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PXD > SEC Filings for PXD > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for PIONEER NATURAL RESOURCES CO

Form 10-Q for PIONEER NATURAL RESOURCES CO


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial and Operating Performance
The Company's financial and operating performance for the second quarter of 2014 included the following highlights:
Net income attributable to common stockholders for the second quarter of 2014 was $1 million ($0.01 per diluted share), as compared to net income of $337 million ($2.40 per diluted share) for the second quarter of 2013. The decrease in net income attributable to common stockholders is comprised of a $268 million decrease in net income from continuing operations and a $68 million decrease in income from discontinued operations, net of tax.

The primary components of the decrease in net income from continuing operations include:

            a $362 million increase in net derivative losses, primarily as a
             result of increases in forward commodity prices and changes in the
             Company's portfolio of derivatives;


            a $179 million decrease in gain on disposition of assets, primarily
             due to the $181 million gain related to the Company's unproved
             property interests that were conveyed to Sinochem in the second
             quarter of 2013;


            a $28 million increase in total oil and gas production costs and
             production and ad valorem taxes, primarily associated with a 12
             percent increase in sales volumes;


            a $23 million increase in DD&A expense, primarily attributable to a
             12 percent increase in sales volumes;


            a $16 million increase in general and administrative expense,
             primarily due to increased personnel, occupancy and information
             technology costs resulting from the growth in employee headcount in
             support of the Company's capital expansion initiatives; and


            an $11 million increase in exploration and abandonment expense,
             primarily attributable to the acquisition costs for seismic data
             covering portions of the Company's Spraberry/Wolfcamp acreage
             position; partially offset by


            a $178 million increase in oil and gas revenues as a result of a 12
             percent increase in sales volumes and a 10 percent increase in the
             average commodity prices received per BOE; and


            a $149 million decrease in the Company's income tax provision as a
             result of the Company's decrease in income from continuing
             operations before taxes.

The primary components of the decrease in income from discontinued operations, net of tax, include:

            a $114 million impairment charge to reduce the carrying value of the
             Company's Barnett Shale field assets to their estimated sales value
             less costs to sell;


            a $33 million decrease in revenues and other income due to the sale
             of Pioneer Alaska in April 2014; partially offset by


            a $24 million decrease in depletion, depreciation and amortization
             due to the assets of the Barnett Shale field and Pioneer Alaska
             being classified as held for sale at December 31, 2013;


            a $15 million decrease in oil and gas production costs due to the
             sale of Pioneer Alaska in April 2014; and


            a $39 million change in the Company's income taxes attributable to
             discontinued operations as a result of the loss from discontinued
             operations before taxes.


      During the second quarter of 2014, average daily sales volumes from
       continuing operations increased by 12 percent to 182,747 BOEPD, as
       compared to 163,443 BOEPD during the second quarter of 2013. The increase
       in second quarter 2014 average daily sales volumes, as compared to the
       second quarter of 2013, is primarily due to the Company's successful
       Spraberry/Wolfcamp and Eagle Ford Shale drilling programs.


      Average oil, NGL and gas prices increased during the second quarter of
       2014 to $95.87 per BBL, $30.65 per BBL and $4.38 per MCF, respectively, as
       compared to $90.35 per BBL, $28.54 per BBL and $3.76 per MCF,
       respectively, in the second quarter of 2013.


      Net cash provided by operating activities increased to $718 million for
       the three months ended June 30, 2014, as compared to $576 million for the
       three months ended June 30, 2013. The $142 million increase in net cash
       provided by operating activities is primarily due to an increase in sales
       volumes and commodity prices, partially offset by a decrease in net cash
       flows from derivative settlements.


      As of both June 30, 2014 and December 31, 2013, the Company's net debt to
       book capitalization was 25 percent.


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PIONEER NATURAL RESOURCES COMPANY

Recent Developments
Divestitures
During the fourth quarter of 2013, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. In August 2014 the Company signed a purchase and sale agreement with an unaffiliated third party for $155 million, before normal closing adjustments. The Company anticipates that the divestiture will close in the third quarter of 2014 and is subject to customary closing conditions.
In July 2014, the Company entered into a purchase and sale agreement with an unaffiliated third party to sell its net assets in the Hugoton field in southwest Kansas for cash proceeds of $340 million, before normal closing adjustments. Closing of the transaction is expected to occur during the third quarter of 2014 and is subject to customary closing conditions. Associated with the sale of the Hugoton field, the Company expects to record a pretax noncash loss of approximately $20 million during the three months ended September 30, 2014. The financial and operating results of the Hugoton field activities for the quarter ending September 30, 2014 and all prior periods presented in future filings are expected to be reflected as discontinued operations. See Note O of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for more information about the sale of the Hugoton field.

Third Quarter 2014 Outlook
Based on current estimates, the Company expects the following operating and financial results from continuing operations for the quarter ending September 30, 2014:
Production is forecasted to average 181,000 to 186,000 BOEPD.
Production costs (including production and ad valorem taxes and transportation costs) are expected to average $13.50 to $15.50 per BOE based on current NYMEX strip commodity prices. DD&A expense is expected to average $14.00 to $16.00 per BOE.
Total exploration and abandonment expense is expected to be $25 million to $35 million. General and administrative expense is expected to be $80 million to $85 million. Interest expense is expected to be $47 million to $52 million, and other expense is expected to be $25 million to $35 million. Accretion of discount on asset retirement obligations is expected to be $3 million to $5 million.
The Company's effective income tax rate is expected to range from 35 percent to 40 percent assuming current capital spending plans and no significant mark-to-market changes in the Company's derivative position. Cash income taxes are expected to range from $10 million to $15 million and are primarily attributable to federal alternative minimum tax and state taxes. Operations and Drilling Highlights
The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during the six months ended June 30, 2014:

                                             Oil (BBLs)     NGLs (BBLs)     Gas (MCF)     Total (BOE)
Permian Basin                                   58,153          18,619        78,457          89,849
South Texas - Eagle Ford Shale                  17,228          12,915        86,714          44,595
Raton Basin                                          -               -       125,762          20,960
Mid-Continent                                    3,010           7,003        38,593          16,445
South Texas - Other                                792               9        28,230           5,506
Other                                                5               2            79              20
  Total continuing operations                   79,188          38,548       357,835         177,375
Barnett Shale                                    2,138           3,639        27,097          10,293
Alaska                                           2,018               -             -           2,018
  Total including discontinued operations       83,344          42,187       384,932         189,686

During 2014 and 2013, the Company has focused its capital budgets and expenditures on oil and liquids-rich gas drilling activities due to relatively lower gas prices. As a result of these capital activities, the Company's total liquids production from continuing operations increased to 66 percent of total production, on a BOE basis, for the six months ended June 30, 2014, as compared to 62 percent for the same period last year. The Company's liquids revenue as a percent of total commodity sales was


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                       PIONEER NATURAL RESOURCES COMPANY

84 percent for the six months ended June 30, 2014, as compared to 85 percent for
the same period last year, due to a 32 percent increase in the average gas price
relative to increases of six percent and eight percent in the average oil and
NGL prices, respectively.
 The following table summarizes by geographic area the Company's finding and
development costs incurred during the six months ended June 30, 2014:
                                                                                                      Asset
                                    Acquisition Costs           Exploration      Development        Retirement
                                  Proved          Unproved         Costs            Costs          Obligations         Total
                                                                       (in millions)
Permian Basin                $       1          $        5     $       441     $         588     $            -     $   1,035
South Texas - Eagle Ford
Shale                                -                   -             176               121                  1           298
Raton Basin                          -                   -               2                15                  -            17
Mid-Continent                        -                   -               2                 4                  -             6
South Texas - Other                  -                   -              15                 7                  -            22
Other                                -                   1               4                 -                  -             5
  Total continuing
operations                           1                   6             640               735                  1         1,383
Barnett Shale                        3                   3              97                22                  -           125
Alaska                               -                   -              (1 )              48                  4            51
  Total including
discontinued operations      $       4          $        9     $       736     $         805     $            5     $   1,559

The following table summarizes the Company's development and exploration/extension drilling activities for the six months ended June 30, 2014:

                                                              Development Drilling
                                        Beginning                                               Ending
                                          Wells         Wells      Successful      Wells         Wells
                                       in Progress      Spud         Wells         Sold       in Progress
Permian Basin                                  59         140            151           4              44
South Texas - Eagle Ford Shale                 16          20             22           -              14
  Total continuing operations                  75         160            173           4              58
Barnett Shale                                   1           -              1           -               -
Alaska                                          4           1              -           5               -
  Total including discontinued
operations                                     80         161            174           9              58



                                                           Exploration/Extension Drilling
                                                                                                               Ending
                               Beginning Wells        Wells      Successful     Unsuccessful      Wells         Wells
                                 in Progress          Spud         Wells           Wells          Sold       in Progress
Permian Basin                     31                    109             51                -           1              88
South Texas - Eagle Ford
Shale                             24                     51             35                -           -              40
South Texas - Other                -                      8              6                -           -               2
Other                              3                      -              -                1           -               2
  Total continuing
operations                        58                    168             92                1           1             132
Barnett Shale                     17                     35             36                -           -              16
Alaska                             2                      -              -                -           2               -
Total including
discontinued operations           77                    203            128                1           3             148

Permian Basin area. The Company successfully completed 202 wells in the Permian Basin area during the first six months of 2014. During 2014, the Company expects to place on production approximately 200 vertical wells and to drill approximately 255 horizontal wells, with the horizontal wells being drilled in the Spraberry/Wolfcamp Shale horizons. The Company expects to spend $2.4 billion of drilling capital in the Spraberry/Wolfcamp area during 2014.
The Company believes it has significant resource potential within its acreage based on its extensive geologic data covering the Spraberry and Wolfcamp A, B, C and D intervals and its drilling results to-date. During 2014, the Company expects to drill 130 horizontal wells in the northern portion of the play and 125 horizontal wells in the southern portion of the play, where the Company has its joint venture with Sinochem. The wells in these areas are expected to be drilled on multiple-well pads to gain


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PIONEER NATURAL RESOURCES COMPANY

efficiencies; therefore, the wells will not be completed until after the last well on each pad is drilled and, accordingly, production from these wells is not expected until all wells on the pad are ready to produce. With the addition of drilling rigs during the first half of 2014, combined with the effects of pad drilling, the Company continues to expect production growth to be weighted towards the second half of 2014.
The Company continues to drill vertically to deeper intervals in the Spraberry field below the Wolfcamp interval, including the Strawn and Atoka intervals. The Company is reducing its vertical drilling activity from 11 rigs to nine rigs during the second half of 2014, with further reductions expected in 2015. The Company expects to place on production approximately 200 vertical wells that are predominately targeting deeper intervals during 2014. These wells are being drilled to meet continuous drilling obligations.
The Company continues to benefit from its integrated services to control well costs and operating costs in addition to supporting the execution of its drilling and production activities in the Spraberry field. The Company is currently utilizing six Company-owned fracture stimulation fleets totaling approximately 250,000 horsepower in the Spraberry field. To support its 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, Premier Silica (the Company's wholly-owned sand mining subsidiary) is supplying brown sand for proppant, which is being used by the Company to fracture stimulate vertical and horizontal wells in the Spraberry and Wolfcamp Shale intervals.
During April 2014, the Company extended its gas processing agreement with Atlas Pipeline Partners, L.P. ("Atlas") for an additional 10 years (through 2032) to help ensure adequate gas processing capacity across the Spraberry/Wolfcamp area as the Company increases its drilling activities. Associated with the agreement, Atlas is adding 400 million cubic feet per day of new processing capacity by the second half of 2015, with half of the new capacity coming online during the fourth quarter of 2014 and the other half coming online during the second half of 2015. The Company owns a 27 percent interest in the Atlas gas processing facilities and will fund its share of capital to build these new facilities. Eagle Ford Shale area. The Company's drilling activities in the South Texas area during 2014 continue to be primarily focused on delineation and development of Pioneer's substantial acreage position in the Eagle Ford Shale play. The 2014 drilling program has been focused on liquids-rich drilling, with no wells planned to be drilled in dry gas acreage. The Company completed 57 horizontal Eagle Ford Shale wells during the first six months of 2014, all of which were successful, with average lateral lengths of approximately 5,500 feet and, on average, 19-stage fracture stimulations. Of the 57 Eagle Ford Shale wells that were placed on production during the first six months of 2014, the Company placed 17 Upper Eagle Ford interval wells on production and estimates that approximately 25 percent of the Company's acreage is prospective for this interval in the Eagle Ford Shale play. The Company plans to spend $545 million of drilling capital in 2014 to drill approximately 125 Eagle Ford Shale wells. The Company is operating two Pioneer-owned fracture stimulation fleets in the play and supplements with third-party fleets as needed.
In 2013, the Company added approximately 300 drilling locations in the liquids-rich area of the play as a result of downspacing from 1,000 feet between wells (120-acre spacing) to 500 feet (60-acre spacing) between wells. Further downspacing and staggered testing to 175 feet between wells is underway in the liquids-rich areas where the 500-foot spacing was successful. Some areas will include testing of the Lower Eagle Ford Shale only, while others will include a combination of the Lower and Upper Eagle Ford interval tests. Early results from the initial downspacing and staggered tests in the Eagle Ford Shale continue to be encouraging.
The Company's drilling operations in the Eagle Ford Shale continue to focus on improving drilling efficiencies. In 2014, most Eagle Ford Shale wells will be drilled utilizing three-well and four-well pads, which are not completed until after the last well on the pad is drilled and, accordingly, production from these wells is not expected until all wells on the pad are ready to produce. Pad drilling saves the Company a significant amount of capital costs per well, as compared to drilling single-well locations. The Company has also been using lower-cost white sand instead of ceramic proppant to fracture stimulate wells drilled in all active development areas, including deeper areas of the field. Well performance continues to be similar to direct offset ceramic-stimulated wells. The Company is continuing to monitor the performance of these wells. During the second quarter of 2014, the Company received confirmation from the U.S. Department of Commerce that condensate processed through distillation units such as those located at several of Pioneer's Eagle Ford Shale central gathering plants in South Texas is a petroleum product that may be exported without a license.

Barnett Shale. During the fourth quarter of 2013, the Company committed to a plan to divest of its net assets in the Barnett Shale field in North Texas. In August 2014, the Company signed a purchase and sale agreement with an unaffiliated third party for $155 million, before normal closing adjustments. The Company classified the Barnett Shale field assets and liabilities as held for sale in the Company's accompanying consolidated balance sheet as of June 30, 2014 and December 31, 2013. Results of


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PIONEER NATURAL RESOURCES COMPANY

operations from the Company's Barnett Shale field are reported as discontinued operations, net of tax, in the Company's accompanying consolidated statements of operations.
See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information about the Company's divestiture of its Barnett Shale assets.
Alaska. During the fourth quarter of 2013, the Company committed to a plan to sell 100 percent of the capital stock in Pioneer Alaska. In April 2014, the Company completed the sale of Pioneer Alaska to an unaffiliated third party pursuant to an amended purchase and sale agreement. Pioneer Alaska's results of operations are reported as discontinued operations, net of tax, in the Company's accompanying consolidated statements of operations.
See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information about the Company's divestiture of Pioneer Alaska.
Results of Operations from Continuing Operations Oil and gas revenues. Oil and gas revenues totaled $959 million and $1.9 billion for the three and six months ended June 30, 2014, respectively, as compared to $781 million and $1.5 billion for the same respective periods in 2013.
The increase in oil and gas revenues during the three months ended June 30, 2014, as compared to the same period in 2013, reflected 15 percent and 32 percent increases in daily oil and NGL sales volumes, respectively, and six percent, seven percent and 16 percent increases in average oil, NGL and gas prices, respectively. Partially offsetting the effects of these increases was a two percent decline in gas sales volumes. The increase in oil and gas revenues during the six months ended June 30, 2014, as compared to the same period in 2013, reflected 15 percent and 26 percent increases in daily oil and NGL sales volumes, respectively, and six percent, eight percent and 32 percent increases in average oil, NGL and gas prices, respectively. Partially offsetting the effects of these increases was a three percent decline in gas sales volumes. The following table provides average daily sales volumes for the three and six months ended June 30, 2014 and 2013:

                  Three Months Ended        Six Months Ended
                       June 30,                 June 30,
                   2014          2013       2014        2013
Oil (BBLs)        79,780        69,501      79,188     69,145
NGLs (BBLs)       41,302        31,231      38,548     30,595
Gas (MCF)        369,987       376,267     357,835    368,018
Total (BOEs)     182,747       163,443     177,375    161,076

Average daily BOE sales volumes increased by 12 percent and 10 percent for the three and six months ended June 30, 2014, respectively, as compared to the same respective periods in 2013, principally due to the Company's successful Spraberry/Wolfcamp and Eagle Ford Shale drilling programs.
The oil, NGL and gas prices that the Company reports are based on the market prices received for each commodity. The following table provides the Company's average prices for the three and six months ended June 30, 2014 and 2013:

                      Three Months Ended           Six Months Ended
                           June 30,                    June 30,
                        2014           2013        2014         2013
Oil (per BBL)     $    95.87         $ 90.35    $    94.15    $ 89.03
NGL (per BBL)     $    30.65         $ 28.54    $    31.91    $ 29.67
Gas (per MCF)     $     4.38         $  3.76    $     4.58    $  3.47
Total (per BOE)   $    57.64         $ 52.52    $    58.21    $ 51.78

Sales of purchased oil and gas. The Company periodically enters into pipeline capacity commitments in order to secure available oil, NGL and gas transportation capacity from the Company's areas of production. The Company enters into purchase transactions with third parties and separate sale transactions with third parties to satisfy unused pipeline capacity commitments and to diversify a portion of the Company's WTI oil sales to a Gulf Coast oil price. Revenues and expenses from these transactions are presented on a gross basis as the Company acts as a principal in the transaction by assuming the risk and rewards of ownership, including credit risk, of the commodities purchased and assuming responsibility to deliver the commodities sold. Deficiency payments on excess pipeline capacity commitments are included in other expense in the accompanying consolidated statements


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PIONEER NATURAL RESOURCES COMPANY

of operations. See Note L of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for further information on transportation commitment charges.

Interest and other income. Interest and other income for the three and six months ended June 30, 2014 was $3 million and $7 million, respectively, as compared to a loss of $5 million for each of the same respective periods in 2013. The increases in interest and other income for the three and six months ended June 30, 2014, as compared to the same respective periods in 2013, are primarily due to a decrease of $5 million and $10 million, respectively, in the net loss from vertical integration services between the periods. See Note K of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information.
Derivative gains (losses), net. 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, sells and consumes,
(ii) support the Company's annual capital budgeting and expenditure plans and
(iii) reduce commodity price risk associated with certain capital projects. During the three and six months ended June 30, 2014, the Company recorded $218 million and $322 million of net derivative losses on commodity price and interest rate derivatives, of which $6 million and $24 million, respectively, represented net cash payments. During the three and six months ended June 30, 2013, the Company recorded $144 million and $102 million of net derivative . . .

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