ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Reserve Estimation Procedures and Audits
The information included in this Report about the Company's proved reserves as of December 31, 2012, 2011 and 2010 is based on evaluations prepared by the Company's engineers and (i) audited by Netherland, Sewell & Associates, Inc. ("NSAI"), with respect to the Company's major properties for all periods, and (ii) with respect to the Company's Oooguruk field properties in Alaska, audited by Ryder Scott Company, L.P. ("RSC"), as of December 31, 2012. The Company has no oil and gas reserves from non-traditional sources. Additionally, the Company does not provide optional disclosure of probable or possible reserves. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding the sale of the Company's share holdings in Pioneer Tunisia during February 2011 and the Company's sale of Pioneer South Africa in August 2012.
Reserve estimation procedures. The Company has established internal controls over reserve estimation processes and procedures to support the accurate and timely preparation and disclosure of reserve estimates in accordance with SEC and GAAP requirements. These controls include oversight of the reserves estimation reporting processes by Pioneer's Worldwide Reserves Group (the "WWR"), and annual external audits of substantial portions of the Company's proved reserves by NSAI and RSC.
Individual asset teams are responsible for the day-to-day management of the oil and gas activities in each of the Company's Permian Basin, Rockies, Mid-Continent, South Texas, Barnett Shale and Alaska asset areas (the "Asset Teams"). The Company's Asset Teams are each staffed with reservoir engineers and geoscientists who prepare reserve estimates at the end of each calendar quarter for the assets that they manage, using reservoir engineering information technology. There is shared oversight of the Asset Teams' reservoir engineers by the Asset Teams' managers and the Director of the WWR, each of whom is in turn subject to direct or indirect oversight by the Company's management committee ("MC"). The Company's MC is comprised of its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and other Executive Vice Presidents. The Asset Teams' reserve estimates are reviewed by the asset team reservoir engineers before being submitted to the WWR for further review.
The reserve estimates are summarized in reserve reconciliations that quantify reserve changes since the previous year end as revisions of previous estimates, purchases of minerals-in-place, improved recovery, extensions and discoveries, production and sales of minerals-in-place. All reserve estimates, material assumptions and inputs used in reserve estimates and significant changes in reserve estimates are reviewed for engineering and financial appropriateness and compliance with SEC and GAAP standards by the WWR, in consultation with the Company's accounting and financial management personnel. Annually, the MC reviews the reserve estimates and any differences with the reserve auditors (for the portion of the reserves audited by NSAI and RSC) on a consolidated basis before these estimates are approved. The engineers and geoscientists who participate in the reserve estimation and disclosure process periodically attend training provided by external consultants and/or through internal Pioneer programs. Additionally, the WWR has prepared and maintains written policies and guidelines for the Asset Teams to reference on reserve estimation and preparation to promote objectivity in the preparation of the Company's reserve estimates and SEC and GAAP compliance in the reserve estimation and reporting process.
Proved reserves audits. The proved reserve audits performed by NSAI for 2012, 2011 and 2010, and by RSC for 2012, in the aggregate represented 95 percent, 90 percent and 90 percent of the Company's 2012, 2011 and 2010 proved reserves, respectively; and, 99 percent, 91 percent and 79 percent of the Company's 2012, 2011 and 2010 associated pre-tax present value of proved reserves discounted at ten percent, respectively.
PIONEER NATURAL RESOURCES COMPANY
NSAI and RSC follow the general principles set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information" promulgated by the Society of Petroleum Engineers (the "SPE"). A reserve audit as defined by the SPE is not the same as a financial audit. The SPE's definition of a reserve audit includes the following concepts:
•
A reserve audit is an examination of reserve information that is conducted for the purpose of expressing an opinion as to whether such reserve information, in the aggregate, is reasonable and has been presented in conformity with the 2007 SPE publication entitled "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information."
•
The estimation of reserves is an imprecise science due to the many unknown geologic and reservoir factors that cannot be estimated through sampling techniques. Since reserves are only estimates, they cannot be audited for the purpose of verifying exactness. Instead, reserve information is audited for the purpose of reviewing in sufficient detail the policies, procedures and methods used by a company in estimating its reserves so that the reserve auditors may express an opinion as to whether, in the aggregate, the reserve information furnished by a company is reasonable.
•
The methods and procedures used by a company, and the reserve information furnished by a company, must be reviewed in sufficient detail to permit the reserve auditor, in its professional judgment, to express an opinion as to the reasonableness of the reserve information. The auditing procedures require the reserve auditor to prepare its own estimates of reserve information for the audited properties.
In conjunction with the audit of the Company's proved reserves and associated pre-tax present value discounted at ten percent, Pioneer provided to NSAI and RSC its external and internal engineering and geoscience technical data and analyses. Following the reserve auditors' review of that data, they had the option of honoring Pioneer's interpretations, or making their own interpretations. No data was withheld from NSAI or RSC. The reserve auditors accepted without independent verification the accuracy and completeness of the historical information and data furnished by Pioneer with respect to ownership interest, oil and gas production, well test data, commodity prices, operating and development costs, and any agreements relating to current and future operations of the properties and sales of production. However, if in the course of their evaluations something came to their attention that brought into question the validity or sufficiency of any such information or data, the reserve auditors did not rely on such information or data until they had satisfactorily resolved their questions relating thereto or had independently verified such information or data.
In the course of their evaluations, NSAI and RSC prepared, for all of the audited properties, their own estimates of the Company's proved reserves and the pre-tax present values of such reserves discounted at ten percent. The reserve auditors reviewed their audit differences with the Company, and, in a number of cases, held meetings with the Company to review additional reserves work performed by the Company's technical teams and any updated performance data related to the proved reserve differences. Such data was incorporated, as appropriate, by both parties into the proved reserve estimates. The reserve auditors' estimates, including any adjustments resulting from additional data, of those proved reserves and the pre-tax present value of such reserves discounted at ten percent did not differ from Pioneer's estimates by more than ten percent in the aggregate. However, when compared on a lease-by-lease, field-by-field or area-by-area basis, some of the Company's estimates were greater than those of the reserve auditors and some were less than the estimates of the reserve auditors. When such differences do not exceed ten percent in the aggregate and NSAI and RSC are satisfied that the proved reserves and pre-tax present values of such reserves discounted at ten percent are reasonable and that their audit objectives have been met, NSAI and RSC will issue an unqualified audit opinion. Remaining differences are not resolved due to the limited cost benefit of continuing such analyses by the Company and the reserve auditors. At the conclusion of the audit process, it was the opinions of NSAI and RSC, as set forth in their audit letters, which are included as exhibits to this Report, that Pioneer's estimates of the Company's proved oil and gas reserves and associated pre-tax present values discounted at ten percent are, in the aggregate, reasonable and have been prepared in accordance with the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the SPE.
See "Item 1A. Risk Factors," "Critical Accounting Estimates" in "Item 7. Management's Discussion and Analysis and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" for additional discussions regarding proved reserves and their related cash flows.
Qualifications of reserves preparers and auditors. The WWR is staffed by petroleum engineers with extensive industry experience and is managed by the Director of the WWR, the technical person that is primarily responsible for overseeing the Company's reserves estimates. These individuals meet the professional qualifications of reserves estimators and reserves auditors as defined by the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information," promulgated by the SPE. The WWR Director's qualifications include 35 years of experience as a petroleum engineer, with 28 years focused on reserves reporting for independent oil and gas companies, including Pioneer. His educational background includes an undergraduate degree in Chemical Engineering and a Masters of Business Administration degree in Finance. He is also a Chartered Financial Analyst Charterholder.
NSAI provides worldwide petroleum property analysis services for energy clients, financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional
PIONEER NATURAL RESOURCES COMPANY
Engineers Registration No.. The technical person primarily responsible for auditing the Company's reserves estimates has been a practicing consulting petroleum engineer at NSAI since 1983 and has over 34 years of practical experience in petroleum engineering, including over 32 years of experience in the estimation and evaluation of proved reserves. He graduated with a Bachelor of Science degree in Chemical Engineering in 1978 and meets or exceeds the education, training and experience requirements set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the board of directors of the SPE.
RSC provides worldwide petroleum property analysis services for energy clients, financial organizations and government agencies. RSC was founded in 1937 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No.. The technical person primarily responsible for auditing the Company's reserves estimates has been a practicing consulting petroleum engineer at RSC since 2000 and has over 28 years of practical experience in petroleum engineering. He graduated with a Bachelor of Science degree in Petroleum Engineering and a Master of Business Administration degree and meets or exceeds the education, training and experience requirements set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the board of directors of the SPE.
Technologies used in reserves estimates. Proved undeveloped reserves include those reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Undeveloped reserves may be classified as proved reserves on undrilled acreage directly offsetting development areas that are reasonably certain of production when drilled, or where reliable technology provides reasonable certainty of economic producibility. Undrilled locations may be classified as having undeveloped proved reserves only if an ability and intent has been established to drill the reserves within five years, unless specific circumstances justify a longer time period.
In the context of reserves estimations, reasonable certainty means a high degree of confidence that the quantities will be recovered and reliable technology means a grouping of one or more technologies (including computational methods) that has been field-tested and has been demonstrated to provide reasonable certain results with consistency and repeatability in the formation being evaluated or in an analogous formation. In estimating proved reserves, the Company uses several different traditional methods such as performance-based methods, volumetric-based methods and analogy with similar properties. In addition, the Company utilizes additional technical analysis such as seismic interpretation, wireline formation tests, geophysical logs and core data to provide incremental support for more complex reservoirs. Information from this incremental support is combined with the traditional technologies outlined above to enhance the certainty of the Company's reserve estimates.
PIONEER NATURAL RESOURCES COMPANY
Proved Reserves
As of December 31, 2012, the Company's oil and gas proved reserves are located entirely in the United States. Less than one percent of proved reserves as of December 31, 2011 were associated with discontinued operations in South Africa and three percent of proved reserves as of December 31, 2010 were associated with discontinued operations in South Africa and Tunisia. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional details of the Company's discontinued operations. The following table provides information regarding the Company's proved reserves and Standardized Measure as of December 31, 2012, 2011 and 2010:
______________________
(a)
The gas reserves contain 280,344 MMCF, 301,123 MMCF and 303,748 MMCF of gas that will be produced and used as field fuel (primarily for compressors) before the gas is delivered to a sales point, for December 31, 2012, 2011 and 2010, respectively.
See the "Unaudited Supplementary Information" section included in "Item 8. Financial Statements and Supplementary Data" for additional details of the estimated quantities of the Company's proved reserves.
Description of Properties
Approximately 78 percent of the Company's proved reserves at December 31, 2012 are located in the Spraberry field in the Permian Basin area, the Hugoton and West Panhandle fields in the Mid-Continent area and the Raton field in the Rocky Mountains area. These fields generate substantial operating cash flow, which provides funding for the Company's development and exploration activities in the Spraberry field, Eagle Ford Shale play, Barnett Shale Combo play and Alaska.
The following tables summarize the Company's development and exploration/extension drilling activities during 2012:
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during 2012:
_____________________
(a)
Gas production excludes gas produced and used as field fuel.
The following table summarizes the Company's costs incurred by asset area during 2012:
____________________
(a)
Includes $8.5 million of capitalized interest associated with the Oooguruk development project.
Permian Basin
Spraberry field. The Spraberry field was discovered in 1949 and encompasses eight counties in West Texas. According to the Energy Information Administration, the Spraberry field is the second largest oil field in the United States. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average energy content of 1,400 BTU. The oil and gas are produced primarily from four formations, the upper and lower Spraberry, the Dean and the Wolfcamp, at depths ranging from 6,700 feet to 11,300 feet. In addition, the Company is drilling deeper to the Strawn, Atoka and Mississippian intervals with positive results.
The Company believes the Spraberry field offers excellent opportunities to grow oil and gas production because of the numerous undeveloped drilling locations, many of which are reflected in the Company's proved undeveloped reserves. The
PIONEER NATURAL RESOURCES COMPANY
Spraberry field has the ability to improve incremental recovery rates through infill and deeper formation drilling, waterflood projects and horizontal drilling in certain formations while containing operating expenses and drilling costs through economies of scale and vertical integration of field services.
During 2012, the Company drilled 691 wells in the Spraberry field and its total acreage position now approximates 827,000 gross acres (707,000 net acres). The Company currently has 24 rigs operating in the Spraberry field, of which 15 are drilling vertical wells and nine are drilling horizontal Wolfcamp Shale wells. During 2013, the Company expects to drill approximately 290 vertical wells and 120 horizontal wells, with the horizontal wells being principally in the Wolfcamp Shale horizon. Excluding the southern Wolfcamp joint interest area, the Company expects to incur $1.2 billion of drilling capital in the Spraberry field during 2013.
In the horizontal Wolfcamp Shale play, the Company believes it has significant resource potential within its acreage based on its extensive geologic data covering the Wolfcamp A, B, C and D intervals and its drilling results to-date. The Company's horizontal drilling activity for 2013 will be focused on the southern part of the play where the Company expects to drill 86 horizontal Wolfcamp Shale wells and the northern part of the play where the Company expects to drill 30 to 40 horizontal wells.
The Company believes it also has significant horizontal potential within the northern portion of its acreage in the play. During the fourth quarter of 2012, the Company initiated horizontal Wolfcamp drilling activities to delineate the northern part of its Spraberry acreage position by drilling in Midland County. During 2013, the Company plans to also test the Wolfcamp Shale potential in Martin County and possibly Gaines County. Wells drilled in these areas are expected to benefit from greater original oil in place and higher reservoir pressures associated with deeper drilling depths. In addition, during 2013, the Company plans to drill several Spraberry shale and Jo Mill horizontal wells. The Company expects to utilize four horizontal rigs in its northern acreage during 2013 to delineate the area's resource potential.
The Company continues to drill vertically to deeper intervals in the Spraberry field below the Wolfcamp interval. This deeper drilling includes the Strawn, Atoka and Mississippian intervals. Production from these deeper intervals contributed to the Company's production growth during 2012. The 2013 drilling program reflects 90 percent of the wells being deepened below the Wolfcamp interval. Based on results to-date, the Company estimates that 85 percent of its Spraberry acreage position is prospective for the Strawn interval, that 40 percent to 50 percent of its acreage position is prospective for the Atoka interval and that the Mississippian interval is prospective in 20 percent of the Company's Spraberry acreage.
In the Spraberry interval, during 2012, the Company drilled two successful horizontal Jo Mill wells with lateral lengths of 2,628 and 2,178 feet. The Company is continuing to analyze the results of the two wells and plans to drill additional horizontal Jo Mill wells in 2013.
In January 2013, the Company signed an agreement with Sinochem, an unaffiliated third party, to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field for consideration of $1.7 billion. At closing Sinochem will pay $522.0 million in cash to Pioneer, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the horizontal Wolfcamp Shale play. This transaction is expected to close during the second quarter of 2013, subject to governmental and third party approvals.
The Company and Sinochem have agreed to a plan to drill 86 horizontal Wolfcamp Shale wells during 2013, 120 wells in 2014 and 165 wells in 2015. Associated therewith, the Company expects to incur $425.0 million of drilling and facilities capital during 2013. To the extent the joint interest partner elects to participate in any vertical wells that are drilled in the joint interest area after the December 1, 2012 effective date, the joint interest partner will receive its share of production and costs from the Wolfcamp and deeper horizons based on the anticipated reserve contribution from the Wolfcamp and deeper intervals relative to anticipated reserves from all completed intervals. Pioneer's and the joint interest owner's participation in vertical wells will be based on each party's interest without any drilling carry being applied. Pioneer will retain 100 percent of its vertical production in the joint interest area for wells drilled before the December 1, 2012 effective date.
The Company continues to expand its integrated services to control drilling and operating costs and support the execution of its drilling and production activities in the Spraberry field. The Company owns 15 drilling rigs and has five Company-owned vertical fracture stimulation fleets totaling 100,000 horsepower and two Company-owned horizontal fracture stimulation fleets totaling 70,000 horsepower currently operating in the Spraberry field. To support its growing operations, the Company also owns other field service equipment, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, blowout preventers, construction equipment and fishing tools. In addition, in early April 2012, the Company completed the acquisition of Premier Silica, which is expected to supply the Company's growing brown sand requirements for proppant that will be used for fracture stimulating wells in the vertical Spraberry and horizontal Wolfcamp Shale plays.
PIONEER NATURAL RESOURCES COMPANY
Mid-Continent
Hugoton field. The Hugoton field in southwest Kansas is one of the largest producing gas fields in the continental United States. The gas is produced from the Chase and Council Grove formations at depths ranging from 2,700 feet to 3,000 feet. The Company's Hugoton properties are located on 268,000 gross acres (235,000 net acres), covering approximately 400 square miles. The Company has working interests in approximately 1,220 wells in the Hugoton field, approximately 1,000 of which it operates.
The Company operates substantially all of the gathering and processing facilities, including the Satanta plant, which processes the production from the Hugoton field. In January 2011, the Company sold a 49 percent interest in the Satanta plant to an unaffiliated third party for the third party's commitment to dedicate gas volumes to the Satanta plant. This agreement has increased the Satanta plant's processing volumes and is expected to increase its economic longevity. The Company is also exploring opportunities to process other gas production in the Hugoton area at the Satanta plant. By maintaining operatorship of the gathering and processing facilities, the Company is able to control the production, gathering, processing and sale of its Hugoton field gas and NGL production.
West Panhandle field. The West Panhandle properties are located in the panhandle region of Texas. These stable, long-lived reserves are attributable to the Red Cave, Brown Dolomite, Granite Wash and fractured Granite formations at depths no greater than 3,500 feet. The Company's gas has an average energy content of 1,365 BTU and is produced from approximately 867 wells on more than 333,000 gross acres (312,000 net acres) covering over 375 square miles. The Company controls 100 percent of the wells, production equipment, gathering system and the Fain gas processing plant for the field. As this field is operated at or below vacuum conditions, Pioneer continually works to improve compressor and gathering system efficiency.
Raton Basin
The Raton Basin properties are located in the southeast portion of Colorado. The Company owns 212,000 gross acres (186,000 net acres) in the center of the Raton Basin and produces CBM gas from the coal seams in the Vermejo and Raton formations from approximately 2,300 wells. The Company owns the majority of the well servicing and fracture stimulation equipment that it utilizes in the Raton field, allowing it to control costs and insure availability.
South Texas Eagle Ford Shale and Edwards
The Company's drilling activities in the South Texas area during 2012 continued to be primarily focused on delineation and development of Pioneer's substantial acreage position in the Eagle Ford Shale play. The 2012 drilling program has been focused on liquids-rich drilling, with only 10 percent of the wells designated to hold strategic dry gas acreage.
The Company completed 137 horizontal Eagle Ford Shale wells during 2012, all of which were successful, with average lateral lengths of 5,700 feet and, on average, 13-stage fracture stimulations. The Company plans to incur $575 million of drilling capital and utilize 10 drilling rigs in 2013 to drill 134 wells. The Company plans to primarily use two Pioneer-owned fracture stimulation fleets during 2013.
The Company has also been testing the use of lower-cost white sand instead of ceramic proppant to fracture stimulate wells drilled in shallower areas of the field. The Company is expanding the use of white sand proppant to deeper areas of the field to further define its performance limits. Early well performance has been similar to direct offset ceramic-stimulated wells. The Company is continuing to monitor the performance of these wells and expects that greater than 50 percent of its 2013 drilling program will use lower-cost white sand proppant.
During June 2010, the Company entered into an Eagle Ford Shale joint venture transaction. Pursuant to the transaction, the Company entered into a purchase and sale agreement to sell 45 percent of its Eagle Ford Shale proved and unproved oil and gas properties to an unaffiliated third party for $212.0 million of cash proceeds. Under the terms of the transaction, the purchaser also paid 75 percent (representing $886.8 million) of the Company's defined exploration, drilling and completion costs attributable to the Eagle Ford Shale assets during the period from June 2010 through December 2012. As of December 31, 2012, the purchaser's obligation has been satisfied. The Company also sold a 49.9 percent member interest in EFS Midstream LLC ("EFS Midstream"), an entity formed by the Company to own and operate gas and liquids gathering, treating and transportation assets in the Eagle Ford Shale play, to the purchaser for $46.4 million of cash proceeds and deferred a $46.2 million associated net gain. The Company does not have voting control of EFS Midstream and does not consolidate its financial statements.
EFS Midstream is obligated to construct midstream assets in the Eagle Ford Shale area. Construction of the midstream assets is continuing, with the majority of the construction expected to be completed by the end of 2013. Eleven of the 13 planned central gathering plants were completed as of December 31, 2012. EFS Midstream is providing gathering, treating and transportation services for the Company during a 20-year contractual term. During 2011, EFS Midstream entered into a $300 million, five-year revolving credit facility that is being used to fund infrastructure investments that exceed its operating cash flows.
PIONEER NATURAL RESOURCES COMPANY
Barnett Shale
The Company has accumulated 93,000 gross acres in the liquid-rich Barnett Shale Combo area in North Texas. In addition, the Company has acquired approximately 340 square miles of proprietary 3-D seismic covering its acreage, which it is using to high-grade future drilling location selections. The Company's total lease holdings in the Barnett Shale play now approximate 149,000 gross acres (114,000 net acres).
During the first half of 2012, the Company had two drilling rigs and one Pioneer-owned fracture stimulation fleet operating in the field. During August 2012, the Company reduced to one drilling rig as a result of lower NGL and gas prices. The Company drilled 57 Barnett Shale Combo wells during 2012.
During the third quarter of 2012, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas, retained a capital markets advisor and actively solicited offers from interested purchasers of the Barnett Shale field assets. Those efforts were unsuccessful in attracting binding offers under acceptable terms to the Company. Since the Company was unable to dispose of its Barnett Shale assets under acceptable terms, in December 2012, the Company decided to retain the assets; therefore, as of December 31, 2012, the Barnett Shale assets and liabilities no longer qualified as held for sale or discontinued operations.
During 2013, the Company plans to increase from one drilling rig to two drilling rigs early in the second quarter. The Company expects to drill 55 wells in 2013 and incur capital expenditures of $185.0 million.
Alaska
The Company owns a 70 percent working interest in, and is the operator of, the Oooguruk development project. Since inception, the Company has drilled 18 production wells and ten injection wells to develop this project. During the first quarter of 2012, the Company drilled an exploration well which was drilled from an onshore location to further evaluate the productivity of the Torok formation and the feasibility of future development expansion. The Company flow tested the well during April 2012 until production could no longer be transported along the ice road being utilized. The well had a gross initial production rate of approximately 2,000 barrels of oil per day. The well will be production tested again this winter pending permanent onshore production facilities, for which an onshore development front-end engineering design (FEED) study has been initiated. In September 2012, the Company entered into a contract for a drilling rig that is currently drilling a second onshore well in the Torok formation to further appraise its resource potential.
During the first quarter of 2012, the Company also completed its first successful mechanically diverted fracture stimulation of a Nuiqsut interval well from the Oooguruk development facilities. Gross initial production from the test was at a rate of 4,000 barrels of oil per day. Based on the success of this fracture stimulation, the Company plans to fracture stimulate four new wells this winter using a similar completion design.
During 2013, the Company expects to incur capital expenditures of $190.0 million in Alaska to continue development with a one rig program at Oooguruk, mechanically fracture stimulate four wells this winter on the island drill site and to complete the other appraisal well in the Torok formation from the onshore drilling location.
International
During 2012, the Company's international operations were entirely located in offshore South Africa and during 2011, the Company's international operations were located in Tunisia and offshore South Africa. During August 2012 and February 2011, the Company completed the sale of Pioneer South Africa and Pioneer Tunisia, respectively, to different unaffiliated third parties. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding the sale of Pioneer South Africa and Pioneer Tunisia. As a result of these sales, the Company no longer has operations outside the United States.
Selected Oil and Gas Information
The following tables set forth selected oil and gas information for the Company as of and for each of the years ended December 31, 2012, 2011 and 2010. Because of normal production declines, increased or decreased drilling activities and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
PIONEER NATURAL RESOURCES COMPANY
Production, price and cost data. The price that the Company receives for the oil and gas it produces is largely a function of market supply and demand. Demand is affected by general economic conditions, weather and other seasonal conditions, including hurricanes and tropical storms. Over or under supply of oil or gas can result in substantial price volatility. Historically, commodity prices have been volatile and the Company expects that volatility to continue in the future. A substantial or extended decline in oil or gas prices or poor drilling results could have a material adverse effect on the Company's financial position, results of operations, cash flows, quantities of oil and gas reserves that may be economically produced and the Company's ability to access capital markets.
The following tables set forth production, price and cost data with respect to the Company's properties for 2012, 2011 and 2010. These amounts represent the Company's historical results from operations without making pro forma adjustments for any acquisitions, divestitures or drilling activity that occurred during the respective years. The production amounts will not match the reserve volume tables in the "Unaudited Supplementary Information" section included in "Item 8. Financial Statements and Supplementary Data" because field fuel volumes are included in the reserve volume tables.
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA
____________________
(a)
The Company records the amortization of deferred VPP revenue at a field level but does not record the results of its hedging activities at a field level. As of December 31, 2012, the Company has no further obligation to deliver oil under the VPP obligation.
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (Continued)
_____________________
(a)
The Company records the amortization of deferred VPP revenue at a field level but does not record the results of its hedging activities at a field level.
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (Continued)
____________________
(a)
The Company records the amortization of deferred VPP revenue at a field level but does not record the results of its hedging activities at a field level.
PIONEER NATURAL RESOURCES COMPANY
Productive wells. Productive wells consist of producing wells and wells capable of production, including shut-in wells and gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. One or more completions in the same well bore are counted as one well. Any well in which one of the multiple completions is an oil completion is classified as an oil well. As of December 31, 2012, the Company owned interests in two gross wells containing multiple completions.
The following table sets forth the number of productive oil and gas wells attributable to the Company's properties as of December 31, 2012, 2011 and 2010:
PRODUCTIVE WELLS
Leasehold acreage. The following table sets forth information about the Company's developed, undeveloped and royalty leasehold acreage as of December 31, 2012:
LEASEHOLD ACREAGE
The following table sets forth the expiration dates of the leases on the Company's gross and net undeveloped acres as of December 31, 2012:
_____________________
(a)
Acres expiring are based on contractual lease maturities.
PIONEER NATURAL RESOURCES COMPANY
Drilling and other exploratory and development activities. The following table sets forth the number of gross and net wells drilled by the Company during 2012, 2011 and 2010 that were productive or dry holes. This information should not be considered indicative of future performance, nor should it be assumed that there was any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to the Company of productive wells compared to the costs of dry holes.
DRILLING ACTIVITIES
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(a)
Represents the ratio of those wells that were successfully completed as producing wells or wells capable of producing to total wells drilled and evaluated.
Present activities. The following table sets forth information about the Company's wells that were in process of being drilled as of December 31, 2012:
ITEM 3.
LEGAL PROCEEDINGS
The Company is party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. See Note J of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding legal proceedings involving the Company.
ITEM 4.
MINE SAFETY DISCLOSURES
The Company's sand mines are subject to regulation by the Federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Annual Report filed on Form 10-K.
PIONEER NATURAL RESOURCES COMPANY
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is listed and traded on the NYSE under the symbol "PXD." The Company's board of directors (the "Board") declared dividends to the holders of the Company's common stock of $.04 per share during each of the first and third quarters of the years ended December 31, 2012 and 2011. The Board intends to consider the payment of dividends to the holders of the Company's common stock in the future. The declaration and payment of future dividends, however, will be at the discretion of the Board and will depend on, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the Board deems relevant.
The following table sets forth quarterly high and low prices of the Company's common stock and dividends declared per share for the years ended December 31, 2012 and 2011:
On February 8, 2013, the last reported sales price of the Company's common stock, as reported in the NYSE composite transactions, was $128.97 per share.
As of February 8, 2013, the Company's common stock was held by 14,429 holders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company's purchases of its common stock during the three months ended December 31, 2012:
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(a)
Consists of shares withheld to satisfy tax withholding on employees' share-based awards.
PIONEER NATURAL RESOURCES COMPANY
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and for each of the five years ended December 31, 2012 should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
______________________
(a)
The Company's oil and gas revenues for 2012, as compared to those of 2011, increased by $517.6 million (or 23 percent) due to increases in oil, NGL, and gas sales volumes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussions about oil and gas revenues and factors impacting the comparability of such revenues.
(b)
The Company recognized $330.3 million of net derivative gains in its total revenues for 2012, including $65.4 million of noncash MTM losses, as compared to $392.8 million of net derivative gains during 2011, including $225.5 million of noncash MTM gains. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Notes B and E of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information about the Company's derivative contracts and associated accounting methods. The Company also recognized $138.9 million of net hurricane activity gains during 2010, primarily associated with East Cameron 322 insurance recoveries, and $17.3 million of net hurricane activity charges during 2009. See Note B of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for more information about the East Cameron 322 reclamation and abandonment project.
(c)
During 2012, the Company recorded $604.4 million of pretax noncash impairment and abandonment charges to reduce the carrying value of its Barnett Shale field assets. During 2011, the Company recorded an impairment charge of $354.4 million related to its Edwards and Austin Chalk net assets in South Texas. See Note D of Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data." During 2009 and 2008, the Company recorded impairment charges of $21.1 million and $89.8 million, respectively, to reduce its Uinta/Piceance field's carrying value.
(d)
During December 2011, the Company committed to a plan to divest Pioneer South Africa and in August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, resulting in a pretax gain of $28.6 million. During December 2010, the Company committed to a plan to sell Pioneer Tunisia and in February 2011 completed the sale of the Company's share holdings in Pioneer Tunisia to an unaffiliated party for net cash proceeds of $802.5 million, excluding cash and cash equivalents sold, resulting in a pretax gain of $645.2 million. During 2010, the Company received $35.3
PIONEER NATURAL RESOURCES COMPANY
million of interest on excess royalties paid during the period from January 1, 2003 through December 31, 2005 on oil and gas production from its deepwater Gulf of Mexico properties, which were sold in 2006. During 2009, the Company recorded $119.3 million of pretax income for the recovery of the excess royalties previously mentioned and a $17.5 million pretax gain, primarily from the sale of substantially all of its Gulf of Mexico shelf properties. The results of operations of these properties, and certain other properties sold during the periods presented are classified as discontinued operations in accordance with GAAP. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for more information about the Company's discontinued operations.
PIONEER NATURAL RESOURCES COMPANY
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial and Operating Performance
Pioneer's financial and operating performance for 2012 included the following highlights:
•
Earnings attributable to common stockholders was $192.3 million ($1.50 per diluted share) for the year ended December 31, 2012, as compared to $834.5 million ($6.88 per diluted share) in 2011. The decrease in earnings attributable to common stockholders is primarily due to:
•
a $368.0 million decrease in income from discontinued operations, net of associated income taxes, primarily attributable to a $645.2 million pretax gain on the sale of Pioneer Tunisia during February 2011;
•
a $231.9 million increase in DD&A, primarily due to a 29 percent increase in sales volumes;
•
a $188.5 million increase in oil and gas production costs, primarily due to increases in lease operating expenses as a result of higher sales volumes and inflation of oilfield service costs;
•
a $178.2 million increase in impairment provisions related to a $532.6 million impairment in the Barnett Shale field associated with reductions in management's commodity price outlook (see Note D of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" and "Results of Operations" below) compared to a $354.4 million impairment related to Edwards and Austin Chalk net assets in South Texas in 2011;
•
an $85.0 million increase in exploration and abandonments expense, primarily due to impairment of unproved gas prospects in the Barnett Shale field;
•
a $62.5 million decrease in net derivative gains, primarily due to reduced interest rate derivative gains during 2012; and
•
a $55.1 million increase in general and administrative expenses due to increases in compensation expense related to a 16 percent increase in office employees supporting the Company's capital expansion initiatives, partially offset by
•
a $517.6 million increase in oil and gas revenues as a result of increased sales volumes, partially offset by lower average sales prices; and
•
a $105.3 million decrease in income tax provision.
•
Daily sales volumes from continuing operations increased on a BOE basis by 29 percent to 155,522 BOEPD during 2012, as compared to 120,418 BOEPD during 2011, primarily due to the success of the Company's drilling programs;
•
Average reported oil, NGL and gas prices from continuing operations decreased during 2012 to $90.89 per BBL, $33.75 per BBL and $2.60 per MCF, respectively, as compared to respective average reported prices of $96.60 per BBL, $46.27 per BBL and $3.84 per MCF during 2011;
•
Average oil and gas production costs per BOE from continuing operations increased during 2012 to $11.16 as compared to per BOE costs of $10.17 during 2011, primarily due to increases in lease operating expenses, third party transportation charges and net natural gas plant charges. The increase in lease operating expenses is primarily due to an increase in salt water disposal costs (principally comprised of water hauling fees) during 2012. The increase in third-party transportation costs is primarily due to gathering, treating and transportation costs associated with increasing sales volumes in the Eagle Ford Shale field. Net natural gas plant charges increased primarily as a result of lower gas and NGL prices being realized on third-party volumes that are retained as processing fees in Company-owned facilities. See "Results of Operations" below for more information about changes in production costs;
•
Net cash provided by operating activities increased by $307.9 million, or 20 percent, to $1.8 billion for 2012, as compared to $1.5 billion during 2011, primarily due to the increases in oil and gas sales volumes and realized derivative gains;
•
During April 2012, the Company acquired 100 percent of the share capital of Industrial Sands Holding Company and its wholly-owned subsidiary, Premier Silica. Premier Silica's core business is the operation of mines and processing facilities that produce, process and sell sand, primarily to upstream oil and gas companies for proppant used in the fracture stimulation of oil and gas wells in the United States. The aggregate purchase price of Premier Silica was $297.1 million and was funded from available cash and borrowings under the Company's credit facility;
•
During May 2012, the Company was rated investment grade by a second credit rating agency after having been similarly rated investment grade by another credit rating agency during 2011;
•
During the December 2012, the Company entered into the First Amendment to Second Amended and Restated 5-Year Credit Agreement (the "Credit Facility") with a syndicate of financial institutions that increased the Company's borrowing capacity under the Credit Facility to $1.5 billion and extended its maturity to December 2017;
PIONEER NATURAL RESOURCES COMPANY
•
Long-term debt increased by $1.2 billion and the Company's cash and cash equivalents decreased by $308.1 million during 2012; and
•
As of December 31, 2012, the Company's net debt to book capitalization was 37 percent, as compared to 26 percent as of December 31, 2011.
During the first quarter of 2013, the following significant events occurred:
•
In January 2013, the Company signed an agreement with Sinochem, an unaffiliated third party to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field for consideration of $1.7 billion. At closing, Sinochem will pay $522.0 million in cash to Pioneer, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the horizontal Wolfcamp Shale play. This transaction is expected to close during the second quarter of 2013, subject to governmental and third party approvals.
•
In January and February 2013, holders of $240.6 million principal amount of the Company's 2.875% Convertible Senior Notes due 2038 (the "Convertible Senior Notes") exercised their right to convert their Convertible Senior Notes into cash and shares of the Company's common stock. In general, upon conversion of a Convertible Senior Note, the holder will receive cash equal to the principal amount of the Convertible Senior Note and shares of the Company's common stock for the Convertible Senior Note's conversion value in excess of the principal amount. See Note G of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Convertible Senior Notes.
First Quarter 2013 Outlook
Based on current estimates, the Company expects that first quarter 2013 production will average 165,000 to 170,000 BOEPD.
First quarter production costs (including production and ad valorem taxes and transportation costs) are expected to average $14.00 to $16.00 per BOE, based on current NYMEX strip prices for oil and gas. DD&A expense is expected to average $13.50 to $15.50 per BOE.
Total exploration and abandonment expense for the quarter is expected to be $25 million to $35 million. General and administrative expense is expected to be $60 million to $65 million. Interest expense is expected to be $53 million to $58 million, and other expense is expected to be $25 million to $35 million. Accretion of discount on asset retirement obligations is expected to be $2 million to $4 million.
Noncontrolling interest in consolidated subsidiaries' net income, excluding noncash derivative MTM adjustments, is expected to be $8 million to $11 million, primarily reflecting the public ownership in Pioneer Southwest.
The Company's first quarter effective income tax rate is expected to range from 35 percent to 40 percent, assuming current capital spending plans and no significant derivative MTM changes in the Company's derivative position. Cash income taxes are expected to be $2 million to $7 million and are primarily attributable to state taxes.
2013 Capital Budget
Pioneer's capital program for 2013 totals $3.0 billion, consisting of $2.75 billion for drilling operations, including budgeted land capital for existing assets, and $240 million for other property, plant and equipment. The 2013 budget excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical general and administrative expense and assumes the aforementioned sale of a 40 percent interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field will close on or about June 1, 2013.
The 2013 drilling capital of $2.75 billion continues to be focused on oil- and liquids-rich drilling, with 81 percent of the capital allocated to the Spraberry field, including the horizontal Wolfcamp Shale play, and the Eagle Ford Shale play. Following is a breakdown of the forecasted spending by asset area:
•
Spraberry field - $1.65 billion, including (i) $425 million for drilling and facilities capital in the southern Wolfcamp joint interest area, (ii) $400 million of horizontal appraisal drilling capital associated with the Company's planned two-year $1 billion appraisal program for its northern Wolfcamp/Spraberry acreage, (iii) $625 million for vertical drilling and (iv) $200 million of infrastructure additions and automation projects;
•
Eagle Ford Shale - $575 million;
•
Barnett Shale Combo play - $185 million;
•
Alaska - $190 million; and
PIONEER NATURAL RESOURCES COMPANY
•
Other spending - $150 million, including land capital for existing assets.
Pioneer's budgeted expenditures for other property, plant and equipment in 2013 include:
•
Buildings and other facilities - $145 million;
•
Brady sand mine expansion - $70 million; and
•
Vertical integration capital - $25 million.
The 2013 capital budget is expected to be funded from a combination of cash and cash equivalents, operating cash flow, borrowings under the Credit Facility, proceeds from the sale of joint interests or nonstrategic assets, and issuances of debt or equity securities.
Acquisitions
During 2012, 2011 and 2010, the Company spent $157.5 million, $131.9 million and $181.6 million, respectively, to acquire primarily undeveloped acreage for future exploitation and exploration activities. The 2012 acquisitions primarily increased the Company's acreage positions in the West Texas Spraberry field. The 2011 and 2010 acquisitions primarily increased the Company's acreage positions in the South Texas Eagle Ford Shale play, Barnett Shale play and West Texas Spraberry field. Additionally, in 2012 the Company acquired Premier Silica for $297.1 million. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's acquisitions.
Divestitures and Discontinued Operations
Barnett Shale. During the third quarter of 2012, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. In connection therewith, the Company classified its (i) Barnett Shale assets and liabilities as discontinued operations held for sale in the Company's consolidated balance sheet as of September 30, 2012, and (ii) Barnett Shale results of operations as income or loss from discontinued operations, net of tax, in the consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011.
The Company retained a capital markets advisor during the third quarter of 2012 and actively solicited offers from interested purchasers of the Barnett Shale field assets. Those efforts were unsuccessful in attracting binding offers under acceptable terms to the Company. Since the Company was unable to dispose of its Barnett Shale field assets under acceptable terms, in December 2012, the Company decided to retain the assets; therefore, the Barnett Shale assets and liabilities no longer qualified as held for sale or discontinued operations. Accordingly, all amounts related to the Barnett Shale that were previously reported as (i) discontinued operations held for sale were reclassified to continuing operations at December 31, 2012, (ii) results from the Barnett Shale operations were recorded to continuing operations for the quarter ended December 31, 2012 and results included in discontinued operations were reclassified to income from continuing operations for the nine months ended September 30, 2012, and (iii) amounts in periods prior to 2012 that were reflected in discontinued operations were reclassified to continuing operations. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's discontinued operations.
Pioneer South Africa. During December 2011, the Company committed to a plan to exit South Africa and initiated a process to divest Pioneer South Africa. The assets and liabilities of Pioneer South Africa are classified as discontinued operations held for sale in the Company's accompanying consolidated balance sheet as of December 31, 2011. During the first quarter of 2012, the Company agreed to sell Pioneer South Africa to an unaffiliated third party, effective January 1, 2012, for $60.0 million of cash proceeds before normal closing and other adjustments, and the buyer's assumption of certain liabilities of the Company's South Africa subsidiaries. In August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, including normal closing adjustments for cash revenues and costs and expenses from the effective date through the date of the sale, resulting in a pretax gain of $28.6 million. Pioneer South Africa's historical results of operations, and the related gain recorded on the disposition of Pioneer South Africa, are reported as discontinued operations, net of tax in the Company's accompanying consolidated statements of operations.
Pioneer Tunisia. During December 2010, the Company committed to a plan to sell Pioneer Tunisia. In February 2011 the Company sold its share holdings in Pioneer Tunisia for cash proceeds of $802.5 million, excluding cash and cash equivalents sold, resulting in a pretax gain of $645.2 million. Pioneer Tunisia's historical results of operations, and the related gain recorded on the disposition of Pioneer Tunisia, are reported as discontinued operations, net of tax in the Company's accompanying consolidated statements of operations.
Eagle Ford Shale. In June 2010, the Company entered into an Eagle Ford Shale joint venture. Associated therewith, the Company sold 45 percent of its Eagle Ford Shale proved and unproved oil and gas properties to an unaffiliated third party for $212.0 million of cash proceeds. Under the terms of the transaction, the purchaser also paid 75 percent (representing $886.8
PIONEER NATURAL RESOURCES COMPANY
million) of the Company's defined exploration, drilling and completion costs attributable to the Eagle Ford Shale assets during the period from June 2010 through December 2012.
Uinta/Piceance. During the first half of 2010, the Company sold certain proved and unproved oil and gas properties in the Uinta/Piceance area for net proceeds of $11.8 million and the assumption by the purchaser of certain asset retirement obligations, resulting in a pretax gain of $17.3 million.
Results of Operations
Oil and gas revenues. Oil and gas revenues from continuing operations totaled $2.8 billion, $2.3 billion and $1.7 billion during 2012, 2011 and 2010, respectively.
The increase in 2012 oil and gas revenues relative to 2011 is reflective of 54 percent, 33 percent and 10 percent increases in oil, NGL and gas sales volumes, respectively. Partially offsetting the effects of these production increases were declines of six percent, 27 percent and 32 percent in average reported oil, NGL and gas prices, respectively.
The increase in 2011 oil and gas revenues relative to 2010 is reflective of seven percent and 21 percent increases in average reported oil and NGL prices, respectively and 44 percent, 14 percent and three percent increases in oil, NGL, and gas sales volumes, respectively. These increases were partially offset by an eight percent decrease in average reported gas prices.
The following table provides average daily sales volumes from continuing operations for 2012, 2011 and 2010:
Average daily BOE sales volumes in 2012 and 2011 increased by 29 percent and 16 percent, respectively, as compared to the daily sales volumes in the respective prior years, principally due to the Company's successful drilling programs and declines in scheduled VPP deliveries. Oil volumes delivered under the Company's VPPs decreased by six percent and 45 percent, respectively, during 2012 and 2011. All VPP production volumes have been delivered as of December 31, 2012 and there are no further obligations under the VPP contracts.
Production growth for 2012, as compared to 2011, was negatively impacted by gas processing capacity limitations in the Spraberry field as a result of wet gas production for the Company and other industry participants growing faster than anticipated. The gas processing capacity limitations resulted in reduced recoveries of ethane, negatively impacting average 2012 sales volumes by approximately 1,450 BOEPD. New Spraberry field gas processing facilities are being built and are expected to be on production in April of 2013.
PIONEER NATURAL RESOURCES COMPANY
The following table provides average daily sales volumes from discontinued operations by geographic area and in total during 2012, 2011 and 2010:
In South Africa, sales volumes in 2012 declined by 46 percent from 2011 primarily due to the sale of Pioneer South Africa during August 2012 compared to a full year of production in 2011.
The oil, NGL and gas prices that the Company reports are based on the market prices received for the commodities adjusted for transfers of the Company's deferred hedge gains and losses from the effective portions of the discontinued deferred hedges included in accumulated other comprehensive income (loss) - net deferred hedge gains (losses), net of tax ("AOCI - Hedging") and the amortization of deferred VPP revenue. See "Derivative activities" and "Deferred revenue" discussion below for additional information regarding the Company's cash flow hedging activities and the amortization of deferred VPP revenue.
The following table provides average reported prices from continuing operations (including deferred hedge gains and losses and the amortization of deferred VPP revenue) and average realized prices from continuing operations (excluding deferred hedge gains and losses and the amortization of deferred VPP revenue) for 2012, 2011 and 2010:
Derivative activities. The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts in order to (i) reduce the effect of price volatility on the commodities the Company produces, sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. Effective February 1, 2009, the Company discontinued hedge accounting on all of its then-existing derivative contracts. Changes in the fair value of effective cash flow hedges prior to the Company's discontinuance of hedge accounting were recorded as a component of AOCI - Hedging in the equity section of the Company's consolidated balance sheets, and were transferred to earnings during the same periods in which the hedged transactions were recognized in the Company's earnings. Since February 1, 2009, the Company has recognized all changes in the fair values of its derivative contracts as gains or losses in the earnings of the periods in which they occur.
PIONEER NATURAL RESOURCES COMPANY
The following table summarizes the transfers of deferred hedge gains and losses associated with oil, NGL and gas cash flow hedges from AOCI - Hedging to oil, NGL and gas revenues for the years ending December 31, 2012, 2011 and 2010 (in thousands):
Deferred revenue. During 2012, 2011 and 2010, the Company's amortization of deferred VPP revenue increased annual oil revenues by $42.1 million, $45.0 million and $90.2 million, respectively. All VPP production volumes have been delivered and there are no further obligations under VPP contracts or deferred revenue as of December 31, 2012. See the revenue recognition section of Note B of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for specific information regarding the Company's deferred revenue.
Interest and other income. The Company's interest and other income from continuing operations totaled $28.3 million, $66.9 million and $57.0 million during 2012, 2011 and 2010, respectively. The $38.6 million decrease during 2012, as compared to 2011, is primarily attributable to a $27.9 million decrease in third-party income from vertical integration services, primarily due to increases in costs of services and idle equipment during the fourth quarter of 2012 and a $9.6 million decrease in Alaskan Petroleum Production Tax ("PPT") credit recoveries. The $9.9 million increase during 2011, as compared to 2010, is primarily attributable to a $15.8 million increase in third-party income associated with vertical integration services and a $2.7 million increase in equity earnings from EFS Midstream, partially offset by an $8.7 million decrease in PPT credit recoveries.
Derivative gains (losses), net. The following table summarizes the Company's net derivative gains or losses for the years ending December 31, 2012, 2011 and 2010 (in thousands):
__________________
(a)
Unrealized changes in fair value are subject to continuing market risk.
Gain (loss) on disposition of assets. The Company recorded net gains of $58.1 million and $19.1 million during 2012 and 2010, respectively, and a net loss on the disposition of assets of $3.6 million during 2011.
During 2012, the Company recorded a $12.6 million pretax gain on the sale of its interest in the Cosmopolitan Unit in the Cook Inlet of Alaska and a $42.6 million pretax gain on the sale of a portion of its interest in an unproved oil and gas property in
PIONEER NATURAL RESOURCES COMPANY
the Eagle Ford Shale field. During 2011, the net loss was primarily associated with losses on the sales of excess materials and supplies inventory, partially offset by gains on the sale of certain unproved properties. During 2010, the Company recorded a $17.3 million net gain associated with the sale of proved and unproved oil and gas properties in the Uinta/Piceance area and a $6.0 million net gain associated with the Eagle Ford Shale joint venture transaction, partially offset by net losses primarily associated with the sale of excess lease and well equipment inventory.
Hurricane activity, net. The Company recorded net hurricane activity gains of $1.5 million and $138.9 million during 2011 and 2010. The Company did not record any hurricane activity in 2012. As a result of Hurricane Rita in September 2005, the Company's East Cameron 322 facility, located on the Gulf of Mexico shelf, was completely destroyed. Operations to reclaim and abandon the East Cameron 322 facility began in 2006 and were completed during 2011. In 2007, the Company commenced legal actions against its insurance carriers regarding policy coverage issues for the cost of reclamation and abandonment of the East Cameron 322 facility. During the fourth quarter of 2010, the Company and the insurance carriers agreed to settle an insurance policy dispute, resulting in an additional payment to the Company of $140.1 million during November 2010. See Note B of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's East Cameron platform facilities reclamation and abandonment activities.
Oil and gas production costs. The Company's oil and gas production costs from continuing operations totaled $635.6 million, $447.1 million and $364.8 million during 2012, 2011 and 2010, respectively. In general, lease operating expenses and workover expenses represent the components of oil and gas production costs over which the Company has management control, while third-party transportation charges represent the cost to transport volumes produced to a sales point. Net natural gas plant/gathering charges represent the net costs to gather and process the Company's gas, reduced by net revenues earned from gathering and processing of third party gas in Company-owned facilities.
Total oil and gas production costs per BOE for the year ended December 31, 2012 increased by 10 percent as compared to 2011. The increase in production costs per BOE during 2012 is primarily reflective of increases in lease operating expenses, third-party transportation charges and net natural gas plant/gathering charges. Lease operating costs increased during 2012 primarily due to a $0.51 per BOE increase in salt water disposal costs (principally comprised of water hauling fees). The $0.19 per BOE increase in third-party transportation charges during 2012 is primarily due to gathering, treating and transportation costs associated with increasing sales volumes from the Company's successful drilling program in the Eagle Ford Shale field. Net natural gas plant charges increased by $0.32 per BOE during 2012, primarily due to a reduction in third-party revenues from processing third-party gas volumes in Company-owned facilities as a result of lower gas and NGL prices being realized on the volumes retained as a processing fee.
During 2011, total production costs per BOE increased by six percent as compared to 2010. The increase in production costs per BOE is primarily due to (i) increased third-party transportation and processing charges associated with increasing Eagle Ford Shale production, (ii) repairs associated with severe winter weather disruptions encountered during the first quarter of 2011 and (iii) inflation in well servicing costs, partially offset by reductions in VPP delivery commitments and decreased workover costs.
The following table provides the components of the Company's total production costs per BOE for 2012, 2011 and 2010:
Production and ad valorem taxes. The Company recorded production and ad valorem taxes of $187.8 million during 2012, as compared to $147.7 million and $112.1 million for 2011 and 2010, respectively. In general, production taxes and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. During 2012, the Company's production taxes per BOE decreased by three percent as compared to 2011, primarily reflecting the impact of lower oil and NGL prices on production taxes. On a per BOE basis, ad valorem taxes increased two percent as compared to 2011. During 2011, the Company's production taxes per BOE increased 44 percent over 2010, primarily reflecting the impact of higher oil and NGL prices on production taxes, while ad valorem taxes decreased by 17 percent, which is primarily a result of an increase in sales volumes from new wells first brought on production during 2011.
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's production and ad valorem taxes per BOE from continuing operations and total production and ad valorem taxes per BOE from continuing operations for 2012, 2011 and 2010:
Depletion, depreciation and amortization expense. The Company's total DD&A expense from continuing operations was $810.2 million ($14.23 per BOE), $578.3 million ($13.16 per BOE), and $499.9 million ($13.19 per BOE) for 2012, 2011 and 2010, respectively. Depletion expense on oil and gas properties, the largest component of DD&A expense, was $13.61, $12.55 and $12.40 per BOE during 2012, 2011 and 2010, respectively.
During 2012, the eight percent increase in per BOE depletion expense was primarily due to (i) increased drilling expenditures on proved undeveloped locations, primarily in the Spraberry field and (ii) declines in proved gas reserves due to lower first-day-of-the-month gas prices during the 12-month period ending on December 31, 2012, partially offset by (iii) the impairment effects of reducing carrying values of the Barnett Shale field and the South Texas Edwards Trend/Austin Chalk fields during 2012 and 2011, respectively (see the discussion below for more information on the Company's impairment charges).
During 2011, the one percent increase in per BOE depletion expense was primarily due to modest inflation in drilling costs in the Spraberry field in West Texas and the Barnett Shale field, partially offset by the cost containment associated with employed integrated services and increasing production in the Eagle Ford Shale play where portions of the Company's drilling costs were carried by a third party.
Impairment of oil and gas properties and other long-lived assets. The Company performs assessments of its long-lived assets to be held and used, including oil and gas properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.
Management's commodity price outlooks represent longer-term outlooks that are developed based on observable third-party futures price outlooks as of a measurement date ("Management's Price Outlooks"). During 2012 and 2011, declines in Management's Price Outlooks provided indications of possible impairment of the Company's predominantly dry gas properties in the Edwards Trend and Austin Chalk fields in South Texas, the Barnett Shale field in North Texas and the Raton field in southeastern Colorado. As a result of management's assessments, during 2012 and 2011, the Company recognized pretax noncash impairment charges of $532.6 million and $354.4 million to reduce the carrying values of the Barnett Shale field and the South Texas Edwards Trend/Austin Chalk fields, respectively, to their estimated fair values.
The Company's estimates of undiscounted future net cash flows attributable to the Raton field's oil and gas properties indicated on December 31, 2012 that its carrying amounts are expected to be recovered, but continues to be at risk for impairment if estimates of future cash flows decline. For example, the Company estimates that the carrying value of the Raton field may become partially impaired if the average gas price in Management's Price Outlooks, of $4.92 per MCF as of December 31, 2012, were to decline by approximately $0.60 to $0.80 per MCF. The Company's Raton field is a relatively long-lived asset that had a carrying value of $2.2 billion as of December 31, 2012. If the Raton field were to become impaired in a future period, the Company would recognize noncash, pretax impairment charges in that period that could range from $1.3 billion to $1.7 billion.
It is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the future resulting in the need to impair their carrying values. The primary factors that may affect estimates of future cash flows are (i) future reserve adjustments, both positive and negative, to proved reserves and appropriate risk-adjusted probable and possible reserves (ii) results of future drilling activities, (iii) Management's Price Outlooks and (iv) increases or decreases in production and capital costs associated with these fields.
See Notes B and D of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's impairment assessments.
PIONEER NATURAL RESOURCES COMPANY
Exploration and abandonments expense. The following table provides the Company's geological and geophysical costs, exploratory dry holes expense and leasehold abandonments and other exploration expense from continuing operations for 2012, 2011 and 2010 (in thousands):
During 2012, the Company's exploration and abandonment expense was primarily attributable to $80.5 million of geological and geophysical costs, of which $52.4 million was geological and geophysical administrative costs; $30.6 million were dry hole provisions, $21.6 million was associated with the Company's unsuccessful Sikumi #1 well that was drilled to test the Ivishak zone on the west side of the Company's Oooguruk unit in Alaska; and $94.7 million was leasehold abandonment expense, which included $72.5 million associated with the Company's unproved properties in the Barnett Shale and other unproved property abandonments. The other significant components of the Company's 2012 leasehold abandonment expense included $9.5 million in the Eagle Ford Shale area, $4.8 million in the Rockies area and $4.7 million in the Permian Basin. During 2012, the Company completed and evaluated 229 exploration/extension wells, 223 of which were successfully completed as discoveries.
During 2011, the Company's exploration and abandonment expense was primarily attributable to $73.6 million of geological and geophysical costs, of which amount $42.5 million was geological and geophysical administrative costs, and $44.2 million of leasehold abandonment expense. The significant components of the Company's 2011 leasehold abandonment expense included dry gas unproved acreage abandonments of $14.5 million in the Barnett Shale area, $9.3 million in the South Texas area and $9.1 million in the Rockies area. During 2011, the Company completed and evaluated 168 exploration/extension wells, 167 of which were successfully completed as discoveries.
During 2010, the Company's exploration and abandonment expense was primarily attributable to $58.0 million of geological and geophysical costs, of which amount $39.9 million was geological and geophysical administrative costs, $96.7 million of dry hole and leasehold abandonment expense resulting from the Company's decision not to pursue development of the Cosmopolitan Unit in the Cook Inlet of Alaska and other dry hole provisions and unproved property abandonments. Other significant components of the Company's 2010 unproved abandonments included $6.3 million in the Raton Basin area, $6.0 million in the Permian Basin area and $4.9 million in the Barnett Shale area. During 2010, the Company completed and evaluated 37 exploration/extension wells, 34 of which were successfully completed as discoveries.
General and administrative expense. General and administrative expense from continuing operations totaled $248.3 million, $193.2 million and $164.3 million during 2012, 2011 and 2010, respectively. The increase in 2012, as compared to 2011, is primarily due to increases of $46.6 million and $4.7 million in compensation and occupancy expenses, respectively, related to staffing increases in support of the Company's capital expansion and integrated services initiatives.
The increase in general and administrative expense during 2011, as compared to 2010, was primarily due to increases of $31.9 million and $5.7 million in compensation and occupancy expenses, respectively, related to staffing increases in support of the Company's capital expansion and integrated services initiatives, partially offset by an increase in producing, drilling and other overhead recoveries.
Accretion of discount on asset retirement obligations. Accretion of discount on asset retirement obligations from continuing operations was $9.9 million, $8.3 million and $7.9 million during 2012, 2011 and 2010, respectively. The 19 percent and five percent increases in accretion of discount on asset retirement obligations during 2012 and 2011, respectively, are primarily due to additional well completions resulting from the Company's drilling activities. See Note I of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's asset retirement obligations.
Interest expense. Interest expense was $204.2 million, $181.7 million and $183.1 million during 2012, 2011 and 2010, respectively. The weighted average interest rate on the Company's indebtedness for the year ended December 31, 2012 was 6.0 percent, as compared to 7.2 percent and 7.1 percent for the years ended December 31, 2011 and 2010, respectively.
The $22.5 million increase in interest expense during 2012, as compared to 2011, is primarily due to an $868.9 million increase in the Company's average outstanding indebtedness, partially offset the 1.2 percent decline in weighted average interest on indebtedness.
PIONEER NATURAL RESOURCES COMPANY
See Notes G and Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information about the Company's long-term debt and interest expense.
Other expenses. Other expenses from continuing operations were $113.4 million during 2012, as compared to $63.2 million during 2011 and $78.4 million during 2010. The $50.2 million increase in other expense during 2012, as compared to 2011, is primarily due to $15.8 million of contract rig termination fees incurred during 2012, a $13.9 million increase in unused gas transportation commitment charges and a $13.1 million increase in the time that drilling rigs and fracture stimulation equipment were not being utilized.
The $15.2 million decrease in other expense during 2011, as compared to 2010, is primarily due to a $30.4 million decrease in charges recorded associated with contracted rig rates that exceeded market rig rates that were able to be charged to joint operations and idle drilling rig and fracture stimulation equipment charges and a $7.6 million decrease in inventory impairments; partially offset by a $21.7 million increase in charges associated with excess gas transportation capacity.
See Note N of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's other expenses.
Income tax provision. The Company recognized income tax provisions attributable to earnings from continuing operations of $92.4 million, $197.6 million and $269.6 million during 2012, 2011 and 2010, respectively. The Company's effective tax rates on earnings from continuing operations, excluding income from noncontrolling interest, for 2012, 2011 and 2010 were 40 percent, 32 percent and 36 percent, respectively, as compared to the combined United States federal and state statutory rates of approximately 37 percent. The increase in the Company's 2012 effective tax rate is primarily due to changes in permanent tax differences and state apportionment factors.
See "Critical Accounting Estimates" below and Note O of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's income tax rates and attributes.
Income (loss) from discontinued operations, net of tax. During December 2011, the Company committed to a plan to exit South Africa and initiated a process to divest Pioneer South Africa. The assets and liabilities of Pioneer South Africa are classified as discontinued operations held for sale in the Company's accompanying consolidated balance sheet as of December 31, 2011. During the first quarter of 2012, the Company agreed to sell its net assets in Pioneer South Africa to an unaffiliated third party, effective January 1, 2012, for $60.0 million of cash proceeds before normal closing and other adjustments, and the buyer's assumption of certain liabilities of the Company's South Africa subsidiaries. In August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, including normal closing adjustments for cash revenues and costs and expenses from the effective date through the date of the sale, resulting in a pretax gain of $28.6 million. Pioneer South Africa's historical results of operations, and the related gain recorded on the disposition of Pioneer South Africa, are reported as discontinued operations, net of tax in the Company's accompanying consolidated statements of operations.
During December 2010, the Company committed to a plan to sell Pioneer Tunisia and in February 2011 sold 100 percent of the Company's share holdings in Pioneer Tunisia for cash proceeds of $802.5 million, excluding cash and cash equivalents sold, resulting in a pretax gain of $645.2 million. Accordingly, the Company classified the results of operations of Pioneer Tunisia as income from discontinued operations, net of tax in the accompanying consolidated statements of operations for the years ended December 31, 2011 and 2010.
The Company recognized income from discontinued operations, net of tax of $55.1 million for 2012 as compared to income of $423.2 million for 2011 and $134.1 million for 2010. The $368.0 million decrease in income from discontinued operations during 2012, as compared to 2011 is primarily attributable to the after tax gain on the sale of Pioneer Tunisia recorded in 2011, partially offset by the after tax gain on the sale of Pioneer South Africa during 2012.
The $289.1 million increase in income from discontinued operations during 2011, as compared to 2010 is primarily attributable to the after tax gain on the sale of Pioneer Tunisia during 2011, partially offset by Pioneer South Africa and Pioneer Tunisia operating income classified as discontinued operations during 2010. See Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's discontinued operations.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interests was $50.5 million, $47.4 million and $40.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company's net income attributable to noncontrolling interest is primarily associated with the net income of Pioneer Southwest that is allocated to limited partners. The $3.1 million increase in net income attributable to noncontrolling interest in 2012, as compared to 2011, is primarily due to a 10 percent increase in noncontrolling interest in Pioneer Southwest during November 2011 as a result of an offering by
PIONEER NATURAL RESOURCES COMPANY
Pioneer Southwest of 4.4 million common units, representing limited partnership units, of which 1.8 million common units were sold by the Company. Partially offsetting the increase in noncontrolling interest in Pioneer Southwest was a $15.3 million decline in Pioneer Southwest's net income during 2012, as compared to 2011.
The $6.6 million increase in net income attributable to noncontrolling interest in 2011, as compared to 2010, is primarily due to an increase in Pioneer Southwest's sales volumes and realized oil prices. See Note B of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding Pioneer Southwest and the Company's noncontrolling interest in consolidated subsidiaries' net income.
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for capital expenditures and acquisition expenditures on oil and gas properties and related vertical integration assets and facilities, payments of contractual obligations, dividends/distributions and working capital obligations. Funding for these cash needs may be provided by any combination of internally-generated cash flow, cash and cash equivalents on hand, proceeds from the sale of joint interests and nonstrategic assets or external financing sources as discussed in "Capital resources" below. During 2013, the Company expects that it will be able to fund its needs for cash (excluding acquisitions) with a combination of internally generated cash flows, cash and cash equivalents on hand, proceeds from the sale of joint interests, availability under its credit facility and issuances of debt or equity securities. Although the Company expects that these sources of funding will be adequate to fund capital expenditures and dividend/distribution payments and provide adequate liquidity to fund other needs, no assurances can be given that such funding sources will be adequate to meet the Company's future needs.
During 2013, the Company plans to continue to focus its capital spending primarily on liquids-rich drilling activities. The Company's 2013 capital budget totals $3.0 billion (excluding effects of acquisitions, asset retirement obligations, capitalized interest, geological and geophysical administrative costs and EFS Midstream capital contributions), consisting of $2.75 billion for drilling operations and $240 million for buildings, expansion of the Company's principal sand mine in Brady, Texas and vertical integration additions. Based on the Company's current Management Price Outlooks, Pioneer expects its net cash flows from operating activities, cash and cash equivalents on hand, proceeds from assets sales and/or joint ventures, availability under the Credit Facility and issuances of debt or equity securities to be sufficient to fund its planned capital expenditures and contractual obligations.
Investing activities. Net cash used in investing activities during 2012 was $3.3 billion, as compared to net cash used in investing activities of $1.6 billion and $954.9 million during 2011 and 2010, respectively. The increase in net cash flow used in investing activities during 2012, as compared to 2011, is primarily due to (i) an $831.1 million increase in additions to oil and gas properties associated with the Company's capital programs, (ii) a $723.5 million decrease in proceeds from disposition of assets (primarily attributable to the 2011 sale of Pioneer Tunisia, partially offset by proceeds from the sales of Pioneer South Africa and a partial interest in certain Eagle Ford Shale unproved leaseholds during 2012) and (iii) the $297.1 million acquisition of Premier Silica, partially offset by (iv) an $89.6 million decrease in investments in EFS Midstream and (v) a $66.4 million decrease in additions to other assets and other property and equipment. During the year ended December 31, 2012, the Company's investing activities were funded by net cash provided by operating activities, cash on hand and borrowings under long-term debt.
The increase in net cash flow used in investing activities during 2011, as compared to 2010, was comprised of a $915.5 million increase in additions to oil and gas properties, an increase of $178.9 million in additions to other assets and other property and equipment and a $16.8 million increase in investments in unconsolidated subsidiaries, partially offset by an increase of $505.3 million in proceeds from disposition of assets (primarily related to the sale of Pioneer Tunisia during February 2011). See "Results of Operations" above and Note C of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding asset divestitures.
Dividends/distributions. During each of the years ended December 31, 2012, 2011 and 2010, the Board declared semiannual dividends of $0.04 per common share. Associated therewith, the Company paid $10.0 million, $9.6 million and $9.5 million, respectively, of aggregate dividends. Future dividends are at the discretion of the Board, and, if declared, the Board may change the dividend amount based on the Company's liquidity and capital resources at the time.
During January, April, July and October of 2012, 2011 and 2010, the board of directors of the general partner of Pioneer Southwest (the "Pioneer Southwest Board") declared quarterly distributions aggregating annually to $2.07, $2.03 and $2.00 per limited partner unit, respectively. Associated therewith, Pioneer Southwest paid aggregate distributions to noncontrolling unitholders of $35.2 million, $25.6 million and $25.2 million during the years ended December 31, 2012, 2011 and 2010, respectively. Future distributions of Pioneer Southwest are at the discretion of the Pioneer Southwest Board, and, if declared, the Pioneer Southwest Board may change the distribution amount based on Pioneer Southwest's liquidity and capital resources at the time.
PIONEER NATURAL RESOURCES COMPANY
Off-balance sheet arrangements. From time-to-time, the Company enters into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations of the Company. As of December 31, 2012, the material off-balance sheet arrangements and transactions that the Company has entered into include (i) undrawn letters of credit, (ii) operating lease agreements, (iii) drilling and firm transportation commitments, (iv) open purchase commitments and (v) contractual obligations for which the ultimate settlement amounts are not fixed and determinable, such as derivative contracts that are sensitive to future changes in commodity prices or interest rates and gathering, treating, fractionation and transportation commitments on uncertain volumes of future throughput. Other than the off-balance sheet arrangements described above and subsequent events that are described in "Financial and Operating Performance," above and in Note Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data," the Company has no transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the Company's liquidity or availability of or requirements for capital resources. See "Contractual obligations" below for more information regarding the Company's off-balance sheet arrangements.
Contractual obligations. The Company's contractual obligations include long-term debt, operating leases, drilling commitments (including commitments to pay day rates for drilling rigs), capital funding obligations, derivative obligations, other liabilities (including postretirement benefit obligations), firm transportation and fractionation commitments and minimum annual gathering, treating and transportation commitments. Other joint owners in the properties operated by the Company will incur portions of the costs represented by these commitments.
The following table summarizes by period the payments due by the Company for contractual obligations estimated as of December 31, 2012:
_____________________
(a)
Long-term debt includes $479.9 million principal amount of the Convertible Senior Notes. The Company currently anticipates that it will redeem all Convertible Senior Notes that remain outstanding during 2013. See Notes G and Q of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further information on the conversion of these Convertible Senior Notes. Also, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for information regarding estimated future interest payment obligations under long-term debt obligations. The amounts included in the table above represent principal maturities only.
(b)
See Note J of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for more information about the Company's operating leases.
(c)
Drilling commitments represent future minimum expenditure commitments for drilling rig services and well commitments under contracts to which the Company was a party on December 31, 2012.
(d)
Derivative obligations represent net liabilities determined in accordance with master netting arrangements for commodity and interest rate derivatives that were valued as of December 31, 2012. The ultimate settlement amounts of the Company's derivative obligations are unknown because they are subject to continuing market risk. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Note E of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Company's derivative obligations.
(e)
Open purchase commitments primarily represent expenditure commitments for inventory, materials and other property, plant and equipment ordered, but not received, as of December 31, 2012.
(f)
The Company's other liabilities represent current and noncurrent other liabilities that are comprised of postretirement benefit obligations, litigation and environmental contingencies, asset retirement obligations and other obligations for which neither the ultimate settlement amounts nor their timings can be precisely determined in advance. See Notes H, I and J of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional
PIONEER NATURAL RESOURCES COMPANY
information regarding the Company's postretirement benefit obligations, asset retirement obligations and litigation and environmental contingencies, respectively.
(g)
Gathering, processing and transportation commitments represent estimated fees on production throughput commitments. See "Item 2.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following quantitative and qualitative information is provided about financial instruments to which the Company was a party as of December 31, 2012, and from which the Company may incur future gains or losses from changes in commodity prices or interest rates.
The fair values of the Company's derivative contracts are determined based on the Company's valuation models and applications. As of December 31, 2012, the Company was a party to commodity swap contracts, interest rate swap contracts, commodity collar contracts and commodity collar contracts with short put options. See Note E of Notes to Consolidated Financial Statements included in "Item 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders of
Pioneer Natural Resources Company
We have audited the accompanying consolidated balance sheets of Pioneer Natural Resources Company (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pioneer Natural Resources Company at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pioneer Natural Resources Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 13, 2013
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
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)
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)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except dividends per share)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (continued)
(in thousands, except dividends per share)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company ("Pioneer" or "the Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company in the United States, with field operations in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Barnett Shale Combo play in North Texas, the Raton field in southeastern Colorado, the Hugoton field in southwest Kansas, the West Panhandle field in the Texas Panhandle and Alaska. The Company's objective is to maximize shareholder investment returns by maintaining financial flexibility, capital allocation discipline and enhancing net asset value through accretive drilling programs, joint ventures and acquisitions.
NOTE B. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries since their acquisition or formation. In accordance with generally accepted accounting principles in the United States ("GAAP"), the Company proportionately consolidates certain affiliate partnerships that are less than wholly-owned and are involved in oil and gas producing activities. All material intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to the 2011 and 2010 financial statement and footnote amounts in order to conform them to the 2012 presentations.
On May 6, 2008, the Company recognized a noncash gain on the sale of common units of Pioneer Southwest Energy Partners L.P. ("Pioneer Southwest," a majority-owned and consolidated subsidiary) as a component of additional paid-in capital in stockholders' equity. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 740 Income Taxes, deferred income taxes of $49.1 million should be recognized for the future tax effects arising from the noncash gain on the sale of the Pioneer Southwest common units, with a corresponding decrease to additional paid-in capital. The Company recorded the deferred income taxes associated with this transaction in 2012. The effect of this adjustment is immaterial to the accompanying financial statements.
The accompanying consolidated balance sheet as of December 31, 2011 has been revised for a change in the classification of deferred income taxes associated with the Company's unrealized current derivative net gains as of December 31, 2011. The noncash revisions resulted in a $77.0 million decrease in current deferred tax assets, a $57.7 million increase in current deferred tax liabilities and a $134.7 million decrease in noncurrent deferred tax liabilities from the amounts previously reported at December 31, 2011. These revisions were made to appropriately reflect the impact on deferred income taxes based on the expected settlement periods related to derivatives, which remained subject to market risk as of December 31, 2011.
Use of estimates in the preparation of financial statements. Preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and gas properties and impairment of goodwill and proved and unproved oil and gas properties, in part, is determined using estimates of proved, probable and possible oil and gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.
Cash and cash equivalents. The Company's cash and cash equivalents include depository accounts held by banks and marketable securities with original issuance maturities of 90 days or less.
Accounts receivable. As of December 31, 2012 and 2011, the Company had accounts receivable - trade, net of allowances for bad debts, of $316.9 million and $276.0 million, respectively. The Company's accounts receivable - trade are primarily comprised of oil and gas sales receivable, joint interest receivables and other receivables for which the Company does not require collateral security.
As of December 31, 2012 and 2011, the Company's allowances for doubtful accounts totaled $1.5 million and $1.1 million, respectively. The Company establishes allowances for bad debts equal to the estimable portions of accounts and notes receivables for which failure to collect is considered probable. The Company estimates the portions of joint interest receivables for which failure to collect is probable based on percentages of joint interest receivables that are past due. The Company estimates the portions
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
of other receivables for which failure to collect is probable based on the relevant facts and circumstances surrounding the receivable. Allowances for doubtful accounts are recorded as reductions to the carrying values of the receivables included in the Company's consolidated balance sheets and as charges to other expense in the consolidated statements of operations in the accounting periods during which failure to collect an estimable portion is determined to be probable.
Inventories. The Company's inventories consist of materials and supplies and commodities. The Company's materials and supplies inventory is primarily comprised of oil and gas drilling or repair items such as tubing, casing, proppant used to fracture-stimulate oil and gas wells, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market, on a first-in, first-out cost basis. "Market," in the context of inventory valuation, represents net realizable value, which is the amount that the Company is allowed to bill to the joint accounts under joint operating agreements to which the Company is a party. Valuation reserve allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supply inventories in the Company's consolidated balance sheets and as other expense in the accompanying consolidated statements of operations.
Commodities inventories are carried at the lower of average cost or market, on a first-in, first-out basis. The Company's commodities inventories consist of oil held in storage and natural gas liquids ("NGLs") and gas pipeline fill volumes. Any valuation allowances of commodities inventories are recorded as reductions to the carrying values of the commodities inventories included in the Company's consolidated balance sheets and as charges to other expense in the consolidated statements of operations.
The following table presents the Company's materials and supplies and commodities inventories as of December 31, 2012 and 2011:
____________________
(a)
As of December 31, 2012 and 2011, the Company's materials and supplies inventories were net of valuation reserve allowances of $4.6 million and $0.9 million, respectively.
(b)
Included in other noncurrent assets in the Company's accompanying consolidated balance sheet.
Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs and geological and geophysical expenditures are expensed. The Company capitalizes interest on expenditures for significant development projects, generally when the underlying project is sanctioned, until such projects are ready for their intended use. For large development projects requiring significant upfront development costs to support the drilling and production of a planned group of wells, the Company continues to capitalize interest on the portion of the development costs attributable to the planned wells yet to be drilled.
The Company does not carry the costs of drilling an exploratory well as an asset in its consolidated balance sheets following the completion of drilling unless both of the following conditions are met:
(i)
The well has found a sufficient quantity of reserves to justify its completion as a producing well.
(ii)
The Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.
Due to the capital intensive nature and the geographical location of certain projects, it may take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability. In these instances, the project's feasibility is not contingent upon price improvements or advances in technology, but rather the Company's ongoing efforts and expenditures related to accurately predicting the hydrocarbon recoverability based on well information, gaining access to other companies' production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells. These activities are ongoing and are being pursued constantly.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Consequently, the Company's assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonments expense. See Note F for additional information regarding the Company's suspended exploratory well costs.
The Company owns interests in four gas processing plants and ten treating facilities. The Company is the operator of two of the gas processing plants and all ten of the treating facilities. The Company's ownership interests in the gas processing plants and treating facilities is primarily to accommodate handling the Company's gas production and thus are considered a component of the capital and operating costs of the respective fields that they service. To the extent that there is excess capacity at a plant or treating facility, the Company attempts to process third party gas volumes for a fee to keep the plant or treating facility at capacity. All revenues and expenses derived from third party gas volumes processed through the plants and treating facilities are reported as components of oil and gas production costs. Third party revenues generated from the processing plants and treating facilities for the three years ended December 31, 2012, 2011 and 2010 were $39.4 million, $46.0 million and $34.0 million, respectively. Third party expenses attributable to the processing plants and treating facilities for the same respective periods were $27.1 million, $22.7 million and $14.3 million. The capitalized costs of the plants and treating facilities are included in proved oil and gas properties and are depleted using the unit-of-production method along with the other capitalized costs of the field that they service.
The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves. Costs of significant nonproducing properties, wells in the process of being drilled and development projects are excluded from depletion until the related project is completed and proved reserves are established or, if unsuccessful, impairment is determined.
Proceeds from the sales of individual properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depletion, depreciation and amortization. Generally, no gain or loss is recognized until an entire amortization base is sold. However, gain or loss is recognized from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the depletion base.
The Company performs assessments of its long-lived assets to be held and used, including proved oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment loss for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. See Note D for additional information regarding the Company's proved property impairment provisions.
Unproved oil and gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment loss at that time. See Note D for additional information regarding impairment of Barnett Shale unproved properties.
Goodwill. During 2004, the Company recorded goodwill associated with a business combination, which represents the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. In accordance with GAAP, goodwill is not amortized to earnings, but is assessed for impairment whenever events or circumstances indicate that impairment of the carrying value of goodwill is likely, but no less often than annually. If the carrying value of goodwill is determined to be impaired, it is reduced for the impaired value with a corresponding charge to pretax earnings in the period in which it is determined to be impaired. During the third quarter of 2012, the Company performed a qualitative assessment of goodwill. Financial Accounting Standards Board ("FASB") Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Based upon the results of the assessment, the Company determined that it was not likely that the Company's goodwill was impaired.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Other property and equipment, net. Other property and equipment is recorded at cost. At December 31, 2012 and 2011, respectively, the net carrying value of other property and equipment consisted of the following:
____________________
(a)
At December 31, 2012 and 2011, other property and equipment was net of accumulated depreciation of $395.9 million and $297.6 million, respectively.
(b)
Includes drilling rigs, well servicing rigs and equipment and fracture stimulation equipment.
The Company's proved and unproved sand properties include sand mines, sales facilities and unproved leaseholds that primarily provide the Company and other unrelated customers with proppant used in the fracture stimulation of oil and gas wells. See Note C for additional information about the Company's sand mine operations. The Company's equipment and rigs include assets owned by subsidiaries that provide drilling, pumping and well services on Company-operated properties. The primary purposes of the Company's sand mines and drilling, pumping and well services operations are to accommodate the Company's drilling and producing operations by increasing the availability of supplies, equipment and services, rather than being dependent on third-party availability, and to contain associated costs. As of December 31, 2012, the Company owned 15 drilling rigs, ten fracture stimulation fleets and other oilfield services equipment, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, blowout preventers, construction equipment and fishing tools. All intercompany gains or losses of the Company's sand mines and drilling, pumping and well services operations are eliminated. Earnings from sales of proppant and from providing drilling, pumping and well services to third-party customers and working interest owners in Company-operated properties are included in interest and other income in the accompanying consolidated statements of operations.
The capitalized costs of proved sand properties are depleted using the unit-of-production method based on proved sand reserves. Equipment items are generally depreciated by individual component on a straight line basis over their economic useful lives, which are generally from two to 12 years. Leasehold improvements are amortized over the lesser of their economic useful lives or the underlying terms of the associated leases.
The Company evaluates other property and equipment for potential impairment whenever indicators of impairment are present. Circumstances that could indicate potential impairment include: significant adverse changes in industry trends and the economic outlook; legal actions; regulatory changes; and significant declines in utilization rates or oil and gas prices. If it is determined that other property and equipment is potentially impaired, the Company performs an impairment evaluation by estimating the future undiscounted net cash flow from the use and eventual disposition of other property and equipment grouped at the lowest level that cash flows can be identified. If the sum of the future undiscounted net cash flows is less than the net book value of the property, an impairment loss is recognized for the excess, if any, of the assets' net book value over its estimated fair value.
Investment in unconsolidated affiliate. During 2010, the Company formed EFS Midstream LLC ("EFS Midstream") to own and operate gas and liquids gathering, treating and transportation assets in the Eagle Ford Shale play in South Texas. During June 2010, the Company sold a 49.9 percent member interest in EFS Midstream to an unaffiliated third party for $46.4 million of cash proceeds. Associated therewith, the Company recorded a $46.2 million deferred gain that is being amortized as a reduction in production costs over a 20 year period, representing the term of a continuing commitment of Pioneer to deliver production volumes through EFS Midstream handling and gathering facilities. The deferred gain is included in other current and noncurrent liabilities in the Company's accompanying consolidated balance sheet.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The Company does not have voting control of EFS Midstream. Consequently, the Company accounts for this investment under the equity method of accounting for investments in unconsolidated affiliates. Under the equity method, the Company's investment in unconsolidated affiliates is increased for investments made and the investor's share of the investee's net income, and decreased for distributions received, the carrying value of member interests sold and the investor's share of the investee's net losses.
The Company's equity interest in the net income or loss of EFS Midstream is recorded in interest and other income, net of eliminations of the profit associated with gathering, treating and transportation fees charged to the Company by EFS Midstream, in the accompanying consolidated statements of operations. See Note M for the Company's equity interest in the net income or loss of EFS Midstream for the years ended December 31, 2012, 2011 and 2010.
Asset retirement obligations. The Company records a liability for the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. Asset retirement obligations are generally capitalized as part of the carrying value of the long-lived asset to which it relates. Conditional asset retirement obligations meet the definition of liabilities and are recognized when incurred if their fair values can be reasonably estimated.
The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets and expenditures are classified as cash used in operating activities in the accompanying consolidated statements of cash flows. See Note I for additional information about the Company's asset retirement obligations.
Treasury stock. Treasury stock purchases are recorded at cost. Upon reissuance, the cost of treasury shares held is reduced by the average purchase price per share of the aggregate treasury shares held.
Noncontrolling interest in consolidated subsidiaries. At December 31, 2012, the Company owned a 0.1 percent general partner interest and a 52.4 percent limited partner interest in Pioneer Southwest. Pioneer Southwest owns interests in proved and unproved oil and gas properties in the Spraberry field in the Permian Basin of West Texas. The financial position, results of operations, and cash flows of Pioneer Southwest are consolidated with those of the Company. On December 12, 2011, Pioneer Southwest completed the public offering of 4.4 million common units of Pioneer Southwest, representing limited partnership interests, at a per-unit offering price to the public of $29.20. Of the 4.4 million common units, Pioneer sold 1.8 million of its Pioneer Southwest common unit holdings and Pioneer Southwest issued 2.6 million of new common units. The common unit sale resulted in the Company's limited partnership interest in Pioneer Southwest decreasing from 61.9 percent to 52.4 percent.
In accordance with GAAP, the Company records transfers of any gains or losses, net of taxes, from noncontrolling interests in consolidated subsidiaries to additional paid in capital proportionate to the ownership after giving effect to the sale of common units. The following table presents the Company's net income or loss attributable to common stockholders adjusted for transfers from noncontrolling interest in consolidated subsidiaries to additional paid in capital attributable to Pioneer Southwest's common unit offerings:
During January 2010, Pioneer Natural Resources USA, Inc. ("Pioneer USA," a wholly-owned subsidiary of the Company) formed Sendero Drilling Company, LLC ("Sendero"). Sendero was formed to own and operate land-based drilling rigs in the
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
United States. As of December 31, 2012, Sendero owned 15 drilling rigs operating under contract to Pioneer USA in the Spraberry field. Pioneer USA is the majority owner of Sendero.
The Company also owns the majority interests in certain other subsidiaries with operations in the United States. Noncontrolling interests in the net assets of consolidated subsidiaries totaled $178.0 million and $162.3 million as of December 31, 2012 and 2011, respectively. The Company recorded net income attributable to the noncontrolling interests of $50.5 million, $47.4 million and $40.8 million for the years ended December 31, 2012, 2011 and 2010 (principally related to Pioneer Southwest), respectively.
Revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable and (iv) collectability is reasonably assured.
The Company uses the entitlements method of accounting for oil, NGLs and gas revenues. Sales proceeds in excess of the Company's entitlement are included in other liabilities and the Company's share of sales taken by others is included in other assets in the accompanying consolidated balance sheets.
The Company had no material oil or NGL entitlement assets or liabilities as of December 31, 2012 or 2011. The following table presents the Company's gas entitlement assets and liabilities with their associated volumes as of December 31, 2012 and 2011. Gas volumes are presented in millions of cubic feet ("MMCF").
The Company recognized revenue of $42.1 million, $45.0 million and $90.2 million during 2012, 2011 and 2010, respectively from volumetric production payment ("VPP") agreements which represented limited-term overriding royalty interests in oil reserves that: (i) entitled the purchaser to receive production volumes over a period of time from specific lease interests, (ii) were free and clear of all associated future production costs and capital expenditures associated with the reserves, (iii) were nonrecourse to the Company (i.e., the purchaser's only recourse was to the reserves acquired), (iv) transferred title of the reserves to the purchaser and (v) allowed the Company to retain the remaining reserves after the VPPs volumetric quantities had been delivered. All VPP production volumes have been delivered and thus there are no further obligations under VPP contracts or deferred revenue as of December 31, 2012.
Derivatives. All derivatives are recorded in the accompanying consolidated balance sheets at estimated fair value. Effective February 1, 2009, the Company discontinued hedge accounting on all of its then-existing hedge contracts. The effective portions of the discontinued deferred hedges as of February 1, 2009 were included in accumulated other comprehensive income (loss) - net deferred hedge gains (losses), net of tax ("AOCI - Hedging") and were transferred to earnings during the same periods in which the forecasted hedged transactions were recognized in the Company's earnings. During 2012, the remaining AOCI - Hedging was transferred to earnings. Since discontinuing hedge accounting, the Company has recognized all changes in the fair values of its derivative contracts as gains or losses in the earnings of the periods in which they occur.
The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. Net derivative asset values are determined, in part, by utilization of the derivative counterparties' credit-adjusted risk-free rate curves and net derivative liabilities are determined, in part, by utilization of the Company's and Pioneer Southwest's credit-adjusted risk-free rate curves. The credit-adjusted risk-free rate curves for the Company and the counterparties are based on their independent market-quoted credit default swap rate curves plus the United States Treasury Bill yield curve as of the valuation date. Pioneer Southwest's credit-adjusted risk-free rate curve is based on independent market-quoted forward London Interbank Offered Rate ("LIBOR") curves plus 162.5 basis points, representing Pioneer Southwest's estimated borrowing rate. See Note E for additional information about the Company's derivative instruments.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Hurricane activity, net. As a result of Hurricane Rita in September 2005, the Company's East Cameron 322 facility, located on the Gulf of Mexico shelf, was completely destroyed. Operations to reclaim and abandon the East Cameron 322 facility began in 2006 and were completed during 2011.
In 2007, the Company commenced legal actions against its insurance carriers regarding policy coverage issues for the cost of reclamation and abandonment of the East Cameron 322 facility. During 2010, the Company and the insurance carriers agreed to settle the insurance policy dispute, resulting in an additional payment to the Company of $140.1 million during November 2010. Hurricane activity reclamation and abandonment charges were recorded when changes occurred in management's estimates of total reclamation and abandonment costs. Associated insurance recoveries were credited to net hurricane activity in the accompanying consolidated statement of operations in the periods in which claims recoveries were received.
Environmental. The Company's environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities for expenditures that will not qualify for capitalization are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. Such liabilities are undiscounted unless the timing of cash payments for the liability is fixed or reliably determinable. Environmental liabilities normally involve estimates that are subject to revision until settlement occurs.
Stock-based compensation. For stock-based compensation awards granted or modified, stock-based compensation expense is being recognized in the Company's financial statements on a straight line basis over the awards' vesting periods based on their fair values on the dates of grant. The stock-based compensation awards generally vest over a period not exceeding three years. The amount of stock-based compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date. The Company utilizes (i) the Black-Scholes option pricing model to measure the fair value of stock options, (ii) the prior day's closing stock price on the date of grant for the fair value of restricted stock, restricted stock units, partnership unit awards or phantom unit awards that are expected to be settled in the Company's common stock or Pioneer Southwest common units ("Equity Awards"), (iii) the Monte Carlo simulation method for the fair value of performance unit awards and (iv) a probabilistic forecasted fair value method for Series B unit awards issued by Sendero.
Stock-based compensation liability awards are awards that are expected to be settled in cash on their vesting dates, rather than in equity shares or units ("Liability Awards"). Stock-based Liability Awards are recorded as accounts payable-affiliates based on the vested portion of the fair value of the awards on the balance sheet date. The fair values of Liability Awards are updated at each balance sheet date and changes in the fair values of the vested portions of the awards are recorded as increases or decreases to stock-based compensation expense.
Segments. Operating segments are defined as components of an enterprise that (i) engage in activities from which it may earn revenues and incur expenses (ii) for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating resources and assessing performance.
Based upon how the Company is organized and managed, the Company has only one reportable operating segment, which is oil and gas exploration and production. The Company considers its vertical integration services as ancillary to its oil and gas exploration and producing activities and manages these services to support such activities. In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise.
Assets held for sale and discontinued operations. On the date at which the Company meets all the held for sale criteria, the Company discontinues the recording of depletion and depreciation of the assets or asset group to be sold and reclassifies the assets and related liabilities to be sold as held for sale on the accompanying consolidated balance sheets. The assets and liabilities are measured at the lower of their carrying amount or estimated fair value less cost to sell.
In addition, after determining that held for sale criteria has been met, the Company considers whether the held for sale assets meet the criteria to be considered discontinued operations. If the assets held for sale are considered discontinued operations, the Company classifies the results of operations from the assets held for sale as income or loss from discontinued operations, net of tax, in the accompanying consolidated statements of operations for the current period and all prior periods. See Note C for additional information about the Company's divestitures.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
NOTE C. Acquisitions and Divestitures
Premier Silica Business Combination
During April 2012, a wholly-owned subsidiary of Pioneer acquired 100 percent of the share capital of Industrial Sands Holding Company and its wholly-owned subsidiary, Oglebay Norton Industrial Sands, LLC (the "Sand Acquisition"). Subsequent to the acquisition, the Company changed the name of Oglebay Norton Industrial Sands, LLC to Premier Silica LLC ("Premier Silica"). Premier Silica's core business is the operation of mines and processing facilities that produce, process and sell sand, primarily to upstream oil and gas companies for proppant used in the fracture stimulation of oil and gas wells in the United States. Premier Silica's business is supportive to the Company's vertical integration strategy of controlling major cost components of the Company's drilling and production activities in the areas where the Company has a significant inventory of drilling locations. The aggregate purchase price of Premier Silica was $297.1 million, including normal closing adjustments, and was funded from available cash and borrowings under the Company's credit facility.
The Sand Acquisition was accounted for as a business combination which, among other things, requires that assets acquired and liabilities assumed be measured at their acquisition date fair values. The fair value of the assets acquired totaled $474.9 million and were primarily comprised of proved sand reserves, probable sand reserves and mine processing facilities and equipment of $460.3 million. The fair value of liabilities assumed totaled $177.8 million and were primarily comprised of deferred income taxes of $151.0 million.
The Company recognized $2.3 million of acquisition-related costs associated with the Sand Acquisition that were expensed during the year ended December 31, 2012. These costs are included in other expense in the accompanying consolidated statements of operations for the year ended December 31, 2012, as presented in Note N.
Discontinued Operations
Barnett Shale. During the third quarter of 2012, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. The Company classified its (i) Barnett Shale assets and liabilities as discontinued operations held for sale in the consolidated balance sheet as of September 30, 2012, and (ii) Barnett Shale results of operations as income or loss from discontinued operations, net of tax, in the consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 (representing a recasting of the Barnett Shale results of operations for the three and nine months ended September 30, 2011, which were originally classified as continuing operations).
The Company retained a capital markets advisor during the third quarter of 2012 and actively solicited offers from interested purchasers of the Barnett Shale field assets. Those efforts were unsuccessful in attracting binding offers under acceptable terms to the Company. Since the Company was unable to dispose of its Barnett Shale field assets under acceptable terms, in December 2012, the Company decided to retain the assets; therefore, the Barnett Shale assets and liabilities no longer qualified as held for sale or discontinued operations. Accordingly, all amounts related to the Barnett Shale that were previously reported as (i) discontinued operations held for sale were reclassified to continuing operations at December 31, 2012, (ii) results from the Barnett Shale operations was recorded to continuing operations for the quarter ended December 31, 2012 and results included in discontinued operations were reclassified to income from continuing operations for the nine months ended September 30, 2012, and (iii) amounts in periods prior to 2012 that were reflected in discontinued operations were reclassified to continuing operations.
Assets classified as held for sale must be assessed for impairment at the point in time when they no longer qualify as held for sale and their carrying values (adjusted for any depreciation, depletion or amortization that would have been recognized had the asset been continuously classified as held and used) cannot exceed the lower of fair value or carrying value. Accordingly, the Company assessed its Barnett Shale field proved and unproved oil and gas properties for impairment during the fourth quarter of 2012. As a result of those assessments, the Company reduced the carrying value of its Barnett Shale field proved properties by $87.7 million and its Barnett Shale field unproved properties by $71.8 million. The reductions in the carrying values of the proved and unproved properties are included in impairment of oil and gas properties and exploration abandonments, respectively, in the Company's accompanying consolidated statements of operations for the year ended December 31, 2012. See Note D for further information about the fair values used to calculate the Barnett Shale impairment.
South Africa. During December 2011, the Company committed to a plan to exit South Africa and initiated a process to divest its net assets in South Africa ("Pioneer South Africa"). During the first quarter of 2012, the Company agreed to sell its net assets in Pioneer South Africa to an unaffiliated third party, effective January 1, 2012, for $60.0 million of cash proceeds before normal closing and other adjustments, and the buyer's assumption of certain liabilities of the Company's South Africa subsidiaries.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
In August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, including normal closing adjustments for cash revenues and costs and expenses from the effective date through the date of the sale, resulting in a pretax gain of $28.6 million. The Company classified (i) Pioneer South Africa's assets and liabilities as discontinued operations held for sale in the accompanying consolidated balance sheet as of December 31, 2011 and (ii) Pioneer South Africa's results of operations prior to the completion of the sale as income from discontinued operations, net of tax, in the accompanying consolidated statements of operations.
Tunisia. In February 2011, the Company sold 100 percent of the Company's share holdings in Pioneer Natural Resources Tunisia Ltd. and Pioneer Natural Resources Anaguid Ltd. (referred to in the aggregate as "Pioneer Tunisia") to an unaffiliated third party for cash proceeds of $802.5 million, including normal closing adjustments and excluding cash and cash equivalents sold, resulting in a pretax gain of $645.2 million. Accordingly, the Company has classified the results of operations of Pioneer Tunisia, prior to its sale, as discontinued operations, net of tax, in the accompanying consolidated statements of operations.
The following table represents the components of the Company's discontinued operations for the years ended December 31, 2012, 2011 and 2010 (principally related to the divestitures of the Company's net assets in Pioneer South Africa and Pioneer Tunisia):
____________________
(a)
Primarily comprised of (i) $35.3 million of interest on excess royalty payments received from Bureau of Ocean Energy Management, Regulation, and Enforcement during the second quarter of 2010, (ii) $2.0 million of additional interest received during the first quarter of 2011 associated with the 2010 recovery of the aforementioned excess royalties and (iii) $2.8 million of interest income associated with Pioneer Tunisia operations during the first quarter of 2011.
(b)
Represents significant noncash components of discontinued operations.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
As of December 31, 2011, the carrying values of Pioneer South Africa assets and liabilities, respectively, were included in discontinued operations held for sale in the accompanying consolidated balance sheet and were comprised of the following:
As of December 31, 2012, there are no assets and liabilities held for sale.
Divestitures Recorded in Continuing Operations
The Company recorded net gains on disposition of assets in continuing operations of $58.1 million and $19.1 million during the years ended December 31, 2012 and 2010, respectively, and a net loss on disposition of assets in continuing operations of $3.6 million during the year ended December 31, 2011. The following describes the significant divestitures of continuing operations:
•
Alaska. In August 2012, the Company completed the sale of its interest in the Cosmopolitan Unit in the Cook Inlet of Alaska to unaffiliated third parties for cash proceeds of $10.1 million, which, together with certain Company obligations assumed by the purchasers, resulted in a pretax gain of $12.6 million.
•
Eagle Ford Shale. In January 2012, the Company sold a portion of its interest in an unproved oil and gas property in the Eagle Ford Shale play to unaffiliated third parties for cash proceeds of $54.7 million, which resulted in a pretax gain of $42.6 million.
In June 2010, the Company entered into an Eagle Ford Shale joint venture and associated therewith the Company sold 45 percent of its Eagle Ford Shale proved and unproved oil and gas properties to an unaffiliated third party for $212.0 million of cash proceeds, resulting in a pretax gain of $6.0 million in 2010.
•
Uinta/Piceance. During 2010, the Company sold certain proved and unproved oil and gas properties in the Uinta/Piceance area for net proceeds of $11.8 million and the assumption by the purchaser of certain asset retirement obligations, resulting in a pretax gain of $17.3 million.
•
Other Assets. During 2012, 2011 and 2010, the Company sold unproved leaseholds, inventory and other property and equipment and recorded a pretax net loss of $1.1 million, $5.1 million and $4.2 million, respectively.
NOTE D. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
•
Level 1 - quoted prices for identical assets or liabilities in active markets.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
•
Level 2 - quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
•
Level 3 - unobservable inputs for the asset or liability.
Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2012 and 2011 for each of the fair value hierarchy levels:
Trading securities and deferred compensation plan assets. The Company's trading securities are comprised of securities that are both actively traded and not actively traded on major exchanges. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of December 31, 2012 and 2011, substantially all of the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. Inputs for certain trading securities that are not actively traded on major exchanges were classified as Level 2 inputs.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Commodity derivatives. The Company's commodity derivatives represent oil, NGL and gas swap contracts, collar contracts and collar contracts with short puts. The Company's oil, NGL and gas swap, collar and collar contracts with short puts asset and liability measurements represent Level 2 inputs in the hierarchy priority. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.
The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs which include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Interest rate derivatives. The Company's interest rate derivative liabilities as of December 31, 2012 and 2011 represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The net derivative values attributable to the Company's interest rate derivative contracts as of December 31, 2012 and 2011 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative liability measurements represent Level 2 inputs in the hierarchy priority.
Assets and liabilities measured at fair value on a nonrecurring basis. During 2012 and 2011, reductions in management's longer-term commodity price outlooks ("Management's Price Outlooks") provided indications of possible impairment of the Company's predominately dry gas properties in the Edwards Trend and Austin Chalk fields in South Texas, the Barnett Shale field in North Texas and the Raton field in southeastern Colorado. As a result of management's assessments, during June 2012 and December 2011, the Company recognized impairment charges to reduce the carrying values of the Barnett Shale field and the Edwards Trend/Austin Chalk fields, respectively, to their fair values.
As discussed in Note C, during December 2012, the Barnett Shale field assets were reclassified from held for sale to held and used. This reclassification triggered an additional assessment to determine whether an impairment charge was necessary to adjust the carrying value of Barnett Shale field proved and unproved properties to the lower of their fair value or carrying value. Based upon this assessment, the Company recognized impairment charges to reduce the carrying value of the Barnett Shale field proved and unproved properties to their fair values during December 2012.
The Company calculated the fair values of the Barnett Shale field and the Edwards Trend/Austin Chalk fields proved properties using a discounted cash flow model. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included Management's Price Outlooks and management's outlooks for (i) production costs, (ii) capital expenditures, (iii) production and (iv) estimated proved reserves and risk-adjusted probable reserves. Management's Price Outlooks are developed based on third-party commodity futures price outlooks as of a measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine fair value. The following table presents the fair value and impairment (in millions) for each of the Company's 2012 and 2011 proved property impairments, as well as the oil price per barrel ("BBL") and gas price per British thermal unit ("MMBTU") utilized in respective Management's Price Outlooks:
It is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the future resulting in the need to impair their carrying values. The primary factors that may affect estimates of future cash flows are (i) future reserve adjustments, both positive and negative, to proved reserves and appropriate risk-adjusted probable and possible reserves, (ii) results of future drilling activities, (iii) Management's Price Outlooks and (iv) increases or decreases in production and capital costs associated with these fields.
During December 2012, the Company recorded an impairment charge to reduce the carrying value of unproved properties in the Barnett Shale field of $71.8 million. The Company calculated the estimated fair value of the Barnett Shale unproved properties using significant Level 3 assumptions based on average lease bonuses per acre for its Barnett liquid-rich acreage, allocating no value to dry gas acreage as the Company does not intend to develop that acreage.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheet as of December 31, 2012 and 2011 are as follows:
Long term debt includes the Company's credit facility, the Pioneer Southwest credit facility and the Company's senior notes. The fair value of debt is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy.
Credit facilities. The fair values of the Company's and Pioneer Southwest's credit facilities are calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rate (in the case of the Company's credit facility) or LIBOR (in the case of Pioneer Southwest's credit facility) yield curves and (iii) the applicable credit-adjustments.
Senior notes. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.
The Company has other financial instruments consisting primarily of cash equivalents, short-term receivables, prepaids, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and relatively short maturities. Non-financial assets and liabilities initially measured at fair value include certain assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
Concentrations of credit risk. As of December 31, 2012, the Company's primary concentration of credit risks are the risks of collecting accounts receivable - trade and the risk of counterparties' failure to perform under derivative obligations. See Note L for information regarding the Company's major customers.
The Company has entered into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note E for additional information regarding the Company's derivative activities and information regarding derivative net assets and liabilities by counterparty.
NOTE E. Derivative Financial Instruments
The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices.
The following table sets forth the volumes per day in BBLs that were outstanding as of December 31, 2012 under the Company's oil derivative contracts and the weighted average oil prices per BBL for those contracts:
____________________
(a)
During the period from January 1, 2013 to February 8, 2013, the Company entered into additional 2014 (i) collar contracts with short puts for 9,000 BBLs per day with a ceiling price of $104.13 per BBL, a floor price of $95.00 per BBL and a short put price of $80.00 per BBL and (ii) rollfactor swap contracts for 15,000 BBLs per day priced at $0.38 per BBL; and (iii) replaced 5,000 BBLs per day of 2014 collar contracts with short puts with a ceiling price of $124.00 per BBL, a floor price of $90.00 per BBL and short put price of $72.00 per BBL with 5,000 BBLs per day of 2014 collar contracts with short puts with a ceiling price of $105.74 per BBL, a floor price of $100.00 per BBL and short put price of $80.00 per BBL.
(b)
Represents swaps that fix the difference between (i) each day's price per BBL of WTI for the first nearby month less (ii) the price per BBL of WTI for the second nearby NYMEX month, multiplied by .6667; plus (iii) each day's price per BBL of WTI for the first nearby month less (iv) the price per BBL of WTI for the third nearby NYMEX month, multiplied by .3333.
(c)
During the period from January 1, 2013 to February 8, 2013, the Company entered into additional basis swap contracts for 1,000 BBLs per day of October through December 2013 production with a price differential between Cushing WTI and Louisiana Light Sweet crude of $7.60 per BBL.
(d)
Basis differential price between Midland WTI and Cushing WTI.
NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities' NGL product component posted prices.
As of December 31, 2012, the Company had NGL collar contracts with short put derivatives for 1,064 BBLs per day of 2013 production with a ceiling price of $105.28 per BBL, a floor price of $89.30 per BBL and short put price of $75.20 per BBL and 1,000 BBLs per day of 2014 production with a ceiling price of $109.50 per BBL, a floor price of $95.00 per BBL and short put price of $80.00 per BBL.
Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and reduce basis risk between NYMEX Henry Hub prices and actual index prices upon which the gas is sold.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table sets forth the volumes per day in MMBTUs that were outstanding as of December 31, 2012 under the Company's gas derivative contracts and the weighted average gas prices per MMBTU for those contracts:
Marketing and basis transfer derivative activities. Periodically, the Company enters into gas buy and sell marketing arrangements to utilize unused firm pipeline transportation commitments. Associated with these gas marketing arrangements, the Company may enter into gas index swaps to mitigate the related price risk.
As of December 31, 2012 the Company had marketing derivative gas index swap contracts outstanding for 40,000 MMBTU of January through March 2013 volumes with a price differential of $0.25 per MMBTU. During the period from January 1, 2013 to February 8, 2013, the Company entered into additional marketing derivative gas index swap contracts for 25,000 MMBTU per day of April 2013 volumes with a price differential of $0.35 per MMBTU.
Interest rates. As of December 31, 2012, the Company was a party to interest rate derivative contracts that lock in a fixed forward annual interest rate of 3.21 percent, for a 10-year period ending in December 2025, on a notional amount of $250 million. These derivative contracts mature and settle by their terms during December 2015.
Tabular disclosure of derivative fair value. Since February 2009, all of the Company's derivatives have been accounted for as non-hedge derivatives. The following tables provide disclosure of the Company's derivative instruments for the years ended December 31, 2012 and 2011:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
_____________________
(a)
Derivative assets and liabilities shown in the tables above are presented as gross assets and liabilities, without regard to master netting arrangements which are considered in the presentations of derivative assets and liabilities in the accompanying consolidated balance sheets.
AOCI - Hedging. The effective portions of discontinued cash flow hedge gains and losses, net of associated taxes, were reflected in AOCI - Hedging as of December 31, 2011 and 2010, and were transferred to oil revenue and to interest expense in the same periods in which the hedged transactions were recorded in earnings.
As of December 31, 2011, AOCI - Hedging was $3.1 million of net deferred losses. The AOCI - Hedging balance as of December 31, 2011 was comprised of $3.2 million and $1.7 million of net deferred losses on the effective portions of discontinued commodity and interest rate hedges, respectively, offset partially by $1.7 million of associated net deferred tax benefits. During 2012, the remaining net deferred hedge losses in AOCI - Hedging were transferred to earnings.
Derivative counterparties. The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table provides the Company's net derivative assets or liabilities by counterparty as of December 31, 2012:
NOTE F. Exploratory Well Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Company's capitalized exploratory well and project activity during each of the years ended December 31, 2012, 2011 and 2010:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table provides an aging, as of December 31, 2012, 2011 and 2010 of capitalized exploratory costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:
Alaska - Oooguruk. As of December 31, 2012, the Company has $22.0 million of suspended well costs recorded for the K-13 well in the Alaska Oooguruk field. Drilling on the K-13 well was completed during September 2011. During well completion operations, sub-surface damages were sustained. The Company currently expects to recomplete the well in mid-2013.
NOTE G. Long-term Debt and Interest Expense
Long-term debt, including the effects of net deferred fair value hedge losses and issuance discounts, consisted of the following components at December 31, 2012 and 2011:
Credit Facility. During December 2012, the Company entered into the First Amendment to the Second Amended and Restated 5-Year Revolving Credit Agreement (the "Credit Facility") with a syndicate of financial institutions that extended the maturity to December 20, 2017, unless extended in accordance with the terms of the Credit Facility, and increased the aggregate loan commitments from $1.25 billion to $1.5 billion. The Company accounted for the entry into the Credit Facility as a modification of the prior agreement and capitalized the debt issuance costs along with those unamortized issuance costs that remained from the issuance of the prior agreement. As of December 31, 2012, the Company had outstanding borrowings of $474.0 million under the Credit Facility and $2.2 million of undrawn letters of credit, all of which were commitments under the Credit Facility, leaving the Company with $1.0 billion of unused borrowing capacity under the Credit Facility.
Borrowings under the Credit Facility may be in the form of revolving loans or swing line loans. Aggregate outstanding swing line loans may not exceed $150 million. Revolving loans under the Credit Facility bear interest, at the option of the Company,
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by Wells Fargo Bank, National Association or the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent plus a defined alternate base rate spread margin, which is currently 0.5 percent based on the Company's debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the "Applicable Margin"), which is currently 1.50 percent and is also determined by the Company's debt rating. Swing line loans under the Credit Facility bear interest at a rate per annum equal to the "ASK" rate for Federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent. The Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company's debt rating (currently 0.25 percent). Borrowings under the Credit Facility are general unsecured obligations.
The Credit Facility requires the maintenance of a ratio of total debt to book capitalization less intangible assets, accumulated other comprehensive income and certain noncash asset impairments not to exceed .60 to 1.0. As of December 31, 2012, the Company was in compliance with all of its debt covenants.
During March 2012, Pioneer Southwest entered into a $300 million Amended and Restated 5-Year Revolving Credit Agreement (the "Pioneer Southwest Credit Facility") with a syndicate of financial institutions that matures in March 2017, unless extended in accordance with the terms of the Pioneer Southwest Credit Facility. The Pioneer Southwest Credit Facility replaced Pioneer Southwest's 5-Year Revolving Credit Agreement entered into in May 2008. As of December 31, 2012, there were $126 million of outstanding borrowings under the Pioneer Southwest Credit Facility. Borrowings under the Pioneer Southwest Credit Facility are general unsecured obligations.
The Pioneer Southwest Credit Facility is available for general partnership purposes, including working capital, capital expenditures and distributions. Borrowings under the Pioneer Southwest Credit Facility may be in the form of Eurodollar rate loans, base rate committed loans or swing line loans. Eurodollar rate loans bear interest annually at LIBOR, plus a margin (the "Applicable Rate") (currently 1.625 percent) that is determined by a reference grid based on Pioneer Southwest's consolidated leverage ratio. Base rate committed loans bear interest annually at a base rate equal to the higher of (i) the Federal Funds Rate plus 0.5 percent (ii) the one-month Eurodollar rate plus .01 or (iii) the Bank of America prime rate (the "Base Rate") plus a margin (currently 0.625 percent). Swing line loans bear interest annually at the Base Rate plus the Applicable Rate.
The Pioneer Southwest Credit Facility contains certain financial covenants, including (i) the maintenance of a quarter end consolidated leverage ratio (representing a ratio of consolidated indebtedness of Pioneer Southwest to consolidated earnings before depreciation, depletion and amortization; impairment of long-lived assets; exploration expense; accretion of discount on asset retirement obligations; interest expense; income taxes; gain or loss on the disposition of assets; noncash commodity derivative related activity; noncash equity-based compensation; and other noncash items) of not more than 3.5 to 1.0 and (ii) the maintenance of a ratio of the net present value of Pioneer Southwest's projected future cash flows from its oil and gas assets to total debt of at least 1.75 to 1.0. As of December 31, 2012, Pioneer Southwest was in compliance with all of its debt covenants.
The net present value covenant limits Pioneer Southwest's available borrowing capacity under the Pioneer Southwest Credit Facility to $134.7 million as of December 31, 2012, and may further limit Pioneer Southwest's borrowing capacity in the future. The variables on which the calculation of net present value is based (including assumed commodity prices and discount rate) are subject to adjustment by the lenders. As a result, a sustained decline in commodity prices could reduce Pioneer Southwest's borrowing capacity under the Pioneer Southwest Credit Facility. In addition, the Pioneer Southwest Credit Facility contains various covenants that limit, among other things, Pioneer Southwest's ability to grant liens, incur additional indebtedness, engage in a merger, enter into transactions with affiliates, pay distributions or repurchase equity, and sell its assets. If any default or event of default (as defined in the Pioneer Southwest Credit Facility) were to occur, the Pioneer Southwest Credit Facility would prohibit Pioneer Southwest from making distributions to unitholders. Such events of default include, among others, nonpayment of principal or interest, violations of covenants, bankruptcy and material judgments and liabilities.
Pioneer Southwest pays a commitment fee on the unused portion of the Pioneer Southwest Credit Facility. The commitment fee is variable based on Pioneer Southwest's consolidated leverage ratio. For the twelve months ended December 31, 2012, the commitment fee was 0.275 percent.
Senior notes. During June 2012, the Company issued $600 million of 3.95% Senior Notes due 2022 and received proceeds, net of $8.5 million of offering discounts and costs, of $591.5 million. The Company used the net proceeds from the issuance to reduce outstanding borrowings under the Credit Facility.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Convertible senior notes. During January 2008, the Company issued $500 million of 2.875% Convertible Senior Notes due 2038 (the "Convertible Senior Notes"). The Convertible Senior Notes mature on January 15, 2038 but are convertible under certain circumstances, using a net share settlement process, into a combination of cash and the Company's common stock pursuant to a formula. In general, upon conversion of a Convertible Senior Note, the holder of such note will receive cash equal to the principal amount of the Convertible Senior Note and the Company's common stock for the Convertible Senior Note's conversion value in excess of such principal amount. If at the time of conversion the applicable price of the Company's common stock exceeds the base conversion price, holders will receive up to an additional 8.9532 shares of the Company's common stock per $1,000 principal amount of notes, as determined pursuant to a specified formula.
The Company may redeem the Convertible Senior Notes for cash at any time on or after January 15, 2013 at a price equal to full principal amount plus accrued and unpaid interest. Holders of the Convertible Senior Notes may require the Company to purchase their Convertible Senior Notes for cash at a price equal to 100 percent of the principal amount plus accrued and unpaid interest if certain defined fundamental changes occur, as defined in the agreement, or on January 15, 2013, 2018, 2023, 2028 or 2033. On January 15, 2013, certain holders put $8 thousand principal amount of the Convertible Senior Notes to the Company and the Company paid $8 thousand, including accrued and unpaid interest, to settle the Convertible Senior Notes. Additionally, holders may convert their notes at their option in the following circumstances:
•
Following defined periods during which the reported sales prices of the Company's common stock exceeds 130 percent of the base conversion price (initially $72.60 per share, which is equivalent to an initial base conversion rate of 13.7741 common shares per $1,000 principal amount of Convertible Senior Notes);
•
During five-day periods following defined circumstances when the trading price of the Convertible Senior Notes is less than 97 percent of the price of the Company's common stock times a defined conversion rate;
•
Upon notice of redemption by the Company; and
•
During the period beginning October 15, 2037, and ending at the close of business on the business day immediately preceding the maturity date.
The Company's stock prices during each of December 2012, September 2012, March 2012 and March 2011 met the price threshold that caused the Convertible Senior Notes to become convertible at the option of the holders during the three months ended March 31, 2013, December 31, 2012, June 30, 2012 and June 30, 2011, respectively. Associated therewith, certain holders tendered $111 thousand and $70 thousand principal amount of the Convertible Senior Notes for conversion during the twelve months ended December 31, 2012 and 2011, respectively. During 2012 and 2011, the Company paid the tendering holders of the Convertible Senior Notes a total of $23 thousand and $71 thousand of cash and issued to the tendering holders 112 shares and 340 shares of the Company's common stock in accordance with the terms of the Convertible Senior Notes indenture supplement, respectively. For the remaining notes tendered during 2012, the Company paid $88 thousand in cash and issued 707 shares in 2013.
In January and February 2013, holders of $240.6 million principal amount of the Convertible Senior Notes exercised their right to convert their Convertible Senior Notes into cash and shares of the Company's common stock. In general, upon conversion of a Convertible Senior Note, the holder will receive cash equal to the principal amount of the Convertible Senior Note and shares of the Company's common stock for the Convertible Senior Note's conversion value in excess of the principal amount. If all outstanding Convertible Senior Notes had been converted on December 31, 2012, the holders would have received $479.9 million of cash and approximately 3.4 million shares of the Company's common stock, which were valued at $358.8 million based on the closing price of the common stock on December 31, 2012.
Interest on the principal amount of the Convertible Senior Notes is payable semiannually in arrears on January 15 and July 15 of each year. Beginning on January 15, 2013, during any six-month period thereafter from January 15 to July 14 and from July 15 to January 14, if the average trading price (as defined in the Convertible Senior Notes indenture supplement) of a Convertible Senior Note for the five consecutive trading days immediately preceding the first day of the applicable six-month interest period equals or exceeds 120 percent of the principal amount of the note, interest on the principal amount of the Convertible Senior Notes will be 2.375 percent solely for the relevant interest period. The trading price of the Convertible Senior Notes for the five consecutive trading days preceding January 15, 2013 exceeded 120 percent of the principal amount of the note and, accordingly, the interest rate in effect during the January 15, 2013 to July 14, 2013 period is reduced to 2.375 percent.
As of December 31, 2012 and 2011, the Convertible Senior Notes had an unamortized discount, which is being amortized ratably through January 2013, of $753 thousand and $18.5 million, respectively, and a net carrying value of $479.2 million and $461.5 million, respectively. For the years ended December 31, 2012, 2011 and 2010, the Company recorded $33.5 million, $32.3
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
million and $31.1 million, respectively, of interest expense relating to the Convertible Senior Notes, which had an effective interest rate of 6.75 percent. As of December 31, 2012 and 2011, $49.5 million is recorded in Additional Paid-in Capital as the equity component of the Convertible Senior Notes.
The Company's senior notes and convertible senior notes are general unsecured obligations ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. The Company is a holding company that conducts all of its operations through subsidiaries; consequently, the senior notes and Convertible Senior Notes are structurally subordinated to all obligations of its subsidiaries. Interest on the Company's senior notes and Convertible Senior Notes is payable semiannually.
Principal maturities. Principal maturities of long-term debt at December 31, 2012, are as follows (in thousands):
The principal maturities during 2013 in the preceding table represent the Convertible Senior Notes, which were subject to repurchase at the option of both the holders and the Company in 2013. As the Company had the intent and ability to fund any required cash payments upon the conversion, redemption or repurchase of the Convertible Senior Notes with borrowing capacity under the Credit Facility, the Convertible Senior Notes are classified as long-term debt in the accompanying balance sheets.
Interest expense. The following amounts have been incurred and charged to interest expense for the years ended December 31, 2012, 2011 and 2010:
__________________
(a) Includes interest rate derivative hedges of $1.7 million, $282 thousand, and $1.7 million for the periods ended December 31, 2012, 2011 and 2010, respectively, that were reclassified from AOCI - Hedging into earnings upon expiration (see Note E).
NOTE H. Incentive Plans
Retirement Plans
Deferred compensation retirement plan. In August 1997, the Compensation Committee of the Company's board of directors (the "Board") approved a deferred compensation retirement plan for the officers and certain key employees of the Company. Each officer and key employee is allowed to contribute up to 25 percent of their base salary and 100 percent of their annual bonus. The Company will provide a matching contribution of 100 percent of the officer's and key employee's contribution limited to the first ten percent of the officer's base salary and eight percent of the key employee's base salary. The Company's matching contribution
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
vests immediately. A trust fund has been established by the Company to accumulate the contributions made under this retirement plan. The Company's matching contributions were $2.4 million, $2.2 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
401(k) plan. The Pioneer USA 401(k) and Matching Plan (the "401(k) Plan") is a defined contribution plan established under the Internal Revenue Code Section 401. All regular full-time and part-time employees of Pioneer USA are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Participants may contribute an amount up to 80 percent of their annual salary into the 401(k) Plan. Matching contributions are made to the 401(k) Plan in cash by Pioneer USA in amounts equal to 200 percent of a participant's contributions to the 401(k) Plan that are not in excess of five percent of the participant's base compensation (the "Matching Contribution"). Each participant's account is credited with the participant's contributions, Matching Contributions and allocations of the 401(k) Plan's earnings. Participants are fully vested in their account balances except for Matching Contributions and their proportionate share of 401(k) Plan earnings attributable to Matching Contributions, which proportionately vest over a four-year period that begins with the participant's date of hire. During the years ended December 31, 2012, 2011 and 2010, the Company recognized compensation expense of $24.7 million, $18.3 million and $13.4 million, respectively, as a result of Matching Contributions.
Stock-based compensation costs. In accordance with GAAP, the Company records stock-based compensation expense, equal to the fair value of share-based payments, ratably over the vesting periods of the Long-Term Incentive Plan ("LTIP") awards, the Series B unit awards issued by Sendero, the Pioneer Southwest Long-Term Incentive Plan ("Pioneer Southwest LTIP") awards and for payments associated with the Company's Employee Stock Purchase Plan ("ESPP").
The following table reflects stock-based compensation expense recorded for each type of incentive award and the associated income tax benefit for the years ended December 31, 2012, 2011 and 2010:
_____________________
(a)
For the year ended December 31, 2010, stock-based compensation expense included a charge of $1.3 million for the modification of equity awards associated with termination agreements made with 12 employees affected by the divestiture of the Company's Tunisian subsidiaries. The modification accelerated vesting of all unvested equity awards for the 12 participants to the closing date of the transaction. The $1.3 million charge, net of the associated tax benefit, is included in income from discontinued operations, net of tax, in the accompanying consolidated statements of operations for the year ended December 31, 2010.
(b)
Cash proceeds received from stock option exercises during 2012, 2011 and 2010 amounted to $3.1 million, $619 thousand and $4.8 million, respectively.
As of December 31, 2012, there was $131.1 million of unrecognized stock-based compensation expense related to unvested share and unit based compensation plans, including $24.5 million attributable to Liability Awards. The stock-based compensation expense will be recognized on a straight-line basis over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
Pioneer Long-Term Incentive Plan
In May 2006, the Company's stockholders approved the LTIP, which provides for the granting of various forms of awards, including stock options, stock appreciation rights, performance units, restricted stock and restricted stock units to directors, officers and employees of the Company. The LTIP provides for the issuance of 9.1 million shares pursuant to awards under the plan. The shares to be delivered under the LTIP shall be made available from (i) authorized but unissued shares, (ii) shares held as treasury stock or (iii) previously issued shares reacquired by the Company, including shares purchased on the open market.
The following table shows the number of shares available for issuance pursuant to awards under the Company's LTIP at December 31, 2012:
Restricted stock awards. During 2012, the Company awarded 1,153,029 restricted shares or units of the Company's common stock as compensation to directors, officers and employees of the Company (including 240,486 shares or units representing Liability Awards). The Company's issued shares, as reflected in the consolidated balance sheets as of December 31, 2012 do not include 304,260 of issued, but unvested shares awarded under stock-based compensation plans that have voting rights.
The following table reflects the restricted stock award activity for the year ended December 31, 2012:
The weighted average grant-date fair value of restricted stock equity awards awarded during 2012, 2011 and 2010 was $113.02, $97.52 and $48.32, respectively. The fair value of shares for which restrictions lapsed during 2012, 2011 and 2010 was $137.2 million, $98.6 million and $42.9 million, respectively, based on the market price on the vesting date.
As of December 31, 2012 and 2011, accounts payable - due to affiliates in the accompanying consolidated balance sheet includes $18.8 million and $9.2 million of liabilities attributable to the Liability Awards, representing the fair value of employee services performed under outstanding awards as of that date. The fair value of shares for which restrictions lapsed during 2012 and 2011 was $14.2 million and $6.7 million, respectively, based on the market price on the vesting date. There were no Liability Awards that vested during 2010.
Stock option awards. Certain employees may be granted options to purchase shares of the Company's common stock with an exercise price equal to the fair market value of Pioneer common stock on the date of grant. The fair value of stock option awards is determined using the Black-Scholes option-pricing model. Option awards have a ten-year contract life. The expected life of an option is estimated based on historical and expected exercise behavior. The volatility assumption was estimated based upon expectations of volatility over the life of the option as measured by historical volatility. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the option. The dividend yield was based upon a seven-year average dividend yield.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The Company used the following weighted-average assumptions to estimate the fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010:
A summary of the Company's nonstatutory stock option awards activity for the year ended December 31, 2012 is presented below:
The weighted average grant-date fair value of options awarded during 2012, 2011 and 2010 was $56.29, $49.61 and $23.79, respectively, using the Black-Scholes option-pricing model. The intrinsic value of options exercised during 2012, 2011 and 2010 was $17.2 million, $1.5 million and $6.9 million, respectively, based on the difference between the market price at the exercise date and the option exercise price.
Performance unit awards. During 2012, 2011 and 2010, the Company awarded performance units to certain of the Company's officers under the LTIP. The number of shares of common stock to be issued is determined by comparing the Company's total shareholder return to the total shareholder return of a predetermined group of peer companies over the performance period. The performance unit awards vest over a 34-month service period. The grant-date fair values per unit of the 2012, 2011 and 2010 performance unit awards are $172.57, $134.68 and $63.52, respectively, which amounts were determined using the Monte Carlo simulation method and are being recognized as stock-based compensation expense ratably over the performance period. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the remaining performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The Company used the following assumptions to estimate the fair value of performance unit awards granted during 2012, 2011 and 2010:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table summarizes the performance unit activity for the year ended December 31, 2012:
_____________________
(a)
These amounts reflect the number of performance units granted. The actual payout of shares may be between zero percent and 250 percent of the performance units granted depending upon the total shareholder return ranking of the Company compared to peer companies at the vesting date.
(b)
On December 31, 2012, the service period lapsed on 70,633 of these performance unit awards. The lapsed units earned 2.5 shares for each vested award representing 176,585 aggregate shares of common stock issued in 2012.
The fair value of shares for which restrictions lapsed during 2012, 2011 and 2010 was $18.8 million, $44.7 million and $27.4 million, respectively, based on the market price on the vesting date.
Pioneer Southwest Long-Term Incentive Plan
In May 2008, the board of directors of the general partner (the "General Partner") of Pioneer Southwest adopted the Pioneer Southwest LTIP, which provides for the granting of various forms of unit-based awards, including options, unit appreciation rights, phantom units, restricted units, unit awards and other unit-based awards, to directors, employees and consultants of the General Partner and its affiliates who perform services for Pioneer Southwest. The Pioneer Southwest LTIP limits the number of units that may be delivered pursuant to unit-based awards granted under the plan to 3.0 million common units.
The following table shows the number of awards available under the Pioneer Southwest LTIP at December 31, 2012:
During 2012, the General Partner awarded 7,496 restricted common units as compensation to directors of the General Partner under the Pioneer Southwest LTIP, which vest in May 2013. During 2011, the General Partner awarded 6,812 restricted common units as compensation to directors of the General Partner under the Pioneer Southwest LTIP, which vested in May 2012. During 2010, the General Partner awarded 8,744 restricted common units to directors of the General Partner under the Pioneer Southwest LTIP, which vested in May 2011.
The weighted average grant-date fair value of restricted common units awarded during 2012, 2011 and 2010 was $26.68, $29.35 and $22.87, respectively. The fair value of common units for which restrictions lapsed on the restricted common units during 2012, 2011 and 2010 was $200 thousand, $342 thousand and $324 thousand, respectively, based on the market price at the vesting date.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
During 2012, 2011 and 2010, the General Partner awarded phantom units to certain members of management of the General Partner under Pioneer Southwest's LTIP. The phantom units entitle the recipients to common units of Pioneer Southwest after a three-year vesting period. The weighted average grant-date fair value of phantom common units awarded during 2012, 2011 and 2010 was $28.00, $32.16 and $22.74, respectively. No restrictions have lapsed on the phantom units outstanding.
Subsidiary Issuances of Unit-Based Compensation
During 2010, Sendero entered into restricted unit agreements with two key employees, granting 1,000 Series B units in Sendero. The Series B unit awards had a grant date fair value of $5.1 million, vest ratably over a five year service period and do not earn equity rights unless certain defined performance conditions are achieved by Sendero.
Employee Stock Purchase Plan
The Company has an ESPP that allows eligible employees to annually purchase the Company's common stock at a discounted price. Officers of the Company are not eligible to participate in the ESPP. Contributions to the ESPP are limited to 15 percent of an employee's pay (subject to certain ESPP limits) during the eight-month offering period (January 1 to August 31). Participants in the ESPP purchase the Company's common stock at a price that is 15 percent below the closing sales price of the Company's common stock on either the first day or the last day of each offering period, whichever closing sales price is lower.
The following table shows the number of shares available for issuance under the ESPP at December 31, 2012:
Postretirement Benefit Obligations
At December 31, 2012 and 2011, the Company had $9.7 million and $7.5 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. These obligations are comprised of five unfunded plans, of which four relate to predecessor entities that the Company acquired in prior years, and two funded plans that the Company assumed sponsorship of in conjunction with the acquisition of Premier Silica. Other than the Company's retirement plan and the two legacy-Premier Silica plans, the participants of these plans are not current employees of the Company.
The unfunded plans had no assets as of December 31, 2012 or 2011. The Company's funding policy for the Premier Silica plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flow generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and may elect to make such contributions in future periods.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
NOTE I. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company's credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. The following table summarizes the Company's asset retirement obligation activity during the years ended December 31, 2012, 2011 and 2010:
_____________________
(a)
The changes in the 2012, 2011 and 2010 estimates are primarily due to increases in abandonment cost estimates based in part on recent actual costs incurred and declines in credit-adjusted risk-free discount rates used to value increases in asset retirement obligations. The increase in the 2012 estimate was also impacted by declines in oil, NGL and gas prices used to calculate proved reserves, which had the effect of shortening the economic life of certain wells and increasing what would otherwise have been the present value of future retirement obligations. The increases in 2011 and 2010 estimates were partially offset by higher oil and NGL prices, which had the effect of lengthening the economic life of certain wells and decreasing what would otherwise have been the present value of future retirement obligations. The increase in commodity prices was less substantial in 2011 as compared to 2010.
(b)
Accretion of discount from integrated services includes Premier Silica accretion expense, which is recorded as a reduction in income from vertical integration services in interest and other income in the Company's accompanying consolidated statements of operations. See Note M for more information about interest and other income.
As of December 31, 2012 and 2011, the current portions of the Company's asset retirement obligations were $13.3 million $14.2 million, respectively.
NOTE J. Commitments and Contingencies
Severance agreements. The Company has entered into severance and change in control agreements with its officers and certain key employees. The current annual salaries for the officers and key employees covered under such agreements total $43.9 million.
Indemnifications. The Company has agreed to indemnify its directors and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation.
Legal actions. The Company is party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such other proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Obligations following divestitures. In April 2006, the Company provided the purchaser of its Argentine assets certain indemnifications. The Company remains responsible for certain contingent liabilities related to such indemnifications, subject to
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
defined limitations, including matters of litigation, environmental contingencies, royalty obligations and income taxes. The Company has also retained certain liabilities and indemnified buyers for certain matters in connection with other divestitures, including the sale of its Canadian assets in 2007, the sale of Pioneer Tunisia in February 2011 and the sale of Pioneer South Africa in August 2012, and in connection with sales of joint interests. The Company does not believe that these obligations are probable of having a material impact on its liquidity, financial position or future results of operations.
Drilling commitments. The Company periodically enters into contractual arrangements under which the Company is committed to expend funds to drill wells in the future. The Company also enters into agreements to secure drilling rig services, which require the Company to make future minimum payments to the rig operators. The Company records drilling commitments in the periods in which the well is drilled or rig services are performed.
Lease agreements. The Company leases equipment and office facilities under operating leases. Rent expense for the years ended December 31, 2012, 2011 and 2010 were $48.0 million, $35.4 million and $38.3 million, respectively. These payments include $67 thousand, $513 thousand and $7.2 million associated with discontinued operations for the years ended December 31, 2012, 2011 and 2010, respectively, which are included in income from discontinued operations, net of tax, in the accompanying consolidated statements of operations.
Future minimum lease commitments under noncancellable operating leases at December 31, 2012 are as follows (in thousands):
Gathering, processing and transportation agreements. The Company from time to time enters into, and as of December 31, 2012 is a party to, contractual commitments with midstream service companies and pipeline carriers for the future gathering, processing, transportation and fractionation. These commitments are normal and customary for the Company's business activities. Future minimum gathering, processing, transportation and fractionation commitments at December 31, 2012 are as follows (in thousands):
Certain future minimum gathering, processing, transportation and fractionation fees are based upon rates and tariffs subject to change over the lives of the commitments.
NOTE K. Related Party Transactions
The Company, through a wholly-owned subsidiary, (i) serves as operator of properties in which it and its affiliated partnerships have an interest and (ii) owns a noncontrolling interest in its unconsolidated affiliate, EFS Midstream, which it manages. Through these relationships, the Company is a party to transactions with the affiliated partnerships and EFS Midstream that represent related party transactions.
Transactions with affiliated partnerships. The Company receives producing well overhead and other fees related to the operation of the properties in which it and its affiliated partnerships have an interest. The affiliated partnerships also reimburse the Company for their allocated share of general and administrative charges. Reimbursements of fees are recorded as reductions to general and administrative expenses in the Company's consolidated statements of operations.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The related party transactions with affiliated partnerships are summarized below for the years ended December 31, 2012, 2011 and 2010:
Transactions with EFS Midstream. The Company, through a wholly-owned subsidiary, (i) provides certain services as the manager of EFS Midstream in accordance with a Master Services Agreement and (ii) is the operator of Eagle Ford Shale properties for which EFS Midstream provides certain services under a Hydrocarbon Gathering and Handling Agreement (the "HGH Agreement").
Master Services Agreement. The terms of the Master Services Agreement provide that the Company will perform certain manager services for EFS Midstream and be compensated by monthly fixed payments and variable payments attributable to expenses incurred by employees whose time is substantially dedicated to EFS Midstream's business. During 2012, 2011 and 2010, the Company received $2.3 million, $2.2 million and $1.1 million of fixed payments and $11.8 million, $8.4 million and $1.9 million of variable payments, respectively, from EFS Midstream. The Company also paid $1.9 million to purchase rights of way from EFS Midstream during 2011 and received $1.1 million of proceeds from the sale of an amine plant to EFS Midstream during 2010.
Hydrocarbon Gathering and Handling Agreement. During June 2010, the Company entered into the HGH Agreement with EFS Midstream. In accordance with the terms of the HGH Agreement, EFS Midstream is obligated to construct certain equipment and facilities capable of gathering, treating and transporting oil and gas production from the Eagle Ford Shale properties operated by the Company. The HGH Agreement also obligates the Company and its Eagle Ford Shale working interest partners to use the EFS Midstream gathering, treating and transportation equipment and facilities. In accordance with the terms of the HGH Agreement, the Company paid EFS Midstream $58.5 million, $21.3 million and $404 thousand of gathering and treating fees during 2012, 2011 and 2010, respectively. Such amounts were expensed as oil and gas production costs in the accompanying consolidated statements of operations.
NOTE L. Major Customers
The Company's share of oil and gas production is sold to various purchasers who must be prequalified under the Company's credit risk policies and procedures. The Company records allowances for doubtful accounts based on the age of accounts receivables and the financial condition of its purchasers and, depending on facts and circumstances, may require purchasers to provide collateral or otherwise secure their accounts.
The following purchasers individually accounted for ten percent or more of the Company's consolidated oil, NGL and gas revenues, including the revenues from discontinued operations, in at least one of the three years ended December 31, 2012. The loss of any one significant purchaser could have a material adverse effect on the ability of the Company to sell its oil and gas production. The table provides the percentages of the Company's consolidated oil, NGL and gas revenues represented by the purchasers during the periods presented:
NOTE M. Interest and Other Income
The following table provides the components of the Company's interest and other income during the years ended December 31, 2012, 2011 and 2010:
______________________
(a)
The Company earns Alaskan Petroleum Production Tax ("PPT") credits on qualifying capital expenditures. The Company recognizes income from PPT credits when they are realized through cash refunds or as reductions in production and ad valorem taxes if realizable as offsets to PPT expense.
(b)
Income (loss) from vertical integration services represent net margins that result from Company-provided fracture stimulation, drilling and related service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three years ended December 31, 2012, 2011 and 2010, these net margins include $247.8 million, $50.9 million and $946 thousand of gross vertical integration revenues, respectively and $259.7 million, $34.9 million and $777 thousand of total vertical integration costs and expenses, respectively.
NOTE N. Other Expense
The following table provides the components of the Company's other expense during the years ended December 31, 2012, 2011 and 2010:
____________________
(a)
Primarily represents firm transportation payments on excess pipeline capacity commitments.
(b)
Primarily represents expenses attributable to the portion of Pioneer's contracted drilling rig rates that were above market rates and idle drilling rig and fracture stimulation fleet fees, neither of which were chargeable to joint operations.
(c)
Primarily represents charges to terminate rig contracts that were not required to meet planned drilling activities.
(d)
Represents lower of cost or market impairment charges on excess materials and supplies inventories.
NOTE O. Income Taxes
The Company and its eligible subsidiaries file a consolidated United States federal income tax return. Certain subsidiaries are not eligible to be included in the consolidated United States federal income tax return and separate provisions for income taxes
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
have been determined for these entities or groups of entities. The tax returns and the amount of taxable income or loss are subject to examination by United States federal, state, local and foreign taxing authorities. The Company made current and estimated tax payments of $32.3 million, $22.3 million and $36.6 million (net of tax refunds) during 2012, 2011 and 2010, respectively. These payments and net refunds include tax payments related to Pioneer Tunisia's and Pioneer South Africa's operations of $9.8 million, $12.2 million and $17.8 million during 2012, 2011 and 2010, respectively.
The Company continually assesses both positive and negative evidence to determine whether it is more likely than not that deferred tax assets can be realized prior to their expiration. Pioneer monitors Company-specific, oil and gas industry and worldwide economic factors and assesses the likelihood that the Company's net operating loss carryforwards ("NOLs") and other deferred tax attributes in the United States, state, local and foreign tax jurisdictions will be utilized prior to their expiration.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. As of December 31, 2012, the Company had no unrecognized tax benefits. With respect to income taxes, the Company's policy is to account for interest charges as interest expense and any penalties as other expense in the consolidated statements of operations. The Company files income tax returns in the United States federal jurisdiction, and various state and foreign jurisdictions. As of December 31, 2012, there are no proposed adjustments or uncertain positions in any jurisdiction that would have a significant effect on the Company's future results of operations or financial position. The Company's earliest open years in its key jurisdictions are as follows:
The Company's income tax provision and amounts separately allocated were attributable to the following items for the years ended December 31, 2012, 2011 and 2010:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The Company's income provision attributable to income from continuing operations consisted of the following for the years ended December 31, 2012, 2011 and 2010:
Reconciliations of the United States federal statutory tax rate to the Company's effective tax rate for income from continuing operations are as follows for the years ended December 31, 2012, 2011 and 2010:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities related to continuing operations are as follows as of December 31, 2012 and 2011:
____________________
(a) All net operating loss carryforwards as of December 31, 2012 expire in 2032.
(b) The Company had no deferred tax valuation allowances at December 31, 2012 and 2011.
NOTE P. Net Income Per Share Attributable To Common Stockholders
In the calculation of basic net income per share attributable to common stockholders, participating securities are allocated earnings based on actual dividend distributions received plus a proportionate share of undistributed net income attributable to common stockholders, if any, after recognizing distributed earnings. The Company's participating securities do not participate in undistributed net losses because they are not contractually obligated to do so. The computation of diluted net income per share attributable to common stockholders reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company. During periods in which the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would not be dilutive to net loss per share and conversion into common stock is assumed not to occur. Diluted net income per share is calculated under both the two-class method and the treasury stock method and the more dilutive of the two calculations is presented. For each of the three years in the period ended December 31, 2012, the two-class method of calculating the Company's diluted net income per share was more dilutive than the treasury stock method.
The Company's basic net income per share attributable to common stockholders is computed as (i) net income attributable to common stockholders, (ii) less participating share- and unit-based basic earnings (iii) divided by weighted average basic shares outstanding. The Company's diluted net income per share attributable to common stockholders is computed as (i) basic net income attributable to common stockholders, (ii) plus diluted adjustments to participating undistributed earnings (iii) divided by weighted average diluted shares outstanding (excluding shares held in treasury).
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table is a reconciliation of the Company's net income attributable to common stockholders to basic net income attributable to common stockholders and to diluted net income attributable to common stockholders for the years ended December 31, 2012, 2011 and 2010:
______________________
(a)
Unvested restricted stock awards and Pioneer Southwest phantom unit awards represent participating securities because they participate in nonforfeitable dividends or distributions with the common equity owners of the Company or Pioneer Southwest, as applicable. Participating share- and unit-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and phantom unit awards do not participate in undistributed net losses as they are not contractually obligated to do so.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011, and 2010
The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the years ended December 31, 2012, 2011 and 2010:
______________________
(a)
Options to purchase 129,918 shares of the Company's common stock were excluded from the diluted income per share calculations for the year ended December 31, 2012 because they would have been anti-dilutive to the calculation.
(b)
Weighted average common shares outstanding have been increased to reflect the dilutive effect that would have resulted if the Convertible Senior Notes had qualified for and been converted during the years ended December 31, 2012, 2011 and 2010, respectively.
NOTE Q. Subsequent Events
In January 2013, the Company signed an agreement with Sinochem Petroleum USA LLC ("Sinochem"), a U.S. subsidiary of the Sinochem Group, an unaffiliated third party, to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field for consideration of $1.7 billion. At closing, Sinochem will pay $522.0 million in cash to Pioneer, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the horizontal Wolfcamp Shale play. This transaction is expected to close during the second quarter of 2013, subject to governmental and third party approvals.
As discussed in Note G, in January and February 2013, holders of $240.6 million principal amount of the Convertible Senior Notes exercised their right to convert their Convertible Senior Notes into cash and shares of the Company's common stock. In general, upon conversion of a Convertible Senior Note, the holder will receive cash equal to the principal amount of the Convertible Senior Note and shares of the Company's common stock for the Convertible Senior Note's conversion value in excess of the principal amount. In addition, pursuant to the terms of the Convertible Senior Notes, the annual interest rate for the Convertible Senior Notes has been reduced from 2.875 percent to 2.375 percent per annum for the six-month period from January 15, 2013 to July 14, 2013 because the Notes met certain trading price conditions.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Oil & Gas Exploration and Production Activities
The Company has operations in one business and geographic segment, that being oil and gas exploration and production. See the Company's accompanying statements of operations for information about results of operations for oil and gas producing activities.
Capitalized Costs
_____________________
(a)
Includes $360.0 million of proved property and $307.0 million of accumulated depletion, depreciation and amortization related to Pioneer South Africa, which was classified as held for sale at December 31, 2011.
Costs Incurred for Oil and Gas Producing Activities (a)
___________________
(a) The costs incurred for oil and gas producing activities includes the following amounts of asset retirement obligations:
Reserve Quantity Information
The estimates of the Company's proved reserves as of December 31, 2012, 2011, and 2010 were based on evaluations prepared by the Company's engineers and audited by independent petroleum engineers with respect to the Company's major properties and prepared by the Company's engineers with respect to all other properties. Proved reserves were estimated in accordance with guidelines established by the United States Securities and Exchange Commission (the "SEC") and the FASB, which require that reserve estimates be prepared under existing economic and operating conditions based upon an average of the first-day-of-the-month commodity price during the 12-month period ending on the balance sheet date with no provision for price and cost escalations except by contractual arrangements.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Proved reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that proved reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
The following table provides a rollforward of total proved reserves for the years ended December 31, 2012, 2011, and 2010. Oil and NGL volumes are expressed in thousands of BBLS ("MBBLs"), gas volumes are expressed in millions of cubic feet ("MMCF") and total volumes are expressed in thousands of barrels of oil equivalent ("MBOE").
______________________
(a)
The proved gas reserves as of December 31, 2012, 2011 and 2010 include 280,344 MMCF, 301,123 MMCF and 303,748 MMCF, respectively, of gas that will be produced and utilized as field fuel. Field fuel is gas consumed to operate field equipment (primarily compressors) prior to the gas being delivered to a sales point.
(b)
Production for 2012, 2011 and 2010 includes 18,930 MMCF, 17,727 MMCF and 17,289 MMCF of field fuel, respectively. Also, for 2012, 2011 and 2010, production includes 787 MBOE, 1,675 MBOE and 3,989 MBOE of production associated with discontinued operations. See Note C for corresponding information regarding the Company's discontinued operations.
(c)
As of December 31, 2012, 2011 and 2010, the portions of the Company's proved reserves attributable to discontinued operations in South Africa and Tunisia were nil, 2,342 MBOE and 26,564 MBOE, respectively, and proved reserves attributable to noncontrolling interests in Pioneer Southwest were as follows:
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Revisions of previous estimates. At December 31, 2012, revisions of previous estimates are comprised of 82 MMBOE of negative price revisions and 27 MMBOE of negative revisions due to updated performance profiles and cost estimates. The December 31, 2012 NYMEX price used for oil and gas reserve preparation based upon SEC guidelines was $94.84 per barrel of oil and $2.76 per Mcf of gas, compared to $96.13 per barrel of oil and $4.12 per Mcf of gas at December 31, 2011.
At December 31, 2011, revisions of previous estimates were comprised of 28 MMBOE of negative price revisions and 10 MMBOE of negative revisions due to updated performance profiles and cost estimates. The December 31, 2011 NYMEX price used for oil and gas reserve preparation based upon SEC guidelines increased $16.85 per barrel of oil and decreased $0.25 per Mcf of gas from $79.28 per barrel of oil and $4.37 per Mcf of gas at December 31, 2010.
At December 31, 2010, revisions of previous estimates of 66 MBOE were comprised of 59 MMBOE of positive price revisions and 7 MMBOE of positive technical revisions. The December 31, 2010 NYMEX price for oil and gas reserves preparation based upon SEC guidelines increased $18.14 per barrel of oil and $0.50 per Mcf of gas from $61.14 per barrel of oil and $3.87 per Mcf of gas at December 31, 2009.
Extensions and discoveries. Extensions and discoveries at December 31, 2012 and 2011 are primarily comprised of discoveries and extensions in the Spraberry field and discoveries in the Eagle Ford Shale and Barnett Shale Combo plays. At December 31, 2010 extensions and discoveries were primarily due to extensions in the Spraberry field and discoveries in the Eagle Ford Shale and Tunisia.
Sales of minerals-in-place. Sales of minerals-in-place in 2012, 2011 and 2010 are primarily related to the divestment of Pioneer South Africa, Pioneer Tunisia and certain proved properties in the Eagle Ford Shale, respectively. See Note C for corresponding information regarding the Company's discontinued operations.
Purchases of minerals-in-place. Purchases of minerals-in-place during all years are primarily attributable to acquisitions in the Company's Spraberry field.
Improved recovery. Additions from improved recovery during 2012, 2011 and 2010 relate to recognizing secondary recovery reserves attributable to waterflooding the Nuiqsut horizon of the Alaskan Oooguruk development project.
The following table provides the Company's proved developed and proved undeveloped reserves for January 1, 2010 and for the years ended December 31, 2012, 2011 and 2010.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
The following table summarizes the Company's proved undeveloped reserves activity during the year ended December 31, 2012 (in MBOE).
As of December 31, 2012, the Company had 3,810 proved undeveloped well locations as compared to 4,599 and 4,727 at December 31, 2011 and 2010, respectively. The Company has 505 proved undeveloped well locations (representing 53 MMBOE of proved reserves) that are scheduled to be drilled more than five years from their original date of booking. All of these wells are scheduled to be drilled within five years of the December 31, 2009 effective date of the Commission's Final Rule on the Modernization of Oil and Gas Reporting.
The changes in proved undeveloped reserves during 2012 are comprised of the following items:
Revisions of previous estimates. Revisions of previous estimates are comprised of 27 MMBOE of negative price revisions associated with proved dry gas reserves that are no longer planned to be drilled in the next five years and 38 MMBOE of negative technical revisions, primarily in the Spraberry field.
Extensions and discoveries. Extensions and discoveries are primarily comprised of extensions and discoveries in the Wolfcamp, Strawn, Atoka and Mississippian horizons in the Spraberry field and discoveries in the Eagle Ford Shale and Barnett Shale Combo plays.
Sales of minerals-in-place. Sales of minerals-in-place are primarily related to sales in the Barnett Shale Combo play.
Purchases of minerals-in-place. Purchases of minerals-in-place are primarily attributable to acquisitions in the Company's Spraberry field.
Improved recovery. Additions from improved recovery relate to recognizing secondary recovery reserves attributable to waterflooding the Nuiqsut horizon of the Alaskan Oooguruk development project.
Transfers to proved developed. Transfers to proved developed reserves represents those undeveloped proved reserves that moved to proved developed as a result of development drilling during 2012. During 2012, the Company incurred $1.4 billion of development costs and developed 12 percent of its proved undeveloped reserves. See the table below for the Company's firm plans for future development expenditures.
As of December 31, 2012, the Company had 31 MMBOE of proved undeveloped reserves for locations that are more than one location removed from developed locations in the Spraberry field, 16 MMBOE of which were recorded during 2012. Within the Spraberry field, the Company uses both public and proprietary geologic data to establish continuity of the formation and its producing properties. This included seismic data and interpretations (2-D, 3-D and micro seismic); open hole log information (both vertical and horizontally collected) and petrophysical analysis of the log data; mud logs; gas sample analysis; drill cutting samples; measurements of total organic content; thermal maturity; sidewall cores and data measured from the Company's internal core analysis facility. After the geologic area was shown to be continuous, statistical analysis of existing producing wells was conducted to generate areas of reasonable certainty at distances from established production. As a result of this analysis, proved undeveloped reserves for drilling locations within these areas of reasonable certainty were recorded during 2012.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
While the Company expects, based on Management's Price Outlooks, that future operating cash flows will provide adequate funding for future development of its proved undeveloped reserves over the next five years, it may also use any combination of internally-generated cash flows, cash and cash equivalents on hand, availability under its credit facility, proceeds from the sale of joint interests and nonstrategic assets or external financing sources to fund these and other capital expenditures, including exploratory drilling and acquisitions. The following table represents the estimated timing and cash flows of developing the Company's proved undeveloped reserves as of December 31, 2012 (dollars in thousands):
______________________
(a)
Production and cash flows represent the drilling results from the respective year plus the incremental effects of proved undeveloped drilling.
(b)
The $260.0 million of future development costs includes (i) $35.9 million and $3.9 million of completion costs forecasted in 2018 and 2019, respectively, and (ii) $220.2 million of net abandonment costs in future years.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is computed by applying commodity prices used in determining proved reserves (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved reserves less estimated future expenditures (based on year-end estimated costs) to be incurred in developing and producing the proved reserves, discounted using a rate of ten percent per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing undiscounted future cash flows to the tax basis of oil and gas properties plus available carryforwards and credits and applying the current tax rates to the difference. The discounted future cash flow estimates do not include the effects of the Company's commodity derivative contracts. Utilizing the first-day-of-the-month commodity prices during the 12-month period ending on December 31, 2012, held constant over each derivative contract's term, the net present value of the Company's derivative contracts discounted at ten percent was an asset of $388.7 million at December 31, 2012.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable and possible reserves, anticipated future commodity prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
The following tables provide the standardized measure of discounted future cash flows as of December 31, 2012, 2011 and 2010, as well as a rollforward in total for each respective year:
__________________
(a)
Includes $840.0 million, $785.0 million and $823.5 million of undiscounted future asset retirement expenditures estimated as of December 31, 2012, 2011 and 2010, respectively, using current estimates of future abandonment costs. See Note I for corresponding information regarding the Company's discounted asset retirement obligations.
(b)
Includes $40.7 million and $565.4 million as of December 31, 2011 and 2010, respectively, attributable to discontinued operations in South Africa and Tunisia. Also includes $282.6 million and $378.6 million attributable to a 48 percent noncontrolling interest in Pioneer Southwest for 2012 and 2011, respectively, and $214.2 million attributable to a 38 percent noncontrolling interest in Pioneer Southwest for 2010.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Changes in Standardized Measure of Discounted Future Net Cash Flows
__________________
(a)
The Company's changes in Standardized Measure attributable to production rates, timing and other primarily represent changes in the Company's estimates of when proved reserve quantities will be realized. During the twelve months ended December 31, 2012, 2011 and 2010, the Company increased its development drilling capital plans, which had the effect of accelerating the estimated timing of development and realization of undeveloped proved reserves.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2012, 2011 and 2010
Selected Quarterly Financial Results
The following table provides selected quarterly financial results for the years ended December 31, 2012 and 2011:
_____________________
(a)
During the third quarter of 2012, the Company committed to a plan to sell the Company's Barnett Shale assets and classified the results of operations as discontinued operations. As discussed in Note B, during the fourth quarter of 2012, the Company reclassified the Barnett Shale field to continuing operations. Accordingly, the Barnett Shale results of operations are classified as continuing operations in all quarters presented.
(b)
The Company's total revenues include derivative gains and (losses), net, of $91.8 million, $275.8 million, $(124.0) million and $86.7 million during the first through fourth quarters of 2012, respectively, and $(244.4) million, $229.5 million, $401.1 million and $6.6 million during the first through fourth quarters of 2011, respectively.
(c)
During the second quarter and fourth quarters of 2012, the Company's total costs and expenses include noncash pretax charges of $444.9 million and $159.5 million, respectively, to impair the carrying value of proved and unproved oil and gas properties in the Barnett Shale field.
(d)
During the fourth quarter of 2011, the Company's total costs and expenses include pretax charges of $354.4 million to impair the carrying value of proved oil and gas properties in the Edwards and Austin Chalk fields of South Texas and a $30.4 million charge for the abandonment of unproved dry gas properties.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's management, with the participation of its principal executive officer and principal financial officer, have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 ("the Exchange Act"), the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this Report, in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including that such information is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed by or under the supervision of the Company's principal executive officer and principal financial officer and effected by the Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with generally accepted accounting principles.
The Company's management, with the participation of its principal executive officer and principal financial officer assessed the effectiveness, as of December 31, 2012, of the Company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2012, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. The report, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2012, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders of
Pioneer Natural Resources Company
We have audited Pioneer Natural Resources Company's (the "Company") internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Pioneer Natural Resources Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pioneer Natural Resources Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pioneer Natural Resources Company as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2012, and our report dated February 13, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 13, 2013
PIONEER NATURAL RESOURCES COMPANY
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held during May 2013 and is incorporated herein by reference.
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held during May 2013 and is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about the Company's equity compensation plans as of December 31, 2012:
_______________________
(a)
There are no outstanding warrants or equity rights awarded under the Company's equity compensation plans. The securities listed do not include restricted stock awarded under the Company's previous Long-Term Incentive Plan and the Company's 2006 Long-Term Incentive Plan.
(b)
In May 2006, the stockholders of the Company approved the 2006 Long-Term Incentive Plan, which provided for the issuance of up to 9.1 million awards, as was supplementally approved by the stockholders of the Company during May 2009. Awards under the 2006 Long-Term Incentive Plan can be in the form of stock options, stock appreciation rights, performance units, restricted stock and restricted stock units. No additional awards may be made under the prior Long-Term Incentive Plan. The number of remaining securities available for future issuance under the Company's Employee Stock Purchase Plan is based on the original authorized issuance of 750,000 shares plus an additional 500,000 shares supplementally approved less 678,882 cumulative shares issued through December 31, 2012. See Note H of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for a description of each of the Company's equity compensation plans.
(c)
The number of securities remaining for future issuance has been reduced by the maximum number of shares that could be issued pursuant to outstanding grants of performance units at December 31, 2012.
The remaining information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held during May 2013 and is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held during May 2013 and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held during May 2013 and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Listing of Financial Statements
Financial Statements
The following consolidated financial statements of the Company are included in "Item 8. Financial Statements and Supplementary Data":
•
Report of Independent Registered Pubic Accounting Firm
•
Consolidated Balance Sheets as of December 31, 2012 and 2011
•
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
•
Notes to Consolidated Financial Statements
•
Unaudited Supplementary Information
(b)
Exhibits
The exhibits to this Report that are required to be filed pursuant to Item 15(b) are listed below and in the "Exhibit Index" attached hereto.
(c)
Financial Statement Schedules
No financial statement schedules are required to be filed as part of this Report or they are inapplicable.
Exhibits
__________________________
(a)
Filed herewith.
(b)
Furnished herewith.
H
Executive Compensation Plan or Arrangement.
*
Pursuant to the rules of the Commission, certain of the schedules and similar attachments to the Agreement have not been filed. The registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date:
February 13, 2013
By:
/s/ Scott D. Sheffield
Scott D. Sheffield,
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
_____________________________
(a)
Filed herewith.
(b)
Furnished herewith.
H
Executive Compensation Plan or Arrangement.
*
Pursuant to the rules of the Commission, certain of the schedules and similar attachments to the Agreement have not been filed. The registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request.