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, 2010

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

For the transition period from to

Commission File Number: 1-13245

PIONEER NATURAL RESOURCES COMPANY

(Exact name of Registrant as specified in its charter)


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

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

(972) 444-9001

(Registrant’s telephone number, including area code)

Not applicable

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

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

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 October 27, 2010 116,096,190

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, 2010 and December 31, 2009		5

	Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009		7

	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2010		8

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		9

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2010 and 2009		10

	Notes to Consolidated Financial Statements		11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		53

Item 4.	Controls and Procedures		56

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		57

Item 1A.	Risk Factors		57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57

Item 6.	Exhibits		58

Signatures			59

Exhibit Index			60

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, availability of equipment, services and personnel required to complete the Company’s operating activities, access to and availability of 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 the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impact of climate change, 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 effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and “Part II, Item 1A. Risk Factors” in this Report and “Part I, Item 1. Business — Competition, Markets and Regulations,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

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 six thousand cubic feet of gas to one Bbl of oil or natural gas liquid.

•

“BOEPD” means BOE per day.

•

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

•

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

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

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

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

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

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

•

“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 employed in the determination of proved reserves 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)


	September 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	78,165		$	27,368
Accounts receivable:
Trade, net of allowance for doubtful accounts of $2,294 and $1,310 as of September 30, 2010 and December 31, 2009, respectively		211,066			330,711
Due from affiliates		650			1,037
Income taxes receivable		8,333			25,022
Inventories		182,238			139,177
Prepaid expenses		17,868			9,011
Deferred income taxes		—			26,857
Other current assets:
Derivatives		189,635			48,713
Other, net of allowance for doubtful accounts of $0 and $5,689 as of September 30, 2010 and December 31, 2009, respectively		1,521			8,222

Total current assets		689,476			616,118

Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties		10,794,371			10,276,244
Unproved properties		184,837			236,660
Accumulated depletion, depreciation and amortization		(3,312,709	)		(2,946,048	)

Total property, plant and equipment		7,666,499			7,566,856

Deferred income taxes		15,045			387
Goodwill		298,413			309,259
Other property and equipment, net		257,413			154,830
Other assets:
Derivatives		210,823			43,631
Other, net of allowance for doubtful accounts of $11,157 and $7,300 as of September 30, 2010 and December 31, 2009, respectively		159,451			176,184

	$	9,297,120		$	8,867,265

The financial information included as of September 30, 2010 has been prepared by management

without audit by independent registered public accountants.

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

PIONEER NATURAL RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)


	September 30, 2010			December 31, 2009
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	321,256		$	221,359
Due to affiliates		42,538			32,224
Interest payable		33,798			47,009
Income taxes payable		18,718			17,411
Deferred income taxes		52,043			128
Other current liabilities:
Derivatives		34,730			116,015
Deferred revenue		56,097			90,215
Other		37,041			46,830

Total current liabilities		596,221			571,191

Long-term debt		2,539,416			2,761,011
Derivatives		31,477			133,645
Deferred income taxes		1,694,575			1,470,899
Deferred revenue		53,400			87,021
Other liabilities		224,193			200,467
Stockholders’ equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 126,193,615 and 125,203,502 shares issued at September 30, 2010 and December 31, 2009, respectively		1,262			1,252
Additional paid-in capital		3,015,986			2,981,450
Treasury stock, at cost: 10,929,778 and 10,828,171 at September 30, 2010 and December 31, 2009, respectively		(422,107	)		(415,211	)
Retained earnings		1,430,566			917,688
Accumulated other comprehensive income–deferred hedge gains, net of tax		17,675			51,009

Total stockholders’ equity attributable to common stockholders		4,043,382			3,536,188
Noncontrolling interests in consolidating subsidiaries		114,456			106,843

Total stockholders’ equity		4,157,838			3,643,031
Commitments and contingencies

	$	9,297,120		$	8,867,265

The financial information included as of September 30, 2010 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,
	2010			2009			2010			2009
Revenues and other income:
Oil and gas	$	471,372		$	409,969		$	1,441,310		$	1,148,512
Interest and other		11,864			503			51,930			99,761
Derivative gains (losses), net		127,581			(15,222	)		570,585			(85,583	)
Gain (loss) on disposition of assets, net		2,383			(385	)		26,971			(447	)
Hurricane activity, net		3,452			(1,830	)		5,678			(18,280	)

		616,652			393,035			2,096,474			1,143,963

Costs and expenses:
Oil and gas production		104,339			90,394			291,348			285,617
Production and ad valorem taxes		33,045			28,089			85,444			79,503
Depletion, depreciation and amortization		152,838			162,605			453,920			509,422
Impairment of oil and gas properties		—			—			—			21,091
Exploration and abandonments		22,963			25,073			70,883			77,861
General and administrative		44,759			34,799			128,081			102,728
Accretion of discount on asset retirement obligations		2,626			2,754			8,218			8,259
Interest		45,002			43,438			137,893			128,051
Other		20,927			21,363			52,228			89,467

		426,499			408,515			1,228,015			1,301,999

Income (loss) from continuing operations before income taxes		190,153			(15,480	)		868,459			(158,036	)
Income tax benefit (provision)		(76,661	)		5,206			(331,828	)		47,671

Income (loss) from continuing operations		113,492			(10,274	)		536,631			(110,365	)
Income from discontinued operations, net of tax		1,082			12,107			27,238			13,868

Net income (loss)		114,574			1,833			563,869			(96,497	)
Net income attributable to the noncontrolling interests		(2,538	)		(8,998	)		(39,003	)		(12,269	)

Net income (loss) attributable to common stockholders	$	112,036		$	(7,165	)	$	524,866		$	(108,766	)

Basic earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	0.94		$	(0.17	)	$	4.23		$	(1.07	)
Income from discontinued operations attributable to common stockholders		0.01			0.11			0.23			0.12

Net income (loss) attributable to common stockholders	$	0.95		$	(0.06	)	$	4.46		$	(0.95	)

Diluted earnings per share:
Income (loss) from continuing operations attributable to common stockholders	$	0.93		$	(0.17	)	$	4.20		$	(1.07	)
Income from discontinued operations attributable to common stockholders		0.01			0.11			0.23			0.12

Net income (loss) attributable to common stockholders	$	0.94		$	(0.06	)	$	4.43		$	(0.95	)

Weighted average shares outstanding:
Basic		115,191			114,123			114,985			114,118

Diluted		116,021			114,123			115,832			114,118

Dividends declared per share	$	0.04		$	0.04		$	0.08		$	0.08

Amounts attributable to common stockholders:
Income (loss) from continuing operations	$	110,954		$	(19,272	)	$	497,628		$	(122,634	)
Income from discontinued operations, net of tax		1,082			12,107			27,238			13,868

Net income (loss)	$	112,036		$	(7,165	)	$	524,866		$	(108,766	)

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, 2009		114,375		$	1,252	$	2,981,450		$	(415,211	)	$	917,688		$	51,009		$	106,843		$	3,643,031
Dividends declared ($0.08 per share)		—			—		—			—			(9,469	)		—			—			(9,469	)
Exercise of long-term incentive plan stock options and employee stock purchases		236			1		2,577			6,677			(2,519	)		—			—			6,736
Treasury stock purchases		(275	)		—		—			(13,573	)		—			—			(203	)		(13,776	)
Tax benefit related to stock-based compensation		—			—		4,032			—			—			—			—			4,032
Compensation costs:
Vested compensation awards, net		928			9		(8	)		—			—			—			—			1
Compensation costs included in net income		—			—		27,935			—			—			—			964			28,899
Cash contributions from noncontrolling interests		—			—		—			—			—			—			1,151			1,151
Cash distributions to noncontrolling interests		—			—		—			—			—			—			(20,160	)		(20,160	)
Net income		—			—		—			—			524,866			—			39,003			563,869
Other comprehensive loss:
Deferred hedging activity, net of tax:
Net hedge gains included in continuing operations		—			—		—			—			—			(33,334	)		(13,142	)		(46,476	)

Balance as of September 30, 2010		115,264		$	1,262	$	3,015,986		$	(422,107	)	$	1,430,566		$	17,675		$	114,456		$	4,157,838

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,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	563,869		$	(96,497	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		453,920			509,422
Impairment of oil and gas properties		—			21,091
Exploration expenses, including dry holes		16,771			40,699
Hurricane activity, net		3,500			16,200
Deferred income taxes		300,303			(67,397	)
(Gain) loss on disposition of assets, net		(26,971	)		447
Accretion of discount on asset retirement obligations		8,218			8,259
Discontinued operations		8,626			(5,373	)
Interest expense		22,567			20,694
Derivative related activity		(549,387	)		48,305
Amortization of stock-based compensation		28,631			29,319
Amortization of deferred revenue		(67,739	)		(110,901	)
Other noncash items		9,620			30,664
Change in operating assets and liabilities
Accounts receivable, net		97,873			71,074
Income taxes receivable		16,689			44,762
Inventories		(6,459	)		(52,069	)
Prepaid expenses		(8,975	)		(6,900	)
Other current assets		2,162			98,532
Accounts payable		62,349			(94,238	)
Interest payable		(13,211	)		(14,766	)
Income taxes payable		1,307			9,127
Other current liabilities		(21,941	)		(89,629	)

Net cash provided by operating activities		901,722			410,825

Cash flows from investing activities:
Proceeds from disposition of assets		297,742			24,247
Additions to oil and gas properties		(714,014	)		(319,928	)
Additions to other assets and other property and equipment, net		(147,930	)		(17,310	)

Net cash used in investing activities		(564,202	)		(312,991	)

Cash flows from financing activities:
Borrowings under long-term debt		199,784			386,269
Principal payments on long-term debt		(438,894	)		(434,269	)
Contributions from noncontrolling interests		1,151			150
Distributions to noncontrolling interests		(20,160	)		(15,042	)
Payments of other liabilities		(20,668	)		(1,069	)
Exercise of long-term incentive plan stock options		6,736			7,955
Purchases of treasury stock		(13,776	)		(21,813	)
Excess tax (costs) benefits from share-based payment arrangements		4,032			(3,583	)
Payment of financing fees		(145	)		(4,475	)
Dividends paid		(4,783	)		(4,679	)

Net cash used in financing activities		(286,723	)		(90,556	)

Net increase in cash and cash equivalents		50,797			7,278
Cash and cash equivalents, beginning of period		27,368			48,337

Cash and cash equivalents, end of period	$	78,165		$	55,615

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,
	2010			2009			2010			2009
Net income (loss)	$	114,574		$	1,833		$	563,869		$	(96,497	)

Other comprehensive loss:
Hedge fair value changes, net		—			—			—			12,974
Net hedge gains included in continuing operations		(21,913	)		(24,640	)		(63,536	)		(90,280	)
Income tax provision		5,988			6,025			17,060			38,999

Other comprehensive loss		(15,925	)		(18,615	)		(46,476	)		(38,307	)

Comprehensive income (loss)		98,649			(16,782	)		517,393			(134,804	)

Comprehensive (income) loss attributable to noncontrolling interest		1,898			(3,417	)		(25,860	)		853

Comprehensive income (loss) attributable to common stockholders	$	100,547		$	(20,199	)	$	491,533		$	(133,951	)

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, 2010

(Unaudited)

NOTE A. Organization and Nature of Operations

Pioneer Natural Resources Company (“Pioneer” or the “Company”) is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company 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, 2010 and for the three and nine months ended September 30, 2010 and 2009 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted in this Report pursuant to the rules and regulations of the United States Securities and Exchange Commission (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, 2009.

Discontinued operations. During June and August 2009, the Company sold its oil and gas properties in Mississippi and substantially all of its shelf properties in the Gulf of Mexico, respectively. In accordance with GAAP, the Company classified the results of operations of the Mississippi and shelf properties in the Gulf of Mexico as discontinued in its accompanying consolidated statements of operations for the three and nine months ended September 30, 2009.

During the fourth quarter of 2009, the Company recorded a $119.3 million receivable from the United States Department of Interior Minerals Management Service (the “MMS,” now the Bureau of Ocean Energy Management, Regulation, and Enforcement) for the recovery of excess royalties paid by the Company on qualifying deepwater leases in the Gulf of Mexico. During the nine months ended September 30, 2010, the MMS paid the Company the $119.3 million receivable plus an additional $35.3 million of associated interest on the excess royalty payments. The properties that were the source of these royalty and interest recoveries were sold by the Company during 2006. Accordingly, the interest income was recorded as a component of income from discontinued operations, net of tax in the accompanying consolidated statement of operations for the nine months ended September 30, 2010. See Note S for additional information about discontinued operations.

Allowances for doubtful accounts. As of September 30, 2010 and December 31, 2009, the Company’s allowances for doubtful accounts totaled $13.5 million and $14.3 million, respectively. Changes in the Company’s allowance for doubtful accounts during the three and nine months ended September 30, 2010 are summarized in the following table:


	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
	(in thousands)

Beginning allowance for doubtful accounts balance	$	13,104		$	14,299
Amount recorded in other expense for bad debt expense		358			328
Other net decreases		(11	)		(1,176	)


Ending allowance for doubtful accounts balance	$	13,451		$	13,451

Inventories. Inventories consisted of $205.9 million and $205.6 million of materials and supplies and $3.9 million and $3.2 million of commodities as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company’s materials and supplies inventory was net of $7.1 million and $5.2 million, respectively, of valuation reserve allowances. As of September 30, 2010 and December 31, 2009, the Company estimated that $27.6 million and $69.6 million, respectively, of its materials and supplies inventory would not be utilized or sold within one year. Accordingly, those inventory values have been classified as other noncurrent assets in the accompanying consolidated balance sheets.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Derivatives and hedging. Changes in the fair values of 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 of its then-existing hedge contracts. Changes in the fair value of effective cash flow hedges prior to the Company’s discontinuance of hedge accounting were recorded as a component of 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 transferred to earnings during the same periods in which the hedged transactions are recognized in the Company’s earnings. Since February 1, 2009, the Company has recognized all changes in the fair values of its derivative contracts as gains or losses in the earnings of the periods in which they occur.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and master netting counterparty. 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 and Pioneer Southwest Energy Partners L.P.’s (“Pioneer Southwest,” a majority-owned and consolidated subsidiary) credit-adjusted risk-free rate curves. The credit-adjusted risk-free rate curves for the Company and the counterparties are based on their independent market-quoted credit default swap rate curves plus the United States Treasury Bill yield curve as of the valuation date. Pioneer Southwest’s credit-adjusted risk-free rate curve is based on independent market-quoted forward London Interbank Offered Rate (“LIBOR”) curves plus 250 basis points, representing Pioneer Southwest’s estimated borrowing rate.

Goodwill. During June 2010, the Company sold 45 percent of its interests in South Texas Eagle Ford Shale oil and gas properties and substantially all of its oil and gas properties in the Uinta/Piceance area. Associated therewith, the Company reduced its goodwill attributable to the sold properties by $10.7 million. Tax benefits associated with the exercise of fully-vested stock options assumed in conjunction with the business combination for which the goodwill is attributable also reduced its carrying value by $222 thousand during 2010. 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 2010, the Company performed its annual assessment of goodwill impairment and determined that there was no impairment.

Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 61.9 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.

During January 2010, Pioneer Natural Resources USA, Inc. (“PNR USA,” a wholly-owned subsidiary of the Company) formed Sendero Drilling Company, LLC (“Sendero”). Sendero was formed to own and operate land-based drilling rigs in the United States. As of September 30, 2010, Sendero owns nine drilling rigs operating under contract to PNR USA in the Spraberry field in the West Texas Permian Basin. PNR USA is the majority owner of Sendero.

In addition to Pioneer Southwest and Sendero, 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 $114.5 million and $106.8 million as of September 30, 2010 and December 31, 2009, respectively. The Company recorded net income attributable to the noncontrolling interests of $2.5 million and $39.0 million for the three and nine months ended September 30, 2010, respectively (principally related to Pioneer Southwest), compared to $9.0 million and $12.3 million for the three and nine months ended September 30, 2009, respectively.

Investment in unconsolidated affiliate. During the second quarter of 2010, the Company formed EFS Midstream LLC (“EFS Midstream”) to own and operate natural gas and liquids gathering, treating and transportation assets in the Eagle Ford Shale area of South Texas. During June 2010, the Company sold a 49.9 percent member interest in EFS Midstream to an unaffiliated third party for $46.4 million of cash proceeds. Associated therewith, the Company recorded a $46.3 million deferred gain that will be amortized as a reduction in production costs over a 20 year period, representing the term of a continuing commitment of Pioneer to deliver production volumes through EFS Midstream handling and gathering facilities. The deferred gain is included in other current and noncurrent liabilities in the Company’s accompanying consolidated balance sheet as of September 30, 2010.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The Company does not have voting control of EFS Midstream. Consequently, the Company accounts for this investment under the equity method of accounting for investments in unconsolidated affiliates. Under the equity method, the Company’s investment in unconsolidated affiliates is increased for investments made and the investor’s share of the investee’s net income, and decreased for distributions received, the carrying value of member interests sold and the investor’s share of the investee’s net losses. The Company’s investment in unconsolidated affiliates is included in other noncurrent assets in the accompanying consolidated balance sheets.

Stock-based compensation. For stock-based compensation equity 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 amount of compensation expense recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. 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, (iii) the Monte Carlo simulation method for the fair value of performance unit awards and (iv) a probabilistic forecasted fair value method for series B unit awards issued by Sendero.

Stock-based compensation liability awards are awards that are expected to be settled wholly or partially in cash on their vesting dates, rather than in equity shares or units. Stock-based liability awards are recorded as accounts payable – affiliates based on the vested portion of the fair value of the awards on the balance sheet date. The fair values of liability awards are updated at each balance sheet date and changes in the fair values of the vested portions of the awards are recorded as increases or decreases to compensation expense. During February and August of 2010, the Company issued 208,620 and 20,935 restricted stock awards, respectively, to employees that represent liability awards, of which 11,161 liability awards have been forfeited or lapsed since the award dates. As of September 30, 2010, account payable – affiliates includes $2.6 million of liabilities attributable to the liability awards.

For the three and nine months ended September 30, 2010, the Company recorded $11.0 million and $31.6 million, respectively, of stock-based compensation costs for all plans, as compared to $10.1 million and $29.3 million for the same respective periods of 2009.

In accordance with GAAP, the Company’s issued shares, as reflected in the consolidated balance sheets at September 30, 2010 and December 31, 2009, do not include 827,861 and 979,493 common shares, respectively, associated with unvested stock-based compensation awards that have voting rights.

The following table summarizes all Pioneer equity and liability stock-based awards, lapses, exercises and forfeitures that occurred during the nine months ended September 30, 2010:


	Restricted Stock Awards			Performance Units		Stock Options

Outstanding at December 31, 2009		2,999,370			347,031		596,033
Awards (a)		741,131			74,482		116,120
Lapsed restrictions		(827,229	)		—		—
Exercises		—			—		(173,441	)
Forfeitures		(84,356	)		—		(1,799	)

Outstanding at September 30, 2010		2,828,916			421,513		536,913

(a)	Restricted stock awards include 218,394 of liability awards.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Subsidiary issuances of unit-based compensation. During the nine months ended September 30, 2010, Pioneer Natural Resources GP LLC (the “General Partner”), the general partner of Pioneer Southwest, awarded phantom units to certain members of management of the General Partner under Pioneer Southwest’s long-term incentive plan (the “Phantom Units”). The Phantom Units entitle the recipients to receive 35,118 common units of Pioneer Southwest after a three-year vesting period. Associated therewith, Pioneer Southwest and the Company recorded $147 thousand of compensation expense during the nine months ended September 30, 2010. During the nine months ended September 30, 2010, the General Partner awarded 8,744 Pioneer Southwest restricted common units to the independent directors of the General Partner and restrictions on 13,653 Pioneer Southwest common unit director awards lapsed. There were no forfeitures of Pioneer Southwest restricted common units during the nine months ended September 30, 2010.

During the nine months ended September 30, 2010, Sendero entered into Restricted Unit Agreements with two key employees, relating to series B units in Sendero. The series B unit awards vest over a five-year period and do not earn equity rights unless certain defined performance conditions are achieved by Sendero. Associated therewith, the Company recorded $765 thousand of compensation expense during the nine months ended September 30, 2010.

As of September 30, 2010, there was $62.6 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $11.8 million attributable to liability awards. 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. Effective December 31, 2009, the Company adopted the SEC’s final rule on “Modernization of Oil and Gas Reporting” (the “Reserve Ruling”) and the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) 2010-03, which conforms ASC 932 to the Reserve Ruling. Among the items, the Reserve Ruling and ASU 2010-03 require companies to report oil and gas reserves using an average price based upon the prior 12-month period rather than a period-end price.

During February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855).” ASU No. 2010-09 amends Accounting Standards Codification (“ASC”) Topic 855 to include the definition of “SEC filer” and alleviate the obligation of SEC filers to disclose the date through which subsequent events have been evaluated. ASU No. 2010-09 became effective during February 2010. See Note T for the Company’s disclosure about subsequent events.

During January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820).” ASU No. 2010-06 amends ASC Topic 820 to (i) require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, (ii) require separate disclosure of purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), (iii) clarify the level of disaggregation for fair value measurements of assets and liabilities and (iv) clarify disclosures about inputs and valuation techniques used to measure fair values for both recurring and nonrecurring fair value measurements. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. See Note D for the Company’s disclosures about fair value measurements.

During July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310).” ASU No. 2010-20 amends ASC Topic 310 to provide enhanced disclosures related to (i) the nature of credit risk inherent in an entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. ASU No. 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company is currently assessing the impact that adoption of ASU No. 2010-20 will have on its disclosures.

NOTE C. Exploratory Costs

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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The following table reflects the Company’s capitalized exploratory well and project activity during the three and nine months ended September 30, 2010:


	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
	(in thousands)

Beginning capitalized exploratory costs	$	151,431		$	127,574
Additions to exploratory costs pending the determination of proved reserves		50,177			164,302
Reclassification due to determination of proved reserves		(57,321	)		(132,063	)
Disposition of assets sold		—			(15,526	)


Ending capitalized exploratory costs	$	144,287		$	144,287

The following table provides an aging, as of September 30, 2010 and December 31, 2009 of capitalized exploratory costs and the number of projects for which exploratory costs have been capitalized for a period greater than one year, based on the date drilling was completed:


	September 30, 2010		December 31, 2009
	(in thousands, except project counts)
Capitalized exploratory costs that have been suspended:
One year or less	$	40,696	$	21,634
More than one year		103,591		105,940


	$	144,287	$	127,574


Number of projects with exploratory costs that have been suspended for a period greater than one year		4		8

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, 2010:


	Total		2010		2009		2008		2007			2006
	(in thousands)
U.S. – Cosmopolitan Unit	$	78,033	$	11,119	$	8,253	$	6,344	$	51,488		$	829
Tunisia		25,558		209		274		21,145		(15	)		3,945

Total	$	103,591	$	11,328	$	8,527	$	27,489	$	51,473		$	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. The Company drilled a lateral sidetrack during 2007 from an existing wellbore on an onshore site to further appraise the resource potential of the unit. The initial unstimulated production test results were encouraging. The Company performed casing repair workover operations on the well during the fourth quarter of 2009, fracture-stimulated the well during the first quarter of 2010 and concluded flow testing during the second quarter of 2010. The Company will continue to conduct permitting activities and facilities planning and may drill another appraisal well during 2011.

Tunisia – Cherouq. The Company has $17.8 million of suspended well costs recorded for the Hayatt #1 well in the Company’s Cherouq production concession area, which is operated by the Company. The Hayatt #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 has project personnel at appropriate levels committed to and actively participating in 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 Hayatt #1 completion plans in early 2011 and execute the well completion during 2011.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Tunisia – Borj El Khadra. The Company has $7.8 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 third-party operator and the Company have project personnel at appropriate levels committed to and actively participating in infrastructure planning and assessment of the area. During the first nine months of 2010, a $13.8 million 3-D seismic program was initiated and future plans include the drilling of an additional exploration well in the area during the fourth quarter of 2010. Additionally, project personnel are evaluating the feasibility of using production handling facilities on a nearby production concession to transport Abir #1 production to sales markets.

NOTE D. Disclosures About Fair Value Measurements

In accordance with GAAP, fair value measurements are 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.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2010, for each of the fair value hierarchy levels:


	Fair Value Measurements at Reporting Date Using						Fair Value at September 30, 2010
	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, 2010
	(in thousands)

Assets:
Trading securities	$	298	$	102	$	—	$	400
Commodity derivatives		—		367,783		502		368,285
Interest rate derivatives		—		32,173		—		32,173
Deferred compensation plan assets		32,896		—		—		32,896

Total assets	$	33,194	$	400,058	$	502	$	433,754


Liabilities:
Commodity derivatives	$	—	$	59,665	$	4,835	$	64,500
Interest rate derivatives		—		1,707		—		1,707
Pioneer Southwest credit facility		—		71,019		—		71,019
5.875% senior notes due 2016		470,185		—		—		470,185
6.65% senior notes due 2017		511,781		—		—		511,781
6.875% senior notes due 2018		478,718		—		—		478,718
7.50% senior notes due 2020		496,687		—		—		496,687
7.20% senior notes due 2028		255,000		—		—		255,000
2.875% senior convertible notes due 2038 (a)		601,200		—		—		601,200

Total liabilities	$	2,813,571	$	132,391	$	4,835	$	2,950,797

(a)	The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege. On the issuance date, the conversion privilege was valued at $81.1 million.

The following tables present the changes in the fair values of the Company’s natural gas liquid (“NGL”) derivative liabilities classified as Level 3 in the fair value hierarchy:


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Three Months Ended September 30, 2010
	NGL Swap Contracts
	(in thousands)
Beginning asset balance	$	4,639
Total gains and losses:
Net unrealized losses included in earnings (a)		(7,131	)
Net realized losses transferred to earnings (a)		(566	)
Settlement receipts		(1,275	)

Ending liability balance	$	(4,333	)

(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 hedge gains and losses are included in net derivative gains or losses in the accompanying consolidated statements of operations.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)	Nine Months Ended September 30, 2010
	NGL Swap Contracts			Notes Receivable			Total
	(in thousands)

Beginning asset (liability) balance	$	(12,904	)	$	4,727		$	(8,177	)
Total gains and losses:
Net unrealized gains included in earnings (a)		14,073			—			14,073
Net realized losses transferred to earnings (a)		(4,417	)		—			(4,417	)
Notes receivable valuation allowance recoveries included in earnings (b)		—			187			187
Settlement receipts (c)		(1,085	)		(4,914	)		(5,999	)

Ending asset balance	$	(4,333	)	$	—		$	(4,333	)

(a)

(b)	The valuation allowance recoveries associated with the Company’s notes receivable are included in other expense in the accompanying consolidated statements of operations.

(c)	During the first quarter of 2010, the Company took possession of a drilling rig that represented $3.0 million of collateral value associated with its notes receivable.

The following table presents the carrying amounts and fair values of the Company’s financial instruments as of September 30, 2010 and December 31, 2009:


	September 30, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)

Assets:
Commodity price derivatives	$	368,285	$	368,285	$	84,080	$	84,080
Interest rate derivatives	$	32,173	$	32,173	$	8,264	$	8,264
Trading securities	$	400	$	400	$	335	$	335
Deferred compensation plan assets	$	32,896	$	32,896	$	27,890	$	27,890
Notes receivable	$	—	$	—	$	4,727	$	4,727
Liabilities:
Commodity price derivatives	$	64,500	$	64,500	$	223,555	$	223,555
Interest rate derivatives	$	1,707	$	1,707	$	26,105	$	26,105
Pioneer credit facility	$	—	$	—	$	240,000	$	259,461
Pioneer Southwest credit facility	$	74,000	$	71,019	$	67,000	$	61,718
5.875 % senior notes due 2012	$	—	$	—	$	6,168	$	6,154
5.875 % senior notes due 2016	$	394,871	$	470,185	$	389,109	$	437,170
6.65 % senior notes due 2017	$	484,011	$	511,781	$	483,914	$	472,546
6.875 % senior notes due 2018	$	449,184	$	478,718	$	449,161	$	438,402
7.50 % senior notes due 2020	$	446,366	$	496,687	$	446,172	$	449,566
7.20 % senior notes due 2028	$	249,925	$	255,000	$	249,924	$	230,868
2.875% senior convertible notes due 2038 (a)	$	441,058	$	601,200	$	429,563	$	508,320

(a)	The fair value of the 2.875% senior convertible notes includes the fair value of the conversion privilege. On the issuance date, the conversion privilege was valued at $81.1 million.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Trading securities and deferred compensation plan assets. The Company’s trading securities represent securities that are both actively traded and not actively traded on major exchanges. The Company’s deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges plus unallocated contributions as of the measurement date. As of September 30, 2010, all significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs except inputs for certain trading securities that are not actively traded on major exchanges, which were provided by broker quotes representing Level 2 inputs.

Interest rate derivatives. The Company’s interest rate derivative assets and liabilities as of September 30, 2010 represent (i) swap contracts for $189 million notional amount of debt, whereby the Company pays a fixed rate of interest and the counterparty pays a variable LIBOR-based rate and (ii) swap contracts for $470 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 asset values attributable to the Company’s interest rate derivative contracts as of September 30, 2010 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 and liability measurements represent Level 2 inputs in the hierarchy priority.

Commodity derivatives. The Company’s commodity derivatives represent oil, NGL and gas swap contracts, collar contracts and collar contracts with short puts (which are also known as three-way 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 and 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 barrels (“Bbls”) of oil at fixed (in the case of swap contracts) or interval (in the case of collar and three-way collar contracts) New York Mercantile Exchange (“NYMEX”) West Texas Intermediate (“WTI”) oil prices and Dated Brent oil prices. The asset and liability values attributable to the Company’s oil derivatives as of September 30, 2010 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, (iii) independent active market-quoted futures Dated Brent price quotes, (iv) the applicable estimated 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 average volatility factors provided by certain independent brokers who are active in buying and selling oil options and were corroborated by market-quoted volatility factors.

NGL derivatives. The Company’s NGL derivatives include swap and collar contracts for notional blended Bbls of Mont Belvieu-posted-price NGLs or NGL component prices per Bbl. The asset and liability values attributable to the Company’s NGL derivatives as of September 30, 2010 are based on (i) the contracted notional volumes, (ii) independent active market-quoted NGL component prices and (iii) the applicable credit-adjusted risk-free rate yield curve. The implied rates of volatility inherent in the Company’s collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling NGL options and were corroborated by market-quoted volatility factors. As of December 31, 2009, the Company’s NGL component price inputs were obtained from independent brokers active in buying and selling NGL derivative contracts.

Gas derivatives. The Company’s gas derivatives are swap, collar and three-way collar contracts for notional volumes of gas (expressed in millions of British thermal units “MMBtus”) 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, 2010 are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH gas, (iii) independent market-quoted forward index prices, (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 and three-way collar contracts were determined based on average volatility factors provided by certain independent brokers who are active in buying and selling gas options and were corroborated by market-quoted volatility factors.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Credit facilities. The fair value of Pioneer Southwest’s credit facility is based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted LIBOR rate yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. Since there are no outstanding borrowings on Pioneer’s credit facility, the fair value is nil at September 30, 2010.

Senior notes. The Company’s senior notes represent debt securities that are actively traded on major exchanges. The fair values of the Company’s senior notes are based on their periodic values as quoted on the major exchanges.

NOTE E. Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC Topic 740, which 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 carry forwards (“NOLs”) and other deferred tax attributes in the U.S., state, local and foreign tax jurisdictions will be utilized prior to their expiration. As of September 30, 2010 and December 31, 2009, the Company’s valuation allowances (relating primarily to foreign tax jurisdictions) were $38.9 million and $44.2 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, 2010, the Company had no significant 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, 2010, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company’s liquidity, future results of operations or financial position.

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, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Current:
U.S. federal	$	(1,550	)	$	(1,335	)	$	(4,850	)	$	(934	)
U.S. state		(1,520	)		(2,206	)		(4,644	)		(9,142	)
Foreign		(16,340	)		(8,708	)		(22,031	)		(9,650	)

		(19,410	)		(12,249	)		(31,525	)		(19,726	)


Deferred:
U.S. federal		(66,125	)		15,273			(268,921	)		68,796
U.S. state		(6,854	)		3,696			(23,354	)		9,460
Foreign		15,728			(1,514	)		(8,028	)		(10,859	)

		(57,251	)		17,455			(300,303	)		67,397

Income tax (provision) benefit	$	(76,661	)	$	5,206		$	(331,828	)	$	47,671

NOTE F. Long-term Debt

Senior notes redemption. On March 15, 2010, the Company redeemed for cash all of its outstanding 5.875% senior notes due 2012 for $6.3 million, which represented the outstanding principal plus accrued and unpaid interest.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Credit facility repayment. During the second quarter of 2010, the Company repaid its outstanding borrowings under the Pioneer credit facility.

As of September 30, 2010, the Company and Pioneer Southwest were in compliance with all of their debt covenants.

NOTE G. Derivative Financial Instruments

The Company uses financial derivative contracts to manage exposures to commodity price, interest rate and foreign currency exchange rate fluctuations. The Company generally does not enter into derivative financial instruments for speculative or trading purposes. The Company may also enter into 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 derivatives 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. The Company accounts for derivative instruments under mark-to-market accounting rules, which require that all changes in the fair values of the Company’s derivative contracts be recognized 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 February 1, 2009 discontinuance of hedge accounting were recorded as a component of AOCI – Hedging, which is being 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, 2010 and December 31, 2009, the Company was not a party to any fair value hedges.

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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Oil prices. All material physical sales contracts governing the Company’s oil production are tied directly or indirectly to NYMEX WTI or Dated Brent oil prices. The following table sets forth the volumes in Bbls outstanding as of September 30, 2010 under the Company’s oil derivative contracts and the weighted average NYMEX or Dated Brent prices per Bbl for those contracts:


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily oil production derivatives (a):
2010 – Swap contracts
Volume (Bbl)								2,500		2,500
Price per Bbl							$	93.34	$	93.34

2010 – Collar contracts with short puts
Volume (Bbl)								30,250		30,250
Price per Bbl:
Ceiling							$	85.09	$	85.09
Floor							$	68.38	$	68.38
Short put							$	55.23	$	55.23

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)		32,000		32,000		32,000		32,000		32,000
Price per Bbl:
Ceiling	$	99.33	$	99.33	$	99.33	$	99.33	$	99.33
Floor	$	73.75	$	73.75	$	73.75	$	73.75	$	73.75
Short put	$	59.31	$	59.31	$	59.31	$	59.31	$	59.31

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

2012 – Collar contracts with short puts
Volume (Bbl)		31,000		31,000		31,000		31,000		31,000
Price per Bbl:
Ceiling	$	119.70	$	119.70	$	119.70	$	119.70	$	119.70
Floor	$	80.48	$	80.48	$	80.48	$	80.48	$	80.48
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)		21,250		21,250		21,250		21,250		21,250
Price per Bbl:
Ceiling	$	117.38	$	117.38	$	117.38	$	117.38	$	117.38
Floor	$	80.18	$	80.18	$	80.18	$	80.18	$	80.18
Short put	$	65.18	$	65.18	$	65.18	$	65.18	$	65.18

(a)	Subsequent to September 30, 2010, the Company entered into additional collar contracts with short puts for 6,000 Bbls per day of the Company’s 2012 production with a ceiling price of $111.33 per Bbl, a floor price of $80.00 per Bbl and a short put price of $65.00 per Bbl.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Natural gas liquids prices. All material physical sales contracts governing the Company’s NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities’ NGL product component prices. The following table sets forth the volumes in Bbls outstanding as of September 30, 2010 under the Company’s NGL derivative contracts and the weighted average NGL prices per Bbl for those contracts:


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily NGL production derivatives:
2010 – Swap contracts
Volume (Bbl)								1,650		1,650
Price per Bbl							$	40.85	$	40.85

2010 – Collar contracts
Volume (Bbl)								2,000		2,000
Price per Bbl:
Ceiling							$	49.98	$	49.98
Floor							$	41.58	$	41.58

2010 – Collar contracts with short puts
Volume (Bbl)								2,000		2,000
Price per Bbl:
Ceiling							$	58.92	$	58.92
Floor							$	47.64	$	47.64
Short put							$	38.71	$	38.71

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

2011 – Collar contracts
Volume (Bbl)		1,000		1,000		1,000		1,000		1,000
Price per Bbl:
Ceiling	$	50.93	$	50.93	$	50.93	$	50.93	$	50.93
Floor	$	42.21	$	42.21	$	42.21	$	42.21	$	42.21

2012 – Swap contracts
Volume (Bbl)		750		750		750		750		750
Price per Bbl	$	35.03	$	35.03	$	35.03	$	35.03	$	35.03

Gas prices. All material physical sales contracts governing the Company’s gas production are tied directly or indirectly to regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and reduce basis risk between NYMEX Henry Hub prices and actual index prices upon which the gas is sold. The following table sets forth the volumes in MMBtus outstanding as of September 30, 2010 under the Company’s gas derivative contracts and the weighted average index prices per MMBtu for those contracts:

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Outstanding Average
Average daily gas production derivatives:
2010 – Swap contracts
Volume (MMBtu)											167,500			167,500
Price per MMBtu										$	6.26		$	6.26

2010 – Collar contracts
Volume (MMBtu)											40,000			40,000
Price per MMBtu:
Ceiling										$	7.19		$	7.19
Floor										$	5.75		$	5.75

2010 – Collar contracts with short puts
Volume (MMBtu)											95,000			95,000
Price per MMBtu:
Ceiling										$	7.94		$	7.94
Floor										$	6.00		$	6.00
Short put										$	5.00		$	5.00

2010 – Basis swap contracts
Volume (MMBtu)											245,109			245,109
Price per MMBtu										$	(0.69	)	$	(0.69	)

2011 – Swap contracts
Volume (MMBtu)		117,500			117,500			117,500			117,500			117,500
Price per MMBtu	$	6.13		$	6.13		$	6.13		$	6.13		$	6.13

2011 – Collar contracts with short puts
Volume (MMBtu)		200,000			200,000			200,000			200,000			200,000
Price per MMBtu:
Ceiling	$	8.55		$	8.55		$	8.55		$	8.55		$	8.55
Floor	$	6.32		$	6.32		$	6.32		$	6.32		$	6.32
Short put	$	4.88		$	4.88		$	4.88		$	4.88		$	4.88

2011 – Basis swap contracts
Volume (MMBtu)		133,500			133,500			133,500			133,500			133,500
Price per MMBtu	$	(0.58	)	$	(0.58	)	$	(0.58	)	$	(0.58	)	$	(0.58	)

2012 – Swap contracts
Volume (MMBtu)		105,000			105,000			105,000			105,000			105,000
Price per MMBtu	$	5.82		$	5.82		$	5.82		$	5.82		$	5.82

2012 – Collar contracts
Volume (MMBtu)		65,000			65,000			65,000			65,000			65,000
Price per MMBtu:
Ceiling	$	6.60		$	6.60		$	6.60		$	6.60		$	6.60
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00

2012 – Collar contracts with short puts
Volume (MMBtu)		190,000			190,000			190,000			190,000			190,000
Price per MMBtu:
Ceiling	$	7.96		$	7.96		$	7.96		$	7.96		$	7.96
Floor	$	6.12		$	6.12		$	6.12		$	6.12		$	6.12
Short put	$	4.55		$	4.55		$	4.55		$	4.55		$	4.55

2012 – Basis swap contracts
Volume (MMBtu)		116,000			116,000			116,000			116,000			116,000
Price per MMBtu	$	(0.37	)	$	(0.37	)	$	(0.37	)	$	(0.37	)	$	(0.37	)

2013 – Swap contracts
Volume (MMBtu)		67,500			67,500			67,500			67,500			67,500
Price per MMBtu	$	6.11		$	6.11		$	6.11		$	6.11		$	6.11

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


2013 – Collar contracts
Volume (MMBtu)		100,000			100,000			100,000			100,000			100,000
Price per MMBtu:
Ceiling	$	6.50		$	6.50		$	6.50		$	6.50		$	6.50
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00

2013 – Collar contracts with short puts
Volume (MMBtu)		45,000			45,000			45,000			45,000			45,000
Price per MMBtu:
Ceiling	$	7.49		$	7.49		$	7.49		$	7.49		$	7.49
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00
Short put	$	4.50		$	4.50		$	4.50		$	4.50		$	4.50

2013 – Basis swap contracts
Volume (MMBtu)		32,500			32,500			32,500			32,500			32,500
Price per MMBtu	$	(0.34	)	$	(0.34	)	$	(0.34	)	$	(0.34	)	$	(0.34	)

2014 – Swap contracts
Volume (MMBtu)		50,000			50,000			50,000			50,000			50,000
Price per MMBtu	$	6.05		$	6.05		$	6.05		$	6.05		$	6.05

2014 – Collar contracts
Volume (MMBtu)		20,000			20,000			20,000			20,000			20,000
Price per MMBtu:
Ceiling	$	7.20		$	7.20		$	7.20		$	7.20		$	7.20
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00

2014 – Collar contracts with short puts
Volume (MMBtu)		50,000			50,000			50,000			50,000			50,000
Price per MMBtu:
Ceiling	$	8.08		$	8.08		$	8.08		$	8.08		$	8.08
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00
Short put	$	4.50		$	4.50		$	4.50		$	4.50		$	4.50

2014 – Basis swap contracts
Volume (MMBtu)		10,000			10,000			10,000			10,000			10,000
Price per MMBtu	$	(0.16	)	$	(0.16	)	$	(0.16	)	$	(0.16	)	$	(0.16	)

Interest rates. The following table sets forth as of September 30, 2010 the notional amount of the Company’s debt under outstanding variable-for-fixed and fixed-for-variable interest rate swap contracts, the weighted average fixed annual interest rate and termination date for those contracts:

Type

Notional
Amount

Weighted
Average Fixed
Interest Rate

Termination
Date

(in thousands)

Variable-for-fixed

189,000

3.0 percent

February 2011

Fixed-for-variable

400,000

2.87 percent

July 2016

Fixed-for-variable

70,000

3.23 percent

March 2017

Tabular disclosure of derivative financial instruments. All of the Company’s derivatives are accounted for as non-hedge derivatives as of September 30, 2010 and December 31, 2009, except for $4.4 million and $17.9 million of net obligations on terminated hedges, respectively. The following tables provide disclosure of the Company’s derivative instruments:

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


Fair Value of Derivative Instruments as of September 30, 2010
	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	$	201,339	Derivatives - current	$	51,612
Interest rate derivatives	Derivatives - current		11,739	Derivatives - current		2,149
Commodity price derivatives	Derivatives - noncurrent		206,342	Derivatives - noncurrent		47,872
Interest rate derivatives	Derivatives - noncurrent		22,599	Derivatives - noncurrent		1,723

Total derivatives not designated as hedging instruments			442,019			103,356

Derivatives designated as hedging instruments (b)
Commodity price derivatives	Derivatives - current		118	Derivatives - current		4,530

Total derivatives designated as hedging instruments			118			4,530

Total derivatives		$	442,137		$	107,886


Fair Value of Derivative Instruments as of December 31, 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	$	66,442	Derivatives - current	$	120,112
Interest rate derivatives	Derivatives - current		9,450	Derivatives - current		5,169
Commodity price derivatives	Derivatives - noncurrent		48,341	Derivatives - noncurrent		116,233
Interest rate derivatives	Derivatives - noncurrent		2,192	Derivatives - noncurrent		24,314

Total derivatives not designated as hedging instruments			126,425			265,828

Derivatives designated as hedging instruments (b)
Commodity price derivatives	Derivatives - current		—	Derivatives - current		17,913

Total derivatives designated as hedging instruments			—			17,913

Total derivatives		$	126,425		$	283,741

(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.


Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in AOCI on Effective Portion
	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(in thousands)

Interest rate derivatives	$	—	$	—	$	—	$	(433	)
Commodity price derivatives		—		—		—		13,407

Total	$	—	$	—	$	—	$	12,974

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


Derivatives in Cash Flow Hedging Relationships	Location of Gain/(Loss) Reclassified from AOCI into Earnings	Amount of Gain/(Loss) Reclassified from AOCI into Earnings
		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
		(in thousands)

Interest rate derivatives	Interest expense	$	(63	)	$	(1,621	)	$	(1,633	)	$	(5,893	)
Interest rate derivatives	Derivative gains (losses), net		—			—			(2,465	)		—
Commodity price derivatives	Oil and gas revenue		21,976			26,261			67,634			96,173

Total		$	21,913		$	24,640		$	63,536		$	90,280


Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Earnings on Derivatives	Amount of Gain (Loss) Recognized in Earnings on Derivatives
		Three Months Ended September 30,					Nine Months Ended September 30,
		2010		2009			2010		2009
		(in thousands)

Interest rate derivatives	Derivative gains (losses), net	$	14,848	$	131		$	52,564	$	(3,120	)
Commodity price derivatives	Derivative gains (losses), net		112,733		(15,353	)		520,486		(82,463	)

Total		$	127,581	$	(15,222	)	$	573,050	$	(85,583	)

AOCI – Hedging. As of September 30, 2010 and December 31, 2009, AOCI – Hedging represented net deferred gains of $17.7 million and $51.0 million, respectively. The AOCI – Hedging balance as of September 30, 2010 was comprised of $51.2 million of net deferred gains on the effective portions of discontinued commodity hedges, $2.0 million of net deferred losses on the effective portions of discontinued interest rate hedges and $13.3 million of associated net deferred tax provisions, reduced by $18.2 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

During the twelve months ending September 30, 2011, the Company expects to reclassify $46.0 million of AOCI – Hedging net deferred gains to oil and gas revenues (including $14.8 million related to noncontrolling interests) and $203 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $12.6 million of net deferred income tax provisions associated with hedge derivatives during the twelve months ending September 30, 2011 from AOCI – Hedging to income tax expense. For the remaining three months of 2010 and the year ending December 31, 2011, the Company expects to reclassify deferred gains on discontinued commodity hedges of $21.4 million and $32.9 million, respectively, to oil and gas revenues. During 2012, the Company expects to reclassify deferred losses on commodity hedges of $3.1 million to oil and gas revenues. The $2.0 million of net deferred hedge losses on the effective portion of interest rate hedges will be transferred from AOCI-Hedging to interest expense ratably through April 2018.

NOTE H. Asset Retirement Obligations

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. The Company has no assets that are legally restricted for purposes of settling asset retirement obligations.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The following table summarizes the Company’s asset retirement obligation activity during the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Beginning asset retirement obligations	$	137,181		$	154,172		$	166,434		$	172,433
Liabilities assumed in acquisitions		—			—			6			—
New wells placed on production and changes in estimates		2,356			1,202			7,000			16,568
Liabilities reclassified to discontinued operations held for sale		—			—			—			(1,756	)
Disposition of wells		(131	)		(491	)		(29,671	)		(13,334	)
Liabilities settled		(6,141	)		(15,587	)		(16,096	)		(40,562	)
Accretion of discount from continuing operations		2,626			2,754			8,218			8,259
Accretion of discount from discontinued operations		—			88			—			530


Ending asset retirement obligations	$	135,891		$	142,138		$	135,891		$	142,138

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, 2010 and December 31, 2009, the current portions of the Company’s asset retirement obligations were $6.5 million and $13.9 million, respectively.

NOTE I. Postretirement Benefit Obligations

As of September 30, 2010 and December 31, 2009, the Company had $8.7 million and $9.1 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities in the accompanying 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, 2010 or December 31, 2009. 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, 2010 and September 30, 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Beginning accumulated postretirement benefit obligations	$	8,968		$	9,364		$	9,075		$	9,612
Net benefit payments		(543	)		(361	)		(1,127	)		(1,052	)
Service costs		80			57			241			171
Net actuarial losses		100			—			200			—
Accretion of interest		108			164			324			493


Ending accumulated postretirement benefit obligations	$	8,713		$	9,224		$	8,713		$	9,224

NOTE J. Commitments and Contingencies

Legal actions. In addition to the legal action described below, the Company is 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.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

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 “Division”). The Notice alleges violations of stormwater discharge permits in the Company’s Raton Basin and former 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 is in advanced discussions with the Division to resolve this matter and does not believe that the outcome of this proceeding will materially impact the Company’s liquidity, financial position or future results of operations.

Investigation by the Alaska Oil and Gas Conservation Commission (the “AOGCC”). During the second quarter of 2010, the AOGCC commenced an investigation into allegations by a former Pioneer employee regarding the Company’s Oooguruk facility on the North Slope of Alaska. Among the allegations are claims that the Company did not have authorization to inject certain non-hazardous substances into its enhanced oil recovery well, that the Company mishandled disposal of waste products and that the Company’s operating practices are harmful to the project’s oil reservoirs. Upon initially becoming aware of the allegations, the Company informed the AOGCC and other relevant federal, state and local agencies and commenced its own investigation, which confirmed injections of non-hazardous fluids into the Oooguruk enhanced oil recovery well without prior authorizations to do so. The results of the investigation have been reported to the agencies, and the Company is cooperating with the AOGCC’s investigation. Although the investigation into the allegations is ongoing, based on the facts as known to date, the Company believes that the outcome of this investigation will not materially and negatively affect 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. Net Income (Loss) Per Share Attributable To Common Stockholders

The Company’s basic net income (loss) per share attributable to common stockholders is computed as (i) net income (loss) attributable to common stockholders, (ii) less participating share- and unit-based basic earnings (iii) divided by weighted average basic shares outstanding. The Company’s diluted net income (loss) per share attributable to common stockholders is computed as (i) basic net income (loss) attributable to common stockholders, (ii) plus diluted adjustments to participating undistributed earnings (iii) divided by weighted average diluted shares outstanding. During periods in which the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would not be dilutive to loss per share and conversion into common stock is assumed not to occur.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The following table is a reconciliation of the Company’s net income (loss) attributable to common stockholders to basic net income (loss) attributable to common stockholders and to diluted net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Net income (loss) attributable to common stockholders	$	112,036		$	(7,165	)	$	524,866		$	(108,766	)
Participating basic distributed earnings (a)		(18	)		—			(125	)		(94	)
Participating basic undistributed earnings (a)		(2,672	)		—			(11,895	)		—

Basic net income (loss) attributable to common stockholders		109,346			(7,165	)		512,846			(108,860	)
Diluted adjustments to share- and unit-based earnings (a)		19			—			128			—


Diluted net income (loss) attributable to common stockholders	$	109,365		$	(7,165	)	$	512,974		$	(108,860	)

(a)

In accordance with ASC 260, unvested restricted stock awards and Pioneer Southwest phantom unit awards represent participating securities because they participate in nonforfeitable dividends or distributions with the common equity owners of the Company or Pioneer Southwest, as applicable. Participating share- and unit-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards and phantom 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 months ended September 30, 2010 and 2009:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(in thousands)

Weighted average common shares outstanding (a):
Basic		115,191		114,123		114,985		114,118
Dilutive common stock options (b)		168		—		218		—
Contingently issuable - performance shares (b)		662		—		629		—


Diluted		116,021		114,123		115,832		114,118

(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 purchases as of September 30, 2010. During the first nine months of 2010, the Company did not purchase any common stock pursuant to the program. During the first nine months of 2009, the Company purchased $16.3 million of common stock pursuant to the program.

(b)

Diluted earnings per share were calculated using the two-class method for the three and nine months ended September 30, 2010 and 2009. 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.

NOTE L. Geographic Operating Segment Information

The Company has reportable operations in only one industry segment, that being the oil and gas exploration and production industry; however, the Company is organizationally structured along geographic operating segments or regions. The Company has reportable continuing operations in the United States, South Africa and Tunisia.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The following tables provide the Company’s geographic operating segment data for the three and nine months ended September 30, 2010 and 2009. 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.


	United States			South Africa			Tunisia			Headquarters			Consolidated Total
	(in thousands)

Three Months Ended September 30, 2010
Revenues and other income:
Oil and gas	$	416,108		$	21,299		$	33,965		$	—		$	471,372
Interest and other		—			—			—			11,864			11,864
Derivative gains, net		—			—			—			127,581			127,581
Gain (loss) on disposition of assets, net		2,429			—			—			(46	)		2,383
Hurricane activity, net		3,452			—			—			—			3,452

		421,989			21,299			33,965			139,399			616,652

Costs and expenses:
Oil and gas production		99,711			1,000			3,628			—			104,339
Production and ad valorem taxes		33,045			—			—			—			33,045
Depletion, depreciation and amortization		119,726			18,338			5,576			9,198			152,838
Exploration and abandonments		21,308			302			1,353			—			22,963
General and administrative		—			—			—			44,759			44,759
Accretion of discount on asset retirement obligations		1,899			622			105			—			2,626
Interest		—			—			—			45,002			45,002
Other		9,682			—			—			11,245			20,927

		285,371			20,262			10,662			110,204			426,499

Income from continuing operations before income taxes		136,618			1,037			23,303			29,195			190,153
Income tax provision		(50,549	)		(290	)		(12,101	)		(13,721	)		(76,661	)

Income from continuing operations	$	86,069		$	747		$	11,202		$	15,474		$	113,492

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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
Derivative losses, net		—			—			—			(15,222	)		(15,222	)
Gain (loss) on disposition of assets, net		80			—			—			(465	)		(385	)
Hurricane activity, net		(1,830	)		—			—			—			(1,830	)

		348,284			20,836			39,099			(15,184	)		393,035

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		2,014			637			103			—			2,754
Interest		—			—			—			43,438			43,438
Other		9,702			—			—			11,661			21,363

		272,750			22,386			16,141			97,238			408,515

Income (loss) from continuing operations before income taxes		75,534			(1,550	)		22,958			(112,422	)		(15,480	)
Income tax benefit (provision)		(27,948	)		450			(12,227	)		44,931			5,206

Income (loss) from continuing operations	$	47,586		$	(1,100	)	$	10,731		$	(67,491	)	$	(10,274	)

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


	United States			South Africa			Tunisia			Headquarters			Consolidated Total
	(in thousands)

Nine Months Ended September 30, 2010
Revenues and other income:
Oil and gas	$	1,264,315		$	67,182		$	109,813		$	—		$	1,441,310
Interest and other		—			—			—			51,930			51,930
Derivative gains, net		—			—			—			570,585			570,585
Gain (loss) on disposition of assets, net		27,408			—			—			(437	)		26,971
Hurricane activity, net		5,678			—			—			—			5,678

		1,297,401			67,182			109,813			622,078			2,096,474

Costs and expenses:
Oil and gas production		278,154			2,672			10,522			—			291,348
Production and ad valorem taxes		85,444			—			—			—			85,444
Depletion, depreciation and amortization		353,090			58,677			17,593			24,560			453,920
Exploration and abandonments		60,773			428			9,354			328			70,883
General and administrative		—			—			—			128,081			128,081
Accretion of discount on asset retirement obligations		6,043			1,866			309			—			8,218
Interest		—			—			—			137,893			137,893
Other		30,233			—			—			21,995			52,228

		813,737			63,643			37,778			312,857			1,228,015

Income from continuing operations before income taxes		483,664			3,539			72,035			309,221			868,459
Income tax provision		(178,956	)		(991	)		(37,653	)		(114,228	)		(331,828	)

Income from continuing operations	$	304,708		$	2,548		$	34,382		$	194,993		$	536,631

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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
Derivative losses, net		—

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