PIONEER NATURAL RESOURCES COMPANY Parsley Acquisition and DoublePoint Acquisition
The Company regularly seeks to acquire or trade acreage that complements its operations, provides exploration and development opportunities, increases the lateral length of future horizontal wells and provides superior returns on investment. OnMay 4, 2021 , the Company completed the acquisition of Double Eagle III Midco 1 LLC in exchange for 27 million shares of Pioneer common stock representing stock consideration transferred of$4.2 billion ,$1.0 billion of cash and the assumption of$890 million of debt. The DoublePoint Acquisition was accounted for as a business combination, with the fair value of the acquisition consideration allocated to the acquisition date fair value of assets acquired and liabilities assumed. The results of operations attributable to the assets acquired in the DoublePoint Acquisition were included in the Company's consolidated financial statements beginning inMay 2021 . OnJanuary 12, 2021 , the Company completed the acquisition of Parsley Energy, Inc., aDelaware corporation that previously traded on the NYSE under the symbol "PE", pursuant to the Agreement and Plan of Merger, dated as ofOctober 20, 2020 , among Pioneer, certain of its subsidiaries, Parsley and Parsley's subsidiary,Parsley Energy, LLC . The Parsley Acquisition was accounted for as a business combination, with the fair value of the acquisition consideration allocated to the acquisition date fair value of assets acquired and liabilities assumed. As acquisition consideration, the Company issued 52 million shares of Pioneer common stock (representing stock consideration transferred of$6.9 billion ) and assumed$3.2 billion of Parsley's debt. The results of operations attributable to the assets acquired in the Parsley Acquisition were included in the Company's consolidated financial statements beginning onJanuary 12, 2021 .
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Delaware Divestiture and Glasscock Divestiture
The Company regularly reviews its asset base to identify nonstrategic assets, the disposition of which would increase capital resources available for other activities, create organizational and operational efficiencies and further the Company's objective of maintaining a strong balance sheet to ensure financial flexibility. InDecember 2021 , the Company completed the divestiture of itsDelaware Basin assets to Continental Resources, Inc. for cash proceeds of$3.1 billion , after normal closing adjustments. The sale of these assets resulted in a pretax loss of$1.1 billion . InOctober 2021 , the Company completed the sale of 20,000 net acres in western Glasscock County to Laredo Petroleum, Inc. in exchange for$137 million in cash and 960 thousand shares of Laredo's common stock representing total consideration transferred of$206 million , after normal closing adjustments. The sale of these assets resulted in a pretax gain of$1 million .
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Financial and Operating Performance
The Company's financial and operating performance for 2021 included the following highlights:
•Net income attributable to common stockholders was$2.1 billion ($8.61 per diluted share) for the year endedDecember 31, 2021 , as compared to a net loss of$200 million ($1.21 per diluted share) in 2020. The primary components of the$2.3 billion increase in earnings attributable to common stockholders include: •a$7.9 billion increase in oil and gas revenues, primarily due to an 89 percent increase in average realized commodity prices per BOE as a result of higher commodity prices in 2021 due to the continued recovery in oil and gas demand from levels achieved earlier in the COVID-19 pandemic, and a 68 percent increase in daily sales volumes due to additional production from the Company's successful horizontal drilling program in thePermian Basin , the Parsley Acquisition and the DoublePoint Acquisition;
partially offset by:
•a
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•the aforementioned loss of
•a$994 million increase in production costs, including taxes, primarily attributable to (i) increased costs related to the production added from the Parsley Acquisition and the DoublePoint Acquisition and (ii) the increase in production taxes as a result of the aforementioned 89 percent increase in average realized commodity prices per BOE;
•an
•a
•During 2021, average daily sales volumes increased on a BOE basis by 68 percent to 617,332 BOEPD, as compared to 367,253 BOEPD during 2020, primarily due to the Company's successful Spraberry/Wolfcamp horizontal drilling program, the Parsley Acquisition and the DoublePoint Acquisition. •Average oil and NGL prices per Bbl and average gas prices per Mcf increased to$67.60 ,$32.70 and$3.85 , respectively, in 2021, as compared to$37.24 ,$15.62 and$1.73 , respectively, in 2020. •Cash provided by operating activities increased during 2021 to$6.1 billion , as compared to$2.1 billion for 2020. The increase in net cash flow provided by operating activities in 2021, as compared to 2020, is primarily due to the aforementioned increase in oil and gas revenues as a result of higher commodity prices and sales volumes partially offset by (i) additional cash used in derivative activities, (ii) an increase in production costs, including taxes, due to the aforementioned increase in costs attributable to the production added by the Parsley Acquisition and the DoublePoint Acquisition and production taxes attributable to higher commodity prices, and (iii) one-time Parsley Acquisition and DoublePoint Acquisition cash transaction-related costs.
•As of
Impact of the COVID-19 Pandemic
The COVID-19 pandemic resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil throughout the world, and created significant volatility, uncertainty and turmoil in the oil and gas industry. The decrease in demand for oil, combined with pressures on the global supply-demand balance for oil and related products, resulted in oil prices declining significantly in lateFebruary 2020 . Since mid-2020, oil prices have improved, with demand steadily increasing despite the uncertainties surrounding the COVID-19 variants, which have continued to inhibit a full global demand recovery. In addition, worldwide oil inventories are, from a historical perspective, very low and supply increases fromOPEC ,Russia and other oil producing nations are not expected to be sufficient to meet forecasted oil demand growth in 2022 and 2023, with manyOPEC countries not able to produce at theirOPEC agreed upon quota levels due to their lack of capital investments over the past few years in developing incremental oil supplies. Global oil price levels will ultimately depend on various factors and consequences beyond the Company's control, such as (i) the effectiveness of responses to combat the COVID-19 virus and their impact on domestic and worldwide demand, (ii) the ability ofOPEC ,Russia and other oil producing nations to manage the global oil supply, (iii) the timing and supply impact of any Iranian sanction relief onIran's ability to export oil, (iv) additional actions by businesses and governments in response to the pandemic, (v) the global supply chain constraints associated with manufacturing delays, and (vi) political stability of oil consuming countries.
The Company continues to assess the impact of the COVID-19 pandemic on the Company and may modify its response as the impact of COVID-19 continues to evolve.
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First Quarter 2022 Outlook
Based on current estimates, the Company expects the following operating and financial results for the first quarter of 2022:
Three Months Ending March 31,
2022
Guidance
($ in millions, except per BOE
amounts)
Average daily production (MBOE) 620 - 645
Average daily oil production (MBbls) 348 - 363
Production costs per BOE $9.25 - $10.75
DD&A per BOE $10.50 - $12.00
Exploration and abandonments expense $10 - $20
General and administrative expense $68 - $78
Accretion of discount on asset retirement obligations $2 - $5
Interest expense $36 - $41
Other expense $15 - $30
Cash flow impact from firm transportation (a) $(55) - $(25)
Current income tax provision (benefit) $10 - $20
Effective tax rate 22% - 27%
_____________________
(a)The cash flow impact from firm transportation is primarily based on the
forecasted differential between WTI oil prices and Brent oil prices less the
costs to transport purchased oil from the areas of the Company's production to
the Gulf Coast . To the extent that the Company's Gulf Coast sales of purchased
oil does not cover the purchase price and associated firm transport costs, the
Company's results of operations will reflect the negative cash flow impact
attributable to the shortfall.
2022 Capital Budget
The Company's capital budget for 2022 is expected to be in the range of$3.3 billion to$3.6 billion , consisting of drilling and completion related activities, including additional tank batteries and saltwater disposal facilities, and$85 million for water infrastructure and vehicles. The 2022 capital budget excludes acquisitions, asset retirement obligations, capitalized interest, geological and geophysical general and administrative expense and corporate facilities. The 2022 capital budget is expected to be funded from operating cash flow, and, if necessary, from cash and cash equivalents on hand or borrowings under the Company's Credit Facility. Results of Operations Results of operations should be read together with the Company's consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. See the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of the Company's 2020 results of operations as compared to the Company's 2019 results of operations. 54
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PIONEER NATURAL RESOURCES COMPANY
Oil and gas revenues. The Company's revenues are derived from sales of oil, NGL
and gas production. Increases or decreases in the Company's revenues,
profitability and future production are highly dependent on commodity prices.
Prices are market driven and future prices will fluctuate due to supply and
demand factors, availability of transportation, seasonality, geopolitical
developments and economic factors, among other items.
Year Ended December 31,
2021 2020 Change
(in millions)
Oil and gas revenues $ 11,503 $ 3,630 $ 7,873 Average daily sales volumes are as follows:
Year Ended December 31,
2021 2020 % Change
Oil (Bbls) 356,986 210,641 69 %
NGLs (Bbls) 143,026 85,728 67 %
Gas (Mcf) (a) 703,919 425,307 66 %
Total (BOE) 617,332 367,253 68 %
____________________
(a)Gas production excludes gas produced and used as field fuel.
Average daily sales volumes per BOE increased for the year endedDecember 31, 2021 , as compared to 2020, primarily due to the Company's successful Spraberry/Wolfcamp horizontal drilling program, combined with the production added from the Parsley Acquisition and the DoublePoint Acquisition. The oil, NGL and gas prices reported by the Company are based on the market prices received for each commodity. Commodity prices for year endedDecember 31, 2021 , as compared to 2020, increased due to the continued recovery in oil, NGL and gas demand from levels achieved earlier in the COVID-19 pandemic. The average prices are as follows: Year Ended December 31, 2021 2020 % Change Oil per Bbl$ 67.60 $ 37.24 82 % NGLs per Bbl$ 32.70 $ 15.62 109 % Gas per Mcf$ 3.85 $ 1.73 123 % Total per BOE$ 51.05 $ 27.01 89 % Net sales of purchased commodities. The Company enters into pipeline capacity commitments in order to secure available oil, NGLs and gas transportation capacity from the Company's areas of production and secure diesel supply from theGulf Coast to the Company's operations in thePermian Basin . The Company enters into purchase transactions with third parties and separate sale transactions with third parties to diversify a portion of the Company's oil and gas sales to (i)Gulf Coast refineries, (ii)Gulf Coast andWest Coast gas markets and (iii) international oil markets, and to satisfy unused gas pipeline capacity commitments. Revenues and expenses from these transactions are generally presented on a gross basis in sales of purchased commodities and purchased commodities expense in the accompanying consolidated statements of operations as the Company acts as a principal in the transaction by assuming both the risks and rewards of ownership, including credit risk, of the commodities purchased and the responsibility to deliver the commodities sold. In conjunction with the Company's downstream sales, the Company also enters into pipeline capacity commitments in order to secure available oil, NGL and gas transportation capacity from the Company's areas of production to downstream sales points. The transportation costs associated with these transactions are included in purchased commodities expense. 55
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The net effect of third party purchases and sales of commodities is as follows:
Year Ended December 31,
2021 2020 Change
(in millions)
Sales of purchased commodities $ 6,367 $ 3,394 $ 2,973
Purchased commodities 6,560 3,633 2,927
$ (193) $ (239) $ 46
The change in net sales of purchased commodities for the year ended December 31,
2021 , as compared to 2020, is primarily due to a $74 million loss during the
first quarter of 2020 attributable to oil that was purchased and in transit via
pipeline to the Gulf Coast or in Gulf Coast storage at the end of January 2020
and February 2020 , and was subsequently sold in February 2020 and March 2020 ,
respectively, at lower prices. The change was also impacted by a decrease in
margins on the Company's downstream Gulf Coast refinery and export oil sales for
the year ended December 31, 2021 , as compared to 2020.
Firm transportation payments on excess pipeline capacity are included in other
expense in the accompanying consolidated statements of operations. See Note
16 of Notes to Consolidated Financial Statements included in "Item 8.
Financial Statements and Supplementary Data" for additional information.
Interest and other income (loss), net.
Year Ended December 31,
2021 2020 Change
(in millions)
Interest and other income (loss), net $ 23 $
(67)
The increase in interest and other income (loss) for the year endedDecember 31, 2021 , as compared to 2020, is primarily due to (i) a noncash net gain of$12 million attributable to the change in fair value of the Company's investment in affiliates, as compared to a noncash net loss of$64 million for the same period in 2020 and (ii) a$42 million noncash loss in 2020 attributable to the decrease in fair value of contingent consideration associated with the Company's sale of its South TexasEagle Ford assets ("South Texas Divestiture") inMay 2019 , partially offset by (i) a$15 million decrease in severance and sales tax refunds and (ii) an$11 million decrease in fair value of the Company's short-term investment in Laredo shares in 2021.
See Note 15 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
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Derivative loss, net.
Year Ended December 31,
2021 2020 Change
(in millions)
Commodity price derivatives:
Noncash derivative gain (loss), net $
437
(2,595) 66 (2,661)
Total commodity derivative loss, net (2,158) (147) (2,011)
Marketing derivatives:
Noncash derivative gain (loss), net 14 (112) 126
Cash payments on settled derivatives, net (39) - (39)
Total marketing derivative loss, net (25) (112) 87
Interest rate derivatives:
Cash payments on settled derivatives, net - (22) 22
Derivative loss, net $ (2,183) $ (281) $ (1,902)
_____________________
(a)Includes $521 million of losses attributable to the early settlement of
certain 2022 oil and gas commodity derivatives, of which the Company recognized
$508 million of such in losses during the fourth quarter of 2021 related to (i)
the termination of certain of its 2022 oil and gas commodity derivative
positions and (ii) entering into equal and offsetting oil and gas commodity
derivative trades, which had the net effect of eliminating certain of its 2022
derivative positions. The Company will make cash payments of $328 million during
2022 to settle the deferred obligations associated with the offsetting
derivatives.
The Company primarily utilizes commodity swap 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 and (ii) support the Company's capital budgeting and expenditure plans.
The Company uses marketing derivatives to diversify its oil pricing to Gulf
Coast and international markets. The Company also, from time to time, utilizes
interest rate contracts to reduce the effect of interest rate volatility on the
Company's indebtedness.
Commodity price derivatives and the relative price impact are as follows:
Year Ended December 31,
2021 2020
Net Cash Net Cash Receipts
Payments Price Impact (Payments) Price Impact
(in millions) (in millions)
Oil derivative receipts (payments), net (a)
$ 80 $ 1.03 per Bbl
Gas derivative payments, net (b) (255)$ (0.99) per Mcf (4)$ (0.02) per Mcf$ (2,074) $ 76 ____________________ (a)Excludes the effect from early settlement of certain of the Company's commodity derivative contracts, which resulted in (i) cash payments of$192 million and$11 million for the year endedDecember 31, 2021 and 2020, respectively, and (ii) deferred obligations with payments to be made in 2022 of$316 million for the year endedDecember 31, 2021 . (b)Excludes the effect from early settlement of certain of the Company's commodity derivative contracts, which resulted in (i) cash payments of$1 million for the year endedDecember 31, 2021 , (ii) deferred obligations with payments to be made in 2022 of$12 million for the year endedDecember 31, 2021 and (iii) cash receipts of$1 million for the year endedDecember 31, 2020 .
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.
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Gain (loss) on disposition of assets, net.
Year Ended December 31,
2021 2020 Change
(in millions)
Gain (loss) on disposition of assets, net $ (1,067) The Company's gain (loss) on disposition of assets is primarily attributable to the following divestitures:
Net Gain (Loss)
Asset Sold Completion Date Recorded
(in millions)
Year Ended December 31, 2021 :
Delaware Divestiture December 2021 $ (1,087)
Glasscock Divestiture October 2021 $ 1
Well services business March 2021 $ 9
Other 2021 $ 10
Year Ended December 31, 2020 :
Upton County - Permian Basin acreage and wells May 2020 $ 6
Other 2020 $ 3
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.
Year Ended December 31,
2021 2020 Change
(in millions)
Oil and gas production costs $ 1,267 $ 682 Total production costs per BOE are as follows:
Year Ended December 31,
2021 2020 % Change
Lease operating expense (a) $ 2.97 $ 3.00 (1 %)
Gathering, processing and transportation expense (b) 3.14 2.59 21 %
Workover costs (a) 0.45 0.24 88 %
Net natural gas plant income (c) (0.93) (0.76) 22 %
$ 5.63 $ 5.07 11 %
_____________________
(a)Lease operating expense and workover costs represent the components of oil
and gas production costs over which the Company has management control.
(b)Gathering, processing and transportation expense represents the costs to (i)
gather, process, transport and fractionate the Company's gas and NGLs to a point
of sale and, to a lesser extent, (ii) gather and transport certain of the
Company's oil production to a point of sale.
(c)Net natural gas plant income represents the earnings from the Company's
ownership share of gas processing facilities that gather and process the
Company's and third party gas.
The change in the Company's production costs per BOE for the year ended
•Lease operating expense per BOE decreased for the year endedDecember 31, 2021 , as compared to 2020, primarily due to (i) operational synergies achieved from the Parsley Acquisition beginning inJanuary 2021 and the DoublePoint Acquisition beginning inMay 2021 , partially offset by fuel, electricity and labor-related price increases; •Gathering, processing and transportation expense per BOE increased for the year endedDecember 31, 2021 , as compared to 2020, primarily due to (i) increased gas and NGL prices during 2021 that resulted in increased gas 58
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PIONEER NATURAL RESOURCES COMPANY processing costs for those contractual volumes retained by the processor as payment for their services, (ii) increased gas processing and transportation costs as a result of higher electricity costs during Winter Storm Uri inFebruary 2021 and (iii) the assumption of Parsley Acquisition and DoublePoint Acquisition contracts that had higher gathering, processing and transportation costs on a per BOE basis; •Workover costs per BOE increased for the year endedDecember 31, 2021 , as compared to 2020, due to an increase in workover activity as a result of improved commodity prices being realized in 2021, which increased the economic benefit of repairing certain of the Company's oil and gas wells; and •Net natural gas plant income per BOE increased for the year endedDecember 31, 2021 , as compared to 2020, primarily due to improved gas and NGL prices.
Production and ad valorem taxes.
Year Ended December 31,
2021 2020 Change
(in millions)
Production and ad valorem taxes $ 651 $ 242
In general, production taxes and ad valorem taxes are directly related to
commodity price changes; however,
Production and ad valorem taxes per BOE are as follows:
Year Ended December 31,
2021 2020 % Change
Production taxes per BOE $ 2.41 $ 1.17 106 %
Ad valorem taxes per BOE 0.48 0.64 (25 %)
$ 2.89 $ 1.81 60 %
Production taxes per BOE increased for the year ended December 31, 2021 , as
compared to 2020, primarily due to the aforementioned increase in oil, NGL and
gas commodity prices. The decrease in ad valorem taxes per BOE for the year
ended December 31, 2021 , as compared to 2020, is primarily due to lower prior
year commodity prices that were used to determine current year ad valorem taxes.
Depletion, depreciation and amortization expense.
Year Ended December 31,
2021 2020 Change
(in millions)
Depletion, depreciation and amortization $ 2,498 $
1,639
Total DD&A expense per BOE is as follows:
Year Ended December 31,
2021 2020 % Change
DD&A per BOE $ 11.08 $ 12.19 (9 %)
Depletion expense per BOE $ 10.81 $ 11.55 (6 %)
The decrease in both DD&A per BOE and depletion expense per BOE for the year endedDecember 31, 2021 , as compared to 2020, is primarily due to additions of proved reserves attributable to (i) the Company's successful Spraberry/Wolfcamp horizontal drilling program, (ii) the Parsley Acquisition and theDouble Point Acquisition and (iii) improved commodity prices (which has the effect of extending the economic life of producing wells). In addition, the DD&A per BOE and depletion expense per BOE attributable to the Parsley Acquisition and the DoublePoint Acquisition were lower than the Company's respective 2020 per BOE amounts. 59
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Exploration and abandonments expense.
Year Ended December 31,
2021 2020 Change
(in millions)
Geological and geophysical $ 46 $ 36 $ 10
Leasehold abandonments and other 5 11 (6)
$ 51 $ 47 $ 4 The increase in geological and geophysical costs for the year ended
The decrease in leasehold abandonments costs for the year ended
During 2021 and 2020, the Company drilled and evaluated 488 and 242 exploratory/extension wells, respectively, with 100 percent successfully completed as discoveries.
See Note 6 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
General and administrative expense.
Year Ended December 31,
2021 2020 Change
(in millions)
Noncash general and administrative expense $ 48 $ 42 $ 6
Cash general and administrative expense 244 202 42
$ 292 $ 244 $ 48 The change in noncash general and administrative expense for the year ended
The change in cash general and administrative expense for the year endedDecember 31, 2021 , as compared to 2020, was primarily due to (i) the incremental costs assumed in the Parsley Acquisition and DoublePoint Acquisition and (ii) the reinstatement of certain employee benefits during 2021 that were temporarily suspended during 2020 in response to the COVID-19 pandemic.
Total general and administrative expense per BOE is as follows:
Year Ended December 31,
2021 2020 % Change
Noncash general and administrative expense $ 0.21 $ 0.31 (32 %)
Cash general and administrative expense 1.08 1.51 (28 %)
$ 1.29 $ 1.82 (29 %)
The decrease in general and administrative expense per BOE for the year ended
December 31, 2021 , as compared to 2020, reflects the general and administrative
synergies achieved from the Parsley Acquisition beginning in January 2021 and
the DoublePoint Acquisition beginning in May 2021 . The Company added significant
sales volumes from the acquisitions with limited associated incremental general
and administrative costs being added.
See Note 3 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
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Interest expense.
Year Ended December 31,
2021 2020 Change
(in millions)
Noncash interest expense $ 10 $ 34 $ (24)
Cash interest expense 151 95 56
$ 161 $ 129 $ 32
The decrease in noncash interest expense for the year ended December 31, 2021 ,
as compared to 2020, is primarily due to the adoption of Accounting Standards
Update ("ASU") 2020-06, effective January 1, 2021 , which reversed the debt
discount recorded to additional paid-in capital upon issuance of the Company's
$1.3 billion principal amount of Convertible Notes to long-term debt. Therefore,
noncash interest expense decreased primarily due to a $28 million decrease in
amortization associated with the discount attributable to the issuance of the
Convertible Notes prior to the adoption of ASU 2020-06. See Note 7 of Notes
to Consolidated Financial Statements in "Item 1. Financial Statements" for
additional information.
The increase in cash interest expense is primarily due to (i) the changes in
long-term debt as a result of the Parsley Acquisition and DoublePoint
Acquisition (see "Liquidity and Capital Resources" below for additional
information) and (ii) the issuance of $1.3 billion of Convertible Notes in May
2020 and $1.1 billion of 1.900% senior notes due 2030 in August 2020 , partially
offset by (i) the partial repayment of $360 million of the Company's 3.450%
senior notes due 2021, $356 million of its 3.950% senior notes due 2022 and $9
million of its 7.200% senior notes due 2028 as a result of the Company's tender
offer for these notes in May 2020 and (ii) the repayment of its 3.450% senior
notes, with a remaining debt principal balance of $140 million , that matured in
January 2021 .
The weighted average cash interest rate on the Company's indebtedness for the
year ended
See Note 7 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Other expense.
Year Ended December 31,
2021 2020 Change
(in millions)
Other expense $ 410 $ 321 $ 89
The increase in other expense for the year ended December 31, 2021 , as compared
to 2020, is primarily related to increases of (i) $201 million of transaction
costs associated with the Parsley Acquisition, (ii) $80 million of costs related
to the fulfillment of certain firm gas commitments during Winter Storm Uri in
February 2021 , (iii) $39 million in facilities expense primarily associated with
certain Parsley offices that are no longer occupied and (iv) $33 million of
transaction costs associated with the DoublePoint Acquisition, partially offset
by decreases of (i) $90 million in the Company's net forecasted deficiency fee
obligation and receivable associated with the South Texas Divestiture, (ii) $77
million of employee-related charges primarily associated with the Company's 2020
corporate restructuring and 2020 staffing reduction in its well services
business, (iii) $70 million in idle frac fleet fees, stacked drilling rig
charges and drilling rig early terminations charges and (iv) $25 million in
early extinguishment of debt charges.
See Note 16 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Income tax benefit (provision).
Year Ended December 31,
2021 2020 Change
(in millions)
Income tax benefit (provision) $ (628) $ 61 $ (689)
Effective tax rate 23 % 23 % - %
The increase in income tax provision for the year ended
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See Note 17 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 investments, (iv) unused borrowing capacity under its Credit Facility, (v) issuances of debt or equity securities and (vi) other sources, such as sales of nonstrategic assets. OnJanuary 12, 2021 , the Company entered into the First Amendment to Credit Agreement, with the primary changes being to increase the aggregate loan commitments from$1.5 billion to$2.0 billion , extend the maturity of the Credit Facility toJanuary 12, 2026 and nominally adjust the drawn and undrawn pricing. The Company's short-term and long-term liquidity requirements consist primarily of (i) capital expenditures, (ii) acquisitions of oil and gas properties, (iii) payments of contractual obligations, including debt maturities, (iv) dividends and share repurchases, (v) income taxes and (vi) working capital obligations. Funding for these requirements 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 2022 liquidity requirements, no assurance can be given that such funding sources will be adequate to meet the Company's future needs. During the year endedDecember 31, 2021 , the Company enhanced its liquidity position by refinancing a portion of the debt acquired in the Parsley Acquisition and the DoublePoint Acquisition, issuing new debt and increasing the borrowing capacity under the Credit Facility, with the combined objective of increasing liquidity, extending the Company's debt maturities and lowering the Company's future cash interest expense on long-term debt. 2022 capital budget. The Company's capital budget for 2022 is expected to be in the range of$3.3 billion to$3.6 billion , consisting of drilling and completion related activities, including additional tank batteries and saltwater disposal facilities, and$85 million for water infrastructure and vehicles. The 2022 capital budget excludes acquisitions, asset retirement obligations, capitalized interest, geological and geophysical general and administrative expense and corporate facilities. The 2022 capital budget is expected to be funded from operating cash flow, and, if necessary, from cash and cash equivalents on hand or borrowings under the Company's Credit Facility. Capital resources. As ofDecember 31, 2021 , the Company had no outstanding borrowings under its Credit Facility, leaving$2.0 billion of unused borrowing capacity. The Company was in compliance with all of its debt covenants as ofDecember 31, 2021 . The Company also had unrestricted cash on hand of$3.8 billion as ofDecember 31, 2021 . See the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of the Company's 2020 capital resources as compared to the Company's 2019 capital resources.
Sources and uses of cash in 2021, as compared to 2020, are as follows:
Year Ended December 31,
2021 2020 Change
(in millions)
Net cash provided by operating activities $ 6,059 $ 2,083 $ 3,976
Net cash used in investing activities $ (869) $ (1,668) $ (799)
Net cash provided by (used in) financing activities $ (2,807) Operating activities. The increase in net cash flow provided by operating activities in 2021, as compared to 2020, is primarily due to an increase in oil and gas revenues as a result of higher commodity prices and sales volumes attributable to the Company's successful Spraberry/Wolfcamp horizontal drilling program and production added by the Parsley Acquisition and the DoublePoint Acquisition, partially offset by (i) additional cash used in derivative activities, (ii) an increase in production costs, including taxes, due to an increase in costs associated with the production added by the Parsley Acquisition and the DoublePoint Acquisition and production taxes attributable to higher commodity prices and (iii) one-time Parsley Acquisition and DoublePoint Acquisition cash transaction-related costs. Investing activities. The decrease in net cash flow used in investing activities during 2021, as compared to 2020, was primarily due to the Delaware Divestiture proceeds in 2021 of$3.1 billion , after normal closing adjustments, and$117 million of net cash acquired in the Parsley Acquisition, partially offset by an increase in additions to oil and gas properties of$1.6 billion and$943 million of net cash used in the DoublePoint Acquisition. 62
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PIONEER NATURAL RESOURCES COMPANY
Financing activities. The Company's significant financing activities are as follows:
•2021: The Company (i) received proceeds from the issuance of 0.550% senior notes due 2023, net of$4 million of issuance costs and discounts, of$746 million , (ii) received proceeds from the issuance of 0.750% senior callable notes due 2024, 1.125% senior notes due 2026 and 2.150% senior notes due 2031, net of$24 million of issuance costs and discounts, of$2.5 billion , (iii) borrowed and repaid$650 million on the Company's Credit Facility, (iv) repaid the Parsley and DoublePoint credit facilities, which had outstanding balances of$397 million and$240 million , respectively, (v) repaid$140 million associated with the maturity of its 3.450% senior notes due inJanuary 2021 , (vi) used proceeds from theMay 2021 Senior Notes Offering to pay$731 million to redeem DoublePoint's 7.750% senior notes due 2025, (vii) used proceeds from theJanuary 2021 Senior Notes Offering to pay$1.6 billion to redeem Parsley's 5.250% senior notes due 2025, Parsley's 5.375% senior notes due 2025 and Jagged Peak's 5.875% senior notes due 2026, (viii) paid$852 million to purchase a portion of Parsley's 5.625% senior notes due 2027 and Parsley's 4.125% senior notes due 2028 pursuant to a cash tender offer, (ix) paid dividends of$1.6 billion , (x) repurchased$269 million of its common stock and (xi) paid$164 million of other liabilities. •2020: The Company (i) received$1.1 billion from the issuance of 1.900% senior notes, net of issuance costs and discounts, (ii) received$1.3 billion from the issuance of the 0.250% convertible senior notes, net of issuance fees, (iii) paid$113 million to enter into capped call transactions with certain financial institution counterparties associated with the convertible senior notes issuance, (iv) paid an aggregate total of$748 million associated with the early repayment of a portion of the 3.450% senior notes due 2021, 3.950% senior notes due 2022 and 7.200% senior notes due 2028, (v) repaid$450 million associated with the maturity of its 7.500% senior notes inJanuary 2020 , (vi) paid dividends of$346 million , (vii) repurchased$176 million of its common stock and (viii) paid$173 million of other liabilities. Dividends/distributions. During the year endedDecember 31, 2021 , the Company's board of directors authorized the payment of base dividends of$487 million or$2.23 per common share, compared to$346 million or$2.09 per common share during the year endedDecember 31, 2020 . In addition to its base dividend program, beginning in the second quarter of 2021, the Company implemented a variable dividend strategy whereby the Company pays a quarterly variable dividend of up to 75 percent of the prior quarter's free cash flow remaining after the payment of that quarter's base dividend. Free cash flow is a non-GAAP financial measure. As used by the Company, free cash flow is defined as net cash provided by operating activities, adjusted for (i) changes in operating assets and liabilities (ii) cash transaction costs associated with acquisitions and (iii) deferred obligations on certain commodity derivative contracts, less capital expenditures. The Company believes this non-GAAP measure is a financial indicator of the Company's ability to internally fund acquisitions, debt maturities, dividends and share repurchases after capital expenditures. Capital expenditures exclude acquisitions, asset retirement obligations, capitalized interest, geological and geophysical general and administrative expenses, information technology capital investments and additions to corporate facilities. During the year endedDecember 31, 2021 , the Company declared and paid variable dividends of$1.1 billion , or$4.53 per common share. OnFebruary 16, 2022 , the board of directors of the Company declared a quarterly base dividend of$0.78 per share and a quarterly variable dividend of$3.00 per share for shareholders of record onFebruary 28, 2022 , with a payment date ofMarch 14, 2022 . Future base and variable 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 outlook for commodity prices, liquidity, debt levels, capital resources, free cash flow or other factors. The Company can provide no assurance that dividends will be authorized or declared in the future or as to the amount of any future dividends. Any future variable dividends, if declared and paid, will fluctuate based on the Company's free cash flow, which will depend on a number of factors beyond the Company's control, including commodity prices. 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 ofDecember 31, 2021 , the material off-balance sheet arrangements and transactions that the Company had entered into included (i) firm purchase, transportation, storage and fractionation commitments, (ii) open purchase commitments and (iii) 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 (a) derivative contracts that are sensitive to future changes in commodity prices or interest rates, (b) gathering, processing and transportation commitments on uncertain volumes of future throughput and (c) indemnification obligations following certain divestitures. 63
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PIONEER NATURAL RESOURCES COMPANY 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 and income taxes. Also associated with its 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 does not recognize a liability if the fair value of the obligation is immaterial or the likelihood of making payments under these guarantees is remote. 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 and additional firm purchase, transportation, storage and fractionation arrangements, in order to support the Company's business plans. See Note 11 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Convertible senior notes. InMay 2020 , the Company issued$1.3 billion principal amount of convertible senior notes due 2025. The Convertible Notes bear a fixed interest rate of 0.250% per year, with interest payable onMay 15 andNovember 15 of each year. The Convertible Notes will mature onMay 15, 2025 , unless earlier redeemed, repurchased or converted. The Convertible Notes are unsecured obligations ranking equally in right of payment with all other senior unsecured indebtedness of the Company. The Convertible Notes are convertible into shares of the Company's common stock at an adjusted conversion rate of 9.3647 shares of the Company's common stock per$1,000 principal amount of the Convertible Notes (subject to further adjustment pursuant to the terms of the notes indenture), which represents an adjusted conversion price of$106.78 per share (subject to further adjustment pursuant to the terms of the notes indenture) as ofDecember 31, 2021 . As a result of the quarterly base and variable dividends declared throughDecember 31, 2021 , the Conversion Rate increased from the initial rate of 9.1098 shares of the Company's common stock per$1,000 principal amount of the Convertible Notes and the Conversion Price decreased from$109.77 . Future declarations of quarterly base dividends in excess of$0.55 per common share and declarations of future variable dividends, as previously described, will cause further adjustments to the Conversion Rate and the Conversion Price pursuant to the terms of the notes indenture. Upon conversion, the Convertible Notes may be settled in cash, shares of the Company's common stock or a combination thereof, at the Company's election.
Holders of the Convertible Notes may convert their notes at their option prior
to
•during the quarter following any quarter during which the last reported sales price of the Company's common stock for at least 20 of the last 30 consecutive trading days of such quarter exceeds 130 percent of the Conversion Price; •during the five-day period following any five consecutive trading day period when the trading price of the Convertible Notes is less than 98 percent of the price of the Company's common stock times the Conversion Rate; •upon notice of redemption by the Company; or •upon the occurrence of specified corporate events, including certain consolidations or mergers. On or afterFebruary 15, 2025 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time. The Company may not redeem the Convertible Notes prior toMay 20, 2023 , and after such date, may redeem the Convertible Notes only if the last reported sale price of the Company's common stock has been at least 130 percent of the Conversion Price for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides the notice of redemption. The redemption price is equal to 100 percent of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. During the last 30 consecutive trading days of the fourth quarter of 2021, the last reported sales prices of the Company's common stock exceeded 130 percent of the Conversion Price for at least 20 trading days, causing the Convertible Notes to become convertible at the option of the holders during the three month period endingMarch 31, 2022 . The Company reserves its right under the notes indenture to elect to settle the Convertible Notes in cash, shares of the Company's common stock or a combination of cash and common stock. Contractual obligations. The Company's contractual obligations include long-term debt, leases (primarily related to contracted drilling rigs, equipment and office facilities), capital funding obligations, derivative obligations, firm transportation, storage and fractionation commitments, minimum annual gathering, processing and transportation commitments and other liabilities (including retained obligations associated with divestitures and postretirement benefit obligations). Other joint owners in the properties operated by the Company could incur portions of the costs represented by these commitments. 64
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Firm commitments. The Company has short-term and long-term firm purchase,
gathering, processing, transportation, fractionation and storage commitments
representing take-or-pay agreements, which include contractual commitments (i)
to purchase sand, water and diesel for use in the Company's drilling and
completion operations, (ii) with midstream service companies and pipeline
carriers for future gathering, processing, transportation, fractionation and
storage and (iii) with oilfield services companies that provide drilling and
pressure pumping services. The Company does not expect to be able to fulfill all
of its short-term and long-term firm transportation volume obligations from
projected production of available reserves; consequently, the Company plans to
purchase third party volumes to satisfy its firm transportation commitments if
it is economic to do so; otherwise, it will pay demand fees for any commitment
shortfalls. The Company also has open purchase commitments for inventories,
materials and other property and equipment ordered, but not received, as of
December 31, 2021. See "Item 2. Properties" and Note 11 of Notes to
Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" for additional information.
Long-term debt. As of December 31, 2021 , the Company's outstanding debt is
comprised of senior notes, including senior notes issued by Parsley Energy, Inc
and Parsley LLC , and convertible senior notes. The senior notes and convertible
senior notes issued by the Company rank equally, but are structurally
subordinated to all obligations of the Company's subsidiaries. See Note 7 of
Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Leases. The Company's short-term and long-term lease obligations primarily relate to contracted drilling rigs, storage tanks, equipment and office facilities. See Note 10 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Derivative obligations. The Company's commodity and marketing derivative contracts are periodically measured and recorded at fair value and continue to be subject to market and credit risk. As ofDecember 31, 2021 , these contracts represented net liabilities of$563 million . The ultimate liquidation value of the Company's commodity price 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, 2021. See Note 4 and Note 5 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. Other liabilities. The Company's other liabilities represent current and noncurrent other liabilities that are primarily 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 9 and Note 11 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Book capitalization and current ratio. The Company's net book capitalization as ofDecember 31, 2021 was$25.9 billion , consisting of cash and cash equivalents of$3.8 billion , debt of$6.9 billion and equity of$22.8 billion . The Company's net debt to book capitalization decreased to 12 percent as ofDecember 31, 2021 from 14 percent as ofDecember 31, 2020 . The Company's ratio of current assets to current liabilities was 1.52:1 as ofDecember 31, 2021 , as compared to 1.36:1 as ofDecember 31, 2020 . Debt ratings. The Company is rated as investment grade by three credit rating agencies. The Company's credit ratings are subject to regular reviews by the credit rating agencies. The Company believes that each of the rating agencies considers many factors in determining the Company's ratings, including: (i) production growth opportunities, (ii) liquidity, (iii) debt levels, (iv) asset composition and (v) proved reserve mix. A reduction in the Company's debt ratings could increase the interest rates that the Company incurs on Credit Facility borrowings and could negatively impact the Company's ability to obtain additional financing or the interest rate, fees and other terms associated with such additional financing. Critical Accounting Estimates The Company prepares its consolidated financial statements for inclusion in this Report in accordance with GAAP. See Note 2 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. The following is a discussion of the Company's most critical accounting estimates, judgments and uncertainties that are inherent in the Company's application of GAAP. Successful efforts method of accounting. The Company utilizes the successful efforts method of accounting for oil and gas producing activities as opposed to the alternate acceptable full cost method. In general, the Company believes that net assets and net income are more conservatively measured under the successful efforts method of accounting for oil and gas producing activities than under the full cost method, particularly during periods of active exploration. The critical difference between the successful efforts method of accounting and the full cost method is that under the successful efforts method, exploratory dry 65
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PIONEER NATURAL RESOURCES COMPANY holes and geological and geophysical exploration costs are charged against earnings during the periods in which they occur; whereas, under the full cost method of accounting, such costs and expenses are capitalized as assets, pooled with the costs of successful wells and charged against the earnings of future periods as a component of depletion expense.
Proved reserve estimates. Estimates of the Company's proved reserves included in
this Report are prepared in accordance with GAAP and
•the quality and quantity of available data; •the interpretation of that data; •the accuracy of various mandated economic assumptions; and •the judgment of the persons preparing the estimate. The Company's proved reserve information included in this Report as ofDecember 31, 2021 , 2020 and 2019 was prepared by the Company's engineers and audited by independent petroleum engineers with respect to the Company's major properties. Estimates prepared by third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, proved reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify, positively or negatively, material revisions to the estimate of proved reserves. It should not be assumed that the Standardized Measure included in this Report as ofDecember 31, 2021 is the current market value of the Company's estimated proved reserves. In accordance withSEC requirements, the Company based the 2021 Standardized Measure on a twelve month average of commodity prices on the first day of each month in 2021 and prevailing costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs utilized in the estimate. See "Item 2. Properties" and Unaudited Supplementary Information included in "Item 8. Financial Statements and Supplementary Data" for additional information. The Company's estimates of proved reserves materially impact depletion expense. If the estimates of proved reserves decline, the rate at which the Company records depletion expense will increase, reducing future net income. Such a decline may result from lower commodity prices, which may make it uneconomical to drill for and produce higher cost fields. In addition, a decline in proved reserve estimates may impact the outcome of the Company's assessment of its proved properties and goodwill for impairment. Impairment of proved oil and gas properties. The Company reviews its proved properties to be held and used whenever management determines that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon estimated future recoverable proved and risk-adjusted probable and possible reserves, commodity price outlooks, production and capital costs expected to be incurred to recover the reserves, discount rates commensurate with the nature of the properties and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment at the level at which depletion of proved properties is calculated. See Note 4 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Impairment of unproved oil and gas properties. Management assesses unproved oil and gas properties for impairment on a project-by-project basis. Such assessments are affected by the results of exploration activities, commodity price outlooks, planned future property sales or expiration of all or a portion of such projects. Suspended wells. The Company suspends the costs of exploratory/extension wells that discover hydrocarbons pending a final determination of the commercial potential of the discovery. The ultimate disposition of these well costs is dependent on the results of future drilling activity and development decisions. If the Company decides not to pursue additional appraisal activities or development of these fields, the costs of these wells will be charged to exploration and abandonments expense.
The Company does not carry the costs of drilling an exploratory/extension well as an asset in its consolidated balance sheets following the completion of drilling unless both of the following conditions are met:
•the well has found a sufficient quantity of reserves to justify its completion
as a producing well; and
•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
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technology, but 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, transportation or processing
facilities and/or getting partner approval to drill additional appraisal wells.
These activities are ongoing and being pursued constantly. Consequently, the
Company's assessment of suspended exploratory/extension well costs is continuous
until a decision can be made that the well has found sufficient quantities of
proved reserves to sanction the project or is determined to be noncommercial and
is impaired. See Note 6 of Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary Data" for additional
information.
Asset retirement obligations. The Company has significant obligations to remove
tangible equipment and facilities and to restore the land at the end of oil and
gas production operations. The Company's removal and restoration obligations are
primarily associated with plugging and abandoning wells. Estimating the future
restoration and removal costs is difficult and requires management to make
estimates and judgments because most of the removal obligations are many years
in the future and contracts and regulations often have vague descriptions of
what constitutes removal. Asset removal technologies and costs are constantly
changing, as are regulatory, political, environmental, safety and public
relations considerations.
Inherent in the present value calculation are numerous assumptions and judgments
including the ultimate settlement amounts, credit-adjusted discount rates,
timing of settlement and changes in the legal, regulatory, environmental and
political environments. To the extent future revisions to these assumptions
impact the present value of the existing asset retirement obligations, a
corresponding adjustment is generally made to the oil and gas property or other
property and equipment balance. See Note 9 of Notes to Consolidated
Financial Statements included in "Item 8. Financial Statements and Supplementary
Data" for additional information.
Deferred tax asset valuation allowances. The Company continually assesses both
positive and negative evidence to determine whether it is more likely than not
that its 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 and other deferred tax
attributes in the U.S. federal, state, local and foreign tax jurisdictions will
be utilized prior to their expiration. There can be no assurance that facts and
circumstances will not materially change and require the Company to establish
deferred tax asset valuation allowances in certain jurisdictions in a future
period.
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 state unrecognized tax
benefits from tax years 2013 and 2015 through 2018 ("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 recorded. The issues related to the claims are
complex and uncertain, and the Company cannot conclude that it is more likely
than not that it will sustain the claims. Accordingly, no tax benefit has been
recognized for the filed claims. The Company believes it will substantially
resolve the uncertainties associated with the state UTBs within the next twelve
months. See Note 17 of Notes to the Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary Data" for additional
information.
Goodwill impairment. The Company reviews its goodwill for impairment at least
annually. During the third quarter of 2021, the Company performed a qualitative
assessment of goodwill to assess whether it was more likely than not that the
fair value of the Company's reporting unit was less than its carrying amount as
a basis for determining whether it was necessary to record a noncash impairment
charge. The Company determined that it was more likely than not that the
Company's goodwill was not impaired. There is considerable judgment involved in
estimating fair values, particularly in determining the valuation methods and
the weighting to use for each method if multiple valuation methods are applied.
See Note 4 of Notes to Consolidated Financial Statements included in "Item
8. Financial Statements and Supplementary Data" for additional information.
Litigation and environmental contingencies. The Company makes judgments and
estimates in recording liabilities for ongoing litigation and environmental
remediation. Actual costs can vary from such estimates for a variety of reasons.
The costs to settle litigation can vary from estimates based on differing
interpretations of laws and opinions and assessments on the amount of damages.
Similarly, environmental remediation liabilities are subject to change because
of changes in laws and regulations, developing information relating to the
extent and nature of site contamination and improvements in technology. A
liability is recorded for these types of contingencies if the Company determines
the loss to be both probable and reasonably estimable. See Note 11 of Notes
to Consolidated Financial Statements included in "Item 8. Financial Statements
and Supplementary Data" for additional information.
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Valuation of stock-based compensation. The Company calculates the fair value of
stock-based compensation using various valuation methods. The valuation methods
require the use of estimates to derive the inputs necessary to determine fair
value. The Company utilizes (i) the Black-Scholes option pricing model to
measure the fair value of stock options, (ii) the closing stock price on the day
prior to the date of grant for the fair value of restricted stock awards,
(iii) the closing stock price on the balance sheet date for restricted stock
awards that are expected to be settled wholly or partially in cash on their
vesting date and (iv) the Monte Carlo simulation method for the fair value of
performance unit awards. See Note 8 of Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data" for
additional information.
Valuation of other assets and liabilities at fair value. The Company
periodically measures and records certain assets and liabilities at fair value.
The assets and liabilities that the Company measures and records at fair value
on a recurring basis include equity investments, deferred compensation plan
assets, commodity derivative contracts, marketing derivative contracts and
interest rate contracts. Other assets are not measured at fair value on an
ongoing basis, but are subject to fair value adjustments in certain
circumstances. The assets and liabilities that the Company measures and records
at fair value on a nonrecurring basis can include inventories, proved and
unproved oil and gas properties, assets acquired and liabilities assumed in
business combinations, goodwill and other long-lived assets that are written
down to fair value when they are determined to be impaired or held for sale. The
Company also measures and discloses certain financial assets and liabilities at
fair value, such as long-term debt. The valuation methods used by the Company to
measure the fair values of these assets and liabilities may require considerable
management judgment and estimates to derive the inputs necessary to determine
fair value estimates, such as future prices, credit-adjusted risk-free rates and
current volatility factors. See Note 4 of Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data" for
additional information.
New Accounting Pronouncements
The effects of new accounting pronouncements are discussed in Note 2 of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
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