Edgar Filing: PIONEER NATURAL RESOURCES CO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

oTRANSITION 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 November 2, 2007

119,485,277

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 September 30, 2007 and December 31, 2006		4

Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006		6

Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2007		7

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

Consolidated Statements of Comprehensive Income for the three and nine months ended September 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		36

Item 3. Quantitative and Qualitative Disclosures About Market Risk		55

Item 4. Controls and Procedures		58

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		59

Item 1A. Risk Factors		59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		60

Item 6. Exhibits		60

Signatures		61

Exhibit Index		62

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, except share data)

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,271		$	7,033
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,335 and $6,999 as of September 30, 2007 and December 31, 2006, respectively		230,274			195,534
Due from affiliates, net of allowance for doubtful accounts of $1,579 as of September 30, 2007		9,458			3,837
Income taxes receivable		88,302			24,693
Inventories		98,918			95,131
Prepaid expenses		11,004			11,509
Deferred income taxes		89,077			82,927
Discontinued operations held for sale		670,026			—
Other current assets:
Derivatives		41,948			63,665
Other		48,847			52,229
Total current assets		1,307,125			536,558
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties		8,449,226			7,967,708
Unproved properties		154,007			210,344
Accumulated depletion, depreciation and amortization		(1,940,595	)		(1,895,408	)
Total property, plant and equipment		6,662,638			6,282,644
Deferred income taxes		3,817			345
Goodwill		310,872			309,908
Other property and equipment, net		137,014			131,840
Other assets:
Derivatives		5,609			4,333
Other, net of allowance for doubtful accounts of $4,028 and $4,405 as of September 30, 2007 and December 31, 2006, respectively		126,509			89,771
	$	8,553,584		$	7,355,399

The financial information included as of September 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)

	September 30,			December 31,
	2007			2006
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade	$	347,047		$	332,795
Due to affiliates		15,411			17,025
Interest payable		28,415			31,008
Income taxes payable		17,462			12,865
Discontinued operations held for sale		104,582			—
Other current liabilities:
Derivatives		159,267			141,898
Deferred revenue		163,941			181,232
Other		167,347			170,156
Total current liabilities		1,003,472			886,979

Long-term debt		2,610,683			1,497,162
Derivatives		47,074			125,459
Deferred income taxes		1,289,401			1,172,507
Deferred revenue		364,636			483,279
Other liabilities and minority interests		173,592			205,342
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 123,266,123 and 122,686,073 shares issued at September 30, 2007 and December 31, 2006, respectively		1,233			1,227
Additional paid-in capital		2,683,575			2,654,047
Treasury stock, at cost: 5,713,120 and 1,183,090 shares at September 30, 2007 and December 31, 2006, respectively		(247,599	)		(53,274	)
Retained earnings		621,582			497,488
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax		(125,343	)		(167,220	)
Cumulative translation adjustment		131,278			52,403
Total stockholders' equity		3,064,726			2,984,671
Commitments and contingencies
	$	8,553,584		$	7,355,399

The financial information included as of September 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						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues and other income:
Oil and gas	$	458,898		$	384,112		$	1,232,272		$	1,108,634
Interest and other		30,991			14,017			71,051			33,576
Gain (loss) on disposition of assets, net		558			(436	)		(860	)		(3,990	)
		490,447			397,693			1,302,463			1,138,220
Costs and expenses:
Oil and gas production		113,554			88,687			308,380			264,741
Depletion, depreciation and amortization		113,879			82,562			280,927			233,269
Impairment of long-lived assets		(2,582	)		—			15,309			—
Exploration and abandonments		34,498			41,006			170,143			158,671
General and administrative		32,330			29,262			94,304			88,466
Accretion of discount on asset retirement obligations		1,702			940			5,025			2,793
Interest		35,476			23,467			94,432			82,857
Hurricane activity, net		110			—			60,658			38,000
Other		7,513			14,001			23,478			31,208
		336,480			279,925			1,052,656			900,005
Income from continuing operations before income taxes		153,967			117,768			249,807			238,215
Income tax provision		(60,948	)		(39,271	)		(92,181	)		(113,966	)
Income from continuing operations		93,019			78,497			157,626			124,249
Income from discontinued operations, net of tax		8,908			2,302			10,374			587,796
Net income	$	101,927		$	80,799		$	168,000		$	712,045

Basic earnings per share:
Income from continuing operations	$	0.78		$	0.63		$	1.30		$	0.99
Income from discontinued operations, net of tax		0.07			0.02			0.09			4.68
Net income	$	0.85		$	0.65		$	1.39		$	5.67

Diluted earnings per share:
Income from continuing operations	$	0.77		$	0.62		$	1.29		$	0.98
Income from discontinued operations, net of tax		0.07			0.02			0.08			4.55
Net income	$	0.84		$	0.64		$	1.37		$	5.53

Weighted average shares outstanding:
Basic		120,323			124,021			121,020			125,520
Diluted		121,805			126,734			122,496			129,134

Dividends declared per share	$	0.14		$	0.13		$	0.27		$	0.25

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	121,503		$	1,227	$	2,654,047		$	(53,274	)	$	497,488		$	(167,220	)	$	52,403	$	2,984,671

Dividends declared ($0.27 per share)	—			—		—			—			(33,190	)		—			—		(33,190	)
Exercise of long-term incentive plan stock options	472			—		—			20,424			(10,716	)		—			—		9,708
Purchase of treasury stock	(5,002	)		—		—			(214,749	)		—			—			—		(214,749	)
Tax benefits related to stock-based compensation	—			—		4,718			—			—			—			—		4,718
Compensation costs:
Compensation awards	580			6		(6	)		—			—			—			—		—
Compensation costs included in net income	—			—		24,816			—			—			—			—		24,816
Net income	—			—		—			—			168,000			—			—		168,000
Other comprehensive income (loss):
Net hedging activity, net of tax:
Net deferred hedge gains	—			—		—			—			—			23,784			—		23,784
Net hedge losses included in continuing operations	—			—		—			—			—			32,260			—		32,260
Net hedge gains included in discontinued operations	—			—		—			—			—			(14,167	)		—		(14,167	)
Translation adjustment	—			—		—			—			—			—			78,875		78,875

Balance as of September 30, 2007	117,553		$	1,233	$	2,683,575		$	(247,599	)	$	621,582		$	(125,343	)	$	131,278	$	3,064,726

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 September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Cash flows from operating activities:
Net income	$	101,927		$	80,799		$	168,000		$	712,045
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization		113,879			82,562			280,927			233,269
Impairment of long-lived assets		(2,582	)		—			15,309			—
Exploration expenses, including dry holes		8,725			15,043			92,706			81,449
Hurricane activity		—			—			66,000			42,000
Deferred income taxes		73,091			42,337			135,505			115,788
(Gain) loss on disposition of assets, net		(558	)		436			860			3,990
Loss on extinguishment of debt		—			—			—			8,076
Accretion of discount on asset retirement obligations		1,702			940			5,025			2,793
Discontinued operations		6,719			12,987			41,518			(512,835	)
Interest expense		4,092			2,357			13,305			7,522
Commodity hedge related activity		5,349			(3,713	)		15,982			(6,210	)
Amortization of stock-based compensation		8,461			7,047			24,816			25,357
Amortization of deferred revenue		(45,578	)		(47,395	)		(135,934	)		(143,230	)
Other noncash items		5,193			5,201			1,744			12,219
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		(55,383	)		(1,351	)		(54,821	)		161,814
Income taxes receivable		(27,428	)		(54	)		(64,026	)		(69	)
Inventories		3,073			(12,990	)		(6,331	)		(52,113	)
Prepaid expenses		(6,723	)		(1,673	)		(1,213	)		291
Other current assets, net		5,224			(7,160	)		5,037			2,047
Accounts payable		44,334			75,160			11,748			(21,253	)
Interest payable		(12,858	)		(1,202	)		(2,592	)		(11,476	)
Income taxes payable		1,697			(37,993	)		4,597			17,820
Other current liabilities		(41,743	)		(31,552	)		(80,189	)		(22,624	)
Net cash provided by operating activities		190,613			179,786			537,973			656,670
Cash flows from investing activities:
Proceeds from disposition of assets, net of cash sold		(2,990	)		(354	)		15,047			1,642,208
Additions to oil and gas properties		(355,485	)		(342,236	)		(1,330,284	)		(986,668	)
Additions to other assets and other property and equipment, net		(60,150	)		(24,589	)		(89,825	)		(57,428	)
Net cash provided by (used in) investing activities		(418,625	)		(367,179	)		(1,405,062	)		598,112
Cash flows from financing activities:
Borrowings under long-term debt		411,000			200,000			1,502,000			1,098,490
Principal payments on long-term debt		(32,075	)		(256,744	)		(393,630	)		(1,959,586	)
Payments of other liabilities		(195	)		4,285			(9,755	)		(13,573	)
Exercise of long-term incentive plan stock options		2,623			7,227			9,708			11,893
Purchase of treasury stock		(160,500	)		(125,204	)		(214,749	)		(297,649	)
Excess tax benefits from share-based payment arrangements		365			954			4,686			2,887
Payment of financing fees		(12	)		(9	)		(4,307	)		(2,178	)
Dividends paid		—			—			(16,035	)		(15,510	)
Net cash provided by (used in) financing activities		221,206			(169,491	)		877,918			(1,175,226	)
Net increase (decrease) in cash and cash equivalents		(6,806	)		(356,884	)		10,829			79,556
Effect of exchange rate changes on cash and cash equivalents		758			(86	)		1,409			1,714
Cash and cash equivalents, beginning of period		25,319			457,042			7,033			18,802
Cash and cash equivalents, end of period	$	19,271		$	100,072		$	19,271		$	100,072

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 September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Net income	$	101,927		$	80,799		$	168,000		$	712,045
Other comprehensive income:
Net hedge activity, net of tax:
Net deferred hedge gains		5,235			68,367			23,784			105,315
Net hedge losses included in continuing operations		1,799			18,630			32,260			75,273
Net hedged (gains) losses included in discontinued operations		(6,235	)		(1,871	)		(14,167	)		122,675
Translation adjustment		37,983			(507	)		78,875			10,276
Other comprehensive income		38,782			84,619			120,752			313,539
Comprehensive income	$	140,709		$	165,418		$	288,752		$	1,025,584

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

September 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 continuing operations in the United States, Equatorial Guinea, 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 September 30, 2007 and for the three and nine months ended September 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 and 2007, the Company sold or has an agreement to sell 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