ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Reserve Estimation Procedures and Audits
The information included in this Report about the Company's proved reserves as of December 31, 2018, 2017 and 2016 is based on evaluations prepared by the Company's engineers and audited by Netherland, Sewell & Associates, Inc. ("NSAI"), with respect to the Company's major properties. The Company has no oil and gas reserves from non-traditional sources. Additionally, the Company does not provide optional disclosure of probable or possible reserves.
Reserve estimation procedures. The Company has established internal controls over reserve estimation processes and procedures to support the accurate and timely preparation and disclosure of reserve estimates in accordance with SEC requirements. These controls include oversight of the reserves estimation reporting processes by Pioneer's Corporate Reserves Group ("Corporate Reserves"), and annual external audits of substantial portions of the Company's proved reserves by NSAI.
Corporate Reserves is responsible for the management of the oil and gas proved reserve estimation processes in each of the Company's asset areas. Corporate Reserves is staffed with reservoir engineers and geoscientists who prepare reserve estimates at the end of each calendar quarter for the assets that they manage, using reservoir engineering information technology. There is oversight of the reservoir engineers by the Director of Corporate Reserves and the Vice President of Corporate Reserves, each of whom is in turn subject to direct or indirect oversight by the Company's management committee ("MC"). The Company's MC is comprised of its Chief Executive Officer, Chief Financial Officer and other executive officers. The reserve estimates are prepared by reservoir engineers before being submitted to the Director and Vice President of Corporate Reserves for further review.
The reserve estimates are summarized in reserve reconciliations that quantify reserve changes since the previous year end as revisions of previous estimates, purchases of minerals-in-place, improved recovery, extensions and discoveries, production and sales of minerals-in-place. All reserve estimates, material assumptions and inputs used in reserve estimates and significant changes in reserve estimates are reviewed for engineering and financial appropriateness and compliance with SEC and GAAP standards by Corporate Reserves, in consultation with the Company's accounting and financial management personnel. Annually, the MC reviews the reserve estimates and any differences with the reserve auditors (for the portion of the reserves audited by NSAI) on a consolidated basis before these estimates are approved. The engineers and geoscientists who participate in the reserve estimation and disclosure process periodically attend training provided by external consultants and through internal Pioneer programs. Additionally, Corporate Reserves has prepared and maintains written policies and guidelines for its staff to reference on reserve estimation and preparation to promote consistency in the preparation of the Company's reserve estimates and compliance with the SEC reserve estimation and reporting rules.
Proved reserves audits. The proved reserve audits performed by NSAI for the years ended December 31, 2018, 2017 and 2016, in the aggregate, represented 79 percent, 77 percent and 77 percent of the Company's year-end 2018, 2017 and 2016 proved reserves, respectively; and 95 percent, 91 percent and 93 percent of the Company's year-end 2018, 2017 and 2016 associated pre-tax present value of proved reserves discounted at ten percent, respectively.
NSAI follows the general principles set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information" promulgated by the Society of Petroleum Engineers (the "SPE"). A reserve audit as defined by the SPE is not the same as a financial audit. The SPE's definition of a reserve audit includes the following concepts:
•
A reserve audit is an examination of reserve information that is conducted for the purpose of expressing an opinion as to whether such reserve information, in the aggregate, is reasonable and has been presented in conformity with the 2007 SPE publication entitled "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information."
PIONEER NATURAL RESOURCES COMPANY
•
The estimation of reserves is an imprecise science due to the many unknown geologic and reservoir factors that cannot be estimated through sampling techniques. Since reserves are only estimates, they cannot be audited for the purpose of verifying exactness. Instead, reserve information is audited for the purpose of reviewing in sufficient detail the policies, procedures and methods used by a company in estimating its reserves so that the reserve auditors may express an opinion as to whether, in the aggregate, the reserve information furnished by a company is reasonable.
•
The methods and procedures used by a company, and the reserve information furnished by a company, must be reviewed in sufficient detail to permit the reserve auditor, in its professional judgment, to express an opinion as to the reasonableness of the reserve information. The auditing procedures require the reserve auditor to prepare their own estimates of reserve information for the audited properties.
In conjunction with the audit of the Company's proved reserves and associated pre-tax present value discounted at ten percent, Pioneer provided to NSAI its external and internal engineering and geoscience technical data and analyses. Following NSAI's review of that data, it had the option of honoring Pioneer's interpretations, or making its own interpretations. No data was withheld from NSAI. NSAI accepted without independent verification the accuracy and completeness of the historical information and data furnished by Pioneer with respect to ownership interest, oil and gas production, well test data, commodity prices, operating and development costs, and any agreements relating to current and future operations of the properties and sales of production. However, if in the course of its evaluations something came to its attention that brought into question the validity or sufficiency of any such information or data, NSAI did not rely on such information or data until it had satisfactorily resolved its questions relating thereto or had independently verified such information or data.
In the course of its evaluations, NSAI prepared, for all of the audited properties, its own estimates of the Company's proved reserves and the pre-tax present values of such reserves discounted at ten percent. NSAI reviewed its audit differences with the Company, and, in a number of cases, held meetings with the Company to review additional reserves work performed by the Company's technical teams and any updated performance data related to the proved reserve differences. Such data was incorporated, as appropriate, by both parties into the proved reserve estimates. NSAI's estimates, including any adjustments resulting from additional data, of those proved reserves and the pre-tax present value of such reserves discounted at ten percent did not differ from Pioneer's estimates by more than ten percent in the aggregate. However, when compared on a lease-by-lease, field-by-field or area-by-area basis, some of the Company's estimates were greater than those of the reserve auditors and some were less than the estimates of the reserve auditors. When such differences do not exceed ten percent in the aggregate and NSAI is satisfied that the proved reserves and pre-tax present values of such reserves discounted at ten percent are reasonable and that its audit objectives have been met, NSAI will issue an unqualified audit opinion. Remaining differences are not resolved due to the limited cost benefit of continuing such analyses by the Company and the reserve auditors. At the conclusion of the audit process, it was NSAI's opinion, as set forth in its audit letter, which is included as an exhibit to this Report, that Pioneer's estimates of the Company's proved oil and gas reserves and associated pre-tax present values discounted at ten percent are, in the aggregate, reasonable and have been prepared in accordance with the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information."
Qualifications of proved reserves preparers and auditors. Corporate Reserves is staffed by petroleum engineers with extensive industry experience and is managed by the Vice President of Corporate Reserves, the technical person who is primarily responsible for overseeing the Company's reserves estimates. These individuals meet the professional qualifications of reserves estimators and reserves auditors as defined by the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information." The qualifications of the Vice President of Corporate Reserves include 41 years of experience as a petroleum engineer, with 34 years focused on reserves reporting for independent oil and gas companies, including Pioneer. His educational background includes an undergraduate degree in Chemical Engineering and a Masters of Business Administration degree in Finance. He is also a Chartered Financial Analyst Charterholder.
NSAI provides worldwide petroleum property analysis services for energy clients, financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No.. The technical person primarily responsible for auditing the Company's reserves estimates has been a practicing consulting petroleum engineer at NSAI since 1983 and has over 40 years of practical experience in petroleum engineering, including over 37 years of experience in the estimation and evaluation of proved reserves. He graduated with a Bachelor of Science degree in Chemical Engineering in 1978 and meets or exceeds the education, training and experience requirements set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information."
Technologies used in proved reserves estimates. Proved undeveloped reserves include those reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Undeveloped reserves may be classified as proved reserves on undrilled acreage directly offsetting development areas that are reasonably certain of production when drilled, or where reliable technology provides reasonable certainty of economic producibility. Undrilled locations may be classified as having undeveloped proved reserves only if an ability and intent has been established to drill the reserves within five years, unless specific circumstances justify a longer time period.
PIONEER NATURAL RESOURCES COMPANY
In the context of reserves estimations, reasonable certainty means a high degree of confidence that the quantities will be recovered and reliable technology means a grouping of one or more technologies (including computational methods) that has been field-tested and has been demonstrated to provide reasonable certainty that the results will be consistent and repeatable in the formation being evaluated or in an analogous formation. In estimating proved reserves, the Company uses several different traditional methods such as performance-based methods, volumetric-based methods and analogy with similar properties. In addition, the Company utilizes additional technical analysis such as seismic interpretation, wireline formation tests, geophysical logs and core data to provide incremental support for more complex reservoirs. Information from this incremental support is combined with the traditional technologies outlined above to enhance the certainty of the Company's proved reserve estimates.
Proved Reserves
Oil and gas proved reserves, located entirely in the United States, are as follows:
_____________________
(a)
Total proved gas reserves contain 106,948 MMcf, 171,623 MMcf and 137,853 MMcf of gas that the Company expected to be produced and used as field fuel (primarily for compressors), rather than being delivered to a sales point as of December 31, 2018, 2017 and 2016, respectively.
The Company's Standardized Measure of total proved reserves are as follows:
_____________________
(a)
The Standardized Measure of total proved reserves as of December 31, 2018 and 2017 includes the reduction of the federal corporate income tax rate to 21 percent associated with the enactment of the Tax Cut and Jobs Act.
See "Unaudited Supplementary Information" included in "Item 8. Financial Statements and Supplementary Data" for additional information.
PIONEER NATURAL RESOURCES COMPANY
Description of Properties
Development drilling activity by significant asset area is as follows:
Exploration/extension drilling activity by significant asset area is as follows:
Average daily oil, NGLs, gas and total production by significant asset area are as follows:
_____________________
(a)
Gas production excludes gas produced and used as field fuel.
Costs incurred by significant asset area are as follows:
PIONEER NATURAL RESOURCES COMPANY
Permian Basin. With approximately 760,000 gross acres (680,000 net acres), Pioneer is the largest acreage holder in the Spraberry/Wolfcamp field, which the U.S. Geological Survey ("USGS") estimates is the largest continuous oil field in the United States. Pioneer's interests in the northern portion of the play comprise approximately 560,000 gross acres and its interests in the southern portion of the play, where the Company has a joint venture with Sinochem, comprise approximately 200,000 gross acres. The oil produced from the Spraberry/Wolfcamp field is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average energy content of 1,400 Btu. The oil and gas are produced primarily from six formations, the Spraberry, the Jo Mill, the Dean, the Wolfcamp, the Strawn and the Atoka, at depths ranging from 7,500 feet to 14,000 feet. The Company believes that it has significant resource potential within its Spraberry, Jo Mill and Wolfcamp formation acreage, based on its extensive geologic data covering the Jo Mill, Lower Spraberry and Middle Spraberry intervals and the Wolfcamp A, B, C and D intervals and its drilling results to date.
During 2018, the Company successfully completed 221 horizontal wells in the northern portion of the play and 64 horizontal wells in the southern portion of the play. In the northern portion of the play, approximately 40 percent of the horizontal wells placed on production were Wolfcamp B interval wells, approximately 45 percent were Wolfcamp A interval wells and approximately 15 percent were Spraberry interval wells. The majority of the wells placed on production in the southern portion of the play were Wolfcamp B interval wells. In addition, the Company continues to complete acreage trades that allow the Company to drill wells with longer laterals, improving the expected returns of the wells. The Company estimates that the acreage trades completed in 2018 added approximately 4.6 million lateral feet to the Company's drilling inventory.
The Company plans to operate 21 to 23 rigs in the Spraberry/Wolfcamp field in 2019, with 16 to 18 rigs operating in the northern portion of the play and five rigs operating in the southern portion of the play. During 2019, the Company expects to place on production between 265 and 290 horizontal wells. Approximately 45 percent of the horizontal wells are planned to be drilled in the Wolfcamp B interval, 35 percent in the Wolfcamp A interval and the remaining 20 percent will be a combination of wells in the Spraberry intervals and a limited appraisal program for the Wolfcamp D interval.
Selected Oil and Gas Information
Production, price and cost data. The price that the Company receives for the oil and gas it produces is largely a function of market supply and demand. Demand is affected by general economic conditions, weather and other seasonal conditions, including hurricanes and tropical storms. Over or under supply of oil or gas can result in substantial price volatility. Historically, commodity prices have been volatile and the Company expects that volatility to continue in the future. A decline in oil, NGL and gas prices or poor drilling results could have a material adverse effect on the Company's financial position, results of operations, cash flows, quantities of oil and gas reserves that may be economically produced and the Company's ability to access the capital markets.
The following tables set forth production, price and cost data with respect to the Company's properties. These amounts represent the Company's historical results of operations without making pro forma adjustments for any acquisitions, divestitures or drilling activity that occurred during the respective years. The production amounts will not match the proved reserve volume tables in the "Unaudited Supplementary Information" section included in "Item 8. Financial Statements and Supplementary Data" because field fuel volumes are included in the proved reserve volume tables. Because of normal production declines, increased or decreased drilling activities and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (continued)
PIONEER NATURAL RESOURCES COMPANY
PRODUCTION, PRICE AND COST DATA - (continued)
PIONEER NATURAL RESOURCES COMPANY
Productive wells. Productive wells consist of producing wells and wells capable of production, including shut-in wells and gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. One or more completions in the same well bore are counted as one well. Any well in which one of the multiple completions is an oil completion is classified as an oil well.
Productive oil and gas wells attributable to the Company's properties are as follows:
PRODUCTIVE WELLS
Developed, undeveloped and royalty leasehold acreage is as follows:
LEASEHOLD ACREAGE
The expiration dates of the leases attributable to gross and net undeveloped acres are as follows:
_____________________
(a)
Acres expiring are based on contractual lease maturities.
Of the 21,728 net acres expiring in 2019 and 2020, 20,254 net acres are concentrated in the Permian Basin in West Texas, where the Company has an active drilling program and ongoing efforts to extend leases that may not be drilled prior to expiration. The Company currently has no proved undeveloped reserve locations scheduled to be drilled after lease expiration. The remaining 1,474 net acres are concentrated in eastern Colorado. The Company has no drilling plans for this acreage and does not have any undeveloped acreage costs recorded as of December 31, 2018 associated with this acreage.
Drilling and other exploratory and development activities. The following table sets forth the number of gross and net wells drilled by the Company that were productive or dry holes. This information should not be considered indicative of future performance, nor should it be assumed that there was any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to the Company of productive wells compared to the costs of dry holes.
PIONEER NATURAL RESOURCES COMPANY
DRILLING ACTIVITIES
______________________
(a)
Represents the ratio of those wells that were successfully completed as producing wells or wells capable of producing to total wells drilled and evaluated.
Wells in process of being drilled are as follows:
ITEM 3.
LEGAL PROCEEDINGS
The Company is party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these 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. See Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
ITEM 4.
MINE SAFETY DISCLOSURES
The Company's sand mines are subject to regulation by the Federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Annual Report filed on Form 10-K.
PIONEER NATURAL RESOURCES COMPANY
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of the date of this Report regarding the Company's executive officers. All of the Company's executive officers serve at the discretion of the Company's board of directors. There are no family relationships among any of the Company's directors or executive officers.
Scott D. Sheffield
Mr. Sheffield was appointed Company's President and Chief Executive Officer in February 2019. Previously, he had served as Chief Executive Officer of the Company from 1997 through December 31, 2016, and then as the Executive Chairman until December 31, 2017. He has served as a director of the Company since 1997 and had served as Chairman of the Board from 1999 through February 2019. Mr. Sheffield was the Chairman of the Board of Directors and Chief Executive Officer of Parker & Parsley Petroleum Company, a predecessor of the Company (together with its predecessor companies, "Parker & Parsley"), from January 1989 until the Company was formed in August 1997. Mr. Sheffield joined Parker & Parsley as a petroleum engineer in 1979, was promoted to Vice President - Engineering in September 1981, was elected President and a Director in April 1985, and became Parker & Parsley's Chairman of the Board and Chief Executive Officer on January 19, 1989. Before joining Parker & Parsley, Mr. Sheffield was employed as a production and reservoir engineer for Amoco Production Company. He had also served as Chief Executive Officer and director from June 2007, and as Chairman of the Board from May 2008, of the general partner of Pioneer Southwest Energy Partners L.P. ("Pioneer Southwest") through December 2013. Mr. Sheffield is a distinguished graduate of the University of Texas with a Bachelor of Science degree in Petroleum Engineering.
Mark S. Berg
Mr. Berg was elected as the Company's Executive Vice President and General Counsel in April 2005, serving in those capacities until January 2014, at which time he assumed broader executive responsibilities, most recently being elected to serve as Executive Vice President, Corporate/Vertically Integrated Operations in May 2017. Mr. Berg had previously served as Executive Vice President, Corporate/Operations since August 2015 and Executive Vice President and General Counsel of the general partner of Pioneer Southwest from June 2007 through the Company's acquisition of Pioneer Southwest in December 2013. Prior to joining the Company, Mr. Berg served as Executive Vice President, General Counsel and Secretary of American General Corporation, a Fortune 200 diversified financial services company, from 1997 through 2002. Subsequent to the sale of American General to American International Group, Inc., Mr. Berg joined Hanover Compressor Company as Senior Vice President, General Counsel and Secretary. He served in that capacity from May 2002 through April 2004. Mr. Berg began his career in 1983 with the Houston-based law firm of Vinson & Elkins L.L.P. He was a partner with the firm from 1990 through 1997. Mr. Berg is also a director of ProPetro Holding Corp. and HighPoint Resources Corporation. Mr. Berg graduated Magna Cum Laude and Phi Beta Kappa with a Bachelor of Arts degree from Tulane University in 1980. He earned his Juris Doctorate with honors from the University of Texas School of Law in 1983.
Chris J. Cheatwood
Mr. Cheatwood was elected as the Company's Executive Vice President and Chief Technology Officer in May 2017. Mr. Cheatwood had previously served as Executive Vice President, Business Development and Geoscience since November 2011, Executive Vice President, Business Development and Technology from February 2010 until November 2011, Executive Vice President, Geoscience from November 2007 until February 2010, Executive Vice President - Worldwide Exploration from January 2002 until November 2007, Senior Vice President - Worldwide Exploration from December 2000 to January 2002 and Vice
PIONEER NATURAL RESOURCES COMPANY
President - Domestic Exploration from July 1998 to December 2000. Mr. Cheatwood also served as an Executive Vice President of the general partner of Pioneer Southwest from June 2007 through the Company's acquisition of Pioneer Southwest in December 2013. Before joining the Company, Mr. Cheatwood spent ten years with Exxon Corporation. Mr. Cheatwood is a graduate of the University of Oklahoma with a Bachelor of Science degree in Geology and earned his Master of Science degree in Geology from the University of Tulsa.
Richard P. Dealy
Mr. Dealy was elected as the Company's Executive Vice President and Chief Financial Officer in November 2004. Mr. Dealy held positions for the Company as Vice President and Chief Accounting Officer from February 1998 to November 2004 and Vice President and Controller from August 1997 to January 1998. Mr. Dealy also served as Executive Vice President, Chief Financial Officer, Treasurer and Director of the general partner of Pioneer Southwest from June 2007 through the Company's acquisition of Pioneer Southwest in December 2013. Mr. Dealy joined Parker & Parsley in July 1992 and was promoted to Vice President and Controller in 1996, in which position he served until August 1997. Before joining Parker & Parsley, Mr. Dealy was employed by KPMG LLP. Mr. Dealy graduated with honors from Eastern New Mexico University with a Bachelor of Business Administration degree in Accounting and Finance and is a Certified Public Accountant.
J. D. Hall
Mr. Hall was elected as the Company's Executive Vice President, Permian Operations, in August 2015. Mr. Hall had previously held positions for the Company as Executive Vice President, Southern Wolfcamp Operations from August 2014 to August 2015, Senior Vice President, South Texas Operations from June 2013 to August 2014, Vice President, South Texas Operations from February 2013 to June 2013, Vice President, South Texas Asset Team from September 2012 to February 2013 and Vice President, Eagle Ford Asset Team from January 2010 to September 2012. Prior to his positions in South Texas, he was the Operations Manager in Alaska from January 2005 to January 2010. He previously held several other positions with the Company, including managing offshore, onshore and international projects. He began his career with a predecessor company, MESA, Inc. ("MESA"), in 1989. He has a Bachelor of Science degree in Mechanical Engineering from Texas Tech University and is a Registered Professional Engineer in Texas.
Kenneth H. Sheffield, Jr.
Mr. Sheffield was elected as the Company's Executive Vice President, Operations/Engineering/Facilities in May 2017. Mr. Sheffield had previously served the Company in a number of executive positions, including Executive Vice President, South Texas Asset Team, Western Asset Team and Corporate Engineering from August 2015 to May 2017, Executive Vice President, South Texas Operations from August 2014 to August 2015, Senior Vice President, Operations and Engineering from June 2013 to August 2014, Vice President, Corporate Engineering from November 2011 to June 2013 and President of the Company's Alaska subsidiary from September 2002 to November 2011. Mr. Sheffield joined MESA in June 1982 and held a number of supervisory and technical positions with MESA in the areas of drilling, production, reservoir engineering and acquisitions until being promoted to Vice President Acquisitions & Development in 1996. He is a graduate of Texas A&M University with a Bachelor of Science degree in Petroleum Engineering.
William F. Hannes
Mr. Hannes was elected as the Company's Senior Vice President, Special Projects in January 2017. Mr. Hannes had previously served the Company as Senior Vice President, Special Management Committee Advisor since August 2014, Executive Vice President, Southern Wolfcamp Operations from February 2013 until August 2014, Executive Vice President, South Texas Operations from February 2010 until February 2013, Executive Vice President, Business Development from December 2007 until February 2010, Executive Vice President, Worldwide Business Development from November 2005 until December 2007 and Vice President, Engineering and Development from September 2003 until November 2005. Mr. Hannes joined Parker & Parsley in July 1997 as Director of Business Development, and continued to serve the Company in this capacity after the Company's formation in August 1997 until he was promoted to Vice President - Engineering and Development in June 2001, which position he held until November 2005. Prior to joining Parker & Parsley, Mr. Hannes held engineering positions with Mobil Corporation and Superior Oil Company. Mr. Hannes earned his Bachelor of Science degree in Petroleum Engineering from Texas A&M University.
Mark H. Kleinman
Mr. Kleinman was elected as the Company's Senior Vice President and General Counsel in January 2014. He also held the positions of Corporate Secretary from June 2005 through August 2015, Vice President from May 2006 until January 2014 and Chief Compliance Officer from June 2005 until May 2013. Mr. Kleinman also served as Vice President and Secretary of the general partner of Pioneer Southwest from June 2007 until April 2008 and as its Vice President and Chief Compliance Officer from April
PIONEER NATURAL RESOURCES COMPANY
2008 through the Company's acquisition of Pioneer Southwest in December 2013. Mr. Kleinman earned a Bachelor of Arts degree in Government from the University of Texas and graduated, with honors, from the University of Texas School of Law.
Teresa A. Fairbrook
Ms. Fairbrook was elected as the Company's Vice President and Chief Human Resources Officer in March 2016, prior to which she had served as Vice President, Human Resources since February 2013. She joined the Company in 1999, serving in a number of positions in the Human Resources Department. Prior to joining the Company, Ms. Fairbrook was in human resources at Dal-Tile Corporation in Dallas, Texas, where she held a variety of roles in employee relations, recruiting and benefits. Ms. Fairbrook received a Bachelor of Business Administration degree from St. Mary's University in San Antonio, Texas, with an emphasis in Human Resource Management, and is a Certified Compensation Professional.
Margaret M. Montemayor
Ms. Montemayor was elected as the Company's Vice President and Chief Accounting Officer in March 2014. Ms. Montemayor had previously served the Company as Vice President and Corporate Controller since January 2014, Corporate Controller from April 2012 to December 2013 and Director of Technical Accounting and Financial Reporting from June 2010 to March 2012. Prior to joining the Company, Ms. Montemayor served as a Manager at PricewaterhouseCoopers LLP since June 2006. Ms. Montemayor graduated from St. Mary's University in San Antonio, Texas with a Bachelor of Business Administration degree in Accounting and a Master of Business Administration degree and is a Certified Public Accountant.
Neal H. Shah
Mr. Shah joined the Company in June 2017 as Vice President, Investor Relations. Before joining the Company, Mr. Shah served as Senior Equity Research Analyst at Thrivent Asset Management from June 2016 to June 2017, and as Vice President at Nuveen LLC from March 2006 to June 2016. He has a financial and equity research background and has held various financial analysis positions at Piper Jaffray & Company, RBC Capital Markets and Goldman Sachs & Company. Mr. Shah earned a Bachelor of Science degree in Electrical Engineering from Louisiana State University and a Master of Business Administration degree from the Booth School of Business at the University of Chicago, where he was a Siebel Scholar and a recipient of the Irwin J. Biedrman Leadership award.
Stephanie D. Stewart
Ms. Stewart joined the Company in June 2014 as Vice President and Chief Information Officer. Before joining the Company, she served as Vice President of E&P Data and Analytics at the end of her 12-year tenure at Devon Energy. Prior to Devon Energy, she worked in information technology at Williams Energy and BP Amoco. Ms. Stewart earned a Bachelor of Business Administration degree from the University of Oklahoma and her Executive Master of Business Administration degree in Energy from the University of Oklahoma's Price College of Business.
Officers are generally elected by the Company's board of directors at its meeting on the day of each annual election of directors, with each such officer serving until a successor has been elected and qualified.
PIONEER NATURAL RESOURCES COMPANY
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is listed and traded on the NYSE under the symbol "PXD." The Company's board of directors has authority to declare dividends to the holders of the Company's common stock. The board of directors intends to consider the payment of dividends to the holders of the Company's common stock in the future. The declaration and payment of future dividends, however, will be at the discretion of the board of directors and will depend on, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant.
As of February 21, 2019, the Company's common stock was held by 9,900 holders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Purchases of the Company's common stock are as follows:
__________________
(a)
Includes shares purchased from employees in order for employees to satisfy income tax withholding payments related to share-based awards that vested during the period.
(b)
In February 2018, the Company's board of directors authorized a $100 million common stock repurchase program. In December 2018, the Company's board of directors canceled the previously authorized program and authorized a new $2 billion common stock repurchase program.
PIONEER NATURAL RESOURCES COMPANY
Performance Graph
The following performance graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall the information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative total stockholder return on the Company's common stock during the five-year period ended December 31, 2018, with cumulative total returns during the same period for the Standard & Poor's ("S&P") Oil and Gas Exploration & Production Index and the S&P 500.
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
PIONEER NATURAL RESOURCES COMPANY
ITEM 6.
SELECTED FINANCIAL DATA
The Company's selected consolidated financial data as of and for each of the five years ended December 31, 2018 should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
______________________
(a)
Results for 2018 are presented under Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers," while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting under ASC 605, "Revenue Recognition." See Note 2 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
(b)
The Company enters into purchase transactions with third parties and separate sale transactions with third parties to (i) diversify a portion of the Company's oil sales to the Gulf Coast refinery or international export markets and (ii) satisfy unused gas pipeline capacity commitments. The net balance of these transactions results in either a cash uplift or cash detriment associated with these purchase and sale transactions.
(c)
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
(d)
The Company recorded unusual items in total costs and expenses as follows:
◦
2018: $77 million of noncash impairment charges related to the Company's gas field assets in the Raton Basin; $443 million of accelerated depreciation on its sand mine assets to be decommissioned in 2019; $39 million of employee-related charges; and $124 million of contract termination charges associated with the Company's asset divestitures.
◦
2017: $285 million of noncash impairment charges related to gas field assets in the Raton Basin.
◦
2016: $32 million of noncash impairment charges related to oil and gas properties in the West Panhandle gas and liquids field.
◦
2015: $1.1 billion of noncash impairment charges related to oil and gas properties in the West Panhandle gas and liquids field and West Eagle Ford Shale gas and liquids field.
PIONEER NATURAL RESOURCES COMPANY
See Note 3, Note 4 and Note 15 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
PIONEER NATURAL RESOURCES COMPANY
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial and Operating Performance
Pioneer's financial and operating performance for 2018 included the following highlights:
•
Net income attributable to common stockholders was $978 million ($5.70 per diluted share) for the year ended December 31, 2018, as compared to net income of $833 million ($4.85 per diluted share) in 2017. The primary components of the $145 million increase in earnings attributable to common stockholders include:
•
a $1.5 billion increase in oil and gas revenues as a result of a 21 percent increase in average realized commodity prices per BOE, including the effects of a $207 million increase in gas and NGL revenues as a result of the adoption of new revenue recognition rules in 2018, combined with a 17 percent increase in sales volumes;
•
a $489 million increase in net revenue generated by purchases and sales of oil and gas, primarily related to the Company's firm transportation agreements that provide opportunities for enhanced margins by moving oil and gas from the Company's areas of production to price advantaged markets;
•
a $208 million decrease in impairment charges reflecting the 2018 noncash impairment charge of $77 million to reduce the carrying value of the Company's Raton Basin assets as compared to the 2017 noncash impairment charge of $285 million related to the same assets;
•
an $82 million increase in net gains on disposition of assets reflecting the 2018 divestitures of the Company's pressure pumping assets; Sinor Nest (Lower Wilcox) oil field; West Panhandle and West Eagle Ford Shale gas and liquids fields; and Raton Basin gas field assets; and
•
a $27 million decrease in interest expense, primarily due to the repayment of the Company's 6.875% senior notes, which matured in May 2018.
Partially offset by:
•
an $800 million increase in the Company's income tax provision, primarily a result of the 2017 Tax Cuts and Jobs Act, which resulted in recording a $625 million income tax benefit during 2017;
•
a $605 million increase in other expense, primarily related to a noncash charge of $443 million associated with the Company's planned closure of its Brady, Texas sand mine and $173 million of asset divestiture-related charges associated with the sale of the aforementioned pressure pumping assets and oil and gas properties during 2018;
•
a $333 million increase in total oil and gas production costs and production and ad valorem taxes as a result of the adoption of new revenue recognition rules, which had the effect of increasing production costs by $207 million in 2018 and the aforementioned increases in commodity prices and sales volumes;
•
a $192 million increase in derivative net losses, primarily as a result of changes in forward commodity prices and the cash settlement of derivative positions in accordance with their terms;
•
a $134 million increase in DD&A expense, primarily related to the aforementioned increase in sales volumes due to the Company's successful Spraberry/Wolfcamp horizontal drilling program; and
•
a $55 million increase in general and administrative expense, primarily due to an increase in compensation costs, including benefits expense, as a result of an increase in headcount due to the Company's continued growth and costs associated with the implementation of a new enterprise resource planning system.
•
During 2018, average daily sales volumes increased on a BOE basis by 17 percent to 319,984 BOEPD, as compared to 272,330 BOEPD during 2017, primarily due to the Company's successful Spraberry/Wolfcamp horizontal drilling program, which more than offset the loss of production associated with the Company's 2018 divestitures.
•
Average oil and NGL prices increased per Bbl in 2018 to $57.36 and $29.84, respectively, as compared to $48.24 and $19.31, respectively, in 2017. Average gas prices decreased per Mcf in 2018 to $2.13 as compared to $2.63 in 2017.
•
Net cash provided by operating activities increased by 54 percent to $3.2 billion for 2018, as compared to $2.1 billion during 2017, primarily due to increases in the Company's oil and gas revenues in 2018 as a result of increases in commodity prices and sales volumes, partially offset by a $627 million reduction in cash available from commodity derivative activities.
PIONEER NATURAL RESOURCES COMPANY
First Quarter 2019 Outlook
Based on the Company's ongoing South Texas divestiture process, it is only providing Permian Basin specific estimates for production, production costs and DD&A expense for the quarter ending March 31, 2019. All other operating and financial results for the quarter ending March 31, 2019 provided below reflect the expected results of the total Company.
2019 Capital Budget
The Company's capital budget for 2019 is expected to be in the range of $3.1 billion to $3.4 billion, consisting of $2.8 billion to $3.1 billion for drilling and completion related activities, including additional tank batteries and saltwater disposal facilities, and $300 million for gas processing facilities, water infrastructure, well services and vehicles. The 2019 capital budget excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical general and administrative expense and corporate facilities.
The 2019 capital budget is expected to be funded from a combination of operating cash flow, cash and cash equivalents on hand, sales of short-term and long-term investments and, if necessary, proceeds from planned asset divestitures or borrowings under the Company's credit facility.
Divestitures
In February 2018, the Company announced its intention to divest its properties in the South Texas, Raton Basin and West Panhandle fields and focus its efforts and capital resources on its Permian Basin assets.
In December 2018, the Company completed the sale of its pressure pumping assets to ProPetro in exchange for total consideration of $282 million, comprised of $110 million of short-term receivables to be paid by ProPetro during the first quarter of 2019 and 16.6 million shares of ProPetro's common stock. On January 1, 2019, ProPetro became a strategic long-term service provider to the Company of pressure pumping and related services. The Company recorded a gain of $30 million, employee-related charges of $19 million, contract termination charges of $13 million and other divestiture-related charges of $6 million associated with the sale.
In December 2018, the Company completed the sale of approximately 2,900 net acres in the Sinor Nest (Lower Wilcox) oil field in South Texas to an unaffiliated third party for cash proceeds of $105 million, after normal closing adjustments. During 2018, the Company recorded a gain of $54 million associated with the sale.
In August 2018, the Company completed the sale of its assets in the West Panhandle gas and liquids field to an unaffiliated third party for net cash proceeds of $170 million, after normal closing adjustments. The assets sold represent all of the Company's interests in the field, including all of its producing wells and the associated infrastructure. During 2018, the Company recorded a gain of $127 million and employee-related charges of $7 million associated with sale.
PIONEER NATURAL RESOURCES COMPANY
In July 2018, the Company completed the sale of its gas field assets in the Raton Basin to an unaffiliated third party for net cash proceeds of $54 million, after normal closing adjustments. The Company recorded a noncash impairment charge of $77 million in June 2018 to reduce the carrying value of its Raton Basin assets to their estimated fair value less costs to sell as the assets were considered held for sale. The Company recorded a gain of $2 million associated with this divestiture. The Company also recorded divestiture-related charges of $117 million, including $111 million of deficiency charges related to certain firm transportation contracts retained by the Company and employee-related charges of $6 million.
In April 2018, the Company completed the sale of approximately 10,200 net acres in the West Eagle Ford Shale gas and liquids field to an unaffiliated third party for net cash proceeds of $100 million, after normal closing adjustments. The Company recorded a gain of $75 million associated with the sale.
In April 2017, the Company completed the sale of approximately 20,500 acres in the Martin County region of the Permian Basin, with net production of approximately1,500 BOEPD, to an unaffiliated third party for cash proceeds of $264 million. The sale resulted in a gain of $194 million.
See Note 3 and Note 4 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Decommissioning Activities
In November 2018, the Company announced plans to close its sand mine located in Brady, Texas and transition its proppant supply requirements to West Texas sand sources. During 2018, the Company recorded $443 million of accelerated depreciation and $7 million of employee-related charges associated with the pending shutdown.
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Results of Operations
Oil and gas revenues. Oil and gas revenues totaled $5.0 billion, $3.5 billion and $2.4 billion for 2018, 2017 and 2016, respectively.
The increase in 2018 oil and gas revenues relative to 2017 is primarily due to increases of 20 percent, 16 percent and 12 percent in oil, NGL and gas sales volumes, respectively, and increases of 19 percent and 55 percent in oil and NGL prices, respectively, with a decrease of 19 percent in gas prices.
The increase in 2017 oil and gas revenues relative to 2016 is primarily due to increases of 19 percent, 26 percent and four percent in oil, NGL and gas sales volumes, respectively, and increases of 22 percent, 43 percent and 25 percent in oil, NGL and gas prices, respectively.
Average daily sales volumes in 2018 and 2017 increased by 17 percent and 16 percent, respectively, as compared to the average daily sales volumes in the respective prior years, principally due to the Company's successful Spraberry/Wolfcamp horizontal drilling program, which more than offset the loss of production associated with the Company's 2018 divestitures.
Average daily sales volumes are as follows:
_____________________
(a)
Gas production excludes gas produced and used as field fuel.
The oil, NGL and gas prices reported by the Company are based on the market prices received for the commodities. The average prices are as follows:
Sales of purchased oil and gas. The Company enters into pipeline capacity commitments in order to secure available oil, NGL and gas transportation capacity from the Company's areas of production. The Company also enters into purchase transactions with third parties and separate sale transactions with third parties to (i) diversify a portion of the Company's oil sales to the Gulf Coast refinery or international export markets and (ii) satisfy unused gas pipeline capacity commitments. Revenues and expenses from these transactions are presented on a gross basis as the Company acts as a principal in the transaction by assuming both the risk and rewards of ownership, including credit risk, of the commodities purchased and the responsibility to deliver the commodities sold. The transportation costs associated with these transactions are presented on a net basis in purchased oil and gas expense. The net effect of third party purchases and sales of oil and gas for the year ended December 31, 2018 was earnings of $458 million, as compared to a loss of $31 million and a loss of $64 million for the years ended December 31, 2017 and 2016, respectively. Firm transportation payments on excess pipeline capacity are included in other expense in the accompanying consolidated statements of operations. See Note 15 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
PIONEER NATURAL RESOURCES COMPANY
Interest and other income. The Company's interest and other income was $38 million for the year ended December 31, 2018, as compared to $53 million and $32 million for the years ended December 31, 2017 and 2016, respectively. The decrease in interest and other income for 2018 as compared to 2017 was primarily due to (i) a decrease of $3 million in interest income from short-term and long-term investments and (ii) a decrease of $12 million in severance, sales and property tax refunds. The increase in interest and other income for 2017 as compared to 2016 was primarily due to an increase of $11 million in severance, sales and property tax refunds and an increase of $10 million in interest income on short-term and long-term investments. See Note 14 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Derivative gains (losses), net. The Company utilizes commodity swap contracts, option contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. During the year ended December 31, 2018, the Company recorded $292 million of derivative net losses, compared to $100 million and $161 million of derivative net losses for the years ended December 31, 2017 and 2016, respectively, on commodity price, marketing and interest rate derivatives. For the year ended December 31, 2018, the Company made net cash payments of $562 million related to its derivative activities, as compared to net cash receipts of $74 million and $690 million for the years ended December 31, 2017 and 2016, respectively.
Commodity derivatives and the relative price impact (per Bbl or Mcf) are as follows:
_____________________
(a)
Excludes the effect of liquidating the Company's NYMEX WTI collar contracts with short puts and its Brent swap contracts for cash payments of $81 million and its ethane basis contracts for cash payments of $4 million.
The Company's open derivative contracts are subject to continuing market risk. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Note 5 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Gain on disposition of assets, net. The Company recorded net gains on the disposition of assets of $290 million, $208 million and $2 million for the years ended December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018, the Company substantially carried out its plan to divest of its properties in the South Texas, Raton Basin and West Panhandle fields and focus its efforts and capital resources on its Permian Basin assets.
During 2018, the Company completed the following divestitures:
For the year ended December 31, 2017, the Company's gain on disposition of assets is primarily due to a gain of $194 million recorded on the sale of approximately 20,500 acres in the Martin County region of the Permian Basin.
PIONEER NATURAL RESOURCES COMPANY
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information .
Oil and gas production costs. The Company recorded oil and gas production costs of $855 million, $591 million and $581 million for the years ended December 31, 2018, 2017 and 2016, respectively. Lease operating expenses and workover expenses represent the components of oil and gas production costs over which the Company has management control. Current year gathering, processing and transportation charges are inclusive of the effect of the adoption of ASC 606 as described in Note 2 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
Net natural gas plant/gathering charges represent the net costs to gather and process the Company's gas, reduced by net revenues earned from gathering and processing of third party gas in Company-owned facilities.
Total production costs per BOE are as follows:
Total oil and gas production costs per BOE for the year ended December 31, 2018 increased 23 percent and eight percent compared to 2017 and 2016, respectively. Lease operating expense per BOE decreased for the year ended December 31, 2018, as compared to the 2017 and 2016 due to a greater proportion of the Company's production coming from horizontal wells in Spraberry/Wolfcamp area, which have lower per BOE lease operating costs. The adoption of ASC 606 had the effect of increasing gathering, processing and transportation charges by $1.78 per BOE over what would have been reported if these changes were accounted for under ASC 605. Th decline in gathering, processing and transportation expenses from 2016 to 2017 is primarily attributable to lower aggregate gathering fees in the Eagle Ford field due to declining production. The net natural gas plant income per BOE is primarily reflective of increased earnings on third party volumes that are processed in the Company-owned facilities due to higher NGL prices. The increase in workover costs per BOE was primarily due to an increase in Permian vertical well workover activity due to the improvement in oil and NGL prices.
Production and ad valorem taxes. The Company recorded production and ad valorem taxes of $284 million for 2018, as compared to $215 million and $136 million for 2017 and 2016, respectively. In general, production taxes and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. The increase in production and ad valorem taxes per BOE for the year ended December 31, 2018 as compared to 2017 and 2016, is primarily due to the increase in oil and NGL prices during 2017 and 2018 and, for ad valorem tax purposes, the higher valuation attributable to the Company's successful Spraberry/Wolfcamp horizontal drilling program.
Production and ad valorem taxes per BOE are as follows:
Depletion, depreciation and amortization expense. The Company's total DD&A expense was $1.5 billion ($13.13 per BOE), $1.4 billion ($14.08 per BOE) and $1.5 billion ($17.29 per BOE) for 2018, 2017 and 2016, respectively. Depletion expense on oil and gas properties, the largest component of DD&A expense, was $12.52, $13.61 and $16.77 per BOE for 2018, 2017 and 2016, respectively.
Year over year depletion expense on oil and gas properties per BOE for the years ended December 31, 2018, 2017 and 2016 decreased eight percent and 19 percent, respectively. The decrease was primarily due to (i) additions to proved reserves attributable to the Company's successful Spraberry/Wolfcamp horizontal drilling program and (ii) commodity price increases and cost reduction initiatives, both of which had the effect of adding proved reserves by lengthening the economic lives of the Company's producing wells.
PIONEER NATURAL RESOURCES COMPANY
Impairment of oil and gas properties and other long-lived assets.The Company performs assessments of its long-lived assets to be held and used, including oil and gas properties, whenever events or circumstances indicate that the carrying values of those assets may not be recoverable.
As a result of the Company's impairment assessments, the Company recorded noncash impairment charges to reduce the carrying values of its oil and gas properties as follows:
•
2018: Raton Basin gas field assets ($77 million);
•
2017: Raton Basin gas field assets ($285 million); and
•
2016: West Panhandle gas and liquids field ($32 million).
See Note 2 and Note 4 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Exploration and abandonments expense. Geological and geophysical costs, exploratory dry holes expense and leasehold abandonments and other exploration expense are as follows:
The increase in exploration and abandonments expense of $8 million for the year ended December 31, 2018, as compared to 2017, was primarily due to a $13 million increase in exploratory well costs related to the abandonment of seven drilled but not completed exploration wells in South Texas as a result of the Company's decision to focus capital spending on its Permian Basin assets, partially offset by a decrease in leasehold abandonments expense and other of $6 million. The decrease in exploration and abandonments expense of $13 million for the year ended December 31, 2017, as compared to 2016, was primarily due to a decrease in leasehold abandonments and other of $29 million, partially offset by an increase in unsuccessful exploration wells of $9 million. Leasehold abandonments and other in 2016 included $32 million associated with unproved acreage in Alaska in which the Company held an overriding royalty interest.
During 2018, 2017 and 2016, the Company completed and evaluated 261, 224, and 215 exploration/extension wells, respectively, and 96 percent, 99 percent, and 100 percent, respectively, were successfully completed as discoveries.
General and administrative expense. General and administrative expense totaled $381 million ($3.26 per BOE), $326 million ($3.28 per BOE) and $325 million ($3.80 per BOE) for 2018, 2017 and 2016, respectively. The increase in general and administrative expense for the year ended December 31, 2018, as compared to 2017 and 2016, was primarily due to an increase in compensation costs, including benefits expense, as a result of an increase in headcount due to the Company's continued growth and costs associated with the implementation of a new enterprise resource planning system.
Accretion of discount on asset retirement obligations. Accretion of discount on asset retirement obligations was $14 million, $19 million and $18 million for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 9 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Interest expense. Interest expense was $126 million, $153 million and $207 million for 2018, 2017 and 2016, respectively. The decrease in interest expense for the year ended December 31, 2018, as compared to 2017, was primarily due to the repayment of the Company's 6.875% Senior Notes, which matured in May 2018. The decrease in interest expense for the year ended December 31, 2017, as compared to 2016, was primarily due to the repayment of both the Company's 6.65% Senior Notes, which matured in March 2017, and the Company's 5.875% Senior Notes, which matured in July 2016. The weighted average interest rate on the Company's indebtedness for the year ended December 31, 2018 was 5.4 percent, as compared to 5.6 percent and 6.0 percent for the years ended December 31, 2017 and 2016, respectively.
See Note 7 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Other expense. Other expense was $849 million for 2018, as compared to $244 million for 2017 and $288 million for 2016. The $605 million increase in other expense for 2018, as compared to 2017, was primarily due to accelerated depreciation of $443
PIONEER NATURAL RESOURCES COMPANY
million related to the decommissioning of the Company's Brady, Texas sand mine and other divestiture-related charges of $173 million associated with the Company's 2018 asset divestitures.
The $44 million decrease in other expense for 2017, as compared to 2016, was primarily due to (i) a decrease of $64 million in idle drilling and well service equipment charges and (ii) a decrease of $37 million in net losses from Company-provided fracture stimulation and related service operations that are provided to third party working interest owners, partially offset by (iii) an increase of $58 million in unused firm transportation costs.
The Company expects to continue to incur charges associated with excess firm gathering and transportation commitments until the contractual obligations expire.
See Note 2, Note 10 and Note 15 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Income tax (provision) benefit. The Company recorded an income tax provision attributable to earnings of $276 million during 2018, as compared to an income tax benefit of $524 million and $403 million during 2017 and 2016, respectively. The increase of $800 million in the income tax provision recorded in 2018 as compared to the income tax benefit recorded in 2017 is primarily attributable to a $625 million income tax benefit recorded during 2017 as a result of the enactment of the December 22, 2017 Tax Cuts and Jobs Act (the "Tax Reform Legislation").
The Company's effective tax rate on earnings, excluding income from noncontrolling interest, for 2018, 2017 and 2016 was 22 percent, (170) percent and 42 percent, respectively, as compared to the combined United States federal and state statutory rates of 22 percent for 2018 and 36 percent for years prior to 2018.
The Company's effective tax rate for 2017 differs from the combined statutory rate primarily due to the enactment of the Tax Reform Legislation, which made significant changes to the U.S. federal income tax law. The most significant change affecting the Company was a reduction in the federal corporate income tax rate to 21 percent beginning January 1, 2018. This rate change resulted in a $625 million income tax benefit for 2017, primarily associated with the remeasurement of the Company's deferred tax liabilities at the new corporate tax rate as of December 31, 2017. Excluding the effects of the Tax Reform Legislation, the Company's effective tax rate for 2017 would have been 33 percent.
The effective tax rate for 2016 differs from the combined statutory rate primarily due to recognizing research and experimental expenditures credits of $72 million during 2016 and, to a lesser extent, state income tax apportionments and nondeductible expenses.
See Note 16 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Liquidity and Capital Resources
Liquidity. The Company's primary sources of short-term liquidity are (i) cash and cash equivalents, (ii) net cash provided by operating activities, (iii) sales of short-term and long-term investments, (iv) proceeds from divestitures, (iv) unused borrowing capacity under its credit facility (the "Credit Facility"), (v) issuances of debt or equity securities and (vi) other sources, such as sales of nonstrategic assets.
The Company's primary needs for cash are for (i) capital expenditures, (ii) acquisitions of oil and gas properties, (iii) payments of contractual obligations, including debt maturities, (iv) dividends and share repurchases and (v) working capital obligations. Funding for these cash needs may be provided by any combination of the Company's sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its 2019 capital expenditures, dividend payments and provide adequate liquidity to fund other needs, including stock repurchases, no assurance can be given that such funding sources will be adequate to meet the Company's future needs.
2019 capital budget. The Company' capital budget for 2019 is expected to be in the range of $3.1 billion to $3.4 billion, consisting of $2.8 billion to $3.1 billion for drilling and completion related activities, including additional tank batteries and saltwater disposal facilities, and $300 million for gas processing facilities, water infrastructure, well services and vehicles. The 2019 capital budget excludes acquisitions, asset retirement obligations, capitalized interest, geological and geophysical general and administrative expense and corporate facilities.
Capital resources. Cash flows from operating, investing and financing activities are summarized below.
As of December 31, 2018, the Company had no outstanding borrowings under its Credit Facility, leaving $1.5 billion of unused borrowing capacity. The Company was in compliance with all of its debt covenants as of December 31, 2018. The Company also had cash on hand of $825 million, short-term investments of $443 million and long-term investments of $125 million as of December 31, 2018.
Operating activities. Net cash provided by operating activities for the years ended December 31, 2018, 2017 and 2016 was $3.2 billion, $2.1 billion and $1.5 billion, respectively. The increase in net cash flow provided by operating activities in 2018, as compared to 2017, was primarily due to increases in the Company's oil and gas revenues in 2018 as a result of increases in commodity prices and sales volumes, partially offset by a $627 million reduction in cash available from commodity derivative activities. The increase in net cash flow provided by operating activities in 2017, as compared to 2016, was primarily due to increases in the Company's oil and gas revenues in 2017 as a result of increases in commodity prices and sales volumes, partially offset by a $613 million reduction in cash provided by commodity derivatives.
PIONEER NATURAL RESOURCES COMPANY
Investing activities. Net cash used in investing activities during 2018 was $2.6 billion, as compared to net cash used in investing activities of $1.8 billion and $3.8 billion during 2017 and 2016, respectively.
The increase of $818 million in net cash flow used in investing activities during 2018, as compared to 2017, is primarily due an increase of $1.2 billion in additions to oil and gas properties offset by a decrease of $235 million in purchases of investments (commercial paper, corporate bonds and time deposits) and a $117 million increase in net cash proceeds from the disposition of assets. The Company's investing activities during the year ended December 31, 2018 were primarily funded by net cash provided by operating activities.
The decrease of $2.0 billion in net cash flow used in investing activities during 2017, as compared to 2016, is primarily due to (i) a decrease of $1.8 billion in purchases of investments (commercial paper, corporate bonds and time deposits), (ii) a $562 million increase in proceeds from investments and (iii) the purchase of 28,000 net acres in the Permian Basin for $428 million in 2016, partially offset by (iv) a $508 million increase in additions to oil and gas properties, (v) a $155 million decrease in net cash proceeds from the disposition of assets and (v) a $135 million increase in additions to other property and equipment.
Net cash proceeds received from the Company's significant divestitures are as follows:
______________________
(a)
The Company received total consideration of $1.0 billion related to the sale of its equity interest in EFS Midstream, of which $530 million was received at closing in July 2015 and the remaining $501 million was received in July 2016.
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Financing activities. Net cash used in financing activities during 2018 was $703 million, as compared to $529 million during 2017 and net cash provided by financing activities of $2.0 billion during 2016. The Company's significant financing activities are as follows:
•
2018: The Company repaid $450 million associated with the maturity of its 6.875% senior notes, repurchased $179 million of its common stock and paid dividends of $55 million.
•
2017: The Company repaid $485 million associated with the maturity of its 6.65% senior notes and repurchased $36 million of its common stock.
•
2016: The Company repaid $455 million associated with the maturity of the Company's 5.875% senior notes and received net cash proceeds of $2.5 billion associated with the sale of shares of its common stock.
See Note 7 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Dividends/distributions. During the year ended December 31, 2018, the Company's board of directors declared semiannual dividends of $0.16 per common share, compared to semiannual dividends of $0.04 per common share during each of the years ended December 31, 2017 and 2016. The Company paid $55 million, $14 million and $13 million, respectively, of aggregate dividends. In addition, in February 2019, the board of directors declared a cash dividend of $0.32 per share on Pioneer's outstanding common stock, payable April 12, 2019 to stockholders of record at the close of business on March 29, 2019. Future dividends are at the discretion of the Company's board of directors, and, if declared, the board of directors may change the dividend amount based on the Company's liquidity and capital resources at that time.
PIONEER NATURAL RESOURCES COMPANY
Off-balance sheet arrangements. From time to time, the Company enters into arrangements and transactions that can give rise to material off-balance sheet obligations of the Company. As of December 31, 2018, the material off-balance sheet arrangements and transactions that the Company had entered into included (i) operating lease agreements (primarily related to contracted drilling rigs, equipment and office facilities), (ii) firm purchase, transportation and fractionation commitments, (iii) open purchase commitments and (iv) contractual obligations for which the ultimate settlement amounts are not fixed and determinable. The contractual obligations for which the ultimate settlement amounts are not fixed and determinable include (i) derivative contracts that are sensitive to future changes in commodity prices or interest rates, (ii) gathering, processing (primarily treating and fractionation) and transportation commitments on uncertain volumes of future throughput, (iii) open purchase commitments and (iv) indemnification obligations following certain divestitures. Other than the off-balance sheet arrangements described above, the Company has no transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the Company's liquidity or availability of or requirements for capital resources. The Company expects to enter into similar contractual arrangements in the future, including incremental derivative contracts and additional firm purchase, transportation and fractionation arrangements, in order to support the Company's business plans. See "Contractual obligations" below and Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Contractual obligations. The Company's contractual obligations include long-term debt, operating leases (primarily related to contracted drilling rigs, equipment and office facilities), capital funding obligations, derivative obligations, firm transportation and fractionation commitments, minimum annual gathering, processing and transportation commitments and other liabilities (including postretirement benefit obligations). Other joint owners in the properties operated by the Company could incur portions of the costs represented by these commitments.
Contractual obligations are estimated as follows:
_____________________
(a)
The amounts included in the table above represent principal maturities only. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and Note 7 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
(b)
Includes drilling commitments that represent future minimum expenditure commitments for drilling rig services and well commitments under contracts to which the Company was a party on December 31, 2018. See Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
(c)
Derivative obligations represent net liabilities determined in accordance with master netting arrangements for commodity derivatives that were valued as of December 31, 2018. The Company's commodity derivative contracts are periodically measured and recorded at fair value and continue to be subject to market and credit risk. The ultimate liquidation value of the Company's commodity derivatives will be dependent upon actual future commodity prices, which may differ materially from the inputs used to determine the derivatives' fair values as of December 31, 2018. See Note 5 and Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information.
(d)
Open purchase commitments primarily represent expenditure commitments for inventories, materials and other property and equipment ordered, but not received, as of December 31, 2018.
(e)
The Company's other liabilities represent current and noncurrent other liabilities that are comprised of litigation and environmental contingencies, asset retirement obligations and other obligations for which neither the ultimate settlement amounts nor their timings can be precisely determined in advance. See Note 8, Note 9 and Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
(f)
Firm purchase, gathering, processing, transportation and fractionation commitments represent take-or-pay agreements, which include (i) contractual commitments to purchase sand and water for use in the Company's drilling operations and
PIONEER NATURAL RESOURCES COMPANY
(ii) estimated fees on production throughput commitments and demand fees associated with volume delivery commitments. The Company does not expect to be able to fulfill all of its short-term and long-term volume delivery obligations from projected production of available reserves; consequently, the Company plans to purchase third party volumes to satisfy its commitments if it is economic to do so; otherwise, it will pay demand fees for any commitment shortfalls. See "Item 2.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company's financial position is routinely subject to a variety of risks, including market risks associated with changes in commodity prices, interest rate movements on outstanding debt and credit risks. These risks are mitigated through the Company's risk management program, which includes the use of derivative instruments. The following quantitative and qualitative information is provided about financial instruments to which the Company was a party as of December 31, 2018, and from which the Company may incur future gains or losses from changes in commodity prices or interest rates. The Company does not enter into any financial instruments, including derivatives, for speculative or trading purposes.
Interest rate risk. As of December 31, 2018 the Company had no variable rate debt outstanding under its credit facility and therefore no related exposure to interest rate risk. As of December 31, 2018, the Company had $2.3 billion of fixed rate long-term debt outstanding with an weighted average interest rate of 5.4 percent. Although changes in interest rates may affect the fair value of the Company's fixed rate long-term debt, any changes would not expose the Company to the risk of earnings or cash flow losses. The Company has no interest rate derivative instruments outstanding; however, it may enter into such instrument in the future to mitigate interest rate risk. See Note 4 and Note 7 of Notes to Consolidated Financial Statements included in "Item 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Pioneer Natural Resources Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pioneer Natural Resources Company (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the related amendments, effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1998.
Dallas, Texas
February 26, 2019
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in millions, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except share data and dividends per share)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (continued)
(in millions, except share data and dividends per share)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 1. 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 that explores for, develops and produces oil, natural gas liquids ("NGLs") and gas within the United States, with operations primarily in the Permian Basin in West Texas.
NOTE 2. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries since their acquisition or formation. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.
Use of estimates in the preparation of financial statements. Preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and gas properties and impairment of goodwill and proved and unproved oil and gas properties, in part, is determined using estimates of proved, probable and possible oil and gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.
Cash and cash equivalents. The Company's cash and cash equivalents include depository accounts held by banks and marketable securities with original issuance maturities of 90 days or less.
Investments. Periodically, the Company invests in commercial paper and corporate bonds with investment grade rated entities. The Company also periodically enters into time deposits with financial institutions. Commercial paper and time deposits are included in cash and cash equivalents if they have maturity dates that are less than 90 days at the date of purchase; otherwise, investments are classified as short-term investments or long-term investments in the consolidated balance sheets based on their maturity dates.
Investments are carried at amortized cost and classified as held-to-maturity as the Company has the intent and ability to hold them until they mature. The carrying values of held-to-maturity investments are adjusted for amortization of premiums and accretion of discounts over the remaining life of the investment. Income related to these investments is recorded as interest and other income in the consolidated statements of operations.
Accounts receivable. The Company's accounts receivable - trade are primarily comprised of oil and gas sales receivables, joint interest receivables and other receivables for which the Company does not require collateral security. The Company's share of oil and gas production is sold to various purchasers who must be prequalified under the Company's credit risk policies and procedures. The Company records allowances for doubtful accounts based on the age of accounts receivables and the financial condition of its purchasers. The Company's credit risk related to collecting accounts receivables is mitigated by using credit and other financial criteria to evaluate the credit standing of the entity obligated to make payment on the accounts receivable, and where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support.
As of December 31, 2018 and 2017, the Company's allowance for doubtful accounts totaled $2 million and $1 million, respectively. The Company establishes allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable. The Company estimates the portions of joint interest receivables for which failure to collect is probable based on percentages of joint interest receivables that are past due. The Company estimates the portions of other receivables for which failure to collect is probable based on the relevant facts and circumstances surrounding the receivable. Allowances for doubtful accounts are recorded as reductions to the carrying values of the receivables included in the Company's consolidated balance sheets and as charges to other expense in the consolidated statements of operations in the accounting periods during which failure to collect an estimable portion is determined to be probable.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Inventories. The Company's inventories consist of materials, supplies and commodities. The Company's materials and supplies inventory is primarily comprised of oil and gas drilling or repair items such as tubing, casing, proppant used to fracture-stimulate oil and gas wells, water, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market, on a weighted average cost basis. Valuation allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supplies inventories in the Company's consolidated balance sheets and as charges to other expense in the consolidated statements of operations.
During the second quarter of 2018, the Company made a voluntary change in accounting policy to account for its materials and supplies inventory on a weighted average cost basis, versus using the previous accounting policy of the first-in-first-out basis. The Company made this voluntary change in accounting policy because it believes this method is preferable, as the weighted average cost basis more closely aligns with the physical flow of material and supplies inventory and is more widely utilized in the oil and gas industry. This voluntary change in accounting policy did not have a material effect on the Company's consolidated financial statements for prior periods. As such, prior periods have not been restated.
Commodity inventories are carried at the lower of cost or market, on a first-in, first-out basis. The Company's commodity inventories consist of oil, NGLs and gas volumes held in storage or as linefill in pipelines. Any valuation allowances of commodity inventories are recorded as reductions to the carrying values of the commodity inventories included in the Company's consolidated balance sheets and as charges to other expense in the consolidated statements of operations.
The components of inventories are as follows:
____________________
(a)
As of December 31, 2018 and 2017, the Company's materials and supplies inventories were net of valuation allowances of $5 million and $5 million, respectively.
Investment in affiliate. In December 2018, the Company completed the sale of its pressure pumping assets to ProPetro Holding Corp. ("ProPetro") in exchange for short-term receivables and 16.6 million shares of ProPetro's common stock, representing an ownership interest in ProPetro of approximately 16 percent as of December 31, 2018. Additionally, the Company is entitled to designate a director and an independent director to ProPetro's board of directors. Based on its ownership in ProPetro and representation on the ProPetro board of directors, the Company has determined it has the ability to exercise significant influence over the operating and financial policies of ProPetro. The Company uses the fair value option to account for its equity method investment in ProPetro. The carrying value of the Company's short-term receivables and investment in ProPetro are classified as accounts receivable - due from affiliates and investment in affiliate, respectively, in the consolidated balance sheets. See Note 4 and Note 11 for additional information.
Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs and geological and geophysical expenditures are expensed. The Company capitalizes interest on expenditures for significant development projects, generally when the underlying project is sanctioned, until such projects are ready for their intended use.
The Company does not carry the costs of drilling an exploratory well as an asset in its consolidated balance sheets following the completion of drilling unless both of the following conditions are met: (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.
Due to the capital-intensive nature and the geographical location of certain projects, it may take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability. In these instances, the project's feasibility is not contingent upon price improvements or advances in technology, but
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
rather the Company's ongoing efforts and expenditures related to accurately predicting the hydrocarbon recoverability based on well information, gaining access to other companies' production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells. These activities are ongoing and are being pursued constantly. Consequently, the Company's assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonments expense. See Note 6 for additional information.
The Company owns interests in 11 gas processing plants and two treating facilities. The Company is the operator of the two treating facilities and none of the gas processing plants. Two of the gas processing facilities are under construction and one of the treating facilities is not currently being used. The Company's ownership interests in the gas processing plants and treating facilities are primarily to accommodate handling the Company's gas production and thus are considered a component of the capital and operating costs of the respective fields that they service. To the extent that there is excess capacity at a plant or treating facility, the Company attempts to process third-party gas volumes for a fee to keep the plant or treating facility at capacity. All revenues and expenses derived from third-party gas volumes processed through the plants and treating facilities are reported as components of oil and gas production costs. Third-party revenues generated from the processing plants and treating facilities for the years ended December 31, 2018, 2017 and 2016 were $78 million, $60 million and $41 million, respectively. Third-party expenses attributable to the processing plants and treating facilities for the same respective periods were $36 million, $26 million and $24 million. The capitalized costs of the plants and treating facilities are included in proved oil and gas properties and are depleted using the unit-of-production method along with the other capitalized costs of the field that they service.
The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves. Costs of significant nonproducing properties, wells in the process of being drilled and development projects are excluded from depletion until the related project is completed and proved reserves are established or, if unsuccessful, impairment is determined.
Proceeds from the sales of individual properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depletion, depreciation and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recorded until an entire amortization base is sold. However, gain or loss is recorded from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.
The Company performs assessments of its long-lived assets to be held and used, including proved oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows, including vertical integrated services that are used in the development of the assets, is less than the carrying amount of the assets, including the carrying value of vertical integrated services assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. See Note 4 for additional information.
Unproved oil and gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment charge at that time.
Goodwill. Goodwill is assessed for impairment whenever it is likely that events or circumstances indicate the carrying value of a reporting unit exceeds its fair value, but no less often than annually. An impairment charge is recorded for the amount by which the carrying amount exceeds the fair value of a reporting unit in the period it is determined to be impaired.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, "Simplifying the Test of Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 simplifies the quantitative goodwill impairment test by eliminating the requirement to calculate the implied fair value of goodwill (step 2 of the previous goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit's carrying value over its fair value (as measured in step 1 of the previous goodwill impairment test). ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In July 2018, the Company elected to early adopt this update. The adoption of ASU 2017-04 had no impact on the Company's consolidated financial statements.
The Company performed its annual qualitative assessment of goodwill during the third quarter of 2018 to determine whether it was more likely than not that the fair value of the Company's reporting unit was less than its carrying amount. Based on the
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
results of the assessment, the Company determined it was not likely that the carrying value of the Company's reporting unit exceeded its fair value.
Other property and equipment, net. Other property and equipment is recorded at cost. The net carrying values of other property and equipment are as follows:
____________________
(a)
At December 31, 2018 and 2017, other property and equipment was net of accumulated depreciation of $854 million and $937 million, respectively.
(b)
The decrease from December 31, 2017 is primarily due to the Company's sale of its pressure pumping assets on December 31, 2018.
(c)
Includes sand mines, facilities and unproved leaseholds that primarily provide the Company with proppant for use in the fracture stimulation of oil and gas wells. The decrease from December 31, 2017 is primarily due to the Company's plan to close its sand mine located in Brady, Texas. Other property and equipment associated with the Brady, Texas sand mine was subject to accelerated depreciation to reduce such property and equipment to its net realizable value by its expected closure in May 2019. The accelerated depreciation associated with the planned closure is recorded to other expense in the consolidated statements of operations. See Note 3 for additional information.
(d)
Includes pipeline infrastructure costs and water supply wells.
(e)
Includes vehicles and well servicing equipment, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, construction equipment and fishing tools that provide well services on Company-operated properties.
(f)
Includes capitalized costs and capitalized interest on other property and equipment not yet placed in service as of December 31, 2018 and 2017. Construction in progress, including related capitalized interest, associated with the Company's new corporate headquarters was $217 million and $57 million as of December 31, 2018 and 2017, respectively. See Note 10 for additional information.
Other property and equipment is depreciated over its estimated useful life on a straight-line basis. Buildings are generally depreciated over 20 to 39 years. Equipment, vehicles, furniture and fixtures and information technology assets are generally depreciated over two to 15 years. Water infrastructure is generally depreciated over ten to 50 years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the underlying terms of the associated leases.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recorded is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. The estimated fair value is determined using either a discounted future cash flow model or another appropriate fair value method.
Asset retirement obligations. The Company records a liability for the fair value of an asset retirement obligation in the period in which the associated asset is acquired or placed into service, if a reasonable estimate of fair value can be made. Asset retirement obligations are generally capitalized as part of the carrying value of the long-lived asset to which it relates. Conditional asset retirement obligations meet the definition of liabilities and are recorded when incurred and when fair value can be reasonably estimated.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the consolidated balance sheets and expenditures are classified as cash used in operating activities in the consolidated statements of cash flows. See Note 9 for additional information.
Treasury stock. Treasury stock purchases are recorded at cost. Upon reissuance, the cost of treasury shares held is reduced by the average purchase price per share of the aggregate treasury shares held.
Issuance of common stock. In January and June of 2016, the Company issued 13.8 million and 6.0 million shares of its common stock, respectively, and realized cash proceeds of $1.6 billion and $937 million, respectively, net of associated underwriting and offering expenses.
Revenue recognition. The Company recognizes revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU No. 2014-09, Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" ("ASC 606"), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition" ("ASC 605"), on January 1, 2018 using the modified retrospective transition method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC 605. The Company completed a detailed review of its revenue contracts in 2017, which represented all of the Company's revenue streams including oil, NGL and gas sales and sales of purchased oil and gas, in order to adopt the new standard beginning on January 1, 2018. The Company did not record a change to its opening retained earnings as of January 1, 2018 as there was no material change to the timing or pattern of revenue recognition due to the adoption of ASC 606.
Prior to the adoption of ASC 606 on January 1, 2018, the Company recognized revenue when it was realized or realizable and earned. Revenues were considered realized or realizable and earned when: (i) persuasive evidence of an arrangement existed, (ii) delivery occurred or services had been rendered, (iii) the seller's price to the buyer was fixed or determinable and (iv) collectability was reasonably assured.
The adoption of ASC 606 as of January 1, 2018 impacted the Company's results of operations as follows:
Changes in oil and gas revenues and oil and gas production costs (specifically gathering, processing and transportation costs) are due to the conclusion under the control model in ASC 606 that the third-party processor or transporter is only providing gas processing or transportation services and that the Company remains the principal owner of the commodity until sold to the ultimate purchaser. This is a change from ASC 605 where the Company historically recorded gas processing fees as a reduction of revenue recognized by the Company, as these fees were considered necessary to separate the wet gas stream into its sellable components (i.e., dry gas and individual NGL components). Under ASC 605, third-party processing and transportation companies were determined to have control of the commodities being processed and transported. As a result of adopting ASC 606, the Company has modified its presentation of revenues and expenses for these arrangements. Revenues related to these agreements are now presented on a gross basis for amounts expected to be received from third-party purchasers through the marketing process. Gathering, processing and transportation expenses related to these agreements, incurred prior to the transfer of control to the purchaser, are now presented as oil and gas production costs. See Note 13 for additional information.
The Company enters into purchase transactions with third parties and separate sale transactions with third parties to diversify a portion of the Company's West Texas Intermediate oil ("WTI") sales to a Gulf Coast or export market price and to satisfy unused gas pipeline capacity commitments. Revenues and expenses from these transactions are presented on a gross basis as the Company acts as a principal in the transaction by assuming the risk and rewards of ownership, including credit risk, of the commodities purchased and assuming the responsibility to deliver the commodities sold. Transportation costs associated with purchases and
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
sales of third-party oil and gas are presented on a net basis in purchased oil and gas expense. Firm transportation payments on excess pipeline capacity are recorded as other expense in the consolidated statements of operations. See Note 15 for additional information.
Derivatives. All of the Company's derivatives are accounted for as non-hedge derivatives and are recorded at estimated fair value in the consolidated balance sheets. All changes in the fair values of its derivative contracts are recorded as gains or losses in the earnings of the periods in which they occur. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty. 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 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 credit-adjusted risk-free rate curve. 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.
The Company's credit risk related to derivatives is a counterparty's failure to perform under derivative contracts owed to the Company. The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.
The Company has entered into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note 5 for additional information.
Income taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.
The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on projected future taxable income, applicable tax strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not (likelihood of greater than 50 percent) that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. If all or a portion of the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company's deferred tax liability and will affect the Company's effective tax rate in the period it is recognized. See Note 16 for additional information.
The Company records any tax-related interest charges as interest expense and any tax-related penalties as other expense in the consolidated statements of operations.
Stock-based compensation. Stock-based compensation expense for restricted stock, restricted stock units and performance units expected to be settled in the Company's common stock ("Equity Awards") is measured at the grant date or modification date, as applicable, using the fair value of the award, and is recorded, net of estimated forfeitures, on a straight line basis over the vesting period of the respective award. The fair value of Equity Awards, except performance unit awards, is determined on the grant date or modification date, as applicable, using the prior day's closing stock price. The fair value of performance unit awards is determined using the Monte Carlo simulation model.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Equity Awards are net settled by withholding shares of the Company's common stock to satisfy income tax withholding payments due upon vesting. Remaining vested shares are remitted to individual employee brokerage accounts. Shares to be delivered upon vesting of Equity Awards are made available from authorized, but unissued shares or shares held as treasury stock.
Restricted stock awards expected to be settled in cash on their vesting dates, rather than in common stock ("Liability Awards"), are classified as accounts payable - due to affiliates on the consolidated balance sheets. The fair value of Liability Awards on the grant date is determined using the prior day's closing stock price. Liability Awards are marked to fair value as of each balance sheet date using the closing stock price on the balance sheet date. Changes in the fair value of Liability Awards are recorded as increases or decreases to stock-based compensation expense.
Equity Awards and Liability awards participate in dividends during vesting periods and generally vest over three years.
Segments. Based upon how the Company is organized and managed, the Company has one reportable operating segment, which is oil and gas development, exploration and production. The Company considers its vertical integration services as ancillary to its oil and gas development, exploration and producing activities and manages these services to support such activities. In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise.
New accounting pronouncements. In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASC 842"). ASC 842 requires lessees to recognize lease assets and lease liabilities for those leases currently classified as operating leases and makes certain changes to the accounting for lease expenses. This standard will be effective for the Company for interim periods beginning January 1, 2019. ASC 842 should be applied using a modified retrospective approach. The Company will elect to apply transition guidance under ASU 2018-11, "Leases (Topic 842) Targeted Improvements," in which ASC 842 is applied at the adoption date, while the comparative periods will continue to be reported in accordance with historic accounting under ASC 840, "Leases." This standard does not apply to leases to explore for or use minerals, oil or gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained.
Based on its current commitments, the Company will be required to recognize lease assets and liabilities related to drilling rig commitments, certain equipment rentals and leases, certain surface use agreements and potentially other arrangements. The Company plans to apply certain practical expedients provided in ASC 842 that, among other things, allow entities to not reassess contracts that commenced prior to adoption and to not recognize right of use assets and lease liabilities related to short-term leases. The adoption of ASC 842 will have a material impact on the Company's consolidated balance sheets, but will not have an impact on the consolidated statements of operations or the consolidated statements of cash flows. In preparation for the adoption of the standard, the Company has developed internal controls applicable to the process used to determine financial information required to be recognized and disclosed.
Upon adoption of ASC 842, the Company will recognize lease assets and lease liabilities in the range of $300 million to $350 million each, as of January 1, 2019. The Company will also derecognize $217 million of other property and equipment and $219 million of build-to-suit lease liability costs associated with the construction of the Company's new corporate headquarters as this contract will no longer qualify for capitalization. The contract for the Company's new corporate headquarters will be evaluated under ASC 842 upon lease commencement, which is expected to occur during the second half of 2019.
NOTE 3. Acquisitions, Divestitures and Decommissioning Activities
Acquisitions. During 2018, 2017 and 2016, the Company spent a total of $65 million, $136 million and $446 million, respectively, to acquire primarily undeveloped acreage for future exploitation and exploration activities in the Spraberry/Wolfcamp field of the Permian Basin.
As part of the the 2016 acquisitions, the Company acquired approximately 28,000 net acres in the Permian Basin, with net production of approximately 1,400 barrels of oil equivalent per day ("BOEPD"), from an unaffiliated third party for $428 million. The acquisition was accounted for as a business combination.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
The allocation of the acquisition price to the assets acquired and the liabilities assumed based on their fair value at the acquisition date (in millions) is as follows:
The fair value measurements of the net assets acquired in 2016 are based on inputs that are not observable in the market and, therefore, represent Level 3 inputs in the fair value hierarchy (see Note 4 for additional information). The Company calculated the fair value of the acquired proved properties and asset retirement obligations using a discounted future cash flow model that utilizes management's estimates of (i) proved reserves, (ii) forecasted production rates, (iii) future operating, development and plugging and abandonment costs, (iv) future commodity prices and (v) a discount rate of ten percent for proved properties and seven percent for asset retirement obligations. The Company calculated the fair value of the acquired unproved properties based on the average price per acre in comparable market transactions. The operating results attributable to the acquired assets and liabilities assumed are included in the Company's consolidated statements of operations since the date of acquisition. In connection with the acquisition, the Company incurred acquisition related costs (primarily consulting, advisory and legal fees) of $1 million.
Divestitures.
The Company's significant divestitures are as follows:
•
In December 2018, the Company completed the sale of its pressure pumping assets to ProPetro in exchange for total consideration of $282 million, comprised of $110 million of short-term receivables to be paid by ProPetro during the first quarter of 2019 and 16.6 million shares of ProPetro's common stock that had a fair value of $172 million. The total consideration is a noncash investing activity as of December 31, 2018. The Company recorded a gain of $30 million, employee-related charges of $19 million, contract termination charges of $13 million and other divestiture-related charges of $6 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $3 million, reflecting the portion of the Company's goodwill related to the assets sold. See Note 2 and Note 11 for additional information.
•
In December 2018, the Company completed the sale of approximately 2,900 net acres in the Sinor Nest (Lower Wilcox) oil field in South Texas to an unaffiliated third party for net cash proceeds $105 million, after normal closing adjustments. The Company recorded a gain of $54 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
•
In August 2018, the Company completed the sale of its assets in the West Panhandle gas and liquids field to an unaffiliated third party for net cash proceeds of $170 million, after normal closing adjustments. The assets sold represent all of the Company's interests in the field, including all of its producing wells and the associated infrastructure. The Company recorded a gain of $127 million and employee-related charges of $7 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
•
In July 2018, the Company completed the sale of its gas field assets in the Raton Basin to an unaffiliated third party for net cash proceeds of $54 million, after normal closing adjustments. The Company recorded a noncash impairment charge of $77 million in June 2018 to reduce the carrying value of its Raton Basin assets to their estimated fair value less costs to sell as the assets were considered held for sale. The Company recorded a gain of $2 million associated with this divestiture. The Company also recorded other divestiture-related charges of $117 million, including $111 million of deficiency charges related to certain firm transportation contracts retained by the Company and employee-related charges of $6 million. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
•
In April 2018, the Company completed the sale of approximately 10,200 net acres in the West Eagle Ford Shale gas and liquids field to an unaffiliated third party for net cash proceeds of $100 million, after normal closing adjustments. The Company recorded a gain of $75 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
•
In April 2017, the Company completed the sale of approximately 20,500 acres in the Martin County region of the Permian Basin, with net production of approximately1,500 BOEPD, to an unaffiliated third party for cash proceeds of $264 million. The sale resulted in a gain of $194 million. In conjunction with the divestiture, the Company reduced the carrying value of goodwill by $2 million, reflecting the portion of the Company's goodwill related to the assets sold.
•
Other. During 2018, 2017 and 2016, the Company sold other proved and unproved properties, inventory and other property and equipment and recorded net gains of $1 million, $14 million and $2 million, respectively. The net gain of $14 million for 2017 is primarily related to the sale of nonstrategic proved and unproved properties in the Permian Basin for cash proceeds of $77 million.
Decommissioning activities. In November 2018, the Company announced plans to close its sand mine located in Brady, Texas and transition its proppant supply requirements to West Texas sand sources. During 2018, the Company recorded $443 million of accelerated depreciation and $7 million of employee-related charges associated with the pending shutdown.
Divestiture-related and decommissioning-related charges. Divestiture-related charges, including employee-related charges, contract termination charges and other costs resulting from the Company's divestitures, are recorded as other expense in the statements of operations and as other noncash operating activities in the consolidated statements of cash flows. Obligations associated with employee-related charges are classified as accounts payable - due to affiliates in the consolidated balance sheets. Obligations associated with contract termination charges are classified as other current or noncurrent liabilities in the consolidated balance sheets.
Divestiture-related and decommissioning-related obligations activity is as follows:
______________________
(a)
Includes $98 million of deficiency charges related to certain firm transportation contracts associated with the divestiture of the Company's gas field assets in the Raton Basin. These obligations were retained by the Company and are expected to be paid as follows: $42 million in 2019, $44 million in 2020 and $12 million in 2021.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 4. Fair Value Measurements
The Company determines fair value based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The 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 three input levels of the fair value hierarchy are as follows:
•
Level 1 - quoted prices for identical assets or liabilities in active markets.
•
Level 2 - quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
•
Level 3 - unobservable inputs for the asset or liability, typically reflecting management's estimate of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore, determined using model-based techniques, including discounted cash flow models.
Assets and liabilities measured at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Commodity derivatives. The Company's commodity derivatives represent oil, NGL and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's commodity derivative contracts are determined using Level 2 inputs. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives using inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar contracts and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Deferred compensation plan assets. The Company's deferred compensation plan assets include investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. The significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs.
Investment in affiliate. The Company elected the fair value option for measuring its equity method investment in ProPetro. The fair value of its investment in ProPetro is determined using Level 2 inputs, including the quoted market price for the stock as adjusted to reflect a value discount due to the shares not being able to be sold until mid-2019. See Note 11 for additional information.
Assets and liabilities measured at fair value on a nonrecurring basis. Assets and liabilities measured at fair value on a nonrecurring basis are subject to fair value adjustments in certain circumstances. The Company assesses recoverability of the carrying amount of certain assets and liabilities whenever events or changes in circumstances indicate the carrying amount of an asset or liability may not be recoverable. These assets and liabilities can include inventories, proved and unproved oil and gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale.
Proved oil and gas properties. As a result of the the Company's proved property impairment assessments, the Company recorded noncash impairment charges to reduce the carrying values of its Raton Basin gas field assets during the year ended December 31, 2017 and the West Panhandle gas and liquids field during the year ended December 31, 2016. Impairment charges for proved oil and gas properties are recorded as impairment of oil and gas properties in the consolidated statements of operations.
The Company calculated the fair values of the Raton Basin assets and West Panhandle field proved properties using a discounted cash flow model. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included management's longer-term commodity price outlooks ("Management's Price Outlooks") and management's outlooks for (i) production, (ii) capital expenditures, (iii) production costs and (iv) estimated proved reserves and risk-adjusted probable reserves. Management's Price Outlooks are developed based on third-party longer-term commodity futures price outlooks as of each measurement date. The expected future net cash flows were discounted using an annual rate of ten percent to determine fair value.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
The fair value and fair value adjustments for proved properties, as well as the average oil price per barrel ("Bbl") and gas price per British thermal unit ("MMBtu") utilized in the respective Management's Price Outlooks are as follows:
Unproved oil and gas properties. During 2016, the Company recorded a noncash impairment charge of $32 million to write-off the carrying value of its unproved royalty acreage in Alaska as a result of the operator curtailing operations in the area and Management's Price Outlooks. The impairment charges for unproved oil and gas properties are recorded as exploration and abandonments in the consolidated statements of operations.
Sale of Raton Basin assets. In June 2018, the Company recognized impairment charges of $77 million to reduce the carrying value of its Raton Basin gas field assets to the agreed upon sales price for these assets, which were sold in July 2018. The impairment charges included $65 million attributable to proved oil and gas properties and $12 million of other property and equipment. These impairment charges are recorded as impairment of oil and gas properties in the consolidated statement of operations. The Company also recorded other divestiture-related charges of $111 million attributable to deficiency charges related to certain firm transportation contracts retained by the Company. The fair value of these contracts was determined using Level 2 inputs, including an annual discount rate of 4.4 percent, to discount the expected future cash flows. See Note 3 for additional information.
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheets are as follows:
______________________
(a)
Fair value approximates carrying value due to the short-term nature of the instruments.
(b)
Fair value is determined using Level 2 inputs.
(c)
Fair value is determined using Level 1 inputs.
(d)
Fair value is determined using Level 2 inputs. The Company's senior notes are quoted but not actively traded on major exchanges; therefore, fair value is based on periodic values as quoted on major exchanges.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
The Company has other financial instruments consisting primarily of receivables, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
NOTE 5. Derivative Financial Instruments
The Company utilizes commodity swap contracts, option contracts, collar contracts, collar contracts with short puts and basis swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
Periodically, the Company may pay a premium to enter into commodity contracts. Premiums paid, if any, have been nominal in relation to the value of the underlying asset in the contract. The Company recognizes the nominal premium payments as an increase to the value of the derivative assets when paid.
Oil production derivatives. The Company sells its oil production at the lease and the sales contracts governing such oil production are tied directly to, or are correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company also enters into pipeline capacity commitments in order to secure available oil transportation capacity from its areas of production to the Gulf Coast. In order to diversify the oil price it receives, the Company (i) enters into oil purchase transactions with third parties in its areas of production that are consistent with the oil prices that the Company receives at the lease, adjusted for transportation costs to the point of purchase, (ii) transports the purchased oil using its pipeline capacity to the Gulf Coast, and (iii) enters into third party sale transactions to sell the oil into the Gulf Coast refinery or international export markets at prices that are highly correlated with Brent oil prices. As a result, the Company will generally use Brent derivative contracts to manage future oil price volatility.
Volumes per day associated with outstanding oil derivative contracts as of December 31, 2018 and the weighted average oil prices for those contracts are as follows:
NGL production derivatives. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to Mont Belvieu, Texas NGL component product prices. The Company uses derivative contracts to manage the NGL component product price volatility. As of December 31, 2018 the Company did not have any NGL derivative contracts outstanding.
Gas production derivatives. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("HH") gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and actual index prices at which the gas is sold.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Volumes per day associated with outstanding gas derivative contracts as of December 31, 2018 and the weighted average gas prices for those contracts are as follows:
____________________
(a)
The referenced basis swap contracts fix the basis differentials between the index price at which the Company sells its Permian Basin gas and the HH price used in swap contracts.
(b)
The referenced basis swap contracts fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in Arizona and southern California.
(c)
The premium associated with selling these call option contracts was utilized to improve the swap contract prices for April through October 2019 swap volumes.
Fair value. The fair value of derivative financial instruments not designated as hedging instruments is as follows:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Gains (losses) recorded on derivative contracts are as follows:
Net derivative assets (liabilities) by counterparty are as follows:
See Note 2 for additional information.
NOTE 6. Exploratory Well Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are classified as proved properties in the consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are recorded as exploration and abandonments expense.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Capitalized exploratory well project activity is as follows:
Aging of capitalized exploratory costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed are as follows:
NOTE 7. Long-term Debt and Interest Expense
The components of long-term debt, including the effects of issuance costs and issuance discounts, are as follows:
______________________________
(a)
The 6.875% senior notes, net of $106 thousand of unamortized issuance costs and discounts, are classified as current in the consolidated balance sheet as of December 31, 2017.
Credit facility. During October 2018, the Company entered into a Credit Agreement dated as of October 24, 2018 (the "Credit Facility") with a syndicate of financial institutions (the "Syndicate"), primarily to extend the maturity of the Credit Facility from August 2020 to October 2023, while maintaining aggregate loan commitments of $1.5 billion. The Company accounted for the entry into the Credit Facility as a modification of the prior agreement and capitalized the debt issuance costs along with those
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
unamortized issuance costs that remained from the issuance of the prior agreement. As of December 31, 2018, the Company had no outstanding borrowings under the Credit Facility.
Borrowings under the Credit Facility may be in the form of revolving loans or swing line loans. Revolving loans represent loans made ratably by the Syndicate in accordance with their respective commitments under the Credit Facility and bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of the prime rate announced from time to time by Wells Fargo Bank, National Association or the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent plus a defined alternate base rate spread margin, which is currently 0.25 percent based upon the Company's debt rating or (b) a base Eurodollar rate, substantially equal to LIBOR, plus a margin (the "Applicable Margin"), which is currently 1.25 percent and is also determined by the Company's debt rating. Swing line loans represent loans made by a subset of the lenders in the Syndicate and may not exceed $150 million. Swing line loans under the Credit Facility bear interest at a rate per annum equal to the "ASK" rate for federal funds periodically published by the Dow Jones Market Service plus the Applicable Margin. Letters of credit outstanding under the Credit Facility are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent. The Company also pays commitment fees on undrawn amounts under the Credit Facility that are determined by the Company's debt rating (currently 0.15 percent). Borrowings under the Credit Facility are general unsecured obligations.
The Credit Facility requires the maintenance of a ratio of total debt to book capitalization, subject to certain adjustments, not to exceed 0.65 to 1.0. As of December 31, 2018, the Company was in compliance with all of its debt covenants.
Senior notes. The Company's 6.875% senior notes (the "6.875% Senior Notes") and 6.65% senior notes (the "6.65% Senior Notes"), with debt principal balances of $450 million and $485 million, respectively, matured and were repaid in May 2018 and March 2017, respectively. The Company funded the repayments with cash on hand. The 6.875% Senior Notes were classified as current in the consolidated balance sheet as of December 31, 2017.
The Company's senior notes are general unsecured obligations ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. The Company is a holding company that conducts all of its operations through subsidiaries; consequently, the senior notes are structurally subordinated to all obligations of its subsidiaries. Interest on the Company's senior notes is payable semiannually.
Principal payments scheduled to be made on the Company's long-term debt are as follows (in millions):
Interest expense activity is as follows:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 8. Incentive Plans
Deferred compensation retirement plan. The Company's deferred compensation retirement plan allows for qualified officers and certain key employees of the Company to contribute up to 25 percent of their base salary and 100 percent of their annual bonus. The Company provides a matching contribution of 100 percent of the officer's and key employee's contribution limited up to the first ten percent of the officer's base salary and eight percent of the key employee's base salary. The Company's matching contribution vests immediately. A trust fund has been established by the Company to accumulate the contributions made under this retirement plan. The Company's matching contributions were $3 million for each of the years ended December 31, 2018, 2017 and 2016, respectively.
401(k) plan. The Pioneer Natural Resources USA, Inc. ("Pioneer USA," a wholly-owned subsidiary of the Company) 401(k) and Matching Plan (the "401(k) Plan") is a defined contribution plan established under the Internal Revenue Code Section 401. All regular full-time and part-time employees of Pioneer USA are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Participants may contribute up to 80 percent of their annual base salary into the 401(k) Plan. Matching contributions are made to the 401(k) Plan in cash by Pioneer USA in amounts equal to 200 percent of a participant's contributions to the 401(k) Plan that are not in excess of five percent of the participant's annual base salary (the "Matching Contribution"). Each participant's account is credited with the participant's contributions, Matching Contributions and allocations of the 401(k) Plan's earnings. Participants are fully vested in their account balances except for Matching Contributions and their proportionate share of 401(k) Plan earnings attributable to Matching Contributions, which proportionately vest over a four-year period that begins on the participant's date of hire. Beginning in February 2018, eligible employees are automatically enrolled in the 401(k) Plan at a contribution rate of five percent of the employee's annual base salary, unless the employee opts out of participation or makes an alternate election within 30 days of becoming eligible for participation.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded compensation expense of $36 million, $25 million and $23 million, respectively, as a result of Matching Contributions.
Stock-based compensation costs. The Company records stock-based compensation expense ratably over the vesting periods of the Company's stock-based compensation awards using the awards' fair value. The Company maintains two plans providing for stock-based compensation: the Amended and Restated 2006 Long-Term Incentive Plan ("LTIP") and the Employee Stock Purchase Plan ("ESPP").
Long-Term Incentive Plan. The LTIP provides for the granting of various forms of awards, including stock options, stock appreciation rights, performance units, restricted stock and restricted stock units to directors, officers and employees of the Company.
The number of shares available for grant pursuant to awards under the LTIP is as follows:
Employee Stock Purchase Plan. The ESPP allows eligible employees to annually purchase the Company's common stock at a discounted price. Officers of the Company are not eligible to participate in the ESPP. Contributions to the ESPP are limited to 15 percent of an employee's base salary (subject to certain ESPP limits) during the eight-month offering period (January 1 to August 31). Participants in the ESPP purchase the Company's common stock at a price that is 15 percent below the closing sales price of the Company's common stock on either the first day or the last day of each offering period, whichever closing sales price is lower.
The number of shares available for issuance under the ESPP is as follows:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Stock-based compensation expense and the associated income tax benefit are as follows:
As of December 31, 2018, there was $80 million of unrecorded stock-based compensation expense related to unvested share-based compensation plans, including $14 million attributable to Liability Awards that are expected to be settled in cash on their vesting dates. The weighted average remaining vesting period of the awards is less than three years.
Restricted stock awards. During 2018, the Company awarded 503,982 restricted shares or units of the Company's common stock as compensation to directors, officers and employees of the Company (including 113,364 shares or units representing Liability Awards).
Restricted stock award activity is as follows:
The weighted average grant-date fair value of restricted stock Equity Awards awarded during 2018, 2017 and 2016 was $180.66, $180.50 and $122.72, respectively. The grant-date fair value of restricted stock Equity Awards that vested during 2018, 2017 and 2016 was $67 million, $70 million and $66 million, respectively.
As of December 31, 2018 and 2017, accounts payable - due to affiliates in the consolidated balance sheets includes $14 million and $20 million, respectively, of liabilities attributable to the Liability Awards, representing the fair value of the earned, but unvested, portion of the outstanding awards as of that date. The cash paid for Liability Awards that vested during 2018, 2017 and 2016 was $24 million, $20 million and $18 million, respectively.
Performance unit awards. During 2018, 2017 and 2016, the Company awarded performance units to certain of the Company's officers under the LTIP. The number of shares of common stock to be issued is determined by comparing the Company's total shareholder return to the total shareholder return of a predetermined group of peer companies over the performance period. The performance unit awards vest over a 34-month service period.
The grant-date fair values per unit of the 2018, 2017 and 2016 performance unit awards were $246.18, $258.27 and $203.69, respectively, which were determined using the Monte Carlo simulation model, and are being recorded as stock-based compensation expense ratably over the performance period. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Assumptions used to estimate the fair value of performance unit awards granted are as follows:
Performance unit activity is as follows:
_____________________
(a)
Amount reflects the number of performance units initially granted. The actual payout of shares upon vesting may be between zero percent and 250 percent of the performance units included in this table depending upon the total shareholder return ranking of the Company compared to peer companies at the vesting date.
(b)
Amount reflects the number of performance units vested upon retirement of eligible officers and the vesting of performance units for which the service period has ended. On December 31, 2018, the service period lapsed on 103,334 performance unit awards that earned 1.10 shares for each vested award, representing 113,674 aggregate shares of common stock issued on January 2, 2019. The vested performance units that earned 1.10 shares for each vested award included 68,556 units that vested in the current year and 34,778 units that vested in prior years associated with the retirement of the participant. In addition, 1,911 units vested upon retirement of an eligible officer and will be issued when the performance period ends in 2019.
The grant-date fair value of performance units that vested during 2018, 2017 and 2016 was $21 million, $18 million and $15 million, respectively.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 9. 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.
Asset retirement obligations activity is as follows:
_____________________
(a)
Changes in estimates are determined based on several factors, including abandonment cost estimates based on recent actual costs incurred to abandon wells, credit-adjusted risk-free discount rates and well life estimates. The increase in 2018 is primarily due to an increase in abandonment expense estimates, offset by an increase in commodity prices, which has the effect of lengthening the economic life of the Company's producing wells. Abandonment expense estimates used in the calculation of asset retirement obligations are based on actual cost incurred per well for such costs. The decrease in 2017 was primarily due to an increase in commodity prices, which has the effect of lengthening the economic life of the Company's producing wells.
The Company classifies the current and noncurrent portions of asset retirement obligations as other current liabilities and other liabilities, respectively, in the consolidated balance sheets. As of December 31, 2018 and 2017, the current portion of the Company's asset retirement obligations were $25 million and $41 million, respectively.
NOTE 10. Commitments and Contingencies
Severance agreements. The Company has entered into severance and change in control agreements with its officers and certain key employees. The current annual salaries for the officers and key employees covered under such agreements total $30 million.
Indemnifications. The Company has agreed to indemnify its directors and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation.
Legal actions. The Company is party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Environmental. Environmental expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities for expenditures that will not qualify for capitalization are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. Such liabilities are undiscounted unless the timing of cash payments for the liability is fixed or reliably determinable. Environmental liabilities normally involve estimates that are subject to revision until settlement or remediation occurs.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Obligations following divestitures. In connection with its divestiture transactions, the Company may retain certain liabilities and provide the purchaser certain indemnifications, subject to defined limitations, which may apply to identified pre-closing matters, including matters of litigation, environmental contingencies, royalty obligations and income taxes. The Company does not believe that these obligations are probable of having a material impact on its liquidity, financial position or future results of operations. Also associated with our divestiture transactions, the Company has issued and received guarantees to facilitate the transfer of contractual obligations such as firm transportation agreements or gathering and processing arrangements. The Company believes the likelihood of making or receiving payments under these guarantees to be remote. As of December 31, 2018 the maximum amount of payments the Company could be required to make under the guarantees is $132 million, which could be partially offset by credit support from third parties of $69 million.
Texas Commission on Environmental Quality ("TCEQ") enforcement action. The Company has been advised by the TCEQ that the agency is pursuing an enforcement action against the Company and may seek monetary sanctions due to various emissions occurring during the Company's ownership of the Fain gas plant in the West Panhandle region of Texas, which was sold during 2018. The Company has engaged in discussions with the TCEQ regarding these matters and the TCEQ staff has proposed an enforcement order that is acceptable to, and has been executed by, the Company. The proposed enforcement order is now awaiting formal consideration and approval by TCEQ commissioners. Commissioner approval is not assured and the Company cannot predict the outcome of the TCEQ commissioner considerations with any certainty. The Company believes such monetary sanctions will not exceed $235,500 in the aggregate.
Lease commitments. The Company leases drilling rigs, storage tanks, equipment and office facilities under operating leases. Rent expense for the years ended December 31, 2018, 2017 and 2016 was $98 million, $82 million and $69 million, respectively.
In June 2017, the Company entered into a 20-year operating lease for the Company's new corporate headquarters that is currently being constructed in Irving, Texas. Annual base rent is expected to be $33 million and lease payments are expected to commence once the building is complete, which is expected to occur during the second half of 2019. The Company has a variable equity interest in the entity that is constructing the building. The Company is not the primary beneficiary of the variable interest entity and only has a profit sharing interest after certain economic returns are achieved. The Company has no exposure to the variable interest entity's losses or future liabilities, if any. The Company is the deemed owner of the building (for accounting purposes) during the construction period and is following the build-to-suit accounting guidance.
The build-to-suit asset and liability associated with the Company's new corporate headquarters are as follows:
____________________
(a)
A noncash investing activity for purposes of the consolidated statements of cash flows.
(b)
A noncash financing activity for purposes of the consolidated statements of cash flows.
Drilling commitments. The Company's principal drilling commitments are related to drilling rig contracts that require the Company to pay day rates for contracted drilling rigs over their contractual term. The majority of the drilling rig day rates are linked to oil prices causing the day rates to fluctuate over the contract term as oil prices change. In addition, the Company periodically enters into contractual arrangements under which the Company is committed to expend funds to drill wells in the future. The Company recognizes its drilling commitments in the periods in which the rig services are performed.
Firm commitments. The Company from time to time enters into, and is a party to, take-or-pay agreements, which include contractual commitments to purchase sand and water for use in the Company's drilling operations and contractual commitments with midstream service companies and pipeline carriers for future gathering, processing, transportation, fractionation and storage. These commitments are normal and customary for the Company's business activities. Certain future minimum gathering, processing, transportation, fractionation and storage fees are based upon rates and tariffs that are subject to change over the terms of the commitments.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Minimum commitments are as follows:
Gas delivery commitments. The Company has contracts that require delivery of fixed volumes of gas. The Company intends to fulfill its short-term and long-term obligations with production or from purchases of third party volumes.
Delivery commitments for gas are as follows:
NOTE 11. Related Party Transactions
On December 31, 2018, the Company completed the sale of its pressure pumping assets to ProPetro in exchange for 16.6 million shares of ProPetro common stock and $110 million of short-term receivables to be paid by ProPetro during the first quarter of 2019. The shares acquired in the acquisition represent approximately 16 percent of ProPetro's outstanding common stock, resulting in ProPetro being considered a related party as of December 31, 2018. In addition to the sale of equipment and related facilities, the Company entered into a long-term agreement with ProPetro to provide pressure pumping and related services. See Note 2 and Note 3 for additional information.
In February 2019, the Company exercised its right to designate (i) a director to the board of directors of ProPetro, which right will exist for so long as the Company owns five percent or more of ProPetro’s outstanding common stock, and (ii) an independent director to the board of directors of ProPetro, which is a one time right. Mark S. Berg, the Company’s Executive Vice President Corporate/Vertically Integrated Operations, was the Company’s designee in the first category, and Royce W. Mitchell, an independent member of the Company’s board of directors, was the Company’s designee in the second category.
Balances with the Company's affiliate are as follows:
____________________
(a)
Includes $110 million of short-term receivables and employee-related charges to be reimbursed by ProPetro.
(b)
Prior to the Company's sale of its pressure pumping assets to ProPetro, the Company utilized the services of ProPetro in the normal course of business. The balance represents invoices associated with those services that are in the process of being paid.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 12. Major Customers
Purchasers of the Company's oil, NGL and gas production that individually accounted for ten percent or more of the Company's oil and gas revenues in at least one of the three years ended December 31, 2018 are as follows:
The loss of any of these major purchasers of oil, NGL and gas production could have a material adverse effect on the ability of the Company to produce and sell its oil, NGL and gas production.
Purchasers of the Company's purchased oil and gas that individually accounted for ten percent or more of the Company's sales of purchased oil and gas in at least one of the three years ended December 31, 2018 are as follows:
The loss of any of these major purchasers of purchased oil and gas would not be expected to have an adverse effect on the ability of the Company to sell commodities it purchases from third parties.
NOTE 13. Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. See Note 2 for additional information.
Disaggregated revenue from contracts with purchasers. Revenues on sales of oil, NGL, gas and purchased oil and gas are recognized when control of the product is transferred to the purchaser and payment can be reasonably assured. Sales prices for oil, NGL and gas production are negotiated based on factors normally considered in the industry, such as an index or spot price, distance from the well to the pipeline or market, commodity quality and prevailing supply and demand conditions. As such, the prices of oil, NGL and gas generally fluctuate based on the relevant market index rates.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Disaggregated revenue from contracts with purchasers by product type is as follows:
Oil sales. Sales under the Company's oil contracts are generally considered performed when the Company sells oil production at the wellhead and receives an agreed-upon index price, net of any price differentials. The Company recognizes revenue when control transfers to the purchaser at the wellhead based on the net price received.
NGL and gas sales. The Company evaluated whether it was the principal or the agent in gas processing transactions and concluded that it is the principal when it has the ability to take-in-kind, which is the case in the majority of the Company's gas processing and transportation contracts. Therefore, beginning January 1, 2018, the Company began recognizing revenue on a gross basis, with the gathering, processing and transportation costs associated with its take-in-kind arrangements being recorded as oil and gas production costs in the consolidated statement of operations. Gas and NGL processing fees that were previously reflected as a reduction in the Company's reported gas and NGL revenue are now recorded as an expense in the Company's production costs.
Sales of purchased oil and gas. The Company enters into pipeline capacity commitments in order to secure available oil, NGL and gas transportation capacity from the Company's areas of production. The Company also enters into purchase transactions with third parties and separate sale transactions with third parties to (i) diversify a portion of the Company's oil sales to the Gulf Coast refinery or international export markets and (ii) satisfy unused gas pipeline capacity commitments. Revenues and expenses from these transactions are presented on a gross basis as the Company acts as a principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The transportation costs associated with these transactions are presented as a component of purchased oil and gas expense. Firm transportation payments on excess pipeline capacity are recorded as other expense in the consolidated statements of operations.
Performance obligations and contract balances. The majority of the Company's product sale commitments are short-term in nature with a contract term of one year or less. The Company typically satisfies its performance obligations upon transfer of control as described above in Disaggregated revenue from contracts with purchasers and records the related revenue in the month production is delivered to the purchaser. Settlement statements for sales of oil, NGL and gas and sales of purchased oil and gas may not be received for 30 to 60 days after the date the volumes are delivered, and as a result, the Company is required to estimate the amount of volumes delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The implementation of ASC 606 has not changed existing controls around revenue estimates and the accrual process. Historically, differences between the Company's revenue estimates and actual revenue received have not been significant. As of December 31, 2018 and 2017, the accounts receivable balance representing amounts due or billable under the terms of contracts with purchasers was $646 million and $594 million, respectively.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 14. Interest and Other Income
The components of interest and other income are as follows:
NOTE 15. Other Expense
The components of other expense are as follows:
____________________
(a)
Represents accelerated depreciation related to the decommissioning of the Company's Brady, Texas sand mine. See Note 3 for additional information.
(b)
Primarily represents $111 million of deficiency charges related to certain firm transportation contracts retained by the Company associated with the sale of its gas field assets in the Raton Basin, $39 million of employee-related charges associated with the Company's 2018 divestitures and sand mine decommissioning efforts and $13 million of contract termination charges associated with the sale of the Company's pressure pumping assets. See Note 3 for additional information.
(c)
Primarily represents firm transportation charges on excess pipeline capacity commitments.
(d)
Primarily represents net margins (attributable to third party working interest owners) that result from Company-provided fracture stimulation and well service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three years ended December 31, 2018, 2017 and 2016, these vertical integration net margins included $128 million, $140 million and $147 million of gross vertical integration revenues, respectively, and $130 million, $157 million and $201 million of total vertical integration costs and expenses, respectively.
(e)
Primarily represents expenses attributable to idle drilling rig fees that are not chargeable to joint operations and charges to terminate rig contracts that were not required to meet planned drilling activities.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 16. Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Certain subsidiaries are not eligible to be included in the consolidated U.S. federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities. The tax returns and the amount of taxable income or loss are subject to examination by U.S. federal, state, local and foreign taxing authorities.
Taxes paid, net of refunds are as follows:
The Company continually assesses 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 and based on that information, along with other data, reassesses the likelihood that the Company's net operating loss carryforwards ("NOLs") and other deferred tax attributes in the U.S. federal, state, local and foreign tax jurisdictions will be utilized prior to their expiration.
Enactment of the Tax Cuts and Jobs Act. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Reform Legislation"), which introduced significant changes to the U.S. federal income tax law. The changes that most impact the Company include:
•
A reduction in the federal corporate income tax rate from 35 percent to 21 percent. The rate reduction is effective for the Company as of January 1, 2018. The application of the rate change on the Company's existing deferred tax liabilities resulted in a $625 million income tax benefit to the Company during 2017.
•
Repeal of the corporate alternative minimum tax ("AMT"). The Tax Reform Legislation provides that existing AMT credit carryovers are refundable beginning in 2018. As of December 31, 2018, the Company had AMT credit carryovers of $20 million that are expected to be fully refunded by 2022.
•
The Tax Reform Legislation preserves the deductibility of intangible drilling costs and provides for 100 percent bonus depreciation on personal tangible property expenditures through 2022. The bonus depreciation percentage is phased down from 100 percent beginning in 2023 through 2026.
The Tax Reform Legislation is a comprehensive bill containing other provisions, such as limitations on the deductibility of interest expense and certain executive compensation, that are not expected to materially affect Pioneer. The ultimate impact of the Tax Reform Legislation may differ from the Company's estimates as of December 31, 2018 due to changes in the interpretations and assumptions made by the Company as well as additional regulatory guidance that may be issued.
ASC 740 "Income Taxes" requires companies to recognize the effect of tax law changes in the period of enactment. However, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 that allowed companies to record provisional amounts during a measurement period not extending beyond one year from the Tax Reform Legislation enactment date. The Company’s accounting for the impacts of the Tax Reform Legislation is complete as of December 31, 2018, and the Company has not recorded any material adjustments to the provisional amounts recorded in the fourth quarter of 2017 related to the Tax Reform Legislation.
Uncertain tax positions. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. The Company has unrecognized tax benefits ("UTBs") resulting from research and experimental expenditures related to horizontal drilling and completion innovations. If all or a portion of the UTBs is sustained upon examination by the taxing authorities, the tax benefit will be recorded as a reduction to the Company's deferred tax liability and will affect the Company's effective tax rate in the period it is recorded. The timing as to when the Company will substantially resolve the uncertainties associated with the UTBs is uncertain.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Unrecognized tax benefit activity is as follows:
Other tax matters. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018, there are no proposed adjustments in any jurisdiction that would have a significant effect on the Company's future results of operations or financial position.
The earliest open years in the Company's key jurisdictions are as follows:
Income tax (provision) benefit is as follows:
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
The effective tax rate for income (loss) is reconciled to the United States federal statutory rate as follows:
____________________
(a)
During 2017, the Company recorded a benefit of $625 million as a result of the Tax Reform Legislation that reduced the federal income tax rate beginning in 2018.
Significant components of deferred tax assets and deferred tax liabilities are as follows:
____________________
(a)
Net operating loss carryforwards as of December 31, 2018 consist of $4.2 billion of U.S. federal NOLs, which expire between 2032 and 2038. Additionally, the net operating loss carryforwards consist of $177 million of Colorado NOLs that begin to expire in 2027, all of which have a fully offsetting valuation allowance.
(b)
Credit carryforwards as of December 31, 2018, consist of $20 million of U.S. federal minimum tax credits. Additionally, the credit carryforwards consist of $88 million of U.S. federal credits and $3 million of Texas credits for increasing research activities. The U.S. federal and state research credits as of December 31, 2018 exclude $141 million of unrecognized tax benefits.
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
NOTE 17. Net Income (Loss) Per Share
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. Diluted net income (loss) per share attributable to common stockholders is calculated under both the two-class method and the treasury stock method and the more dilutive of the two calculations is presented.
The components of basic and diluted net income (loss) per share attributable to common stockholders are as follows:
______________________
(a)
Unvested restricted stock awards represent participating securities because they participate in nonforfeitable dividends with the common equity owners of the Company. Participating share- or unit-based earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. Unvested restricted stock awards do not participate in undistributed net losses as they are not contractually obligated to do so.
Basic and diluted weighted average common shares outstanding were 171 million, 170 million and 166 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock repurchase program. In December 2018, the Company's board of directors authorized a common stock repurchase program that will allow the Company to repurchase up to $2 billion of its common stock. Under this stock repurchase program, the Company may repurchase shares from time to time at management's discretion in accordance with applicable securities laws. In addition, the Company may repurchase shares pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Act of 1934, which would permit the Company to repurchase shares at times that may otherwise be prohibited under the Company's insider trading policy. The stock repurchase program has no time limit, may be modified, suspended or terminated at any time by the board of directors and replaces and terminates the Company's prior $100 million common stock repurchase program announced in February 2018.
During 2018, the Company repurchased $22 million of common stock pursuant to the prior common stock repurchase program and $127 million of common stock pursuant to the newly authorized common stock repurchase program. As of December 31, 2018, $1.9 billion remains available for use to repurchase shares under the newly authorized common stock repurchase program.
NOTE 18. Subsequent Events
In February 2019, the board of directors declared a cash dividend of $0.32 per share on Pioneer's outstanding common stock, payable April 12, 2019 to stockholders of record at the close of business on March 29, 2019.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Oil & Gas Exploration and Production Activities
The Company has only one reportable operating segment, which is oil and gas development, exploration and production in the U.S. See the Company's accompanying consolidated statements of operations for information about results of operations for oil and gas producing activities.
Capitalized Costs
Costs Incurred for Oil and Gas Producing Activities
____________________
(a)
The costs incurred for oil and gas producing activities include amounts related to asset retirement obligations as follows:
Reserve Quantity Information
The estimates of the Company's proved reserves as of December 31, 2018, 2017 and 2016 were based on evaluations prepared by the Company's engineers and audited by independent petroleum engineers with respect to the Company's major properties and prepared by the Company's engineers with respect to all other properties. Proved reserves were estimated in accordance with guidelines established by the U.S. Securities and Exchange Commission (the "SEC") and the FASB, which require that reserve estimates be prepared under existing economic and operating conditions based upon an average of the first-day-of-the-month commodity price during the 12-month period ending on the balance sheet date with no provision for price and cost escalations except by contractual arrangements.
Proved reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in commodity prices and operating costs. The Company emphasizes that proved reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
The following table provides a rollforward of total proved reserves. Oil and NGL volumes are expressed in thousands of Bbls ("MBbls"), gas volumes are expressed in millions of cubic feet ("MMcf") and total volumes are expressed in thousands of barrels of oil equivalent ("MBOE").
______________________
(a)
The proved gas reserves as of December 31, 2018, 2017 and 2016 include 106,948 MMcf, 171,623 MMcf and 137,853 MMcf, respectively, of gas that the Company expected to be produced and utilized as field fuel. Field fuel is gas consumed to operate field equipment (primarily compressors) rather than being delivered to a sales point.
(b)
Production for 2018, 2017 and 2016 includes 13,690 MMcf, 14,799 MMcf and 15,082 MMcf of field fuel, respectively.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Revisions of previous estimates. Revisions of previous estimates for 2018 were comprised of 20 million barrels of oil equivalent ("MMBOE") of positive price revisions due to a 28 percent increase in the NYMEX oil price and a four percent increase in the NYMEX gas price that were used to determine proved oil and gas reserves for 2018, as compared to 2017, in addition to 29 MMBOE of positive revisions that were primarily attributable to improved performance from horizontal wells placed on production in the Spraberry/Wolfcamp oil field in the Permian Basin prior to 2018. The December 31, 2018 NYMEX price used for oil and gas reserve preparation based upon SEC guidelines was $65.57 per barrel of oil and $3.10 per Mcf of gas, compared to $51.34 per barrel of oil and $2.98 per Mcf of gas at December 31, 2017.
Revisions of previous estimates for 2017 were comprised of 52 MMBOE of positive price revisions due to 20 percent increases in both the NYMEX oil and NYMEX gas prices that were used to determine proved oil and gas reserves for 2017, as compared to 2016, in addition to 74 MMBOE of positive revisions that were primarily attributable to improved performance from horizontal wells placed on production in the Spraberry/Wolfcamp prior to 2017 and, to a lesser extent, reductions in costs (based on the Company's cost reduction initiatives during 2017) that had the effect of extending the economic lives of the Company's producing wells. The December 31, 2017 NYMEX price used for oil and gas reserve preparation based upon SEC guidelines was $51.34 per barrel of oil and $2.98 per Mcf of gas, compared to $42.82 per barrel of oil and $2.48 per Mcf of gas at December 31, 2016.
Revisions of previous estimates for 2016 were comprised of 58 MMBOE of negative price revisions due to 15 percent and four percent declines in the NYMEX oil and gas prices, respectively, that were used to determine proved oil and gas reserves for 2016, as compared to 2015, partially offset by 43 MMBOE of positive revisions that were primarily attributable to reductions in cost estimates (based on cost savings achieved during 2016) that had the effect of extending the economic lives of the Company's producing wells. The December 31, 2016 NYMEX price used for oil and gas reserve preparation based upon SEC guidelines was $42.82 per barrel of oil and $2.48 per Mcf of gas, compared to $50.11 per barrel of oil and $2.59 per Mcf of gas at December 31, 2015.
Extensions and discoveries. Extensions and discoveries for 2018, 2017 and 2016 were primarily comprised of proved reserve additions attributable to the Company's successful horizontal drilling program in the Spraberry/Wolfcamp oil field.
Sales of minerals-in-place. Sales of minerals-in-place in 2018 were primarily related to the sale of approximately 10,200 net acres in the West Eagle Ford Shale gas and liquids field, the sale of the Raton Basin gas field assets in southeast Colorado, the sale of the West Panhandle gas and liquids field assets in the panhandle region of Texas and the sale of 2,900 net acres in the Sinor Nest (Lower Wilcox) oil field in South Texas. See Note 3 to the accompanying financial statements for additional information.
Purchases of minerals-in-place. Purchases of minerals-in-place during 2018, 2017 and 2016 were primarily attributable to acquisitions in the Company's Spraberry/Wolfcamp oil field.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Proved developed and proved undeveloped reserves are as follows:
Proved undeveloped reserves activity is as follows (in MBOE):
As of December 31, 2018, the Company had 134 proved undeveloped well locations as compared to 134 and 90 at December 31, 2017 and 2016, respectively. The Company has no proved undeveloped well locations that are scheduled to be drilled more than five years from their original date of booking.
The changes in proved undeveloped reserves during 2018 were comprised of the following items:
Revisions of previous estimates. Revisions of previous estimates were primarily comprised of 2 MMBOE of positive revisions that were related to pricing and technical revisions.
Extensions and discoveries. Extensions and discoveries were primarily comprised of proved reserve additions attributable to the Company's successful horizontal drilling program in the Spraberry/Wolfcamp oil field.
Transfers to proved developed. Transfers to proved developed reserves represented those undeveloped proved reserves that moved to proved developed as a result of development drilling. During 2018, the Company incurred $949 million of development costs and developed 25 percent of its proved undeveloped reserves.
The Company uses both public and proprietary geologic data to establish continuity of the formation and its producing properties. This included seismic data and interpretations (2-D, 3-D and micro seismic); open hole log information (both vertical and horizontally collected) and petrophysical analysis of the log data; mud logs; gas sample analysis; drill cutting samples; measurements of total organic content; thermal maturity; sidewall cores and data measured from the Company's internal core analysis facility. After the geologic area was shown to be continuous, statistical analysis of existing producing wells was conducted to generate areas of reasonable certainty at distances from established production. As a result of this analysis, proved undeveloped reserves for drilling locations within these areas of reasonable certainty were recorded during 2018.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
While the Company expects, based on Management's Price Outlooks, that future operating cash flows will provide adequate funding for future development of its proved undeveloped reserves over the next five years, it may also use any combination of internally-generated cash flows, cash and cash equivalents on hand, sales of short-term and long-term investments, availability under its credit facility, proceeds from divestitures of nonstrategic assets or external financing sources to fund these and other capital expenditures, including exploratory drilling and acquisitions.
The estimated timing and cash flows of developing proved undeveloped reserves are as follows:
______________________
(a)
Production and cash flows represent the drilling results from the respective year plus the incremental effects of proved undeveloped drilling beginning in 2019.
(b)
The $11 million of future development costs represents net abandonment costs in years beyond the forecasted years.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is computed by applying commodity prices used in determining proved reserves (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved reserves less estimated future expenditures (based on year-end estimated costs) to be incurred in developing and producing the proved reserves, discounted using a rate of ten percent per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing undiscounted future cash flows to the tax basis of oil and gas properties plus available carryforwards and credits and applying the current tax rates to the difference. The discounted future cash flow estimates do not include the effects of the Company's commodity derivative contracts.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable and possible reserves, anticipated future commodity prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
The standardized measure of discounted future cash flows as well as a rollforward in total for each respective year are as follows:
__________________
(a)
Includes $621 million, $639 million and $603 million of undiscounted future asset retirement expenditures estimated as of December 31, 2018, 2017 and 2016, respectively, using current estimates of future abandonment costs. See Note 9 for additional information.
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Changes in Standardized Measure of Discounted Future Net Cash Flows
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2018, 2017 and 2016
Selected Quarterly Financial Results
Selected quarterly financial results, with adjustments to conform to annual results, are as follows:
_____________________
(a)
During the second quarter of 2018, the Company impaired the carrying value of proved properties and related assets in the Raton Basin gas field (sold July 2018).
(b)
During the first quarter of 2017, the Company impaired the carrying value of proved properties in the Raton Basin gas field (sold July 2018).
PIONEER NATURAL RESOURCES COMPANY
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's management, with the participation of its principal executive officer and principal financial officer, have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 ("the Exchange Act"), the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this Report, in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including that such information is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There have been no changes to the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed by or under the supervision of the Company's principal executive officer and principal financial officer and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with generally accepted accounting principles.
The Company's management, with the participation of its principal executive officer and principal financial officer assessed the effectiveness, as of December 31, 2018, of the Company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control - Integrated Framework (2013)," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2018, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018. The report, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Pioneer Natural Resources Company
Opinion on Internal Control over Financial Reporting
We have audited Pioneer Natural Resources Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Pioneer Natural Resources Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Pioneer Natural Resources Company as of December 31, 2018 and 2017, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 26, 2019
PIONEER NATURAL RESOURCES COMPANY
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I of this Report. The other information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in May 2019 and is incorporated herein by reference.
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in May 2019 and is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
Summarized information about the Company's equity compensation plans is as follows:
_______________________
(a)
There are no outstanding warrants or equity rights awarded under the Company's equity compensation plans.
(b)
In May 2006, the stockholders of the Company approved the 2006 Long-Term Incentive Plan, which provided for the issuance of up to 9.1 million securities, as was supplementally approved by the stockholders of the Company in May 2009. In May 2016, the stockholders of the Company approved a 3.5 million increase in the number of securities available for issuance under the plan. Awards under the 2006 Long-Term Incentive Plan can be in the form of stock options, stock appreciation rights, performance units, restricted stock and restricted stock units.
(c)
The number of securities remaining for future issuance has been reduced by the maximum number of shares that could be issued pursuant to outstanding grants of performance units as of December 31, 2018.
(d)
The number of remaining securities available for future issuance under the Company's Employee Stock Purchase Plan is based on the aggregate authorized issuances of 1,250,000 shares less 1,002,433 cumulative shares issued through December 31, 2018.
See Note 8 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
The remaining information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in May 2019 and is incorporated herein by reference.
PIONEER NATURAL RESOURCES COMPANY
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in May 2019 and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item will be set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in May 2019 and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Listing of Financial Statements
Financial Statements
The following consolidated financial statements of the Company are included in "Item 8. Financial Statements and Supplementary Data:"
•
Report of Independent Registered Pubic Accounting Firm
•
Consolidated Balance Sheets as of December 31, 2018 and 2017
•
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
•
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
•
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
•
Notes to Consolidated Financial Statements
•
Unaudited Supplementary Information
(b)
Exhibits
The exhibits to this Report that are required to be filed pursuant to Item 15(b) are listed below.
(c)
Financial Statement Schedules
No financial statement schedules are required to be filed as part of this Report or they are inapplicable.
PIONEER NATURAL RESOURCES COMPANY
Exhibits
PIONEER NATURAL RESOURCES COMPANY
PIONEER NATURAL RESOURCES COMPANY
PIONEER NATURAL RESOURCES COMPANY
PIONEER NATURAL RESOURCES COMPANY
PIONEER NATURAL RESOURCES COMPANY
__________________________
(a)
Filed herewith.
(b)
Furnished herewith.
H
Executive Compensation Plan or Arrangement.
PIONEER NATURAL RESOURCES COMPANY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date:
February 26, 2019
By:
/s/ Scott D. Sheffield
Scott D. Sheffield,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.