UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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, 5202 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 July 31, 1998....100,423,593
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 ........................................... 3
Consolidated Statements of Operations and Comprehensive Income
for the three and six months ended June 30, 1998 and 1997...... 5
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1998.................................... 6
Consolidated Statements of Cash Flows for the three and six
months ended June 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 4. Submission of Matters to a Vote of Security Holders............. 29
Item 6. Exhibits and Reports on Form 8-K................................ 30
Signatures...................................................... 31
Exhibit Index................................................... 32
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 45,693 $ 71,713
Restricted cash 348 1,695
Accounts receivable:
Trade, net 59,124 75,432
Oil and gas sales 98,666 116,500
Inventories 20,752 13,576
Deferred income taxes 18,500 16,900
Other current assets 9,888 12,372
--------- ---------
Total current assets 252,971 308,188
--------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties 3,839,245 3,575,971
Unproved properties 466,699 545,074
Accumulated depletion, depreciation and
amortization (764,414) (605,203)
--------- ---------
3,541,530 3,515,842
--------- ---------
Deferred income taxes 70,300 -
Other property and equipment, net 48,708 44,017
Other assets, net 84,912 78,543
--------- ---------
$3,998,421 $3,946,590
========= =========
The financial information included as of June 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)
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,772 $ 5,791
Undistributed unit purchases 348 1,695
Accounts payable:
Trade 115,464 176,697
Affiliates 2,788 9,994
Other current liabilities 88,070 67,375
--------- ---------
Total current liabilities 210,442 261,552
--------- ---------
Long-term debt, less current maturities 2,139,084 1,943,718
Other noncurrent liabilities 178,398 180,275
Deferred income taxes - 12,200
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares
authorized; one share issued and outstanding at
June 30, 1998 and December 31, 1997 - -
Common stock, $.01 par value; 500,000,000 shares
authorized; 100,745,293 and 101,037,562 shares
issued at June 30, 1998 and December 31, 1997,
respectively 1,007 1,010
Additional paid-in capital 2,350,912 2,359,992
Treasury stock, at cost; 300,700 and 591 shares
at June 30, 1998 and December 31, 1997,
respectively (6,799) (21)
Unearned compensation (11,212) (16,196)
Retained deficit (860,649) (795,940)
Accumulated other comprehensive loss:
Cumulative translation adjustment (2,762) -
--------- ---------
Total stockholders' equity 1,470,497 1,548,845
Commitments and contingencies (Note D)
--------- ---------
$3,998,421 $3,946,590
========= =========
The financial information included as of June 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 Six months ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $ 183,647 $ 94,847 $ 381,016 $ 198,626
Interest and other 1,145 680 2,323 2,833
Gain on disposition of assets, net 315 1,862 325 2,637
-------- -------- -------- --------
185,107 97,389 383,664 204,096
-------- -------- -------- --------
Costs and expenses:
Oil and gas production 56,613 24,958 111,755 49,671
Depletion, depreciation and
amortization 83,808 30,879 160,058 59,509
Exploration and abandonments 26,573 10,800 50,522 18,415
General and administrative 17,387 8,270 37,412 14,990
Reorganization 3,372 - 20,549 -
Interest 41,017 10,259 80,495 20,154
Other 6,846 410 13,626 831
-------- -------- -------- --------
235,616 85,576 474,417 163,570
-------- -------- -------- --------
Income (loss) before income taxes (50,509) 11,813 (90,753) 40,526
Income tax benefit (provision) 17,700 (4,400) 31,100 (14,500)
-------- -------- -------- --------
Net income (loss) (32,809) 7,413 (59,653) 26,026
-------- -------- -------- --------
Other comprehensive loss:
Translation adjustment (3,702) - (2,762) -
-------- -------- -------- ------
Comprehensive income (loss) $ (36,511) $ 7,413 $ (62,415) $ 26,026
======== ======== ======== ========
Net income (loss) per share:
Basic $ (.33) $ .21 $ (.60) $ .74
======== ======== ======== ========
Diluted $ (.33) $ .21 $ (.60) $ .71
======== ======== ======== ========
Dividends declared per share $ - $ - $ .05 $ .05
======== ======== ======== ========
Weighted average shares outstanding 99,939 35,028 100,003 35,038
========= ========= ========= =========
</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 Loss 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 - - (500) - - - - (500)
Purchase of treasury stock (300,109) - - (6,778) - - - (6,778)
Shares awarded 109,486 1 2,515 - (697) - - 1,819
Amortization of unearned
compensation - - - - 5,681 - - 5,681
Dividends ($.05 per share) - - - - - (5,056) - (5,056)
Net loss - - - - - (59,653) - (59,653)
Other comprehensive loss:
Translation adjustment - - - - - - (2,762) (2,762)
------------ ----- --------- ------- -------- -------- --------- ----------
Balance at June 30, 1998 100,444,593 $1,007 $2,350,912 $ (6,799) $ (11,212) $(860,649) $ (2,762) $ 1,470,497
============ ===== ========= ======= ========= ======== ========== ===========
</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 Six months ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (32,809) $ 7,413 $ (59,653) $ 26,026
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization 83,808 30,879 160,058 59,509
Exploration expenses, including dry holes 19,811 8,168 35,645 14,191
Deferred income taxes (15,700) 2,600 (28,400) 11,400
Gain on disposition of assets, net (315) (1,862) (325) (2,637)
Other noncash items 12,676 1,733 25,813 2,180
Change in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable 31,873 (2,478) 37,302 12,024
Inventory (682) (1,048) 143 (1,851)
Other current assets 7,462 (153) (1,329) 680
Accounts payable (16,891) 6,006 (24,723) 3,099
Accrued income taxes and other current
liabilities 2,136 (128) 15,889 (28)
-------- -------- -------- --------
Net cash provided by operating activities 91,369 51,130 160,420 124,593
-------- -------- -------- --------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired 5 - (424) -
Proceeds from disposition of assets 3,238 6,572 16,122 12,278
Additions to oil and gas properties (134,763) (92,902) (330,072) (169,500)
Other property additions, net (13,535) (3,766) (17,405) (750)
-------- -------- -------- --------
Net cash used in investing activities (145,055) (90,096) (331,779) (157,972)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt 53,018 41,543 826,201 41,543
Principal payments on long-term debt (15,506) (2,230) (631,225) (12,802)
Payment of noncurrent liabilities (10,881) (327) (32,315) (707)
Dividends - - (5,056) (1,754)
Purchase of treasury stock (1,206) (347) (6,778) (2,932)
Deferred loan fees/issuance costs (144) - (5,434) -
Exercise of long-term incentive plan stock options - 745 - 1,163
-------- -------- -------- --------
Net cash provided by financing activities 25,281 39,384 145,393 24,511
-------- -------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents (54) - (54) -
Net increase (decrease) in cash and cash equivalents (28,405) 418 (25,966) (8,868)
Cash and cash equivalents, beginning of period 74,152 9,425 71,713 18,711
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 45,693 $ 9,843 $ 45,693 $ 9,843
======== ======== ======== ========
</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
June 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 No. 16,
"Business Combinations", both the merger with Mesa and the acquisition of
Chauvco have been accounted for as purchases by the Company (formerly Parker &
Parsley). As a result, the historical financial statements for the Company are
those of Parker & Parsley, and the Company's financial statements present the
addition of Mesa's and Chauvco's assets and liabilities as an acquisition by the
Company in August and December 1997, respectively. Specifically, the
accompanying Consolidated Statements of Operations and Comprehensive Income and
Consolidated Statements of Cash Flows include the financial results of Mesa and
Chauvco for the three and six months ended June 30, 1998 but only include the
financial results of Parker & Parsley for the three and six months ended June
30, 1997.
NOTE B. Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements of the Company as of June 30, 1998 and for the three and six months
ended June 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 (loss) consisting of foreign currency translation adjustments.
NOTE C. 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.
8
<PAGE>
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 D. 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%) covering the period from July 1, 1967, to
the present. In March 1995, the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiff's claims (which related
to periods prior to October 1, 1989), but which also reduced a number of the
Company's defenses. The Company and CIG filed stipulations with the court
whereby the Company would have been liable for between 50% and 60%, depending on
the time period covered, of an adverse judgment against CIG 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
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 a decision is
currently pending.
9
<PAGE>
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,
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 June 30, 1998, the Company has paid $1.2
million and has set aside approximately $28.8 million in an escrow account with
a similar provision for such litigation recorded in the accompanying
Consolidated Balance Sheet as of June 30, 1998.
10
<PAGE>
NOTE E. 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 June 30, 1998.
<TABLE>
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Average
------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Daily oil production:
1998 - Swap Contracts
Volume (Bbl) - - 8,900 8,900 8,900
Price per Bbl $ - $ - $ 19.75 $ 19.74 $ 19.74
1998 - Collar Options
Volume (Bbl) - - 2,000 2,000 2,000
Price per Bbl $ - $ - $18.70-20.65 $18.70-20.65 $18.70-20.65
1998 - Put Options
Volume (Bbl) - - 2,000 2,000 2,000
Price per Bbl $ - $ - $ 18.40 $ 18.40 $ 18.40
1999 - Swap Contracts
Volume (Bbl) 7,500 7,500 7,500 7,500 7,500
Price per Bbl $ 17.96 $ 17.96 $ 17.96 $ 17.96 $ 17.96
2000 - Swap Contracts
Volume (Bbl) 2,000 2,000 2,000 2,000 2,000
Price per Bbl $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00
</TABLE>
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 Six months ended
June 30, June 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Average price reported per Bbl $13.06 $18.41 $13.52 $19.20
Average price realized per Bbl $11.97 $18.62 $12.54 $20.24
Addition/(reduction) to revenue
(in millions) $ 6.2 $ (.6) $ 11.0 $ (6.0)
Natural Gas. The Company employs a policy of hedging gas production based
on the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The following table
sets forth the Company's outstanding gas hedge contracts as of June 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.
11
<PAGE>
<TABLE>
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Average
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Daily gas production:
1998 - Swap Contracts
Volume (Mcf) - - 85,000 51,848 68,424
Index price per MMBtu $ - $ - $ 2.07 $ 2.00 $ 2.04
NYMEX price per MMBtu $ - $ - $ 2.26 $ 2.30 $ 2.27
1998 - Put Options
Volume (Mcf) - - 297,500 254,402 275,951
Index price per MMBtu $ - $ - $ 1.90 $ 1.91 $ 1.91
NYMEX price per MMBtu $ - $ - $ 2.26 $ 2.30 $ 2.27
1999 - Swap Contracts
Volume (Mcf) 92,500 114,945 110,000 88,451 101,486
Index price per MMBtu $ 2.05 $ 2.11 $ 2.12 $ 2.13 $ 2.10
NYMEX price per MMBtu $ 2.38 $ 2.38 $ 2.39 $ 2.39 $ 2.38
1999 - Collar Contracts
Volume (Mcf) 97,500 97,500 97,500 97,500 97,500
Index price per MMBtu $2.11-2.76 $2.11-2.76 $2.11-2.76 $2.11-2.76 $2.11-2.76
NYMEX price per MMBtu $ 2.38 $ 2.38 $ 2.39 $ 2.39 $ 2.38
</TABLE>
In addition to the open positions above, Pioneer has sold short put
options for 45,000 Mcf of gas per day for 1999. Consequently, there is no
effective minimum price to be realized from the collar contracts if the NYMEX
price falls below $2.00.
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:
Three months ended Six months ended
June 30, June 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Average price reported per Mcf $ 1.81 $ 2.07 $ 1.94 $ 2.26
Average price realized per Mcf $ 1.88 $ 2.05 $ 1.91 $ 2.42
Addition/(reduction) to revenue
(in millions) $ (3.2) $ .5 $ 2.3 $ (6.1)
NOTE F. 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 six
months ended June 30, 1998 include a $5.8 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 six months ended
June 30, 1998 also include mark-to-market adjustments totaling $5.9 million
relating to certain derivative contracts acquired from Chauvco that do not
qualify as hedges. 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 G. Reorganization
In February 1998, the Company announced its plans to sell certain
nonstrategic fields for estimated proceeds of $375 to $550 million during the
latter part of 1998. The proceeds will be used to reduce the Company's
outstanding indebtedness and to fund the Company's capital expenditures program.
12
<PAGE>
Coincidentally with the property divestiture program, the Company announced 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 six months ended June 30, 1998, the Company has
recorded severance, relocation, lease termination and other costs of
approximately $20.5 million relating to this reorganization. The Company's
additional reorganization costs incurred throughout the remainder of 1998 are
expected to be minimal.
The consummation of the Company's 1998 divestiture plans is entirely
dependent on finding one or more willing buyers who have the financial
wherewithal to complete such a purchase. Until such a buyer is found, the
Company may reevaluate its portfolio of properties and at any time may adjust
its plans concerning divestitures. As a result, there can be no assurance that
the divestiture of any or all of these properties will be completed or that the
estimated proceeds will be realized.
NOTE H. 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 financial
information for Pioneer Natural Resources Company as the Parent on a stand-alone
basis (carrying any investments in subsidiaries under the equity method),
financial information for Pioneer USA on a stand-alone basis (carrying any
investment in non-guarantor subsidiaries under the equity method), financial
information for the non-guarantor subsidiaries of the Company on a consolidated
basis, the consolidation and elimination entries necessary to arrive at the
information for the Company on a consolidated basis, and the financial
information for the Company, including its consolidated subsidiaries. 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 six
months ended June 30, 1997 have not been presented.
13
<PAGE>
CONSOLIDATING BALANCE SHEET
As of June 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 $ 3,192 $ 26,229 $ 16,272 $ $ 45,693
Restricted cash - 348 - 348
Accounts receivable:
Trade, net 55 45,747 13,322 59,124
Affiliates - 3,379 (3,379) -
Oil and gas sales - 75,226 23,440 98,666
Intercompany notes receivable 2,212,719 (1,798,260) (414,459) -
Inventories - 10,606 10,146 20,752
Deferred income taxes 17,300 - 1,200 18,500
Other current assets 111 6,746 3,031 9,888
--------- --------- ---------- ---------
Total current assets 2,233,377 (1,629,979) (350,427) 252,971
--------- ---------- ---------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties - 2,588,514 1,250,731 3,839,245
Unproved properties - 119,904 346,795 466,699
Accumulated depletion, depreciation
and amortization - (609,833) (154,581) (764,414)
--------- --------- ---------- ---------
- 2,098,585 1,442,945 3,541,530
--------- --------- ---------- ---------
Deferred income taxes 242,715 - (172,415) 70,300
Other property and equipment, net - 30,523 18,185 48,708
Other assets, net 9,347 41,169 34,396 84,912
Investment in subsidiaries 571,960 309,507 (2,494) (878,973) -
--------- --------- ---------- ---------
$3,057,399 $ 849,805 $ 970,190 $3,998,421
========= ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 662 $ 3,110 $ $ 3,772
Undistributed unit purchases - 348 - 348
Accounts payable:
Trade 675 87,404 27,385 115,464
Affiliates 104 2,684 - 2,788
Other current liabilities 25,715 59,630 2,725 88,070
--------- --------- ---------- ---------
Total current liabilities 26,494 150,728 33,220 210,442
--------- --------- ---------- ---------
Long-term debt, less current maturities 1,847,600 126 291,358 2,139,084
Other noncurrent liabilities - 138,003 40,395 178,398
Stockholders' equity:
LP Capital - - 22 (22) -
Common stock 898 1 109 (1) 1,007
Additional paid-in capital 2,049,855 2,033,188 793,563 (2,525,694) 2,350,912
Treasury stock, at cost (6,799) - - (6,799)
Unearned compensation - (11,212) - (11,212)
Retained deficit (860,649) (1,461,029) (185,715) 1,646,744 (860,649)
Accumulated other comprehensive loss:
Cumulative translation adjustment - - (2,762) (2,762)
--------- --------- ---------- ---------
Total stockholders' equity 1,183,305 560,948 605,217 1,470,497
Commitments and contingencies
--------- ---------- ---------- ---------
$3,057,399 $ 849,805 $ 970,190 $3,998,421
========= ========== ========== =========
</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:
GP Capital - - 4 (4) -
LP Capital - - 397 (397) -
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>
<TABLE>
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 1998
(in thousands)
(Unaudited)
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 $ - $ 280,382 $ 100,634 $ - $ $ 381,016
Interest and other 38 2,173 763 - (651) 2,323
Gain on disposition of assets,
net - 325 - - 325
-------- -------- --------- ---------- --------
38 282,880 101,397 - 383,664
-------- -------- --------- ---------- --------
Costs and expenses:
Oil and gas production - 81,490 30,265 - 111,755
Depletion, depreciation and
amortization - 103,475 56,583 - 160,058
Exploration and abandonments - 28,171 22,351 - 50,522
General and administrative 1,048 29,011 7,353 - 37,412
Reorganization - 20,549 - - 20,549
Interest (8,479) 78,593 11,032 - (651) 80,495
Equity (income) loss from
subsidiary 86,243 (2,459) - - (83,784) -
Other 14 6,421 7,191 - 13,626
-------- -------- --------- ---------- --------
78,826 345,251 134,775 - 474,417
-------- -------- --------- ---------- --------
Loss before income taxes (78,788) (62,371) (33,378) (90,753)
Income tax benefit - - 11,965 19,135 31,100
-------- -------- --------- ---------- --------
Net loss (78,788) (62,371) (21,413) 19,135 (59,653)
Other comprehensive loss:
Translation adjustment - - (2,762) - (2,762)
-------- -------- --------- ---------- --------
Comprehensive loss $ (78,788) $ (62,371) $ (24,175) $ 19,135 $ (62,415)
======== ======== ========= ========== ========
</TABLE>
16
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months ended June 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 $ (78,788) $ (62,371) $ (21,413) $ 19,135 $ 83,784 $ (59,653)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depletion, depreciation and
amortization - 103,475 56,583 - 160,058
Exploration and abandonments - 17,395 18,250 - 35,645
Deferred income taxes - - (11,965) (16,435) (28,400)
Gain on disposition of
assets, net - (325) - - (325)
Other noncash items 91,484 11,065 7,048 - (83,784) 25,813
Change in working capital (134,928) 126,964 37,946 (2,700) 27,282
-------- -------- --------- --------- --------
Net cash provided by (used
in) operating activities (122,232) 196,203 86,449 - 160,420
-------- -------- --------- --------- --------
Cash flows from investing activities:
Payment for acquisitions, net of
cash acquired - (424) - - (424)
Proceeds from disposition of assets - 13,930 2,192 - 16,122
Additions to oil and gas properties - (192,581) (137,491) - (330,072)
Other property additions, net - (9,777) (7,628) - (17,405)
-------- -------- --------- --------- --------
Net cash used in
investing activities - (188,852) (142,927) - (331,779)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Borrowings under long-term debt 770,890 - 55,311 - 826,201
Principal payments on long-term
debt (628,239) (319) (2,667) - (631,225)
Payment of noncurrent liabilities - (29,836) (2,479) - (32,315)
Dividends (5,056) - - - (5,056)
Purchase of treasury stock (6,778) - - - (6,778)
Deferred loan fees/issuance costs (5,434) - - - (5,434)
-------- -------- --------- --------- --------
Net cash provided by
(used in) financing
activities 125,383 (30,155) 50,165 - 145,393
-------- -------- --------- --------- --------
Effect of exchange rate changes on
cash and cash equivalents - - (54) - (54)
Net increase (decrease) in cash and
cash equivalents 3,151 (22,804) (6,313) - (25,966)
Cash and cash equivalents,
beginning of period 41 49,033 22,639 - 71,713
-------- -------- --------- --------- --------
Cash and cash equivalents, end
of period $ 3,192 $ 26,229 $ 16,272 $ - $ 45,693
======== ======== ========== ========= ========
</TABLE>
17
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations(1)
The Formation of Pioneer
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 No. 16,
"Business Combinations", both the merger with Mesa and the acquisition of
Chauvco have been accounted for as purchases by the Company (formerly Parker &
Parsley). As a result, the historical financial statements for the Company are
those of Parker & Parsley, and the Company's financial statements present the
addition of Mesa's and Chauvco's assets and liabilities as an acquisition by the
Company in August and December 1997, respectively. Specifically, the
accompanying Consolidated Statements of Operations and Comprehensive Income and
Consolidated Statements of Cash Flows include the financial results of Mesa and
Chauvco for the three and six months ended June 30, 1998 but only include the
financial results of Parker & Parsley for the three and six months ended June
30, 1997.
Financial Performance
The Company reported a net loss of $32.8 million ($.33 per share) and
$59.7 million ($.60 per share) for the three and six months ended June 30, 1998,
as compared to net income of $7.4 million ($.21 per share) and $26.0 million
($.74 per share) for the same periods in 1997. The three and six month periods
ended June 30, 1998 were negatively impacted by a decline in the average price
received for oil and gas (see "Results of Operations" below) and reorganization
costs totaling $3.4 million and $20.5 million, respectively (see "1998 Outlook"
below). The Company's financial performance during the first half of 1998 was
positively affected by increases in oil and gas production and decreases in
production costs per BOE due to ongoing cost reduction efforts (see "Results of
Operations" below).
Net cash provided by operating activities was $91.4 million and $160.4
million during the three and six months ended June 30, 1998, as compared to net
cash provided by operating activities of $51.1 million and $124.6 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 June 30, 1998
was $3.6 billion, consisting of total long-term debt of $2.1 billion and
stockholders' equity of $1.5 billion. Debt as a percentage of total book
capitalization was 59% at June 30, 1998, as compared to 56% at December 31,
1997.
Drilling Results
During the first half of 1998, the Company participated in the completion
of 36 gross exploration and 336 gross development wells, including 193 in the
Permian Basin region, 26 in the Gulf Coast region, 58 in the MidContinent
region, 46 in Argentina, 48 in Canada and two in South Africa. Of these wells,
129 were in progress at December 31, 1997. Of the 372 total wells completed
during the six months ended June 30, 1998, 347 were completed successfully which
resulted in a 93% success rate. In addition to the wells completed in the first
half of 1998, the Company had 91 wells in progress at June 30, 1998.
18
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
During the second quarter, Pioneer completed its development program on
the Eugene Island 208 block in the Gulf of Mexico. Pioneer operates the property
with a 75% working interest. Two new wells and one recompleted well were placed
on production at a combined rate of 3,900 BOE per day. Pioneer will continue its
Gulf of Mexico drilling program, and is preparing to drill a development well
targeting natural gas reserves on the Pioneer operated Vermilion 348 block where
the Company holds a 100% interest.
In the West Panhandle field, Pioneer drilled 41 wells during the first
half of the year with 100% success. Through June 30, 1998, fourteen of these
wells have been connected and are producing at a combined gross rate of 3.4 MMcf
per day. Pioneer holds a 77% interest and plans to drill an additional 15 wells
this year.
In the 100% owned Timbalier Bay field in South Louisiana, four new wells
and one recompletion resulted in new production of 1,400 barrels of oil per day
and 1.2 MMcf of gas per day. The Company continues to evaluate this large oil
field with 3-D seismic data to unlock additional development and large-scale
exploration opportunities. In the Lopeno field in South Texas, the Company
completed six new wells increasing production more than 30 MMcf of gas per day.
Pioneer's activity in the South Texas Lopeno and Pawnee fields is expected to
increase during the third quarter. The Company anticipates a three-rig
development program targeting natural gas reserves in these operated fields.
In the Neuquen Basin of Argentina, the Company has drilled 37 wells of a
60-well drilling program with initial production rates from 26 completed wells
of approximately 4,000 BOE per day. The Company's Dorsal gas gathering expansion
was completed on schedule in June. Gas sales have increased by 7 MMcf per day,
with an additional 4 MMcf per day anticipated by the end of July.
In the Chinchaga gas field in Northeast British Columbia, Pioneer's net
production is currently averaging 23 MMcf per day, an increase of 16 MMcf per
day from 1997 year-end levels. Pioneer drilled 19 development wells 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. As of June 30, 1988, production has increased by 16 MMcf of gas
per day to 23 MMcf of gas per day, net to the Company's interest compared to
January 1, 1998.
The Company also completed two infill development wells in the Bear Creek
field, a water flood unit in Dunn County, North Dakota. The two new wells are
producing at a combined rate of over 715 barrels of oil per day and 230 Mcf of
gas per day, net to the Company's interest. The field was discovered in 1982 and
water flooding commenced in 1992.
1998 Outlook
In February 1998, the Company announced plans to accelerate its portfolio
management initiatives through a divestiture program focused on improving
operating efficiency and profitability. The Company plans to sell certain
nonstrategic fields for estimated proceeds of $375 to $550 million during the
latter part of 1998. The proceeds will be used to reduce the Company's
outstanding indebtedness and to fund the Company's capital expenditures program.
This will leave the Company with approximately 25 domestic fields, which
represent its core producing assets and complementary development and
exploration opportunities.
The consummation of the Company's 1998 divestiture plans is entirely
dependent on finding one or more willing buyers who have the financial
wherewithal to complete such a purchase. Until such a buyer is found, the
Company may reevaluate its portfolio of properties and at any time may adjust
its plans concerning divestitures. As a result, there can be no assurance that
the divestiture of any or all of these properties will be completed or that the
estimated proceeds will be realized.
Coincidentally with the property divestiture program, the Company
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
19
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Company formally notified the employees affected by the reorganization whether
they were to be severed or relocated. During the six months ended June 30, 1998,
the Company has recorded severance, relocation, lease termination and other
costs of approximately $20.5 million relating to this reorganization. The
Company's additional reorganization costs incurred throughout the remainder of
1998 are expected to be minimal.
During the second half of 1998, the Company will continue its emphasis on
core development, exploration and production activities, with a primary focus on
the exploitation of its current portfolio of drilling locations. This portfolio
was significantly enhanced and expanded by the major acquisitions completed in
1997. In addition, the Company's 1996 and 1997 drilling programs have added a
large number of new locations to which proved reserves have been assigned. The
Company believes that its current portfolio of undeveloped prospects provides
attractive development and exploration opportunities for at least the next three
to five years. The Company's 1998 capital expenditure budget has been decreased
to $440 million from its previous budget of $500 million. The Company budgets
its capital expenditures based on projected internally-generated cash flows and
routinely adjusts the level of its capital expenditures in response to
anticipated changes in cash flows. The decrease in the Company's 1998 capital
expenditure budget is a direct result of the decrease in operating cash flows
due to declines in commodity prices. Of the total capital expenditure budget of
$440 million, the Company has allocated $265 million to exploitation activities,
$115 million to exploration activities and $60 million to oil and gas property
acquisitions. The Company anticipates that the $440 million budget will be spent
geographically as follows: $85 million in the Permian Basin, $145 million in the
onshore and offshore Gulf Coast, $40 million in the MidContinent, $70 million in
Canada, $75 million in Argentina and $25 million in Africa and other
international areas.
During most of 1996 and 1997, the Company benefitted from higher oil
prices as compared to previous years. However, during the fourth quarter of
1997, oil prices began a downward trend that has continued into August 1998. A
continuation of the oil price environment experienced thus far in 1998 will have
an adverse effect on the Company's revenues and operating cash flows, and may
result in further downward adjustments to the Company's current 1998 capital
budget of $440 million. Also, a continuing decline in oil prices could result in
additional decreases in the carrying value of the Company's oil and gas
properties.
The forward looking statements in these projections, including statements
relating to capital budget, production, cash flows and drilling activities, are
based upon a number of assumptions, including among others, limited changes in
oil and gas prices and the accuracy of reserve engineering studies. These
assumptions may prove not to have been accurate.
Information Systems for the Year 2000. The Company will be required to
modify its information systems in order to accurately process data referencing
the year 2000. Because of the importance of occurrence dates in the oil and gas
industry, the consequences of not pursuing these modifications could be very
significant to the Company's ability to manage and report operating activities.
The Company has contracted with a third party to perform the software
programming changes necessary to correct any existing deficiencies. The Company
currently believes the total cost to make the necessary software program
modifications will be approximately $3 million and has spent $317 thousand
through June 30, 1998. Such programming changes are anticipated to be completed
and tested by June 30, 1999.
On a daily basis, the Company exchanges date-specific information with a
multitude of suppliers and purchasers. If these other parties do not properly
address the year 2000 in their data exchange processes, the adverse effect to
the Company could be significant. At this time, the extent of the potential
impact to the Company cannot be determined.
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
20
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
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 six months ended June 30, 1998 and 1997:
<TABLE>
Six Months Ended June 30, 1998
----------------------------------------------------------
United Other
States Canada Argentina Foreign (b) Total
--------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ 315,092 $ 33,401 $ 32,523 $ - $ 381,016
Gain on disposition of oil and gas
properties, net (a) 274 - - - 274
-------- ------- -------- --------- --------
315,366 33,401 32,523 - 381,290
-------- ------- -------- --------- --------
Costs and expenses:
Oil and gas production (88,480) (12,373) (10,902) - (111,755)
Depletion (114,621) (19,373) (19,532) - (153,526)
Exploration and abandonments (6,757) (3,990) (5,326) (3,936) (20,009)
Geological and geophysical (17,604) (7,953) (2,905) (2,051) (30,513)
-------- ------- -------- --------- --------
(227,462) (43,689) (38,665) (5,987) (315,803)
-------- -------- -------- --------- --------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 87,904 $(10,288) $ (6,142) $ (5,987) $ 65,487
======== ======= ======== ========= ========
Production:
Oil (MBbls) 7,822 1,757 1,634 - 11,213
NGLs (MBbls) 5,027 131 112 - 5,270
Gas (MMcf) 71,280 8,330 11,651 - 91,261
Total (MBOE) 24,729 3,276 3,688 - 31,693
Average daily production:
Oil (Bbls) 43,217 9,705 9,031 - 61,953
NGLs (Bbls) 27,774 723 617 - 29,114
Gas (Mcf) 393,811 46,025 64,370 - 504,206
Average oil price (per Bbl) $ 14.44 $ 11.64 $ 11.14 $ - $ 13.52
Average NGL price (per Bbl) $ 9.93 $ 11.00 $ 12.20 $ - $ 10.00
Average gas price (per Mcf) $ 2.14 $ 1.38 $ 1.11 $ - $ 1.94
Costs (per BOE):
Lease operating expense $ 2.92 $ 3.73 $ 2.79 $ - $ 2.99
Production taxes $ .52 $ - $ .17 $ - $ .42
Workover costs $ .14 $ .05 $ - $ - $ .12
-------- ------- -------- --------- --------
Total production costs $ 3.58 $ 3.78 $ 2.96 $ - $ 3.53
======== ======= ======== ========= ========
Depletion $ 4.64 $ 5.91 $ 5.30 $ - $ 4.84
Six Months Ended June 30, 1997
---------------------------------------------------------
United Other
States Canada Argentina Foreign (b) Total
--------- -------- --------- ----------- ---------
Revenues:
Oil and gas $ 197,083 $ - $ 1,543 $ - $ 198,626
Gain on disposition of oil and gas
properties, net (a) 1,071 - - - 1,071
-------- ------- -------- --------- --------
198,154 - 1,543 - 199,697
-------- ------- -------- --------- --------
Costs and expenses:
Oil and gas production (49,211) - (460) - (49,671)
Depletion (55,459) - (713) - (56,172)
Exploration and abandonments (11,029) - (220) - (11,249)
Geological and geophysical (5,790) - (934) (442) (7,166)
-------- ------- -------- --------- --------
(121,489) - (2,327) (442) (124,258)
-------- ------- -------- --------- --------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 76,665 $ - $ (784) $ (442) $ 75,439
======== ======= ======== ========= ========
Production:
Oil (MBbls) 5,679 - 74 - 5,753
Gas (MMcf) 38,957 - - - 38,957
Total (MBOE) 12,172 - 74 - 12,246
Average daily production:
Oil (Bbls) 31,376 - 411 - 31,787
Gas (Mcf) 215,230 - - - 215,230
Average oil price (per Bbl) $ 19.18 $ - $ 20.76 $ - $ 19.20
Average gas price (per Mcf) $ 2.26 $ - $ - $ - $ 2.26
Costs (per BOE):
Lease operating expense $ 2.77 $ - $ 5.96 $ - $ 2.79
Production taxes $ .92 $ - $ .23 $ - $ .91
Workover costs $ .35 $ - $ - $ - $ .35
-------- ------- -------- --------- --------
Total production costs $ 4.04 $ - $ 6.19 $ - $ 4.05
======== ======= ======== ========= ========
Depletion $ 4.56 $ - $ 9.59 $ - $ 4.59
</TABLE>
22
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
<TABLE>
Three Months Ended June 30, 1998
---------------------------------------------------------
United Other
States Canada Argentina Foreign (b) Total
--------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ 150,389 $ 16,959 $ 16,299 $ - $ 183,647
Gain on disposition of oil and gas
properties, net (a) 274 - - - 274
-------- ------- -------- --------- --------
150,663 16,959 16,299 - 183,921
-------- ------- -------- --------- --------
Costs and expenses:
Oil and gas production (44,135) (6,698) (5,780) - (56,613)
Depletion (59,847) (10,432) (10,092) - (80,371)
Exploration and abandonments (2,781) (735) (3,118) (2,249) (8,883)
Geological and geophysical (11,153) (3,365) (1,914) (1,258) (17,690)
-------- ------- -------- --------- --------
(117,916) (21,230) (20,904) (3,507) (163,557)
-------- -------- -------- --------- --------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes) $ 32,747 $ (4,271) $ (4,605) $ (3,507) $ 20,364
======== ======= ======== ========= ========
Production:
Oil (MBbls) 3,956 872 792 - 5,620
NGLs (MBbls) 2,614 69 58 - 2,741
Gas (MMcf) 36,280 4,757 6,194 - 47,231
Total (MBOE) 12,617 1,734 1,882 - 16,233
Average daily production:
Oil (Bbls) 43,479 9,577 8,706 - 61,762
NGLs (Bbls) 28,723 753 634 - 30,110
Gas (Mcf) 398,677 52,278 68,067 - 519,022
Average oil price (per Bbl) $ 13.81 $ 11.45 $ 11.11 $ - $ 13.06
Average NGL price (per Bbl) $ 8.91 $ 10.08 $ 10.44 $ - $ 8.97
Average gas price (per Mcf) $ 2.00 $ 1.32 $ 1.11 $ - $ 1.81
Costs (per BOE):
Lease operating expense $ 2.89 $ 3.79 $ 2.89 $ - $ 2.99
Production taxes $ .48 $ - $ .18 $ - $ .40
Workover costs $ .12 $ .07 $ - $ - $ .10
-------- ------- -------- --------- --------
Total production costs $ 3.49 $ 3.86 $ 3.07 $ - $ 3.49
======== ======= ======== ========= ========
Depletion $ 4.74 $ 6.02 $ 5.36 $ - $ 4.95
Three Months Ended June 30, 1998
---------------------------------------------------------
United Other
States Canada Argentina Foreign (b) Total
--------- -------- --------- ---------- ---------
Revenues:
Oil and gas $ 94,113 $ - $ 734 $ - $ 94,847
Gain on disposition of oil and gas
properties, net (a) 1,122 - - - 1,122
-------- ------ -------- --------- --------
95,235 - 734 - 95,969
-------- ------ -------- --------- --------
Costs and expenses:
Oil and gas production (24,797) - (161) - (24,958)
Depletion (28,872) - (294) - (29,166)
Exploration and abandonments (6,021) - 174 - (5,847)
Geological and geophysical (3,999) - (512) (442) (4,953)
-------- ------ -------- --------- --------
(63,689) - (793) (442) (64,924)
-------- ------ -------- --------- --------
Operating profit (loss) (excluding
general and administrative expenses
and income taxes $ 31,546 $ - $ (59) $ (442) $ 31,045
======== ======= ======== ========= ========
Production:
Oil (MBbls) 2,841 - 40 - 2,881
Gas (MMcf) 20,221 - - - 20,221
Total (MBOE) 6,211 - 40 - 6,251
Average daily production:
Oil (Bbls) 31,219 - 444 - 31,663
Gas (Mcf) 222,210 - - - 222,210
Average oil price (per Bbl) $ 18.41 $ - $ 18.17 $ - $ 18.41
Average gas price (per Mcf) $ 2.07 $ - $ - $ - $ 2.07
Costs (per BOE):
Lease operating expense $ 2.89 $ - $ 3.56 $ - $ 2.89
Production taxes $ .79 $ - $ .42 $ - $ .79
Workover costs $ .31 $ - $ - $ - $ .31
-------- ------- -------- --------- --------
Total production costs $ 3.99 $ - $ 3.98 $ - $ 3.99
======== ======= ======== ========= ========
Depletion $ 4.65 $ - $ 7.28 $ - $ 4.67
</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 $183.6
million and $381.0 million for the three and six months ended June 30, 1998
compared to $94.8 million and $198.6 million for the same periods in 1997,
representing an increase of 94% and 92%, 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 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 six months
ended June 30, 1998 is the price received for dry residue gas and the price per
Mcf for natural gas for the three and six months ended June 30, 1997 is a price
for natural gas liquids combined with dry residue gas.
On a BOE basis, production increased by 160% and 159% for the three and
six months ended June 30, 1998, respectively, as compared to the same periods in
1997. The additional production volumes from the Mesa properties contributed
approximately 92% of production growth and the Chauvco properties contributed
approximately 57% for each of the three and six months ended June 30, 1998. 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 18% and 20% for the three and six months ended
June 30, 1998 as compared to the same periods in 1997.
The average oil price for the six months ended June 30, 1998 decreased
30% (from $19.20 to $13.52 for the six months ended June 30, 1997 and 1998,
respectively) and the average gas price decreased 14% (from $2.26 to $1.94 for
the six months ended June 30, 1997 and 1998, respectively). During the three
months ended June 30, 1998, the average price of oil and gas received decreased
29% (from $18.41 during the second quarter of 1997 to $13.06 during the second
quarter of 1998) and 13% (from $2.07 during the second quarter of 1997 to $1.81
during the second quarter of 1998), respectively. The average NGL price for the
three and six months ended June 30, 1998 was $8.97 and $10.00, 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 first half of 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 six months ended June 30, 1998 was $11.97 per Bbl and
$12.54 per Bbl, respectively, while, as a point of reference, the comparable
average NYMEX prompt month closing per Bbl for the same periods was $14.67 per
Bbl and $15.28 per Bbl, respectively. The Company recorded net increases to oil
revenues of $6.2 million and $11 million for the three and six months ended June
30, 1998, respectively, as a result of its commodity hedges.
24
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
During the three and six months ended June 30, 1997, the Company realized
an average price for physical oil sales (excluding hedge results) of $18.62 per
Bbl and $20.24 per Bbl, respectively, while, as a point of reference, the
comparable average NYMEX prompt month closing per Bbl for the same periods was
$19.94 per Bbl and $21.36 per Bbl, respectively. The Company recorded net
reductions to oil revenues of $606 thousand and $6 million for the three and six
months ended June 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 six months ended June 30, 1998 was
$1.88 per Mcf and $1.91 per Mcf, respectively, while as a point of reference,
the comparable average NYMEX prompt month closing for the same periods was $2.26
and $2.24 per Mcf, respectively. The Company recorded a net reduction to gas
revenues of $3.2 million during the three months ended June 30, 1998 and a net
increase to gas revenues of $2.3 million for the six months ended June 30, 1998,
as a result of its commodity hedges.
During the three and six months ended June 30, 1997, the Company realized
an average price for physical gas sales (excluding hedge results) of $2.05 per
Mcf and $2.42 per Mcf, respectively, while as a point of reference, the
comparable average NYMEX prompt month closing for the same periods was $2.14 and
$2.25 per Mcf, respectively. The Company recorded net increase to gas revenues
of $471 thousand and a net reduction to gas revenues of $6.1 million for the
three and six months ended June 30, 1997, respectively, as a result of its
commodity hedges.
See Note E of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information concerning the Company's open hedge
positions at June 30, 1998 and the related prices to be realized.
Production Costs. Total production costs per BOE decreased to $3.53 during
the six months ended June 30, 1998 as compared to production costs per BOE of
$4.05 during the same period in 1997. The decrease is due to decreases in
domestic production taxes caused by lower commodity prices and decreases in
workover expense, offset by increases in lease operating expenses. During the
three months ended June 30, 1998 production costs per BOE decreased 13% to $3.49
from $3.99 during the same periods in 1997.
Depletion Expense. Depletion expense per BOE increased to $4.95 and $4.84
during the three and six months ended June 30, 1998, respectively, as compared
to $4.67 and $4.59 per BOE during the same periods in 1997. The increase in
depletion expense per BOE during 1998 is primarily associated with the value
allocated to Chauvco's reserves and decreases in oil and gas reserves due to
declines in oil and gas prices from June 30, 1997 to June 30, 1998.
Exploration and Abandonments/Geological and Geophysical Costs. Exploration
and abandonments/geological and geophysical costs increased to $26.6 million and
$50.5 million during the three and six months ended June 30, 1998, respectively,
from $10.8 million and $18.4 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.
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Exploratory dry holes:
United States $ 1,055 $ 5,183 $ 2,801 $ 9,701
Foreign 3,965 (174) 7,547 219
Geological and geophysical costs:
United States 11,153 3,999 17,604 5,790
Foreign 6,537 954 12,909 1,376
Leasehold abandonments and other 3,863 838 9,661 1,329
------- ------- ------- -------
$ 26,573 $ 10,800 $ 50,522 $ 18,415
======= ======= ======= =======
25
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Approximately 26% 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
currently anticipates that its 1998 exploration efforts will be 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 $17.4 million and $37.4 million
for the three and six months ended June 30, 1998, respectively, as compared to
$8.3 million and $15 million for the same periods ended June 30, 1997,
representing an increase of $9.1 million and $22.4 million, respectively. The
increase is primarily due to the acquisitions of Mesa and Chauvco.
Reorganization costs for the six months ended June 30, 1998 totaled
$20.5 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 six months
ended June 30, 1998, the Company has recorded severance, relocation, lease
termination and other costs of approximately $20.5 million relating to this
reorganization. The Company's additional reorganization costs incurred
throughout the remainder of 1998 are expected to be minimal.
Interest Expense
During the three months ended June 30, 1998, interest expense increased
$30.7 million to $41.0 million from $10.3 million for the second quarter of
1997. Interest expense for the six months ended June 30, 1998 increased to $80.5
million as compared to $20.2 million for the same period in 1997. The increase
is due to an increase of $1.7 billion in the weighted average outstanding
balance of the Company's indebtedness for the six months ended June 30, 1998 as
compared to the six months ended June 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 7.83% during the first half of
1997 to 7.45% during the first half of 1998.
During the three and six months ended June 30, 1998, the Company was a
party to various interest rate swap agreements that resulted in an increase in
interest expense of $78 thousand and $73 thousand, respectively. During the same
periods in 1997, such agreements resulted in a reduction in interest expense of
$310 thousand and $700 thousand, respectively.
Income Taxes
The Company's income tax benefit of $17.7 million and $31.1 million for
the three and six months ended June 30, 1998, respectively, and the provision of
$4.4 million and $14.5 million for the three and six months ended June 30, 1997,
respectively, reflect the net benefit and provision resulting from the separate
tax calculation prepared for each tax jurisdiction in which the Company is
subject to income taxes. At June 30, 1998, the Company has a current deferred
tax asset of $18.5 million and a noncurrent deferred tax asset of $70.3 million.
Management believes that it is more likely than not that the net deferred tax
asset is realizable; however, realization is contingent upon future profitable
operations and is not assured.
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.
26
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
The Company's cash expenditures during the first half of 1998 for
additions to oil and gas properties totaled $330.1 million. This amount includes
$35.3 million for the acquisition of properties and $294.8 million for
development and exploratory drilling. Significant drilling expenditures in the
first half of 1998 included $86.9 million in the Permian Basin region, $97.9
million in the Gulf Coast region, $19.9 million in the MidContinent region,
$53.1 million in Canada, $31.6 in Argentina and $5.4 million in other
international areas.
The Company's 1998 capital expenditure budget has been set at $440
million, reflecting planned expenditures of $265 million for exploitation
activities, $115 million for exploration activities and $60 million for oil and
gas property acquisitions in the Company's core areas. The Company budgets its
capital expenditures based on projected internally-generated cash flows and
routinely adjusts the level of its capital expenditures in response to
anticipated changes in cash flows.
Funding for the Company's working capital obligations is provided by
internally-generated cash 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 in 1998.
Net cash provided by operating activities was $91.4 million and $160.4
million during the three and six months ended June 30, 1998, as compared to net
cash provided by operating activities of $51.1 million and $124.6 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 June 30, 1998 of $1.2 billion (including outstanding, undrawn
letters of credit of $28.0 million), leaving approximately $217.7 million of
unused borrowing base immediately available. At June 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 six months ended June 30, 1998 on the Company's
indebtedness was 7.45% as compared to 7.83% for the six months ended June 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
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 six months ended June 30, 1998
and 1997, proceeds from the sale of domestic nonstrategic assets totaled $16.1
million and $12.3 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
27
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
to sell domestic nonstrategic properties for proceeds ranging from $375 to $550
million. These properties represent an estimated 10% to 12% of the Company's
reserves at December 31, 1997. The Company plans to complete this divestiture in
the latter part of 1998. The Company anticipates that it will continue to sell
nonstrategic properties from time to time to increase capital resources
available for other activities and to achieve operating and administrative
efficiencies and improved profitability.
The consummation of the Company's 1998 divestiture plans is entirely
dependent on finding one or more willing buyers who have the financial
wherewithal to complete such a purchase. Until such a buyer is found, the
Company may reevaluate its portfolio of properties and at any time may adjust
its plans concerning divestitures. As a result, there can be no assurance that
the divestiture of any or all of these properties will be completed or that the
estimated proceeds will be realized.
Liquidity. At June 30, 1998, the Company had $45.7 million of 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 1.20 at June 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
As discussed in Note D of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements", the Company is a party to various legal actions
incidental to its business. The claims for damages from such legal actions are
not in excess of 10% of the Company's current assets and the Company believes
none of these actions to be material.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 21, 1998 in Dallas,
Texas. At the meeting, two proposals were submitted for vote of stockholders (as
described in the Company's Proxy Statement dated April 13, 1998). The following
is a brief description of the proposals and results of the stockholder votes.
Election of Directors. Prior to the meeting, the Company's Board of Directors
designated four nominees as Class I directors with their terms to expire at the
annual meeting in 2001 when their successors are elected and qualified. Messrs.
Gardner, Houghton and Smith were, at the time of such nomination and at the time
of the meeting, directors of the Company. Mr. Turcotte was a new candidate for
director of the Company. Each nominee was reelected or elected as a director of
the Company, with the results of the stockholder voting being as follows:
Authority Broker
For Withheld Abstain Non-Votes
---------- --------- ------- ---------
R. Hartwell Gardner 88,327,027 1,702,497 - -
James L. Houghton 88,327,235 1,702,289 - -
Philip B. Smith 88,286,594 1,742,930 - -
Guy J. Turcotte 88,239,904 1,789,620 - -
The term of office for the following directors continues as of June 30, 1998: I.
Jon Brumley, Scott D. Sheffield, James R. Baroffio, R. Hartwell Gardner, Kenneth
A. Hersh, James L. Houghton, Jerry P. Jones, T. Boone Pickens, Richard E.
Rainwater, Charles E. Ramsey, Jr., Philip B. Smith, Robert L. Stillwell and Guy
J. Turcotte.
Ratification of selection of auditors. The engagement of Ernst & Young LLP as
the Company's independent auditors for 1998 was approved by the Company's Board
of Directors on December 5, 1997. At the annual meeting of stockholders, the
selection of Ernst & Young LLP was submitted to the stockholders for
ratification. Such selection was ratified, with the results of the stockholder
voting being as follows:
For 89,783,181
Against 111,026
Abstain 135,317
Broker non-votes -
29
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed the following Current
Reports on Form 8-K:
(1) On June 2, 1998, the Company filed a Current Report on Form 8-K dated
May 29, 1998, reporting under Item 5 (Other Events), the resignation of
Arthur L. Smith as a member of the Board of Directors. Mr. Smith has
resigned as a result of accepting the position of Chairman and CEO with
Torch Energy Advisors Incorporated.
30
<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: August 7, 1998 By: /s/ Scott D. Sheffield
---------------------------------
Scott D. Sheffield
President
Date: August 7, 1998 By: /s/ M. Garrett Smith
---------------------------------
M. Garrett Smith
Executive Vice President and
Chief Financial Officer
Date: August 7, 1998 By: /s/ Rich Dealy
---------------------------------
Rich Dealy
Vice President and Chief
Accounting Officer
31
<PAGE>
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index Page
27.1 Financial Data Schedule
32
<PAGE>
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<CIK> 0001038357
<NAME> PNR J10Q
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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0
0
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<INCOME-PRETAX> (90,753)
<INCOME-TAX> (31,100)
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<NET-INCOME> (59,653)
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