Pioneer Natural Resources Company

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Pioneer Natural Resources Company

5205 N. O'Connor Boulevard, Suite 1400
Irving, Texas 75039
U.S.A.
Telephone: (972) 444-9001
Fax: (972) 969-3576
Web site: http://www.pioneernrc.com

Public Company
Incorporated: 1997
Employees: 979
Sales: $717.4 million (2002)
Stock Exchanges: New York
Ticker Symbol: PXD
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Pioneer Natural Resources Company is a gas and oil exploration, development, and production company, with onshore and offshore properties in the United States, Canada, Argentina, South Africa, Tunisia, and Gabon. Domestic properties include the West Panhandle gas field and Spraberry Trend oilfield, both in Texas and the Hugoton gas field in southwestern Kansas; gas processing facilities are located in Fain, Texas, and in Satana, Kansas. Pioneer owns and operates the Falcon gas fields in the Gulf of Mexico, southeast of Corpus Christi, and holds a working interest in several offshore exploration and development projects in the deepwater Gulf, including Devils Tower oilfield, southeast of New Orleans. On Alaska's North Slope, Pioneer holds an interest in ten oil development sites on the Kuparuk River field. The producing Chinchaga gas field in northeast British Columbia, Canada, includes gas processing facilities and a pipeline. International interests include the Sable oilfield in shallow water offshore South Africa, the Adam oilfield onshore in Tunisia, and exploration and development properties in Gabon. Producing and development properties in Argentina are located in the Tierra del Fuego and Neuquen Basin and produce oil, gas, and natural gas liquids. As of December 31, 2002, Pioneer held proved reserves of 737.7 MBOE (million barrels of oil equivalent), equivalent to 380.8 million barrels of oil and natural gas liquids and 2.1 billion cubic feet of natural gas. Mid-continent properties in Texas and Kansas accounted for approximately two-thirds of proved reserves.

1997 Merger Creating Growth-Driven Company

Pioneer Natural Resources Company formed in April 1997 through the merger of Parker & Parsley Petroleum Company and Mesa, Inc., companies whose histories in the oil and gas industry trace back to the 1950s and 1970s, respectively. Mesa CEO Jon Brumley initiated the merger after Richard Rainwater, a wealthy investor who saved Mesa from bankruptcy in 1996, hired Brumley for the purpose of helping Mesa grow beyond its debt-ridden state. Brumley found an interest and a good strategic fit in Parker & Parsley. Upon shareholder approval in August, Pioneer opened on the New York Stock Exchange at slightly more than $37 per share. Parker & Parsley Chairman Scott Sheffield took the positions of president and CEO and Brumley became chairman.

The merger formed the third largest independent oil and gas exploration and production company at that time. The new company owned proved reserves of 611 MBOE, primarily located in the West Panhandle and Hugoton gas fields and the Spraberry Trend oilfield. These long-lived resources provided a dependable base of low-risk revenues that could be invested to expand the company. Pioneer planned to increase development and production in these areas, including 600 development wells in Spraberry Trend. Pioneer also planned exploration and development in 200 locations at the Greenhill Petroleum properties in the Gulf of Mexico just purchased by Mesa. Pioneer's goal was to double its growth over five years, primarily through acquisition, seeking opportunities in the East Texas basin, the Rocky Mountain region, and Canada. The company prepared to increase exploration as well, by expanding its team of geoscientists, particularly with expertise in deepwater exploration.

Seeking to improve the company's cash flow, Pioneer expanded immediately through two acquisitions. In September Pioneer announced an agreement to acquire Chauvco Resources Ltd., of Calgary, Alberta, involving properties in western Canada and Argentina with 153 million proven BOE of gas and oil properties and a backlog of 1,700 drilling locations. The $1.2 billion stock transaction involved a stock exchange valued at $975 million and $220 million in assumed debt. In October Pioneer announced that it would acquire assets in East Texas Permian Basin from subsidiaries of Belgium's Electrafina, for $157 million in cash and stock. Pioneer obtained producing wells, land, seismic data and royalties, and a gathering system, pipeline, and gas processing plant. Pioneer became one of the largest holders of acreage in the East Texas basin, with assets producing 25 MMcfd (million cubic feet per day) of gas.

To fund acquisitions and maintain cash flow Pioneer sold several properties that no longer fit with the company's goals. Pioneer sold properties in the Permian Basin of West Texas for $55 million in cash and properties in Oklahoma, the Texas Panhandle, and along the Gulf of Mexico in Texas and Louisiana for $50 million. The company placed for sale another 425 properties originally owned by Parker & Parsley, accounting for 95 percent of domestic fields but only 15 percent of cash flow. After divestments and acquisitions Pioneer held 762 BOE proved reserves at the end of 1997, equal to 384 million barrels of crude oil and natural gas liquids and 2.3 trillion cubic feet of natural gas.

Oversupply of Gas and Oil Constricting Revenues in the Company's First Year

Pioneer's pursuit of growth encountered major difficulties when gas and oil prices declined significantly in late 1997, decreasing the value of certain reserves and forcing the company to sell many properties. In the fourth quarter Pioneer took a noncash write-down of $863 million on certain reserves, resulting in a loss of $890.7 million on revenues of $546 million in 1997. As prices continued to decline in 1998, to as low as $10 per barrel of oil, Pioneer reduced its 1998 capital budget from $600 million to $480 million, allocating $265 million to develop producing wells, $115 million for exploration, and $60 million in property acquisitions. Other cost reduction activities included consolidation of administration activities to the Irving, Texas headquarters and closure of the Corpus Christi, Texas office, eliminating 200 staff positions. In 1999 the company closed offices in Houston and Oklahoma City, eliminating an additional 150 jobs.

Pioneer's new emphasis on exploration resulted in significant oil and gas discoveries in 1998 and 1999. Using the latest 3-D seismic imaging technology, Pioneer made a significant discovery at the Greenhill properties along the Gulf coast off Louisiana, which tested at 3,000 Bbl/d (barrels per day) of oil and 7 MMcfd of gas. Through a joint venture with state-owned Soeker Exploration & Production Pty, Ltd., in which Pioneer owned a 49 percent interest, the company made the Sable oil discovery in shallow water offshore South Africa in June 1998. In the deepwater Gulf, a joint venture made the March 1999 Aconcagua discovery in a lease property known as Mississippi Canyon Block 35, in which Pioneer owned a 25 percent interest. Exploration continued in South Africa, Gabon, Argentina, and gas fields in Canada.

For 1999, the $300 million capital budget was cut further as low gas and oil prices averaging $15.36 Bbl oil hindered cash flow. In April 1999 Pioneer halted plans for exploratory drilling at offshore sites in South Africa and the U.S. Gulf Coast Transition Zone. Exploration continued in both the deepwater Gulf and onshore wells in Louisiana and Texas. Pioneer also allocated $100 million to develop gas wells in Canada, Argentina, and the U.S. mainland.

To service a high level of debt Pioneer divested properties in 1999, including many along the Gulf Coast, for a total of $410 million. In May the company sold a package of 400 domestic oilfields to Prize Energy, formed by executives and directors of Pioneer who resigned their positions to lead the new company. Pioneer received $215 million in cash and $30 million in stock from Prize. Pioneer sold additional properties through ten separate deals for a total of $105 million. The largest sale, at $62.3 million, involved natural gas properties in South Texas. The company sold noncore Canadian properties and the West Texas field, but kept its northeast British Columbia property, the Chinchaga gas field, where a gas pipeline was under construction.

The sale of property resulted in a profit for the third quarter of 1999, but Pioneer ended the year with a loss of $22.5 million on revenues of $644.6 million. While revenues represented a 9 percent decline from 1998, these were derived from fewer working assets, as Pioneer had become a more streamlined company. The average cost of production per BOE had declined from $2.40 in 1998 to $2.11 in 1999.

Pioneer's capital investment focused on opportunities that would provide long-term reserves. In November 1999 Pioneer acquired two properties in Argentina's Neuquen Basin for $40 million, involving eight blocks over 230,000 acres. The properties held net proven reserves of 7.7 million BOE with existing wells producing 2,000 Bbl/d and 9 MMcfd. Pioneer planned to invest $1.2 billion during the course of 17-year concession contracts. Exploration at the new property procured a discovery with the first well in the Al Sur de la Dorsal Block in February 2000.

Pioneer continued to improve its operating cash flow in 2000, selling shares of Prize Energy for $18.6 million in March 2000. The company divested $102.7 million in nonaffiliated entity and noncore domestic properties located in Oklahoma, Louisiana, and New Mexico. The company sought funding through the issuance of $400 million in ten-year bonds, but stopped the plan when interest lagged. Oil and gas prices continued to rise during 2000, however, allowing Pioneer to improve its balance sheet without the bonds and to expand its holdings through incremental increases in existing interests.

Company Perspectives:

"We have the right strategy, the financial strength and the organizational agility to sustain an aggressive pace. Our strategy for growth combines selective investment in exploration balanced with aggressive development in our core areas and complementary acquisitions."

—Scott D. Sheffield, chairman, president, and CEO

In late 2000 Pioneer invested a total of $38 million in development properties, notably in the deepwater Gulf of Mexico discoveries and Chinchaga gas fields. For $23 million the company acquired 12 nonproducing blocks in the Gulf of Mexico, including a 33.3 percent interest in the Camden Hills gas discovery in Mississippi Canyon, for a total 18 percent interest in the Canyon Express development project where the Aconcagua discovery is located. Pioneer increased to 20 percent its interest in the Devil's Tower oil discovery in Mississippi Canyon. Pioneer became sole owner of the Chinchaga gas field in British Columbia, acquiring the remaining 13 percent interest in that property. The company planned 70 extension and infill wells at Chinchaga over the next three drilling seasons.

During 2000, Pioneer became a profitable company. Although the company's producing assets had declined significantly, higher gas and oil prices offset the changes. Revenues of $852.7 million and net profit of $152.2 million originated from 4,717 gross productive wells (gross wells in which the company owns a working interest; 2,970 net wells based on percentage of ownership), compared with $711.5 million in 1998 revenues from 13,184 gross productive wells (7,378 net). On average across all geographic regions, oil prices rose from $13.00 Bbl in 1998 to $24.01 Bbl, and natural gas liquids prices rose from $8.90 Bbl to $20.27 Bbl; gas prices rose from $1.80 Mcf (thousand cubic feet) to $2.81 Mcf. Overall production declined across geographic region and type of mineral, with a significant decline in oil and gas production in the United States and in gas production in Canada. In Argentina gas production increased by more than one-third over those three years, however.

Pioneer prepared for long-term growth through exploration and development. Of 1,168 gross development and exploratory wells drilled from 1998 to 2000 (852.8 wells net), 92 percent was successfully completed as productive. As immediate demand and commodity prices rose, Pioneer increased production and development. In 2000 Pioneer put 86 oil wells into production at Spraberry Trend and 51 gas wells at the West Panhandle field, and two development wells were completed at the Hugoton field in 2000. In Canada 17 of 21 development wells and 12 of 14 development wells were successfully completed. In Argentina, 28 of 30 development well and 38 of 54 exploratory wells were successfully completed. At the end of fiscal 2000 Pioneer reported proved reserves of 87.2 Mbls of oil and natural gas liquids and 419.6 billion cubic feet of natural gas.

Early 2000s: Consolidating Assets and Developing New Discoveries

As Pioneer returned to profitability, the company increased its 2001 capital budget by 28 percent to $430 million. The company allocated $115 million for international exploration and development projects and $315 million for domestic projects, the latter involving $244 million for development at low-risk, long-lived domestic fields and $74.5 million for exploration and development projects in the deepwater Gulf. Funds applied to development included new discovery sites scheduled to become productive in 2002 and 2003. Pioneer expected its hedging contracts to produce more cash flow than the capital budget required, allowing the company to apply excess funds to debt reduction, stock repurchase, core area acquisitions, and further development. With the help of higher oil and natural gas prices the company reduced its debt from $1.6 billion to $700 million during the second quarter 2001.

Pioneer's exploration activities procured several new discoveries in 2001. Overseas, Pioneer was successful in finding significant oil and gas in the Boomslang prospect south of Mossel Bay, South Africa. Pioneer owned a 49 percent working interest in the joint venture with the state-owned Soeker. In May Pioneer made a discovery in Gabon at Olowi block in offshore West Africa, a wholly owned working interest. Deepwater Gulf of Mexico exploration resulted in the Falcon discovery in April and the Ozona Deep discovery in October, with Pioneer owning a 45 percent interest and a 32 percent interest in the properties, respectively. The Ozona Deep discovery represented the company's 13th successful discovery of 17 exploration wells drilled in the Gulf of Mexico since 1998. Exploration of deepwater locations resulted in a discovery at the Turnberry prospect as well, where Pioneer owned a 40 percent working interest.

In 2001 Argentina acquired or increased to 100 percent its interests in four properties in the Neuquen Basin. The Anticlinal Campamento block included a newly developed field producing 7 Mcbd of gas and the Cerro Vagon block where several discoveries would be further appraised. Construction projects involved production facilities and a pipeline for Loma Negra Norte field and an NGL extraction facility (for recovering ethane, propane, butane, and other sales quality gases) at the Loma Negra gas complex. Construction completed on a dehydration plan and an eight-mile pipeline allowed production to begin at the Lago Fuego block in Tierra del Fuego, extracting 200 Bbls of natural gas liquids per day and 7 MMcfd of natural gas.

Pioneer completed the merger of 42 Parker & Parsley Limited Partnerships, involving privately and publicly owned stock. Shareholders approved the merger in December 2001; four partnerships, however, did not approve the merger and remained partially owned subsidiaries of the company. Pioneer issued $99.2 million in a stock exchange. Aggregate reserves of the partnerships involved 29 million BOE of gas and oil reserves, including the dependable Spraberry Trend. In other business, Pioneer increased its interests in the Aconcagua field and Canyon Express pipeline project, to 37.5 percent and 23.5 percent, respectively, for $25.5 million.

Key Dates:

1997:: Pioneer is formed through a merger of Mesa, Inc. and Parker & Parsley Petroleum Company.
1998:: A decline in gas and oil prices and enduring debt lead to large losses.
1999:: Pioneer divests properties, and halts certain exploration projects.
2000:: Higher commodity prices support expansion and profitability.
2001:: Exploration yields discoveries in the Gulf of Mexico and offshore of Gabon.
2003:: Production begins at the Falcon discovery; exploration yields three satellite discoveries.

In the spring of 2002 Pioneer offered 11 million new shares of stock at $21.40 per share, netting $235 million to fund $193 million in acquisitions. In addition, the company sold $150 million in senior notes to refinance debt. Acquisitions involved increasing the company's working interest in several development projects. Pioneer acquired a 25 percent interest in the Falcon field, increasing its interest to 75 percent; the project became the first deepwater Gulf project for Pioneer to operate. Pioneer acquired an additional 25 percent working increase in 11 blocks in the vicinity of the Falcon field, as well as a 100 percent interest for ten development blocks in the area. In addition, Pioneer became the sole owner of field and gathering systems at the West Panhandle gas field.

With a capital budget of $425 million in 2002, Pioneer prepared to exploit its discoveries with several projects in development for initial production in 2002 and 2003. Development of discoveries in the deepwater Gulf involved the Falcon and Devil's Tower discoveries, with production expected to begin in 2003 and 2004, respectively. The Sable oil well development project began in late 2001, with initial production slated to begin within 12 to 18 months. Gas production began at the Camden Hills discoveries at Canyon Express in September 2002, extracting 110 to 120 MMcfd of gas with prices rising to new highs. During 2002 Pioneer placed 89 new wells on production at the Spraberry Trend and 40 wells at West Panhandle and began evaluation of new development sites at Hugoton.

In September 2002 Pioneer found oil in Tunisia's Ghadames Basin, where the company owned a 40 percent working interest. The primary zone at Adam 1 well tested at 3,500 Bbl/d. Through use of nearby production facilities development of the well progressed quickly and production began in May 2003, with first sales expected by the end of the year. Pioneer continued development and exploration in the Adam concession as well as exploration in the Anaquid permit, the latter operated by Anadarko.

Progress in other international locations involved renegotiation of Pioneer's exploration interests in Gabon and initial production at the Sable field, after some delays due to problems with leased equipment, in late 2003. In Argentina's Neuquen province a $23 million liquefied petroleum gas plant began production. Pioneer concentrated activities on extension and development wells in the oil reserves in the Neuquen Basin.

The company acquired a 70 percent working interest in oil exploration on Alaska's North Slope. Pioneer operated ten leases covering 14,000 acres in the Kuparuk River field for its partner Armstrong Resources. In early 2003 the company drilled three exploration wells in NW Kuparuk, testing for possible extension wells in shallow waters offshore. Potential production at the Kuparuk prospects was estimated at one half billion BOE, with production expected to begin in 2005, increasing to 50,000 to 75,000 barrels of oil per day by 2008.

Pioneer acquired full interest in 32 blocks at the Falcon discovery area in June 2003 for $113 million cash. The acquisitions included the Harrier field, a satellite discovery made in early 2003. Production began at Falcon in April and tie-back production from the Harrier field was expected to be completed in early 2004. Pioneer estimated that together the Falcon and Harrier wells would produce 275 MMcfd in gas. Exploration procured two additional discoveries, the Tomahawk prospect and the Raptor field, in August and September, respectively. Pioneer planned to tie-back the Tomahawk and Raptor wells to Falcon platform for production in 2004. The tie-back system provided a cost-efficient method of expanding production and the Falcon facility accommodated up to 400 MMcfd.

Principal Subsidiaries

Pioneer Natural Gas Company; Pioneer Natural Resources Alaska, Inc.; Pioneer Natural Resources (Argentina) S.A.; Pioneer Natural Resources (Tierra Del Fuego) S.A.; Pioneer Natural Resources Canada, Inc.; Pioneer Natural Resources South Africa Limited; Pioneer Natural Resources Tunisia Ltd.; Pioneer Natural Resources USA, Inc.; Pioneer Resources Gabon-Olowi, Ltd.; Westpan Resources Company.