Edgar Filing: PIONEER NATURAL RESOURCES CO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File Number: 1-13245

PIONEER NATURAL RESOURCES COMPANY

(Exact name of Registrant as specified in its charter)

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

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

(972) 444-9001

(Registrant's telephone number, including area code)

Not applicable

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

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

Yes o No x

Number of shares of Common Stock outstanding as of August 7, 2007

123,161,645

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS

		Page

Cautionary Statement Concerning Forward-Looking Statements		2

Definitions of Certain Terms and Conventions Used Herein		3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		4

Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006		6

Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2007		7

Consolidated Statements of Cash Flows for the three and six months ended June 30, 2007 and 2006		8

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2007 and 2006		9

Notes to Consolidated Financial Statements		10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		32

Item 3. Quantitative and Qualitative Disclosures About Market Risk		49

Item 4. Controls and Procedures		52

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		53

Item 1A. Risk Factors		53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 4. Submission of Matters to a Vote of Security Holders		54

Item 6. Exhibits		55

Signatures		56

Exhibit Index		57

Cautionary Statement Concerning Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate," or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Item 1. Business — Competition, Markets and Regulations", "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. The Company undertakes no duty to publicly update these statements except as required by law.

Definitions of Certain Terms and Conventions Used Herein

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

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

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

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

•	"BOEPD" means BOE per day.

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

•	"CBM" means coal bed methane.

•	"IPO" means initial public offering.

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

•	"MBbl" means one thousand Bbls.

•	"MBOE" means one thousand BOEs.

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

•	"MMBbl" means one million Bbls.

•	"MMBOE" means one million BOEs.

•	"MMBtu" means one million Btus.

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

•	"NGL" means natural gas liquid.

•	"NYMEX" means the New York Mercantile Exchange.

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

•

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

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

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

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

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

•	"VPP" means volumetric production payment.

•	"U.S." means United States.

•

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

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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	25,318		$	7,033
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,119 and $6,999 as of June 30, 2007 and December 31, 2006, respectively		198,725			195,534
Due from affiliates		653			3,837
Income taxes receivable		61,291			24,693
Inventories		108,483			95,131
Prepaid expenses		5,999			11,509
Deferred income taxes		90,549			82,927
Other current assets:
Derivatives		56,812			63,665
Other		49,392			52,229
Total current assets		597,222			536,558
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties		8,894,449			7,967,708
Unproved properties		215,196			210,344
Accumulated depletion, depreciation and amortization		(2,099,722	)		(1,895,408	)
Total property, plant and equipment		7,009,923			6,282,644
Deferred income taxes		478			345
Goodwill		309,830			309,908
Other property and equipment, net		131,381			131,840
Other assets:
Derivatives		4,703			4,333
Other, net of allowance for doubtful accounts of $4,039 and $4,045 as of June 30, 2007 and December 31, 2006, respectively		84,326			89,771
	$	8,137,863		$	7,355,399

The financial information included as of June 30, 2007 has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

	June 30,			December 31,
	2007			2006
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade	$	312,825		$	332,795
Due to affiliates		10,777			17,025
Interest payable		41,274			31,008
Income taxes payable		15,765			12,865
Other current liabilities:
Derivatives		137,343			141,898
Deferred revenue		169,812			181,232
Other		192,395			170,156
Total current liabilities		880,191			886,979

Long-term debt		2,229,988			1,497,162
Derivatives		71,468			125,459
Deferred income taxes		1,264,590			1,172,507
Deferred revenue		404,343			483,279
Other liabilities and minority interests		197,061			205,342
Stockholders' equity:
Common stock, $.01 par value: 500,000,000 shares authorized; 123,228,975 and 122,686,073 shares issued at June 30, 2007 and December 31, 2006, respectively		1,232			1,227
Additional paid-in capital		2,674,749			2,654,047
Treasury stock, at cost: 2,093,392 and 1,183,090 shares at June 30, 2007 and December 31, 2006, respectively		(91,454	)		(53,274	)
Retained earnings		538,542			497,488
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax		(126,142	)		(167,220	)
Cumulative translation adjustment		93,295			52,403
Total stockholders' equity		3,090,222			2,984,671
Commitments and contingencies
	$	8,137,863		$	7,355,399

The financial information included as of June 30, 2007 has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues and other income:
Oil and gas	$	458,032		$	407,570		$	849,950		$	787,038
Interest and other		27,690			9,741			41,606			22,852
Loss on disposition of assets, net		(1,802	)		(3,403	)		(1,542	)		(3,476	)
		483,920			413,908			890,014			806,414
Costs and expenses:
Oil and gas production		120,417			103,066			224,830			197,749
Depletion, depreciation and amortization		103,979			87,984			196,117			170,390
Impairment of long-lived assets		17,891			—			17,891			—
Exploration and abandonments		69,790			41,618			146,162			124,260
General and administrative		30,811			29,468			65,255			61,715
Accretion of discount on asset retirement obligations		2,146			1,154			4,204			2,302
Interest		30,502			22,766			58,996			59,342
Hurricane activity, net		47,000			—			60,548			38,000
Other		10,195			11,759			18,608			16,813
		432,731			297,815			792,611			670,571

Income from continuing operations before income taxes		51,189			116,093			97,403			135,843
Income tax provision		(16,284	)		(50,207	)		(32,203	)		(70,924	)
Income from continuing operations		34,905			65,886			65,200			64,919
Income from discontinued operations, net of tax		1,575			22,153			873			566,327
Net income	$	36,480		$	88,039		$	66,073		$	631,246

Basic earnings per share:
Income from continuing operations	$	0.29		$	0.52		$	0.53		$	0.52
Income from discontinued operations, net of tax		0.01			0.18			0.01			4.48
Net income	$	0.30		$	0.70		$	0.54		$	5.00

Diluted earnings per share:
Income from continuing operations	$	0.29		$	0.52		$	0.53		$	0.52
Income from discontinued operations, net of tax		0.01			0.17			0.01			4.34
Net income	$	0.30		$	0.69		$	0.54		$	4.86

Weighted average shares outstanding:
Basic		121,226			125,629			121,374			126,282
Diluted		122,776			129,624			122,847			130,346

Dividends declared per share	$	—		$	—		$	0.13		$	0.12

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except dividends per share)

(Unaudited)

														Accumulated Other Comprehensive Income (Loss)
	Shares Outstanding		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Net Deferred Hedge Losses, Net of Tax			Cumulative Translation Adjustment		Total Stockholders' Equity
Balance as of January 1, 2007	121,502		$	1,227	$	2,654,047		$	(53,274	)	$	497,488		$	(167,220	)	$	52,403	$	2,984,671

Dividends declared ($.13 per share)	—			—		—			—			(16,035	)		—			—		(16,035	)
Exercise of long-term incentive plan stock options	372			—		—			16,069			(8,984	)		—			—		7,085
Purchase of treasury stock	(1,281	)		—		—			(54,249	)		—			—			—		(54,249	)
Tax benefits related to stock-based compensation	—			—		4,352			—			—			—			—		4,352
Compensation costs:
Compensation awards	543			5		(5	)		—			—			—			—		—
Compensation costs included in net income	—			—		16,355			—			—			—			—		16,355
Net income	—			—		—			—			66,073			—			—		66,073
Other comprehensive income (loss):
Net hedging activity, net of tax:
Net deferred hedge gains	—			—		—			—			—			17,292			—		17,292
Net hedge losses included in continuing operations	—			—		—			—			—			23,786			—		23,786
Translation adjustment	—			—		—			—			—			—			40,892		40,892

Balance as of June 30, 2007	121,136		$	1,232	$	2,674,749		$	(91,454	)	$	538,542		$	(126,142	)	$	93,295	$	3,090,222

The financial information included herein has been prepared by management without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Cash flows from operating activities:
Net income	$	36,480		$	88,039		$	66,073		$	631,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization		103,979			87,984			196,117			170,390
Impairment of long-lived assets		17,891			—			17,891			—
Exploration expenses, including dry holes		42,921			17,354			89,886			69,936
Hurricane activity		47,000			—			66,000			42,000
Deferred income taxes		52,628			50,223			63,394			67,184
Loss on disposition of assets, net		1,802			3,403			1,542			3,476
Loss on extinguishment of debt		—			8,076			—			8,076
Accretion of discount on asset retirement obligations		2,146			1,154			4,204			2,302
Discontinued operations		(61	)		(1,002	)		(2,167	)		(540,655	)
Interest expense		4,487			2,118			9,213			5,165
Commodity hedge related activity		4,734			(6,061	)		10,633			(5,553	)
Amortization of stock-based compensation		8,617			10,824			16,355			18,310
Amortization of deferred revenue		(45,322	)		(47,886	)		(90,356	)		(95,835	)
Other noncash items		3,125			4,892			(3,152	)		7,591
Change in operating assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		15,789			37,137			562			163,165
Income taxes receivable		(49,156	)		104			(36,598	)		(15	)
Inventories		(11,393	)		(18,994	)		(9,404	)		(39,125	)
Prepaid expenses		4,064			14,228			5,219			1,964
Other current assets, net		(399	)		(341	)		(187	)		9,207
Accounts payable		(7,996	)		(18,758	)		(32,586	)		(96,413	)
Interest payable		13,736			8,826			10,266			(10,274	)
Income taxes payable		(3,915	)		(78,236	)		2,900			55,815
Other current liabilities		(23,795	)		(4,438	)		(38,446	)		8,927
Net cash provided by operating activities		217,362			158,646			347,359			476,884
Cash flows from investing activities:
Proceeds from disposition of assets, net of cash sold		13,272			679,371			18,037			1,642,562
Additions to oil and gas properties		(536,152	)		(309,544	)		(974,799	)		(644,432	)
Additions to other assets and other property and equipment, net		(16,102	)		(26,291	)		(29,675	)		(32,839	)
Net cash provided by (used in) investing activities		(538,982	)		343,536			(986,437	)		965,291
Cash flows from financing activities:
Borrowings under long-term debt		369,000			534,219			1,091,000			898,490
Principal payments on long-term debt		—			(438,571	)		(361,555	)		(1,702,842	)
Payments of other liabilities		(3,805	)		(1,428	)		(9,560	)		(17,858	)
Exercise of long-term incentive plan stock options		4,716			2,744			7,085			4,666
Purchase of treasury stock		(22,812	)		(170,464	)		(54,249	)		(172,445	)
Excess tax benefits from share-based payment arrangements		2,781			918			4,321			1,933
Payment of financing fees		(776	)		(2,169	)		(4,295	)		(2,169	)
Dividends paid		(16,035	)		(15,510	)		(16,035	)		(15,510	)
Net cash provided by (used in) financing activities		333,069			(90,261	)		656,712			(1,005,735	)
Net increase in cash and cash equivalents		11,449			411,921			17,634			436,440
Effect of exchange rate changes on cash and cash equivalents		519			2,139			651			1,800

Cash and cash equivalents, beginning of period			13,350			42,982			7,033			18,802
Cash and cash equivalents, end of period		$	25,318		$	457,042		$	25,318		$	457,042

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

	Three Months Ended					Six months Ended
	June 30,					June 30,
	2007		2006			2007		2006

Net income	$	36,480	$	88,039		$	66,073	$	631,246
Other comprehensive income:
Net hedge activity, net of tax:
Net deferred hedge gains (losses)		28,367		(1,806	)		17,292		36,948
Net hedge gains included in continuing operations		11,441		15,185			23,786		54,917
Net hedge losses included in discontinued operations		—		—			—		126,272
Translation adjustment		37,731		13,018			40,892		10,783
Other comprehensive income		77,539		26,397			81,970		228,920
Comprehensive income	$	114,019	$	114,436		$	148,043	$	860,166

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE A.

Organization and Nature of Operations

Pioneer 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 with operations in the United States, Canada, Equatorial Guinea, Nigeria, South Africa and Tunisia.

NOTE B.

Basis of Presentation

Presentation. In the opinion of management, the unaudited consolidated financial statements of the Company as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

Discontinued operations. During 2006, the Company sold its interests in the following oil and gas asset groups:

Country	Description of Assets	Date Divested

United States	Deepwater Gulf of Mexico fields	March 2006

Argentina	Argentine assets	April 2006

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company has reflected the results of operations of the above divestitures as discontinued operations, rather than as a component of continuing operations. See Note P for additional information regarding discontinued operations.

Inventories. Inventories consisted of $107.1 million and $93.7 million of materials and supplies and $1.4 million of commodities as of June 30, 2007 and December 31, 2006, respectively. The Company's materials and supplies inventory primarily comprises oil and gas drilling or repair items such as tubing, casing, 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 weighted average cost basis. Commodities inventory is carried at the lower of weighted average cost or market, on a first-in, first-out basis. Any valuation reductions to inventory are reflected as a loss on disposition of assets in the Consolidated Statements of Operations. As of June 30, 2007 and December 31, 2006, the Company's materials and supplies inventory was net of $2.6 million and $4.2 million, respectively, of valuation reserve allowances.

Goodwill. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", 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 2006, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment. In accordance with GAAP, certain qualifying income tax benefits derived from stock-based compensation are recorded as reductions in the carrying value of goodwill.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

Minority interests in consolidated subsidiaries. The Company owns the majority interests in certain subsidiaries with operations in the United States and Nigeria. Associated therewith, the Company has recognized minority interests in consolidated subsidiaries of $10.9 million and $14.4 million in other liabilities and minority interests in the Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006, respectively.

Minority interests in the net losses of the Company's consolidated Nigerian subsidiary amounting to $.4 million and $2.5 million for the three and six months ended June 30, 2007, respectively, as compared to $.7 million and $3.6 million for the same respective periods of 2006, are included in interest and other income in the Consolidated Statements of Operations. Minority interests in the net income of the Company's consolidated United States subsidiaries amounting to $.6 million and $1.3 million for the three and six months ended June 30, 2007, respectively, as compared to $.6 million and $1.5 million for the same respective periods in 2006, are included in other expense in the Consolidated Statements of Operations.

Stock-based compensation. On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") to account for stock-based compensation. For equity-based compensation awards granted or modified subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant, is being recognized in the Company's financial statements over the vesting period. The Company utilizes (a) the Black-Scholes option pricing model to measure the fair value of stock options, (b) the stock price on the date of grant for the fair value of restricted stock awards and (c) the Monte Carlo simulation method for the fair value of performance unit awards. Prior to the adoption of SFAS 123(R), the Company followed the intrinsic value method in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to account for stock options. Prior period financial statements have not been restated. The Company recorded no cumulative effect as a result of adopting SFAS 123(R).

For the three and six months ended June 30, 2007, the Company recorded $8.6 million and $16.4 million of stock-based compensation costs for all plans, respectively, as compared to $10.8 million and $18.3 million for the same respective periods of 2006.

Pursuant to the provisions of SFAS 123(R), the Company's issued shares, as reflected in the Consolidated Balance Sheets at June 30, 2007 and December 31, 2006, do not include 2,024,882 shares and 1,946,211 shares, respectively, related to unvested restricted stock awards. During the six months ended June 30, 2007, the Company issued 777,476 shares of restricted stock, net of associated forfeitures, for which restrictions will lapse in future periods.

As of June 30, 2007, there was approximately $54.2 million of unrecognized compensation expense related to unvested share-based compensation plan awards, primarily related to restricted stock and performance unit awards. This compensation will be recognized over the remaining vesting periods, which on a weighted average basis is approximately twenty-one months.

Reclassifications. Certain reclassifications have been made to the 2006 amounts in order to conform with the 2007 presentation. Specifically, (a) the Company reduced its exploration and abandonments expense by $42.0 million and interest and other income by $4.0 million for the six months ended June 30, 2006, which represents reclassification of abandonment costs and insurance recoveries for the Company's East Cameron facility destroyed by Hurricane Rita to hurricane activity, net expense in the Consolidated Statements of Operations, (b) the Company reclassified the aforementioned $42.0 million of East Cameron abandonment charge from exploration and abandonments to hurricane activity within net cash flows from operating activities in the Consolidated Statements of Cash Flows, (c) $1.3 million and $17.2 million for the three and six months ended June 30, 2006, respectively, of unfunded check issuances were reclassified from changes in accounts payable in net cash flows from operating activities to payment of other liabilities in net cash flows from financing activities within the Consolidated Statements of Cash Flows, (d) $0.9 million and $1.9 million for the three and six months ended June 30, 2006, respectively, of excess tax benefits from share-based payment arrangements were reclassified from other noncash items in net cash flows from operating activities to financing activities within the Consolidated Statements of Cash Flows and (e) $104 thousand and $(15) thousand for the three and six months ended June 30, 2006, respectively, of

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

income taxes receivable were reclassified from changes in other current assets, net to changes in income taxes receivable in net cash flows from operating activities within the Consolidated Statements of Cash Flows.

New accounting pronouncements. In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). The Interpretation clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on measurement, classification, interim accounting and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note D for additional information regarding the Company’s adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is continuing to assess the impact of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The implementation of SFAS 159 is not expected to have a material effect on the financial condition or results of operations of the Company.

NOTE C.

Exploratory Well Costs

The Company capitalizes exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. The capitalized exploratory well costs are presented in proved properties in the Consolidated Balance Sheets. If the exploratory well is determined to be impaired, the well costs are charged to exploration and abandonments expense.

The following table reflects the Company's capitalized exploratory well activity during the three and six months ended June 30, 2007:

	Three months ended			Six months ended
	June 30, 2007			June 30, 2007
	(in thousands)

Beginning capitalized exploratory well costs	$	294,877		$	265,053
Additions to exploratory well costs pending the determination of proved reserves		106,058			218,898
Reclassification due to determination of proved reserves		(57,821	)		(96,726	)
Impairment of properties		(3,377	)		(3,377	)
Exploratory well costs charged to exploration expense		(24,138	)		(68,249	)

Ending capitalized exploratory well costs	$	315,599		$	315,599

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

The following table provides an aging as of June 30, 2007 and December 31, 2006 of capitalized exploratory well costs based on the date the drilling was completed and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the date the drilling was completed:

	June 30,		December 31,
	2007		2006
	(in thousands, except well counts)

Capitalized exploratory well costs that have been capitalized:
One year or less	$	111,866	$	126,749
Greater than one year		203,733		138,304

	$	315,599	$	265,053

Number of projects with exploratory well costs that have been capitalized for a period greater than one year		14		14

The following table provides an aging of capitalized costs of exploration projects that have been suspended for more than one year as of June 30, 2007:

	Total		2007		2006		2005		2004		2003		2002
	(in thousands)
United States:
Clipper	$	75,910	$	668	$	37,027	$	38,215	$	—	$	—	$	—
Lay Creek		44,815		13,555		31,260		—		—		—		—
Oooguruk		52,205		—		—		5,122		1,014		45,565		504
Other		14,368		2,364		9,031		2,973		—		—		—
Canada		15,809		112		13,655		2,042		—		—		—
Equatorial Guinea		626		178		183		265		—		—		—
Total	$	203,733	$	16,877	$	91,156	$	48,617	$	1,014	$	45,565	$	504

The following discussion describes the history and status of each individually significant suspended exploratory project:

Clipper. During 2005, the Company drilled its first exploratory well on the Clipper prospect, which was a discovery. During 2006, the Company drilled additional wells to determine the magnitude of the discovery, which were successful. The Company is currently evaluating the plans for development of the discovery, including options for subsea tie-back to third-party production and handling facilities in the area.

Lay Creek. The Company’s Lay Creek project is a coal bed methane pilot program located in northwestern Colorado. The Company has drilled 17 wells in six separate pilot areas and completed workovers and recompletions on 14 wells drilled by a previous operator. The Company completed the water treatment facilities and plans to initiate sales of production in the second half of 2007. Determination of success of the pilot project is dependent on the ability to dewater the formation and determine if commercial quantities of gas can be produced. The pilot project is currently in the dewatering phase and if the pilot project is successful then full field development could begin in 2008.

Oooguruk. During 2003, the Company's Alaskan Oooguruk discovery wells found quantities of oil believed to be commercial. In 2003, the Company began farm-in discussions with the owner of undeveloped discoveries in adjacent acreage given its proximity and the potential cost benefits of a larger scale project. The farm-in was

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

completed during 2004. Along with completing the farm-in agreement, Pioneer obtained access to exploration well and seismic data to improve the Company's understanding of the potential of the discoveries without having to drill additional wells. In late 2004, the Company completed an extensive technical and economic evaluation of the resource potential and a front-end engineering design study ("FEED study") for the area.

During 2006, the Company sanctioned the development of the discovery and obtained the necessary regulatory approvals. The Company completed the installation and armoring of the offshore gravel drilling and production site during 2006. During the first half of 2007, the flowline and facilities to carry produced liquids to existing onshore processing facilities at the Kuparuk River Unit were installed. Operations are underway to connect and commission the flowline and facilities. Pioneer is currently assembling the drilling rig on location and plans to commence drilling approximately 40 horizontal wells to develop the discovery in the second half of 2007. The Company estimates first production will occur during the first half of 2008.

NOTE D.

Income Taxes

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that the Company continually assess 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 to assess the likelihood that the Company's net operating loss carryforwards ("NOLs") and other deferred tax attributes in the United States and state, local and foreign tax jurisdictions will be utilized prior to their expiration. As of June 30, 2007 and December 31, 2006, the Company's valuation allowances (relating primarily to foreign tax jurisdictions) were $73.1 million and $94.7 million, respectively.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company has analyzed its filing positions for open tax years in all of the foreign, federal and state jurisdictions where it has material tax attributes and is required to file income tax returns. The Company believes that its income tax filing positions and deductions will be substantially sustained on audit and does not anticipate any significant adjustments. Consequently, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company believes that it is no longer subject to examinations by tax authorities for years before 2002. In the fourth quarter of 2006, the Internal Revenue Service commenced an examination of the Company’s 2004 U.S. income tax return that is anticipated to be completed by the end of 2007. In addition, the Company’s 2003 through 2005 state income tax returns in Colorado and Louisiana are currently under audit, the Tunisian government is concluding an audit of the Company’s 2002 through 2005 income tax returns for the Adam Concession, and the Canada Revenue Agency is currently auditing the Company’s 2003 and 2004 Canadian income tax returns. As of June 30, 2007, no significant adjustments have been proposed in any jurisdiction.

In February 2007, the Republic of South Africa passed legislation that included significant new tax benefits for oil and gas activities. Effective January 1, 2007, the Company is allowed a deduction from oil and gas income equal to 200 percent of exploration expenditures and 150 percent of development expenditures. Pursuant to the new tax legislation, the Company recorded a $5.2 million tax benefit for the six months ended June 30, 2007 associated with capital expenditures incurred after the effective date, primarily related to the South Coast Gas project.

Pursuant to Accounting Principles Board (“APB”) Opinion No. 23 “Accounting for Income Taxes – Special Areas”, the Company historically treated the undistributed earnings in South Africa as permanently reinvested and did not provide for a U.S. tax on such earnings. As of June 30, 2007, the Company made the determination that it no longer had identifiable plans to reinvest these earnings in South Africa and accordingly recorded $13.0 million of U.S. deferred tax expense in the second quarter of 2007. Prospectively, the Company will record U.S. taxes on the earnings of its South African subsidiaries.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

During the second quarter of 2007, the Company commenced plans to relinquish its interest in Block 256 and entered into an agreement to divest its interest in a subsidiary that held an interest in Block 320 in deepwater Nigeria. The agreement was terminated and the Company intends to withdraw from Block 320. Relinquishing of Block 256 is a result of unsuccessful drilling efforts while the withdrawal from Block 320 is a result of the terminated attempt to dispose of its interest and legal compliance matters, which are more fully discussed in Note O. With the plan to relinquish Block 256 and withdraw from Block 320, the Company plans to exit Nigeria. This exit allows the Company to deduct in the U.S. the cumulative expenditures associated with its past Nigerian activities and accordingly, during the second quarter of 2007, the Company recognized a $40.0 million tax benefit.

Income tax (provisions) benefits. The Company's income tax (provisions) benefits attributable to income from continuing operations consisted of the following for the three and six months ended June 30, 2007 and 2006:

	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
	(in thousands)
Current:
U.S. federal	$	48,842		$	10,460		$	53,619		$	12,973
U.S. state and local		—			(12	)		—			(3	)
Foreign		(12,498	)		(10,432	)		(22,428	)		(16,710	)
		36,344			16			31,191			(3,740	)
Deferred:
U.S. federal		(46,554	)		(38,703	)		(58,717	)