Edgar Filing: PIONEER NATURAL RESOURCES CO

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2009

¨	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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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 x 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 x

Number of shares of Common Stock outstanding as of November 2, 2009 115,320,979

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 September 30, 2009 and December 31, 2008	5

	Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008	7

	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2009	8

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	9

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2009 and 2008	10

	Notes to Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	62

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 6.	Exhibits	64

Signatures		65

Exhibit Index		66

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,” “intends,” “continue,” “may,” “will,” “could,” “should,” “future,” “potential,” “estimate,” or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company (“Pioneer” or the “Company”) are intended to identify forward-looking statements. The forward-looking statements are based on the Company’s current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company’s control.

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, international operations and associated international political and economic instability, litigation, the costs and results of drilling and operations, access to and availability of drilling equipment and transportation, processing 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 resource potential and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, 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 Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse impact 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 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” 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, 2008 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. The Company undertakes no duty to publicly update these statements except as required by law.

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.

•

“Bcf “ means one billion cubic feet.

•

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

•

“BOEPD” means BOE per day.

•

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

•

“CBM” means coal bed methane.

•

“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.

•

“MBbl” means one thousand Bbls.

•

“MBOE” means one thousand BOEs.

•

“Mcf” means one thousand cubic feet and is a measure of natural gas volume.

•

“MMBbl” means one million Bbls.

•

“MMBOE” means one million BOEs.

•

“MMBtu” means one million Btus.

•

“MMcf” means one million cubic feet.

•

“MMcfpd” means one million cubic feet per day.

•

“Mont Belvieu–posted-price” 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 Mont Belvieu, Texas.

•

“NGL” means natural gas liquid.

•

“NYMEX” means the New York Mercantile Exchange.

•

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

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

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

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

•

“SEC” means the United States Securities and Exchange Commission.

•

“Standardized Measure” means the after-tax present value of estimated future net cash flows of proved reserves, determined in accordance with the rules and regulations of the SEC, using prices and costs in effect at the specified date and a ten percent discount rate.

•

“U.S.” means United States.

•

“VPP” means volumetric production payment.

•

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

•

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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)


	September 30, 2009			December 31, 2008 (a)
ASSETS
Current assets:
Cash and cash equivalents	$	55,615		$	48,337
Accounts receivable:
Trade, net of allowance for doubtful accounts of $1,437 and $22,464 as of September 30, 2009 and December 31, 2008, respectively		136,893			206,794
Due from affiliates		624			759
Income taxes receivable		16,290			60,573
Inventories		145,976			76,901
Prepaid expenses		12,553			12,464
Deferred income taxes		3,417			6,510
Other current assets:
Derivatives		41,280			59,622
Other, net of allowance for doubtful accounts of $5,566 and $5,491 as of September 30, 2009 and December 31, 2008, respectively		10,314			14,951

Total current assets		422,962			486,911

Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties		10,170,341			10,167,220
Unproved properties		212,818			204,183
Accumulated depletion, depreciation and amortization		(2,819,643	)		(2,511,401	)

Total property, plant and equipment		7,563,516			7,860,002

Deferred income taxes		2,572			553
Goodwill		309,371			310,563
Other property and equipment, net		154,956			161,266
Other assets:
Derivatives		35,772			72,594
Other, net of allowance for doubtful accounts of $7,172 and $4,410 as of September 30, 2009 and December 31, 2008, respectively		191,919			269,896

	$	8,681,068		$	9,161,785

(a)	Retrospectively adjusted as described in Note B.

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share data)

(Unaudited)


	September 30, 2009			December 31, 2008 (a)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	201,768		$	322,688
Due to affiliates		18,562			34,284
Interest payable		28,481			43,247
Income taxes payable		12,745			3,618
Deferred income taxes		307			—
Discontinued operations held for sale		1,802			—
Other current liabilities:
Derivatives		91,967			49,561
Deferred revenue		104,743			147,905
Other		57,445			93,694

Total current liabilities		517,820			694,997


Long-term debt		2,867,298			2,899,241
Derivatives		65,664			20,584
Deferred income taxes		1,408,481			1,501,459
Deferred revenue		109,497			177,236
Other liabilities		178,076			187,409
Stockholders’ equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 125,191,035 and 124,566,963 shares issued at September 30, 2009 and December 31, 2008, respectively		1,252			1,246
Additional paid-in capital		2,935,897			2,909,735
Treasury stock, at cost: 10,863,513 and 10,020,502 shares at September 30, 2009 and December 31, 2008, respectively		(416,566	)		(411,659	)
Retained earnings		861,922			988,786
Accumulated other comprehensive income - deferred hedge gains, net of tax		64,851			88,788

Total stockholders’ equity attributable to common stockholders		3,447,356			3,576,896
Noncontrolling interests in consolidating subsidiaries		86,876			103,963

Total stockholders’ equity		3,534,232			3,680,859
Commitments and contingencies

	$	8,681,068		$	9,161,785

(a)	Retrospectively adjusted as described in Note B.

The financial information included as of September 30, 2009 has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008 (a)			2009			2008 (a)
Revenues and other income:
Oil and gas	$	409,969		$	600,413		$	1,148,512		$	1,777,579
Interest and other		503			2,285			99,761			33,697
Gain (loss) on disposition of assets, net		(385	)		190			(447	)		4,768

		410,087			602,888			1,247,826			1,816,044

Costs and expenses:
Oil and gas production		90,394			107,159			285,617			297,299
Production and ad valorem taxes		28,089			46,124			79,503			129,670
Depletion, depreciation and amortization		162,605			121,265			509,422			338,153
Impairment of oil and gas properties		—			89,753			21,091			89,753
Exploration and abandonments		25,073			109,420			77,861			172,714
General and administrative		34,799			31,622			102,728			103,739
Accretion of discount on asset retirement obligations		2,754			1,981			8,259			5,885
Interest		43,438			41,176			128,051			123,124
Hurricane activity, net		1,830			541			18,280			2,400
Derivative losses, net		15,222			3,858			85,583			1,451
Other		21,363			33,964			89,467			54,153

		425,567			586,863			1,405,862			1,318,341

Income (loss) from continuing operations before income taxes		(15,480	)		16,025			(158,036	)		497,703
Income tax benefit (provision)		5,206			(13,165	)		47,671			(217,615	)

Income (loss) from continuing operations		(10,274	)		2,860			(110,365	)		280,088
Income from discontinued operations, net of tax		12,107			327			13,868			14,718

Net income (loss)	$	1,833			3,187			(96,497	)		294,806
Net income attributable to the noncontrolling interests		(8,998	)		(8,422	)		(12,269	)		(15,388	)

Net income (loss) attributable to common stockholders	$	(7,165	)	$	(5,235	)	$	(108,766	)	$	279,418

Basic earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	(0.17	)	$	(0.04	)	$	(1.07	)	$	2.22
Income from discontinued operations attributable to common stockholders		0.11			—			0.12			0.12

Net income (loss) attributable to common stockholders	$	(0.06	)	$	(0.04	)	$	(0.95	)	$	2.34

Diluted earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	(0.17	)	$	(0.04	)	$	(1.07	)	$	2.20
Income from discontinued operations attributable to common stockholders		0.11			—			0.12			0.12

Net income (loss) attributable to common stockholders	$	(0.06	)	$	(0.04	)	$	(0.95	)	$	2.32

Weighted average shares outstanding:
Basic		114,123			118,110			114,118			118,136

Diluted		114,123			118,110			114,118			118,765

Dividends declared per share	$	0.04		$	0.16		$	0.08		$	0.30

Amounts attributable to common stockholders:
Income (loss) from continuing operations	$	(19,272	)	$	(5,562	)	$	(122,634	)	$	264,700
Discontinued operations		12,107			327			13,868			14,718

Net income (loss)	$	(7,165	)	$	(5,235	)	$	(108,766	)	$	279,418

(a)	Retrospectively adjusted as described in Note B.

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except dividends per share)

(Unaudited)


			Stockholders’ Equity Attributable To Common Stockholders
	Shares Outstanding		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interests			Total Stockholders’ Equity
Balance as of December 31, 2008 (a)	114,546		$	1,246	$	2,909,735		$	(411,659	)	$	988,786		$	88,788		$	103,963		$	3,680,859
Dividends declared ($0.08 per share)	—			—		—			—			(9,405	)		—			—			(9,405	)
Exercise of long-term incentive plan stock options and employee stock purchases	431			—		—			16,648			(8,693	)		—			—			7,955
Purchase of treasury stock	(1,273	)		—		—			(21,555	)		—			—			—			(21,555	)
Purchase of subsidiary noncontrolling units																		(258	)		(258	)
Tax provision related to stock-based compensation	—			—		(3,583	)		—			—			—			—			(3,583	)
Compensation costs:
Vested compensation awards, net	624			6		(6	)		—			—			—			—			—
Compensation costs included in net income (loss)	—			—		29,751			—			—			—			164			29,915
Cash contributions of noncontrolling interests	—			—		—			—			—			—			150			150
Cash distributions to noncontrolling interests	—			—		—			—			—			—			(15,042	)		(15,042	)
Net income (loss)	—			—		—			—			(108,766	)		—			12,269			(96,497	)
Other comprehensive loss:
Deferred hedging activity, net of tax:
Hedge fair value changes, net	—			—		—			—			—			10,477			3,692			14,169
Net hedge gains included in continuing operations	—			—		—			—			—			(34,414	)		(18,062	)		(52,476	)

Balance as of September 30, 2009	114,328		$	1,252	$	2,935,897		$	(416,566	)	$	861,922		$	64,851		$	86,876		$	3,534,232

(a)	Retrospectively adjusted as described in Note B.

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

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2009			2008 (a)
Cash flows from operating activities:
Net income (loss)	$	(96,497	)	$	294,806
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		509,422			338,153
Impairment of oil and gas properties		21,091			89,753
Exploration expenses, including dry holes		40,699			93,996
Hurricane activity, net		16,200			—
Deferred income taxes		(67,397	)		160,346
(Gain) loss on disposition of assets, net		447			(4,768	)
Accretion of discount on asset retirement obligations		8,259			5,885
Discontinued operations		(5,373	)		24,609
Interest expense		20,694			21,252
Derivative related activity		48,305			31,118
Amortization of stock-based compensation		29,319			25,571
Amortization of deferred revenue		(110,901	)		(118,644	)
Other noncash items		30,664			30,495
Change in operating assets and liabilities
Accounts receivable, net		71,074			(39,039	)
Income taxes receivable		44,762			(9,522	)
Inventories		(52,069	)		(54,990	)
Prepaid expenses		(6,900	)		(7,152	)
Other current assets		98,532			(2,561	)
Accounts payable		(94,238	)		15,364
Interest payable		(14,766	)		(12,724	)
Income taxes payable		9,127			11,528
Other current liabilities		(89,629	)		(76,972	)

Net cash provided by operating activities		410,825			816,504

Cash flows from investing activities:
Proceeds from disposition of assets, net of cash sold		24,247			143,352
Additions to oil and gas properties		(319,928	)		(996,721	)
Additions to other assets and other property and equipment, net		(17,310	)		(31,350	)

Net cash used in investing activities		(312,991	)		(884,719	)

Cash flows from financing activities:
Borrowings under long-term debt		386,269			794,998
Principal payments on long-term debt		(434,269	)		(732,775	)
Distributions to noncontrolling interests, net		(14,892	)		(2,941	)
Proceeds from issuance of partnership common units, net of issuance costs		—			165,978
Borrowings (payments) of other liabilities		(1,069	)		4,686
Exercise of long-term incentive plan stock options and employee stock purchase plan		7,955			8,008
Purchases of treasury stock and subsidiary noncontrolling units		(21,813	)		(86,201	)
Excess tax (provisions) benefits from share-based payment arrangements		(3,583	)		381
Payment of financing fees		(4,475	)		(12,377	)
Dividends paid		(4,679	)		(16,896	)

Net cash provided by (used in) financing activities		(90,556	)		122,861

Net increase in cash and cash equivalents		7,278			54,646
Cash and cash equivalents, beginning of period		48,337			12,171

Cash and cash equivalents, end of period	$	55,615		$	66,817

(a)	Retrospectively adjusted as described in Note B.

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008 (a)			2009			2008 (a)

Net income (loss)	$	1,833		$	3,187		$	(96,497	)	$	294,806

Other comprehensive income (loss):
Hedge activity:
Hedge fair value changes, net		—			580,567			22,490			(168,801	)
Net hedge (gains) losses included in continuing operations		(25,887	)		145,106			(103,039	)		389,016
Income tax provision (benefit)		7,272			(269,973	)		42,242			(82,322	)

Other comprehensive income (loss)		(18,615	)		455,700			(38,307	)		137,893

Comprehensive income (loss)		(16,782	)		458,887			(134,804	)		432,699

Comprehensive (income) loss attributable to noncontrolling interest		(3,417	)		(40,097	)		853			(28,031	)

Comprehensive income (loss) attributable to common stockholders	$	(20,199	)	$	418,790		$	(133,951	)	$	404,668

(a)	Retrospectively adjusted as described in Note B.

The financial information included herein has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

NOTE A. Organization and Nature of Operations

Pioneer is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company with continuing operations in the United States, South Africa and Tunisia.

NOTE B. Basis of Presentation

Presentation. In the opinion of management, the consolidated financial statements of the Company as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 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 GAAP have been condensed or omitted in this Report pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Discontinued operations. During June and August 2009, the Company sold its Mississippi assets and substantially all of its shelf properties in the Gulf of Mexico, respectively. The Company has reflected the results of operations of both of these asset groups as discontinued operations, rather than as components of continuing operations. In April 2006 and November 2007, the Company completed the sale of its Argentine assets and Canadian subsidiaries, respectively. During the three and nine months ended September 30, 2008, the Company continued to realize certain net costs and expenses associated with these divestitures. See Note R for additional information regarding discontinued operations.

Allowances for doubtful accounts. As of September 30, 2009 and December 31, 2008, the Company’s allowances for doubtful accounts totaled $14.2 million and $32.4 million, respectively. The Company establishes allowances for doubtful accounts equal to the estimable portions of accounts and notes receivables for which failure to collect is considered probable. The Company estimates the portions of joint interest receivables for which failure to collect is probable based on percentages of joint interest receivables that are past due. The Company estimates the portions of other receivables for which failure to collect is probable based on the relevant facts and circumstances surrounding the receivable. Allowances for doubtful accounts are recorded as reductions to the carrying values of the receivables included in the Company’s consolidated balance sheets and as charges to other expense in the Company’s consolidated statements of operations in the accounting periods during which failure to collect an estimable portion is determined to be probable.

Changes in the Company’s allowance for doubtful accounts during the three and nine months ended September 30, 2009 are summarized in the following table:


	Three Months Ended September 30, 2009			Nine Months Ended September 30, 2009
	(in thousands)

Beginning allowance for doubtful accounts balance	$	12,205		$	32,365
Amount recorded in other expense for bad debt expense		1,985			1,241
Write-offs of uncollectible accounts (a)		(15	)		(19,431	)


Ending allowance for doubtful accounts balance	$	14,175		$	14,175

(a)

Write-offs of uncollectible accounts for the nine months ended September 30, 2009 are primarily comprised of the allowance for doubtful accounts established to reduce the carrying value of the Company’s pre-petition claims receivable from SemGroup, L.P. (“SemGroup”), which filed bankruptcy during 2008. The Company sold all of its pre-petition SemGroup claims during April 2009 for approximately $10.1 million.

Inventories. Inventories consisted of $212.3 million and $158.7 million of materials and supplies and $4.0 million and $8.4 million of commodities as of September 30, 2009 and December 31, 2008, respectively. The Company’s materials and supplies inventory is primarily comprised of oil and gas drilling or repair items such as

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

tubing, casing, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market, on a first-in, first-out cost basis. “Market,” in the context of inventory valuation, represents net realizable value, which is the amount that the Company is allowed to charge to the joint accounts when the inventory is used in joint operations under joint operating agreements to which the Company is a party. Any valuation reserve allowances of materials and supplies inventory are recorded as reductions to the carrying values of the materials and supply inventories in the Company’s consolidated balance sheets and as charges to other expense in the accompanying consolidated statements of operations. As of September 30, 2009 and December 31, 2008, the Company’s materials and supplies inventory was net of $5.9 million and $4.7 million, respectively, of valuation reserve allowances. The Company estimated that approximately $70.4 million and $90.2 million of its September 30, 2009 and December 31, 2008 materials and supplies inventories, respectively, would not be utilized within one year based on current drilling plans. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

Commodities inventories are carried at the lower of average cost or market, on a first-in, first-out basis. The Company’s commodities inventories consist of oil and natural gas liquids (“NGLs”) held in storage. Any valuation allowances of commodities inventories are recorded as reductions to the carrying values of the commodities inventories included in the Company’s consolidated balance sheets and as charges to other expense in the consolidated statements of operations. As of December 31, 2008, the Company’s commodities inventories were net of $159 thousand of valuation allowances.

Derivatives and hedging. Prior to December 2008, the Company had elected to designate the majority of its commodity derivative instruments as cash flow hedges. During December 2008, the Company began entering into commodity derivative contracts that were not designated as hedges. Changes in the fair values of non-hedge derivative instruments are recognized as gains or losses in the earnings of the period in which they occur. Effective February 1, 2009, the Company discontinued hedge accounting on all existing hedge contracts. The effective portions of the discontinued deferred hedges as of January 31, 2009 are included in accumulated other comprehensive income – deferred hedge gains, net of tax (“AOCI – Hedging”), in the stockholders’ equity section of the accompanying consolidated balance sheets, and are being reclassified to earnings during the same periods in which the hedged transactions are recognized in the Company’s earnings. For the period from February 1, 2009 through September 30, 2009, the Company recognized, and in the future will recognize, all changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities by commodity, whichever the case may be. Net derivative asset values are determined, in part, by utilization of the derivative counterparties’ credit-adjusted risk-free rate curves and net derivative liabilities are determined, in part, by utilization of the Company’s credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates are based on an independent market-quoted credit default swap rate curve for the Company’s or the counterparties’ debt plus the United States Treasury Bill yield curve as of September 30, 2009.

Goodwill. Goodwill is assessed for impairment whenever events or circumstances indicate that impairment of the carrying value of goodwill is likely, but no less often than annually. If the carrying value of goodwill is determined to be impaired, it is reduced for the impaired value with a corresponding charge to pretax earnings in the period in which it is determined to be impaired. During the third quarter of 2009, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment. See Note M for additional information regarding the Company’s impairment assessments. In connection with the August 2009 sale of its Gulf of Mexico shelf properties, the Company reduced its goodwill attributable to the carrying value of those properties by $1.2 million.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 68.3 percent limited partner interest in Pioneer Southwest. Pioneer Southwest owns interests in certain oil and gas properties previously owned by the Company 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.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In addition to Pioneer Southwest, the Company owns the majority interests in certain other subsidiaries with operations in the United States. Noncontrolling interest in the net assets of consolidated subsidiaries totaled $86.9 million and $104.0 million as of September 30, 2009 and December 31, 2008, respectively. The Company recorded net income attributable to the noncontrolling interests of $9.0 million and $12.3 million for the three and nine months ended September 30, 2009, (principally related to Pioneer Southwest) compared to $8.4 million and $15.4 million for the three and nine months ended September 30, 2008, respectively. See “New accounting pronouncements” and “Reclassifications and retrospective adjustments” for information regarding the Company’s accounting for noncontrolling interests.

Stock-based compensation. For stock-based compensation awards, compensation expense is being recognized in the Company’s financial statements on a straight line basis over the awards’ vesting periods based on their fair values on the dates of grant. The Company utilizes (i) the Black-Scholes option pricing model to measure the fair value of stock options, (ii) the prior day’s closing stock price on the date of grant for the fair value of restricted stock awards and (iii) the Monte Carlo simulation method for the fair value of performance unit awards.

For the three and nine month periods ended September 30, 2009, the Company recorded $10.1 million and $29.3 million of stock-based compensation costs for all plans, respectively, as compared to $8.3 million and $25.6 million for the same respective periods of 2008.

In accordance with GAAP, the Company’s issued shares, as reflected in the consolidated balance sheets at September 30, 2009 and December 31, 2008, do not include 987,696 and 1,078,267, respectively, of issued but unvested shares awarded under stock-based compensation plans which have voting rights.

The following table summarizes all stock-based awards, lapses and forfeitures that occurred during the nine months ended September 30, 2009:


	Restricted Stock Shares	Restricted Stock Units	Performance Units	Stock Options

Awards	378,497	1,638,711	189,247	361,021
Lapsed restrictions	452,018	172,054	—	—
Exercises	—	—	—	288,114
Forfeitures	17,050	47,712	—	99,250

As of September 30, 2009, there was approximately $52.5 million of unrecognized compensation expense related to unvested share-based compensation plan awards, restricted stock, restricted stock units, performance unit awards and stock options. This compensation will be recognized over the remaining vesting periods of the awards, which on a weighted average basis is a period of less than three years.

New accounting pronouncements. On June 30, 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 creates a new source of authoritative U.S. accounting and reporting standards for nongovernmental entities, known as the FASB “Accounting Standards Codification” (“ASC”). This statement was effective for interim and annual periods ending after September 15, 2009. On September 30, 2009, the Company adopted the provisions of SFAS 168. Hereafter, all new and existing accounting pronouncements will be referred to by their section in the ASC.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. During February 2008, the FASB issued FASB Staff Position No. 157-2, “FSP FAS 157-2”, which delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. On January 1, 2009, the Company adopted the remaining provisions of ASC 820, for which delayed adoption was allowed.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“ASC 805”). ASC 805 replaces SFAS 141 and provides greater consistency in the accounting and financial reporting of business combinations. ASC 805 requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of the date that the acquirer achieves control over the business acquired. This includes the measurement of the acquirer’s shares issued in consideration for a business combination, the recognition of contingent consideration, the recognition of pre-acquisition contractual and certain non-contractual gain and loss contingencies, the recognition of capitalized research and development costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. The provisions of ASC 805 also require that restructuring costs resulting from the business combination that the acquirer expects but is not required to incur and costs incurred to effect the acquisition be recognized separate from the business combination. ASC 805 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. The Company became subject to the provisions of ASC 805 on January 1, 2009.

In December 2007, the FASB issued SFAS 160 (“ASC 810”). ASC 810 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC 810 requires consolidated earnings to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The Company adopted the provisions of ASC 810 on January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“ASC 815”). ASC 815 changes the disclosure requirements for derivative instruments and hedging activities by requiring entities to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under ASC 815 and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. ASC 815 was adopted by the Company on January 1, 2009. See Note G for disclosures about the Company’s derivative instruments and hedging activities.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC 470”). ASC 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted the provisions of ASC 470 on January 1, 2009. The adoption of ASC 470 increases the annual interest expense that the Company recognizes on its $480 million of 2.875% convertible senior notes due 2038 (“2.875% Convertible Senior Notes”) from an annual yield of 2.875 percent to 6.75 percent, the annual yield equivalent to a nonconvertible debt borrowing at the time of issuance. The adoption of ASC 470 also resulted in the reclassification of the estimated issuance date fair value of the 2.875% Convertible Senior Notes conversion privilege from long-term debt to shareholders’ equity in the accompanying consolidated balance sheets. See “Reclassifications and retrospective adjustments” and Note F for additional information regarding the Company’s adoption of ASC 470.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“ASC 260”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the net income (loss) allocation in computing basic and diluted earnings per share under the two class method prescribed under SFAS 128, “Earnings per Share”. The Company adopted the provisions of ASC 260 on January 1, 2009 and, in accordance with ASC 260, applied its provisions retrospectively to prior-period earnings per share computations. See Note K for additional information regarding the Company’s basic and diluted earnings per share computations for the three and nine months ended September 30, 2009 and 2008.

In December 2008, the SEC released Final Rule, “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”). The Reserve Ruling revises oil and gas reporting disclosures. The Reserve Ruling also permits the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The Reserve Ruling will also allow companies to disclose their probable

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

and possible reserves to investors. In addition, the new disclosure requirements require companies to: (i) report the independence and qualifications of its reserves preparer or auditor, (ii) file reports when a third party is relied upon to prepare reserves estimates or conduct a reserves audit and (iii) report oil and gas reserves using an average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, rather than a year-end price. The Reserve Ruling becomes effective for annual reports on Forms 10-K for fiscal years ending on or after December 31, 2009. During February 2009, the FASB announced a project to amend SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” (“ASC 932”) to conform to the Reserve Ruling. The Company is currently assessing the impact that adoption of the provisions of the Reserve Ruling will have on its financial position, results of operations and disclosures.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”. ASC 825 requires fair value disclosures by publicly traded companies of financial instruments for interim reporting purposes. ASC 825 was adopted by the Company during the second quarter of 2009. See Note D for disclosures about the fair values of the Company’s financial instruments.

Reclassifications and retrospective adjustments. Certain reclassifications have been made to the 2008 amounts in order to conform to the 2009 presentation and for the retrospective application of the adoption of ASC 810. The retrospective application of ASC 810 resulted in the reclassification of $59.2 million from minority interest in consolidated subsidiaries and $44.8 million from AOCI – Hedging to Noncontrolling interest in consolidated subsidiaries at December 31, 2008. In addition, the adoption of ASC 470 and ASC 260 required retrospective adjustments to the Company’s financial statements as of December 31, 2008 and the three and nine months ended September 30, 2008. The retrospective adjustments related to the adoption of ASC 470 decreased the Company’s net income attributable to common stockholders by $2.2 million (approximately $.01 per diluted share) and $6.1 million (approximately $.05 per diluted share), respectively, for the three and nine months ended September 30, 2008. The retrospective application of ASC 470 also increased additional paid-in capital by $49.5 million and decreased retained earnings by $10.0 million as of December 31, 2008. The retrospective application of the provisions of ASC 260 did not change the Company’s diluted earnings for the three months ended September 30, 2008 and reduced the Company’s diluted earnings for the nine months ended September 30, 2008 by approximately $.05 per share, exclusive of the effects from the adoption of ASC 470.

In the second quarter of 2009, the Company inadvertently overstated its depletion, depreciation and amortization (“DD&A”) expense by $7.3 million ($4.6 million net of associated income taxes) attributable to oil and gas volumes sold during that quarter. This overstatement primarily resulted from an exclusion of certain proved reserves from the calculation of the Company’s DD&A expense for the three months ended June 30, 2009. This error also overstated the Company’s accumulated depletion, depreciation and amortization and income taxes payable by $7.3 million and $178 thousand, respectively, and understated the Company’s deferred tax liabilities by $2.9 million. The Company has concluded that the effect of the overstatement was not material to the reported financial position and earnings of the Company as of and for the three and six months ended June 30, 2009 and has reflected the correction in its reported financial position and results of operations as of and for the nine months ended September 30, 2009. The correction reduced the Company’s diluted per share net loss attributable to common stockholders by $.04 for the three and six months ended June 30, 2009.

NOTE C. Exploratory Well Costs

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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The following table reflects the Company’s capitalized exploratory well activity during the three and nine months ended September 30, 2009:


	Three Months Ended September 30, 2009			Nine Months Ended September 30, 2009
	(in thousands)

Beginning capitalized exploratory well costs	$	113,997		$	124,014
Additions to exploratory well costs pending the determination of proved reserves		20,420			46,758
Reclassification due to determination of proved reserves		(5,949	)		(33,150	)
Exploratory well costs charged to exploration expense		(6,798	)		(15,952	)


Ending capitalized exploratory well costs	$	121,670		$	121,670

The following table provides an aging, as of September 30, 2009 and December 31, 2008, of capitalized exploratory well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:


	September 30, 2009		December 31, 2008
	(in thousands, except well counts)

Capitalized exploratory well costs that have been suspended:
One year or less	$	30,850	$	54,423
More than one year		90,820		69,591


	$	121,670	$	124,014


Number of projects with exploratory well costs that have been suspended for a period greater than one year		5		4

The following table provides an aging of capitalized costs of exploration projects that have been suspended for more than one year as of September 30, 2009:


	Total		2009		2008		2007		2006
	(in thousands)

United States:
Cosmopolitan Unit	$	60,613	$	1,952	$	6,344	$	51,488	$	829
Tunisia		30,207		962		20,866		4,434		3,945

Total	$	90,820	$	2,914	$	27,210	$	55,922	$	4,774

Cosmopolitan Unit. The Company owns a 100 percent working interest in, and is the operator of, the Cosmopolitan Unit in the Cook Inlet of Alaska. During 2007, the Company drilled the Hansen #1A L1 well, a lateral sidetrack from an existing wellbore, to appraise the resource potential of the unit. The initial unstimulated production test results were encouraging. The Company plans to workover the well in the fourth quarter 2009 to repair the casing. The well may be fracture stimulated in 2010 contingent upon the results of the casing repair and subsequent flow testing. The Company will continue to conduct permitting activities and facilities planning during the fourth quarter of 2009 and may drill another appraisal well in 2010.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Tunisia – Cherouq. The Company has $17.5 million and $5.0 million of suspended well costs recorded for the Hayaat #1 and Hilal #1 wells, respectively, in the Company’s Cherouq production concession area, which is operated by the Company. The Hayaat #1 well began drilling in April 2008 to test several targeted formations. Mechanical failures were encountered during the testing of the well that did not allow completion of the formation assessments. The Company is analyzing seismic and other data to determine the optimal plan forward for completing the well, which may utilize the existing wellbore or a new wellbore adjacent to the existing well. The Company expects to finalize its Hayaat #1 plans and complete its assessment activities during 2010 or 2011.

The Hilal #1 well was originally drilled as an exploration well during 2007. The well was unsuccessful; however, the well is being re-completed to a formation that will be used for water disposal in support of other Cherouq operations. The Company recorded a $1.5 million dry hole charge for the Hilal #1 during 2007, representing the portion of the well costs that will not be used in disposal operations. Installation of the surface equipment is underway and disposal operations are planned to start during the fourth quarter of 2009.

Tunisia – Borj El Khadra. The Company has $7.6 million of suspended well costs attributable to the Nahkil #1 and Abir #1 wells in the Borj El Khadra exploration permit area, which is operated by a third-party. The Nahkil #1 well encountered oil-bearing sands and the Abir #1 well encountered gas-bearing sands. The Company does not record proved reserves associated with discoveries in exploration permit areas until a production concession is granted. Infrastructure planning is underway and further exploration of the permit area is planned to occur in the fourth quarter of 2009 or 2010.

NOTE D. Disclosures About Fair Value Measurements

The valuation framework of ASC 820, which addresses fair value measurements, is based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. 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. These two types of inputs are further prioritized into the following fair value input hierarchy:

•

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.

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.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2009, for each of the fair value hierarchy levels:


	Fair Value Measurements at Reporting Date 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 September 30, 2009
	(in thousands)

Assets:
Trading securities	$	231	$	73	$	—	$	304
Commodity derivatives		—		71,706		5,346		77,052
Deferred compensation plan assets		25,582		—		—		25,582

Total assets	$	25,813	$	71,779	$	5,346	$	102,938


Liabilities:
Commodity derivatives	$	—	$	146,741	$	3,939	$	150,680
Interest rate derivatives		—		6,951		—		6,951

Total liabilities	$	—	$	153,692	$	3,939	$	157,631

The following tables present the changes in the fair values of the Company’s net commodity derivative assets classified as Level 3 in the fair value hierarchy:


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Three Months Ended September 30, 2009
	NGL Swap Contracts
	(in thousands)

Beginning balance	$	5,466
Total gains (losses) (a):
Net unrealized losses included in earnings		(1,695	)
Net realized losses included in earnings		(2,423	)
Settlements		59

Ending balance	$	1,407

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives in AOCI – Hedging are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Nine Months Ended September 30, 2009
	NGL Swap Contracts			Gas Three-Way Collars			Oil Three-Way Collars			Total
	(in thousands)

Beginning balance	$	18,560		$	—		$	—		$	18,560
Total gains (losses):
Net unrealized gains (losses) included in earnings (a)		(8,260	)		(1,697	)		3,364			(6,593	)
Net derivative losses included in other comprehensive income		(1,855	)		—			—			(1,855	)
Net realized gains transferred to earnings (a)		(2,794	)		—			—			(2,794	)
Settlements		(4,244	)		—			—			(4,244	)
Transfers into/out of Level 3		—			1,697			(3,364	)		(1,667	)

Ending balance	$	1,407		$	—		$	—		$	1,407

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)

(a)

The hedge-effective portions of realized gains and losses on commodity derivatives are included in oil and gas revenues, while non-hedge derivatives or ineffective portions of realized and unrealized gains and losses are included in derivative losses, net in the accompanying consolidated statements of operations.

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2009 and December 31, 2008:


	September 30, 2009				December 31, 2008
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)

Assets:
Commodity price derivatives	$	77,052	$	77,052	$	132,216	$	132,216
Trading securities	$	304	$	304	$	356	$	356
Deferred compensation plan assets	$	25,582	$	25,582	$	18,276	$	18,276
Notes receivable due 2008 to 2011	$	10,573	$	10,573	$	11,258	$	11,258
Liabilities:
Commodity price derivatives	$	150,680	$	150,680	$	60,242	$	60,242
Interest rate derivatives	$	6,951	$	6,951	$	9,903	$	9,903
Pioneer Natural Resources Credit facility	$	730,000	$	723,653	$	913,000	$	868,597
Pioneer Southwest Credit facility	$	135,000	$	132,562	$	—	$	—
2.875% senior convertible notes due 2038	$	425,890	$	459,600	$	415,194	$	345,600
5.875 % senior notes due 2012	$	6,174	$	6,183	$	6,191	$	5,233
5.875 % senior notes due 2016	$	387,274	$	418,954	$	382,010	$	301,583
6.65 % senior notes due 2017	$	483,883	$	458,420	$	483,792	$	339,570
6.875 % senior notes due 2018	$	449,154	$	424,777	$	449,132	$	292,175
7.20 % senior notes due 2028	$	249,923	$	222,750	$	249,922	$	145,000

Trading securities and deferred compensation plan assets. The Company’s trading securities represent equity securities that are not actively traded on major exchanges and trading securities that are 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 plus unallocated contributions as of the measurement date. As of September 30, 2009, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for trading securities that are not actively traded on major exchanges, which were provided by broker quotes representing Level 2 inputs.

Notes receivable. The fair value of the Company’s notes receivable approximates the carrying values based on the adequacy of the collateral security and interest yields.

Interest rate derivatives. The Company’s interest rate derivative liabilities represent swap contracts for $400 million notional amount of debt, whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate and $50 million notional amount of debt, whereby the Company pays a variable LIBOR-based rate and the counterparty pays a fixed rate of interest. The net derivative liability values attributable to the Company’s interest rate derivative contracts as of September 30, 2009 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company’s interest rate derivative asset measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company’s commodity derivatives represent oil, NGL and gas swap and collar contracts. The Company’s oil and gas swap, collar and three-way collar derivative contract asset and liability measurements represent Level 2 inputs in the hierarchy priority while NGL derivative contract asset and liability measurements represent Level 3 inputs in the hierarchy priority.

Oil derivatives. The Company’s oil derivatives are swap, collar and three-way collar contracts for notional Bbls of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) NYMEX

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

West Texas Intermediate (“WTI”) oil prices. The asset and liability values attributable to the Company’s oil derivatives as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

NGL derivatives. The Company’s NGL derivatives are swap contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs. The asset and liability values attributable to the Company’s NGL derivatives as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent broker-supplied forward Mont Belvieu-posted-price quotes and (iii) the applicable credit-adjusted risk-free rate yield curve.

Gas derivatives. The Company’s gas derivatives are swap, collar and three-way collar contracts for notional MMBtus of gas contracted at various posted price indexes, including NYMEX Henry Hub (“HH”) swap contracts coupled with basis swap contracts that convert the HH price index point to other price indexes. The asset and liability values attributable to the Company’s gas derivative contracts as of September 30, 2009 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) averages of forward posted price quotes supplied by independent brokers who are active in buying and selling gas derivatives at the indexes other than HH (iv) the applicable credit-adjusted risk-free rate yield curve and (v) the implied rate of volatility inherent in the collar and three-way collar contracts. The implied rates of volatility inherent in the Company’s collar contracts were determined based on market-quoted volatility factors adjusted for estimated volatility skews and corroborated with average volatility factors provided by the Company’s counterparties.

The Company corroborated independent broker-supplied forward price quotes by comparing price quote samples to alternate observable market data.

Credit facility. The fair value of the Company’s credit facility is based on (i) contractual interest and fees, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.

Senior notes. The Company’s senior notes represent debt securities that are actively traded on major exchanges.

NOTE E. Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC 740 (formerly SFAS 109), “Income Taxes” (“ASC 740”). ASC 740 requires that the Company continually assess both positive and negative evidence to determine whether it is more likely than not that deferred tax assets can be realized prior to their expiration. Pioneer monitors Company-specific, oil and gas industry and worldwide economic factors to assess the likelihood that the Company’s net operating loss carryforwards (“NOLs”) and other deferred tax attributes in the U.S. federal, state and foreign tax jurisdictions will be utilized prior to their expiration. As of September 30, 2009 and December 31, 2008, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $44.2 million and $37.5 million, respectively.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized and prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2009, the Company had no unrecognized tax benefits. The Company’s policy is to account for interest charges with respect to income taxes as interest expense and any penalties, with respect to income taxes, as other expense in the consolidated statements of operations. The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. With few exceptions, the Company believes that it is no longer subject to examinations by tax authorities for years before 2004. As of September 30, 2009, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company’s future results of operations or financial position.

On June 30, 2009, pursuant to Tunisian law, the Company established an investment reserve equal to 20 percent of 2008 taxable profits on the Adam and Cherouq concessions and thereby reduced current taxes payable by $13.1 million with a corresponding offset to deferred income taxes in the Company’s accompanying consolidated balance sheets. The investment reserve will be used to fund future drilling activity or pipeline infrastructure projects in Tunisia.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

In the reported results for the nine months ended September 30, 2009, the Company recognized an additional deferred provision of $2.9 million and a current tax benefit of $178 thousand related to the Company’s correction of the understatement of reported earnings for the three months ended June 30, 2009. See Note B for additional information regarding this correction.

Income tax (provisions) benefits. The Company’s income tax (provisions) benefits attributable to income from continuing operations consisted of the following for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Current:
U.S. federal	$	(1,335	)	$	(124	)	$	(934	)	$	8,784
U.S. state		(2,206	)		967			(9,142	)		(630	)
Foreign		(8,708	)		(24,972	)		(9,650	)		(65,423	)

		(12,249	)		(24,129	)		(19,726	)		(57,269	)


Deferred:
U.S. federal		15,273			17,455			68,796			(125,565	)
U.S. state		3,696			(1,377	)		9,460			(4,246	)
Foreign		(1,514	)		(5,114	)		(10,859	)		(30,535	)

		17,455			10,964			67,397			(160,346	)


Income tax (provision) benefit	$	5,206		$	(13,165	)	$	47,671		$	(217,615	)

Discontinued operations. The Company’s income tax (provisions) benefits attributable to income from discontinued operations consisted of the following for three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Current:
Foreign	$	—		$	(135	)	$	—		$	(306	)

		—			(135	)		—			(306	)


Deferred:
U.S. federal		(7,153	)		(438	)		(8,102	)		(6,746	)
Foreign		—			65			—			935

		(7,153	)		(373	)		(8,102	)		(5,811	)


Income tax provision	$	(7,153	)	$	(508	)	$	(8,102	)	$	(6,117	)

NOTE F. Long-term Debt

Lines of credit. During April 2007, the Company entered into an Amended and Restated 5-Year Revolving Credit Agreement (the “Credit Facility”) that matures in April 2012, unless extended in accordance with the terms of the Credit Facility. The Credit Facility provides for initial aggregate loan commitments of $1.5 billion, which may be increased to a maximum aggregate amount of $2.0 billion if the lenders increase their loan commitments or if loan commitments of new financial institutions are added. As of September 30, 2009, the Company had $730.0 million of outstanding borrowings under the Credit Facility and $46.0 million of undrawn letters of credit, all of which were commitments under the Credit Facility, leaving the Company with $724.0 million of unused borrowing capacity under the Credit Facility.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Effective April 29, 2009, the Company and the lenders under the Company’s Credit Facility amended the Credit Facility to provide the Company additional financial flexibility. The Credit Facility contains certain financial covenants, one of which required the Company to maintain a ratio of the net present value of the Company’s oil and gas properties to total debt of at least 1.75 to 1.0 until the Company achieves an investment grade rating by Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group, Inc. The amendment changed that ratio to 1.5 to 1.0 through the period ending March 31, 2011, after which time the ratio would revert to 1.75 to 1.0, and provides that the Company may include in the calculation of the present value of its oil and gas properties 75 percent of the market value of its ownership of limited partner units of Pioneer Southwest. The covenant requiring the Company to maintain a ratio of total debt to total capitalization of no more than 0.60 to 1.0 was not changed.

The amendment also adjusted certain borrowing rates and commitment fees, and changed certain provisions relating to the consequences if a lender under the Credit Facility defaults in its obligations under the agreement. After taking into account the amendment, revolving loans under the Credit Facility bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by JPMorgan Chase Bank or the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System during the last preceding business day plus .5 percent plus a defined alternate base rate spread margin (“ABR Margin”), which is currently one percent based on the Company’s debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the “Applicable Margin”), which is currently two percent and is also determined by the Company’s debt rating. Swing line loans under the Credit Facility bear interest at a rate per annum equal to the “ASK” rate for Federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus ..125 percent. The Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company’s debt rating (currently 0.375 percent).

On August 31, 2009, Pioneer Southwest borrowed $138.0 million under its $300 million credit facility (the “Pioneer Southwest Credit Facility”) that matures during 2013 to fund a portion of the purchase consideration of oil and gas properties acquired from Pioneer Natural Resources USA, Inc. (“Pioneer USA”), a wholly-owned subsidiary of the Company, for $169.6 million, including estimated customary closing adjustments, and assumed net obligations associated with certain commodity price derivative positions and certain other liabilities that were assigned by Pioneer USA to Pioneer Southwest. The Pioneer Southwest Credit Facility is available for general partnership purposes, including working capital, capital expenditures and distributions.

Borrowings under the Pioneer Southwest Credit Facility may be in the form of Eurodollar rate loans, base rate committed loans or swing line loans. Eurodollar rate loans bear interest annually at LIBOR, plus a margin (the “Applicable Rate”) (currently 0.875 percent) that is determined by a reference grid based on Pioneer Southwest’s consolidated leverage ratio. Base rate committed loans bear interest annually at a base rate equal to the higher of (i) the Federal Funds Rate plus 0.5 percent or (ii) the Bank of America prime rate (the “Base Rate”) plus a margin (currently zero percent). Swing line loans bear interest annually at the Base Rate plus the Applicable Rate. As of September 30, 2009, there were $135.0 million of outstanding borrowings under the Pioneer Southwest Credit Facility.

The Pioneer Southwest Credit Facility contains certain financial covenants, including (i) the maintenance of a quarter-end consolidated leverage ratio (representing a ratio of consolidated indebtedness of Pioneer Southwest to consolidated earnings before depreciation, depletion and amortization; impairment of long-lived assets; exploration expense; accretion of discount on asset retirement obligations; interest expense; income taxes; gain or loss on the disposition of assets; noncash commodity hedge related activity; and noncash equity-based compensation, (“EBITDAX”) of not more than 3.5 to 1.0, (ii) an interest coverage ratio (representing a ratio of EBITDAX to interest expense) of not less than 2.5 to 1.0 and (iii) the maintenance of a ratio of the net present value of Pioneer Southwest’s projected future cash flows from its oil and gas assets to total debt of at least 1.75 to 1.0.

Because of the net present value covenant, the remaining available borrowing capacity under the Pioneer Southwest Credit Facility was limited to approximately $140 million as of September 30, 2009. The variables on which the calculation of net present value is based (including assumed commodity prices and discount rate) are subject to adjustment by the lenders. As a result, declines in commodity prices could reduce Pioneer Southwest’s borrowing capacity under the Pioneer

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Southwest Credit Facility. In addition, the Pioneer Southwest Credit Facility contains various covenants that limit, among other things, Pioneer Southwest’s ability to grant liens, incur additional indebtedness, engage in a merger, enter into transactions with affiliates, pay distributions or repurchase equity, and sell its assets. If any default or event of default (as defined in the Pioneer Southwest Credit Facility) were to occur, the Pioneer Southwest Credit Facility would prohibit Pioneer Southwest from making distributions to unitholders. Such events of default include, among others, nonpayment of principal or interest, violations of covenants, bankruptcy and material judgments and liabilities.

As of September 30, 2009, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

Senior convertible notes. During January 2008, the Company issued $500 million principal amount of 2.875% Convertible Senior Notes, of which $480.0 million remains outstanding at September 30, 2009. Effective January 1, 2009, the Company adopted the provisions of ASC 470 (formerly FSP APB 14-1) and, in accordance therewith, the Company applied the provisions of ASC 470 on a retrospective basis. The initial adoption of ASC 470 decreased the carrying value of the 2.875% Convertible Senior Notes by $63.5 million, increased stockholders’ equity by $39.5 million and increased deferred tax liabilities by $24.0 million. For the three and nine months ended September 30, 2009, the adoption of ASC 470 had the effect of adding $3.6 million and $10.7 million to the Company’s reported interest expense, respectively, and approximately $2.3 million ($.02 per diluted share) and $6.7 million ($.06 per diluted share) to the Company’s respective net losses.

NOTE G. Derivative Financial Instruments

The Company uses financial derivative contracts to manage exposures to commodity price, interest rate and foreign currency fluctuations. The Company generally does not enter into derivative financial instruments for speculative or trading purposes. The Company also may enter physical delivery contracts to effectively provide commodity price protection. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, physical delivery contracts are not accounted for as derivative financial instruments in the financial statements.

All derivative contracts are recorded on the balance sheet at estimated fair value. Fair value is generally determined based on the credit-adjusted present value difference between the fixed contract price and the underlying market price at the determination date. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments and since that date has accounted for derivative instruments using the mark-to-market accounting method. Therefore, the Company will recognize all future changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which they occur.

Changes in the fair value of effective cash flow hedges prior to the Company’s discontinuance of hedge accounting on February 1, 2009 were recorded as a component of AOCI – Hedging, which has been or will be transferred to earnings when the hedged transaction is recognized in earnings. Any ineffective portion of changes in the fair value of hedge derivatives prior to February 1, 2009 was recorded in the earnings of the period of change. The ineffective portion was calculated as the difference between the change in fair value of the hedge derivative and the estimated change in cash flows from the item hedged.

Fair value derivatives. The Company monitors the debt capital markets and interest rate trends to identify opportunities to enter into and terminate interest rate derivative contracts, with the objective of reducing the Company’s costs of capital. As of September 30, 2009 and December 31, 2008, the Company was not a party to any fair value hedges.

Cash flow derivatives. The Company utilizes commodity swap and collar contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (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 and forward currency exchange agreements to reduce the effect of exchange rate volatility.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Oil prices. All material physical sales contracts governing the Company’s oil production have been tied directly or indirectly to the NYMEX prices. The following table sets forth the volumes in Bbls underlying the Company’s outstanding oil derivative contracts and the weighted average NYMEX prices per Bbl for those contracts as of September 30, 2009:


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily oil production non-hedge derivatives (a):
2009 – Swap Contracts
Volume (Bbl)								11,250		11,250
Price per Bbl							$	63.41	$	63.41

2009 – Collar Contracts
Volume (Bbl)								2,000		2,000
Price per Bbl:
Ceiling							$	70.38	$	70.38
Floor							$	52.00	$	52.00

2009 – Collar Contracts with Short Puts
Volume (Bbl)								15,000		15,000
Price per Bbl:
Ceiling							$	69.72	$	69.72
Floor							$	51.47	$	51.47
Short Put							$	41.47	$	41.47

2010 – Swap Contracts
Volume (Bbl)		2,500		2,500		2,500		2,500		2,500
Price per Bbl	$	93.34	$	93.34	$	93.34	$	93.34	$	93.34

2010 – Collar Contracts with Short Puts
Volume (Bbl)		24,750		25,000		25,000		25,250		25,000
Price per Bbl:
Ceiling	$	83.57	$	83.61	$	83.61	$	83.74	$	83.63
Floor	$	66.20	$	66.24	$	66.24	$	66.28	$	66.24
Short	$	53.46	$	53.48	$	53.48	$	53.50	$	53.48

2011 – Swap Contracts
Volume (Bbl)		750		750		750		750		750
Price per Bbl	$	77.25	$	77.25	$	77.25	$	77.25	$	77.25

2011 – Collar Contracts
Volume (Bbl)		2,000		2,000		2,000		2,000		2,000
Price per Bbl:
Ceiling	$	170.00	$	170.00	$	170.00	$	170.00	$	170.00
Floor	$	115.00	$	115.00	$	115.00	$	115.00	$	115.00

2011 – Collar Contracts with Short Puts
Volume (Bbl)		25,000		25,000		25,000		25,000		25,000
Price per Bbl:
Ceiling	$	94.60	$	94.60	$	94.60	$	94.60	$	94.60
Floor	$	72.80	$	72.80	$	72.80	$	72.80	$	72.80
Short Put	$	58.52	$	58.52	$	58.52	$	58.52	$	58.52

2012 – Swap Contracts
Volume (Bbl)		3,000		3,000		3,000		3,000		3,000
Price per Bbl	$	79.32	$	79.32	$	79.32	$	79.32	$	79.32

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


2012 – Collar Contracts with Short Puts
Volume (Bbl)		1,000		1,000		1,000		1,000		1,000
Price per Bbl:
Ceiling	$	103.50	$	103.50	$	103.50	$	103.50	$	103.50
Floor	$	80.00	$	80.00	$	80.00	$	80.00	$	80.00
Short Put	$	65.00	$	65.00	$	65.00	$	65.00	$	65.00

2013 – Swap Contracts
Volume (Bbl)		3,000		3,000		3,000		3,000		3,000
Price per Bbl	$	81.02	$	81.02	$	81.02	$	81.02	$	81.02

2013 – Collar Contracts with Short Puts
Volume (Bbl)		1,250		1,250		1,250		1,250		1,250
Price per Bbl:
Ceiling	$	111.50	$	111.50	$	111.50	$	111.50	$	111.50
Floor	$	83.00	$	83.00	$	83.00	$	83.00	$	83.00
Short Put	$	68.00	$	68.00	$	68.00	$	68.00	$	68.00

(a)

Subsequent to September 30, 2009, the Company entered into additional collar contracts with short puts for (i) 2,000 Bbls per day of the Company’s 2010 production with a ceiling price of $86.50 per Bbl, a floor price of $75.00 per Bbl and a short put price of $60.00 per Bbl, (ii) 9,000 Bbls per day of the Company’s 2011 production with a ceiling price of $107.37 per Bbl, a floor price of $75.00 per Bbl and a short put price of $60.00 per Bbl and (iii) 4,000 Bbls per day of the Company’s 2012 production with a ceiling price of $107.50 per Bbl, a floor price of $80.00 per Bbl and a short put price of $65.00 per Bbl.

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production have been tied directly or indirectly to Mont Belvieu prices. The following table sets forth the volumes in Bbls under outstanding NGL derivative contracts and the weighted average Mont Belvieu-posted-prices per Bbl for those contracts as of September 30, 2009:


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily NGL production non-hedge derivatives:
2009 – Swap Contracts
Volume (Bbl)								3,750		3,750
Price per Bbl							$	34.28	$	34.28

2010 – Swap Contracts
Volume (Bbl)		1,250		1,250		1,250		1,250		1,250
Price per Bbl	$	47.36	$	47.37	$	47.38	$	47.38	$	47.38

2011 – Swap Contracts
Volume (Bbl)		750		750		750		750		750
Price per Bbl	$	34.65	$	34.65	$	34.65	$	34.65	$	34.65

2010 – Swap Contracts
Volume (Bbl)		750		750		750		750		750
Price per Bbl	$	35.03	$	35.03	$	35.03	$	35.03	$	35.03

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

Gas prices. All material physical sales contracts governing the Company’s gas production have been tied directly or indirectly to regional index prices where the gas is produced. The Company uses derivative contracts to mitigate gas price volatility and reduce basis risk between NYMEX prices and actual index prices upon which the gas is sold. The following table sets forth the volumes in MMBtus under outstanding gas derivative contracts and the weighted average index prices per MMBtu for those contracts as of September 30, 2009:


	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Outstanding Average
Average daily gas production non-hedge derivatives (a):
2009 – Swap Contracts
Volume (MMBtu)											137,500			137,500
Price per MMBtu										$	6.13		$	6.13

2009 – Collar Contracts
Volume (MMBtu)											20,000			20,000
Price per MMBtu:
Ceiling										$	5.90		$	5.90
Floor										$	4.00		$	4.00

2009 – Collar Contracts with Short Puts
Volume (MMBtu)											150,000			150,000
Price per MMBtu:
Ceiling										$	5.35		$	5.35
Floor										$	4.18		$	4.18
Short Put										$	3.18		$	3.18

2009 – Basis Swap Contracts
Volume (MMBtu)											285,000			285,000
Price per MMBtu										$	(0.96	)	$	(0.96	)

2010 – Swap Contracts
Volume (MMBtu)		177,500			177,500			127,500			127,500			152,295
Price per MMBtu	$	6.30		$	6.30		$	6.59		$	6.59		$	6.42

2010 – Collar Contracts
Volume (MMBtu)		30,000			30,000			30,000			30,000			30,000
Price per MMBtu:
Ceiling	$	7.52		$	7.52		$	7.52		$	7.52		$	7.52
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00

2010 – Collar Contracts with Short Puts
Volume (MMBtu)		95,000			95,000			95,000			95,000			95,000
Price per MMBtu:
Ceiling	$	7.94		$	7.94		$	7.94		$	7.94		$	7.94
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00
Short Put	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00

2010 – Basis Swap Contracts
Volume (MMBtu)		215,000			215,000			215,000			215,000			215,000
Price per MMBtu	$	(0.77	)	$	(0.77	)	$	(0.77	)	$	(0.77	)	$	(0.77	)

2011 – Swap Contracts
Volume (MMBtu)		2,500			2,500			2,500			2,500			2,500
Price per MMBtu	$	6.65		$	6.65		$	6.65		$	6.65		$	6.65

2011 – Collar Contracts with Short Puts
Volume (MMBtu)		175,000			175,000			175,000			175,000			175,000
Price per MMBtu:
Ceiling	$	8.69		$	8.69		$	8.69		$	8.69		$	8.69
Floor	$	6.36		$	6.36		$	6.36		$	6.36		$	6.36
Short Put	$	4.93		$	4.93		$	4.93		$	4.93		$	4.93

2011 – Basis Swap Contracts
Volume (MMBtu)		100,000			100,000			100,000			100,000			100,000
Price per MMBtu	$	(0.71	)	$	(0.71	)	$	(0.71	)	$	(0.71	)	$	(0.71	)

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


2012 – Swap Contracts
Volume (MMBtu)		2,500			2,500			2,500			2,500			2,500
Price per MMBtu	$	6.77		$	6.77		$	6.77		$	6.77		$	6.77

2012 – Collar Contracts with Short Puts
Volume (MMBtu)		50,000			50,000			50,000			50,000			50,000
Price per MMBtu:
Ceiling	$	8.81		$	8.81		$	8.81		$	8.81		$	8.81
Floor	$	6.25		$	6.25		$	6.25		$	6.25		$	6.25
Short Put	$	4.50		$	4.50		$	4.50		$	4.50		$	4.50

2012 – Basis Swap Contracts
Volume (MMBtu)		20,000			20,000			20,000			20,000			20,000
Price per MMBtu	$	(0.78	)	$	(0.78	)	$	(0.78	)	$	(0.78	)	$	(0.78	)

2013 – Swap Contracts
Volume (MMBtu)		2,500			2,500			2,500			2,500			2,500
Price per MMBtu	$	6.89		$	6.89		$	6.89		$	6.89		$	6.89

2013 – Basis Swap Contracts
Volume (MMBtu)		10,000			10,000			10,000			10,000			10,000
Price per MMBtu	$	(0.71	)	$	(0.71	)	$	(0.71	)	$	(0.71	)	$	(0.71	)

(a)	Subsequent to September 30, 2009, the Company unwound gas swap contracts for 24,795 MMBtu per day of the Company’s 2010 production at an average price of $5.56 per MMBtu.

Interest rate. During August 2009 and January 2008, the Company entered into interest rate swap contracts. The August 2009 contracts were fixed-for-variable-rate swaps on $50 million notional amount of debt at a weighted average fixed annual rate of 3.09 percent. The August 2009 contracts had an effective start date of August 2009 and were scheduled to terminate in August 2014. The January 2008 contracts were variable-for-fixed-rate swaps on $400 million notional amount of debt at a weighted average fixed annual rate of 2.87 percent, excluding any applicable margins. The January 2008 interest rate swaps had an effective start date of February 2008, with $200 million terminating during February 2010 and $200 million during February 2011. During October 2009, the Company terminated the $50 million notional amount, fixed-for-variable rate swap contracts and $111 million notional amount of the variable-for-fixed rate swap contracts. The resulting gains and losses from the terminated contracts completely offset and will have no impact on the Company’s 2009 results of operations

Hedge ineffectiveness. On February 1, 2009, the Company discontinued hedge accounting on all existing derivative contracts. As a result, the Company only recorded ineffectiveness during January 2009, which was nominal. During the three and nine months ended September 30, 2008, the Company recorded net ineffectiveness charges of $4.5 million and $2.6 million, respectively. Hedge ineffectiveness represents the ineffective portions of changes in the fair values of the Company’s cash flow hedging instruments. The primary causes of hedge ineffectiveness were changes in forecasted hedged sales volumes and commodity price correlations.

Tabular disclosure of derivative fair value. Effective February 1, 2009, the Company discontinued hedge accounting on all existing derivative instruments, and since that date forward has accounted for derivative instruments using the mark-to-market accounting method. All of the Company’s derivatives were made up of non-hedge derivatives as of September 30, 2009 and both hedge derivatives and non-hedge derivatives as of December 31, 2008.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The following tables provide disclosure of the Company’s derivative instruments:


Fair Value of Derivative Instruments as of September 30, 2009
	Asset Derivatives (a)			Liability Derivatives (a)
Type	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(in thousands)			(in thousands)
Derivatives not designated as hedging instruments
Commodity price derivatives	Derivatives - current	$	71,422	Derivatives - current	$	95,248
Interest rate derivatives	Derivatives - current		1,280	Derivatives - current		7,027
Commodity price derivatives	Derivatives - noncurrent		38,537	Derivatives - noncurrent		62,942
Interest rate derivatives	Derivatives - noncurrent		653	Derivatives - noncurrent		1,856

Total derivatives not designated as hedging instruments			111,892			167,073


Derivatives designated as hedging instruments (b)
Commodity price derivatives	Derivatives - current		—	Derivatives - current		21,114
Commodity price derivatives	Derivatives - noncurrent		—	Derivatives - noncurrent		4,284

Total derivatives designated as hedging instruments			—			25,398

Total derivatives		$	111,892		$	192,471


Fair Value of Derivative Instruments as of December 31, 2008
	Asset Derivatives (a)			Liability Derivatives (a)
Type	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(in thousands)			(in thousands)
Derivatives not designated as hedging instruments
Commodity price derivatives	Derivatives - current	$	3,606	Derivatives - current	$	20,233
Commodity price derivatives	Derivatives - noncurrent		3,972	Derivatives - noncurrent		—

Total derivatives not designated as hedging instruments			7,578			20,233


Derivatives designated as hedging instruments
Commodity price derivatives	Derivatives - current		57,367	Derivatives - current		24,195
Interest rate derivatives	Derivatives - current		—	Derivatives - current		6,484
Commodity price derivatives	Derivatives - noncurrent		68,622	Derivatives - noncurrent		17,165
Interest rate derivatives	Derivatives - noncurrent		—	Derivatives - noncurrent		3,419

Total derivatives designated as hedging instruments			125,989			51,263

Total derivatives		$	133,567		$	71,496

(a)	Derivative assets and liabilities shown in the tables above are presented as gross assets and liabilities, without regard to master netting arrangements which are considered in the presentations of derivative assets and liabilities in the accompanying consolidated balance sheets.

(b)	Represent derivative obligations under terminated hedge arrangements.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


		Amount of Gain/(Loss) Recognized in OCI on Effective Portion
Derivatives in Cash Flow Hedging Relationships		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships		2009			2008			2009			2008
		(in thousands)

Interest rate derivatives		$	—		$	(1,424	)	$	(433	)	$	3,677
Commodity price derivatives			—			617,321			4,968			(172,478	)

Total		$	—		$	615,897		$	4,535		$	(168,801	)


	Location of Gain/(Loss) Reclassified from AOCI into Earnings	Amount of Gain/(Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships		2009			2008			2009			2008
					(in thousands)

Interest rate derivatives	Interest expense	$	(1,621	)	$	(467	)	$	(5,893	)	$	(772	)
Commodity price derivatives	Oil and gas revenue		26,261			(144,030	)		96,173			(388,244	)

Total		$	24,640		$	(144,497	)	$	90,280		$	(389,016	)


	Location of Gain/(Loss) Recognized in Earnings on Ineffective Portion	Amount of Gain/(Loss) Recognized in Earnings on Ineffective Portion
		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships		2009			2008			2009			2008
		(in thousands)

Commodity price derivatives	Derivative losses, net	$	—		$	(4,493	)	$	—		$	(2,585	)

	Location of Gain/(Loss) Recognized in Earnings on Derivative	Amount of Gain/(Loss) Recognized in Earnings on Derivative
		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments		2009			2008			2009			2008
					(in thousands)

Interest rate derivatives	Interest expense	$	131		$	—		$	(3,120	)	$	—
Commodity price derivatives	Derivative losses, net		(15,353	)		634			(82,463	)		1,134

Total		$	(15,222	)	$	634		$	(85,583	)	$	1,134

AOCI - Hedging. The fair value of the effective portion of the Company’s derivative contracts that were designated as cash flow hedges on January 31, 2009 was recorded in AOCI-Hedging and is being transferred to oil and gas revenue (for commodity derivatives) and interest expense (for interest rate derivatives) over the remaining term of the contracts. In accordance with the mark-to-market method of accounting, the Company will recognize all future changes in the fair values of its derivative contracts as gains or losses in the earnings of the period in which the changes occur.

As of September 30, 2009 and December 31, 2008, AOCI - Hedging represented net deferred gains of $64.9 million and $88.8 million, respectively. The AOCI - Hedging balance as of September 30, 2009 was comprised of $142.2 million of net deferred gains on the effective portions of discontinued commodity hedges, $7.6 million of net deferred losses on the effective portions of discontinued interest rate hedges, $38.1 million of associated net deferred tax provisions and a charge for $31.6 million of AOCI – Hedging attributable to noncontrolling interests. The $23.9 million decrease in net deferred hedge gains comprising AOCI - Hedging during the nine months ended September 30, 2009 was primarily attributable to the transfer of net deferred hedge gains to earnings, partially offset by deferred fair value gains during January 2009 and a decrease in AOCI – Hedging attributable to noncontrolling interests. AOCI - Hedging attributable to noncontrolling interests represented $44.7 million of deferred gains, net of taxes as of December 31, 2008.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

During the twelve months ending September 30, 2010, the Company expects to reclassify approximately $92.0 million of AOCI – Hedging net deferred gains to oil and gas revenues and $4.4 million of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify approximately $32.4 million of net deferred income tax provisions associated with hedge derivatives during the year ending September 30, 2010 from AOCI - Hedging to income tax expense.

Discontinued commodity hedges. Effective on February 1, 2009, the Company discontinued all of its commodity and interest rates hedges and began accounting for the associated derivatives using the mark-to-market accounting method. Prior to February 1, 2009, the Company periodically discontinued commodity hedges by terminating the derivative positions when the underlying commodity prices reached a point that the Company believed would be near the high or low price of the commodity prior to the scheduled settlement of the open commodity position. This allowed the Company to lock in gains or minimize losses associated with the open hedge positions. At the time of hedge discontinuation, the amounts recorded in AOCI—Hedging are maintained and amortized to earnings over the periods the production was scheduled to occur.

The following table sets forth, as of September 30, 2009, the scheduled amortization of net deferred gains and (losses) on discontinued commodity hedges that will be recognized as increases or (decreases) to the Company’s future oil and gas revenues:


	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
	(in thousands)
2009 net deferred hedge gains										$	24,622		$	24,622
2010 net deferred hedge gains	$	21,700		$	22,029		$	22,353		$	22,417		$	88,499
2011 net deferred hedge gains	$	7,989		$	8,072		$	8,159		$	8,021		$	32,241
2012 net deferred hedge losses	$	(810	)	$	(791	)	$	(783	)	$	(773	)	$	(3,157	)

NOTE H. Asset Retirement Obligations

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company does not provide for a market risk premium associated with asset retirement obligations because a reliable estimate cannot be determined. The Company has no assets that are legally restricted for purposes of settling asset retirement obligations. The following table summarizes the Company’s asset retirement obligation transactions during the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)
Beginning asset retirement obligations	$	154,172		$	185,911		$	172,433		$	208,184
Liabilities assumed in acquisitions		—			756			—			777
New wells placed on production and changes in estimates (a)		1,202			1,592			16,568			(6,200	)
Liabilities reclassified to discontinued operations held for sale		—			—			(1,756	)		—
Disposition of wells		(491	)		—			(13,334	)		—
Liabilities settled		(15,587	)		(31,774	)		(40,562	)		(50,578	)
Accretion of discount on continuing operations		2,754			1,981			8,259			5,885
Accretion of discount on discontinued operations		88			199			530			597


Ending asset retirement obligations	$	142,138		$	158,665		$	142,138		$	158,665

(a)

During the nine months ended September 30, 2008, the Company recorded a $9.0 million decrease in the abandonment estimates and associated insurance recovery estimates for the East Cameron facility that was destroyed by Hurricane Rita in 2005. During the nine months ended September 30, 2009, the Company recorded a $16.2 million increase to the abandonment estimate associated with the East Cameron facility. See Note O for additional information regarding the East Cameron facility.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

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 September 30, 2009 and December 31, 2008, the current portions of the Company’s asset retirement obligations were $9.9 million and $29.9 million, respectively.

NOTE I. Postretirement Benefit Obligations

As of September 30, 2009 and December 31, 2008, the Company had $9.2 million and $9.6 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 consolidated balance sheets. These obligations are comprised of five plans of which four relate to predecessor entities that the Company acquired in prior years. These plans had no assets as of September 30, 2009 or December 31, 2008. Other than participants in the Company’s retirement plan, the participants of these plans are not current employees of the Company.

The following table reconciles changes in the Company’s unfunded accumulated postretirement benefit obligations during the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in thousands)

Beginning accumulated postretirement benefit obligations	$	9,364		$	10,341		$	9,612		$	10,494
Net benefit payments		(361	)		(599	)		(1,052	)		(1,162	)
Service costs		57			47			171			142
Accretion of interest		164			158			493			473


Ending accumulated postretirement benefit obligations	$	9,224		$	9,947		$	9,224		$	9,947

NOTE J. Commitments and Contingencies

Legal actions. The Company is party to the legal actions that are described below. The Company is also a party to other 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 other 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 will continue to evaluate its litigation on a quarter-by-quarter basis and will establish and adjust any litigation reserves as appropriate to reflect its assessment of the then current status of litigation.

MOSH Holding. On April 11, 2005, the Company and its principal United States subsidiary, Pioneer Natural Resources USA, Inc., were named as defendants in MOSH Holding, L.P. v Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc.; Woodside Energy (USA) Inc.; and JPMorgan Chase Bank, N.A., as Trustee of the Mesa Offshore Trust (the “Trust”), which was formerly pending before the Judicial District Court of Harris County, Texas (334th Judicial District) (the “Court”).

In April, 2009, the Company and all parties in the lawsuit reached an agreement to settle the lawsuit. Under the terms of the settlement agreement, the Company will pay to the Trust the sum of $13 million in exchange for a full and final release of all claims made or that could have been made in the lawsuit (the “Claims”). The Company will also contribute to the Trust any proceeds obtained from the Company’s sale of its complete interest, including its working interest, in the Brazos Block A-39 tract, which will be offered for sale in conjunction with the Trust’s sale of its assets.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

The settlement agreement is subject to customary conditions, including a condition that the settlement is not final until it is approved by the Court and the Court issues a final, non-appealable judgment disposing of all Claims. In September, 2009, the Court entered a final judgment approving the settlement and dismissing all Claims. Subsequently, certain unit-holders in the Trust filed an appeal in Texas state court seeking to reverse the Court’s final judgment. The settlement will not be final and completed until such appeal is dismissed and any other post-judgment proceedings are exhausted. Pioneer expects to prevail with respect to any such appeal or any other post-judgment proceedings attempting to avoid the settlement.

Colorado Notice of Violation. On May 13, 2008, the Company was served with a Notice of Violation/Cease and Desist Order by the State of Colorado Department of Public Health and Environmental Water Quality Control Division. The Notice alleges violations of stormwater discharge permits in the Company’s Raton Basin and Lay Creek operations, specifically deficiencies in the Company’s stormwater management plans, failure to implement and maintain best management practices to protect stormwater runoff and failure to conduct inspections of the stormwater management system. The Company has filed an answer to the Notice asserting defenses to the allegations. The Company does not believe that the outcome of this proceeding will materially impact the Company’s liquidity, financial position or future results of operations.

Obligations following divestitures. In April 2006, the Company provided the purchaser of its Argentine assets certain indemnifications. The Company remains responsible for certain contingent liabilities related to such indemnifications, subject to defined limitations. The Company does not believe that these obligations, which primarily pertain to matters of litigation, environmental contingencies, royalty obligations and income taxes, are probable of having a material impact on its liquidity, financial position or future results of operations.

The Company has also retained certain liabilities and indemnified buyers for certain matters in connection with other divestitures, including the sale in 2007 of its Canadian assets.

NOTE K. Earnings Per Share From Continuing Operations

Basic earnings per share from continuing operations is computed by dividing earnings from continuing operations attributable to common stockholders by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share from continuing operations reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to income from continuing operations were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company. During periods that the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would not be dilutive to loss per share and conversion into common stock is assumed not to occur.

The Company’s earnings from continuing operations attributable to common stockholders is computed as income (loss) from continuing operations less participating share-based earnings. The following table is a reconciliation of the Company’s income (loss) from continuing operations to income (loss) from continuing operations attributable to common stockholders for the three- and nine-month periods ended September 30, 2009 and 2008:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008
	(in thousands)

Income (loss) from continuing operations	$	(10,274	)	$	2,860	$	(110,365	)	$	280,088

Participating share-based earnings (a)		—			—		(94	)		(3,440	)

Income (loss) from continuing operations available to common stockholders	$	(10,274	)	$	2,860	$	(110,459	)	$	276,648

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

(a)

In accordance with ASC 260 (formerly FSP EITF 03-6-1), unvested restricted stock share awards and restricted stock unit awards represent participating securities because they participate in nonforfeitable dividends with the Company’s common stock. Participating share-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and restricted stock unit awards do not participate in undistributed net losses as they are not contractually obligated to do so.

The following table is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three- and nine-month periods ended September 30, 2009 and 2008:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2009	2008	2009	2008
	(in thousands)

Weighted average common shares outstanding (a):
Basic	114,123	118,110	114,118	118,136
Dilutive common stock options (b)	—	—	—	312
Contingently issuable - performance shares (b)	—	—	—	120
Convertible notes dilution (c)	—	—	—	197


Diluted	114,123	118,110	114,118	118,765

(a)

In 2007, the Company’s board of directors (“Board”) approved a $750 million share repurchase program of which $355.8 million remained available for purchase as of September 30, 2009. During the first nine months of 2009 and 2008, the Company purchased $16.3 million and $12.8 million of common stock pursuant to the program, respectively.

(b)

Diluted earnings per share were calculated using the two-class method for the three- and nine-months ended September 30, 2009 and 2008. The following common stock equivalents were excluded from the diluted loss per share calculations for the three and nine months ended September 30, 2009 because they would have been anti-dilutive to the calculations: 1,194,518 and 768,049 unvested restricted shares or restricted stock units, respectively; 180,124 and 154,946 outstanding options to purchase the Company’s common stock, respectively; and 203,835 and 126,091 performance units, respectively. Additionally, 1,594,793 unvested restricted shares or restricted stock units, 277,034 outstanding options to purchase the Company’s common stock and 276,544 performance units were excluded from the diluted loss per share calculation for the three months ended September 30, 2008 because they would have been anti-dilutive to the calculation.

(c)

During January 2008, the Company issued $500 million of 2.875% Convertible Senior Notes. Weighted average common shares outstanding have been increased to reflect the dilutive effect that would have resulted if the 2.875% Convertible Senior Notes had qualified for and been converted during the nine-months ended September 30, 2008. The 2.875% Convertible Senior Notes were not dilutive to the per share calculations of 2009 or the three months ended September 30, 2008.

NOTE L. Geographic Operating Segment Information

The Company’s only operations are oil and gas exploration and producing activities; however, the Company is organizationally structured along geographic operating segments or regions. The Company has reportable operations in the United States, South Africa and Tunisia.

The following tables provide the Company’s geographic operating segment data for the three and nine months ended September 30, 2009 and 2008. Geographic operating segment income tax (provisions) benefits have been determined based on statutory rates existing in the various tax jurisdictions where the Company has oil and gas producing activities. The “Headquarters” table column includes income and expenses that are not routinely included in the earnings measures internally reported to management on a geographic operating segment basis and operations in Equatorial Guinea and Nigeria, where the Company concluded exploration activities during 2007.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


	United States			South Africa			Tunisia			Headquarters			Consolidated Total
	(in thousands)
Three Months Ended September 30, 2009
Revenues and other income:
Oil and gas	$	350,034		$	20,836		$	39,099		$	—		$	409,969
Interest and other		—			—			—			503			503
Gain (loss) on disposition of assets, net		80			—			—			(465	)		(385	)

		350,114			20,836			39,099			38			410,087

Costs and expenses:
Oil and gas production		84,083			822			5,489			—			90,394
Production and ad valorem taxes		28,089			—			—			—			28,089
Depletion, depreciation and amortization		128,954			20,813			5,639			7,199			162,605
Exploration and abandonments		19,908			114			4,910			141			25,073
General and administrative		—			—			—			34,799			34,799
Accretion of discount on asset retirement obligations		—			—			—			2,754			2,754
Interest		—			—			—			43,438			43,438
Hurricane activity, net		1,830			—			—			—			1,830
Derivative losses, net		—			—			—			15,222			15,222
Other		9,702			—			—			11,661			21,363

		272,566			21,749			16,038			115,214			425,567

Income (loss) from continuing operations before income taxes		77,548			(913	)		23,061			(115,176	)		(15,480	)
Income tax benefit (provision)		(28,693	)		265			(12,227	)		45,861			5,206

Income (loss) from continuing operations	$	48,855		$	(648	)	$	10,834		$	(69,315	)	$	(10,274	)

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


	United States			South Africa			Tunisia			Headquarters			Consolidated Total
	(in thousands)
Three Months Ended September 30, 2008
Revenues and other income:
Oil and gas	$	499,606		$	33,418		$	67,389		$	—		$	600,413
Interest and other		—			—			—			2,285			2,285
Gain on disposition of assets, net		—			—			—			190			190

		499,606			33,418			67,389			2,475			602,888

Costs and expenses:
Oil and gas production		91,933			10,389			4,837			—			107,159
Production and ad valorem taxes		46,124			—			—			—			46,124
Depletion, depreciation and amortization		106,085			4,109			3,739			7,332			121,265
Impairment of oil and gas properties		89,753			—			—			—			89,753
Exploration and abandonments		99,613			—			8,074			1,733			109,420
General and administrative		—			—			—			31,622			31,622
Accretion of discount on asset retirement obligations		—			—			—			1,981			1,981
Interest		—			—			—			41,176			41,176
Hurricane activity, net		541			—			—			—			541
Derivative losses, net											3,858			3,858
Other		5,079			—			—			28,885			33,964

		439,128			14,498			16,650			116,587			586,863

Income (loss) from continuing operations before income taxes		60,478			18,920			50,739			(114,112	)		16,025
Income tax benefit (provision)		(22,377	)		(5,487	)		(29,268	)		43,967			(13,165	)

Income (loss) from continuing operations	$	38,101		$	13,433		$	21,471		$	(70,145	)	$	2,860

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


	United States			South Africa			Tunisia			Headquarters			Consolidated Total
	(in thousands)
Nine Months Ended September 30, 2009:
Revenues and other income:
Oil and gas	$	991,849		$	50,801		$	105,862		$	—		$	1,148,512
Interest and other		—			—			—			99,761			99,761
Gain (loss) on disposition of assets, net		87			—			—			(534	)		(447	)

		991,936			50,801			105,862			99,227			1,247,826

Costs and expenses:
Oil and gas production		257,580			4,763			23,274			—			285,617
Production and ad valorem taxes		79,503			—			—			—			79,503
Depletion, depreciation and amortization		414,135			57,812			15,706			21,769			509,422
Impairment of oil and gas properties		21,091			—			—			—			21,091
Exploration and abandonments		61,276			403			15,458			724			77,861
General and administrative		—			—			—			102,728			102,728
Accretion of discount on asset retirement obligations		—			—			—			8,259			8,259
Interest		—			—			—			128,051			128,051
Hurricane activity, net		18,280			—			—			—			18,280
Derivative losses, net		—			—			—			85,583			85,583
Other		48,852			—			3,768			36,847			89,467

		900,717			62,978			58,206			383,961			1,405,862

Income (loss) from continuing operations before income taxes		91,219			(12,177	)		47,656			(284,734	)		(158,036	)
Income tax benefit (provision)		(33,751	)		3,531			(26,911	)		104,802			47,671

Income (loss) from continuing operations	$	57,468		$	(8,646	)	$	20,745		$	(179,932	)	$	(110,365	)

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)


	United States		South Africa		Tunisia		Headquarters		Consolidated Total
	(in thousands)
Nine Months Ended September 30, 2008:
Revenues and other income:
Oil and gas	$	1,496,590	$	100,983	$	180,006	$	—	$	1,777,579
Interest and other		—		—		—		33,697		33,697
Gain on disposition of assets, net		513		—		—		4,255		4,768

		1,497,103		100,983		180,006		37,952		1,816,044

Costs and expenses:
Oil and gas production		254,464		28,738		14,097		—		297,299
Production and ad valorem taxes		129,670		—		—		—		129,670
Depletion, depreciation and amortization		294,009		13,152		9,116		21,876		338,153
Impairment of oil and gas properties		89,753		—		—		—		89,753
Exploration and abandonments		144,249		52		21,074		7,339		172,714
General and administrative		—		—		—		103,739		103,739
Accretion of discount on asset retirement obligations		—		—		—		5,885		5,885
Interest		—		—		—		123,124		123,124
Hurricane activity, net		2,400		—		—		—		2,400
Derivative losses, net		—		—		—		1,451		1,451
Other		19,657		—		—		34,496		54,153

		934,202		41,942		44,287		297,910		1,318,341

Income (loss) from continuing operations before income taxes		562,901		59,041		135,719

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company