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 (including opportunities to acquire particular oil and gas assets or entities owning oil and gas assets and opportunities to engage in mergers, consolidations or other business combinations with such entities). OnMay 4, 2021 , the Company completed the acquisition of Double Eagle III Midco 1 LLC ("DoublePoint") in exchange for 27 million shares of Pioneer common stock representing stock consideration transferred of$4 billion ,$1 billion of cash and the assumption of$890 million of debt (the "DoublePoint Acquisition"). 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. DoublePoint's results of operations were included in the Company's interim consolidated financial statements beginning in May 2021. See Note 3 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information. The Company completed the acquisition of Parsley Energy, Inc., aDelaware corporation that previously traded on the NYSE under the symbol "PE" ("Parsley"), 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") onJanuary 12, 2021 . 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. Parsley's post-acquisition date results of operations were included in the Company's interim consolidated financial statements beginning onJanuary 12, 2021 . See Note 3 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information. Financial and Operating Performance The Company's financial and operating performance for the three months endedJune 30, 2021 included the following highlights: •Net income attributable to common stockholders for the three months endedJune 30, 2021 was$380 million ($1.54 per diluted share) as compared to net loss of$449 million ($2.73 per diluted share) for the same period in 2020. The primary components of the$829 million increase in earnings attributable to common stockholders include: •a$2.1 billion increase in oil and gas revenues due to a 166 percent increase in average realized commodity prices per BOE as a result of improved commodity prices due to the economic recovery from 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; and •a$43 million decrease in other expense, primarily due to (i) a$43 million decrease in idle frac fleet fees, stacked drilling rig charges and drilling rig early termination charges and (ii) a$3 million gain on early extinguishment of debt for the three months endedJune 30, 2021 , as compared to a$27 million loss on early extinguishment of debt for the same period in 2020, partially offset by$36 million of transaction-related costs associated with the Parsley Acquisition and DoublePoint Acquisition; partially offset by: •a$476 million decrease in net derivative results, primarily due to changes in forward commodity prices and the cash settlement of derivative positions in accordance with their terms; •a$255 million increase in production costs, including taxes, primarily attributable to (i) an increase in production taxes as a result of the aforementioned 166 percent increase in average realized commodity prices and (ii) increased costs attributable to production added from the Parsley Acquisition and the DoublePoint Acquisition; •a$232 million increase in DD&A expense, primarily due to an increase in sales volumes from the Company's successful horizontal drilling program in thePermian Basin , the Parsley Acquisition and the DoublePoint Acquisition; •a$229 million increase in the Company's income tax provision due to the increase in earnings during the three months endedJune 30, 2021 as compared to the same period in 2020; and 34 -------------------------------------------------------------------------------- PIONEER NATURAL RESOURCES COMPANY •a$68 million decrease in net interest and other income (loss), primarily due to a noncash loss of$25 million attributable to the decrease in the fair value of the Company's investment in affiliate during the three months endedJune 30, 2021 as compared to a noncash gain of$44 million for the same period in 2020. •During the three months endedJune 30, 2021 , average daily sales volumes increased by 68 percent to 629,468 BOEPD, as compared to 374,563 BOEPD during the same period in 2020, due to additional production from Company's successful horizontal drilling program in thePermian Basin , the Parsley Acquisition and the DoublePoint Acquisition. •Average oil and NGL prices per Bbl and average gas prices per Mcf increased to$64.55 ,$27.95 and$2.69 , respectively, during the three months endedJune 30, 2021 as compared to$23.16 ,$12.65 and$1.15 , respectively, for the same period in 2020. •Cash provided by operating activities increased during the three months endedJune 30, 2021 to$1.5 billion as compared to$328 million for the same period in 2020. The increase was primarily due to an increase in oil and gas revenues due to the aforementioned increase in commodity prices and sales volumes partially offset by (i) additional cash used in derivative activities and (ii) an increase in production costs due to the aforementioned increase in production taxes attributable to the increase in commodity prices and costs attributable to the production added from the Parsley Acquisition and the DoublePoint Acquisition. •As ofJune 30, 2021 andDecember 31, 2020 , the Company's net debt to book capitalization was 23 percent and 14 percent, respectively. 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 beginning in lateFebruary 2020 . Although demand has shown signs of recovery, there is significant uncertainty regarding the long-term impact to global oil demand, which will ultimately depend on various factors and consequences beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic downturn, the ability ofOPEC ,Russia and other oil producing nations to manage the global oil supply, additional actions by businesses and governments in response to the pandemic, the economic downturn and the decrease in oil demand, the speed and effectiveness of responses to combat the virus, and the time necessary to balance oil supply and demand to restore oil pricing. The Company continues to assess the global impacts of the COVID-19 pandemic and may modify its plans as the economic and health impacts of COVID-19 continue to evolve. Third Quarter 2021 Outlook The Company's operating and financial results for the third quarter of 2021 and beyond are uncertain and will depend on various factors beyond the Company's control, such as: the duration of the COVID-19 pandemic and the speed and effectiveness of vaccine distributions to combat the virus; environmental and trade policies; fiscal challenges facingthe United States federal government; geopolitical issues globally, especially in theMiddle East ; the extent to whichOPEC members and some nonmembers, includingRussia , adhere to and agree to extend cuts to their oil production quotas; the timing and supply impact of any Iranian sanction relief onIran's ability to export oil and the uncertainty in oil demand fundamentals associated with governmental policy aimed at redirecting fossil fuel consumption towards lower carbon energy. 35
--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Based on current estimates, the Company expects the following operating and financial results for the third quarter of 2021:
Three Months Ending September 30,
2021
Guidance
($ in millions, except per BOE
amounts)
Average daily production (MBOE) 660 - 685
Average daily oil production (MBO) 380 - 395
Production costs per BOE $7.25 - $8.75
DD&A per BOE $10.75 - $12.75
Exploration and abandonments expense $10 - $20
General and administrative expense $67 - $77
Accretion of discount on asset retirement obligations $2 - $5
Interest expense $39 - $44
Other expense $15 - $30
Cash flow impact from firm transportation (a) $(65) - $(35)
Current income tax provision $5 - $15
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 cashflow impact
attributable to its firm transportation commitments. The cash flow impact from
firm transportation does not include the expected cash flow impact from the
Company's firm transportation marketing contracts that are accounted for as
derivatives.
Operations and Drilling Highlights
Average daily oil, NGL and gas sales volumes are as follows:
Six Months Ended June 30, 2021
Oil (Bbls) 322,258
NGL (Bbls) 126,520
Gas (Mcf) 620,124
Total (BOE) 552,132
The Company's liquids production was 81 percent of total production, on a BOE
basis, for the six months ended June 30, 2021 .
Costs incurred are as follows:
Six Months Ended June 30 , 2021
(in millions)
Proved property acquisition costs (a) $ 9,039
Unproved property acquisitions (a) 8,054
Exploration/extension costs 1,173
Development costs 316
Asset retirement obligations 5
$ 18,587
_____________________
(a)Includes proved and unproved acquisition costs related to the Parsley
Acquisition of
36--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Development and exploration/extension drilling activity is as follows:
Six Months Ended June 30, 2021
Development Exploration/Extension
Beginning wells in progress 9 210
Wells spud 11 227
Acquired wells in progress 4 103
Successful wells (11) (252)
Ending wells in progress 13 288
The Company is currently operating 24 drilling rigs and eight frac fleets in the
Midland Basin . The Company plans to move four drilling rigs to the Delaware
Basin during the third quarter of 2021. The Company will continue to evaluate
its drilling and completions program with future activity levels assessed
regularly.
During the six months ended June 30, 2021 , the Company successfully completed
198 horizontal wells in the northern portion of the Midland Basin , 48 horizontal
wells in the southern portion of the Midland Basin and 17 horizontal wells in
the Delaware Basin . In the northern portion of the Midland Basin , 42 percent of
the horizontal wells placed on production were Wolfcamp A interval wells, 30
percent were Wolfcamp B interval wells and the remaining 28 percent were
primarily Spraberry and Wolfcamp D interval wells. In the southern portion of
the Midland Basin , the majority of the wells placed on production were Wolfcamp
A and B interval wells. In the Delaware Basin , approximately 35 percent were in
the Bone Spring interval and the remaining 65 percent were Wolfcamp A and B
interval wells.
Results of Operations
Oil and gas revenues.
Average daily sales volumes are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % Change 2021 2020 % Change
Oil (Bbls) 363,046 214,959 69 % 322,258 218,808 47 %
NGL (Bbls) 147,135 90,184 63 % 126,520 87,271 45 %
Gas (Mcf) 715,719 416,516 72 % 620,124 412,704 50 %
Total (BOEs) 629,468 374,563 68 % 552,132 374,863 47 %
The increase in average daily BOE sales volumes for the three and six months
ended June 30, 2021 , as compared to the same periods in 2020 was 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 that the Company reports are based on the market
prices received for each commodity. Commodity prices for the three and six
months ended June 30, 2021 , as compared to the same respective periods in 2020,
increased due to the continued recovery in oil, NGL and gas demand from the
COVID-19 pandemic. The average prices are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % Change 2021 2020 % Change
Oil per Bbl $ 64.55 $ 23.16 179 % $ 61.15 $ 34.58 77 %
NGL per Bbl $ 27.95 $ 12.65 121 % $ 27.10 $ 13.55 100 %
Gas per Mcf $ 2.69 $ 1.15 134 % $ 2.83 $ 1.38 105 %
Total per BOE $ 46.82 $ 17.61 166 % $ 45.08 $ 24.85 81 %
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 the Gulf Coast to
the Company's operations in the Permian 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 and West 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 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
37--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
purchased and the responsibility to deliver the commodities sold. The Company
has also entered into long-term marketing contracts, which are accounted for as
derivatives, to similarly diversify its oil sales to Gulf Coast and
international markets. The marketing contracts were entered in October 2019 ,
each with a January 1, 2021 contract commencement date and a December 31, 2026
contract termination date. The gains and losses associated with the Company's
marketing derivatives are recognized in net derivative gains (losses) in the
consolidated statements of operations. 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 sales of purchased commodities are included in purchased
commodities expense. See Consolidated Statements of Operations included in
"Item 1. Financial Statements" for additional information.
The net effects of third party purchases and sales of commodities and associated
marketing contracts are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Sales of purchased commodities
1,627 572 1,055 2,882 1,600 1,282
Net effect (40) (31) (9) (54) (144) 90
Realized marketing derivative (13) - (13) (20) - (20)
loss
$ (53) $ (31) $ (22) $ (74) $ (144) $ 70
The change in net sales of purchased commodities for the three months ended
June 30, 2021 , as compared to the same period in 2020, was primarily due to a
decrease in 2021 downstream oil margins on the Company's Gulf Coast refinery and
export sales. The change in net sales of purchased commodities for the six
months ended June 30, 2021 , as compared to the same period in 2020, was
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 and February, which was
subsequently sold in February 2020 and March 2020 , respectively, at lower
prices. This oil inventory is sold in the month following purchase at contracted
prices that are generally tied to monthly average index oil prices (typically
Brent oil prices).
The realized losses associated with the commencement of the marketing derivative
contracts in 2021 were due to differences in the oil volumes purchased by the
Company which were based on Midland WTI prices and sold at prices highly
correlated to Brent pricing. See Note 5 of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for additional
information.
Firm transportation payments on excess pipeline capacity are included in other
expense in the accompanying consolidated statements of operations. See Note
14 of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information.
Interest and other income (loss), net.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Interest and other income
(loss), net $ (20) $ 48 $
(68)
The decrease in net interest and other income (loss) for the three months endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to a noncash loss of$25 million attributable to the change in fair value of the Company's investment in affiliate in 2021 compared to a noncash gain of$44 million in 2020. The increase in net interest and other income (loss) for the six months endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to (i) a noncash gain of$29 million attributable to the change in fair value of the Company's investment in affiliate in 2021 compared to a noncash loss of$101 million in 2020 and (ii) a$64 million noncash loss attributable to the decrease in fair value of contingent consideration associated with the South Texas Divestiture. See Note 13 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information. 38
--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Derivative gain (loss), net.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Commodity derivatives:
Noncash derivative loss, net $ (279)
Cash receipts (payments) on settled derivative instruments, net (557) 128 (685) (871) 191 (1,062) Total commodity derivative gain (loss), net (836) (335) (501) (1,500) 137 (1,637) Marketing derivatives: Noncash derivative gain (loss), net 17 (21) 38 (3) (15) 12 Cash payments on settled derivative instruments, net (13) - (13) (20) - (20) Total marketing derivative gain (loss), net 4 (21) 25 (23) (15) (8) Interest rate derivatives: Cash payments on settled derivative instruments, net - - - - (22) 22 Derivative gain (loss), net $ (832)$ (356) $ (476) $ (1,523) $ 100 $ (1,623) 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, (ii) support the Company's capital budgeting and expenditure plans and (iii) support the payment of contractual obligations and dividends. The Company uses marketing derivatives to diversify its oil sales toGulf 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 derivative settlements and the related price impact (per Bbl or Mcf) are as follows: Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 Net cash payments Price impact Net cash payments Price impact (in millions) (in millions)
Oil derivative payments (a) $ (548)$ (16.60) per Bbl $ (841)$ (14.42) per Bbl Gas derivative payments (9)$ (0.13) per Mcf (17)$ (0.14) per Mcf Total net commodity derivative payments $ (557) $ (858) _____________________ (a)Excludes the effect of liquidating certain of the Company's 2022 WTI swap contracts for cash payments of$13 million during the six months endedJune 30, 2021 . Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Net cash receipts Price impact Net cash receipts Price impact (in millions) (in millions)
Oil derivative receipts (a) $ 96$ 4.91 per Bbl $ 159$ 4.00 per Bbl _____________________
(a)Excludes the effect of liquidating certain of the Company's Brent collar
contracts with short puts and Brent swap contracts for cash receipts of
Note 4 and Note 5 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information.
39--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Gain on disposition of assets, net
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Gain on disposition of assets,
net $ 2 $ 6 $ (4) $ 13 $ 6 $ 7
The decrease in gain on disposition of assets for the three months ended
June 30, 2021 , as compared to the same period in 2020, was primarily due to the
Company recognizing a $6 million gain on the sale of certain vertical wells and
approximately 1,500 net acres in 2020. The increase in gain on disposition of
assets for the six months ended June 30, 2021 , as compared to the same period in
2020, was primarily due to recognizing a gain of $9 million in 2021 associated
with the sale of the Company's well services business to a third party for net
cash proceeds of $20 million . See Note 3 of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for additional
information.
Oil and gas production costs.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Oil and gas production costs $ 316 $ 167 $ 149 $ 568 $ 343 $ 225 Oil and gas production costs per BOE are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % Change 2021 2020 % Change
Lease operating expense per BOE (a) $ 3.05
10 % $ 3.23$ 3.05 6 % Gathering, processing and transportation expense per BOE (b) 2.66 2.38 12 % 2.83 2.45 16 % Workover costs per BOE (a) 0.39 0.10 290 % 0.40 0.27 48 % Net natural gas plant income per BOE (c) (0.59) (0.34) 74 % (0.79) (0.74) 7 % $ 5.51$ 4.92 12 % $ 5.67$ 5.03 13 % _____________________ (a)Lease operating expense and workover expense 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 gather, process, transport and fractionate the Company's gas and NGLs 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. Although the Company continues to realize the benefit of lower production costs in 2021 due to the Company's cost saving initiatives, the Company realized higher than expected production costs during the three and six months endedJune 30, 2021 compared to the same periods in 2020 due to the following: •Lease operating expense per BOE increased for the three months endedJune 30, 2021 , as compared to the same period in 2020, due to higher costDelaware Basin assets acquired in the Parsley Acquisition. Lease operating expense per BOE increased for the six months endedJune 30, 2021 , as compared to the same period in 2020 primarily due to (i) higher costDelaware Basin assets acquired in the Parsley Acquisition and (ii) an increase in electricity costs and lower production associated with the impact Winter Storm Uri had on the Company's operations inFebruary 2021 ; •Gathering, processing and transportation expense per BOE increased for the three months endedJune 30, 2021 , as compared to the same period in 2020 primarily due to (i) transportation costs related to new pipeline takeaway capacity for the Company's gas and NGL production and (ii) increased gas and NGL prices during the second quarter of 2021 that resulted in increased gas processing costs for those contractual volumes retained by the processor as payment for their services. Gathering, processing and transportation expense per BOE increased for the six months endedJune 30, 2021 , as compared to the same period in 2020 primarily due to (i) transportation costs related to new pipeline takeaway capacity for the Company's gas and NGL production, (ii) increased gas processing and transportation costs as a result of higher electricity costs during Winter Storm Uri inFebruary 2021 40
--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
and (iii) increased gas and NGL prices during 2021 that resulted in increased
gas processing costs for those contractual volumes retained by the processor as
payment for their services;
•Workover costs per BOE increased for the three and six months ended June 30,
2021 , as compared to the same periods in 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 three months ended
June 30, 2021 , as compared to the same period in 2020 primarily due to improved
gas and NGL prices. Net natural gas plant income per BOE increased for the six
months ended June 30, 2021 , as compared to the same period in 2020 primarily due
to improved gas and NGL prices, partially offset by a temporary decrease in
volumes processed as a result of Winter Storm Uri's impact to the Company's
processing facilities.
Production and ad valorem taxes.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Production and ad valorem
taxes $ 153 $ 47 $
106 $ 266
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. Production and ad valorem taxes per BOE are as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change Production taxes per BOE $ 2.15$ 0.70 207 % $ 2.07$ 1.07 93 % Ad valorem taxes per BOE 0.52 0.65 (20 %) 0.58 0.69 (16 %) $ 2.67$ 1.35 98 % $ 2.65$ 1.76 51 % The increase in production taxes per BOE for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, was primarily due to increases in oil, NGL and gas commodity prices. The decrease in ad valorem taxes per BOE for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, was primarily due to lower prior year commodity prices that are used to determine current year ad valorem taxes. Depletion, depreciation and amortization expense. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change (in millions) Depletion, depreciation and amortization $ 648$ 416 $ 232 $ 1,121 $ 850 $ 271
Total DD&A and depletion expense per BOE is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % Change 2021 2020 % Change
DD&A per BOE $ 11.31 $ 12.21 (7 %) $ 11.22 $ 12.46 (10 %)
Depletion expense per BOE $ 11.04 $ 11.57 (5 %) $ 10.83 $ 11.83 (8 %)
The decrease in DD&A per BOE and depletion expense per BOE was primarily due to
incremental additions to proved reserves attributable to (i) new wells placed on
production from the Company's successful Spraberry/Wolfcamp horizontal drilling
program and (ii) 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.
41--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Exploration and abandonments expense. Geological and geophysical costs and lease abandonments and other exploration expenses are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Geological and geophysical $ 10 $ 9 $ 1 $ 26 $ 16 $ 10
Leasehold abandonments and other - 1 (1) 3 3 -
$ 10 $ 10 $ - $ 29 $ 19 $ 10
The increase in geological and geophysical costs for the six months ended
June 30, 2021 , as compared to the same period in 2020, was primarily due to
relicensing certain seismic data in connection with the Parsley Acquisition.
During the six months ended June 30, 2021 , the Company drilled and evaluated 252
exploration/extension wells, of which 100 percent were successfully completed as
discoveries. During the same period in 2020, the Company drilled and evaluated
156 exploration/extension wells, of which 100 percent were successfully
completed as discoveries.
General and administrative expense.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Noncash general and
administrative expense $ 12 $ 10 $ 2 $ 24 $ 15 $ 9
Cash general and administrative
expense 63 50 13 119 101 18
$ 75 $ 60 $ 15 $ 143 $ 116 $ 27
The change in noncash general and administrative expense for the three and six
months ended June 30, 2021 , as compared to the same periods in 2020, is
primarily due to market fluctuations in the Company's deferred compensation
obligation as a result of mark-to-market valuation changes attributable to the
Company's deferred compensation plan assets.
The change in cash general and administrative expense for the three and six
months ended June 30, 2021 , as compared to the same periods in 2020, was
primarily due to 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:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % Change 2021 2020 % Change
Noncash general and administrative
expense per BOE $ 0.21 $ 0.29 (28 %) $ 0.24 $ 0.22 9 %
Cash general and administrative
expense per BOE 1.10 1.46 (25 %) 1.19 1.48 (20 %)
$ 1.31 $ 1.75 (25 %) $ 1.43 $ 1.70 (16 %)
The decrease in general and administrative expense per BOE for the three and six
months ended June 30, 2021 , reflect 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 the production
volumes from the acquisitions, with limited associated general and
administrative costs.
42--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Interest expense.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Noncash interest expense $ 7 $ 13 $ (6) $ 12 $ 18 $ (6)
Cash interest expense 34 20 14 69 42 27
$ 41 $ 33 $ 8 $ 81 $ 60 $ 21
The Company early adopted Accounting Standard Update ("ASU") 2020-06 effective
January 1, 2021 , as a result of this early adoption, the Company reversed the
debt discount recorded to additional paid-in capital upon issuance of the
Company's Convertible Notes to long-term debt. Therefore, noncash interest
expense during the three and six months ended June 30, 2021 decreased as
compared to the same respective periods in 2020, primarily due to a $7 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 during the three and six months ended
June 30, 2021 , as compared to the same respective periods in 2020, 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
further information) and (ii) the issuance in May 2020 and August 2020 ,
respectively, of $1.3 billion of the Convertible Notes and $1.1 billion of 1.90%
senior notes due 2030, partially offset by (i) the partial repayment of $360
million of the Company's 3.45% senior notes due 2021, $356 million of its 3.95%
senior notes due 2022 and $9 million of its 7.20% 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 3.45% senior notes that matured in January 2021 .
The weighted average cash interest rate on the Company's indebtedness for the
six months ended June 30, 2021 was 1.9 percent, as compared to 2.4 percent for
the same period in 2020. See Note 7 of Notes to Consolidated Financial
Statements in "Item 1. Financial Statements" for additional information.
Other expense.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Other expense $ 47 $ 90 $ (43) $ 351 $ 175 $ 176
The decrease in other expense during the three months and increase in the six
months ended June 30, 2021 , as compared to the same respective periods in 2020,
was primarily due to the following:
•$36 million and $233 million of transaction-related costs for the three and six
months ended June 30, 2021 , respectively, associated with the Parsley
Acquisition and DoublePoint Acquisition;
•$80 million of losses for the six months ended June 30, 2021 related to the
Company's fulfillment of certain firm gas purchase commitments during Winter
Storm Uri in February 2021 ; and
•$7 million and $17 million of costs primarily related to unoccupied facilities
acquired through the Parsley Acquisition for the three and six months ended
June 30, 2021 , respectively; as compared to
•a $69 million charge for estimated deficiency payments related to the Company's
South Texas Divestiture for the six months ended June 30, 2020 ;
•$44 million and $53 million of idle frac fleet fees, stacked drilling rig
charges and drilling rig early termination charges for the three and six months
ended June 30, 2020 , respectively; and
•$27 million of early extinguishment of debt charges for the three and six
months ended June 30, 2020 associated with the Company's refinancing activities
during the second quarter of 2020.
See Note 14 of Notes to Consolidated Financial Statements in "Item 1.
Financial Statements" for additional information.
43--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Income tax benefit (provision).
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
(in millions)
Income tax benefit (provision) $ (120) $ 109 $ (229) $ (109) $ 31 $ (140)
Effective tax rate 24 % 20 % 4 % 26 % 17 % 9 %
The change in income tax benefit (provision) during the three and six months
ended June 30, 2021 , as compared to the same periods in 2020, was primarily due
to a $1.1 billion and $608 million increase, respectively, in income before
income taxes. The Company evaluates and updates its annual effective income tax
rate on an interim basis based on current and forecasted earnings and tax laws.
The mix and timing of the Company's actual earnings compared to annual
projections can cause interim effective tax rate fluctuations. The Company's
interim effective tax rate for the three and six months ended June 30, 2021
differed from the U.S. statutory rate of 21 percent primarily due to forecasted
state income taxes. See Note 15 of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" 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. In January 2021 , Pioneer 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 to January 12, 2026 and to 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 and (v) 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 2021 liquidity requirements, no assurance can be given that
such funding sources will be adequate to meet the Company's future needs.
During the six months ended June 30, 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
borrowing capacity under the Company's 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.
2021 revised capital budget. With the completion of the Parsley Acquisition and
the DoublePoint Acquisition, the Company's capital budget for 2021 was revised
and is expected to be in the range of $3.1 billion to $3.4 billion , consisting
of $2.95 billion to $3.25 billion for drilling and completion related
activities, including additional tank batteries, saltwater disposal facilities,
water infrastructure additions and vehicles, and $150 million of estimated
Parsley and DoublePoint integration costs. The Company's capital expenditures
for the six months ended June 30, 2021 were $1.5 billion . The 2021 capital
budget and actual capital expenditures for the six months ended June 30, 2021
excludes acquisitions, asset retirement obligations, capitalized interest,
geological and geophysical general and administrative expense and corporate
facilities.
Capital resources. As of June 30, 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 of
June 30, 2021 . The Company also had unrestricted cash on hand of $93 million as
of June 30, 2021 .
44--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Cash flows from operating, investing and financing activities are summarized
below.
Six Months Ended June 30,
2021 2020 Change
(in millions)
Net cash provided by operating activities $ 1,843 $ 1,154 $ 689
Net cash used in investing activities $ (2,042) $ (1,106) $ 936
Net cash used in financing activities $ (1,160) $
(504)
Operating activities. The increase in net cash flow provided by operating activities for the six months endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to an 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 due to an increase in production taxes attributable to higher commodity prices and costs attributable to the production added from the from the Parsley Acquisition and the DoublePoint Acquisition, (iii) one-time cash Parsley and DoublePoint transaction-related costs and (iv) cash paid to fulfill certain gas commitments during Winter Storm Uri. Investing activities. The increase in net cash used in investing activities for the six months endedJune 30, 2021 , as compared to the same period in 2020, was primarily a result of$943 million of net cash used in the DoublePoint Acquisition and an increase in additions to oil and gas properties of$159 million , partially offset by (i)$117 million of net cash acquired in the Parsley Acquisition, (ii) an increase in proceeds from disposition of assets of$25 million primarily related to the sale of the Company's well services business and (iii) a decrease in additions to other assets and other property and equipment of$24 million . Financing activities. The Company's significant financing activities are as follows: •2021: The Company (i) received proceeds from theMay 2021 Senior Notes Offering, net of$4 million of issuance costs and discounts, of$746 million , (ii) received proceeds from theJanuary 2021 Senior Notes Offering, 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 3.45% senior notes due inJanuary 2021 , (vi) used proceeds from theMay 2021 Senior Notes Offering to pay$731 million to redeem DoublePoint's 7.75% senior notes due 2023, (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$147 million of other liabilities and (x) paid dividends of$213 million . •2020: The Company (i) received$1.3 billion from the issuance of the Convertible Notes, net of issuance fees, (ii) paid$113 million to enter into the Capped Call transactions associated with the Convertible Notes issuance, (iii) repaid an aggregate of$725 million associated with the early repayment of a portion of the 3.45% senior notes, 3.95% senior notes and 7.20% senior notes, (iv) repaid$450 million associated with the maturity of its 7.50% senior notes inJanuary 2020 , (v) purchased$172 million of treasury stock, (vi) paid dividends of$164 million and (vii) paid$154 million of other liabilities. Dividends/distributions. During the six months endedJune 30, 2021 , the Company paid dividends of$213 million , or$1.11 per share. InMay 2021 , the board of directors declared a quarterly cash dividend of$0.56 per share on the Company's outstanding common stock, payable onJuly 14, 2021 , to stockholders of record onJune 30, 2021 . In addition to its base dividend program, the Company has initiated a variable dividend strategy whereby the Company may pay a quarterly variable dividend of up to 75 percent of the prior quarter free cash flow remaining after the payment of the base dividend. OnAugust 2, 2021 , the Company declared an inaugural variable dividend of$1.51 per share for shareholders of record onSeptember 3, 2021 , with a payment date ofSeptember 17, 2021 . 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 changes in operating assets and liabilities and cash transaction costs associated with acquisitions, 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. 45
--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY Capital expenditures exclude acquisitions, asset retirement obligations, capitalized interest, geological and geophysical general and administrative expenses, information technology capital and additions to corporate facilities. 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 and 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 by their nature fluctuate based on the Company's free cash flow, which will depend on a number of factors beyond the Company's control, including commodities 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. As ofJune 30, 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 (primarily treating and fractionation) and transportation commitments on uncertain volumes of future throughput and (c) indemnification obligations following certain 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 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 and 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, including incremental derivative contracts and additional firm purchase, transportation, storage 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 1. Financial Statements" 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 0.25% 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 a conversion rate of 9.111 shares of the Company's common stock per$1,000 principal amount of the Convertible Notes (subject to adjustment pursuant to the terms of the notes indenture, the "Conversion Rate"), which represents a conversion price of$109.76 per share (subject to adjustment pursuant to the terms of the notes indenture, the "Conversion Price"). As a result of the quarterly base dividends declared throughMarch 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 changes to the Company's base dividend program or the declaration of a variable dividend, as previously described, will cause an adjustment 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 toFebruary 15, 2025 under the following circumstances: •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. 46
--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
On or after February 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 to May 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 second 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
ending September 30, 2021 . If converted by the holder, the Company intends to
settle the Convertible Notes in cash, although the Company reserves its right
under the notes indenture to elect to settle the Convertible Notes in 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
postretirement benefit obligations). Other joint owners in the properties
operated by the Company could incur portions of the costs represented by these
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'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 of June 30, 2021 , these contracts represented net liabilities of
$1.3 billion . 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 June 30, 2021. See Note 5 of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" and " Item 3.
Quantitative and Qualitative Disclosures About Market Risk " 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 1. Financial
Statements."
ITEM 3. 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 financial instruments and selling purchased oil
and gas outside of the Permian Basin . The following quantitative and qualitative
information is provided about financial instruments to which the Company was a
party as of June 30, 2021 , 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 June 30, 2021 , the Company had no variable rate debt
outstanding under the Credit Facility and, consequently, no related exposure to
interest rate risk. As of June 30, 2021 , the Company had $6.9 billion of fixed
rate long-term debt outstanding with a weighted average cash interest rate of
1.9 percent. Although changes in interest rates may affect the fair value of the
Company's fixed rate long-term debt, any changes would not impact earnings or
expose the Company to the risk of cash flow losses. The Company did not have any
interest rate derivative instruments outstanding as of June 30, 2021 ; however,
it may enter into such instruments in the future to mitigate interest rate risk.
See Note 4 and Note 7 of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for additional information.
47--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
Commodity price risk. The Company's primary market risk exposure is related to
the price it receives from the sale of its oil, NGLs and gas production.
Realized pricing is volatile and is determined by market prices that fluctuate
with changes in supply and demand for these products throughout the world. The
price the Company receives for its production depends on many factors outside of
the control of the Company, including differences in commodity pricing at the
point of sale versus market index prices. Reducing the Company's exposure to
price volatility helps secure funds to be used in its capital program and to
fund general working capital needs, debt obligations, dividends and share
repurchases, among other uses. The Company mitigates its commodity price risk
through the use of derivative financial instruments and sales of purchased oil
and gas.
Derivative financial instruments. The Company's decision on the quantity and
price at which it executes derivative contracts is based in part on its view of
current and future market conditions. The Company may choose not to enter into
derivative positions for expected production if the commodity price forecast for
certain time periods is deemed to be unfavorable. Additionally, the Company may
choose to liquidate existing derivative positions prior to the expiration of
their contractual maturity in order to monetize gain positions or minimize loss
positions if it is anticipated that the commodity price forecast is expected to
improve. Proceeds, if any, can be used for the purpose of funding the Company's
capital program, general working capital needs, debt obligations, dividends and
share repurchases, among other uses. While derivative positions limit the
downside risk of adverse price movements, they also limit future revenues from
upward price movements. The Company manages commodity price risk with the
following types of commodity derivative contracts:
•Swaps. The Company receives a fixed price and pays a floating market price to
the counterparty on a notional amount of sales volumes, thereby fixing the price
for the commodity sold.
•Collars. Collar contracts provide minimum ("floor" or "long put") and maximum
("ceiling") prices on a notional amount of sales volumes, thereby allowing some
price participation if the relevant index price closes above the floor price but
below the ceiling price.
•Collar contracts with short put options. Collar contracts with short put
options differ from other collar contracts by virtue of the short put option
price, below which the Company's realized price will exceed the variable market
prices by the long put-to-short put price differential.
•Basis swaps. Basis swap contracts fix the basis differentials between the index
price at which the Company sells its production and the index price used in swap
or collar contracts.
•Rollfactor swaps. Rollfactor swaps are utilized to match the derivative
contracts to the physical oil sales. Physical oil sales typically use trade
month averages whereas derivative contracts utilize calendar month averages. The
rollfactor swaps convert the calendar month into a trade month.
•Options. Selling individual call options can enhance the market price by the
premium received or, alternatively, the premium received can be utilized to
improve swap or collar contract prices. Purchased put options establish a
minimum floor price (less any premiums paid) and allow participation in higher
prices when prices close above the floor price.
The Company has entered into commodity derivative contracts for a portion of its
forecasted 2021 and 2022 production; consequently, if commodity prices decline,
the Company could realize lower prices for volumes not protected by the
Company's derivative activities and could see a reduction in derivative contract
prices on additional volumes in the future. As a result, the Company's internal
cash flows will be negatively impacted by a reduction in commodity prices.
The average forward prices based on June 30, 2021 market quotes were as follows:
2021 Year Ending
Third Fourth December 31,
Quarter Quarter 2022
Average forward Brent oil price $ 73.82 $ 71.79 $ 68.54
Average forward WTI Midland oil price $ 71.76 $ 69.43 $ 65.48
Average forward MEH oil price $ 72.14 $ 69.91 $ 66.15
Average forward NYMEX gas price $ 3.64 $ 3.67 $ 3.17
Average forward DUTCH TTF gas price $ 12.02 $ 12.12 $ 8.94
Average forward WAHA gas price $ 3.57 $ 3.56 $ 2.83
WTI Midland/Brent oil basis differentials:
Average forward basis differential price (a) $
(2.06)
48--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY
The average forward prices based on July 30, 2021 market quotes are as follows:
2021 Year Ending
Third Fourth December 31,
Quarter Quarter 2022
Average forward Brent oil price $ 75.44 $ 73.11 $ 69.63
Average forward WTI Midland oil price $ 73.11 $ 70.86 $ 66.63
Average forward MEH oil price $ 73.54 $ 71.34 $ 67.28
Average forward NYMEX gas price $ 3.91 $ 4.00 $ 3.46
Average forward DUTCH TTF gas price $ 14.18 $ 14.14 $ 9.61
Average forward WAHA gas price $ 3.68 $ 3.79 $ 3.14
WTI Midland/Brent oil basis differentials:
Average forward basis differential price (a) $
(2.34)
___________________
(a)Based on market quotes for basis differentials betweenMidland oil index prices and the Brent oil index price. See Note 4 and Note 5 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for a description of the Company's open derivative positions and additional information. Sales of purchased commodities. 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. The Company also enters into pipeline capacity commitments to secure diesel supply from theGulf Coast to the Company's operations in thePermian Basin . The Company enters into separate sales transactions with third parties related to diesel volumes that exceed the Company's operational needs. Marketing derivatives. The Company's marketing derivatives reflect two long-term marketing contracts that were entered inOctober 2019 whereby the Company agreed to purchase and simultaneously sell 50 thousand barrels of oil per day at an oil terminal inMidland, Texas for a six-year term that began onJanuary 1, 2021 and ends onDecember 31, 2026 . The price the Company pays to purchase the oil volumes under the purchase contract is based on a Midland WTI price and the price the Company receives for the oil volumes sold is a WASP that a non-affiliated counterparty receives for selling oil through theirGulf Coast storage and export facility at prices that are highly correlated with Brent oil prices during the same month of the purchase. Based on the form of the marketing contracts, the Company determined that the marketing contracts should be accounted for as derivative instruments. Similar to sales of purchased commodities, these marketing derivatives allow the Company to diversify a portion of its oil sales from its area of production toGulf Coast and international markets. The average forward prices based onJune 30, 2021 market quotes are as follows:
Year Ending
December 31 ,December 31 ,
2021 2022 2023 2024 2025 2026
Average forward Brent oil price
64.59
70.60 65.48 60.86 57.56 55.48 54.42
Average forward basis differential
price (a) $ 2.21 $ 3.06 $
3.73
The average forward prices based on
Year Ending
December 31 ,December 31 ,
2021 2022 2023 2024 2025 2026
Average forward Brent oil price
65.48
71.98 66.63 61.42 57.68 55.18 53.72
Average forward basis differential
price (a) $ 2.30 $ 3.00 $ 4.06 $ 4.65 $ 4.96 $ 5.22
___________________
(a)Based on market quotes for basis differentials between
49--------------------------------------------------------------------------------
Table of Contents
PIONEER NATURAL RESOURCES COMPANY Credit risk. The Company's primary concentration of credit risks are associated with the collection of receivables resulting from the sale of oil and gas production and purchased oil and gas, and the risk of a counterparty's failure to meet its obligations under derivative contracts with the Company. The Company's commodities are sold to various purchasers who must be prequalified under the Company's credit risk and procedures. The Company monitors exposure to counterparties primarily by reviewing credit ratings, financial criteria and payment history. Where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty, a letter of credit or other credit support. Historically, the Company's credit losses on commodities receivables have not been material. 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 right of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative contract, 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 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information.
© Edgar Online, source
