| PIONEER NATURAL RESOURCES CO Regulations”, “Item 1A Risk Factors” and “Item 7A Quantitative and Qualitative Disclosures About Market Risk” for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements |
| The Company undertakes no duty to publicly update these statements except as required by law |
| 2 _________________________________________________________________ [93]Table of Contents 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 6dtta0 Mcf of gas to 1dtta0 Bbl of oil or natural gas liquid |
| • “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 |
| • “field fuel” means gas consumed to operate field equipment (primarily compressors) prior to the gas being delivered to a sales point |
| • “GAAP” means accounting principles that are generally accepted in the United States of America |
| • “LIBOR” means London Interbank Offered Rate, which is a market rate of interest |
| • “Mcf” means one thousand cubic feet and is a measure of natural gas volume |
| • “MMcf” means one million cubic feet |
| • “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 |
| • “proved reserves” mean the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, ie, prices and costs as of the date the estimate is made |
| Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions |
| (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test |
| The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data |
| In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir |
| (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the “proved” classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based |
| (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as “indicated additional reserves”; (B) crude oil, natural gas and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (C) crude oil, natural gas and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources |
| • “SEC” means the United States Securities and Exchange Commission |
| • “Standardized Measure” means the after-tax present value of estimated future net revenues of proved reserves, determined in accordance with the rules and regulations of the SEC, using prices and costs in effect at the specified date and a 10 percent discount rate |
| • 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 US dollars |
| BUSINESS General Pioneer is a Delaware corporation whose common stock is listed and traded on the NYSE The Company is a large independent oil and gas exploration and production company with operations in the United States, Argentina, Canada, Equatorial Guinea, Nigeria, South Africa and Tunisia |
| The Company’s executive offices are located at 5205 N O’Connor Blvd, Suite 900, Irving, Texas 75039 |
| The Company maintains other offices in Anchorage, Alaska; Denver, Colorado; Midland, Texas; Buenos Aires, Argentina; Calgary, Canada; London, England; Lagos, Nigeria; Capetown, South Africa and Tunis, Tunisia |
| At December 31, 2005, the Company had 1cmam694 employees, 912 of whom were employed in field and plant operations |
| Available Information Pioneer files or furnishes annual, quarterly and current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”) |
| The public may read and copy any materials that Pioneer files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 |
| The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 |
| Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Pioneer, that file electronically with the SEC The public can obtain any documents that Pioneer files with the SEC at http://www |
| The Company also makes available free of charge on or through its internet website (www |
| com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC In 2005, the Company submitted the annual certification of its Chief Executive Officer regarding the Company’s compliance with the NYSE’s corporate governance listing standards, pursuant to Section 303A12(a) of the NYSE Listed Company Manual |
| Evergreen Merger On September 28, 2004, Pioneer completed a merger with Evergreen Resources, Inc |
| Pioneer acquired the common stock of Evergreen for a total purchase price of approximately dlra1dtta8 billion, which was comprised of cash and Pioneer common stock |
| Evergreen was a publicly-traded independent oil and gas company primarily engaged in the production, development, exploration and acquisition of North American unconventional natural gas |
| Evergreen’s operations were principally focused on developing and expanding its coal bed methane (“CBM”) field located in the Raton Basin in southern Colorado |
| Evergreen also had operations in the Piceance Basin in western Colorado, the Uinta Basin in eastern Utah and the Western Canada Sedimentary Basin |
| Financial Statements and Supplementary Data” for more information regarding the Evergreen merger |
| Mission and Strategies The Company’s mission is to enhance shareholder investment returns through strategies that maximize Pioneer’s long-term profitability and net asset value |
| The strategies employed to achieve this mission are predicated on maintaining financial flexibility and capital allocation discipline |
| These strategies are anchored by the Company’s long-lived Spraberry oil field and Hugoton, Raton and West Panhandle gas fields’ reserves and production which have an estimated remaining productive life in excess of 40 years |
| Underlying these fields are approximately 78 percent of the Company’s proved oil and gas reserves as of December 31, 2005 |
| 4 _________________________________________________________________ [95]Table of Contents Recent strategic initiatives |
| During September 2005, the Company announced that its board of directors (the “Board”) approved significant strategic initiatives intended to enhance shareholder value and investment returns |
| Together with other important initiatives, the Board approved: • A dlra1 billion share repurchase program, dlra650 million of which was immediately initiated and substantially completed during 2005 and dlra350 million of which is subject to the completion of the planned deepwater Gulf of Mexico and Argentina divestitures discussed below |
| • A plan to divest the Company’s assets in the Tierra del Fuego area in southern Argentina |
| The plan was later broadened to include entertaining offers for a complete sale of all of the Company’s Argentine assets |
| During January 2006, Pioneer entered into an agreement to sell its assets in Argentina for dlra675 million |
| • A plan to divest the Company’s assets in the deepwater Gulf of Mexico |
| Bids to purchase the properties were received in January 2006 and the Company is currently engaged in negotiations for the sale of these assets |
| The implementation of the Board’s strategic initiatives is allowing Pioneer to (i) allocate and focus its investment capital more heavily towards predictable oil and gas basins in North America that have delivered relatively strong and consistent growth and (ii) lower its risk profile by expanding North American unconventional resource investments while reducing higher-risk exploration expenditures |
| The divestiture of the Company’s Argentine oil and gas assets will allow the Company to leverage the current commodity price environment to monetize and exit operations in an area that has become characterized by lower operating margins, government-controlled pricing and modest production growth opportunities |
| The divestiture of the Company’s deepwater Gulf of Mexico assets, if successful, will also allow the Company to monetize and exit operations in an area that is characterized by escalating drilling and operating costs and relatively high exploration risk and production volatility |
| During 2006, the Company plans to: (i) selectively explore for and develop proved reserve discoveries in areas that it believes will offer superior reserve growth and profitability potential; (ii) evaluate opportunities to acquire oil and gas properties that will complement the Company’s exploration and development drilling activities; (iii) invest in the personnel and technology necessary to maximize the Company’s exploration and development successes; and (iv) enhance liquidity, allowing the Company to take advantage of future exploration, development and acquisition opportunities |
| The Company is committed to continuing to enhance shareholder investment returns through adherence to these strategies |
| Business Activities The Company is an independent oil and gas exploration and production company |
| Pioneer’s purpose is to competitively and profitably explore for, develop and produce oil, NGL and gas reserves |
| In so doing, the Company sells homogenous oil, NGL and gas units which, except for geographic and relatively minor qualitative differentials, cannot be significantly differentiated from units offered for sale by the Company’s competitors |
| Competitive advantage is gained in the oil and gas exploration and development industry by employing experienced management and staff that will lead the Company to prudent capital investment decisions, technological innovation and price and cost management |
| Petroleum industry |
| The petroleum industry has generally been characterized by rising oil, NGL and gas commodity prices during 2005 and recent years |
| During 2005, the Company has also been affected by increasing costs, particularly higher drilling and well servicing rig rates and drilling supplies |
| During recent years, world oil prices have increased in response to increases in demand in Asian economies, hurricane activity in the Gulf of Mexico and supply disruptions and threatened disruptions in the Middle East and Venezuela |
| North American gas prices have improved as overall demand fundamentals have strengthened while supply uncertainties still remain |
| Significant factors that will impact 2006 commodity prices include developments in the issues currently impacting Iraq and Iran and the Middle East in general; the extent to which members of the Organization of Petroleum Exporting Countries (“OPEC”) and other oil exporting nations are able to continue to manage oil supply through export quotas; and overall North American gas supply and demand fundamentals |
| To mitigate the impact of commodity price volatility on the Company’s net asset value, Pioneer utilizes commodity hedge contracts |
| See 5 _________________________________________________________________ [96]Table of Contents “Item 7A Quantitative and Qualitative Disclosures About Market Risk” and Note J of Notes to Consolidated Financial Statements included in “Item 8 |
| Financial Statements and Supplementary Data” for information regarding the impact to oil and gas revenues during 2005, 2004 and 2003 from the Company’s hedging activities and the Company’s open hedge positions at December 31, 2005 |
| The Company’s asset base is anchored by the Spraberry oil field located in West Texas, the Hugoton gas field located in Southwest Kansas, the Raton gas field located in southern Colorado and the West Panhandle gas field located in the Texas Panhandle |
| Complementing these areas, the Company has exploration and development opportunities and/or oil and gas production activities in the Gulf of Mexico, the onshore Gulf Coast area and in Alaska, and internationally in Argentina, Canada, Equatorial Guinea, Nigeria, South Africa and Tunisia |
| Combined, these assets create a portfolio of resources and opportunities that are well balanced among oil, NGLs and gas, and that are also well balanced between long-lived, dependable production and exploration and development opportunities |
| Additionally, the Company has a team of dedicated employees that represent the professional disciplines and sciences that will allow Pioneer to maximize the long-term profitability and net asset value inherent in its physical assets |
| The Company provides administrative, financial and management support to United States and foreign subsidiaries that explore for, develop and produce oil, NGL and gas reserves |
| Production operations are principally located domestically in Texas, Kansas, Colorado, Louisiana, Utah and the Gulf of Mexico, and internationally in Argentina, Canada, South Africa and Tunisia |
| The Company focuses its efforts towards maximizing its average daily production of oil, NGLs and gas through development drilling, production enhancement activities and acquisitions of producing properties while minimizing the controllable costs associated with the production activities |
| During the year ended December 31, 2005, the Company’s average daily production, on a BOE basis, decreased as a result of (i) production curtailments in the Gulf of Mexico resulting from 2004 and 2005 hurricane damages, (ii) production curtailment in the United States Mid-Continent area during mid-May through mid-July due to the fire at the Company’s Fain gas plant and (iii) full production of recoverable reserves from the Harrier field in the deepwater Gulf of Mexico during the third quarter of 2005 |
| Partially offsetting these decreases in production volumes were (i) a full year of gas production from the properties acquired in the Evergreen merger, (ii) increased production from the Company’s Devils Tower oil field in the deepwater Gulf of Mexico despite hurricane disruptions, (iii) increased production from the Company’s Raptor and Tomahawk gas fields in the deepwater Gulf of Mexico and (iv) increased production from the Company’s Argentine and Canadian subsidiaries, primarily in response to increased development drilling |
| Production, price and cost information with respect to “Item 1A Risk Factors-Acquisitions” |
| Asset divestitures |
| The Company regularly reviews its asset base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities and create organizational and operational efficiencies |
| While the Company generally does not dispose of assets solely for the purpose of reducing debt, such dispositions can have the result of furthering the Company’s objective of increasing financial flexibility through reduced debt levels |
| During September 2005, the Company announced that the Board had approved a series of strategic initiatives, including a plan to divest the Company’s nonoperated Tierra del Fuego interests in southern Argentina and the Company’s deepwater Gulf of Mexico portfolio |
| During the Argentine sale process, the Company had indications from several potential buyers that they could enhance their value for a transaction in Argentina if it included all of the Company’s properties |
| Consequently, the Company expressed its willingness to entertain offers for a complete exit from Argentina |
| During January 2006, the Company announced signing an agreement with Apache Corporation to sell all of its assets in Argentina for dlra675 million, subject to normal closing adjustments |
| The sale to Apache Corporation is expected to close during the latter part of the first quarter or in early April of 2006 |
| The deepwater Gulf of Mexico bid process has been completed and the Company is currently engaged in negotiations for the sale of the properties |
| During 2005, the Company’s material divestitures consisted of (i) the sale of three volumetric production payments (“VPPs”) in the Spraberry and Hugoton fields for net proceeds of approximately dlra892dtta6 million, (ii) the sale of all of its interests in the Martin Creek, Conroy Black and Lookout Butte oil and gas properties in Canada for net proceeds of dlra197dtta2 million, which resulted in a gain of dlra138dtta3 million that is included in the Company’s discontinued operations; (iii) the sale of all of its interests in certain oil and gas properties on the shelf of the Gulf of Mexico for net proceeds of dlra59dtta1 million, which resulted in a gain of dlra27dtta7 million that is included in the Company’s discontinued operations; and (iv) the sale of all of its shares in a subsidiary that owns the interest in the Olowi block in Gabon for net proceeds of dlra47dtta9 million, which resulted in a gain of dlra47dtta5 million that is included in 7 _________________________________________________________________ [98]Table of Contents the Company’s 2005 income from continuing operations |
| The net cash proceeds were primarily used to fund additions to oil and gas properties or to reduce the Company’s outstanding indebtedness |
| See Notes N and T of Notes to Consolidated Financial Statements included in “Item 8 |
| Financial Statements and Supplementary Data” for specific information regarding the Company’s asset divestitures and VPPs entered into by the Company during 2005 |
| The Company anticipates that it will continue to sell nonstrategic properties or other assets from time to time to increase capital resources available for other activities, to achieve operating and administrative efficiencies and to improve profitability |
| Operations by Geographic Area The Company operates in one industry segment, that being oil and gas exploration and production |
| Financial Statements and Supplementary Data” for geographic operating segment information, including results of operations and segment assets |
| Production from the Company’s properties is marketed using methods that are consistent with industry practices |
| Sales prices for oil, NGL and gas production are negotiated based on factors normally considered in the industry, such as the index or spot price for gas or the posted price for oil, price regulations, distance from the well to the pipeline, well pressure, estimated reserves, commodity quality and prevailing supply conditions |
| In Argentina, the Company receives significantly lower prices for its production as a result of the Argentine government’s imposed price limitations |
| See “Qualitative Disclosures” in “Item 7A Quantitative and Qualitative Disclosures About Market Risk” for additional discussion of Argentine foreign currency, operations and price risk |
| Significant purchasers |
| During 2005, the Company’s primary purchasers of oil, NGLs and gas were Williams Power Company, Inc |
| (nine percent), Occidental Energy Marketing, Inc |
| (nine percent), ConocoPhillips (seven percent), Plains Marketing LP (seven percent) and Tenaska Marketing (six percent) |
| The Company is of the opinion that the loss of any one purchaser would not have an adverse effect on its ability to sell its oil, NGL and gas production |
| Hedging activities |
| The Company utilizes commodity swap and collar contracts in order 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 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of the Company’s hedging activities, “Item 7A Quantitative and Qualitative Disclosures About Market Risk” and Note J of Notes to Consolidated Financial Statements included in “Item 8 |
| Financial Statements and Supplementary Data” for information concerning the impact on oil and gas revenues during 2005, 2004 and 2003 from the Company’s commodity hedging activities and the Company’s open commodity hedge positions at December 31, 2005 |
| The oil and gas industry is highly competitive |
| A large number of companies, including major integrated and other independent companies, and individuals engage in the exploration for and development of oil and gas properties, and there is a high degree of competition for oil and gas properties suitable for development or exploration |
| Acquisitions of oil and gas properties have been an important element of the Company’s growth |
| The Company intends to continue to acquire oil and gas properties that complement its operations, provide exploration and development opportunities and potentially provide superior returns on investment |
| The principal competitive factors in the acquisition of oil and gas properties include the staff and data necessary to identify, evaluate and purchase such properties and the financial resources necessary to acquire and develop the properties |
| Higher recent commodity prices have increased the cost of properties available for acquisition |
| Many of the Company’s competitors are substantially larger and have financial and other resources greater than those of the Company |
| The Company’s ability to produce and market oil, NGLs and gas profitably depends on numerous factors beyond the Company’s control |
| The effect of these factors cannot be accurately predicted or anticipated |
| Although the Company cannot predict the occurrence of events that may affect these commodity prices or the degree to which these prices will be affected, the prices for any commodity that the Company produces will generally approximate current market prices in the geographic region of the production |
| Governmental regulations |
| Enterprises that sell securities in public markets are subject to regulatory oversight by agencies such as the SEC and the NYSE This regulatory oversight imposes on the Company the responsibility for establishing and maintaining disclosure controls and procedures that will ensure that material information relating to the Company and its consolidated subsidiaries is made known to the Company’s management and that the financial statements and other financial information included in submissions to the SEC do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made in such submissions not misleading |
| Oil and gas exploration and production operations are also subject to various types of regulation by local, state, federal and foreign agencies |
| Additionally, the Company’s operations are subject to state conservation laws and regulations, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of wells |
| States and foreign governments also generally impose a production or severance tax with respect to the production and sale of oil and gas within their respective jurisdictions |
| The regulatory burden on the oil and gas industry increases the Company’s cost of doing business and, consequently, affects its profitability |
| Additional proposals and proceedings that might affect the oil and gas industry are considered from time to time by the United States Congress, the Federal Energy Regulatory Commission, state regulatory bodies, the courts and foreign governments |
| The Company cannot predict when or if any such proposals might become effective or their effect, if any, on the Company’s operations |
| Environmental and health controls |
| The Company’s operations are subject to numerous US federal, state and local, as well as foreign, laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental and health protection |
| These laws and regulations may require the acquisition of a permit before drilling commences, restrict the type, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas and impose substantial liabilities for pollution resulting from oil and gas operations |
| The Company’s inability to obtain these permits in a timely manner or at all could cause delays or otherwise negatively impact the Company’s ability to implement its business plans |
| Failure to comply with these environmental laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that limit or prevent operations |
| Although the Company believes that compliance with US and foreign environmental laws and regulations will not have a material adverse effect on its future results of operations or financial condition, risks of substantial costs and liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities will not be incurred or that curtailment in production or processing might not arise as a result of such compliance |
| Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from the Company’s operations, could result in substantial costs and liabilities |
| In the US, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a “hazardous substance” into the environment |
| These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances released at the site |
| Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several, strict liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment |
| 9 _________________________________________________________________ [100]Table of Contents The Company generates wastes in the US, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes |
| The US Environmental Protection Agency, and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes |
| Furthermore, certain wastes generated by the Company’s oil and gas operations that are currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes, and therefore be subject to more rigorous and costly operating and disposal requirements |
| The Company currently owns or leases, and has in the past owned or leased, properties in the US that for many years have been used for the exploration and production of oil and gas reserves |
| Although the Company has used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such hydrocarbons or wastes have been taken for recycling or disposal |
| In addition, some of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company’s control |
| These properties and the hydrocarbons or wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws |
| Under such laws, the Company could be required to remove or remediate previously disposed wastes or property contamination or to perform remedial plugging operations to prevent future contamination |
| Federal regulations require certain owners or operators of facilities that store or otherwise handle oil, such as the Company, to prepare and implement spill prevention control plans, countermeasure plans and facility response plans relating to the possible discharge of oil into surface waters |
| The Oil Pollution Act of 1990 (“OPA”) amends certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act (“CWA”), and other statutes as they pertain to the prevention of and response to oil spills into navigable waters of the US The OPA subjects owners of facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters |
| The CWA provides penalties for any discharges of petroleum products in reportable quantities and imposes substantial liability for the costs of removing a spill |
| OPA requires responsible parties to establish and maintain evidence of financial responsibility to cover removal costs and damages resulting from an oil spill |
| OPA calls for a financial responsibility of dlra35 million to cover pollution cleanup for offshore facilities |
| State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground |
| The Company does not believe that the OPA, CWA or related state laws are any more burdensome to it than they are to other similarly situated oil and gas companies |
| Many states in which the Company operates regulate naturally occurring radioactive materials (“NORM”) and NORM wastes that are generated in connection with oil and gas exploration and production activities |
| NORM wastes typically consist of very low-level radioactive substances that become concentrated in pipes and production equipment |
| Certain state regulations require the testing of pipes and production equipment for the presence of NORM, the licensing of NORM-contaminated facilities and the careful handling and disposal of NORM wastes |
| The Company believes the regulation of NORM has minimal effect on its operations because the Company generates only small quantities of NORM on an annual basis |
| The Company’s field operations in the US involve the use of gas-fired compressors, which are subject to the federal Clean Air Act and analogous state laws governing the control and permitting of air emissions |
| The Company believes that it is in substantial compliance with applicable permitting and control technology requirements of such laws and regulations; however, in the future, additional facilities could become subject to additional permitting, monitoring and pollution control requirements as compressor facilities are expanded |
| The Company’s operations outside of the US are potentially subject to similar foreign governmental controls relating to protection of the environment |
| The Company believes that compliance with existing requirements of these foreign governmental bodies has not had a material adverse effect on the Company’s operations |
| ITEM 1A RISK FACTORS The nature of the business activities conducted by the Company subjects it to certain hazards and risks |
| The following is a summary of some of the material risks relating to the Company’s business activities |
| Other risks are 10 _________________________________________________________________ [101]Table of Contents described in “Item 1 |
| If any of these risks actually occur, they could materially harm the Company’s business, financial condition or results of operations and impair Pioneer’s ability to implement business plans or complete development projects as scheduled |
| In that case, the market price of the Company’s common stock could decline |
| Commodity prices |
| The Company’s revenues, profitability, cash flow and future rate of growth are highly dependent on oil and gas prices, which are affected by numerous factors beyond the Company’s control |
| Historically, oil and gas prices have been very volatile |
| A significant downward trend in commodity prices would have a material adverse effect on the Company’s revenues, profitability and cash flow and could, under certain circumstances, result in a reduction in the carrying value of the Company’s oil and gas properties and goodwill and the recognition of deferred tax asset valuation allowances or an increase to the Company’s deferred tax asset valuation allowances, depending on the Company’s tax attributes in each country in which it has activities |
| Pioneer makes price assumptions that are used for planning purposes, and a significant portion of the Company’s operating expenses, including rent, salaries and noncancellable capital commitments, is largely fixed in nature |
| Accordingly, if commodity prices are below expectations, Pioneer’s financial results are likely to be adversely and disproportionately affected because these expenses are not variable in the short term and cannot be quickly reduced to respond to unanticipated decreases in commodity prices |
| Drilling activities |
| Drilling involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be encountered |
| The cost of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions and shortages or delays in the delivery of equipment |
| The Company’s future drilling activities may not be successful and, if unsuccessful, such failure could have an adverse effect on the Company’s future results of operations and financial condition |
| While all drilling, whether developmental or exploratory, involves these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons |
| The Company expects that it will continue to experience exploration and abandonment expense in 2006 even though less than 20 percent of the Company’s 2006 capital budget is devoted to higher-risk exploratory projects |
| Increased levels of drilling activity in the oil and gas industry in recent periods have led to reduced availability, extended delivery times and increased costs of some drilling equipment, materials and supplies |
| The Company expects that these trends will continue in the foreseeable future and, if so, will impact the Company’s profitability, cash flow and ability to complete development projects as scheduled |
| At December 31, 2005, the Company carried unproved property costs of dlra313dtta9 million |
| GAAP requires periodic evaluation of these costs on a project-by-project basis in comparison to their estimated fair value |
| These evaluations will be affected by the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of the leases, contracts and permits appurtenant to such projects |
| If the quantity of potential reserves determined by such evaluations is not sufficient to fully recover the cost invested in each project, the Company will recognize noncash charges in the earnings of future periods |
| Acquisitions |
| Acquisitions of producing oil and gas properties have been a key element of the Company’s growth |
| The Company’s growth following the full development of its existing property base could be impeded if it is unable to acquire additional oil and gas reserves on a profitable basis |
| The success of any acquisition will depend on a number of factors, including the ability to estimate accurately the costs to develop the reserves, the recoverable volumes of reserves, rates of future production and future net revenues attainable from the reserves and the assessment of possible environmental liabilities |
| All of these factors affect whether an acquisition will ultimately generate cash flows sufficient to provide a suitable return on investment |
| Even though the Company performs a review of the properties it seeks to acquire that it believes is consistent with industry practices, such reviews are often limited in scope |
| The Company regularly reviews its property base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities and create organizational and operational efficiencies |
| Various factors could materially affect the ability of the Company to dispose of nonstrategic assets, including the availability of purchasers willing to purchase the nonstrategic assets at prices acceptable to the Company |
| Operation of gas processing plants |
| As of December 31, 2005, the Company owned interests in 12 gas processing plants and three treating facilities |
| The Company operates eight of the plants and all three treating facilities |
| There are significant risks associated with the operation of gas processing plants |
| For example, in May 2005, the Company’s Fain gas plant was shut in for two months due to a mechanical failure that resulted in a fire |
| Gas and NGLs are volatile and explosive and may include carcinogens |
| Damage to or misoperation of a gas processing plant or facility could result in an explosion or the discharge of toxic gases, which could result in significant damage claims in addition to interrupting a revenue source |
| Operating hazards and uninsured losses |
| The Company’s operations are subject to all the risks normally incident to the oil and gas exploration and production business, including blowouts, cratering, explosions, adverse weather effects and pollution and other environmental damage, any of which could result in substantial losses to the Company due to injury or loss of life, damage to or destruction of wells, production facilities or other property, clean-up responsibilities, regulatory investigations and penalties and suspension of operations |
| Increased hurricane activity over the past two years has resulted in production curtailments and physical damage to the Company’s Gulf of Mexico operations |
| Although the Company currently maintains insurance coverage that it considers reasonable and that is similar to that maintained by comparable companies in the oil and gas industry, it is not fully insured against certain of these risks, either because such insurance is not available or because of the high premium costs and deductibles associated with obtaining such insurance |
| Environmental |
| The oil and gas business is subject to environmental hazards, such as oil spills, produced water spills, gas leaks and ruptures and discharges of substances or gases that could expose the Company to substantial liability due to pollution and other environmental damage |
| A variety of United States federal, state and local, as well as foreign laws and regulations govern the environmental aspects of the oil and gas business |
| Noncompliance with these laws and regulations may subject the Company to administrative, civil, or criminal penalties, remedial cleanups, and natural resource damages or other liabilities and compliance may increase the cost of the Company’s operations |
| Such laws and regulations may also affect the costs of acquisitions |
| Business — Competition, Markets and Regulations — Environmental and health controls” above for additional discussion related to environmental risks |
| The Company does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry |
| Nevertheless, no assurance can be given that future environmental laws will not result in a curtailment of production or processing activities, result in a material increase in the costs of production, development, exploration or processing operations or adversely affect the Company’s future operations and financial condition |
| Pollution and similar environmental risks generally are not fully insurable |
| Debt restrictions and availability |
| The Company is a borrower under fixed rate senior notes and a variable rate credit facility |
| The terms of the Company’s borrowings under the senior notes and the credit facility specify scheduled debt repayments and require the Company to comply with certain associated covenants and restrictions |
| The Company’s ability to comply with the debt repayment terms, associated covenants and restrictions is dependent on, among other things, factors outside the Company’s direct control, such as commodity prices and interest rates |
| Financial Statements and Supplementary Data” for information regarding the Company’s outstanding debt as of December 31, 2005 and the terms associated therewith |
| The Company’s ability to obtain additional financing is also impacted by the Company’s debt credit ratings and competition for available debt financing |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the Company’s debt credit ratings |
| The Company competes with other companies, producers and operators for acquisitions and in the exploration, development, production and marketing of oil and 12 _________________________________________________________________ [103]Table of Contents gas |
| Some of these competitors have substantially greater financial and other resources than the Company |
| Business — Competition, Markets and Regulations” above for additional discussion regarding competition |
| Government regulation |
| The Company’s business is regulated by a variety of federal, state, local and foreign laws and regulations |
| There can be no assurance that present or future regulations will not adversely affect the Company’s business and operations |
| Business — Competition, Markets and Regulations” above for additional discussion regarding government regulation |
| International operations |
| At December 31, 2005, approximately 14 percent of the Company’s proved reserves of oil, NGLs and gas were located outside the United States (ten percent in Argentina, two percent in Canada and two percent in Africa) |
| The success and profitability of international operations may be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) and changes in the value of the US dollar versus the local currencies in which oil and gas producing activities may be denominated |
| To the extent that the Company is involved in international activities, changes in exchange rates may adversely affect the Company’s future results of operations and financial condition |
| Financial Statements and Supplementary Data” for information specific to Argentina’s economic and political situation and other risks associated with the Company’s international operations |
| The aforementioned planned sale of Argentine assets, if completed, will significantly reduce the Company’s international operations |
| Estimates of reserves and future net revenues |
| Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues therefrom |
| The estimates of proved reserves and related future net revenues set forth in this Report are based on various assumptions, which may ultimately prove to be inaccurate |
| Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner |
| Estimates of economically recoverable oil and gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including the following: • historical production from the area compared with production from other producing areas, • the quality and quantity of available data, • the interpretation of that data, • the assumed effects of regulations by governmental agencies, • assumptions concerning future oil and gas prices and • assumptions concerning future operating costs, severance, ad valorem and excise taxes, development costs and workover and remedial costs |
| Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating reserves: • the quantities of oil and gas that are ultimately recovered, • the production and operating costs incurred, • the amount and timing of future development expenditures and • future oil and gas sales prices |
| Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data |
| The Company’s actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material |
| 13 _________________________________________________________________ [104]Table of Contents As required by the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower |
| Actual future net cash flows also will be affected by factors such as: • the amount and timing of actual production, • increases or decreases in the supply or demand of oil and gas and • changes in governmental regulations or taxation |
| The Company reports all proved reserves held under production sharing arrangements and concessions utilizing the “economic interest” method, which excludes the host country’s share of proved reserves |
| Estimated quantities of production sharing arrangements reported under the “economic interest” method are subject to fluctuations in the price of oil and gas and recoverable operating expenses and capital costs |
| If costs remain stable, reserve quantities attributable to recovery of costs will change inversely to changes in commodity prices |
| Standardized Measure is a reporting convention that provides a common basis for comparing oil and gas companies subject to the rules and regulations of the SEC It requires the use of oil and gas prices, as well as operating and development costs, prevailing as of the date of computation |
| Consequently, it may not reflect the prices ordinarily received or that will be received for oil and gas production because of seasonal price fluctuations or other varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and gas properties |
| Accordingly, estimates included herein of future net revenues may be materially different from the net revenues that are ultimately received |
| Therefore, the estimates of discounted future net cash flows or Standardized Measure in this Report should not be construed as accurate estimates of the current market value of the Company’s proved reserves |
| Stock repurchases |
| During 2005, the Company repurchased 20 million shares of its common stock, and announced its intention to repurchase up to an additional dlra350 million of its common stock, subject to completion of the planned divestiture of its deepwater Gulf of Mexico and Argentine assets |
| The Board sets limits on the price per share at which Pioneer’s common stock can be repurchased, and the Company will not be permitted to repurchase its stock during certain periods because of scheduled and unscheduled trading blackouts |
| Additionally, business conditions and availability of capital may dictate that repurchases be suspended or cancelled |
| As a result, there can be no assurance that additional repurchases will be commenced and, if so, that they will be completed |
| Commodity hedges |
| To the extent that the Company engages in hedging activities to reduce commodity price risk, Pioneer may be prevented from realizing the benefits of price increases above the levels of the hedges |