<PAGE> 1
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, 1999
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 / /
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 1999.................100,306,273
</TABLE>
<PAGE> 2
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998.....................................................................3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three and nine months ended September 30, 1999 and 1998.........................5
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1999........................................................6
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 1999 and 1998...............................................7
Notes to Consolidated Financial Statements...............................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................43
Item 6. Exhibits and Reports on Form 8-K........................................................43
Signatures..............................................................................44
Exhibit Index...........................................................................45
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 33,246 $ 59,221
Accounts receivable:
Trade, net ............................................................. 30,154 33,384
Affiliates ............................................................. 1,808 3,657
Oil and gas sales ...................................................... 72,699 73,479
Inventories .............................................................. 12,902 15,221
Deferred income taxes .................................................... 6,400 7,100
Other current assets ..................................................... 8,462 9,926
------------- -------------
Total current assets ................................................. 165,671 201,988
------------- -------------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties ................................................. 2,892,364 3,621,630
Unproved properties ............................................... 292,505 342,589
Accumulated depletion, depreciation and amortization ..................... (704,504) (930,111)
------------- -------------
2,480,365 3,034,108
------------- -------------
Deferred income taxes ...................................................... 97,500 96,800
Other property and equipment, net .......................................... 43,851 55,010
Other assets, net .......................................................... 109,719 93,408
------------- -------------
$ 2,897,106 $ 3,481,314
============= =============
</TABLE>
The financial information included as of September 30, 1999 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> 4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt ........................... $ 856 $ 306,521
Accounts payable:
Trade ....................................................... 69,947 94,937
Affiliates .................................................. 425 4,492
Accrued interest payable ....................................... 23,835 33,194
Other current liabilities ...................................... 91,974 87,688
------------- -------------
Total current liabilities ............................. 187,037 526,832
------------- -------------
Long-term debt, less current maturities ........................... 1,714,314 1,868,744
Other noncurrent liabilities ...................................... 173,233 232,461
Deferred income taxes ............................................. 59,000 64,200
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares authorized;
one share issued and outstanding ............................ -- --
Common stock, $.01 par value; 500,000,000 shares authorized;
100,843,665 and 100,833,615 shares issued as of September 30,
1999 and December 31, 1998, respectively .................... 1,008 1,008
Additional paid-in-capital ..................................... 2,348,228 2,347,996
Treasury stock, at cost; 537,392 shares as of September 30, 1999
and December 31, 1998 ....................................... (10,388) (10,388)
Accumulated deficit ............................................ (1,583,131) (1,552,442)
Accumulated other comprehensive income:
Cumulative translation adjustment ........................... 7,805 2,903
------------- -------------
Total stockholders' equity ............................ 763,522 789,077
------------- -------------
Commitments and contingencies
$ 2,897,106 $ 3,481,314
============= =============
</TABLE>
The financial information included as of September 30, 1999 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> 5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------------
1999 1998 1999 1998
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas ............................... $ 159,855 $ 173,462 $ 481,237 $ 554,478
Interest and other ........................ 32,362 5,868 81,139 8,191
Gain (loss) on disposition of assets, net.. 20,948 (461) (21,276) (136)
------------- ------------- ------------- -------------
213,165 178,869 541,100 562,533
------------- ------------- ------------- -------------
Costs and expenses:
Oil and gas production .................... 34,643 57,753 123,461 169,508
Depletion, depreciation and amortization 50,981 87,150 184,588 247,208
Impairment of oil and gas properties ...... -- -- 17,894 --
Exploration and abandonments .............. 11,891 35,627 41,592 86,149
General and administrative ................ 8,795 19,236 29,232 56,648
Reorganization ............................ 786 609 7,805 21,158
Interest .................................. 41,002 41,822 130,426 122,317
Other...................................... 18,039 4,874 36,291 18,500
------------- ------------- ------------- -------------
166,137 247,071 571,289 721,488
------------- ------------- ------------- -------------
Income (loss) before income taxes ........... 47,028 (68,202) (30,189) (158,955)
Income tax benefit (provision)............... (600) 24,300 (500) 55,400
------------- ------------- ------------- -------------
Net income (loss) ........................... 46,428 (43,902) (30,689) (103,555)
Other comprehensive income (loss):
Unrealized translation adjustments......... (91) 4,784 5,738 2,022
------------- ------------- ------------- -------------
Comprehensive income (loss) ................. $ 46,337 $ (39,118) $ (24,951) $ (101,533)
============= ============= ============= =============
Net income (loss) per share:
Basic ................................... $ .46 $ (.44) $ (.31) $ (1.04)
============= ============= ============= =============
Diluted ................................. $ .46 $ (.44) $ (.31) $ (1.04)
============= ============= ============= =============
Dividends declared per share ................ $ -- $ .05 $ -- $ .10
============= ============= ============= =============
Weighted average shares outstanding ......... 100,305 99,939 100,304 99,982
============= ============= ============= =============
</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
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PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
SHARES COMMON PAID-IN- TREASURY
OUTSTANDING STOCK CAPITAL STOCK
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1999 ............... 100,296 $ 1,008 $ 2,347,996 $ (10,388)
Restricted stock awards .................. 6 -- 182 --
Stock option awards ...................... -- -- 25 --
Exercise of long-term incentive plan
stock options ......................... 4 -- 25 --
Net loss ................................. -- -- -- --
Realized translation adjustments ......... -- -- -- --
Other comprehensive income:
Unrealized translation adjustments .... -- -- -- --
------------- ------------- ------------- -------------
Balance as of September 30, 1999 ............ 100,306 $ 1,008 $ 2,348,228 $ (10,388)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT INCOME EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
Balance as of January 1, 1999 ............... $ (1,552,442) $ 2,903 $ 789,077
Restricted stock awards .................. -- -- 182
Stock option awards ...................... -- -- 25
Exercise of long-term incentive plan
stock options ......................... -- -- 25
Net loss ................................. (30,689) -- (30,689)
Realized translation adjustments ......... -- (836) (836)
Other comprehensive income:
Unrealized translation adjustments .... -- 5,738 5,738
------------- ------------- -------------
Balance as of September 30, 1999 ............ $ (1,583,131) $ 7,805 $ 763,522
============= ============= =============
</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> 7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $ 46,428 $ (43,902) $ (30,689) $(103,555)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization ....... 50,981 87,150 184,588 247,208
Impairment of oil and gas properties ........... -- -- 17,894 --
Exploration expenses, including dry holes ...... 3,630 29,832 28,661 65,477
Deferred income taxes .......................... 600 (24,600) -- (53,000)
(Gain) loss on disposition of assets, net ...... (20,948) 461 21,276 136
Other noncash items ............................ 20,365 12,232 1,690 38,045
Changes in operating assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable ............................ 6,576 59,383 6,875 96,685
Inventory ...................................... 1,043 731 2,313 874
Other current assets ........................... (357) 236 762 (1,093)
Accounts payable ............................... (5,586) (2,198) (28,113) (26,921)
Other current liabilities ...................... (13,404) (13,237) (18,550) 2,652
--------- --------- --------- ---------
Net cash provided by operating activities ... 89,328 106,088 186,707 266,508
--------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets ................... 117,238 3,560 386,670 19,682
Additions to oil and gas properties ................... (29,875) (97,866) (95,322) (427,938)
Other property additions, net ......................... (2,294) (5,985) (1,222) (23,814)
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................ 85,069 (100,291) 290,126 (432,070)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term debt ....................... -- 96,709 319,340 922,910
Principal payments on long-term debt .................. (215,016) (63,277) (787,287) (694,502)
Payment of other noncurrent liabilities ............... (5,494) (4,686) (28,231) (37,001)
Dividends ............................................. -- (5,023) -- (10,079)
Purchase of treasury stock ............................ -- (3,112) -- (9,890)
Deferred loan fees and issuance costs ................. -- (1,765) (6,891) (7,199)
Exercise of long-term incentive plan stock
options ............................................. 25 -- 25 --
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................ (220,485) 18,846 (503,044) 164,239
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents... (46,088) 24,643 (26,211) (1,323)
Effect of exchange rate changes on cash and cash
equivalents.......................................... 65 (51) 236 (105)
Cash and cash equivalents, beginning of period ........ 79,269 45,693 59,221 71,713
--------- --------- --------- ---------
Cash and cash equivalents, end of period .............. $ 33,246 $ 70,285 $ 33,246 $ 70,285
========= ========= ========= =========
</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> 8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 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., 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 Mid Continent,
Southwestern and onshore and offshore Gulf Coast regions of the United States
and in Argentina, Canada and South Africa.
NOTE B. BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of the Company as of September 30, 1999 and for the three and nine
months ended September 30, 1999 and 1998 include all adjustments and accruals,
consisting only of normal recurring accrual adjustments, which are necessary for
a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
1998 Annual Report on Form 10-K.
NOTE C. ASSET DIVESTITURES
During 1998, the Company announced measures to increase its financial
flexibility and to safeguard net asset values. Those measures included the
enactment of an operating strategy focused on the enhancement of core assets and
the divestiture of non-core assets, continuation of cost containment measures
and the reduction of outstanding indebtedness. During the nine months ended
September 30, 1999, the Company completed the asset divestiture phase of the
measures referred to above. As a result, the Company realized net divestment
proceeds of $117.2 million and $416.7 million, respectively, during the three
and nine month periods ended September 30, 1999, and has recorded an associated
net gain on disposition of assets of $20.9 million during the three months ended
September 30, 1999 and a net loss on disposition of assets of $21.3 million
during the nine months ended September 30, 1999. The net cash proceeds from the
1999 asset divestitures were used to reduce outstanding indebtedness (see Note
D. Amended Credit Facilities, below).
Prize Divestitures. On June 29, 1999, the Company completed a sale of
certain United States oil and gas producing properties, gas plants and other
assets to Prize Energy Corp. ("Prize"). The oil and gas producing assets sold to
Prize include properties located in the Gulf Coast, Mid Continent and Permian
Basin areas of the Company's United States region.
In accordance with the terms of the purchase and sale agreement (the "Prize
Divestitures"), the Company received net sales proceeds of $245.0 million,
comprised of $215.0 million of cash and 2,307.693 shares of six percent
convertible preferred stock having a liquidation preference and fair value of
$30.0 million. The convertible preferred stock provides for a six percent annual
dividend payment, payable quarterly in additional equity shares of Prize through
2001. Subsequent to 2001, Prize has the option of paying the quarterly dividends
on the convertible preferred stock in equity shares or cash. Each share of the
convertible preferred stock may, at the option of the Company, be converted into
one share of Prize common stock, subject to certain anti-dilution adjustments.
The Company recognized a loss of $46.4 million from the Prize Divestitures
during the nine months ended September 30, 1999.
8
<PAGE> 9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
The board of directors of Prize is comprised of six directors, which
include Mr. Philip P. Smith, the Chief Executive Officer; Mr. Kenneth A. Hersh;
two directors to be elected by the Company under the terms of the convertible
preferred stock received in this transaction; and, two other directors unrelated
to the Company. Messrs. Smith and Hersh were members of the board of directors
of the Company and resigned their positions with the Company during the second
quarter of 1999. Additionally, Mr. Lon C. Kile resigned his position as
Executive Vice President of the Company to accept the position of President and
Chief Operating Officer of Prize. The sale of the assets to Prize was initiated
through an auction process which, upon receipt of Prize's initial offer, was
placed under the supervision of a special independent committee (comprised of
outside directors unrelated to Prize) of the Company's board of directors. Upon
the independent committee's review and consideration of all offers presented to
the Company, the Prize offer was approved.
Other United States Divestitures. In addition to the Prize Divestiture, the
Company completed the divestitures of non-strategic United States oil and gas
properties located in the South Texas Gulf Coast, West Texas Permian Basin and
North Dakota areas, an East Texas gas facility and certain other assets for net
cash proceeds of $91.1 million and $113.7 million, respectively, during the
three and nine month periods ended September 30, 1999. Associated with these
divestitures, the Company recorded net gains on divestitures of assets of $27.5
million and $33.6 million, respectively, during the three and nine month periods
ended September 30, 1999.
Canadian Divestitures. During 1999, the Company completed the divestitures
of certain non-strategic Canadian oil and gas properties, gas plants and other
related assets. In accordance with the terms of the Canadian divestitures, the
Company received net cash proceeds of US $26.1 million and US $58.0 million,
respectively, during the three and nine month periods ended September 30, 1999.
Associated with these divestitures, the Company recognized net losses of US $6.6
million and US $8.5 million, respectively, during the three and nine month
periods ended September 30, 1999.
NOTE D. AMENDED CREDIT FACILITIES
As of September 30, 1999 and December 31, 1998, the Company had $795.3
million and $1.25 billion of respective borrowings under credit facility
agreements financed by a syndicate of banks (the "Banks"). As of December 31,
1998, the Company's credit facility borrowings included $974 million of
borrowings (excluding $19.6 million of undrawn letters of credit) outstanding
under a $1.075 billion credit facility (the "Primary Facility"), $276 million of
borrowings under a $290 million Canadian credit facility (the "Canadian
Facility") and no borrowings outstanding under the Company's $85 million 364-day
credit facility (the "364-day Facility"). Total loan commitments under these
facilities were $1.44 billion on December 31, 1998.
On March 19, 1999, the Company and the Banks executed amendments to the
credit facility agreements that combined the Primary Facility and the Canadian
Facility into one facility (the "Credit Facility"). The 364-day Facility expired
by its terms in August 1999. The terms of the Credit Facility provide for a
combined reduction in loan commitments to $941 million, prior to December 31,
1999. Additionally, the amendments provided for an increase in the maximum
interest rate margin on LIBOR rate advances under the Credit Facility to 300
basis points, including leverage fees; and, the amendments provide for the
maintenance of certain associated debt covenants, the most restrictive of which
being the maintenance of an annualized ratio of outstanding Company senior debt
to earnings before interest, depletion, depreciation, amortization, income
taxes, exploration and abandonment and other non-cash expenses not to exceed
5.75 to one through September 30, 1999, 4.25 to one for the period of October 1,
1999 through March 31, 2000, and 3.5 to one, thereafter. In satisfaction of the
commitment reduction provisions of the Credit Facility, the Company reduced its
outstanding borrowings through the use of funds generated by the combined
sources of operating activities and asset divestitures. During the nine months
ended September 30, 1999, the Company reduced its outstanding borrowings under
the Credit Facility by $454.7 million (see Note C. Asset Divestitures, above).
9
<PAGE> 10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
During October 1999, the Company reduced its loan commitments under the
Credit Facility to $939.6 million. As a result of the loan commitment reduction
and debt covenant compliance, the future interest rate margin on LIBOR rate
advances under the Credit Facility will be reduced to 187.5 basis points.
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.
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 certain 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 that 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 percent) 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 percent and 60 percent, 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 oral arguments were
heard in December 1998. The court's decision regarding this litigation could be
announced at any time.
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, which would be
payable if such action was determined adversely to the Company.
10
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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the state court suit pending the resolution of the
first suit.
Based on the jury verdict and final judgment in the first suit, 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 September 30, 1999, the Company has set
aside approximately $31.0 million, including accrued interest, in an escrow
account and has a corresponding amount recorded as other current liabilities in
the accompanying Consolidated Balance Sheet as of September 30, 1999.
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.
11
<PAGE> 12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
Crude oil. The majority of sales contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. Correspondingly, the
Company, from time to time, enters into NYMEX based hedge contracts to mitigate
the impact of price volatility. The following table sets forth the Company's
outstanding oil hedge contracts as of September 30, 1999. In addition to the
outstanding hedge contracts identified in the following table, the Company has
deferred oil hedge gains of $.9 million that will be recognized during the
fourth quarter of 1999 and deferred oil hedge losses of $1.6 million and $.3
million that will be recognized during 2000 and 2001, respectively.
<TABLE>
<CAPTION>
YEARLY
FIRST SECOND THIRD FOURTH OUTSTANDING
QUARTER QUARTER QUARTER QUARTER AVERAGE
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daily oil production:
1999 - Swap Contracts*
Volume (Bbl) ............. 8,728 8,728
Price per Bbl ............ $ 15.67 $ 15.67
1999 - Collar Contracts**
Volume (Bbl) ............. 14,000 14,000
Price per Bbl ............ $ 15.86-18.58 $ 15.86-18.58
1999 - Purchased Put Contracts
Volume (Bbl) ............. 2,000 2,000
Price per Bbl ............ $ 15.00 $ 15.00
2000 - Swap Contracts
Volume (Bbl) ............. 626 538 478 435 519
Price per Bbl ............ $ 15.76 $ 15.76 $ 15.76 $ 15.76 $ 15.76
2000 - Collar Contracts***
Volume (Bbl) ............. 7,000 7,000 7,000 7,000 7,000
Price per Bbl ............ $17.29-$20.42 $17.29-$20.42 $17.29-$20.42 $17.29-$20.42 $17.29-$20.42
2001 - Collar Contracts****
Volume (Bbl) ............. 3,000 3,000 3,000 3,000 3,000
Price per Bbl ............ $17.50-$20.58 $17.50-$20.58 $17.50-$20.58 $17.50-$20.58 $17.50-$20.58
</TABLE>
- ----------------------------
* Certain counterparties to the 1999 swap contracts have the contractual
right to buy year 2000 swap contracts from the Company for 9,000 Bbl's per
day for a fixed price of $16.56 per Bbl.
** Associated with the Company's purchase of the fourth quarter 1999 collar
contracts, the Company sold fourth quarter 1999 put contracts to the
counterparties for equal notional contract volumes at a weighted average
index price of $12.14 per Bbl. Consequently, if the weighted average
fourth quarter 1999 index price falls below $12.14 per Bbl, the Company
will receive the weighted average index price for the notional contract
volumes plus approximately $3.72 per Bbl.
*** Concurrent with the Company's purchase of the year 2000 collar contracts,
the Company sold year 2000 put contracts to the counterparties for equal
notional contract volumes at a weighted average index price of $14.29 per
Bbl. Consequently, if the weighted average year 2000 index price falls
below $14.29 per Bbl, the Company will receive the weighted average index
price for the notional contract volumes, plus $3.00 per Bbl. The
counterparties have the contractual right to extend contracts for notional
volumes of 5,000 Bbl's per day through year 2001 at weighted average per
Bbl strike prices of $17.00 - $20.09 for the collar contracts and $14.00
for the put contracts.
**** Concurrent with the Company's purchase of the year 2001 collar contracts,
the Company sold year 2001 put contracts to the counterparties for equal
notional contract volumes at a weighted average index price of $14.50 per
Bbl. Consequently, if the weighted average year 2001 index price falls
below $14.50 per Bbl, the Company will receive the weighted average index
price for the notional contract volumes, plus $3.00 per Bbl.
12
<PAGE> 13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
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
and reported, and the net effects of settlements of oil price hedges to revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1999 1998 1999 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Average price reported per Bbl ...... $17.20 $12.97 $14.38 $13.34
Average price realized per Bbl ...... $18.84 $11.80 $14.59 $12.30
Addition (reduction) to revenue (in
millions) .......................... $ (5.5) $ 6.2 $ (2.5) $ 17.2
</TABLE>
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 September 30,
1999. Prices included herein represent the Company's weighted average index
price per MMBtu. In addition to the outstanding hedge contracts identified in
the following table, the Company has deferred gas hedge gains of $3.2 million
that will be recognized during the fourth quarter of 1999, and deferred hedge
losses of $1.4 million and $.2 million that will be recognized in 2000 and 2001,
respectively.
<TABLE>
<CAPTION>
YEARLY
FIRST SECOND THIRD FOURTH OUTSTANDING
QUARTER QUARTER QUARTER QUARTER AVERAGE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Daily gas production:
1999 - Swap Contracts*
Volume (Mcf).............. 6,896 6,896
Index price per MMBtu..... $2.16 $2.16
1999 - Collar Contracts**
Volume (Mcf).............. 73,266 73,266
Index price per MMBtu..... $2.06-$2.62 $2.06-$2.62
2000 - Collar Contracts***
Volume (Mcf).............. 73,223 73,223 73,223 70,571 72,557
Index price per MMBtu..... $2.04-$2.57 $2.04-$2.57 $2.04-$2.57 $2.05-$2.58 $2.04-$2.57
2001 Collar Contracts****
Volume (Mcf).............. 60,000 60,000 60,000 60,000 60,000
Index price per MMBtu..... $2.25-$2.74 $2.24-$2.58 $2.24-$2.58 $2.25-$2.68 $2.25-$2.64
2002 Swap Contracts*
Volume (Mcf).............. 10,000 10,000 10,000 10,000 10,000
Index price Per MMBtu..... $2.42 $2.42 $2.42 $2.42 $2.42
</TABLE>
13
<PAGE> 14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
- ----------------
* Certain counterparties have the contractual right to sell year 2000, 2001,
2002, and 2003 swap contracts to the Company for notional contract volumes
of 20,000; 49,223; 12,500; and 10,000 Mcf per day, respectively, at
weighted average strike prices of $2.32; $2.21; $2.52; and $2.58 per
MMBtu, respectively.
** Concurrent with the Company's purchase of certain of the fourth quarter
1999 collar contracts, the Company sold fourth quarter 1999 put contracts
to the counterparties for a weighted average volume of 49,065 Mcf per day
at an average index price of $1.84 per MMBtu. Consequently, if the
weighted average 1999 index price falls below $1.84 per MMBtu, the Company
will receive the weighted average index price for the notional contract
volumes, plus approximately $.30 per MMBtu. 30,000 Mcf per day of the
fourth quarter 1999 collar contracts and associated put contracts sold are
extendable at the option of the counterparties for a period of one year at
average per MMBtu strike prices of $2.13-$2.73 for the collar contracts
and $1.83 for the put contracts.
*** Concurrent with the Company's purchase of the year 2000 collar contracts,
the Company sold year 2000 put contracts to the counterparties for an
equal volume at a weighted average index price of $1.76 per MMBtu.
Consequently, if the weighted average year 2000 index price falls below
$1.76 per MMBtu, the Company will receive the weighted average index price
for the notional contract volumes, plus approximately $.28 per MMBtu.
54,482 Mcf per day of the year 2000 collar contracts and associated put
contracts are extendable for one year at the option of the counterparties
at weighted average per MMBtu prices of $2.09-$2.71 for the collar
contracts and $1.80 for the put contracts.
**** Concurrent with the Company's purchase of the year 2001 collar contracts,
the Company sold year 2001 put contracts to the counterparties for an
equal volume at a weighted average index price of $1.95 per MMBtu.
Consequently, if the weighted average year 2001 index price falls below
$1.95 per MMBtu, the Company will receive the weighted average index price
for the notional contract volumes, plus approximately $.30 per MMBtu. The
year 2001 collar contracts and associated put contracts are extendable for
one year at the option of the counterparties for notional contract volumes
of 60,000 Mcf per day at weighted average per MMBtu prices of $2.25-$2.64
for the collar contracts and $1.95 for the put contracts.
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 and reported, and the net effects of settlements of
gas price hedges to revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Average price reported per Mcf ....... $ 2.00 $ 1.73 $ 1.86 $ 1.87
Average price realized per Mcf ....... $ 2.06 $ 1.68 $ 1.77 $ 1.83
Addition (reduction) to revenue (in
millions)............................ $ (2.2) $ 2.5 $ 10.8 $ 4.8
</TABLE>
NOTE G. OTHER INCOME
In December 1998, the Company announced the sale of an exclusive and
irrevocable option to a third party to purchase, on or before March 31, 1999,
certain oil and gas properties of the Company. In consideration for the option,
the third party paid an option fee of $41.3 million to the Company, consisting
of $29.3 million of cash and the third party's common stock valued at $12.0
million. The third party was unable to complete the purchase of the Company's
oil and gas properties on March 31, 1999. A new purchase and sale agreement was
entered into between the parties that was not completed in April 1999 as
specified in the purchase and sale agreement; resulting in the Company receiving
$.5 million of liquidated damages (in the form of common stock of the third
party) during the second quarter of 1999. Accordingly, interest and other
revenue in the accompanying Consolidated Statement of Operations and
Comprehensive Income (Loss) for the nine month period ended September 30, 1999
includes other income of $41.8 million associated with these transactions. (See
Note H. Mark-to-Market Financial Instruments for a discussion of 1999
mark-to-market charges associated with the Company's investment in the third
party's common stock). Other non-cash items in the accompanying Consolidated
Statement of Cash Flows for the nine months ended September 30, 1999 includes a
$41.8 million reduction for these non-cash components of earnings.
14
<PAGE> 15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
During July 1999, the Company received a $30.2 million refund of excise
taxes. Due to the uncertainty surrounding the collectability of this refund, the
Company was not carrying it as an asset. Accordingly, the Company recognized the
tax refund as other income during the third quarter of 1999. The proceeds from
the tax refund were used by the Company to reduce its outstanding indebtedness
under its Credit Facility (see Note D. Amended Credit Facilities).
NOTE H. MARK-TO-MARKET FINANCIAL INSTRUMENTS
The Company is a party to certain BTU swap agreements that do not qualify
as hedges. Other expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss) for the three and nine month periods
ended September 30, 1999 include non-cash mark-to-market increases of $1.5
million and $2.4 million, respectively, to the liabilities recognized for the
BTU swap agreements; and, for the three and nine month periods ended September
30, 1998, a decrease of $2.8 million and an increase of $3.0 million,
respectively. These contracts will continue to be marked-to-market at the end of
each reporting period during their respective lives. The related effects on the
Company's results of operations in future periods could be significant.
During the fourth quarter of 1998, the Company received three million
shares of common stock of a closely held, non-affiliated, publicly traded entity
in partial payment of option fees referred to in Note G, above. During April
1999, the Company was paid liquidated damages of an additional one million
shares of common stock of the entity. Other expenses in the accompanying
Consolidated Statement of Operations and Comprehensive Income (Loss) for the
nine month period ended September 30, 1999 includes a non-cash mark-to-market
charge of $11.9 million to recognize declines in the market quoted value of the
four million shares of common stock prior to the Company's sale of the
investment. In June 1999, the Company sold its investments in the common stock
of the non-affiliated entity for cash proceeds of $.6 million.
The Company has a series of forward foreign exchange swap agreements to
exchange Canadian dollars for United States dollars at future dates and fixed
exchange rates. As these contracts do not qualify as hedges, the Company
recorded a non-cash mark-to-market increase to the recognized liabilities
associated with these agreements during the three month period ended September
30, 1999 of $.5 million and, during the nine month period ended September 30,
1999, the Company recorded a decrease to the recognized liabilities of $5.4
million. During the three and nine month periods ended September 30, 1998, the
Company recognized non-cash mark-to-market increases to the recognized
liabilities for these agreements of $8.6 million and $14.5 million,
respectively. These contracts will continue to be marked-to-market until they
mature at various dates in the fourth quarter of 2000. The associated effects on
the Company's future results of operations could be significant.
During the first quarter of 1999, the Company sold call options that
provide the counterparties an option to exercise call provisions on 10,000
barrels per day of oil, at a strike price of $20.00 per barrel, for a twenty-one
month period that began on April 1, 1999 and ends on December 31, 2000, or to
exercise call provisions over that same time period on 100,000 MMBtu per day of
natural gas, at a weighted average price of $2.70 per MMBtu. These contracts do
not qualify for hedge accounting treatment. Other expenses in the accompanying
Consolidated Statement of Operations and Comprehensive Income (Loss) for the
three and nine month periods ended September 30, 1999 include $14.3 million and
$22.5 million of respective non-cash mark-to-market increases to the liabilities
recognized on these contracts.
NOTE I. IMPAIRMENT OF OIL AND GAS PROPERTIES
In accordance with Statement of Financial Accounting Standards No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies" ("SFAS
19"), the Company periodically assesses its unproved properties for impairment
by comparing their cost to their estimated value on a project-by-project basis.
During the second quarter of 1999, the Company completed the analysis of seismic
data pertaining to certain unproved properties owned by the Company in the East
Texas area. The results of the analysis of the seismic data indicated a decline
in the recoverability of the carrying value of the properties. Accordingly, the
Company recognized a $17.9 million provision for impairment of unproved
properties during the second quarter of 1999.
15
<PAGE> 16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE J. REORGANIZATION
During 1998, the Company announced its intentions to reorganize its
operations to realize additional operational and administrative efficiencies.
During the three and nine month periods ended September 30, 1999, the Company
recorded reorganization costs of $.8 million and $7.8 million, respectively,
primarily consisting of relocation costs that were related to the 1998
reorganization initiatives, but that were not incurred until 1999, and certain
costs associated with the second quarter 1999 centralization, in Irving, Texas,
of certain operational functions that were previously located in Midland, Texas.
During the three and nine month periods ended September 30, 1998, the Company
recorded severance, relocation, lease termination and other costs of $.6 million
and $21.2 million, respectively, relating to the reorganization.
NOTE K. GEOGRAPHIC OPERATING SEGMENT INFORMATION
The Company has operations in only one industry segment, that being the oil
and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina and Canada.
The following table provides the interim geographic operating segment data
required by Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information." Geographic operating
segment income tax benefits (provisions) have been determined based on statutory
rates existing in the various tax jurisdictions where the Company has oil and
gas producing activities. The "Headquarters and Other" table column includes
revenues and expenses that are not routinely included in the earnings measures
internally reported to management on a geographic operating segment basis.
<TABLE>
<CAPTION>
UNITED OTHER HEADQUARTERS CONSOLIDATED
STATES ARGENTINA CANADA FOREIGN AND OTHER TOTAL
--------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Oil and gas revenue .......................... $ 124,309 $ 23,011 $ 12,535 $ -- $ -- $ 159,855
Interest and other ........................... -- -- -- -- 32,362 32,362
Gain (loss) on disposition of assets ......... 35,259 -- (6,605) -- (7,706) 20,948
--------- --------- --------- --------- --------- ---------
159,568 23,011 5,930 -- 24,656 213,165
--------- --------- --------- --------- --------- ---------
Production costs ............................. 27,431 4,056 3,156 -- -- 34,643
Depletion, depreciation and amortization ..... 31,817 10,150 4,675 -- 4,339 50,981
Impairment of oil and gas properties.......... -- -- -- -- -- --
Exploration and abandonments ................. 7,784 2,422 1,056 629 -- 11,891
General and administrative ................... -- -- -- -- 8,795 8,795
Reorganization ............................... -- -- -- -- 786 786
Interest ..................................... -- -- -- -- 41,002 41,002
Other ........................................ -- -- -- -- 18,039 18,039
--------- --------- --------- --------- --------- ---------
67,032 16,628 8,887 629 72,961 166,137
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ............ 92,536 6,383 (2,957) (629) (48,305) 47,028
Income tax benefit (provision)................ (34,246) (2,233) 1,291 220 34,368 (600)
--------- --------- --------- --------- --------- ---------
Net income (loss) ............................ $ 58,290 $ 4,150 $ (1,666) $ (409) $ (13,937) $ 46,428
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED SEPTEMBER 30, 1998:
Oil and gas revenue .......................... $ 139,247 $ 17,808 $ 16,407 $ -- $ -- $ 173,462
Interest and other ........................... -- -- -- -- 5,868 5,868
Loss on disposition of assets ................ (391) -- -- -- (70) (461)
--------- --------- --------- --------- --------- ---------
138,856 17,808 16,407 -- 5,798 178,869
--------- --------- --------- --------- --------- ---------
Production costs ............................. 45,812 5,011 6,930 -- -- 57,753
Depletion, depreciation and amortization ..... 62,323 12,197 9,017 -- 3,613 87,150
Exploration and abandonments ................. 17,549 7,895 3,804 6,379 -- 35,627
General and administrative ................... -- -- -- -- 19,236 19,236
Reorganization ............................... -- -- -- -- 609 609
Interest ..................................... -- -- -- -- 41,822 41,822
Other......................................... -- -- -- -- 4,874 4,874
--------- --------- --------- --------- --------- ---------
125,684 25,103 19,751 6,379 70,154 247,071
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ............ 13,172 (7,295) (3,344) (6,379) (64,356) (68,202)
Income tax benefit (provision) ............... (4,874) 2,407 1,461 2,233 23,073 24,300
--------- --------- --------- --------- --------- ---------
Net income (loss) ............................ $ 8,298 $ (4,888) $ (1,883) $ (4,146) $ (41,283) $ (43,902)
========= ========= ========= ========= ========= =========
</TABLE>
16
<PAGE> 17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
UNITED OTHER HEADQUARTERS CONSOLIDATED
STATES ARGENTINA CANADA FOREIGN AND OTHER TOTAL
--------- --------- --------- --------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Oil and gas revenue ...................... $ 375,785 $ 57,360 $ 48,092 $ -- $ -- $ 481,237
Interest and other ....................... -- -- -- -- 81,139 81,139
Loss on disposition of assets ............ (5,081) -- (8,502) -- (7,693) (21,276)
----------- ----------- ----------- --------- ----------- -----------
370,704 57,360 39,590 -- 73,446 541,100
----------- ----------- ----------- --------- ----------- -----------
Production costs ......................... 96,226 12,372 14,863 -- -- 123,461
Depletion, depreciation and amortization.. 122,320 27,859 20,875 -- 13,534 184,588
Impairment of oil and gas properties ..... 17,894 -- -- -- -- 17,894
Exploration and abandonments ............. 27,063 7,308 4,300 2,921 -- 41,592
General and administrative ............... -- -- -- -- 29,232 29,232
Reorganization ........................... -- -- -- -- 7,805 7,805
Interest ................................. -- -- -- -- 130,426 130,426
Other .................................... -- -- -- -- 36,291 36,291
----------- ----------- ----------- --------- ----------- -----------
263,503 47,539 40,038 2,921 217,288 571,289
----------- ----------- ----------- --------- ----------- -----------
Income (loss) before income taxes ........ 107,201 9,821 (448) (2,921) (143,842) (30,189)
Income tax benefit (provision) ........... (39,662) (3,436) 196 1,022 41,380 (500)
----------- ----------- ----------- --------- ----------- -----------
Net income (loss) ........................ $ 67,539 $ 6,385 $ (252) $ (1,899) $ (102,462) $ (30,689)
=========== =========== =========== ========= =========== ===========
Segment assets (as of September 30) ........ $ 1,884,936 $ 676,957 $ 208,726 $ 8,318 $ 118,169 $ 2,897,106
=========== =========== =========== ========= =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Oil and gas revenue ...................... $ 454,339 $ 50,331 $ 49,808 $ -- $ -- $ 554,478
Interest and other ....................... -- -- -- -- 8,191 8,191
Loss on disposition of assets ............ (117) -- -- -- (19) (136)
----------- ----------- ----------- --------- ----------- -----------
454,222 50,331 49,808 -- 8,172 562,533
----------- ----------- ----------- --------- ----------- -----------
Production costs ......................... 134,292 15,913 19,303 -- -- 169,508
Depletion,depreciation and amortization.. 176,944 31,729 28,390 -- 10,145 247,208
Exploration and abandonments ............. 41,910 16,126 15,747 12,366 -- 86,149
General and administrative ............... -- -- -- -- 56,648 56,648
Reorganization ........................... -- -- -- -- 21,158 21,158
Interest ................................. -- -- -- -- 122,317 122,317
Other .................................... -- -- -- -- 18,500 18,500
----------- ----------- ----------- --------- ----------- -----------
353,146 63,768 63,440 12,366 228,768 721,488
----------- ----------- ----------- --------- ----------- -----------
Income (loss) before income taxes ........ 101,076 (13,437) (13,632) (12,366) (220,596) (158,955)
Income tax benefit (provision) ........... (37,398) 4,434 5,957 4,328 78,079 55,400
----------- ----------- ----------- --------- ----------- -----------
Net income (loss) ........................ $ 63,678 $ (9,003) $ (7,675) $ (8,038) $ (142,517) $ (103,555)
=========== =========== =========== ========= =========== ===========
Segment assets (as of September 30) ...... $ 2,594,282 $ 816,970 $ 392,732 $ 1,936 $ 186,706 $ 3,992,626
=========== =========== =========== ========= =========== ===========
</TABLE>
NOTE L. 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 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
Sheets, Consolidating Statements of Operations and Comprehensive Income (Loss)
and Consolidating Statements of Cash Flows present financial information for
Pioneer Natural Resources Company as the Parent on a stand-alone basis (carrying
any investments in subsidiaries under the equity method), financial information
for Pioneer USA on a stand-alone basis (carrying any investment in non-guarantor
subsidiaries under the equity method), the non-guarantor subsidiaries of the
Company on a consolidated basis, the consolidation and elimination entries
necessary to arrive at the information for the Company on a consolidated basis,
and the financial information for the Company on a consolidated basis. Pioneer
USA is not restricted from making distributions to the Company.
17
<PAGE> 18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
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 $ 28,434 $ 4,809 $ $ 33,246
Accounts receivable:
Trade ................................... 84 65,906 36,863 102,853
Affiliate ............................... 2,090,625 (1,549,695) (539,122) 1,808
Inventories ................................ -- 7,238 5,664 12,902
Deferred income taxes ...................... 6,400 -- -- 6,400
Other current assets ....................... 99 7,517 846 8,462
----------- ----------- ----------- -----------
Total current assets ................. 2,097,211 (1,440,600) (490,940) 165,671
----------- ----------- ----------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties ...................... 9 2,176,765 715,590 2,892,364
Unproved properties .................... -- 35,059 257,446 292,505
Accumulated depletion, depreciation
and amortization ......................... -- (583,728) (120,776) (704,504)
----------- ----------- ----------- -----------
9 1,628,096 852,260 2,480,365
----------- ----------- ----------- -----------
Deferred income taxes ........................ 97,500 -- -- 97,500
Other property and equipment, net ............ -- 28,721 15,130 43,851
Other assets, net ............................ 14,073 57,239 38,407 109,719
Investment in subsidiaries ................... 175,915 152,964 -- (328,879) --
----------- ----------- ----------- -----------
$ 2,384,708 $ 426,420 $ 414,857 $ 2,897,106
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........ $ -- $ 856 $ -- $ 856
Accounts payable:
Trade .................................... 628 47,582 21,737 69,947
Affiliates ............................... -- 425 -- 425
Other current liabilities .................. 23,436 83,723 8,650 115,809
----------- ----------- ----------- -----------
Total current liabilities ........ 24,064 132,586 30,387 187,037
----------- ----------- ----------- -----------
Long-term debt, less current maturities ...... 1,714,117 197 -- 1,714,314
Other noncurrent liabilities ................. -- 142,023 31,210 173,233
Deferred income taxes ........................ -- -- 59,000 59,000
Stockholders' equity:
Partners' capital .......................... -- -- 22 (22) --
Common stock ............................... 969 1 41 (3) 1,008
Additional paid-in-capital ................. 2,238,162 2,022,076 590,388 (2,502,398) 2,348,228
Treasury stock, at cost .................... (10,388) -- -- (10,388)
Accumulated deficit ........................ (1,582,216) (1,870,463) (303,996) 2,173,544 (1,583,131)
Cumulative translation adjustment .......... -- -- 7,805 7,805
----------- ----------- ----------- -----------
Total stockholders' equity ....... 646,527 151,614 294,260 763,522
----------- ----------- ----------- -----------
Commitments and contingencies
$ 2,384,708 $ 426,420 $ 414,857 $ 2,897,106
=========== =========== =========== ===========
</TABLE>
18
<PAGE> 19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
ASSETS
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 ............. $ 3,161 $ 37,932 $ 18,128 $ $ 59,221
Accounts receivable:
Trade .............................. 636 75,236 30,991 106,863
Affiliate .......................... 2,240,421 (1,828,672) (408,092) 3,657
Inventories ........................... -- 8,930 6,291 15,221
Deferred income taxes ................. 7,100 -- -- 7,100
Other current assets .................. 87 8,868 971 9,926
----------- ----------- ----------- -----------
Total current assets ........ 2,251,405 (1,697,706) (351,711) 201,988
----------- ----------- ----------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties ................. -- 2,678,637 942,993 3,621,630
Unproved properties ............... -- 58,989 283,600 342,589
Accumulated depletion, depreciation
and amortization .................. -- (753,570) (176,541) (930,111)
----------- ----------- ----------- -----------
-- 1,984,056 1,050,052 3,034,108
----------- ----------- ----------- -----------
Deferred income taxes ................... 96,800 -- -- 96,800
Other property and equipment, net ....... -- 38,229 16,781 55,010
Other assets, net ....................... 9,787 43,557 40,064 93,408
Investment in subsidiaries .............. 135,204 148,257 -- (283,461) --
----------- ----------- ----------- -----------
$ 2,493,196 $ 516,393 $ 755,186 $ 3,481,314
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt... $ 212,302 $ 1,189 $ 93,030 $ 306,521
Accounts payable:
Trade ............................... 697 56,723 37,517 94,937
Affiliates .......................... 29 4,463 -- 4,492
Other current liabilities ............. 21,001 84,759 15,122 120,882
----------- ----------- ----------- -----------
Total current liabilities ... 234,029 147,134 145,669 526,832
----------- ----------- ----------- -----------
Long-term debt, less current maturities.. 1,676,933 830 190,981 1,868,744
Other noncurrent liabilities ............ -- 189,325 43,136 232,461
Deferred income taxes ................... -- -- 64,200 64,200
Stockholders' equity:
Partners capital ...................... -- -- 22 (22) --
Common stock .......................... 934 1 76 (3) 1,008
Additional paid-in-capital ............ 2,143,214 2,022,076 589,511 (2,406,805) 2,347,996
Treasury stock, at cost ............... (10,388) -- -- (10,388)
Accumulated deficit ................... (1,551,526) (1,842,973) (281,312) 2,123,369 (1,552,442)
Cumulative translation adjustment ..... -- -- 2,903 2,903
----------- ----------- ----------- -----------
Total stockholders' equity... 582,234 179,104 311,200 789,077
----------- ----------- ----------- -----------
Commitments and contingencies
$ 2,493,196 $ 516,393 $ 755,186 $ 3,481,314
=========== =========== =========== ===========
</TABLE>
19
<PAGE> 20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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 ..................... $ -- $ 350,591 $ 130,646 $ -- $ $ 481,237
Interest and other .............. 264 45,056 35,819 -- 81,139
Gain (loss) on disposition of
assets, net ................. -- 22,538 (43,814) -- (21,276)
--------- --------- --------- --------- ---------
264 418,185 122,651 -- 541,100
--------- --------- --------- --------- ---------
Costs and expenses:
Oil and gas production .......... -- 92,873 30,588 -- 123,461
Depletion, depreciation and
amortization ................ -- 122,854 61,734 -- 184,588
Impairment of oil and gas
properties .................. -- 17,894 -- -- 17,894
Exploration and abandonments .... -- 28,478 13,114 -- 41,592
General and administrative ...... 852 20,793 7,587 -- 29,232
Reorganization .................. -- 7,805 -- -- 7,805
Interest ........................ (24,572) 114,602 40,396 -- 130,426
Equity (income) loss from
subsidiary .................. 54,039 (3,864) -- -- (50,175) --
Other ........................... 657 40,127 (4,493) -- 36,291
--------- --------- --------- --------- ---------
30,976 441,562 148,926 -- 571,289
--------- --------- --------- --------- ---------
Loss before income taxes .......... (30,712) (23,377) (26,275) -- (30,189)
Income tax provision .............. -- (443) (80) 23 (500)
--------- --------- --------- --------- ---------
Net loss .......................... (30,712) (23,820) (26,355) 23 (30,689)
Other comprehensive income:
Translation adjustment ...... -- -- 5,738 -- 5,738
--------- --------- --------- --------- ---------
Comprehensive loss ................ $ (30,712) $ (23,820) $ (20,617) $ 23 $ (24,951)
========= ========= ========= ========= =========
</TABLE>
20
<PAGE> 21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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>
21
<PAGE> 22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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 income (loss) .................... $ (30,712) $ (23,820) $ (26,355) $ 23 $ 50,175 $ (30,689)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depletion, depreciation and
amortization ................. -- 122,854 61,734 -- 184,588
Impairment of oil and gas
properties ................... -- 17,894 -- -- 17,894
Exploration and abandonments.... -- 21,594 7,067 -- 28,661
Deferred income taxes .......... -- -- -- -- --
(Gain) loss on disposition of
assets, net .................. -- (22,538) 43,814 -- 21,276
Other noncash items ............ 60,458 (4,140) (4,453) -- (50,175) 1,690
Change in working capital .......... 152,708 (303,355) 113,957 (23) (36,713)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating activities ... 182,454 (191,511) 195,764 -- 186,707
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets .. -- 268,746 117,924 -- 386,670
Additions to oil and gas properties .. -- (58,435) (36,887) -- (95,322)
Other property additions
(retirements), net ............... -- (3,227) 2,005 -- (1,222)
--------- --------- --------- --------- ---------
Net cash provided
by investing activities ........ -- 207,084 83,042 -- 290,126
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term debt ...... 319,048 -- 292 -- 319,340
Principal payments on long-term
debt ............................. (497,794) (967) (288,526) -- (787,287)
Payment of other noncurrent
liabilities ...................... -- (24,104) (4,127) -- (28,231)
Deferred loan fees/issuance costs .... (6,891) -- -- -- (6,891)
Exercise of long-term incentive
plan stock options ............... 25 -- -- -- 25
--------- --------- --------- --------- ---------
Net cash used in
financing activities ......... (185,612) (25,071) (292,361) -- (503,044)
--------- --------- --------- --------- ---------
Net decrease in cash and cash
equivalents .......................... (3,158) (9,498) (13,555) -- (26,211)
Effect of exchange rate changes on
cash and cash equivalents ............ -- -- 236 -- 236
Cash and cash equivalents, beginning
of period ............................ 3,161 37,932 18,128 -- 59,221
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period ............................... $ 3 $ 28,434 $ 4,809 $ -- $ 33,246
========= ========= ========= ========= =========
</TABLE>
22
<PAGE> 23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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) loss 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:
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 .................. -- (17,327) (6,487) -- (23,814)
--------- --------- --------- --------- ---------
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 other 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 each 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>
23
<PAGE> 24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1)
FINANCIAL PERFORMANCE
The Company reported net income of $46.4 million ($.46 per share) for the
three months ended September 30, 1999 and a net loss of $30.7 million ($.31 per
share) for the nine months ended September 30, 1999, as compared to respective
net losses of $43.9 million ($.44 per share) and $103.6 million ($1.04 per
share) for the same periods in 1998. The Company's results for the three and
nine months ended September 30, 1999 were significantly impacted by divestment
gains and losses; while the Company's results for the three and nine months
ended September 30, 1998 were significantly impacted by declines in commodity
prices (see "Trends and Uncertainties" and "Results of Operations", below). The
results for the three and nine months ended September 30, 1999 include a net
gain of $20.9 million and a net loss of $21.3 million, respectively, from the
divestment of certain United States and Canadian oil and gas properties, gas
plants and other assets. See Note C. of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" and "Asset Divestitures",
below, for specific discussions of the 1999 asset divestitures. Additionally,
the Company's results of operations for the nine month period ended September
30, 1999 includes other income of $30.2 million associated with a third quarter
refund of excise taxes and $41.8 million of option fees principally received for
a terminated property sales agreement in the first quarter. See Note G of Notes
to Consolidated Financial Statements included in "Item 1. Financial Statements"
for specific discussions of the excise tax refund and option fees recognized
during 1999.
Net cash provided by operating activities were $89.3 million and $186.7
million, respectively, during the three and nine months ended September 30,
1999, as compared to net cash provided by operating activities of $106.1 million
and $266.5 million, respectively, for the same periods in 1998. Net cash
provided by operating activities during the three and nine month periods ended
September 30, 1999, as compared to the same periods of 1998, were positively
impacted by improving commodity prices and cost structures, but were negatively
impacted by production declines in the Company's United States and Canadian
areas, primarily as a result of asset divestitures (see "Results of Operations",
below). Additionally, net cash provided by operating activities during the three
and nine month periods ended September 30, 1999, as compared to the same periods
of 1998, were negatively impacted by working capital changes. During the three
and nine month periods ended September 30, 1999, working capital changes
associated with operating activities used $11.7 million and $36.7 million of
operating cashflows, respectively, primarily associated with reductions in
accounts payable due to declines in capital expenditures; as compared to working
capital changes having provided $44.9 million and $72.2 million of operating
cashflows, respectively, during the three and nine month periods ended September
30, 1998, primarily associated with reductions in accounts receivable due to
commodity price declines.
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, 1999 was
$2.5 billion, consisting of total debt of $1.7 billion and stockholders' equity
of $.8 billion. Debt as a percentage of total book capitalization was 68 percent
at September 30, 1999, as compared to 73 percent at December 31, 1998. The
Company has reduced its outstanding indebtedness by $460.1 million during 1999
through the use of funds generated by the combined sources of operating
activities and asset divestitures.
DRILLING HIGHLIGHTS
During the first nine months of 1999, the Company spent $95.3 million on
capital projects, including $64.5 million for development activities, $27.1
million for exploration activities and $3.7 million on acquisitions. The
Company, which had 57 development wells and 15 exploratory wells in progress at
December 1998, participated in spudding 168 development wells and seven
exploratory wells, completed 121 development wells and eight exploratory wells
for production and plugged and abandoned four development wells and ten
exploratory wells. As of September 30, 1999, the Company had 100 development
wells and four exploratory wells in progress.
DOMESTIC. The Company expended $58.2 million during the first nine months
of 1999 on drilling activities primarily in the Gulf Coast, Permian Basin and
Mid Continent areas of the United States.
24
<PAGE> 25
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1)(continued)
In the Gulf Coast area, the Company drilled its first deepwater Gulf of
Mexico well to a depth of 14,000 feet, at a cost of $10.7 million net to the
Company. As a result, in March 1999, the Company announced a significant
discovery at Mississippi Canyon Block 305 encountering a hydrocarbon-bearing
section of over 200 gross feet. The Company plans to spud a second appraisal
well on the block during the fourth quarter of 1999, where it owns a 25 percent
working interest. The Company spudded its second deepwater well during the
second quarter of 1999 at Garden Banks 515, which was unsuccessful. In East
Texas, the Company plugged and abandoned one exploratory well that was in
progress at December 31, 1998 and two exploratory wells that were spud in the
first quarter of 1999. During the third quarter of 1999, the Company completed a
non-cash transaction whereby it traded its interest in several prospects in East
Texas for the remaining interest in the Overton prospect, also in East Texas.
The Company spud its first exploratory well in the Overton prospect during the
third quarter of 1999, which remains in progress at September 30, 1999. Other
projects initiated in the Gulf Coast area during the third quarter of 1999 were
the spuding of one development well at Pawnee in South Texas and one development
well at Spider Logansport in Northwest Louisiana, both of which were in progress
at September 30, 1999.
In the Permian Basin area, the Company completed 52 new development wells
and one exploratory well during the first nine months of 1999. Of the new
development wells completed, 49 were Spraberry Driver Unit development wells.
The Company began a drilling program during the fourth quarter of 1998 to drill
100 wells at minimal cost in the Spraberry units of West Texas, primarily the
Spraberry Driver Unit. However, the wells were being shut-in until oil prices
rebounded. In the second quarter of 1999, with the increase in oil prices, the
Company initiated a program to begin completing these wells and placing them on
production. As of September 30, 1999, the Company has 64 Spraberry Driver Unit
wells in progress. During 1999, the Company plans to complete 150 Spraberry
Field oil development wells.
The Company's Mid Continent drilling program has been focused primarily in
the West Panhandle Field in the Texas Panhandle. During the first nine months of
1999, the Company spudded 24 development wells in the West Panhandle field; five
were successfully completed and 19 remain in progress as of September 30, 1999
waiting on pipeline connections. During the third quarter of 1999, the Company
also spud four development wells in the Panoma Field in Southwest Kansas that
remain in progress at September 30, 1999.
ARGENTINA. The Company spent $20.5 million during the first nine months of
1999 on drilling activities primarily in the Neuquen Basin of Argentina. Of the
seven wells in progress at December 31, 1998, two exploratory wells and two
development wells were completed during the first nine months of 1999, two
exploratory wells were plugged and abandoned and one development well remains in
progress at September 30, 1999. The Company also spud 28 development wells and
two exploratory wells during the first nine months of 1999 with 18 development
wells and one exploratory well being completed as producers. Three development
wells and one exploratory well were plugged and abandoned as non-commercial. As
a result, the Company had eight development wells in progress at September 30,
1999.
CANADA. The Company spent $12.6 million during the first nine months of
1999 on drilling activities, principally to complete winter access drilling that
began during the fourth quarter of 1998. The drilling operations were focused
primarily in the Chinchaga and Martin Creek areas in northeast British Columbia.
Of the three Canadian wells in progress at December 31, 1998, two development
wells were completed as producers and one exploratory well was plugged and
abandoned. The Company also spud 32 development wells during the first nine
months of 1999 with all being completed as producers. New well production from
the recently completed winter access drilling operations began during the first
quarter of 1999. Combined initial test rates on the Chinchaga wells totaled 17.6
MMCF per day, net to the Company. The new well completions in the Chinchaga,
Martin Creek and Rycroft areas contributed 15 to 18 MMCF per day of new
production, net to the Company. The Company had no wells in progress in Canada
as of September 30, 1999.
1999 EXPENDITURES. In February 1999, the Company announced a 1999 capital
budget of approximately $100 million, of which approximately 25 percent would be
expended on exploration. The Company also announced its intention to reduce its
outstanding indebtedness through the use of funds generated by the individual or
combined sources of operating activities, asset divestitures or additional
issuances of equity. Since that time, the Company has
25
<PAGE> 26
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
reduced its outstanding indebtedness by $460.1 million through the use of the
net cash provided by operating activities and the net cash proceeds from asset
divestitures (see "Asset Divestitures", below). As a result of the successful
completion of the Company's 1999 asset divestitures and the use of the
associated net cash proceeds to reduce its outstanding indebtedness, the Company
has increased its 1999 capital budget to $180 million.
ASSET DIVESTITURES
During 1998, the Company announced measures to increase its financial
flexibility and to safeguard net asset values. Those measures included the
enactment of an operating strategy focused on the enhancement of core assets and
the divestiture of non-core assets, continuation of cost containment measures
and the reduction of outstanding indebtedness. During the nine months ended
September 30, 1999, the Company completed the asset divestiture phase of the
measures referred to above. As a result, the Company realized net divestment
proceeds of $117.2 million and $416.7 million, respectively, during the three
and nine month periods ended September 30, 1999, and has recorded an associated
net gain on disposition of assets of $20.9 million during the three months ended
September 30, 1999 and a net loss on disposition of assets of $21.3 million
during the nine months ended September 30, 1999. The net cash proceeds from the
1999 asset divestitures were used to reduce outstanding indebtedness (see
"Amended Credit Facilities", below, for a discussion of the Company's credit
facility agreements).
Prize Divestiture. On June 29, 1999, the Company completed the divestiture
(the "Prize Divestiture") of certain United States oil and gas producing
properties, gas plants and other assets to Prize Energy Corp. ("Prize"). The oil
and gas producing assets sold to Prize include properties located in the Gulf
Coast, Mid Continent and Permian Basin areas of the Company's United States
region.
At December 31, 1998, the Company's interest in these properties contained
63 million BOE of proved reserves (consisting of 26 million Bbls of oil and
NGL's, and 224 Bcf of gas), representing $199 million of SEC 10 value. During
1998, daily production from these properties averaged 7,390 Bbls of oil, 1,904
Bbls of NGL's and 68,884 Mcf of gas.
In accordance with the terms of the Prize Divestiture, the Company received
net sales proceeds of $245.0 million, comprised of $215.0 million of cash and
2,307.693 shares of six percent convertible preferred stock having a liquidation
preference and fair value of $30.0 million. The convertible preferred stock
provides for a six percent annual dividend payment (see Note C of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
a specific discussion of the conversion features of the Prize convertible
preferred stock, as well as information concerning the Prize Divestiture). The
Company recognized a loss of $46.4 million from the disposition during the
quarter ended June 30, 1999. The cash sales proceeds realized from the Prize
Divestiture were used to reduce the Company's outstanding indebtedness under its
Credit Facility.
Other United States Divestitures. In addition to the Prize Divestiture, the
Company completed the divestitures of non-strategic United States oil and gas
properties located in the South Texas Gulf Coast, the West Texas Permian Basin
and North Dakota areas, an East Texas gas facility and certain other assets for
net cash proceeds of $91.1 million and $113.7 million, respectively, during the
three and nine month periods ended September 30, 1999. Associated with these
divestitures, the Company recorded net gains on disposition of assets of $27.5
million and $33.6 million, respectively, during the three and nine month periods
ended September 30, 1999.
At December 31, 1998, the Company's interest in these properties contained
12.5 million BOE of proved reserves (consisting of 6 million Bbls of oil and
NGL's, and 37 Bcf of gas), representing $38 million of SEC 10 value. During
1998, daily production from these properties averaged 2,514 Bbls of oil, 120
Bbls of NGL's and 12,864 Mcf of gas.
26
<PAGE> 27
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
Canadian Divestitures. During 1999, the Company completed the divestiture
of certain non-strategic Canadian oil and gas properties, gas plants and other
related assets. In accordance with the terms of the Canadian purchase and sale
agreements, the Company received net cash proceeds of US $26.1 million and US
$58.0 million, respectively, during the three and nine month periods ended
September 30, 1999. Associated with these divestitures, the Company recognized
net losses of US $6.6 million and US $58.5 million, respectively, during the
three and nine month periods ended September 30, 1999.
At December 31, 1998, the Company's interest in the divested Canadian
properties contained 13.8 million BOE of proved reserves (consisting of 9
million Bbls of oil and NGL's, and 29 Bcf of gas), representing $47 million of
SEC 10 value. During 1998, daily production from these properties averaged 7,805
Bbls of oil, 211 Bbls of NGL's and 15,970 Mcf of gas.
AMENDED CREDIT FACILITIES
On March 19, 1999, the Company and a syndicate of banks executed amendments
to the credit facility agreements that combined the Company's existing primary
credit facility and Canadian credit facility agreements into a new primary
credit facility (the "Credit Facility"). The Company's 364-day credit facility
expired by its terms in August 1999. The terms of the Credit Facility provide
for a combined reduction in loan commitments to $941 million prior to December
31, 1999. Additionally, the amendments provided for an increase in the maximum
interest rate margin on LIBOR rate advances under the Credit Facility to 300
basis points, including leverage fees; and, maintenance of certain associated
debt covenants (see Note D to Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for a specific discussion of the
Credit Facility terms, including restrictive debt covenants).
To satisfy the commitment reduction provisions of the Credit Facility, the
Company reduced its outstanding borrowings through the use of funds generated by
operating activities and asset divestitures. During the nine months ended
September 30, 1999, the Company reduced its outstanding borrowings under the
Credit Facility by $454.7 million.
During October 1999, the Company reduced its loan commitments under the
Credit Facility to $939.6 million. As a result of the loan commitment reduction
and debt covenant compliance, the future interest rate margin on LIBOR rate
advances under the Credit Facility will be reduced to 187.5 basis points.
EVENTS, TRENDS AND UNCERTAINTIES
COMMODITY PRICES. The oil and gas prices that the Company reports are based
on the market prices received for the commodities 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.
From the third quarter of 1997 through the first quarter of 1999, there was
a declining trend in oil and gas price levels. During the first quarter of 1999,
the Organization of Petroleum Exporting Countries and certain other crude oil
exporting nations announced reductions in their planned export volumes. These
announcements, together with the enactment of announced reductions in export
volumes, have had a positive impact on world crude oil prices since the first
quarter of 1999. No assurances can be given that the reductions in export
volumes or the positive trend in oil and gas commodity prices can be sustained
for an extended period of time.
27
<PAGE> 28
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
The volatility of commodity prices has had, and will continue to have, a
significant impact on the Company's results of and cash flows from operations,
capital spending programs and general financial condition.
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").
MARKET SENSITIVE FINANCIAL INSTRUMENTS. The Company is a party to various
financial instruments that, by their terms, cause the Company to be at risk from
future changes in commodity prices, interest and foreign exchange rates, and
other market sensitivities. For specific information concerning the market risk
associated with financial instruments that the Company is a party to, see "Item
3. Quantitative and Qualitative Disclosures About Market Risk".
ASSET IMPAIRMENTS AND VALUATION ALLOWANCES. The recent improvement in
commodity prices may be sustained by market fundamentals. However, if the
improvement proves to be short-lived, re-emergence of the declining price trend,
or other relevant factors, could result in future impairment provisions to the
carrying value of the Company's proved or unproved properties or the recognition
of additional valuation allowances to the Company's deferred tax assets. If
additional asset impairments or valuation allowances were to become necessary in
the future, they could have a material adverse effect on the Company's financial
condition and results of operations. See "Results of Operations", below, for
information concerning the Company's $17.9 million provision for impairment of
oil and gas properties that was recognized during the second quarter of 1999.
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.
As of September 30, 1999, the assessment phase of the Company's Year 2000
project is complete and has included, but was not limited to, the following
procedures:
o the identification of necessary remediation, upgrades 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,
28
<PAGE> 29
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
o the formulation of contingency plans for mission-critical information
technology systems.
The Company distributed Year 2000 problem inquiries to over 500 entities
and received responses to approximately 52 percent of the inquiries.
The remedial phase of the Company's Year 2000 project is in the final
stages of completion as it pertains to the remediation of information technology
and non-information technology applications and systems in the United States,
Canada and Argentina. As of September 30, 1999, the remedial phase of the
Company's Year 2000 project was approximately 98 percent complete, on a
worldwide basis, subject to continuing evaluations of the responses to third
party inquiries and to the testing phase results. 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 has completed the testing of the system for Year
2000 compliance. The remediation of non-information technology was 97 percent
complete as of September 30, 1999, and was completed in October 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 completed the testing of non-information technology remediation in
October 1999. The testing of information technology remediation is scheduled to
be completed by the end of November 1999.
The Company now expects that its total costs related to the Year 2000
problem will approximate $2.9 million. As of September 30, 1999, the Company's
total costs incurred on the Year 2000 problem were $2.5 million.
The risks associated with the Year 2000 problem are significant. A failure
to remedy a critical Year 2000 problem could have a material adverse effect on
the Company's results of operations and financial condition. The most likely
worst case scenario 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 business continuity and contingency planning phase of the Company's
Year 2000 project, contingency plans were designed to mitigate the exposures to
mission critical information technology systems, such as oil and gas sales
receipts; vendor and royalty cash distributions; debt compliance; accounting;
and employee compensation. Such contingency plans anticipate the extensive
utilization of third-party data processing services, personal computer
applications and the substitution of courier and mail services in place of
electronic data interchange. 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.
PROPOSAL TO ACQUIRE PARTNERSHIPS. On September 8, 1999, Pioneer USA filed a
preliminary proxy statement with the SEC proposing an agreement and plan of
merger to the limited partners of 25 publicly-held Parker & Parsley limited
partnerships. Pioneer USA is the managing partner of the Parker & Parsley
limited partnerships. The preliminary proxy statement is non-building and is
subject to, among other things, consideration of offers from third parties to
purchase any partnership or its assets, the majority approval of the limited
partners in each partnership and SEC review and comments. If the agreement and
plan of merger is consummated, the amount of cash that Pioneer USA would pay for
the partnership interests would be based on the partnerships' reserve values
plus net working capital. Pioneer USA estimates that the cash offer for the
partnership interests would be approximately $60 million in the aggregate.
29
<PAGE> 30
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
ACCOUNTING FOR DERIVATIVES. In June 1998, the Financial Accounting
Standards Board ("FASB") 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.
On May 19, 1999, the FASB voted to delay the effective date for SFAS 133 to
fiscal years beginning after June 15, 2000. The Company has not determined what
effect, if any, SFAS 133 will have on its consolidated financial statements.
RESULTS OF OPERATIONS
OIL AND GAS PRODUCTION.
The following table provides the Company's production volume data, average
prices and per BOE average production and depletion costs for the three and nine
months ended September 30, 1999 and 1998. See Note K to the Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
the Company's unaudited results of operations by geographic operating segment.
30
<PAGE> 31
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------
UNITED
STATES ARGENTINA CANADA TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Production:
Oil (MBbls) ................ 2,584 558 223 3,365
NGLs (MBbls) ............... 2,080 57 74 2,211
Gas (MMcf) ................. 22,065 9,516 4,063 35,644
Total (MBOE) ............... 8,343 2,201 973 11,517
Average daily production:
Oil (Bbls) ................. 28,092 6,064 2,420 36,576
NGLs (Bbls) ................ 22,615 616 800 24,031
Gas (Mcf) .................. 239,837 103,438 44,162 387,437
Total (BOE) ................ 90,681 23,919 10,580 125,180
Average oil price (per Bbl) .. $ 16.37 $ 21.05 $ 17.10 $ 17.20
Average NGL price (per Bbl) .. $ 14.12 $ 11.64 $ 12.77 $ 14.02
Average gas price (per Mcf) .. $ 2.39 $ 1.11 $ 1.92 $ 2.00
Costs (per BOE):
Lease operating expense .... $ 2.67 1.67 2.64 2.48
Production taxes ........... .47 .17 -- .37
Workover costs ............. .15 -- .60 .16
------------ ----------- ------------ ------------
Total production costs ... $ 3.29 $ 1.84 $ 3.24 $ 3.01
============ =========== ============ ============
Depletion .................... $ 3.81 $ 4.61 $ 4.80 $ 4.05
============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------
UNITED
STATES ARGENTINA CANADA TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
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
Total (BOE) ................ 130,822 19,381 22,794 172,997
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
============ =========== ============ ============
</TABLE>
31
<PAGE> 32
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------
UNITED
STATES ARGENTINA CANADA TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Production:
Oil (MBbls) ................ 9,050 1,621 1,577 12,248
NGLs (MBbls) ............... 6,665 167 240 7,072
Gas (MMcf) ................. 84,043 26,505 14,522 125,070
Total (MBOE) ............... 29,722 6,205 4,238 40,165
Average daily production:
Oil (Bbls) ................. 33,150 5,936 5,777 44,863
NGLs (Bbls) ................ 24,412 612 881 25,905
Gas (Mcf) .................. 307,849 97,087 53,196 458,132
Total (BOE) ................ 108,872 22,729 15,523 147,124
Average oil price (per Bbl) .. $ 14.28 $ 16.42 $ 12.90 $ 14.38
Average NGL price (per Bbl) .. $ 10.42 $ 8.70 $ 10.18 $ 10.38
Average gas price (per Mcf) .. $ 2.11 $ 1.11 $ 1.74 $ 1.86
Costs (per BOE):
Lease operating expense .... $ 2.74 $ 1.84 $ 3.15 $ 2.63
Production taxes ........... .42 .15 -- .34
Workover costs ............. .08 -- .36 .10
------------ ------------ ------------ ------------
Total production costs ... $ 3.24 $ 1.99 $ 3.51 $ 3.07
============ ============ ============ ============
Depletion .................. $ 4.12 $ 4.49 $ 4.93 $ 4.26
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------
UNITED
STATES ARGENTINA CANADA TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Total (BOE) ................ 134,670 18,531 21,191 174,392
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
============ ============ ============ ============
</TABLE>
OIL AND GAS REVENUES. Revenues from oil and gas operations totaled $159.9
million and $481.2 million for the three and nine months ended September 30,
1999, respectively, compared to $173.5 million and $554.5 million, respectively,
for the same periods in 1998. The decrease in revenues during the three and nine
month periods ended September 30, 1999, as compared to the three and nine month
periods ended September 30, 1998, is reflective of declines in production
volumes, principally due to the 1999 asset divestitures, partially offset by
increased commodity prices. See "Asset Divestitures", above, and Note C of Notes
to Consolidated Financial Statements included in "Item 1. Financial Statements"
for specific discussions of the Company's 1999 asset divestitures.
32
<PAGE> 33
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
On a BOE basis, production decreased by 28 percent and 16 percent for the
three and nine months ended September 30, 1999, respectively, as compared to the
same periods in 1998. For the three months ended September 30, 1999, production,
on a BOE basis, declined 31 percent in the United States, Argentine production
increased by 23 percent and Canadian production declined by 54 percent. On a
worldwide basis, 44 percent of the decline in production was attributable to
declines in crude oil production, which was primarily due to asset divestitures
and to the Company having suspended oil development drilling in 1998 following
the decline in oil prices.
For the nine months ended September 30, 1999, production, on a BOE basis,
declined 19 percent in the United States, Argentine production increased by 23
percent and Canadian production declined by 27 percent. On a worldwide basis, 57
percent of the decline in production was attributable to declines in crude oil
production, primarily resulting from asset divestitures and suspended oil
development drilling in 1998.
Comparing the three months ended September 30, 1999 to the same period in
1998, the average oil price increased 33 percent (from $12.97 per Bbl to $17.20
per Bbl, respectively); the average NGL price increased 69 percent (from $8.30
per Bbl to $14.02 per Bbl, respectively); and, the average gas price increased
16 percent (from $1.73 per Mcf to $2.00 per Mcf, respectively). Comparing the
first nine months of 1999 to the same period in 1998, the average oil price
increased eight percent (from $13.34 per Bbl to $14.38 per Bbl, respectively);
the average NGL price increased ten percent (from $9.42 per Bbl to $10.38 per
Bbl, respectively); and, the average gas price decreased one percent (from $1.87
per Mcf to $1.86 per Mcf, 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 three and nine months ended September 30,
1999, the Company's hedging activities decreased the average price received for
oil sales by nine percent and one percent, respectively. The average price
received for gas sales were decreased by three percent and increased by five
percent, as a result of the Company's hedging activities during the respective
three and nine month periods ended September 30, 1999.
Crude Oil. The majority of sales contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. Correspondingly, the
Company, from time to time, enters into NYMEX based hedge contracts to mitigate
the impact of price volatility. 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, 1999 was $18.84 per Bbl, and $14.59 per Bbl, respectively, while,
as a point of reference, the comparable daily average NYMEX closing for the same
periods were $21.72 per Bbl and $17.48 per Bbl, respectively. The Company
recorded a net decrease to oil revenues of $5.5 million and $2.5 million,
respectively, for the three and nine month periods ended September 30, 1999, as
a result of its commodity hedges.
During the three and nine months ended September 30, 1998, the Company
realized an average price for physical oil sales (excluding hedge results) of
$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 were
$14.18 per Bbl and $14.95 per Bbl, respectively. The Company recorded net
increases to 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.
33
<PAGE> 34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
Natural Gas. The Company hedges 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 gas
hedges. The Company's average realized price for physical gas sales (excluding
hedge results) for the three and nine months ended September 30, 1999 were $2.06
per Mcf and $1.77 per Mcf, respectively, while, as a point of reference, the
comparable daily average NYMEX closing for the same periods were $2.60 per Mcf
and $2.16 per Mcf, respectively. The Company recorded a net decrease to gas
revenues of $2.2 million during the three months ended September 30, 1999, and,
during the nine months ended September 30, 1999, a net increase to gas revenues
of $10.8 million as a result of its commodity hedges.
During the three and nine months ended September 30, 1998, the Company
realized an average price for physical gas sales (excluding hedge results) of
$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 were $2.02 and
$2.14 per Mcf, respectively. The Company recorded net increases to gas revenues
of $2.5 million and $4.8 million for the three and nine months ended September
30, 1998, 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 and related contract prices as of September 30, 1999.
PRODUCTION COSTS. During the three and nine months ended September 30,
1999, total production costs per BOE decreased to $3.01 and $3.07, respectively,
as compared to production costs per BOE of $3.63 and $3.56, respectively, during
the same periods in 1998. The quarter-to-quarter decline in production costs per
BOE is reflective of a 21 percent decline in lease operating expenses, primarily
realized as a result of the Company's cost containment initiatives and the sale
of certain high cost properties, and a five percent decline in production taxes.
Quarter-to-quarter workover costs increased by $.05 per BOE. The relative
decline in year-to-date production costs per BOE is reflective of a 13 percent
decline in lease operating expenses, a 17 percent decline in production taxes
and a nine percent decline in workover costs per BOE.
DEPLETION EXPENSE. Depletion expense per BOE decreased to $4.05 per BOE and
$4.26 per BOE during the three and nine months ended September 30, 1999,
respectively, as compared to $5.25 per BOE and $4.98 per BOE during the same
periods in 1998. The decline in depletion expense per BOE during 1999 is
primarily associated with the reduction in net depletable basis that resulted
from the fourth quarter 1998 impairment charge taken 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". A
secondary factor to the decline in per BOE depletion expense is the relative
increase in estimated recoverable proved reserves resulting from improved
commodity price outlooks.
IMPAIRMENT OF OIL AND GAS PROPERTIES. During the second quarter of 1999,
the Company reduced the carrying value of certain of its East Texas unproved
properties by $17.9 million. The impairment of the associated properties was
recognized after the assessment of seismic data that indicated that the
estimated value of the properties was less than their carrying cost. See Note I.
of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements".
EXPLORATION AND ABANDONMENTS/GEOLOGICAL AND GEOPHYSICAL COSTS. Exploration
and abandonments and geological and geophysical costs decreased to $11.9 million
and $41.6 million during the three and nine month periods ended September 30,
1999, respectively, from $35.6 million and $86.1 million during the same periods
in 1998. The decrease is primarily the result of the Company's curtailed capital
program as evidenced by declines in all categories of exploration, abandonments,
geological and geophysical costs.
34
<PAGE> 35
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Exploratory dry holes:
United States ....................... $ 665 $ 8,639 $ 8,910 $ 11,440
Argentina ........................... 2,063 348 2,523 3,156
Canada .............................. 57 6 982 809
Other foreign ....................... (609) 5,115 (275) 9,050
Geological and geophysical costs:
United States ....................... 6,100 7,531 14,250 25,136
Argentina ........................... 301 5,784 1,406 8,689
Canada .............................. 185 3,268 224 11,221
Other foreign ....................... 1,237 1,266 3,187 3,317
Leasehold abandonments and other....... 1,892 3,670 10,385 13,331
-------- -------- -------- --------
$ 11,891 $ 35,627 $ 41,592 $ 86,149
======== ======== ======== ========
</TABLE>
INTEREST AND OTHER INCOME
During the three and nine months ended September 30, 1999, the Company
recorded interest and other income of $32.4 million and $81.1 million,
respectively, as compared to $5.9 million and $8.2 million, respectively, during
the same periods of 1998. The increase in interest and other income for the
quarter ended September 30, 1999, as compared to the quarter ended September 30,
1998, is primarily comprised of a $30.2 million refund of excise taxes. The
increase in revenue during the nine months ended September 30, 1999, as compared
to the same period in 1998, was primarily attributable to the $41.8 million of
option income and liquidated damages, and the refund of excise taxes (see Note
G. of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for disclosure regarding interest and other income).
GAIN (LOSS) ON DISPOSITION OF ASSETS
The Company recognized a net gain of $20.9 million and a net loss of $21.3
million on the divestiture of assets during the three and nine month periods
ended September 30, 1999, respectively, as compared to net losses of $.5 million
and $.1 million during the respective prior year periods ended September 30,
1998. The 1999 gains and losses are associated with the divestitures of oil and
gas properties, gas plants and other assets in the United States and Canada. See
Note C. of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" and "Asset Divestitures", above, for discussions
pertaining to the divestitures completed during the first nine months of 1999.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense was $8.8 million and $29.2 million
during the respective three and nine month periods ended September 30, 1999, as
compared to $19.2 million and $56.6 million for the same periods ended September
30, 1998, representing respective period-to-period decreases of 54 percent and
48 percent. On a per BOE basis, general and administrative expense declined from
$1.21 and $1.19, respectively, during the three and nine months ended September
30, 1998, to $.76 and $.73 during each of the same respective periods in 1999.
The decreases are primarily attributable to the efficiency measures initiated
through the 1998 reorganization.
35
<PAGE> 36
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
REORGANIZATION EXPENSE
Reorganization expense for the three and nine month periods ended September
30, 1999 totaled $.8 million and $7.8 million, respectively, compared to $.6
million and $21.2 million during the same periods in 1998. As announced in 1998,
the Company has consolidated its six domestic operating divisions, relocated
most of its administrative services to Irving, Texas, closed its regional
offices in Corpus Christi, Texas, Houston, Texas and Oklahoma City, Oklahoma,
and eliminated approximately 350 employee positions. Additionally, during the
second quarter of 1999, the Company centralized, in Irving, Texas, certain
operational functions that were previously located in Midland, Texas. The
Company does not expect any significant additional reorganization charges during
the remainder of 1999. See Note J of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for a specific discussion of the
reorganization provisions recognized by the Company.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 1999 was
$41.0 million and $130.4 million, respectively, as compared to $41.8 million and
$122.3 million for the same periods in 1998. The $.8 million decrease in
interest expense during the third quarter of 1999 as compared to the third
quarter of 1998 is reflective of a $343.1 million decrease in the Company's
average debt outstanding, partially offset by a 122 basis point increase in the
Company's weighted average interest rate on debt. The $8.1 million increase in
interest expense during the first nine months of 1999 as compared to the first
nine months of 1998 is primarily reflective of a $103.7 million increase in the
Company's average debt outstanding.
Prior to their maturity in May and June 1999, the Company was a party to
interest rate swap agreements that resulted in a decrease in interest expense of
$849 thousand during the nine months ended September 30, 1999. The swap
agreements had no impact on interest expense during the three months ended
September 30, 1999. Such agreements resulted in a decrease in interest expense
of $58 thousand and an increase in interest expense of $15 thousand during the
respective three and nine month periods ended September 30, 1998.
OTHER COSTS AND EXPENSES
Other costs and expenses for the three and nine months ended September 30,
1999 were $18.0 million and $36.3 million, respectively, compared to $4.9
million and $18.5 million for the same periods in 1998. The increase in other
costs and expenses are primarily attributable to fluctuations in mark-to-market
provisions on financial instruments.
The Company is a party to certain BTU swap agreements that do not qualify
as hedges. Other expenses for the three and nine month periods ended September
30, 1999 include non-cash mark-to-market increases of $1.5 million and $2.4
million, respectively, to the liabilities recognized for the BTU swap
agreements; and, for the three and nine month periods ended September 30, 1998,
a decrease of $2.8 million and an increase of $3.0 million, respectively. These
contracts will continue to be marked-to-market at the end of each reporting
period during their respective lives. The effects on the Company's results of
operations in future periods could be significant.
During the fourth quarter of 1998, the Company received three million
shares of common stock of a closely held, non-affiliated, publicly traded entity
in partial payment of option fees referred to in "Financial Performance," above.
During April 1999, the Company was paid liquidated damages of an additional one
million shares of common stock of the entity. Other expenses for the nine months
ended September 30, 1999, includes a non-cash mark-to-market charge of $11.9
million to recognize declines in the market quoted value of the four million
shares of common stock prior to the Company's sale of the investment. In June
1999, the Company sold its interest in this investment.
36
<PAGE> 37
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
The Company has a series of forward foreign exchange swap agreements to
exchange Canadian dollars for United States dollars at future dates for a fixed
amount of the first currency. As these contracts do not qualify as hedges, the
Company recorded a non-cash mark-to-market increase in the recognized
liabilities associated with these agreements during the three months ended
September 30, 1999 of $.5 million and, during the nine months ended September
30, 1999, the Company recorded a decrease in the recognized liabilities of $5.4
million. These contracts will continue to be marked-to-market until they mature
at various dates in the fourth quarter of 2000. The related effects on the
Company's results of operations in future periods could be significant.
During the first quarter of 1999, the Company sold certain NYMEX crude oil
calls and other crude oil and natural gas call options that do not qualify for
hedge accounting treatment. Other expenses for the three and nine months ended
September 30, 1999, include $14.3 million and $22.5 million, respectively, of
non-cash mark-to-market increases to the liabilities recognized on these
contracts.
INCOME TAXES
During 1998, the Company determined that it was more likely than not that
certain of its net operating loss carryforwards and other credit carryforwards
may expire unused. Accordingly, the Company has established a valuation reserve
to reduce the carrying value of its deferred tax assets. As a result of this
situation, it is likely that the Company's effective tax rate during the
remainder of 1999 will be minimal, or nil, if the Company recognizes a loss
before income taxes. If the Company recognizes income before income taxes during
the remainder of 1999, its effective tax rate will be reduced to the extent that
taxable earnings are recognized in those tax jurisdictions where the Company has
established deferred tax valuation allowances.
During the three and nine month periods ended September 30, 1999, the
Company recognized income tax provisions of $600 thousand and $500 thousand,
respectively, as compared to tax benefits of $24.3 million and $55.4 million for
the three and nine month periods ended September 30, 1998, respectively. The
minimal income tax provision recognized during the nine months ended September
30, 1999 is primarily comprised of state and provincial income taxes incurred by
the Company.
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 nine months of 1999 for
additions to oil and gas properties totaled $95.3 million. This amount includes
$3.7 million for the acquisition of prospects and properties and $91.6 million
for development and exploratory drilling. Drilling expenditures during the first
nine months of 1999 included $58.2 million of expenditures in the United States,
$20.5 million of expenditures in Argentina, $12.6 million of expenditures in
Canada and $.3 million of expenditures in other international areas. See
"Drilling Highlights", above, for a specific discussion of capital investments
made during the first nine months of 1999.
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 has been principally funded by operating cash flow
and proceeds from the divestitures of non-strategic assets during 1999, 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 non-strategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments in 1999.
37
<PAGE> 38
PIONEER NATURAL RESOURCES COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1) (continued)
Operating Activities. Net cash provided by operating activities was $89.3
million and $186.7 million during the three and nine month periods ended
September 30, 1999, respectively, as compared to net cash provided by operating
activities of $106.1 million and $266.5 million for the same respective periods
in 1998. The decrease in net cash provided by operating activities during the
three and nine month periods ended September 30, 1999 as compared to the same
periods of 1998 are primarily attributable to declines in revenue from oil and
gas operations due to declines in production volumes and to changes in working
capital associated with operating activities, partially offset by increases in
commodity prices (see "Financial Performance" and "Oil and Gas Revenues",
above).
Financing Activities. The Company had an outstanding balance under its
Credit Facility at September 30, 1999 of $795.3 million ($823.8 million
including outstanding, undrawn letters of credit of $28.5 million). In
accordance with the commitment reduction provisions of the Credit Facility, the
Company reduced its debt commitments under the Credit Facility to $939.6 million
during October 1999, leaving approximately 99 million of unused borrowing
capacity available after the reduction in debt commitments. The Company reduced
its outstanding borrowings by $460.1 million, of which $454.7 million was used
to reduce outstanding borrowings under the Credit Facility, during the first
nine months of 1999 through the use of funds generated by the combined sources
of operating activities and asset divestitures. See Note D to Notes to the
Consolidated Financial Statements included in "Item 1. Financial Statements" and
"Amended Credit Facilities", above, for specific discussions of the Credit
Facility terms.
As the Company pursues its strategy, it may 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.
DIVESTITURE OF NON-STRATEGIC ASSETS. During the three and nine month
periods ended September 30, 1999, net cash proceeds from the divestiture of
non-strategic assets totaled $117.2 million and $386.7 million, respectively.
The proceeds from these divestitures were used to reduce the Company's
outstanding borrowings.
LIQUIDITY. As of September 30, 1999, the Company had $33.2 million of cash
and cash equivalents on hand, compared to $59.2 million as of December 31, 1998.
The Company's ratio of current assets to current liabilities was .89 to one at
September 30, 1999 and .38 to one at December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(1)
The following quantitative and qualitative disclosures about market risk
are supplementary to the quantitative and qualitative disclosures provided in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998. As such, the information contained herein should be read in conjunction
with the related disclosures in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
The disclosures provided below provide specific information about material
changes during the nine months ended September 30, 1999 in the Company's
portfolio of financial instruments. The Company may incur future earnings gains
or losses on these instruments from changes in market interest rates, foreign
exchange rates, commodity prices or common stock prices.
INTEREST RATE SENSITIVITY. On March 19, 1999, the Company and a syndicate
of banks executed amendments to the Company's variable rate credit facility
agreements. The amendments combined the Company's existing primary credit
facility and Canadian credit facility agreements into a new primary credit
facility (the "Credit Facility"). The terms of the Credit Facility provide for a
$495 million combined reduction in loan commitments, to $941 million, which the
Company completed in October 1999. Additionally, the amendments provide for an
increase in the maximum interest rate margin on LIBOR rate advances under the
Credit Facility to 300 basis points, including leverage fees, that was reduced
to 187.5 basis points in October 1999 as a result of the loan commitment
reduction and the debt covenant compliance and, the maintenance of certain
associated debt covenants
38
<PAGE> 39
PIONEER NATURAL RESOURCES COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(1)
(continued)
(see Note D to Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for a specific discussion of the Credit Facility). The
quantitative information provided in the Company's Annual Report on Form 10-K
was reflective of the terms of the March 19, 1999 amendments described above,
except for the change in the interest rate margin on LIBOR rate advances under
the Credit Facility to 187.5 basis points. As of October 28, 1999, the market
rate for 60-day LIBOR was 6.35 percent per annum. During the nine months ended
September 30, 1999, the Company reduced its combined borrowings under its Credit
Facility to $795.3 million, representing a $454.7 million decrease in variable
rate borrowings and a $306.2 million decrease in 1999 variable rate debt
maturities.
During May and June 1999, the Company's $150 million notional amount
interest rate swaps matured. During the nine months ended September 30, 1999,
there were no other material changes to the Company's interest rate derivatives
related to total debt.
FOREIGN EXCHANGE RATE SENSITIVITY. As of September 30, 1999, the recognized
liability for the fair value of the Company's foreign currency swaps declined to
$9.9 million. The terms of the foreign currency swaps provide for the Company to
pay a fixed Canadian to United States dollar rate on notional United States
dollar amounts of $72 million in 1999 and 2000.
During the nine months ended September 30, 1999, there were no other
material changes to the Company's foreign exchange rate sensitive derivatives.
COMMODITY PRICE SENSITIVITY. During the nine months ended September 30,
1999, the Company entered into certain hedge and non-hedge crude oil derivatives
and changed its portfolio of natural gas hedge derivatives.
The following tables provide information about the crude oil and natural
gas derivative financial instruments that the Company was a party to as of
September 30, 1999. The tables segregate hedge derivative contracts from those
that do not qualify as hedges.
Commodity hedge instruments. The Company hedges commodity price risk with
swap contracts, collar contracts, collar contracts with short put options, and
put spread contracts. Swap contracts provide a fixed price for a notional amount
of sales volumes. Collar contracts provide a floor price for the Company on a
notional amount of sales volumes while allowing some additional price
participation if the relevant index price closes above the floor price. Collar
contracts with short put options differ from other collar contracts by virtue of
the short put option price, below which the Company's realized price will exceed
variable market prices by the long put-to-short put price differential. With put
spread contracts, the Company purchases a put contract and concurrently sells a
put contract at a lower index price. The put spread contracts are similar to the
collar contracts with short put options, except that the Company participates in
all prices above the tentative floor price.
Commodity non-hedge instruments. The Company has also entered into BTU swap
contracts that do not qualify for hedge accounting. Under the terms of the BTU
swap, the Company receives 10 percent of the NYMEX oil price and pays the NYMEX
gas price on 13,036 notional MMBtu daily volume.
The Company also entered into optional calls that do not qualify for hedge
accounting treatment. The terms of the optional calls provide the
counter-parties with the option to elect to call either notional crude oil
volumes or natural gas volumes at specific index prices.
See Notes F and H of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for information regarding the terms of the
Company's derivative financial instruments that are sensitive to changes in
natural gas and crude oil commodity prices.
39
<PAGE> 40
PIONEER NATURAL RESOURCES COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(1)
(continued)
PIONEER NATURAL RESOURCES COMPANY
CRUDE OIL PRICE SENSITIVITY
DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
--------- ---------- ---------- ---------- --------- ---------- ----------
(in thousands except volumes and prices)
<S> <C> <C> <C> <C> <C> <C> <C>
Crude Oil Hedge Derivatives:
Average daily notional Bbl volumes (1):
Swap contracts (2): .................... 8,728 519 $(21,827)
Weighted average per Bbl fixed
price .............................. $ 15.67 $ 15.76
Put contracts: ......................... 2,000 $ 1
Weighted average long put per Bbl
floor price ........................ $ 15.00
Collar contracts with short put (3): ... 14,000 7,000 3,000 $(12,250)
Weighted average short call per Bbl
ceiling price ...................... $ 18.58 $ 20.42 $ 20.58
Weighted average long put per Bbl
floor price......................... $ 15.86 $ 17.29 $ 17.50
Weighted average short put per Bbl
price below which floor becomes
variable ........................... $ 12.14 $ 14.29 $ 14.50
Crude Oil Non-hedge Derivatives:
Daily notional crude oil Bbl volumes
under optional calls sold (4) ...... 10,000 10,000 $(18,738)
Weighted average short call per Bbl
ceiling price ...................... $ 20.00 $ 20.00
Average forward NYMEX crude oil
price per Bbl ...................... $ 22.90 $ 20.43
Daily notional MMBtu volumes under swap
of NYMEX gas price for 10 percent of
NYMEX WTI price .................... 13,036 13,036 13,036 13,036 13,036 13,036 $(16,241)
Average forward NYMEX gas
prices(5) ........................ $ 2.83 $ 2.62 $ 2.60 $ 2.63 $ 2.67 $ 2.73
Average forward NYMEX oil
prices (5) ....................... $ 22.90 $ 20.43 $ 18.21 $ 17.73 $ 17.50 $ 17.20
</TABLE>
- ----------
(1) See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter for 1999, 2000 and 2001.
(2) Certain counterparties to the fourth quarter 1999 swap contracts have the
contractual right to extend 9,000 Bbl's per day for one additional year at
a weighted average strike price of $16.56 per Bbl.
(3) The counterparties to the year 2000 collar contracts with short puts have
the contractual right to extend the contracts for notional volumes of 5,000
Bbl's per day through year 2001 at weighted average per Bbl strike prices
of $20.09, $17.00 and $14.00 for the short call, long put and short put,
respectively.
(4) The counterparties to the fourth quarter 1999 and year 2000 optional call
contracts have the contractual right to elect to call crude volumes or gas
volumes at the indicated prices. See the "Natural Gas Price Sensitivity"
table for the optional natural gas volumes and call prices available to the
counterparties.
(5) Average forward NYMEX oil and gas prices are as of November 8, 1999.
40
<PAGE> 41
PIONEER NATURAL RESOURCES COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(1)
(continued)
PIONEER NATURAL RESOURCES COMPANY
NATURAL GAS PRICE SENSITIVITY
DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
--------- -------- ---------- ---------- ---------- ---------- ----------
(in thousands except volumes and prices)
<S> <C> <C> <C> <C> <C> <C> <C>
Natural Gas Hedge Derivatives(1):
Average daily notional MMBtu
volumes(2):
Swap contracts(3) ............. 6,896 -- -- 10,000 $(11,313)
Weighted average MMBtu fixed
price ..................... $ 2.16 $ 2.42
Collar contracts .............. 24,201 $ (469)
Weighted average short call
MMBtu ceiling price ........ $ 2.56
Weighted average long put
MMBtu floor price ......... $ 1.91
Collar contracts with
short puts(4) ............... 49,065 72,557 60,000 $(19,147)
Weighted average short call
MMBtu ceiling price ....... $ 2.65 $ 2.57 $ 2.64
Weighted average long put
MMBtu contingent floor
price ..................... $ 2.14 $ 2.04 $ 2.25
Weighted average short put
MMBtu price below which
floor becomes variable .... $ 1.84 $ 1.76 $ 1.95
Natural Gas Non-hedge Derivatives:
Daily nominal gas MMBtu volumes
under optional calls sold(5)..... 100,000 100,000 $(18,738)
Weighted average short call
per MMBtu ceiling price... $ 2.64 $ 2.76
Average forward NYMEX gas
price per MMBtu ........... $ 2.83 $ 2.62
Daily notional MMBtu volumes
under agreement to swap NYMEX
gas price for 10 percent of
NYMEX WTI price ............... 13,036 13,036 13,036 13,036 13,036 13,036 $(16,241)
Average forward NYMEX gas
prices(6) ................... $ 2.83 $ 2.62 $ 2.60 $ 2.63 $ 2.67 $ 2.73
Average forward NYMEX oil
prices(6) ................... $ 22.90 $ 20.43 $ 18.21 $ 17.73 $ 17.50 $ 17.20
</TABLE>
- --------
(1) When necessary, to minimize basis risk the Company enters into natural gas
basis swaps to connect the index price of the hedging instrument from a
NYMEX index to an index that reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap and
option contracts and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(2) See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter for 1999, 2000, 2001 and 2002.
(3) Certain counterparties have the contractual right to sell year 2000, 2001,
2002 and 2003 swap contacts to the Company for notional contract volumes of
20,000; 49,223; 12,500; and 10,000 MMBtu per day, respectively, at weighted
average strike prices of $2.32; $2.21; $2.52; and $2.58 per MMBtu,
respectively.
(4) 30,000; 54,482; and 60,000 MMBtu per day of the fourth quarter 1999, and
year 2000 and 2001 collar option contracts with short puts are extendable
at the option of the counterparties for a period of one year at respective
weighted average per MMBtu prices of $2.73, $2.71 and $2.64 for the short
call, $2.13, $2.09 and $2.25 for the long put and $1.83, $1.80 and $1.95
for the short put.
(5) The counterparties to the fourth quarter 1999 and 2000 optional call
contracts have the contractual right to elect to call crude volumes or gas
volumes at the indicated prices. See the "Crude Oil Price Sensitivity"
table for the optional crude oil volumes and call prices available to the
counterparties.
(6) Average forward NYMEX oil and gas prices are as of November 8, 1999.
41
<PAGE> 42
PIONEER NATURAL RESOURCES COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(1)
(continued)
OTHER PRICE SENSITIVITY. During June 1999, the Company sold its investment
in Costilla Energy Inc. common stock for $.6 million.
- --------------
(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 1998 Annual Report on
Form 10-K that is available from the United States Securities and Exchange
Commission.
42
<PAGE> 43
PIONEER NATURAL RESOURCES COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the specific litigation discussed in Note E of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements",
the Company is a party to various other legal actions incidental to its
business. The claims for damages from such legal actions are not in excess of 10
percent of the Company's current assets and the Company believes none of these
actions to be material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27. Financial Data Schedule
REPORTS ON FORM 8-K
On July 13, 1999, the Company filed a Current Report on Form 8-K to report
the disposition of assets under Items 2. and 7. of Form 8-K, related pro forma
condensed balance of the Company as of March 31, 1999 and related pro forma
condensed statements of operations of the Company for the three months ended
March 31, 1999 and the year ended December 31, 1998. See Note C of the Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
disclosures regarding the dispositions of assets.
43
<PAGE> 44
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 9, 1999 By: /s/ M. Garrett Smith
----------------------------------
M. Garrett Smith
Executive Vice President and Chief
Financial Officer
Date: November 9, 1999 By: /s/ Rich Dealy
----------------------------------
Rich Dealy
Vice President and Chief
Accounting Officer
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,246
<SECURITIES> 0
<RECEIVABLES> 104,661
<ALLOWANCES> 0
<INVENTORY> 12,902
<CURRENT-ASSETS> 165,671
<PP&E> 3,184,869
<DEPRECIATION> 704,504
<TOTAL-ASSETS> 2,897,106
<CURRENT-LIABILITIES> 187,037
<BONDS> 0
0
0
<COMMON> 1,008
<OTHER-SE> 762,514
<TOTAL-LIABILITY-AND-EQUITY> 2,897,106
<SALES> 481,237
<TOTAL-REVENUES> 541,100
<CGS> 308,049
<TOTAL-COSTS> 337,281
<OTHER-EXPENSES> 103,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,426
<INCOME-PRETAX> (30,189)
<INCOME-TAX> (500)
<INCOME-CONTINUING> (30,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,689)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
