weighted average
price for the portion of the Company's gas which is hedged based on NYMEX.
<TABLE>
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Daily oil production:
1998 - Swap Contracts
Volume (Mcf) 51,848 51,848
Index price per MMBtu $ 2.00 $ 2.00
NYMEX price per MMBtu $ 2.32 $ 2.32
1998 - Collar Options*
Volume (Mcf) 11,489 11,489
Index price per MMBtu $1.64-1.87 $1.64-1.87
1998 - Long Put Options
Volume (Mcf) 254,402 254,402
Index price per MMBtu $ 1.91 $ 1.91
NYMEX price per MMBtu $ 2.32 $ 2.32
1999 - Swap Contracts**
Volume (Mcf) 127,500 149,945 145,000 123,451 136,486
Index price per MMBtu $ 2.21 $ 2.23 $ 2.24 $ 2.27 $ 2.24
NYMEX price per MMBtu $ 2.39 $ 2.39 $ 2.39 $ 2.39 $ 2.39
1999 - Collar Contracts***
Volume (Mcf) 179,827 179,827 179,827 170,991 177,600
Index price per MMBtu $2.06-2.65 $2.06-2.60 $2.06-2.60 $2.08-2.65 $2.07-2.63
NYMEX price per MMBtu $ 2.39 $ 2.39 $ 2.39 $ 2.39 $ 2.39
2000 - Swap Contracts**
Volume (Mcf) 35,000 35,000 35,000 35,000 35,000
Index price per MMBtu $ 2.41 $ 2.41 $ 2.41 $ 2.41 $ 2.41
2000 - Collar Options****
Volume (Mcf) 74,000 74,000 74,000 71,348 73,534
Index price per MMBtu $2.17-2.85 $2.17-2.85 $2.17-2.85 $2.19-2.88 $2.18-2.86
</TABLE>
* Concurrent with the Company's purchase of the 1998 Collar Options, the
Company sold 1998 put options to the counterparties for a volume of 11,489
Mcf per day at an index price of $1.35 per MMBtu. Consequently, there is
no effective minimum price to be realized from the collar options if the
index price falls below $1.35.
** The counterparties to the 1999 and 2000 Swap Contracts have the
contractual right to extend 35,000 Mcf per day for one additional year at
prices of $2.40 and $2.41 per Mcf, respectively.
*** Concurrent with the Company's purchase of certain of the 1999 Collar
Options, the Company sold 1999 put options to the counterparties for
125,100 Mcf per day at an average index price of $1.82 per MMBtu.
Consequently, there is no effective minimum price to be realized from an
equal volume of the 1999 Collar Options if the index price falls below
$1.82. 65,000 Mcf per day of the 1999 Collar Options and associated put
options sold are extendable at the option of the counterparties for a
period of one year at average per Mcf prices of $2.18-$2.79 for the collar
options and $1.88 for the put options.
**** 70,000 Mcf per day of the 2000 Collar Options are extendable for one year
at prices of $2.19-$2.89. Concurrent with the Company's purchase of the
2000 Collar Options, the Company sold 2000 put options to the
counterparties for an equal volume at an index price of $1.87 per MMBtu.
Consequently, there is no minimum price to be realized from the collar
options if the index price falls below $1.87. 70,000 Mcf per day of the
put options are extendable for one year at a price of $1.89 per MMBtu.
The Company reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. The following table sets forth the
Company's gas prices, both realized (excluding hedge results) and reported, and
net effects of settlements of gas price hedges to revenue:
12
<PAGE>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
Average price reported per Mcf $ 1.73 $ 2.16 $ 1.87 $ 2.21
Average price realized per Mcf $ 1.68 $ 2.22 $ 1.83 $ 2.32
Addition/(reduction) to revenue
(in millions) $ 2.5 $ (1.8) $ 4.8 $ (7.9)
NOTE G. Other Derivatives
During 1996, Mesa entered into Btu swap agreements covering 13,036 MMBtu
per day from January 1, 1997 through December 31, 2004. Under the terms of these
agreements, the Company will receive a premium of $.52 per MMBtu over market
natural gas prices from January 1, 1997 through December 31, 1998. Following
this two-year period, the Company will receive 10% of the NYMEX oil price for
the volumes covered for a six-year period beginning January 1, 1999 and ending
December 31, 2004. As these derivative contracts do not qualify as hedges, other
expenses in the accompanying Consolidated Statement of Operations for the nine
months ended September 30, 1998 include a $3.0 million noncash pre-tax
mark-to-market adjustment to the carrying value of the Btu swap agreements.
Other expenses in the accompanying Consolidated Statement of Operations for the
nine months ended September 30, 1998 also include mark-to-market adjustments
totaling $14.5 million relating to certain foreign currency derivative contracts
acquired from Chauvco that do not qualify for hedge accounting treatment. These
contracts will continue to be marked-to-market at the end of each reporting
period during their respective lives and the effects on the Company's results of
operations in future periods could be significant.
NOTE H. Reorganization
In February 1998, the Company announced its plans to sell certain
nonstrategic fields and its intentions to reorganize its operations by combining
its six domestic operating regions into three geographic regions: the Permian
Basin region, the MidContinent region and the onshore and offshore Gulf Coast
region. In addition, most of the Company's administrative services are being
relocated from Midland, Texas to Dallas, Texas. Shortly after the announcement,
the Company formally notified the employees affected by the reorganization
whether they were to be severed or relocated. During the nine months ended
September 30, 1998, the Company has recognized severance, relocation, lease
termination and other costs of approximately $21.2 million relating to this
reorganization.
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 certain
debt securities of the Company. The Company has not prepared financial
statements and related disclosures for Pioneer USA under separate cover because
management of the Company has determined that such information is not material
to investors. In accordance with practices accepted by the U.S. Securities and
Exchange Commission ("SEC"), the Company has prepared Consolidating Financial
Statements in order to quantify the assets of Pioneer USA as a subsidiary
guarantor. The following Consolidating Balance Sheet, Consolidating Statement of
Operations and Consolidating Statement of Cash Flows present, on a stand-alone
basis, financial information for Pioneer Natural Resources Company as the
Parent, Pioneer USA and the non-guarantor subsidiaries of the Company. All
investments in subsidiaries are presented using the equity method and are
eliminated in consolidation. Pioneer USA is not restricted from making
distributions to the Company.
Pioneer USA's guarantees of the Company's debt securities were executed as
a result of the merger with Mesa in August 1997. Consequently, the Consolidating
Statements of Operations and Consolidating Statement of Cash Flows for the nine
months ended September 30, 1997 have not been presented.
13
<PAGE>
CONSOLIDATING BALANCE SHEET
As of September 30, 1998
(in thousands)
(Unaudited)
ASSETS
<TABLE>
Pioneer
Natural
Resources Non-
Company Pioneer Guarantor The
(Parent) USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 17 $ 55,963 $ 14,305 $ - $ 70,285
Restricted cash - 25,020 - - 25,020
Accounts receivable:
Trade, net 55 33,928 8,657 - 42,640
Affiliates - 10,382 (10,382) - -
Oil and gas sales - 34,720 22,031 - 56,751
Intercompany notes receivable 2,233,305 (1,808,105) (425,200) - -
Inventories - 10,163 7,297 - 17,460
Deferred income taxes 14,900 - 1,200 - 16,100
Other current assets 83 8,203 1,952 - 10,238
--------- ---------- ----------- ---------
Total current assets 2,248,360 (1,629,726) (380,140) 238,494
--------- ---------- ----------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties - 2,833,297 1,066,406 - 3,899,703
Unproved properties - 121,585 343,165 - 464,750
Accumulated depletion, depreciation and
amortization - (699,528) (147,968) - (847,496)
--------- ---------- ----------- ---------
- 2,255,354 1,261,603 3,516,957
--------- --------- ----------- ---------
Deferred income taxes 242,815 - (140,615) - 102,200
Other property and equipment, net - 33,326 17,368 - 50,694
Other assets, net 10,748 35,288 38,245 - 84,281
Investment in subsidiaries 625,269 139,421 (940) (763,750) -
--------- ---------- ----------- ---------
$3,127,192 $ 833,663 $ 795,521 $3,992,626
========= ========== =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 608 $ 1,104 $ - $ 1,712
Accounts payable:
Trade 315 86,415 21,358 - 108,088
Affiliates 84 5,193 (245) - 5,032
Other current liabilities 15,053 84,928 12,520 - 112,501
--------- ---------- ----------- ---------
Total current liabilities 15,452 177,144 34,737 227,333
--------- ---------- ----------- ---------
Long-term debt, less current maturities 1,884,127 24 280,108 - 2,164,259
Other noncurrent liabilities - 145,051 31,544 - 176,595
Deferred income taxes (48) - 48 - -
Stockholders' equity:
Partners' Capital - - 22 (22) -
Common stock 933 - 75 (1) 1,007
Additional paid-in capital 2,146,213 2,032,175 566,102 (2,393,494) 2,350,996
Treasury stock, at cost (9,911) - - - (9,911)
Unearned compensation - (10,101) - - (10,101)
Retained deficit (909,574) (1,510,630) (119,137) 1,629,767 (909,574)
Accumulated other comprehensive income:
Cumulative translation adjustment - - 2,022 - 2,022
--------- ---------- ----------- ---------
Total stockholders' equity 1,227,661 511,444 449,084 1,424,439
Commitments and contingencies
$3,127,192 $ 833,663 $ 795,521 $3,992,626
========= ========== =========== =========
</TABLE>
14
<PAGE>
CONSOLIDATING BALANCE SHEET
As of December 31, 1997
(in thousands)
ASSETS
<TABLE>
Pioneer
Natural
Resources Non-
Company Pioneer Guarantor The
(Parent) USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 41 $ 49,033 $ 22,639 $ $ 71,713
Restricted cash - 1,695 - 1,695
Accounts receivable:
Trade, net 5 56,424 19,003 75,432
Oil and gas sales - 82,145 34,355 116,500
Intercompany notes receivable 2,088,082 (1,673,443) (414,639) -
Inventories - 11,677 1,899 13,576
Deferred income taxes 16,700 - 200 16,900
Other current assets - 9,293 3,079 12,372
--------- ---------- ---------- ---------
Total current assets 2,104,828 (1,463,176) (333,464) 308,188
--------- ---------- ---------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties - 2,453,750 1,122,221 3,575,971
Unproved properties - 98,664 446,410 545,074
Accumulated depletion, depreciation and
amortization - (504,628) (100,575) (605,203)
--------- ---------- ---------- ---------
- 2,047,786 1,468,056 3,515,842
--------- ---------- ---------- ---------
Other property and equipment, net - 26,096 17,921 44,017
Other assets, net 4,705 68,715 28,098 (22,975) 78,543
Investment in subsidiaries 645,113 284,046 - (929,159) -
--------- ---------- ---------- ---------
$2,754,646 $ 963,467 $ 1,180,611 $3,946,590
========= ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 538 $ 28,228 $ (22,975) $ 5,791
Undistributed unit purchases - 1,695 - 1,695
Accounts payable:
Trade 663 113,432 62,602 176,697
Affiliates 90 9,904 - 9,994
Other current liabilities 5,771 59,953 1,651 67,375
--------- ---------- ---------- ---------
Total current liabilities 6,524 185,522 92,481 261,552
--------- ---------- ---------- ---------
Long-term debt, less current maturities 1,700,500 565 242,653 1,943,718
Other noncurrent liabilities - 140,668 39,607 180,275
Deferred income taxes (216,253) - 228,453 12,200
Stockholders' equity:
Partners' Capital - - 401 (401) -
Common stock 901 1 110 (2) 1,010
Additional paid-in capital 2,058,935 2,049,072 739,518 (2,487,533) 2,359,992
Treasury stock, at cost (21) - - (21)
Unearned compensation - (16,196) - (16,196)
Retained deficit (795,940) (1,396,165) (162,612) 1,558,777 (795,940)
--------- ----------- ---------- ----------
Total stockholders' equity 1,263,875 636,712 577,417 1,548,845
Commitments and contingencies
$2,754,646 $ 963,467 $ 1,180,611 $3,946,590
========= ========== =========== =========
</TABLE>
15
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 1998
(in thousands)
(Unaudited)
<TABLE>
Pioneer
Natural
Resources Non- Consolidated
Company Pioneer Guarantor Income The
(Parent) USA Subsidiaries Tax Benefit Eliminations Company
---------- ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ - $ 408,885 $ 145,593 $ - $ $ 554,478
Interest and other 38 7,433 84 - 636 8,191
Gain (loss) on disposition of
assets, net - (168) 32 - (136)
--------- --------- ---------- --------- ---------
38 416,150 145,709 - 562,533
--------- --------- ---------- --------- ---------
Costs and expenses:
Oil and gas production - 124,411 45,097 - 169,508
Depletion, depreciation and
amortization - 163,743 83,465 - 247,208
Exploration and abandonments - 52,335 33,814 - 86,149
General and administrative 1,424 45,161 10,063 - 56,648
Reorganization - 21,158 - - 21,158
Interest (14,309) 121,196 15,430 - 122,317
Equity (income) loss from
subsidiary 143,197 (3,929) - - (139,268) -
Other 14 3,857 13,993 - 636 18,500
--------- --------- ---------- --------- ---------
130,326 527,932 201,862 - 721,488
--------- --------- ---------- --------- ---------
Loss before income taxes (130,288) (111,782) (56,153) - (158,955)
Income tax benefit - - 28,667 26,733 55,400
--------- --------- ---------- --------- ---------
Net loss (130,288) (111,782) (27,486) 26,733 (103,555)
Other comprehensive income:
Translation adjustment - - 2,022 - 2,022
--------- --------- ---------- --------- ---------
Comprehensive loss $ (130,288) $ (111,782) $ (25,464) $ 26,733 $ (101,533)
========= ========= ========== ========= =========
</TABLE>
16
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months ended September 30, 1998
(in thousands)
(Unaudited)
<TABLE>
Pioneer
Natural
Resources Non- Consolidated
Company Pioneer Guarantor Income The
(Parent) USA Subsidiaries Tax Benefit Eliminations Company
---------- ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (130,288) $ (111,782) $ (27,486) $ 26,733 $ 139,268 $ (103,555)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depletion, depreciation and
amortization - 163,743 83,465 - 247,208
Exploration and abandonments - 38,064 27,413 - 65,477
Deferred income taxes - - (26,267) (26,733) (53,000)
Gain on disposition of
assets, net - 175 (39) - 136
Other noncash items 150,780 9,867 16,666 - (139,268) 38,045
Change in working capital (170,501) 208,774 33,924 - 72,197
--------- --------- --------- --------- ----------
Net cash provided by (used
in) operating activities (150,009) 308,841 107,676 - 266,508
--------- --------- --------- --------- ----------
Cash flows from investing
activities:
Payment for acquisitions, net
of cash acquired - (424) - - (424)
Proceeds from disposition of
assets - 16,900 2,782 - 19,682
Additions to oil and gas
properties - (268,132) (159,806) - (427,938)
Other property additions, net - (16,903) (6,487) - (23,390)
--------- --------- -------- --------- ----------
Net cash used in
investing activities - (268,559) (163,511) - (432,070)
--------- --------- -------- --------- ----------
Cash flows from financing
activities:
Borrowings under long-term debt 805,785 - 117,125 - 922,910
Principal payments on long-term
debt (628,635) (476) (65,391) - (694,502)
Payment of noncurrent liabilities - (32,873) (4,128) - (37,001)
Dividends (10,079) - - - (10,079)
Purchase of treasury stock (9,890) - - - (9,890)
Deferred loan fees/issuance
costs (7,196) (3) - - (7,199)
--------- ---------- -------- --------- ----------
Net cash provided by
(used in) financing
activities 149,985 (33,352) 47,606 - 164,239
--------- ---------- -------- --------- ----------
Net increase (decrease) in cash
and cash equivalents (24) 6,930 (8,229) - (1,323)
Effect of exchange rate changes
on cash and cash equivalents - - (105) - (105)
Cash and cash equivalents,
beginning of period 41 49,033 22,639 - 71,713
--------- ---------- -------- --------- ----------
Cash and cash equivalents, end
of period $ 17 $ 55,963 $ 14,305 $ - $ 70,285
========= ========= ======== ========= ==========
</TABLE>
17
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations(1)
Financial Performance
The Company reported a net loss of $43.9 million ($.44 per share) and
$103.6 million ($1.04 per share) for the three and nine months ended September
30, 1998, as compared to net loss of $12.6 million ($.21 per share) and a net
income of $13.5 million ($.31 per share) for the same periods in 1997. The
Company's results have been significantly impacted by declines in 1998 commodity
prices as compared to 1997 price levels. For a discussion on commodity prices
and other factors impacting the three and nine months ended September 30, 1998,
see "Trends and Uncertainties" and "Results of Operations", below.
Net cash provided by operating activities was $106.1 million and $266.5
million during the three and nine months ended September 30, 1998, as compared
to net cash provided by operating activities of $54.5 million and $179.1 million
for the same periods in 1997. These increases are primarily attributable to cash
flows generated by the oil and gas properties acquired from Mesa and Chauvco in
1997, offset, to some extent, by decreased commodity prices and increases in
interest expense, general and administrative expenses and reorganization costs.
The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Company's total book capitalization at September 30,
1998 was $3.6 billion, consisting of total long-term debt of $2.2 billion and
stockholders' equity of $1.4 billion. Debt as a percentage of total book
capitalization was 60% at September 30, 1998, as compared to 56% at December 31,
1997.
Drilling Highlights
During the first three quarters of 1998, the Company participated in the
drilling of 80 gross exploration and extension and 389 gross development wells,
including 260 in the Permian Basin region, 30 in the Gulf Coast region, 64 in
the MidContinent region, 61 in Argentina, 49 in Canada and five in South Africa.
Of these wells, 129 were in progress at December 31, 1997. Of the 469 total
wells drilled during the nine months ended September 30, 1998, 436 were
completed successfully which resulted in a 93% success rate. In addition to the
wells completed in the first three quarters of 1998, the Company had 102 wells
in progress at September 30, 1998.
Permian Basin. During 1998, the majority of the drilling has been
development drilling in the Spraberry units of West Texas. In particular, the
Company has focused its activities on the Spraberry Driver Unit where it has
completed 57 wells during the first nine months of 1998. In addition, the
Company has approved the acceleration of another 100-well drilling program in
the Driver Unit starting in the fourth quarter of 1998. The acceleration of the
drilling into 1998 is primarily attributable to the Company being able to
negotiate lower drilling rates.
Gulf Coast. During the first three quarters of 1998, the Company has
completed seven wells in the Lopeno field with a resulting increase in
production of more than 30 MMcf of gas per day, net to the Company's interest.
In addition, two wells were drilled and placed on production in the Pawnee field
at a combined rate of three MMcf of gas per day, net to the Company's interest.
Mid-Continent. In the West Panhandle field, Pioneer drilled 57 wells
during the first three quarters of 1998. Through September 30, 1998, 40 of these
wells have been connected and are producing at a combined gross rate of nine
MMcf per day. Pioneer holds a 77% interest and plans to drill an additional ten
wells this year.
Argentina. In the Neuquen Basin of Argentina, the Company has drilled 59
wells with initial production rates from 43 completed wells of approximately
3,300 BOE per day. In addition, the Company's Dorsal gas gathering expansion was
completed in June, resulting in increased production of 27 MMcf of gas per day.
An additional ten wells are planned for the remainder of 1998.
Canada. In the Chinchaga gas field in Northeast British Columbia, the
Company's net production is currently averaging 28 MMcf per day, an increase of
22 MMcf per day from 1997 year-end levels. Pioneer drilled 19 development wells
18
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
and six delineation wells and installed a 50 MMcf per day gas processing
facility and gathering system during its winter-access program, more than
tripling production from the field. Preparations are underway for the 1999
winter drilling program with access expected to the area in early December.
Pending Asset Divestiture
In September 1998, the Company signed a purchase and sale agreement (the
"Agreement") to sell certain non-strategic oil and gas properties for estimated
proceeds of $410 million. The Agreement will be effective October 1, 1998 and is
anticipated to close by December 31, 1998. The consummation of this Agreement is
primarily dependent upon the buyer's successful ability to finance the purchase
as well as certain other contingencies defined in the Agreement. As a result,
there can be no assurance that the divestiture of any or all of these properties
will be completed or that the estimated proceeds will be realized in accordance
with the Agreement. (See Note C of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements.")
If the Agreement is consummated, the proceeds will be utilized to reduce
the Company's outstanding bank indebtedness. Also, once the divestiture is
completed, the Company will have significantly fewer domestic fields. These
fields will represent the Company's core domestic assets that have production
growth opportunities through additional development and exploration activities.
1998 Reorganization
Coincidentally with the property divestiture program announced in
February 1998, the Company announced its intentions to reorganize its operations
to take advantage of the economies of scale provided by the concentration of
reserves in a small number of fields. Consequently, the Company combined its six
domestic regions into three geographic regions: the Permian Basin region, the
MidContinent region and the onshore and offshore Gulf Coast region. In addition,
most of the Company's administrative services are being relocated from Midland,
Texas to Dallas, Texas. Shortly after the announcement, the Company formally
notified the employees affected by the reorganization whether they were to be
severed or relocated. During the nine months ended September 30, 1998, the
Company has recognized severance, relocation, lease termination and other costs
of approximately $21.2 million relating to this reorganization. (See Note H of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements".)
Trends and Uncertainties
Commodity Prices. The oil and gas prices that the Company reports are
based on the market price received for the commodity adjusted by the results of
the Company's hedging activities. Historically, worldwide oil and gas prices
have been extremely volatile and subject to significant changes in response to
real and perceived conditions in world politics, weather patterns and other
fundamental supply and demand variables.
Since the third quarter of 1997, there has been a declining trend in
world oil prices and, more recently, natural gas prices have declined in
comparison to 1997 levels. The benchmark daily average NYMEX West Texas
Intermediate closing price has declined 28% in each of the three and nine months
ended September 30, 1998, in comparison with the same periods ended September
30, 1997; and, the benchmark daily average NYMEX Henry Hub closing natural gas
price has declined 19% and 8% during the three and nine months ended September
30, 1998, respectively, in comparison with the same periods ended September 30,
1997.
The declines in commodity prices have had, and continue to have,
significant impact on the Company's results and cash flows from operations,
capital spending programs and general financial conditions. Consequently, the
Company is in the process of making organizational changes that are necessary to
remain competitive in the current depressed price environment. The
organizational changes include closing the Company's Oklahoma City, Oklahoma and
Houston, Texas offices and reducing the Company's current staffing.
19
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
To mitigate the impact of changing prices on the Company's results of
operations, cash flows and financial condition, the Company from time to time
enters into commodity derivative contracts as hedges against oil and gas price
risk (see Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements").
Impairments. In accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived assets and for
Long-Lived Assets to be Disposed Of", ("SFAS 121"), the Company reviews its oil
and gas properties for impairment whenever events and circumstances indicate a
decline in the recoverability of the carrying value of the Company's assets.
The Company is currently in the process of completing its oil and gas
reserve study and assessing performance issues relative to certain properties in
East Texas and the Gulf Coast. Both the declining oil and gas price trends and
performance issues may be indicative of a decline in the recoverable value of
the Company's assets. As a result, asset impairments may be required in the
fourth quarter of 1998. The amount of impairments, if any, cannot be determined
until the reserve study and performance assessments are complete.
The conditions discussed above are also relevant to the Company's
continuing review of its deferred tax asset. As the Company completes its oil
and gas reserve study, it will also complete its review of the deferred tax
asset for a potential valuation allowance. The amount, if any, of a potential
valuation allowance cannot be determined until the reserve study and performance
assessments are complete. (See "Income Taxes", below.)
Year 2000 Project Readiness. Historically, many computer programs have
been developed that use only the last two digits in a date to refer to a year.
As the year 2000 nears, the inability of such computer programs and embedded
technologies to distinguish between "1900" and "2000" has given rise to the
"Year 2000" problem. Theoretically, such computer programs and related
technology could fail outright, or communicate inaccurate data, if not
remediated or replaced. With the proliferation of electronic data interchange,
the Year 2000 problem represents a significant exposure to the entire global
community, the full extent of which cannot be accurately assessed.
In proactive response to the Year 2000 problem, the Company established a
"Year 2000" project to assess, to the extent possible, the Company's internal
Year 2000 problem; to take remedial actions necessary to minimize the Year 2000
risk exposure to the Company and significant third parties with whom it has data
interchange; and, to test its systems and processes once remedial actions have
been taken. The Company has contracted with IBM Global Services to perform the
assessment and remedial phases of its Year 2000 project.
The assessment phase of the Company's Year 2000 project is 85% complete
and has included, but is not limited to, the following procedures:
o the identification of necessary remediation, upgrade and/or replacement
of existing information technology applications and systems;
o the assessment of non-information technology exposures, such as
telecommunications systems, security systems,
elevators and process control equipment;
o the initiation of inquiry and dialogue with significant third party
business partners, customers and suppliers in an effort to understand and
assess their Year 2000 problems, readiness and potential impact on the
Company and its Year 2000 problem;
o the implementation of processes designed to reduce the risk of
reintroduction of Year 2000 problems into the Company's systems and
business processes; and,
o the formulation of contingency plans for mission-critical information
technology systems.
The Company expects to complete the assessment phase of its Year 2000
project by the end of the first quarter of 1999 but is being delayed by limited
responses received on inquiries made of third party businesses. To date, the
20
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Company has distributed Year 2000 problem inquiries to over 500 entities and has
received responses to approximately 10% of those inquiries.
The remedial phase of the Company's Year 2000 project is approximately
40% complete, subject to the results of the third party inquiry assessments and
the testing phase. The remedial phase has included the upgrade and/or
replacement of certain application and hardware systems. The Company has
upgraded its Artesia general ledger accounting systems through remedial coding
and is currently testing this system for Year 2000 compliance. The remediation
of non-information technology is expected to be completed by mid-1999. The
Company's Year 2000 remedial actions have not delayed other information
technology projects or upgrades.
The testing phase of the Company's Year 2000 project is on schedule. The
Company expects to complete the testing of the Artesia system upgrades by March
1999 and all other information technology systems by May 1999. The testing of
the non-information technology remediation is scheduled to be completed by the
end of September 1999.
The Company expects that its total costs related to the Year 2000 problem
will approximate $3.5 million, of which approximately $500 thousand will have
been incurred to replace non-compliant information technology systems. As of
September 30, 1998, the Company's total costs incurred on the Year 2000 problem
were $1.5 million, of which $200 thousand were incurred to replace non-compliant
systems. The Company intends to use its working capital to pay for the costs of
the Year 2000 projects.
The risks associated with the Year 2000 problem are significant. A
failure to remedy a critical Year 2000 problem could have a materially adverse
affect on the Company's results of operations and financial condition. The
problems which may be encountered as a result of a Year 2000 problem could
include information and non-information system failures, the receipt or
transmission of erroneous data, lost data or a combination of similar problems
of a magnitude that cannot be accurately assessed at this time. In the
assessment phase of the Company's Year 2000 project, contingency plans are being
designed to mitigate the exposures noted above. However, given the uncertainties
regarding the scope of the Year 2000 problem and the compliance of significant
third parties, there can be no assurance that contingency plans will have
anticipated all Year 2000 scenarios.
Accounting for Derivatives. In June 1998, the Financial Accounting
Standards Board issued Statement of Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not determined what effect, if any, SFAS
133 will have on its consolidated financial statements.
21
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Results of Operations
Oil and Gas Production.
The following tables reflect the activities for the Company's oil and gas
properties for the nine months ended September 30, 1998 and 1997:
<TABLE>
Nine Months Ended September 30, 1998
-----------------------------------------------------------
United Other
States Canada Argentina Foreign(b) Total
---------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ 454,339 $ 49,808 $ 50,331 $ - $ 554,478
Gain on disposition of oil and gas
properties, net (117) - - - (117)
--------- ------- -------- --------- ---------
454,222 49,808 50,331 - 554,361
--------- ------- -------- --------- ---------
Costs and expenses:
Oil and gas production (134,292) (19,303) (15,913) - (169,508)
Depletion (176,944) (28,390) (31,729) - (237,063)
Exploration and abandonments (16,774) (4,526) (7,437) (9,050) (37,787)
Geological and geophysical (25,136) (11,221) (8,689) (3,316) (48,362)
--------- -------- -------- --------- ---------
(353,146) (63,440) (63,768) (12,366) (492,720)
--------- -------- -------- --------- ---------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 101,076 $(13,632) $ (13,437) $ (12,366) $ 61,641
========= ======= ======== ========= =========
Production:
Oil (MBbls) 11,568 2,563 2,378 - 16,509
NGLs (MBbls) 7,616 207 169 - 7,992
Gas (MMcf) 105,481 13,739 19,432 - 138,652
Total (MBOE) 36,765 5,059 5,785 - 47,609
Average daily production:
Oil (Bbls) 42,374 9,387 8,710 - 60,471
NGLs (Bbls) 27,900 756 618 - 29,274
Gas (Mcf) 386,378 50,328 71,178 - 507,884
Average oil price (per Bbl) $ 14.20 $ 11.30 $ 11.37 $ - $ 13.34
Average NGL price (per Bbl) $ 9.38 $ 9.84 $ 10.86 $ - $ 9.42
Average gas price (per Mcf) $ 2.07 $ 1.37 $ 1.10 $ - $ 1.87
Costs (per BOE):
Lease operating expense $ 3.01 $ 3.73 $ 2.59 $ - $ 3.04
Production taxes $ .51 $ - $ .16 $ - $ .41
Workover costs $ .14 $ .09 $ - $ - $ .11
--------- ------- -------- --------- ---------
Total production costs $ 3.66 $ 3.82 $ 2.75 $ - $ 3.56
========= ======= ======== ========= =========
Depletion $ 4.81 $ 5.61 $ 5.48 $ - $ 4.98
Nine Months Ended September 30, 1997
-----------------------------------------------------------
United Other
States Canada Argentina Foreign(b) Total
---------- -------- --------- ---------- ----------
Revenues:
Oil and gas $ 346,756 $ - $ 2,224 $ - $ 348,980
Gain on disposition of oil and gas
properties, net (a) 1,068 - - - 1,068
--------- ------- -------- --------- ---------
347,824 - 2,224 - 350,048
--------- ------- -------- --------- ---------
Costs and expenses:
Oil and gas production (90,998) - (676) - (91,674)
Depletion (120,322) - (980) - (121,302)
Exploration and abandonments (19,821) - (252) - (20,073)
Geological and geophysical (11,691) - (1,261) (1,285) (14,237)
--------- ------- -------- --------- ---------
(242,832) - (3,169) (1,285) (247,286)
--------- ------- -------- ---------- ---------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 104,992 $ - $ (945) $ (1,285) $ 102,762
========= ======= ======== ========= =========
Production:
Oil (MBbls) 9,314 - 111 - 9,425
NGLs (MBbls) 1,151 - - - 1,151
Gas (MMcf) 71,284 - - - 71,284
Total (MBOE) 22,346 - 111 - 22,457
Average daily production:
Oil (Bbls) 34,117 - 408 - 34,525
NGLs (Bbls) 4,214 - - - 4,214
Gas (Mcf) 261,113 - - - 261,113
Average oil price (per Bbl) $ 18.69 $ - $ 19.96 $ - $ 18.70
Average NGL price (per (Bbl) $ 12.89 $ - $ - $ - $ 12.89
Average gas price (per Mcf) $ 2.21 $ - $ - $ - $ 2.21
Costs (per BOE):
Lease operating expense $ 2.92 $ - $ 5.86 $ - $ 2.94
Production taxes $ .86 $ - $ .21 $ - $ .85
Workover costs $ .29 $ - $ - $ - $ .29
---------- ------- -------- --------- ---------
Total production costs $ 4.07 $ - $ 6.07 $ - $ 4.08
========== ======= ======== ========= =========
Depletion $ 5.38 $ - $ 8.83 $ - $ 5.40
</TABLE>
22
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
<TABLE>
Three Months Ended September 30, 1998
-----------------------------------------------------------
United Other
States Canada Argentina Foreign(b) Total
---------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ 139,247 $ 16,407 $ 17,808 $ - $ 173,462
Loss on disposition of oil and gas
properties, net (391) - - - (391)
--------- ------- -------- --------- ---------
138,856 16,407 17,808 - 173,071
--------- ------- -------- --------- ---------
Costs and expenses:
Oil and gas production (45,812) (6,930) (5,011) - (57,753)
Depletion (62,323) (9,017) (12,197) - (83,537)
Exploration and abandonments (10,017) (536) (2,111) (5,114) (17,778)
Geological and geophysical (7,532) (3,268) (5,784) (1,265) (17,849)
--------- ------- -------- --------- ---------
(125,684) (19,751) (25,103) (6,379) (176,917)
--------- -------- -------- --------- ---------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 13,172 $ (3,344) $ (7,295) $ (6,379) $ (3,846)
========= ======= ======== ========= =========
Production:
Oil (MBbls) 3,746 806 744 - 5,296
NGLs (MBbls) 2,589 76 57 - 2,722
Gas (MMcf) 34,202 5,409 7,780 - 47,391
Total (MBOE) 12,036 1,783 2,097 - 15,916
Average daily production:
Oil (Bbls) 40,717 8,761 8,078 - 57,556
NGLs (Bbls) 28,146 821 621 - 29,588
Gas (Mcf) 371,757 58,793 84,570 - 515,120
Average oil price (per Bbl) $ 13.71 $ 10.56 $ 11.88 $ - $ 12.97
Average NGL price (per Bbl) $ 8.31 $ 7.84 $ 8.24 $ - $ 8.30
Average gas price (per Mcf) $ 1.94 $ 1.35 $ 1.09 $ - $ 1.73
Costs (per BOE):
Lease operating expense $ 3.20 $ 3.73 $ 2.25 $ - $ 3.13
Production taxes $ .49 $ - $ .14 $ - $ .39
Workover costs $ .12 $ .15 $ - $ - $ .11
--------- ------- -------- --------- ---------
Total production costs $ 3.81 $ 3.88 $ 2.39 $ - $ 3.63
========= ======= ======== ========= =========
Depletion $ 5.18 $ 5.06 $ 5.82 $ - $ 5.25
Three Months Ended September 30, 1997
-----------------------------------------------------------
United Other
States Canada Argentina Foreign(b) Total
---------- -------- --------- ---------- ----------
Revenues:
Oil and gas $ 149,673 $ - $ 681 $ - $ 150,354
Gain on disposition of oil and gas
properties, net (a) (3) - - - (3)
--------- ------- -------- --------- ---------
149,670 - 681 - 150,351
--------- ------- -------- --------- ---------
Costs and expenses:
Oil and gas production (41,787) - (216) - (42,003)
Depletion (64,865) - (267) - (65,132)
Exploration and abandonments (8,410) - (32) - (8,442)
Geological and geophysical (5,900) - (327) (844) (7,071)
--------- ------- -------- --------- ---------
(120,962) - (842) (844) (122,648)
--------- ------- -------- --------- ---------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 28,708 $ - $ (161) $ (844) $ 27,703
========= ======= ======== ========= =========
Production:
Oil (MBbls) 3,635 - 37 - 3,672
NGLs (MBbls) 1,151 - - - 1,151
Gas (MMcf) 32,327 - - - 32,327
Total (MBOE) 10,174 - 37 - 10,211
Average daily production:
Oil (Bbls) 39,509 - 403 - 39,912
NGLS (Bbls) 12,506 - - - 12,506
Gas (Mcf) 351,384 - - - 351,384
Average oil price (per Bbl) $ 17.98 $ - $ 18.36 $ - $ 17.93
Average oil price (per Bbl) $ 12.89 $ - $ - $ - $ 12.89
Average gas price (per Mcf) $ 2.16 $ - $ - $ - $ 2.16
Costs (per BOE):
Lease operating expense $ 3.11 $ - $ 5.66 $ - $ 3.11
Production taxes $ .78 $ - $ .16 $ - $ .78
Workover costs $ .22 $ - $ - $ - $ .22
--------- ------- -------- --------- ---------
Total production costs $ 4.11 $ - $ 5.82 $ - $ 4.11
========= ======= ======== ========= =========
Depletion $ 6.38 $ - $ 7.22 $ - $ 6.38
</TABLE>
- ---------------
(a) The 1997 amounts do not include the gain related to the disposition of the
Company's subsidiary which owned an interest in oil and gas properties in
Turkey.
(b) Other foreign amounts primarily relate to exploratory activities in
Guatemala and South Africa.
23
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Oil and Gas Revenues. Revenues from oil and gas operations totaled $173.5
million and $554.5 million for the three and nine months ended September 30,
1998 compared to $150.4 million and $349.0 million for the same periods in 1997,
representing an increase of 15% and 59%, respectively. The increase is primarily
attributable to oil and gas production added from the oil and gas properties
acquired from Mesa and Chauvco and the results of the Company's 1998 drilling
program, offset by substantial declines in commodity prices.
Parker & Parsley historically accounted for processed natural gas
production as wellhead production on a wet gas basis while Mesa accounted for
processed natural gas production in two components: natural gas liquids and dry
residue gas. The combined entities own three major gas processing facilities,
and the majority of the gas processed by these facilities is owned by the
Company and produced by Company-operated properties. Consequently, the Company
now accounts for natural gas production as processed natural gas liquids and dry
residue gas, and separate product volumes will not be comparable for periods
prior to September 30, 1997. Also, prices for gas products will not be
comparable as the price per Mcf for natural gas for the three and nine months
ended September 30, 1998 is the price received for dry residue gas and the price
per Mcf for natural gas prior to August 1997 is a price for natural gas liquids
combined with dry residue gas.
On a BOE basis, production increased by 56% and 112% for the three and
nine months ended September 30, 1998, respectively, as compared to the same
periods in 1997. The additional production volumes from the Mesa properties
contributed approximately 28% and 51% of production growth and the Chauvco
properties contributed approximately 68% and 43% for the three and nine months
ended September 30, 1998, respectively. The remainder of the increases are a
direct result of the successes of the Company's exploration and exploitation
efforts. Such production growth becomes particularly evident in light of the
fact that a portion of the average daily oil and gas production for 1997 related
to properties included in the 1997 sale of certain nonstrategic domestic assets.
Excluding production associated with assets sold during 1997 and the Mesa and
Chauvco properties acquired in 1997, on a BOE basis, production increased 6% and
9% for the three and nine months ended September 30, 1998 as compared to the
same periods in 1997.
The average oil price for the nine months ended September 30, 1998
decreased 29% (from $18.70 per Bbl to $13.34 per Bbl for the nine months ended
September 30, 1997 and 1998, respectively); the average NGL price decreased 27%
(from $12.89 per Bbl to $9.42 per Bbl for the nine months ended September 30,
1997 and 1998, respectively); and, the average gas price decreased 15% (from
$2.21 per Mcf to $1.87 per Mcf for the nine months ended September 30, 1997 and
1998, respectively). During the three months ended September 30, 1998, the
average prices of oil, NGL and gas received decreased 28% (from $17.93 per Bbl
during the third quarter of 1997 to $12.97 per Bbl during the third quarter of
1998), 36% (from $12.89 per Bbl during the third quarter of 1997 to $8.30 per
Bbl during the third quarter of 1998), and 20% (from $2.16 per Mcf during the
third quarter of 1997 to $1.73 per Mcf during the third quarter of 1998),
respectively.
Hedging Activities
The oil and gas prices that the Company reports are based on the market
price received for the commodities adjusted by the results of the Company's
hedging activities. The Company from time to time enters into commodity
derivative contracts (swaps, futures and options) in order to (i) reduce the
effect of the volatility of price changes on the commodities the Company
produces and sells, (ii) support the Company's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects. During the nine months ended September 30, 1998, the
Company's hedging activities increased the average price received for oil and
gas sales 8% and 2%, respectively, as discussed below.
Crude Oil. All material sales contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The average oil
price per Bbl that the Company reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. The
Company's average realized price for physical oil sales (excluding hedge
results) for the three and nine months ended September 30, 1998 was $11.80 per
Bbl and $12.30 per Bbl, respectively, while, as a point of reference, the
comparable daily average NYMEX closing per Bbl for the same periods was $14.18
per Bbl and $14.95 per Bbl, respectively. The Company recorded net increases to
24
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
oil revenues of $6.2 million and $17.2 million for the three and nine months
ended September 30, 1998, respectively, as a result of its commodity hedges.
During the three and nine months ended September 30, 1997, the Company
realized an average price for physical oil sales (excluding hedge results) of
$18.03 per Bbl and $19.37 per Bbl, respectively, while, as a point of reference,
the comparable daily average NYMEX closing per Bbl for the same periods was
$19.79 per Bbl and $20.83 per Bbl, respectively. The Company recorded net
reductions to oil revenues of $351 thousand and $6.3 million for the three and
nine months ended September 30, 1997, respectively, as a result of its commodity
hedges.
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas price
per Mcf that the Company reports includes the effects of Btu content, gathering
and transportation costs, gas processing and shrinkage and the net effect of the
gas hedges. The Company's average realized price for physical gas sales
(excluding hedge results) for the three and nine months ended September 30, 1998
was $1.68 per Mcf and $1.83 per Mcf, respectively, while as a point of
reference, the comparable daily average NYMEX closing for the same periods was
$2.02 and $2.14 per Mcf, respectively. The Company recorded a net increase to
gas revenues of $2.5 million and $4.8 million, respectively, for the three and
nine months ended September 30, 1998, as a result of its commodity hedges.
During the three and nine months ended September 30, 1997, the Company
realized an average price for physical gas sales (excluding hedge results) of
$2.22 per Mcf and $2.32 per Mcf, respectively, while as a point of reference,
the comparable daily average NYMEX closing for the same periods was $2.49 and
$2.33 per Mcf, respectively. The Company recorded net reductions to gas revenues
of $1.8 million and $7.9 million for the three and nine months ended September
30, 1997, respectively, as a result of its commodity hedges.
See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information concerning the Company's open hedge
positions at September 30, 1998 and the related prices to be realized.
Production Costs. During the three and nine month periods ended September
30, 1998, total production costs per BOE decreased to $3.63 and $3.56,
respectively, as compared to production costs per BOE of $4.11 and $4.08,
respectively, during the same periods in 1997. The decreases are due to
decreases in domestic production taxes caused by lower commodity prices and
decreases in workover expense, partially offset by increases in lease operating
expenses.
Depletion Expense. Depletion expense per BOE decreased to $5.25 and $4.98
during the three and nine months ended September 30, 1998, respectively, as
compared to $6.38 and $5.40 per BOE during the same periods in 1997. The decline
in depletion expense per BOE during 1998 is primarily associated with the
reduction in net depletable basis that resulted from the 1997 impairment charge
taken in accordance with SFAS 121.
Exploration and Abandonments/Geological and Geophysical Costs. Exploration
and abandonments/geological and geophysical costs increased to $35.6 million and
$86.1 million during the three and nine months ended September 30, 1998,
respectively, from $15.5 million and $34.3 million during the same periods in
1997. The increase is largely the result of increased geological and geophysical
activity, both in domestic and international activity, resulting from the
Company's increased focus on exploration activities.
25
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Exploratory dry holes:
United States $ 8,639 $ 7,184 $ 11,440 $ 16,885
Foreign 5,469 34 13,016 253
Geological and geophysical costs:
United States 7,531 5,900 25,136 11,690
Foreign 10,318 1,171 23,226 2,547
Leasehold abandonments and other 3,670 1,224 13,331 2,935
------- ------- ------- -------
$ 35,627 $ 15,513 $ 86,149 $ 34,310
======= ======= ======= =======
Approximately 25% of the Company's 1998 capital budget will be spent on
exploratory projects (compared to 25% in 1997 and 16.7% in 1996). The Company's
1998 exploration efforts have been concentrated in the Gulf Coast region, Canada
and Argentina. The Company continues to review opportunities involving
exploration joint ventures in domestic or international areas outside the
Company's existing core operating areas.
General and Administrative Expense
General and administrative expense was $19.2 million and $56.6 million
for the three and nine months ended September 30, 1998, respectively, as
compared to $16.8 million and $31.8 million for the same periods ended September
30, 1997, representing an increase of $2.4 million and $24.8 million,
respectively. The increase is primarily attributable to the acquisitions of Mesa
and Chauvco; however, general and administrative expense per BOE has declined
$.43 and $.22 during the three and nine months ended September 30, 1998,
respectively, as compared to the same periods of 1997.
Reorganization costs for the nine months ended September 30, 1998
totaled $21.2 million. As announced in February 1998, the Company has
consolidated its six domestic operating divisions into three geographic regions
and is relocating most of its administrative services to Dallas, Texas. During
the nine months ended September 30, 1998, the reorganization charge included
severance, relocation, lease termination and other costs.
Interest Expense
During the three months ended September 30, 1998, interest expense
increased $17.7 million to $41.8 million from $24.1 million for the third
quarter of 1997. Interest expense for the nine months ended September 30, 1998
increased to $122.3 million as compared to $44.3 million for the same period in
1997. The increase is due to an increase of $1.5 billion in the weighted average
outstanding balance of the Company's indebtedness for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997. The
increase in the weighted average outstanding balance of the Company's
indebtedness was primarily the result of the additional debt assumed from Mesa,
and to a lesser extent, from Chauvco. This increase is slightly offset by a
decrease in the weighted average interest rate on the Company's indebtedness
from 8.05% during the first three quarters of 1997 to 7.2% during the first
three quarters of 1998.
During the three and nine months ended September 30, 1998, the Company
was a party to various interest rate swap agreements that resulted in a decrease
in interest expense of $58 thousand and an increase in interest expense of $15
thousand, respectively. During the same periods in 1997, such agreements
resulted in reductions in interest expense of $5 thousand and $705 thousand,
respectively.
26
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Income Taxes
The Company's income tax benefit of $24.3 million and $55.4 million for
the three and nine months ended September 30, 1998, respectively, and the
benefit of $6 million and provision of $8.5 million for the three and nine
months ended September 30, 1997, respectively, reflect the net benefits and
provision resulting from the separate tax calculation prepared for each tax
jurisdiction in which the Company is subject to income taxes. At September 30,
1998, the Company has a current deferred tax asset of $16.1 million and a
noncurrent deferred tax asset of $102.2 million. Management believes that it is
more likely than not that the net deferred tax asset is realizable; however,
during the fourth quarter of 1998, the Company will be reviewing its deferred
tax asset position in light of evolving economic conditions in the oil and gas
industry. Such analysis will include forecasting future operations to determine
if it is more likely than not that the deferred tax asset is realizable.
Capital Commitments, Capital Resources and Liquidity
Capital Commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of principal and interest on outstanding indebtedness and working capital
obligations.
The Company's cash expenditures during the first three quarters of 1998
for additions to oil and gas properties totaled $427.9 million. This amount
includes $46.4 million for the acquisition of properties and $381.5 million for
development and exploratory drilling. Significant drilling and seismic
expenditures in the first three quarters of 1998 included $100.0 million in the
Permian Basin region, $137.4 million in the Gulf Coast region, $24.1 million in
the MidContinent region, $55.2 million in Canada, $47.7 million in Argentina and
$17.1 million in other international areas.
Funding for the Company's working capital obligations is provided by
internally-generated cash flows. Funding for the repayment of principal and
interest on outstanding debt may be provided by any combination of
internally-generated cash flows, proceeds from the disposition of nonstrategic
assets or alternative financing sources as discussed in "Capital Resources"
below.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of nonstrategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments.
Net cash provided by operating activities was $106.1 million and $266.5
million during the three and nine months ended September 30, 1998, as compared
to net cash provided by operating activities of $54.5 million and $179.1 million
for the same periods in 1997. These increases are primarily attributable to cash
flows generated by the oil and gas properties acquired from Mesa and Chauvco in
1997, offset, to some extent, by decreased commodity prices and increases in
interest expense, general and administrative expenses and reorganization costs.
Financing Activities. The Company had an outstanding balance under its
bank facilities at September 30, 1998 of $993 million (including outstanding,
undrawn letters of credit of $23 million), leaving approximately $167 million of
unused borrowing base immediately available. At September 30, 1998, the Company
had four other outstanding significant debt issuances. Such debt issuances
consist of (i) $150 million of 8-7/8% senior notes due in 2005, (ii) $150
million of 8-1/4% senior notes due in 2007, (iii) $350 million of 6.5% senior
notes due in 2008 and (iv) $250 million of 7.2% senior notes due in 2028. The
weighted average interest rate for the nine months ended September 30, 1998 on
the Company's indebtedness was 7.2% as compared to 8.05% for the nine months
ended September 30, 1997 (taking into account the effect of interest rate
swaps).
During January 1998, the Company completed the issuance of the 6.5%
senior notes due 2008 and the 7.2% senior notes due 2028 for total net proceeds
of $593 million. The proceeds were used primarily to repay the Company's bank
indebtedness. Interest on the 6.5% and 7.2% senior notes is payable
semi-annually on January 15 and July 15 of each year, commencing July 15, 1998.
These two senior note issuances are governed by an Indenture between the Company
and The Bank of New York dated January 13, 1998. Both senior note issuances are
27
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
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.
As the Company pursues its strategy, it will continue to utilize various
financing sources, including fixed and floating rate debt, convertible
securities, preferred stock or common stock. The Company may also issue
securities in exchange for oil and gas properties, stock or other interests in
other oil and gas companies or related assets. Additional securities may be of a
class preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Company's Board of Directors.
Sales of Nonstrategic Assets. During the nine months ended September 30,
1998 and 1997, proceeds from the sale of domestic nonstrategic assets totaled
$19.7 million and $12.8 million, respectively. The proceeds from these sales
were utilized to reduce the Company's outstanding bank indebtedness and for
general working capital purposes.
In February 1998, the Company announced its intentions to sell domestic
nonstrategic properties and has since signed a purchase and sale agreement (the
"Agreement") to sell certain non-strategic oil and gas properties for estimated
proceeds of $410 million. The Agreement will be effective October 1, 1998 and is
anticipated to close by December 31, 1998. The proceeds will be utilized to
reduce the Company' s outstanding bank indebtedness. The consummation of this
Agreement is primarily dependent upon the buyer's successful ability to finance
the purchase and certain other contingencies defined in the Agreement. As a
result, there can be no assurance that the divestiture of any or all of the
properties will be completed or that the estimated proceeds will be realized in
accordance with the Agreement. The properties to be divested represent an
estimated 10% to 12% of the Company's reserves at December 31, 1997. The Company
anticipates that it will continue to sell nonstrategic properties from time to
time to increase capital resources available for other activities and to achieve
operating and administrative efficiencies and improved profitability.
Liquidity. At September 30, 1998, the Company had $70.3 million of
unrestricted cash and cash equivalents on hand, compared to $71.7 million at
December 31, 1997. The Company's ratio of current assets to current liabilities
was 1.05 at September 30, 1998 and 1.18 at December 31, 1997.
- ---------------
(1) The information in 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, 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, 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.
These and other risks are described in the Company's 1997 Annual Report on
Form 10-K which is available from the United States Securities and Exchange
Commission.
28
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pioneer is party to various legal proceedings, which are described under
"Legal Actions" in Note E of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements". Pioneer is also party to other litigation
incidental to its business. The claims for damages from such other legal actions
are not in excess of 10% of Pioneer's current assets and Pioneer believes none
of these actions to be material.
Item 5. Other Information
Stockholder Proposals
Any stockholder of the Company who desires to submit a proposal for
action at the Company's 1999 annual meeting of stockholders and wishes to have
such proposal (a "Rule 14a-8 Proposal") included in the Company's proxy
materials, must submit such Rule 14a-8 Proposal to the Company at its principal
executive offices no later than December 14, 1998, unless the Company notifies
the stockholders otherwise. Only those Rule 14a-8 proposals that are timely
received by the Company and proper for stockholder action (and otherwise proper)
will be included in the Company's proxy materials.
Any stockholder of the Company who desires to submit a proposal for
action at the 1999 annual meeting of stockholders but does not wish to have such
proposal (a "Non-Rule 14a-8 Proposal") included in the Company's proxy
materials, must submit such Non-Rule 14a-8 Proposal to the Company at its
principal executive offices no later than February 27, 1999, unless the Company
notifies the stockholders otherwise. If a Non-Rule 14a-8 Proposal is not
received by the Company on or before February 27, 1999, then the Company intends
to exercise its discretionary voting authority with respect to such Non-Rule
14a-8 Proposal. "Discretionary voting authority" is the ability to vote proxies
that stockholders have executed and returned to the Company, on matters not
specifically reflected in the Company's proxy materials, and on which
stockholders have not had an opportunity to vote by proxy.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27.* Financial Data Schedule.
* filed herewith
Reports on Form 8-K
None.
29
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: November 12, 1998 By: /s/ Scott D. Sheffield
------------------------------------
Scott D. Sheffield
President
Date: November 12, 1998 By: /s/ M. Garrett Smith
------------------------------------
M. Garrett Smith
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998 By: /s/ Rich Dealy
------------------------------------
Rich Dealy
Vice President and Chief
Accounting Officer
30
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index Page
27.* Financial Data Schedule.
* filed herewith
31
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038357
<NAME> PNR CO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 95,305
<SECURITIES> 0
<RECEIVABLES> 99,391
<ALLOWANCES> 0
<INVENTORY> 17,460
<CURRENT-ASSETS> 238,494
<PP&E> 4,449,291
<DEPRECIATION> 881,640
<TOTAL-ASSETS> 3,992,626
<CURRENT-LIABILITIES> 227,333
<BONDS> 0
0
0
<COMMON> 1,007
<OTHER-SE> 2,350,996
<TOTAL-LIABILITY-AND-EQUITY> 3,992,626
<SALES> 554,478
<TOTAL-REVENUES> 562,533
<CGS> 0
<TOTAL-COSTS> 169,508
<OTHER-EXPENSES> 429,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,317
<INCOME-PRETAX> (158,955)
<INCOME-TAX> (55,400)
<INCOME-CONTINUING> (103,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103,555)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
