This excerpt taken from the PXD 10-K filed Feb 25, 2009.
The failure by counterparties to the Company’s derivative risk management activities to perform their obligations could have a material adverse effect on the Company’s results of operations.
To achieve more predictable cash flow and to reduce the Company’s exposure to adverse fluctuations in the prices of oil, NGL and gas, the Company’s strategy is to enter into derivative arrangements covering a portion of its oil, NGL and gas production. The use of derivative risk management transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. If any of these counterparties were to default on its obligations under the Company’s derivative arrangements, such a default could have a material, adverse effect on the Company’s results of operations, and could result in a larger percentage of the Company’s future production being subject to commodity price changes. In addition, in light of the current economic outlook, it is possible that fewer counterparties will participate in derivative transactions, which could result in a greater concentration of the Company’s exposure to any one counterparty, or a larger percentage of the Company’s future production could be subject to commodity price changes.