Edgar Filing: PIONEER NATURAL RESOURCES CO

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Non-accelerated filer

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Smaller reporting company

PXD-2013.06.30

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 June 30, 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 July 30, 2013 138,546,648

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 June 30, 2013 and December 31, 2012	5

	Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	7

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012	8

	Consolidated Statement of Equity for the six months ended June 30, 2013	9

	Consolidated Statements of Cash Flows for the six months ended June 30, 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, 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 and other Quarterly Reports on Form 10-Q 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.


•	"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)



	June 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	695,625		$	229,396
Accounts receivable:
Trade, net	345,812			316,854
Due from affiliates	4,676			3,299
Income taxes receivable	927			7,447
Inventories	198,650			197,056
Prepaid expenses	23,634			13,438
Other current assets:
Derivatives	191,697			279,119
Other	4,171			3,746
Total current assets	1,465,192			1,050,355
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties	15,373,058			14,259,708
Unproved properties	133,172			231,555
Accumulated depletion, depreciation and amortization	(4,859,716		)	(4,412,913		)
Total property, plant and equipment	10,646,514			10,078,350
Goodwill	279,687			298,142
Other property and equipment, net	1,231,127			1,217,694
Other assets:
Investment in unconsolidated affiliate	228,475			204,129
Derivatives	137,898			55,257
Other, net	173,694			165,103
	$	14,162,587		$	13,069,030

The financial information included as of June 30, 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 BALANCE SHEETS (continued)

(in thousands, except share data)



	June 30, 2013			December 31, 2012
	(Unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade	$	813,532		$	729,942
Due to affiliates	65,151			96,935
Interest payable	61,464			68,083
Income taxes payable	938			208
Deferred income taxes	25,344			86,481
Other current liabilities:
Derivatives	6,453			13,416
Other	39,246			39,725
Total current liabilities	1,012,128			1,034,790
Long-term debt	2,823,428			3,721,193
Derivatives	—			12,307
Deferred income taxes	2,390,144			2,140,416
Other liabilities	288,730			293,016
Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 145,814,643 and 134,966,740 shares issued at June 30, 2013 and December 31, 2012, respectively	1,458			1,350
Additional paid-in capital	4,844,720			3,683,934
Treasury stock at cost: 7,269,817 and 11,611,093 at June 30, 2013 and December 31, 2012, respectively	(327,927		)	(510,570		)
Retained earnings	2,947,040			2,514,640
Total equity attributable to common stockholders	7,465,291			5,689,354
Noncontrolling interests in consolidating subsidiaries	182,866			177,954
Total equity	7,648,157			5,867,308
Commitments and contingencies
	$	14,162,587		$	13,069,030

The financial information included as of June 30, 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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenues and other income:
Oil and gas	$	845,136		$	641,737		$	1,632,991		$	1,360,693
Interest and other	1,159			(714		)	20,474			21,194
Derivative gains, net	144,445			275,812			102,202			367,562
Gain on disposition of assets, net	190,987			1,140			215,404			44,736
	1,181,727			917,975			1,971,071			1,794,185
Costs and expenses:
Oil and gas production	179,488			150,081			348,628			281,862
Production and ad valorem taxes	53,837			44,495			108,134			90,291
Depletion, depreciation and amortization	249,590			200,921			480,353			382,339
Impairment of oil and gas properties	—			444,880			—			444,880
Exploration and abandonments	23,973			37,178			51,600			90,465
General and administrative	66,654			54,957			130,405			118,024
Accretion of discount on asset retirement obligations	3,166			2,444			6,319			4,874
Interest	42,805			49,008			93,540			95,866
Other	18,711			30,651			40,060			54,258
	638,224			1,014,615			1,259,039			1,562,859
Income (loss) from continuing operations before income taxes	543,503			(96,640		)	712,032			231,326
Income tax benefit (provision)	(192,029		)	45,086			(251,358		)	(72,617		)
Income (loss) from continuing operations	351,474			(51,554		)	460,674			158,709
Income (loss) from discontinued operations, net of tax	—			12,017			(465		)	22,712
Net income (loss)	351,474			(39,537		)	460,209			181,421
Net income attributable to noncontrolling interests	(14,211		)	(30,855		)	(22,283		)	(37,194		)
Net income (loss) attributable to common stockholders	$	337,263		$	(70,392	)	$	437,926		$	144,227

Basic earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	2.42		$	(0.67	)	$	3.24		$	0.98
Income (loss) from discontinued operations attributable to common stockholders	—			0.10			—			0.18
Net income (loss) attributable to common stockholders	$	2.42		$	(0.57	)	$	3.24		$	1.16
Diluted earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	2.40		$	(0.67	)	$	3.19		$	0.95
Income (loss) from discontinued operations attributable to common stockholders	—			0.10			—			0.18
Net income (loss) attributable to common stockholders	$	2.40		$	(0.57	)	$	3.19		$	1.13
Weighted average shares outstanding:
Basic	137,539			123,028			133,263			122,754
Diluted	138,829			123,028			135,762			125,772
Dividends declared per share	$	—		$	—		$	0.04		$	0.04

Amounts attributable to common stockholders:
Income (loss) from continuing operations	$	337,263		$	(82,409	)	$	438,391		$	121,515
Income (loss) from discontinued operations, net of tax	—			12,017			(465		)	22,712
Net income (loss)	$	337,263		$	(70,392	)	$	437,926		$	144,227

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.

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income (loss)	$	351,474		$	(39,537	)	$	460,209		$	181,421
Other comprehensive activity:
Net hedge losses included in continuing operations	—			2,347			—			4,855
Income tax benefit	—			(797		)	—			(1,725		)
Other comprehensive activity	—			1,550			—			3,130
Comprehensive income (loss)	351,474			(37,987		)	460,209			184,551
Comprehensive income attributable to the noncontrolling interests	(14,211		)	(30,855		)	(22,283		)	(37,194		)
Comprehensive income (loss) attributable to common stockholders	$	337,263		$	(68,842	)	$	437,926		$	147,357

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.

Table of Contents

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)	—		—		—			—			(5,526		)	—			(5,526		)
Exercise of long-term incentive plan stock options	111		—		(1,293		)	5,026			—			—			3,733
Treasury stock purchases	(152	)	—		—			(19,615		)	—			—			(19,615		)
Conversion of 2.875% senior convertible notes	4,381		—		(197,240		)	197,232			—			—			(8		)
Tax benefit related to conversion of 2.875% senior convertible notes	—		—		38,415			—			—			—			38,415
Tax benefit related to stock-based compensation	—		—		6,574			—			—			—			6,574
Compensation costs:
Vested compensation awards, net	499		5		(5		)	—			—			—			—
Compensation costs included in net income	—		—		33,522			—			—			580			34,102
Cash distributions to noncontrolling interests	—		—		—			—			—			(17,951		)	(17,951		)
Net income	—		—		—			—			437,926			22,283			460,209
Balance as of June 30, 2013	138,545		$	1,458	$	4,844,720		$	(327,927	)	$	2,947,040		$	182,866		$	7,648,157

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.

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	460,209		$	181,421
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization	480,353			382,339
Impairment of oil and gas properties	—			444,880
Exploration expenses, including dry holes	12,293			39,730
Deferred income taxes	233,738			57,291
Gain on disposition of assets, net	(215,404		)	(44,736		)
Accretion of discount on asset retirement obligations	6,319			4,874
Discontinued operations	(158		)	3,597
Interest expense	8,907			18,152
Derivative related activity	(14,488		)	(144,000		)
Amortization of stock-based compensation	34,027			30,970
Amortization of deferred revenue	—			(20,919		)
Other noncash items	(4,706		)	(7,513		)
Change in operating assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net	(32,928		)	33,881
Income taxes receivable	6,520			(1,452		)
Inventories	(679		)	(33,318		)
Prepaid expenses	(10,196		)	(13,425		)
Other current assets	2,537			(8,846		)
Accounts payable	(9,172		)	30,580
Interest payable	(6,620		)	82
Income taxes payable	730			(7,907		)
Other current liabilities	(15,422		)	(20,271		)
Net cash provided by operating activities	935,860			925,410
Cash flows from investing activities:
Proceeds from disposition of assets	675,075			62,945
Payments for acquisition, net of cash acquired	—			(295,974		)
Additions to oil and gas properties	(1,388,180		)	(1,424,807		)
Additions to other assets and other property and equipment, net	(100,591		)	(164,230		)
Net cash used in investing activities	(813,696		)	(1,822,066		)
Cash flows from financing activities:
Borrowings under long-term debt	418,864			1,339,093
Principal payments on long-term debt	(1,322,771		)	(596,000		)
Proceeds from issuance of common stock, net of issuance costs	1,280,916			—
Distributions to noncontrolling interests	(17,951		)	(17,956		)
Payments of other liabilities	(143		)	(744		)
Exercise of long-term incentive plan stock options	3,733			1,008
Purchases of treasury stock	(19,615		)	(56,317		)
Excess tax benefits from share-based payment arrangements	6,574			17,545
Payments of financing fees	(8		)	(4,660		)
Dividends paid	(5,534		)	(5,028		)
Net cash provided by financing activities	344,065			676,941
Net increase (decrease) in cash and cash equivalents	466,229			(219,715		)
Cash and cash equivalents, beginning of period	229,396			537,484
Cash and cash equivalents, end of period	$	695,625		$	317,769

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.

Table of Contents

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 in Alaska.

NOTE B. Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of June 30, 2013 and for the three and six months ended June 30, 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 cash 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 $169.3 million attributable to outstanding Pioneer Southwest common units held by unitholders other than Pioneer or its subsidiaries as of June 30, 2013. See Note C for additional discussion of Pioneer Southwest.

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. Premier Silica's sand production that is in excess of the Company's sand needs for fracture stimulation and sand production that is not usable for fracture stimulation is primarily sold to third parties for industrial and recreational purposes. The aggregate purchase price of Premier Silica was $297.1 million, including closing adjustments.

Divestitures Recorded in Continuing Operations

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 $1.8 billion, including normal closing adjustments. In May 2013, the Company completed the sale to Sinochem for net cash proceeds of $614.5 million, including normal closing adjustments, resulting in a second quarter 2013 pretax gain of $180.9 million. The Company reduced the carrying value of goodwill and the gain recognized associated with the sale by $18.5 million, reflecting the portion of the Company's goodwill that related to the horizontal Wolfcamp Shale assets that were

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sold. Sinochem will pay the remaining $1.2 billion of the transaction price by carrying 75 percent of Pioneer's portion of future drilling and facilities costs attributable to the Company's joint operations with Sinochem in the horizontal Wolfcamp Shale play.

Sales of unproved oil and gas properties. For the three and six months ended June 30, 2013, the Company's pretax gains on disposition of assets from continuing operations of $191.0 million and $215.4 million, respectively, were primarily associated with the Southern Wolfcamp transaction noted above. Additionally, the Company sold (i) its interest in unproved oil and gas properties adjacent to the Company's West Panhandle field operations during the first quarter of 2013 for net cash proceeds of $38.1 million, which resulted in a pretax gain of $22.4 million, and (ii) its interest in certain unproved oil and gas properties in the Barnett Shale during the second quarter of 2013 for net cash proceeds of $11.2 million, which resulted in a pretax gain of $8.3 million. For the three and six months ended June 30, 2012, the Company's pretax gains on disposition of assets amounted to $1.1 million and $44.7 million, respectively. The Company's gain on disposition of assets during the six months ended June 30, 2012 is primarily associated with the first quarter 2012 sale of a portion of its interest in an unproved oil and gas property in the Eagle Ford Shale field for net cash proceeds of $54.7 million, which resulted in a pretax gain of $42.6 million.

Divestitures Recorded as Discontinued Operations

South Africa. During the first quarter of 2012, the Company agreed to sell its assets in South Africa ("Pioneer South Africa"), 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 associated with the assets. 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 and six months ended June 30, 2012, the Company recognized revenues and other income of $20.2 million and $39.8 million, respectively, and pretax earnings of $16.6 million and $34.0 million, respectively, associated with discontinued operations, principally related to the results of operations of Pioneer South Africa prior to its divestiture in August 2012.

Acquisition Proposal

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 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 (the "Pioneer Southwest Merger Proposal"). The Company's proposal was made based on the assumption that Pioneer Southwest would declare and pay the distribution for the period April 1, 2013 to June 30, 2013 (which was declared in July 2013 and is to be paid on August 9, 2013, to unitholders of record on August 2, 2013) and then suspend future common unit distributions pending the execution of a definitive agreement and the consummation of a transaction.

The consummation of the transaction contemplated by the Pioneer Southwest Merger Proposal is subject to approval of the Company's Board of Directors (the "Board"), approval of the Conflicts Committee and the Board of Directors of the General Partner 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. See Note J for a description of the litigation contingencies associated with the Pioneer Southwest Merger Proposal.

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.

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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.

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 June 30, 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 June 30, 2013
	(in thousands)
Recurring fair value measurements
Assets:
Trading securities	$	146	$	146	$	—	$	292
Commodity derivatives	—		329,595		—		329,595
Deferred compensation plan assets	55,997		—		—		55,997
Total assets	56,143		329,741		—		385,884
Liabilities:
Commodity derivatives	—		6,453		—		6,453
Total recurring fair value measurements	$	56,143	$	323,288	$	—	$	379,431

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 June 30, 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 commodity derivative contracts 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.

Assets and liabilities measured at fair value on a nonrecurring basis. The Company reviews its long-lived assets for impairment, including oil and gas properties, whenever events or circumstances indicate their carrying values may not be fully recoverable. During the six months ended June 30, 2012, reductions in management's longer-term commodity price outlooks

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("Management's Price Outlooks") provided indications of possible impairment of the Company's dry gas properties in the Barnett Shale field in North Texas. As a result of management's assessments, during the second quarter of 2012, the Company recognized a pretax noncash impairment charge of $444.9 million to reduce the carrying value of the Barnett Shale field to its estimated fair value. The Company calculated the estimated fair value of the Barnett Shale field as of June 30, 2012 using a discounted cash flow model. Significant Level 3 assumptions associated with the calculation of Barnett Shale field's discounted future cash flows as of June 30, 2012 included Management's Price Outlooks for (i) oil and gas prices of $87.09 per barrel ("BBL") for oil and $4.64 per British thermal unit ("MMBTU") for gas, (ii) production costs, (iii) capital expenditures, (iv) production and (v) estimated proved reserves and risk-adjusted probable reserves. Management's commodity price outlooks represent longer-term outlooks that are developed based on third-party futures price outlooks as of a measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine estimated fair value.

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 June 30, 2013 and December 31, 2012 are as follows:



	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Long-term debt	$	2,823,428	$	3,197,908	$	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 active market-quoted London Interbank Offered Rate ("LIBOR") yield curves (in the case of the Pioneer Southwest credit facility) 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 their 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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The following table sets forth the volumes per day in BBLs associated with the Company's outstanding oil derivative contracts as of June 30, 2013 and the weighted average oil prices per BBL for those contracts:



	Six Months Ending December 31,		Year Ending December 31,
	2013		2014		2015		2016
Collar contracts with short puts:
Volume (BBL) (a)	74,250		69,000		32,000		2,000
Price per BBL:
Ceiling	$	120.11	$	114.05	$	103.23	$	94.75
Floor	$	92.21	$	93.70	$	93.13	$	85.00
Short put	$	74.44	$	77.61	$	78.13	$	70.00
Swap contracts:
Volume (BBL) (a)	3,000		—		—		—
Price per BBL	$	81.02	$	—	$	—	$	—
Rollfactor swap contracts:
Volume (BBL) (a)	6,000		15,000		—		—
NYMEX roll price (b)	$	0.43	$	0.38	$	—	$	—
Basis swap contracts:
Cushing to LLS index swap volume (BBL)	1,500		—		—		—
Price per BBL (c)	$	8.53	$	—	$	—	$	—

____________________

(a)

During the period from July 1, 2013 to July 30, 2013, the Company (i) converted collar contracts with short puts for 6,750 BBLs per day of the Company's August through December 2013 production with a ceiling price of $119.70 per BBL, a floor price of $97.07 per BBL and a short put price of $76.07 per BBL into swap contracts for 6,750 BBLs per day of August through December 2013 production with a price of $102.04 per BBL, (ii) entered into additional swap contracts for 10,000 BBLs per day of the Company's 2014 production with a price of $93.87 per BBL, (iii) entered into additional rollfactor swap contracts for 5,000 BBLs per day of the Company's September through December 2013 production with a NYMEX roll price of $1.36 per BBL, (iv) entered into additional rollfactor swap contracts for 4,000 BBLs per day of the Company's 2014 production with a NYMEX roll price of $0.73 per BBL, (v) entered into additional collar contracts with short puts for 33,000 BBLs per day of the Company's 2015 production with a ceiling price of $95.53 per BBL, a floor price of $85.00 per BBL and a short put price of $70.00 per BBL and (vi) entered into additional collar contracts with short puts for 18,000 BBLs per day of the Company's 2016 production with a ceiling price of $93.09 per BBL, a floor price of $85.00 per BBL and a short put price of $70.00 per BBL.


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


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

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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 June 30, 2013 and the weighted average NGL prices per BBL for those contracts:



	Six Months Ending December 31,		Year Ending December 31,
	2013		2014
Collar contracts with short puts (a):
Volume (BBL)	1,064		1,000
Price per BBL:
Ceiling	$	105.28	$	109.50
Floor	$	89.30	$	95.00
Short put	$	75.20	$	80.00
Collar contracts (b):
Volume (BBL)	2,500		3,000
Price per BBL:
Ceiling	$	12.68	$	13.72
Floor	$	10.50	$	10.78

____________________


(a)	Represent collar contracts with short puts that reduce the price volatility of natural gasoline forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.


(b)	Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.

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.

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The following table sets forth the volumes per day in MMBTUs associated with the Company's outstanding gas derivative contracts as of June 30, 2013 and the weighted average gas prices per MMBTU for those contracts:



	Six Months Ending December 31,			Year Ending December 31,
	2013			2014			2015			2016
Collar contracts with short puts:
Volume (MMBTU)	—			115,000			285,000			20,000
Price per MMBTU:
Ceiling	$	—		$	4.70		$	5.07		$	5.36
Floor	$	—		$	4.00		$	4.00		$	4.00
Short put	$	—		$	3.00		$	3.00		$	3.00
Collar contracts:
Volume (MMBTU)	152,500			—			—			—
Price per MMBTU:
Ceiling	$	6.22		$	—		$	—		$	—
Floor	$	4.98		$	—		$	—		$	—
Swap contracts:
Volume (MMBTU)	169,185			175,000			20,000			—
Price per MMBTU	$	5.07		$	4.02		$	4.31		$	—
Basis swap contracts:
Volume (MMBTU)	162,500			45,082			30,000			—
Price per MMBTU	$	(0.22	)	$	(0.18	)	$	(0.18	)	$	—

Interest rate derivative activities. During the period ended June 30, 2013, the Company terminated its interest rate derivative contracts that locked 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 and received cash proceeds of $482 thousand. During the period from July 1, 2013 to July 30, 2013, the Company entered into interest rate derivative contracts whereby the Company will receive a fixed interest rate of 3.95 percent in exchange for paying a floating interest rate comprised of the three-month LIBOR plus an average rate of 1.21 percent on a notional amount of $175 million through July 15, 2022.

Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives as of June 30, 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.

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



Fair Value of Derivative Instruments as of June 30, 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	$	196,651	$	(4,954	)	$	191,697
Commodity price derivatives	Derivatives - noncurrent	$	139,764	$	(1,866	)	137,898
							$	329,595
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	11,407	$	(4,954	)	$	6,453
Commodity price derivatives	Derivatives - noncurrent	$	1,866	$	(1,866	)	—
							$	6,453



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 Not Designated as Hedging	Location of Gain / (Loss) Recognized in	Three Months Ended June 30,					Six Months Ended June 30,
Instruments	Earnings on Derivatives	2013		2012			2013		2012
		(in thousands)
Commodity price derivatives	Derivative gains, net	$	138,179	$	298,471		$	91,996	$	386,601
Interest rate derivatives	Derivative gains, net	6,266		(22,659		)	10,206		(19,039		)
Total		$	144,445	$	275,812		$	102,202	$	367,562

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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.

The following table reflects the Company's capitalized exploratory well and project activity during the three and six months ended June 30, 2013:



	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
	(in thousands)
Beginning capitalized exploratory costs	$	293,757		$	212,670
Additions to exploratory costs pending the determination of proved reserves	340,542			692,117
Reclassification due to determination of proved reserves	(289,285		)	(552,039		)
Disposition of assets	(87,704		)	(87,704		)
Exploratory well costs charged to exploration expense	(2,309		)	(10,043		)
Ending capitalized exploratory costs	$	255,001		$	255,001

The following table provides an aging, as of June 30, 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:



	June 30, 2013		December 31, 2012
	(in thousands, except project counts)
Capitalized exploratory costs that have been suspended:
One year or less	$	126,110	$	190,678
More than one year	128,891		21,992
	$	255,001	$	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 June 30, 2013 and December 31, 2012, the Company had $22.4 million and $22.0 million, respectively, 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 has equipment on site with plans to recomplete the well during the second half of 2013. The well may require additional stimulation work that, if required, is expected to be completed during the first quarter of 2014.

Alaska - Nuna. The Company's Nuna project, which has $106.5 million of suspended project costs as of June 30, 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

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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 June 30, 2013, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

Corporate credit facility. The Company maintains a corporate credit facility (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 June 30, 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 June 30, 2013, Pioneer Southwest had outstanding borrowings of $176.0 million under the Pioneer Southwest Credit Facility. Pioneer Southwest's borrowing capacity under the Pioneer Southwest Credit Facility is subject to a covenant requiring that Pioneer Southwest maintain a specified ratio of the net present value of Pioneer Southwest's projected future cash flows from its oil and gas assets to total debt, with the variables on which the calculation of net present value is based (including assumed commodity prices and discount rates) being subject to adjustment by the lenders. The net present value covenant limits Pioneer Southwest's available borrowing capacity under the Pioneer Southwest Credit Facility to $99.8 million as of June 30, 2013.

Convertible senior notes. As of December 31, 2012, the Company had $479.9 million of 2.875% Convertible Senior Notes due 2038 ("Convertible Senior Notes") outstanding. During December 2012 and March 2013, respectively, the Company's stock price met the price threshold that causes the Convertible Senior Notes to be convertible for the three months ended March 31, 2013 and June 30, 2013, respectively, at the option of the holders 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. In addition, on April 15, 2013, the Company announced that it would exercise its option to redeem all Convertible Senior Notes that had not been converted by the holders before May 16, 2013. Associated therewith, during the six months ended June 30, 2013, holders of $479.1 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. The Company paid the tendering holders $479.1 million of cash and issued to the tendering holders 4.4 million shares of the Company's common stock during the six months ended June 30, 2013, in accordance with the terms of the Convertible Senior Notes indenture agreement. On May 16, 2013, the Company paid $845 thousand in principal and interest to redeem all Convertible Senior Notes that remained outstanding.

NOTE H. Incentive Plans

Stock-based compensation

For the three and six months ended June 30, 2013, the Company recorded $25.2 million and $52.8 million, respectively, of stock-based compensation expense for all plans, as compared to $21.7 million and $43.3 million, respectively, for the same periods of 2012. As of June 30, 2013, there was $189.1 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $50.3 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 June 30, 2013 and December 31, 2012, accounts payable – due to affiliates includes $13.7 million and $18.8 million, respectively, of liabilities attributable to Liability Awards.

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(Unaudited)

The following table summarizes the activity that occurred during the six months ended June 30, 2013, for each type of share-based incentive award issued by Pioneer or Pioneer Southwest:



	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	412,080		238,269		94,917		—		—		32,242
Awards vested	(493,153	)	(181,368	)	—		—		(7,496	)	(35,118	)
Options exercised	—		—		—		(111,469	)	—		—
Awards forfeited	(49,103	)	(20,291	)	(10,842	)	(11,085	)	—		—
Outstanding as of June 30, 2013	1,382,586		442,526		175,445		344,932		—		99,768

Postretirement Benefit Obligations

As of June 30, 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 June 30, 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

June 30, 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 and six months ended June 30, 2013 and 2012:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Beginning asset retirement obligations	$	190,861		$	134,314		$	197,754		$	136,742
Liabilities assumed in acquisitions	—			8,515			—			8,515
New wells placed on production	1,296			1,581			2,449			2,411
Changes in estimates (a)	(1,315		)	1,603			(5,597		)	1,603
Dispositions	(231		)	—			(4,310		)	—
Liabilities settled	(2,649		)	(3,054		)	(5,498		)	(8,742		)
Accretion of discount	3,166			2,444			6,319			4,874
Accretion of discount from integrated services (b)	1			54			12			54
Ending asset retirement obligations	$	191,129		$	145,457		$	191,129		$	145,457

_____________________


(a)	The changes in estimates during the three and six months ended June 30, 2013 are attributable to lengthening the economic lives of certain wells, which reduced the present values of the associated asset retirement obligations.


(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 June 30, 2013 and December 31, 2012, the current portions of the Company's asset retirement obligations were $12.6 million and $13.3 million, respectively.

NOTE J. Commitments and Contingencies

The Company is a party to 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.

On May 13, 2013, David Flecker, a purported unitholder of Pioneer Southwest, in connection with the Pioneer Southwest Merger Proposal, filed a class action petition on behalf of Pioneer Southwest's unitholders and a derivative suit on behalf of Pioneer Southwest against Pioneer, Pioneer Natural Resources USA, Inc., the General Partner and the directors of the General Partner, in the 134^th Judicial District of Dallas County, Texas. A similar class action petition and derivative suit was filed against the same defendants on May 20, 2013, in the 160^th Judicial District of Dallas County, Texas, by purported unitholder Vipul Patel.

The class action and derivative complaints allege, among other things, that the consideration offered by Pioneer is unfair and inadequate and that the defendants have breached their duties under the Pioneer Southwest partnership agreement as well as the implied covenant of good faith and fair dealing, and are engaging in self-dealing. Specifically, the lawsuits allege that: (i) the defendants are engaging in self-dealing, are not acting in good faith toward Pioneer Southwest, and have breached and are breaching their duties owed to Pioneer Southwest; (ii) the defendants are failing to properly value Pioneer Southwest and its various assets and operations and are ignoring or are not protecting against the numerous conflicts of interest arising out of the proposed transaction; (iii) the defendants breached the implied covenant of good faith and fair dealing by engaging in a flawed merger process and (iv) Pioneer, Pioneer Natural Resources USA, Inc. and the General Partner have aided and abetted the defendant directors named in the lawsuits for the purpose of advancing their own interests. Based on these allegations, the plaintiffs seek to enjoin the defendants from proceeding with or consummating the merger. To the extent that the merger is implemented before relief is granted, plaintiffs

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

seek to have the merger rescinded. The plaintiffs also seek money damages and attorneys' fees. Pioneer has filed a motion to dismiss the Flecker petition due to improper forum.

Pioneer cannot predict the outcome of these or any other lawsuits that might be filed, nor can Pioneer predict the amount of time and expense that will be required to resolve these lawsuits. Pioneer and the other defendants named in the lawsuits intend to defend vigorously against these and any other actions. See Note C for a description of the Pioneer Southwest Merger Proposal.

NOTE K. Interest and Other Income

The following table provides the components of the Company's interest and other income for the three and six months ended June 30, 2013 and 2012:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Alaskan Petroleum Production Tax credits and refunds (a)	$	6,362		$	—		$	25,770		$	11,846
Equity interest in income of unconsolidated affiliate	2,547			1,104			6,083			1,545
Other income	1,689			592			3,565			2,234
Deferred compensation plan income	355			150			1,982			1,523
Interest income	81			1,260			174			1,317
Income (loss) from vertical integration services (b)	(9,875		)	(3,820		)	(17,100		)	2,729
Total interest and other income	$	1,159		$	(714	)	$	20,474		$	21,194

____________________


(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 and six months ended June 30, 2013, these net margins include $46.9 million and $103.2 million of gross vertical integration revenues, respectively, and $56.8 million and $120.3 million of total vertical integration costs and expenses, respectively. For the same periods in 2012, these net margins include $86.3 million and $161.7 million of gross vertical integration revenues, respectively, and $90.1 million and $159.0 million of total vertical integration costs and expenses, respectively.

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

NOTE L. Other Expense

The following table provides the components of the Company's other expense for the three and six months ended June 30, 2013 and 2012:



	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
	(in thousands)
Transportation commitment charge (a)	$	8,371	$	9,227		$	17,746	$	17,680
Above market and idle drilling and well services equipment rates (b)	4,944		5,760			8,451		10,746
Other	3,754		5,768			8,321		8,716
Inventory impairment (c)	855		1,262			2,442		7,454
Contingency and environmental accrual adjustments	787		(326		)	2,081		702
Terminated drilling rig contract charges (d)	—		8,960			1,019		8,960
Total other expense	$	18,711	$	30,651		$	40,060	$	54,258

____________________


(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 drilling rig contracts that are not required to meet planned activities.

NOTE M. Income Taxes

The Company's income tax benefits or provisions attributable to income from continuing operations consisted of the following for the three and six months ended June 30, 2013 and 2012:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Current	$	(10,185	)	$	(3,494	)	$	(17,620	)	$	(15,326	)
Deferred	(181,844		)	48,580			(233,738		)	(57,291		)
Income tax benefit (provision)	$	(192,029	)	$	45,086		$	(251,358	)	$	(72,617	)

For each of the three and six months ended June 30, 2013, the Company's effective tax rate, excluding income attributable to the noncontrolling interest, was 36 percent as compared to 35 percent and 37 percent for the same respective periods of 2012. The Company's effective tax rates differ from the U.S. statutory rate of 35 percent primarily due to state income tax apportionments 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 June 30, 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

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PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

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, such as during the three months ended June 30, 2012, 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.

The following tables reconcile the Company's net income (loss) attributable to common stockholders to basic net income (loss) attributable to common stockholders and diluted net income (loss) attributable to common stockholders for the three and six months ended June 30, 2013 and 2012:



	Three Months Ended June 30, 2013								Six Months Ended June 30, 2013
	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations			Total
	(in thousands)
Net income (loss) attributable to common stockholders	$	337,263		$	—	$	337,263		$	438,391		$	(465	)	$	437,926
Participating basic earnings	(4,584		)	—		(4,584		)	(5,586		)	—			(5,586		)
Basic net income (loss) attributable to common stockholders	332,679			—		332,679			432,805			(465		)	432,340
Reallocation of participating earnings	73			—		73			124			—			124
Diluted income (loss) attributable to common stockholders	$	332,752		$	—	$	332,752		$	432,929		$	(465	)	$	432,464

Three Months Ended June 30, 2012

Six Months Ended June 30, 2012

Continuing

Operations

Discontinued

Operations

Total

Continuing

Operations

Discontinued

Operations

Total