Edgar Filing: PIONEER NATURAL RESOURCES CO

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PXD-2013.03.31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013



¨	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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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

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

Yes ¨ No ý

Number of shares of Common Stock outstanding as of May 2, 2013 136,578,089

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

TABLE OF CONTENTS



		Page
Cautionary Statement Concerning Forward-Looking Statements		3

Definitions of Certain Terms and Conventions Used Herein		4

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	5

	Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012	7

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012	8

	Consolidated Statement of Equity for the three months ended March 31, 2013	9

	Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	10

	Notes to Consolidated Financial Statements	11

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 4.	Mine Safety Disclosures	44

Item 6.	Exhibits	45

Signatures		46

Exhibit Index		47

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

Cautionary Statement Concerning Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "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 as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.

These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, the receipt of approvals required to consummate the Company's Southern Wolfcamp joint interest transaction, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to complete the Company's operating activities, access to and availability of transportation, processing, fractionation and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer's credit facility and derivative contracts and the purchasers of Pioneer's oil, NGL and gas production, uncertainties about estimates of reserves and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impacts of climate change, the risks associated with the ownership and operation of an industrial sand mining business and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this Report and other filings with the United States Securities and Exchange Commission (the "SEC"). In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Part I, Item 1. Business — Competition, Markets and Regulations," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, 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, 2012 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. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

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.


•	"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 six thousand cubic feet of gas to one 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.


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


•	"DD&A" means depletion, depreciation and amortization.


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


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


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


•	"MMBTU" means one million BTUs.


•	"MMBTUPD" means MMBTU per day.


•	"Mont Belvieu" means the daily average natural gas liquids components as priced in OPIS in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.


•	"NGL" means natural gas liquid.


•	"NYMEX" means the New York Mercantile Exchange.


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


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

•

"Proved reserves" mean the quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons ("LKH") as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil ("HKO") elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.


•	"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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)



	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	430,298		$	229,396
Accounts receivable:
Trade, net	355,093			316,854
Due from affiliates	4,124			3,299
Income taxes receivable	1,394			7,447
Inventories	233,402			197,056
Prepaid expenses	13,337			13,438
Other current assets:
Derivatives	151,431			279,119
Other	7,335			3,746
Total current assets	1,196,414			1,050,355
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties	15,007,980			14,259,708
Unproved properties	218,404			231,555
Accumulated depletion, depreciation and amortization	(4,633,359		)	(4,412,913		)
Total property, plant and equipment	10,593,025			10,078,350
Goodwill	298,142			298,142
Other property and equipment, net	1,228,108			1,217,694
Other assets:
Investment in unconsolidated affiliate	216,369			204,129
Derivatives	95,121			55,257
Other, net	134,118			165,103
	$	13,761,297		$	13,069,030

The financial information included as of March 31, 2013 has been prepared by management

without audit by independent registered public accountants.

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

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)



	March 31, 2013			December 31, 2012
	(Unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade	$	780,395		$	729,942
Due to affiliates	39,968			96,935
Interest payable	37,494			68,083
Income taxes payable	292			208
Deferred income taxes	51,783			86,481
Other current liabilities:
Derivatives	20,413			13,416
Other	41,521			39,725
Total current liabilities	971,866			1,034,790
Long-term debt	3,017,280			3,721,193
Derivatives	13,372			12,307
Deferred income taxes	2,202,637			2,140,416
Other liabilities	290,071			293,016
Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 145,799,929 and 134,966,740 shares issued at March 31, 2013 and December 31, 2012, respectively	1,458			1,350
Additional paid-in capital	4,898,318			3,683,934
Treasury stock at cost: 9,337,865 and 11,611,093 at March 31, 2013 and December 31, 2012, respectively	(420,947		)	(510,570		)
Retained earnings	2,609,801			2,514,640
Total equity attributable to common stockholders	7,088,630			5,689,354
Noncontrolling interests in consolidating subsidiaries	177,441			177,954
Total equity	7,266,071			5,867,308
Commitments and contingencies
	$	13,761,297		$	13,069,030

The financial information included as of March 31, 2013 has been prepared by management

without audit by independent registered public accountants.

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

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)



	Three Months Ended March 31,
	2013			2012
Revenues and other income:
Oil and gas	$	787,855		$	718,956
Interest and other	19,315			21,908
Gain on disposition of assets, net	24,417			43,596
	831,587			784,460
Costs and expenses:
Oil and gas production	169,140			131,781
Production and ad valorem taxes	54,297			45,796
Depletion, depreciation and amortization	230,763			181,418
Exploration and abandonments	27,627			53,287
General and administrative	63,751			63,067
Accretion of discount on asset retirement obligations	3,153			2,430
Interest	50,735			46,858
Derivative (gains) losses, net	42,243			(91,750		)
Other	21,349			23,607
	663,058			456,494
Income from continuing operations before income taxes	168,529			327,966
Income tax provision	(59,329		)	(117,703		)
Income from continuing operations	109,200			210,263
Income (loss) from discontinued operations, net of tax	(465		)	10,695
Net income	108,735			220,958
Net income attributable to noncontrolling interests	(8,072		)	(6,339		)
Net income attributable to common stockholders	$	100,663		$	214,619

Basic earnings per share:
Income from continuing operations attributable to common stockholders	$	0.77		$	1.65
Income (loss) from discontinued operations attributable to common stockholders	—			0.08
Net income attributable to common stockholders	$	0.77		$	1.73
Diluted earnings per share:
Income from continuing operations attributable to common stockholders	$	0.75		$	1.60
Income (loss) from discontinued operations attributable to common stockholders	—			0.08
Net income attributable to common stockholders	$	0.75		$	1.68
Weighted average shares outstanding:
Basic	128,940			122,480
Diluted	132,751			126,247
Dividends declared per share	$	0.04		$	0.04

Amounts attributable to common stockholders:
Income from continuing operations	$	101,128		$	203,924
Income (loss) from discontinued operations, net of tax	(465		)	10,695
Net income	$	100,663		$	214,619

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.

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)



	Three Months Ended March 31,
	2013			2012
Net income	$	108,735		$	220,958
Other comprehensive activity:
Net hedge losses included in continuing operations	—			2,508
Income tax benefit	—			(928		)
Other comprehensive activity	—			1,580
Comprehensive income	108,735			222,538
Comprehensive income attributable to the noncontrolling interests	(8,072		)	(6,339		)
Comprehensive income attributable to common stockholders	$	100,663		$	216,199

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.

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF EQUITY

(in thousands, except dividends per share)

(Unaudited)



		Equity Attributable To Common Stockholders
	Shares Outstanding	Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Noncontrolling Interests			Total Equity
Balance as of December 31, 2012	123,356	$	1,350	$	3,683,934		$	(510,570	)	$	2,514,640		$	177,954		$	5,867,308
Issuance of common stock	10,350	103		1,280,813			—			—			—			1,280,916
Dividends declared ($0.04 per share)	—	—		—			—			(5,502		)	—			(5,502		)
Exercise of long-term incentive plan stock options	41	—		(791		)	1,838			—			—			1,047
Treasury stock purchases	2,232	—		—			(19,202		)	—			—			(19,202		)
Conversion of 2.875% senior convertible notes	—	—		(106,989		)	106,987			—			—			(2		)
Tax benefit related to conversion of 2.875% senior convertible notes	—	—		22,524			—			—			—			22,524
Tax benefit related to stock-based compensation	—	—		1,688			—			—			—			1,688
Compensation costs:
Vested compensation awards, net	484	5		(5		)	—			—			—			—
Compensation costs included in net income	—	—		17,144			—			—			300			17,444
Cash distributions to noncontrolling interests	—	—		—			—			—			(8,885		)	(8,885		)
Net income	—	—		—			—			100,663			8,072			108,735
Balance as of March 31, 2013	136,463	$	1,458	$	4,898,318		$	(420,947	)	$	2,609,801		$	177,441		$	7,266,071

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.

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PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	108,735		$	220,958
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization	230,763			181,418
Exploration expenses, including dry holes	7,954			27,163
Deferred income taxes	51,894			105,871
Gain on disposition of assets, net	(24,417		)	(43,596		)
Accretion of discount on asset retirement obligations	3,153			2,430
Discontinued operations	(158		)	1,577
Interest expense	4,844			9,870
Derivative related activity	95,884			(27,243		)
Amortization of stock-based compensation	17,395			15,086
Amortization of deferred revenue	—			(10,459		)
Other noncash items	(2,922		)	(9,516		)
Change in operating assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net	(41,803		)	(20,663		)
Income taxes receivable	6,053			1,407
Inventories	825			(31,027		)
Prepaid expenses	101			1,413
Other current assets	(636		)	2,488
Accounts payable	(57,572		)	19,326
Interest payable	(30,589		)	(21,917		)
Income taxes payable	84			16,941
Other current liabilities	(9,514		)	(15,441		)
Net cash provided by operating activities	360,074			426,086
Cash flows from investing activities:
Proceeds from disposition of assets	46,184			58,514
Additions to oil and gas properties	(697,191		)	(678,339		)
Additions to other assets and other property and equipment, net	(56,169		)	(59,841		)
Net cash used in investing activities	(707,176		)	(679,666		)
Cash flows from financing activities:
Borrowings under long-term debt	304,922			134,000
Principal payments on long-term debt	(1,012,253		)	(49,000		)
Proceeds from issuance of common stock, net of issuance costs	1,280,916			—
Distributions to noncontrolling interests	(8,885		)	(8,957		)
Borrowings (payments) of other liabilities	(210		)	458
Exercise of long-term incentive plan stock options	1,047			1,008
Purchases of treasury stock	(19,202		)	(56,129		)
Excess tax benefits from share-based payment arrangements	1,688			12,938
Payments of convertible senior note conversions and financing fees	(2		)	(1,261		)
Dividends paid	(17		)	(43		)
Net cash provided by financing activities	548,004			33,014
Net increase (decrease) in cash and cash equivalents	200,902			(220,566		)
Cash and cash equivalents, beginning of period	229,396			537,484
Cash and cash equivalents, end of period	$	430,298		$	316,918

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.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

NOTE A. Organization and Nature of Operations

Pioneer Natural Resources Company ("Pioneer" or the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company operating in the United States, with field operations in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Barnett Shale Combo play in North Texas, the Raton field in southeastern Colorado, the Hugoton field in southwest Kansas, the West Panhandle field in the Texas Panhandle and Alaska.

NOTE B. Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of March 31, 2013 and for the three months ended March 31, 2013 and 2012 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 in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together 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, 2012.

Certain reclassifications have been made to the 2012 financial statement and footnote amounts in order to conform to the 2013 presentation.

Issuance of common stock. In February 2013, the Company issued 10.35 million shares of its common stock and realized $1.3 billion of proceeds, net of associated underwriting and offering expenses.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 52.4 percent limited partner interest in Pioneer Southwest Energy Partners L.P. ("Pioneer Southwest"). The Company owns and controls Pioneer Natural Resources GP LLC (the "General Partner"), which manages Pioneer Southwest. Pioneer Southwest owns interests in certain oil and gas properties in the Spraberry field in the Permian Basin of West Texas. The financial position, results of operations and cash flows of Pioneer Southwest are consolidated with those of the Company. Noncontrolling interests in consolidated subsidiaries includes $163.9 million attributable to outstanding Pioneer Southwest common units held by unitholders other than Pioneer or its subsidiaries as of March 31, 2013.

NOTE C. Acquisitions and Divestitures

Premier Silica Business Combination

On April 2, 2012, a wholly-owned subsidiary of the Company acquired an industrial sand mining business that is now called Premier Silica LLC ("Premier Silica"). Premier Silica's primary mine operations are in Brady, Texas. The Brady mine facilities primarily produce, process and provide sand to the Company for use as proppant in its fracture stimulation of oil and gas wells in Texas. Excess sand and sand not useable for fracture stimulation is sold to third parties for use as proppant or other industrial and recreational purposes. The aggregate purchase price of Premier Silica was $297.1 million, including closing adjustments.

Divestitures Recorded in Continuing Operations

Sales of unproved oil and gas properties. For the three months ended March 31, 2013, the Company's pretax gain on disposition of assets from continuing operations of $24.4 million was primarily associated with the sale of its interest in unproved oil and gas properties adjacent to the Company's West Panhandle field operations to an unaffiliated third party for cash proceeds of $37.4 million, which resulted in a pretax gain of $21.7 million. For the three months ended March 31, 2012, the Company's pretax gain on disposition of assets of $43.6 million was primarily associated with the sale of a portion of its interest in an unproved oil and gas property in the Eagle Ford Shale field to unaffiliated third parties for cash proceeds of $54.7 million, which resulted in a pretax gain of $42.6 million.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

Divestitures Recorded as Discontinued Operations

South Africa. During the first quarter of 2012, the Company agreed to sell its net assets in South Africa ("Pioneer South Africa") to an unaffiliated third party, effective January 1, 2012, for $60.0 million of cash proceeds before normal closing and other adjustments, and the buyer's assumption of certain liabilities of the Company's South Africa subsidiaries. In August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, including normal closing adjustments for cash revenues and costs and expenses from the effective date through the date of the sale, resulting in a third quarter 2012 pretax gain of $28.6 million. The Company classified Pioneer South Africa's results of operations as income from discontinued operations, net of tax, in the accompanying consolidated statements of operations.

For the three months ended March 31, 2012, the Company recognized revenues and other income and pretax earnings of $19.6 million and $17.4 million, respectively, associated with discontinued operations, principally related to the results of operations of Pioneer South Africa prior to its divestiture in August 2012.

Pending Divestitures

Southern Wolfcamp. In January 2013, the Company signed an agreement with Sinochem Petroleum USA LLC ("Sinochem"), a U.S. subsidiary of the Sinochem Group, an unaffiliated third party, to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field in West Texas for total consideration of $1.7 billion. Sinochem will pay $522.0 million in cash to Pioneer at closing, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the horizontal Wolfcamp Shale play. This transaction is expected to close during the second quarter of 2013, subject to governmental approvals.

NOTE D. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:


•	Level 1 – quoted prices for identical assets or liabilities in active markets.


•	Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3 – unobservable inputs for the asset or liability.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The following table presents the Company's assets and liabilities that are measured at fair value as of March 31, 2013:



	Fair Value Measurement at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at March 31, 2013
	(in thousands)
Recurring fair value measurements
Assets:
Trading securities	$	158	$	142	$	—	$	300
Commodity derivatives	—		246,552		—		246,552
Deferred compensation plan assets	53,768		—		—		53,768
Total assets	53,926		246,694		—		300,620
Liabilities:
Commodity derivatives	—		28,001		—		28,001
Interest rate derivatives	—		5,784		—		5,784
Total liabilities	—		33,785		—		33,785
Total recurring fair value measurements	$	53,926	$	212,909	$	—	$	266,835

Trading securities and deferred compensation plan assets. The Company's trading securities are comprised of securities that are both actively traded and not actively traded on major exchanges. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of March 31, 2013, substantially all of the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. Inputs for certain trading securities that are not actively traded on major exchanges were classified as Level 2 inputs.

Commodity derivatives. The Company's commodity derivatives represent oil, natural gas liquids ("NGL") and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's oil, NGL and gas swap, collar and collar contracts with short puts represent Level 2 inputs in the hierarchy. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.

The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.

Interest rate derivatives. The Company's interest rate derivative liabilities as of March 31, 2013 represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The net derivative values attributable to the Company's interest rate derivative contracts as of March 31, 2013 are based on (i) the contracted notional amounts, (ii) active market-quoted London Interbank Offered Rate ("LIBOR") yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative liability measurements represent Level 2 inputs in the hierarchy.

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheet as of March 31, 2013 and December 31, 2012 are as follows:



	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Long-term debt	$	3,017,280	$	3,768,884	$	3,721,193	$	4,555,770

Long-term debt includes the Company's credit facility, the Pioneer Southwest credit facility and the Company's senior notes. The fair value of debt is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy.

Credit facilities. The fair values of the Company's and Pioneer Southwest's credit facilities are calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rate (in the case of the Company's credit facility) or LIBOR (in the case of the Pioneer Southwest credit facility) yield curves and (iii) the applicable credit-adjustments.

Senior notes. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.

The Company has other financial instruments consisting primarily of cash equivalents, receivables, prepaid expenses, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and relatively short maturities. Non-financial assets and liabilities initially measured at fair value include certain assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.

NOTE E. Derivative Financial Instruments

The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.

Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

The following table sets forth the volumes per day in barrels ("BBLs") associated with the Company's outstanding oil derivative contracts as of March 31, 2013 and the weighted average oil prices per BBL for those contracts:



	Nine Months Ending December 31,			Year Ending December 31,
	2013			2014		2015
Collar contracts with short puts:
Volume (BBL)	72,430			69,000		26,000
Average price per BBL:
Ceiling	$	119.89		$	114.05	$	104.45
Floor	$	92.26		$	93.70	$	95.00
Short put	$	74.36		$	77.61	$	80.00
Swap contracts:
Volume (BBL)	3,000			—		—
Average price per BBL	$	81.02		$	—	$	—
Rollfactor swap contracts:
Volume (BBL)	6,000			15,000		—
NYMEX roll price (a)	$	0.43		$	0.38	$	—
Basis swap contracts:
Midland-Cushing index swap volume (BBL)	1,655			—		—
Average price per BBL (b)	$	(5.75	)	$	—	$	—
Cushing-LLS index swap volume (BBL)	669			—		—
Average price per BBL (c)	$	(9.30	)	$	—	$	—

____________________


(a)	Represents swaps that fix the difference between (i) each day's price per BBL of WTI for the first nearby month less (ii) the price per BBL of WTI for the second nearby NYMEX month, multiplied by .6667; plus (iii) each day's price per BBL of WTI for the first nearby month less (iv) the price per BBL of WTI for the third nearby NYMEX month, multiplied by .3333.


(b)	Basis differential price between Midland WTI and Cushing WTI.


(c)	Basis differential price between Cushing WTI and Louisiana Light Sweet crude "LLS".

NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities' NGL product component prices.

The following table sets forth the volumes per day in BBLs associated with the Company's outstanding NGL derivative contracts as of March 31, 2013 and the weighted average NGL prices per BBL for those contracts:



	Nine Months Ending December 31,		Year Ending December 31,
	2013		2014
Collar contracts with short puts:
Volume (BBL)	1,064		1,000
Average price per BBL:
Ceiling	$	105.28	$	109.50
Floor	$	89.30	$	95.00
Short put	$	75.20	$	80.00

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

Subsequent to March 31, 2013, the Company entered into additional NGL collar contracts for (i) 2,000 BBLs per day of the Company's May through December 2013 ethane production with a ceiling price of $12.60 per BBL and a floor price of $10.50 per BBL, (ii) 500 BBLs per day of the Company's July through December 2013 ethane production with a ceiling price of $13.02 per BBL and a floor price of $10.50 per BBL and (iii) 3,000 BBLs per day of the Company's 2014 ethane production with a ceiling price of $13.72 per BBL and a floor price of $10.78 per BBL.

Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("HH") gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and reduce basis risk between HH prices and actual index prices at which the gas is sold.

The following table sets forth the volumes per day in millions of British thermal units ("MMBTU") associated with the Company's outstanding gas derivative contracts as of March 31, 2013 and the weighted average gas prices per MMBTU for those contracts:



	Nine Months Ending December 31,			Year Ending December 31,
	2013			2014			2015		2016
Collar contracts with short puts:
Volume (MMBTU) (a)	—			65,000			235,000		20,000
Price per MMBTU:
Ceiling	$	—		$	4.70		$	5.09	$	5.36
Floor	$	—		$	4.00		$	4.00	$	4.00
Short put	$	—		$	3.00		$	3.00	$	3.00
Collar contracts:
Volume (MMBTU) (a)	150,000			—			—		—
Price per MMBTU:
Ceiling	$	6.25		$	—		$	—	$	—
Floor	$	5.00		$	—		$	—	$	—
Swap contracts:
Volume (MMBTU)	170,282			175,000			20,000		—
Price per MMBTU	$	5.07		$	4.02		$	4.31	$	—
Basis swap contracts:
Volume (MMBTU) (a)	162,500			10,000			—		—
Price per MMBTU	$	(0.22	)	$	(0.19	)	$	—	$	—

____________________

(a)

Subsequent to March 31, 2013, the Company entered into additional (i) collar contracts for 2,500 MMBTUs per day of the Company's June through December 2013 production with a ceiling price of $4.50 per MMBTU and a floor price of $4.00 per MMBTU, (ii) collar contracts with short puts for 50,000 MMBTUs per day of the Company's 2014 production with a ceiling price of $4.70 per MMBTU, a floor price of $4.00 per MMBTU and a short put price of $3.00 per MMBTU, (iii) collar contracts with short puts for 50,000 MMBTUs per day of the Company's 2015 production with a ceiling price of $5.03 per MMBTU, a floor price of $4.00 per MMBTU and a short put price of $3.00 per MMBTU, (iv) basis swap contracts for 22,500 MMBTU per day of the Company's 2014 production with a negative price differential of $0.18 per MMBTU between the relevant index price and the NYMEX price and (v) basis swap contracts for 7,500 MMBTU per day of the Company's 2015 production with a negative price differential of $0.13 per MMBTU between the relevant index price and the NYMEX price.

Marketing and basis transfer derivative activities. Periodically, the Company enters into buy and sell marketing arrangements to utilize unused firm pipeline transportation commitments. Associated with these marketing arrangements, the Company may enter into index swaps to mitigate the related price risk.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

The following table sets forth the contract volumes associated with the Company's outstanding marketing derivative contracts as of March 31, 2013 and the weighted average prices for those contracts:



	Nine Months Ending December 31,
	2013
Average Daily Gas Production Associated with Marketing Derivatives:
Basis swap contracts:
Index swap volume (MMBTU)	4,364
Price differential ($/MMBTU)	$	0.34

Interest rates. As of March 31, 2013, the Company was a party to interest rate derivative contracts that lock in a fixed forward annual interest rate of 3.21 percent, for a 10-year period ending in December 2025, on a notional amount of $250 million. These derivative contracts mature and settle by their terms in December 2015.

Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives as of March 31, 2013 and December 31, 2012 and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty, as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty.

The aggregate fair value of the Company's derivative instruments reported in the consolidated balance sheets by commodity and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:



Fair Value of Derivative Instruments as of March 31, 2013
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in thousands)
Derivatives not designated as hedging instruments
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	160,149	$	(8,718	)	$	151,431
Commodity price derivatives	Derivatives - noncurrent	$	100,090	$	(4,969	)	95,121
							$	246,552
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	29,131	$	(8,718	)	$	20,413
Commodity price derivatives	Derivatives - noncurrent	$	12,557	$	(4,969	)	7,588
Interest rate derivatives	Derivatives - noncurrent	$	5,784	$	—		5,784
							$	33,785

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)



Fair Value of Derivative Instruments as of December 31, 2012
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in thousands)
Derivatives not designated as hedging instruments
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	286,805	$	(7,686	)	$	279,119
Commodity price derivatives	Derivatives - noncurrent	$	61,618	$	(6,361	)	55,257
							$	334,376
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	21,102	$	(7,686	)	$	13,416
Commodity price derivatives	Derivatives - noncurrent	$	8,944	$	(6,361	)	2,583
Interest rate derivatives	Derivatives - noncurrent	$	9,724	$	—		9,724
							$	25,723

The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.



Derivatives in Cash Flow Hedging	Location of (Gain)/Loss Reclassified from
Derivatives in Cash Flow Hedging	Location of (Gain)/Loss Reclassified from	Three Months Ended March 31,
Relationships	AOCI into Earnings	2013		2012
		(a)
Commodity price derivatives	Oil and gas revenue	$	—	$	809
Interest rate derivatives	Interest expense	—		1,699
Total		$	—	$	2,508

____________________


(a)	During 2012, all remaining Accumulated Other Comprehensive Income ("AOCI") related to hedging was transferred to earnings.




Derivatives Not Designated as Hedging	Location of (Gain) Loss Recognized in	Three Months Ended March 31,
Instruments	Earnings on Derivatives	2013			2012

Commodity price derivatives	Derivative (gains) losses, net	$	46,183		$	(88,130	)
Interest rate derivatives	Derivative (gains) losses, net	(3,940		)	(3,620		)
Total		$	42,243		$	(91,750	)

NOTE F. Exploratory Costs

The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. After an exploratory well has been completed and found oil and gas reserves, a determination may be pending as to whether the oil and gas reserves can be classified as proved. In those circumstances, the Company continues to capitalize the well or project costs pending the determination of proved status if (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

The following table reflects the Company's capitalized exploratory well and project activity during the three months ended March 31, 2013:



	Three Months Ended March 31, 2013
	(in thousands)
Beginning capitalized exploratory costs	$	212,670
Additions to exploratory costs pending the determination of proved reserves	351,575
Reclassification due to determination of proved reserves	(262,754		)
Exploratory well costs charged to exploration expense	(7,734		)
Ending capitalized exploratory costs	$	293,757

The following table provides an aging, as of March 31, 2013 and December 31, 2012, of capitalized exploratory costs and the number of projects for which exploratory costs have been capitalized for a period greater than one year based on the date drilling was completed:



	March 31, 2013		December 31, 2012
	(in thousands, except project counts)
Capitalized exploratory costs that have been suspended:
One year or less	$	174,841	$	190,678
More than one year	118,916		21,992
	$	293,757	$	212,670

Number of projects with exploratory costs that have been suspended for a period greater than one year	2		1

Alaska - Oooguruk. As of each of March 31, 2013 and December 31, 2012, the Company had $22.0 million of suspended well costs recorded for the K-13 well in the Alaska Oooguruk field. Drilling on the K-13 well was completed during September 2011. During well completion operations, subsurface damages were sustained. The Company plans to recomplete the well during 2013. The well may require additional stimulation work that, if required, will be done during the first quarter of 2014 to initiate production.

Alaska - Nuna. The Company's Nuna project, which has $96.9 million of suspended project costs as of March 31, 2013, includes the Nuna-1 exploration well that was drilled during 2012 to test the Torok formation and a second appraisal well that was drilled and logged during the first quarter of 2013. The Company flow-tested the Nuna-1 well during the second quarter of 2012 and again in the first quarter of 2013. The second appraisal well encountered a mechanical problem and could not be flow-tested before the end of the winter drilling season. The results of the flow-tests on the Nuna-1 well and the log data from the second Nuna well are both very encouraging. The Company is currently conducting a front-end engineering design ("FEED") study to evaluate the potential for onshore production facilities to support the project.

NOTE G. Long-term Debt

The Company's long-term debt consists of senior notes and revolving credit facilities, including the effects of net deferred fair value hedge losses and issuance discounts. As of March 31, 2013, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

Credit facility. The Company maintains a Credit Agreement (the "Credit Facility") with a syndicate of financial institutions that has aggregate loan commitments of $1.5 billion that expires in December 2017. As of March 31, 2013, the Company had no outstanding borrowings under the Credit Facility.

Pioneer Southwest credit facility. Pioneer Southwest maintains a Credit Agreement (the "Pioneer Southwest Credit Facility") with a syndicate of financial institutions that has aggregate loan commitments of $300 million that expires in March 2017. As of

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

March 31, 2013, Pioneer Southwest had outstanding borrowings of $154.0 million under the Credit Facility, leaving $146.0 million of unused borrowing capacity.

Convertible senior notes. As of March 31, 2013 and December 31, 2012, the Company had $218.6 million and $479.9 million of 2.875% Convertible Senior Notes due 2038 ("Convertible Senior Notes") outstanding. The Convertible Senior Notes are convertible at the option of the holders under certain circumstances, using a net share settlement process, into a combination of cash and the Company's common stock based on a formula set forth in the indenture supplement pursuant to which the Convertible Senior Notes were issued and, as of January 15, 2013, are redeemable by the Company at any time for cash at a price equal to the full principal amount plus accrued and unpaid interest.

During December 2012, the Company's stock price met the price threshold that causes the Convertible Senior Notes to be convertible at the option of the holders for the three months ended March 31, 2013. Associated therewith, during the three months ended March 31, 2013, holders of $274.1 million principal amount of the Convertible Senior Notes exercised their right to convert their Convertible Senior Notes into cash and shares of the Company's common stock and the Company paid the tendering holders $261.3 million of cash and issued to the tendering holders 2.4 million shares of the Company's common stock during the three months ended March 31, 2013, in accordance with the terms of the Convertible Senior Notes indenture agreement. The remaining $12.8 million principal amount was settled in cash and the issuance of 115 thousand shares of the Company's common stock in April 2013.

The Company's stock prices during March 2013 and 2012 also met the price threshold that causes the Convertible Senior Notes to be convertible at the option of the holders for the following three month period. In addition, on April 15, 2013, the Company announced that it would exercise its option to redeem all Convertible Senior Notes that have not been converted by the holders before May 16, 2013.

If all of the remaining Convertible Senior Notes had been converted on March 31, 2013, the note holders would have received $218.6 million of additional cash and approximately 2.1 million shares of the Company's common stock, which were valued at $259.7 million on March 31, 2013. Holders of the Convertible Senior Notes who present their notes for conversion prior to May 16, 2013 will be subject to a 20 consecutive day cash settlement averaging period that will encompass the trading days from April 16, 2013 through May 13, 2013. The Company has the intent and ability to fund cash payments that will be required upon the conversion or redemption of the Convertible Senior Notes with borrowing capacity under the Credit Facility. Accordingly, the Convertible Senior Notes are classified as long-term debt in the accompanying balance sheets.

Interest on the principal amount of the Convertible Senior Notes is payable semiannually in arrears on January 15 and July 15 of each year. The trading price of the Convertible Senior Notes for the five consecutive trading days preceding January 15, 2013 exceeded 120 percent of the principal amount of the note and, in accordance with the indenture supplement, the interest rate in effect during the January 15, 2013 to July 14, 2013 period was reduced to 2.375 percent.

NOTE H. Incentive Plans

Stock-based compensation

For the three months ended March 31, 2013, the Company recorded $27.6 million of stock-based compensation expense for all plans, as compared to $21.3 million for the same period of 2012. As of March 31, 2013, there was $198.5 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $47.5 million attributable to stock-based awards that are expected to be settled in cash on their vesting date, rather than in equity shares ("Liability Awards"). This compensation will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis. As of March 31, 2013 and December 31, 2012, accounts payable – due to affiliates includes $5.8 million and $18.8 million, respectively, of liabilities attributable to Liability Awards.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

The following table summarizes the activity that occurred during the three months ended March 31, 2013, for each type of share-based incentive award issued by Pioneer:



	Restricted Stock Equity Awards		Restricted Stock Liability Awards		Performance Units	Stock Options		Pioneer Southwest LTIP Restricted Units	Pioneer Southwest LTIP Phantom Units
Outstanding at December 31, 2012	1,512,762		405,916		91,370	467,486		7,496	102,644
Awards granted	397,439		238,269		94,917	—		—	32,242
Awards vested	(476,717	)	(178,143	)	—	—		—	(35,118	)
Options exercised	—		—		—	(12,818	)	—	—
Awards forfeited	(3,834	)	(5,015	)	—	—		—	—
Outstanding as of March 31, 2013	1,429,650		461,027		186,287	454,668		7,496	99,768

Postretirement Benefit Obligations

As of March 31, 2013 and December 31, 2012, the Company had $9.1 million and $9.7 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. These obligations are comprised of five unfunded plans, of which four relate to predecessor entities that the Company acquired in prior years, and one funded plan that the Company assumed sponsorship for in conjunction with the acquisition of Premier Silica.

The unfunded plans had no assets as of March 31, 2013 or December 31, 2012. The Company's funding policy for the Premier Silica plan is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flow generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and may elect to make such contributions in future periods.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

NOTE I. Asset Retirement Obligations

The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and facilities. The following table summarizes the Company's asset retirement obligation activity during the three months ended March 31, 2013 and 2012:



		Three Months Ended March 31,
		2013			2012
	(in thousands)
Beginning asset retirement obligations		$	197,754		$	136,742
New wells placed on production		2,468			830
Changes in estimates (a)		(5,597		)	—
Dispositions		(4,079		)	—
Liabilities settled		(2,849		)	(5,688		)
Accretion of discount		3,153			2,430
Accretion of discount from integrated services (b)		11			—
Ending asset retirement obligations		$	190,861		$	134,314

_____________________


(a)	The change in estimate during the three months ended March 31, 2013 is attributable to lengthening the economic life of certain wells, which reduced the present value of the associated asset retirement obligation.


(b)	Accretion of discount from integrated services includes Premier Silica accretion expense, which is recorded as a reduction in third-party income from vertical integration services in interest and other income in the Company's accompanying consolidated statements of operations. See Note K for more information about interest and other income.

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of March 31, 2013 and December 31, 2012, the current portions of the Company's asset retirement obligations were $12.8 million and $13.3 million, respectively.

NOTE J. Commitments and Contingencies

The Company is a party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

NOTE K. Interest and Other Income

The following table provides the components of the Company's interest and other income for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013			2012
	(in thousands)
Alaskan Petroleum Production Tax credits and refunds (a)	$	19,408		$	11,846
Equity interest in income of unconsolidated affiliate	3,536			441
Other income	1,876			1,641
Deferred compensation plan income	1,627			1,374
Interest income	93			57
Income (loss) from vertical integration services (b)	(7,225		)	6,549
Total interest and other income	$	19,315		$	21,908

____________________


(a)	The Company earns Alaskan Petroleum Production Tax ("PPT") credits on qualifying capital expenditures. The Company recognizes income from PPT credits when they are realized through cash refunds or as reductions in production and ad valorem taxes if realizable as offsets to PPT expense.

(b)

Income (loss) from vertical integration services represent net margins that result from Company-provided fracture stimulation, drilling and related service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three months ended March 31, 2013 and 2012, these net margins include $56.1 million and $75.4 million of gross vertical integration revenues, respectively, and $63.3 million and $68.9 million of total vertical integration costs and expenses, respectively.

NOTE L. Other Expense

The following table provides the components of the Company's other expense for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013		2012
	(in thousands)
Transportation commitment charge (a)	$	9,377	$	8,453
Other	4,565		2,911
Above market and idle drilling and well services equipment rates (b)	3,507		4,986
Inventory impairment (c)	1,587		6,041
Contingency and environmental accrual adjustments	1,294		1,216
Terminated drilling rig contract charges (d)	1,019		—
Total other expense	$	21,349	$	23,607

____________________


(a)	Primarily represents firm transportation payments on excess pipeline capacity commitments.


(b)	Primarily represents expenses attributable to the portion of Pioneer's contracted drilling rig rates that are above current market rates and idle drilling rig fees, neither of which are charged to joint operations.


(c)	Represents valuation charges on excess materials and supplies inventories.


(d)	Primarily represents charges to terminate a drilling rig contract that is not required to meet planned activities.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

NOTE M. Income Taxes

The Company's income tax provisions attributable to income from continuing operations consisted of the following for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013			2012
	(in thousands)
Current	$	(7,435	)	$	(11,832	)
Deferred	(51,894		)	(105,871		)
Income tax provision	$	(59,329	)	$	(117,703	)

For each of the three months ended March 31, 2013 and 2012, the Company's effective tax rate, excluding income attributable to the noncontrolling interest, was 37 percent. The Company's effective tax rate differed from the U.S. statutory rate of 35 percent due to state income taxes and nondeductible expenses.

The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. The Internal Revenue Service has closed examinations of the 2011 and prior tax years and, with few exceptions, the Company believes that it is no longer subject to examinations by state and foreign tax authorities for years before 2008. As of March 31, 2013, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company's liquidity, future results of operations or financial position.

NOTE N. Net Income Per Share

The Company uses the two-class method of calculating net income per share because certain of the Company's and its consolidated subsidiaries' unvested share-based awards qualify as participating securities. Participating securities participate in the Company's dividend or partnership distributions and are assumed to participate in the Company's undistributed income proportionate to their share of the weighted average outstanding common shares, but are not assumed to participate in the Company's net losses because they are not contractually obligated to do so. Accordingly, allocations of earnings to participating securities are included in the Company's calculations of basic and diluted earnings per share from continuing operations, discontinued operations and net income attributable to common stockholders.

During periods in which the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would be dilutive to loss per share from continuing operations; therefore, conversion into common stock is assumed not to occur.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

The following tables reconcile the Company's net income (loss) attributable to common stockholders to basic net income attributable to common stockholders and diluted net income (loss) attributable to common stockholders for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31, 2013
	Continuing Operations			Discontinued Operations			Total
	(in thousands)
Net income (loss) attributable to common stockholders	$	101,128		$	(465	)	$	100,663
Participating basic earnings	(1,270		)	—			(1,270		)
Basic net income (loss) attributable to common stockholders	99,858			(465		)	99,393
Reallocation of participating earnings	35			—			35
Diluted income (loss) attributable to common stockholders	$	99,893		$	(465	)	$	99,428



	Three Months Ended March 31, 2012
	Continuing Operations			Discontinued Operations			Total
	(in thousands)
Net income attributable to common stockholders	$	203,924		$	10,695		$	214,619
Participating basic earnings	(2,326		)	(122		)	(2,448		)
Basic income attributable to common stockholders	201,598			10,573			212,171
Reallocation of participating earnings	68			3			71
Diluted income attributable to common stockholders	$	201,666		$	10,576		$	212,242

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013	2012
	(in thousands)
Weighted average common shares outstanding:
Basic	128,940	122,480
Dilutive common stock options (a)	157	150
Convertible Senior Notes dilution	3,534	3,460
Contingently issuable performance unit shares	120	157
Diluted	132,751	126,247

____________________


(a)	Options to purchase 98,819 shares of the Company's common stock were excluded from the diluted income per share calculations for the three months ended March 31, 2013 because they would have been anti-dilutive to the calculation.

NOTE O. Subsequent Event

In April 2013, Pioneer Southwest declared a cash distribution of $0.52 per common unit for the period from January 1 to March 31, 2013. The distribution is payable on May 10, 2013 to unitholders of record at the close of business on May 3, 2013. Associated therewith, Pioneer Southwest expects to pay $18.6 million of aggregate distributions.

On April 15, 2013, the Company announced that it would exercise its option to redeem all Convertible Senior Notes that have not been converted by the holders before May 16, 2013 for cash at a price equal to the full principal amount plus accrued and unpaid interest, in accordance with the indenture agreement. The Convertible Senior Notes are convertible at the option of

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

the holders prior to May 16, 2013, using a net share settlement process, into a combination of cash and shares of the Company's common stock based on a formula set forth in the indenture supplement. See Note G for additional information about the Convertible Senior Notes.

On May 7, 2013, the Company delivered a proposal to the chairman of the Conflicts Committee (the "Conflicts Committee") of the General Partner to acquire all of the outstanding common units of Pioneer Southwest that are held by unitholders other than Pioneer or its subsidiaries for consideration of .2234 of a share of common stock of Pioneer for each outstanding common unit of Pioneer Southwest held by such unitholders in a transaction to be structured as a merger of Pioneer Southwest with a wholly-owned subsidiary of Pioneer. In proposing the .2234 exchange ratio, the Company stated that it has assumed that a regular quarterly common unit distribution of $0.52 per common unit will be declared by Pioneer Southwest in July 2013 and that, thereafter, common unit distributions will be suspended while the transaction is pending. The consummation of the transactions contemplated by the Company's proposal is subject to approval of the Company's board of directors, approval of the Conflicts Committee and the negotiation of a definitive agreement. There can be no assurance that a definitive agreement will be executed or that any transaction will be approved or consummated.

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PIONEER NATURAL RESOURCES COMPANY

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 first quarter of 2013 included the following highlights:

•

Net income attributable to common stockholders for the first quarter of 2013 was $100.7 million ($0.75 per diluted share), as compared to $214.6 million ($1.68 per diluted share) for the first quarter of 2012. The decrease in net income attributable to common stockholders is primarily comprised of a $101.1 million decrease in net income from continuing operations and an $11.2 million decline in income from discontinued operations, net of tax, as a result of completing the sale of Pioneer South Africa during the third quarter of 2012 and no longer recognizing the results of operations for Pioneer South Africa as discontinued operations. The primary components of the decrease in net income from continuing operations include:


▪	a $134.0 million change in net derivative activity, principally comprised of increases in gas derivative losses, partially offset by increases in oil derivative gains, as a result of cash settlements and changes in forward commodity prices and the Company's portfolio of derivatives;


▪	a $49.3 million increase in DD&A expense, primarily due to increased sales volumes and an increase in the carrying value of proved oil and gas properties; and


▪	a $37.4 million increase in oil and gas production costs, primarily due to increases in variable lease operating expenses and third-party transportation fees due to higher sales volumes; partially offset by


▪	a $68.9 million increase in oil and gas revenues as a result of an increase in sales volumes and average gas prices, partially offset by lower average oil and NGL prices; and


▪	a $58.4 million decrease in the Company's income tax provision.

•

During the first quarter of 2013, average daily sales volumes from continuing operations increased by 16 percent to 170,900 BOEPD, as compared to 146,727 BOEPD during the first quarter of 2012. The increase in first quarter 2013 average daily sales volumes, as compared to the first quarter of 2012, was primarily due to the Company's successful drilling program during the last nine months of 2012 and the first three months of 2013.


•	Average reported oil and NGL prices decreased during the first quarter of 2013 to $88.57 per BBL and $30.36 per BBL, respectively, as compared to $100.99 per BBL and $41.81 per BBL, respectively, in the first quarter of 2012. Average reported gas prices increased during the first quarter of 2013 to $3.14 per MCF, as compared to $2.51 per MCF in the first quarter of 2012.

•

Average oil and gas production costs per BOE increased to $10.99 for the first quarter of 2013, as compared to $9.87 for the first quarter of 2012, primarily due to increases in lease operating expenses and third-party transportation charges. The increase in lease operating expenses is primarily due to inflation of field services costs and the increase in third-party transportation fees is primarily due to gathering, treating and transportation costs associated with increasing sales volumes in the Permian Basin and South Texas asset areas.


•	Net cash provided by operating activities decreased to $360.1 million for the three months ended March 31, 2013, as compared to $426.1 million for the three months ended March 31, 2012. The $66.0 million decrease in net cash provided by operating activities is primarily due to working capital changes.

•

In January 2013, the Company signed an agreement with Sinochem, an unaffiliated third party to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field for total consideration of $1.7 billion. Sinochem will pay $522.0 million in cash to Pioneer at closing, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the horizontal Wolfcamp Shale play. This transaction is expected to close during the second quarter of 2013, subject to governmental approvals.

•

During February 2013, the Company completed an offering of 10.35 million shares of its common stock at a per-share price, after underwriting and offering expenses, of $123.76 and realized $1.3 billion of associated net proceeds. The Company used the net proceeds from the offering to reduce outstanding debt under the Credit Facility and to increase cash and cash equivalents. The Company intends to use the increase in cash and cash equivalents for general corporate purposes, including funding the acceleration of horizontal appraisal drilling in the northern portion of the Company's highly prospective Wolfcamp/Spraberry acreage position in West Texas.


•	During the first three months of 2013, certain holders of the Company's Convertible Senior Notes exercised their right to convert their Convertible Senior Notes. Associated therewith, the Company paid $261.3 million of cash and issued 2.4 million shares of the Company's common stock during the first quarter of 2013. In April 2013, the Company announced

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PIONEER NATURAL RESOURCES COMPANY

that it would exercise its option to redeem all Convertible Senior Notes that have not been converted by the holders before May 16, 2013 for cash at a price equal to the full principal amount plus accrued and unpaid interest, in accordance with the indenture agreement. The Convertible Senior Notes are convertible at the option of the holders prior to May 16, 2013, using a net share settlement process, into a combination of cash and shares of the Company's common stock for the Convertible Senior Note's conversion value in excess of the principal amount. See Note G of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information about the Convertible Senior Notes.


•	As of March 31, 2013, the Company's net debt to book capitalization was 26 percent, as compared to 37 percent as of December 31, 2012. The Company was upgraded to investment grade by one of its debt rating agencies during the first quarter of 2013. Three of the major debt rating agencies have now upgraded the Company to investment grade.

Recent Developments

On May 7, 2013, the Company delivered a proposal to the chairman of the Conflicts Committee of the General Partner to acquire all of the outstanding common units of Pioneer Southwest that are held by unitholders other than Pioneer or its subsidiaries for consideration of .2234 of a share of common stock of Pioneer for each outstanding common unit of Pioneer Southwest held by such unitholders in a transaction to be structured as a merger of Pioneer Southwest with a wholly-owned subsidiary of Pioneer. In proposing the .2234 exchange ratio, the Company stated that it has assumed that a regular quarterly common unit distribution of $0.52 per common unit will be declared by Pioneer Southwest in July 2013 and that, thereafter, common unit distributions will be suspended while the transaction is pending. The consummation of the transactions contemplated by the Company's proposal is subject to approval of the Company's board of directors (the "Board"), approval of the Conflicts Committee and the negotiation of a definitive agreement. There can be no assurance that a definitive agreement will be executed or that any transaction will be approved or consummated.

The consolidation of the properties of Pioneer and Pioneer Southwest in the Midland Basin in West Texas through this proposed transaction would facilitate the Company's plans to fully and optimally develop the area and would provide organizational, operational and administrative efficiencies. Pioneer owns 100 percent of the General Partner and owns approximately 52.4 percent of the 35,713,700 outstanding common units of Pioneer Southwest. See Notes B and O of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for more information about Pioneer Southwest.

Second Quarter 2013 Outlook

Based on current estimates, the Company expects the following operations and financial results from continuing operations for the quarter ending June 30, 2013:

Production is forecasted to average 174,000 to 179,000 BOEPD.

Production costs (including production and ad valorem taxes and transportation costs) are expected to average $14.00 to $16.00 per BOE based on current NYMEX strip 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 $62 million to $67 million. Interest expense is expected to be $50 million to $55 million, and other expense is expected to be $25 million to $35 million. Accretion of discount on asset retirement obligations is expected to be $2 million to $4 million.

Noncontrolling interest in consolidated subsidiaries' net income, excluding noncash mark-to-market adjustments, is expected to be $8 million to $11 million, primarily reflecting the public ownership in Pioneer Southwest.

The Company's effective income tax rate, excluding the effect of net income attributable to noncontrolling interest, 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 $5 million to $10 million, attributable to federal alternative minimum tax and state taxes.

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PIONEER NATURAL RESOURCES COMPANY

Operations and Drilling Highlights

The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during the three months ended March 31, 2013:



	Oil (BBLs)	NGLs (BBLs)	Gas (MCF)	Total (BOE)
Permian Basin	52,763	13,303	62,116	76,418
South Texas - Eagle Ford Shale	12,741	10,133	86,305	37,257
Raton Basin	—	—	138,358	23,060
Mid-Continent	3,202	6,511	41,250	16,588
South Texas - Edwards and Austin Chalk	79	2	31,609	5,349
Barnett Shale	1,445	3,038	24,159	8,510
Alaska	3,707	—	—	3,707
Other	2	2	39	11
	73,939	32,989	383,836	170,900

During 2013 and 2012, the Company has focused its capital budgets and expenditures on oil and liquids-rich-gas drilling activities due to low gas prices. As a result of these capital activities, the Company's total liquids production from continuing operations increased to 63 percent of total production, on a BOE basis, for the three months ended March 31, 2013, as compared to 58 percent for the same period last year. Despite the increase in liquids production, the Company's liquids revenue, as a percent of total commodity sales, decreased to 86 percent for the three months ended March 31, 2013, as compared to 88 percent for the same period last year, due to a 25 percent increase in the average reported gas price and declines of 12 percent and 27 percent in reported oil and NGL prices, respectively, as compared to the first quarter of 2012.

The following table summarizes by geographic area the Company's finding and development costs incurred during the three months ended March 31, 2013:



	Acquisition Costs				Exploration		Development			Asset Retirement
	Proved		Unproved		Costs		Costs			Obligations			Total
	(in thousands)
Permian Basin	$	266	$	3,531	$	170,876	$	313,455		$	1,339		$	489,467
South Texas - Eagle Ford Shale	—		763		121,520		39,910			776			162,969
Raton Basin	—		—		1,728		1,009			—			2,737
Mid-Continent	—		59		712		861			—			1,632
South Texas - Edwards and Austin Chalk	—		—		292		72			—			364
Barnett Shale	1,071		1,452		22,612		(1,413		)	168			23,890
Alaska	—		—		41,326		52,827			(5,434		)	88,719
Other	4		360		9,176		—			22			9,562
	$	1,341	$	6,165	$	368,242	$	406,721		$	(3,129	)