Pioneer Natural Resources Company (PXD)

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Pioneer Natural Resources Company 10-Q 2008

Documents found in this filing:

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, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File Number:1-13245

PIONEER NATURAL RESOURCES COMPANY

(Exact name of Registrant as specified in its charter)

Delaware		75-2702753
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5205 N. O'Connor Blvd., Suite 200, Irving, Texas		75039
(Address of principal executive offices)		(Zip Code)

(972) 444-9001

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x		Accelerated filer	o

Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Number of shares of Common Stock outstanding as of November 5, 2008

117,689,829

11/7/2008 11:17:33 AM

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

		Page

Cautionary Statement Concerning Forward-Looking Statements		3

Definitions of Certain Terms and Conventions Used Herein		4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007		5

Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007		7

Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2008		8

Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2008 and 2007		9

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2008 and 2007		10

Notes to Consolidated Financial Statements		11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3. Quantitative and Qualitative Disclosures About Market Risk		57

Item 4. Controls and Procedures		60

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		61

Item 1A. Risk Factors		61

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 6. Exhibits		63

Signatures		64

Exhibit Index		65

PIONEER NATURAL RESOURCES COMPANY

Cautionary Statement Concerning Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate," or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.

These risks and uncertainties include, among other things, volatility of commodity prices, the financial strength of counterparties to the Company's credit facility and derivative contracts and the purchasers of the Company's oil, NGL and gas production, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, international operations and associated international political and economic instability, litigation, the costs and results of drilling and operations, access to and availability of drilling equipment and transportation, processing and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, uncertainties about estimates of reserves and resource potential and the ability to add proved reserves in the future, the assumptions underlying production forecasts, the quality of technical data, environmental and weather risks, and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this Report, other Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Item 1. Business — Competition, Markets and Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. The Company undertakes no duty to publicly update these statements except as required by law.

Definitions of Certain Terms and Conventions Used Herein

Within this Report, the following terms and conventions have specific meanings:

•	"Bbl" means a standard barrel containing 42 United States gallons.

•	"Bcf" means one billion cubic feet and is a measure of natural gas volume.

•	"BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or natural gas liquid.

•	"BOEPD" means BOE per day.

•	"Btu" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit.

•	"CBM" means coal bed methane.

•	"GAAP" means accounting principles that are generally accepted in the United States of America.

•	"IPO" means initial public offering.

•	"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.

•	"MBbl" means one thousand Bbls.

•	"MBOE" means one thousand BOEs.

•	"Mcf" means one thousand cubic feet and is a measure of natural gas volume.

•	"MMBbl" means one million Bbls.

•	"MMBOE" means one million BOEs.

•	"MMBtu" means one million Btus.

•	"MMcf" means one million cubic feet.

•	"MMcfpd" means one million cubic feet per day.

•	"Mont Belvieu–posted-price" means the daily average natural gas liquids components as priced in Oil Price Information Service ("OPIS") in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.

•	"NGL" means natural gas liquid.

•	"NYMEX" means the New York Mercantile Exchange.

•	"Pioneer" or "the Company" means Pioneer Natural Resources Company and its subsidiaries.

•	"Pioneer Southwest" means Pioneer Southwest Energy Partners L.P. and its subsidiaries.

•

"proved reserves" mean the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

(i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

(ii)Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based.

(iii)Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (C) crude oil, natural gas and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources.

•	"SEC" means the United States Securities and Exchange Commission.

•	"VPP" means volumetric production payment.

•	"U.S." means United States.

•

With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by the Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.

•	Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	66,817		$	12,171
Accounts receivable:
Trade, net of allowance for doubtful accounts of $30,890 and $7,657 as of September 30, 2008 and December 31, 2007, respectively		294,891			283,249
Due from affiliates		716			583
Income taxes receivable		49,316			40,046
Inventories		146,136			97,619
Prepaid expenses		16,710			9,378
Deferred income taxes		63,042			108,073
Other current assets:
Derivatives		27,548			33,970
Other		20,222			179,966
Total current assets		685,398			765,055
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties		9,828,666			8,973,634
Unproved properties		226,654			277,479
Accumulated depletion, depreciation and amortization		(2,358,385	)		(2,028,472	)
Total property, plant and equipment		7,696,935			7,222,641
Deferred income taxes		1,176			10,263
Goodwill		310,563			310,870
Other property and equipment, net		158,456			152,990
Other assets:
Derivatives		22,839			684
Other, net of allowance for doubtful accounts of $4,532 and $4,573 as of September 30, 2008 and December 31, 2007, respectively		191,214			154,478
	$	9,066,581		$	8,616,981

The financial information included as of September 30, 2008 has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

	September 30,			December 31,
	2008			2007
	(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable:
Trade	$	379,138		$	350,782
Due to affiliates		20,321			27,634
Interest payable		29,296			42,020
Income taxes payable		24,119			12,842
Other current liabilities:
Derivatives		111,255			262,547
Deferred revenue		150,396			158,138
Other		99,525			140,206
Total current liabilities		814,050			994,169

Long-term debt		2,823,371			2,755,491
Derivatives		49,971			77,929
Deferred income taxes		1,421,980			1,229,677
Deferred revenue		214,240			325,142
Minority interest in consolidated subsidiaries		57,933			11,942
Other liabilities		174,262			179,909
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 124,566,687 and 123,389,014 shares issued at September 30, 2008 and December 31, 2007, respectively		1,246			1,234
Additional paid-in capital		2,852,210			2,693,257
Treasury stock, at cost: 6,978,187 and 5,661,692 shares at September 30, 2008 and December 31, 2007, respectively		(316,473	)		(245,601	)
Retained earnings		1,064,155			822,089
Accumulated other comprehensive loss - deferred hedge losses, net of tax		(90,364	)		(228,257	)
Total stockholders' equity		3,510,774			3,042,722
Commitments and contingencies
	$	9,066,581		$	8,616,981

The financial information included as of September 30, 2008 has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues and other income:
Oil and gas	$	612,200		$	458,898		$	1,823,985		$	1,232,272
Interest and other		3,389			30,665			36,892			68,273
Gain (loss) on disposition of assets, net		190			558			4,768			(860	)
		615,779			490,121			1,865,645			1,299,685
Costs and expenses:
Oil and gas production		155,761			113,554			432,936			308,380
Depletion, depreciation and amortization		127,467			113,879			351,773			280,927
Impairment of oil and gas properties		89,753			(2,582	)		89,753			15,309
Exploration and abandonments		111,075			34,498			179,841			170,143
General and administrative		31,617			32,330			103,646			94,304
Accretion of discount on asset retirement obligations		2,180			1,702			6,482			5,025
Interest		37,689			35,476			113,423			94,432
Hurricane activity, net		541			110			2,400			60,658
Minority interest in consolidated subsidiaries' net income (loss)		8,422			172			15,388			(1,020	)
Other		38,926			7,015			58,799			21,720
		603,431			336,154			1,354,441			1,049,878

Income from continuing operations before income taxes		12,348			153,967			511,204			249,807
Income tax provision		(14,895	)		(60,948	)		(227,919	)		(92,181	)
Income (loss) from continuing operations		(2,547	)		93,019			283,285			157,626
Income (loss) from discontinued operations, net of tax		(491	)		8,908			2,245			10,374
Net income (loss)	$	(3,038	)	$	101,927		$	285,530		$	168,000

Basic earnings per share:
Income (loss) from continuing operations	$	(0.03	)	$	0.78		$	2.40		$	1.30
Income (loss) from discontinued operations, net of tax		—			0.07			0.02			0.09
Net income (loss)	$	(0.03	)	$	0.85		$	2.42		$	1.39

Diluted earnings per share:
Income (loss) from continuing operations	$	(0.03	)	$	0.77		$	2.37		$	1.29
Income (loss) from discontinued operations, net of tax		—			0.07			0.02			0.08
Net income (loss)	$	(0.03	)	$	0.84		$	2.39		$	1.37

Weighted average shares outstanding:
Basic		118,110			120,323			118,136			121,020
Diluted		118,110			121,805			119,493			122,496

Dividends declared per share	$	0.16		$	0.14		$	0.30		$	0.27

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except dividends per share)

(Unaudited)

	Shares Outstanding		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity

Balance as of January 1, 2008	117,727		$	1,234	$	2,693,257		$	(245,601	)	$	822,089		$	(228,257	)	$	3,042,722

Dividends declared ($0.30 per share)	—			—		—			—			(36,143	)		—			(36,143	)
Exercise of long-term incentive plan stock options and employee stock purchases	353			—		—			15,329			(7,321	)		—			8,008
Purchase of treasury stock	(1,669	)		—		—			(86,201	)		—			—			(86,201	)
Tax benefits related to stock-based compensation	—			—		381			—			—			—			381
Compensation costs:
Vested compensation awards	1,178			12		(12	)		—			—			—			—
Compensation costs included in net income	—			—		25,504			—			—			—			25,504
Gain on sale of Pioneer Southwest common units	—			—		133,080			—			—			—			133,080
Net income	—			—		—			—			285,530			—			285,530
Other comprehensive loss:
Deferred hedging activity, net of tax:
Hedge fair value changes, net	—			—		—			—			—			(106,594	)		(106,594	)
Net hedge losses included in continuing operations	—			—		—			—			—			244,487			244,487
Balance as of September 30, 2008	117,589		$	1,246	$	2,852,210		$	(316,473	)	$	1,064,155		$	(90,364	)	$	3,510,774

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Cash flows from operating activities:
Net income (loss)	$	(3,038	)	$	101,927		$	285,530		$	168,000
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		127,467			113,879			351,773			280,927
Impairment of oil and gas properties		89,753			(2,582	)		89,753			15,309
Exploration expenses, including dry holes		89,414			8,725			93,996			92,706
Hurricane activity, net		—			—			—			66,000
Deferred income taxes		(9,234	)		73,091			170,650			135,505
(Gain) loss on disposition of assets, net		(190	)		(558	)		(4,768	)		860
Accretion of discount on asset retirement obligations		2,180			1,702			6,482			5,025
Discontinued operations		3,304			6,719			3,677			41,518
Interest expense		3,671			4,092			11,551			13,305
Minority interest in consolidated subsidiaries' net income (loss)		8,422			172			15,388			(1,020	)
Commodity hedge related activity		15,602			5,349			31,118			15,982
Amortization of stock-based compensation		8,283			8,461			25,504			24,816
Amortization of deferred revenue		(39,708	)		(45,578	)		(118,644	)		(135,934	)
Other noncash items		26,748			4,902			30,562			1,744
Changes in operating assets and liabilities:
Accounts receivable, net		59,496			(55,383	)		(39,039	)		(54,821	)
Income taxes receivable		(120	)		(27,428	)		(9,522	)		(64,026	)
Inventories		(14,347	)		3,073			(54,990	)		(6,331	)
Prepaid expenses		(8,255	)		(6,432	)		(7,152	)		(1,213	)
Other current assets		(9,747	)		5,224			(2,561	)		5,037
Accounts payable		16,533			44,334			15,364			11,748
Interest payable		(15,878	)		(12,858	)		(12,724	)		(2,592	)
Income taxes payable		(16,584	)		1,697			11,528			4,597
Other current liabilities		(30,941	)		(41,915	)		(79,913	)		(79,169	)
Net cash provided by operating activities		302,831			190,613			813,563			537,973
Cash flows from investing activities:
Proceeds from disposition of assets, net of cash sold		(2,421	)		(2,990	)		143,352			15,047
Additions to oil and gas properties		(380,113	)		(355,485	)		(996,721	)		(1,330,284	)
Additions to other assets and other property and equipment, net		(10,704	)		(60,150	)		(31,350	)		(89,825	)
Net cash used in investing activities		(393,238	)		(418,625	)		(884,719	)		(1,405,062	)
Cash flows from financing activities:
Borrowings under long-term debt		179,000			411,000			794,998			1,502,000
Principal payments on long-term debt		—			(32,075	)		(732,775	)		(393,630	)
Proceeds from issuance of partnership common units, net of issuance costs		—			—			165,978			—
Borrowings (payments) of other liabilities		(8,569	)		(195	)		4,686			(9,755	)
Exercise of long-term incentive plan stock options and employee stock purchase plan		2,226			2,623			8,008			9,708
Purchase of treasury stock		(58,689	)		(160,500	)		(86,201	)		(214,749	)
Excess tax benefit (provision) from share-based payment arrangements		(23	)		365			381			4,686
Payment of financing fees		—			(12	)		(12,377	)		(4,307	)
Dividends paid		(3	)		—			(16,896	)		(16,035	)
Net cash provided by financing activities		113,942			221,206			125,802			877,918
Net increase (decrease) in cash and cash equivalents		23,535			(6,806)			54,646			10,829
Effect of exchange rate changes on cash and cash equivalents		—			758			—			1,409

Cash and cash equivalents, beginning of period			43,282			25,319			12,171			7,033
Cash and cash equivalents, end of period		$	66,817		$	19,271		$	66,817		$	19,271

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008		2007

Net income (loss)	$	(3,038	)	$	101,927	$	285,530	$	168,000
Other comprehensive income:
Net hedge activity, net of tax:
Hedge fair value changes, net

Pioneer Natural Resources Company (PXD)

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